(In Statutory Management)
Report to Equiticorp Holdings Ltd debenture stockholders
Dated 3 July 2014
From 1 July 2014 we have relocated our office in order to save costs. This is the reason for the slight delay in issuing this letter. Our postal address remains unchanged. Please direct any queries regarding debenture stock, including transfers to estates, to our email or postal address.
2. Cheah loan
On 19 July 2013, the Malaysian High Court rejected the appointment of a private liquidator to City Centre Sdn Bhd ("CCSB"). The judge ruled that the Official Receiver was to conduct the liquidation. We were disappointed that our nominee, the liquidator of CCSB's parent company, did not get the appointment.
The original winding up order for CCSB required the liquidator to appoint and consult with a Committee of Inspection. We believed it was important for a competent committee to be convened to guide the Official Receiver on the most effective sale process for the CCSB property, to ensure the maximum return for the company. Accordingly, we encouraged the Official Receiver to form a Committee of Inspection as soon as possible.
A meeting of creditors was called for 5 September 2013. The agenda was "to obtain the creditors' views on the incorporation of a Committee of Inspection". We attended the meeting and our lawyer told the Official Receiver that he was bound by the terms of the original winding up order and therefore was required by law to form a Committee of Inspection.
We wanted to proceed immediately with a vote. The Official Receiver floated the suggestion that the committee could be established based on the highest value creditors. There was much discussion and the creditors present indicated a preference to vote for the committee members. The Official Receiver adjourned the meeting to review the options and called for another meeting in a months time.
The second meeting of creditors was held on 7 October 2013. Voting papers were circulated prior to the meeting. It was agreed that the Committee of Inspection would consist of 4 creditors' representatives and UOB Bank. UOB Bank holds a security charge over the shares in CCSB for a loan it made to CCSB's parent company.
There was a lengthy discussion as to whether the Official Receiver should first adjudicate on the validity of claims filed by creditors before considering their votes. In the end, we persuaded the Official Receiver to take a common sense approach and count everyone's votes, then deal with the substantiation of claims prior to paying any monies out to creditors.
The votes were tallied and then a situation arose because the Malaysian Companies Act requires voting to take account of both numbers of creditors and the value of claims. Several candidates sympathetic to Mr Cheah received votes from the greatest number of creditors, but the candidates sympathetic to us received votes from the greatest value of claims. There was a debate about how the votes should be translated into seats on the committee.
We had Malaysian case law, supported by English precedents, that the value of claims was the most important factor when it came to voting at a meeting of creditors. At this stage, the meeting had been going for over 2 1/2 hours and the Official Receiver said the only way to resolve the issue was to apply to the court for directions.
The court application was heard on 23 December 2013 and a verbal ruling was handed down at the end of the hearing. The 4 creditor seats on the Committee of Inspection were to be filled as to 3 based on the value of claims and 1 based on the number of creditors. This resulted in Equiticorp's appointment to the committee, alongside the liquidator of CCSB's parent company (our appointee), a prominent Malaysian architect (who is sympathetic to our approach for selling the property), and a former director of the company who is a friend of Mr Cheah.
The Official Receiver called for a meeting of the Committee of Inspection on 10 January 2014. He asked for the committee's views on the sale of the property. He suggested that he could sell the property by simply listing it for sale on the Malaysian Government Insolvency website. We said that was completely inadequate and proposed a sale by international tender being conducted by a major real estate firm with overseas connections, especially in the Asian region.
Lawyers for 2 of the committee members said they would have to seek instructions from their clients. We were very unhappy with this, because it was abundantly clear what the committee was meeting for. The Official Receiver had no choice but to adjourn the meeting.
The next meeting was held on 12 February 2014. All the committee members agreed that the best course was to sell the property by public tender. The majority of members favoured marketing the property by one or more international real estate firms. Only the former director wanted the Official Receiver to conduct the tender himself. We tabled a detailed proposal by 2 major international real estate firms to jointly conduct the marketing and tender process.
The Official Receiver then informed the committee that the final decision would have to be made by the Malaysian Director General of Insolvency at central government. Following that, a further Committee of Inspection meeting would be called to consider the detailed terms of sale. We were taken aback, as were others present, that a decision was not made at the meeting and pressed for a decision as soon as possible. Malaysian case law is clear that the views of a Committee of Inspection should be followed by a liquidator in normal circumstances.
We made several follow ups, including asking for a meeting with the Director General, which was declined. Eventually a Committee of Inspection meeting was called for 17 June 2014. It had taken 4 months for a decision to be made by the Director General.
The Director General had decided that the Malaysian Insolvency Department could sell the property by itself in a tender process advertised on its website and through newspaper advertising. We argued that the property was extremely valuable and needed to be marketed by experts who had experience in sales of such magnitude. The Official Receiver conceded that he had never previously handled a property sale of such value.
We also argued that the wishes of the committee had been ignored without regard to the legal standing of the Committee of Inspection under Malaysian law. The Official Receiver eventually agreed to recommend to the Director General that the 2 major international real estate firms jointly conduct the marketing and tender process, as per our proposal. We hope a decision will be made more quickly than 4 months, this time.
At every meeting there has also been another matter that we have raised in relation to the property. A portion of the vacant land has been utilised for many years as an unauthorised car park and CCSB has received no income from this car parking operation. Once again the Official Receiver had taken no action to recover any monies for CCSB from the operation or managed to remove the car park operators, so vacant possession of the property can be given upon its sale.
We have very serious concerns about the manner in which the Insolvency Department personnel in Kuala Lumpur are conducting the liquidation. They appear to view the Committee of Inspection as a nuisance rather than the master to the liquidator, as described in a Malaysian court case. We are worried that a property sale conducted without expert assistance will not achieve the best possible price for the land. They also were willing to sell the property on an "as is, where is" basis to avoid having to remove the car park operators, and this would undoubtedly reduce the sale price.
The potential recovery for Equiticorp is most affected by the sale price, as the bulk of our potential recovery comes from the bankrupt estate of Mr Cheah, which owns 82% of the parent company of CCSB, and the shareholders of that company are the last in line to be paid, behind the creditors of CCSB and UOB Bank. This is why we have been pushing the Official Receiver so hard to try to maximise the sale price for the property. We have written to the Malaysian Director General of Insolvency to stress these issues.
If the property can be sold for a good price, around the level of current commercial sales in the central Kuala Lumpur area, there is the prospect of a considerable recovery for debenture stockholders. However, we do not wish to raise hopes too high, as there are hurdles to overcome still and the history of this matter shows that they may take some time to resolve.
3. Next report
Unless there are any significant developments that warrant an earlier report, we will write again in 12 months time, around 30 June 2015.
B G Stowell
Statutory Manager
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