On 22nd December 2022, the High Court struck out a class action suit seeking more than RM300 million against our client, a professional trustee company. Our Christopher Foo and Harish Nair acted for the client.
In 2010, a group of investors (including the plaintiffs in the suit under discussion) invested and took part in an oil palm plantation scheme set up and operated by a management company. Our client was appointed as the trustee of the scheme under a trust deed entered into between our client, the management company, and each investor of the scheme.
The scheme had been established, and subsequently opened for public subscription, under Division 5 of the Companies Act 1965. Upon the Act being repealed, the scheme then fell to be governed under the Interest Scheme Act 2016. Under the scheme, a certain number of “plots” were created and offered to the public for purchase. The scheme was planned to last for up to 23 years, with 2 phases envisaged. Under the trust deed, the management company was required to “repurchase” the plots during the second phase of the scheme if requests were made by the investors. Investors were also entitled to a return on their investment in the form of receipt of “net yield” from the oil palm plantation.
Around 2016, the scheme met various challenges, including an unexpectedly high volume of requests for repurchase of plots by investors. A meeting of the investors was then held pursuant to the provisions of the trust deed. A resolution was put forward to close the scheme with immediate effect, which was passed by a vast majority of the investors present and voting at the meeting.
Following this, a group of investors brought a representative action by way of an originating summons against the management company. This group of investors were asking the Court to order the management company to pay all monies due on the “net yield” and to repurchase all the plots in the second phase of the scheme. In this representative action, the investors heavily contended that the scheme was a “ponzi scheme” because the scheme was set up in such a way that investors could not request that the management company “repurchase” the plots in the first phase of the scheme (the first 6 years). Therefore, the investors contended that the scheme allowed the management company to swindle the investors during the first 6 years (i.e., the first phase) and subsequently close the scheme as soon as the scheme entered the second phase. The investors claimed that the provision in the trust deed that allowed the management company to call for a meeting of the investors to close the scheme was a convenient “exit clause”.
At the same time, the management company filed their own originating summons seeking to wind up the Scheme in light of the resolution passed at the investors’ meeting.
Round 1 - Suit against Manager
Both summonses were heard together by the High Court. The High Court found that the resolution passed (to close the scheme) at the investors’ meeting was null and void. The scheme was ordered to be wound up. In arriving at its decision, the High Court found that the investors’ contention that the scheme was a “ponzi scheme” was baseless and unsubstantiated.
On appeal, the Court of Appeal found that the resolution passed at the Growers’ Meeting was valid and the Scheme was wound up thereafter. The High Court’s order was varied accordingly (i.e. the remainder of the decision of the High Court was affirmed). The Court of Appeal did not disturb the High Court’s finding that the scheme was not a “ponzi scheme”.
Round 2 - Suit against Trustee
In 2022, the plaintiff, by way of a second representative action, filed a suit against our client, the trustee company. The plaintiff contended that the trustee knew or ought to have known that the scheme was a scam. The plaintiff’s reason for this was that the management company was able to invoke the so called “exit clause” under the trust deed to close the scheme when the scheme entered its 2nd phase. The plaintiff further contended that, by failing to warn the investors or to safeguard the investors’ interests, the trustee had breached its duties to the investors. The plaintiff also contended that the trustee had acted in conflict of interest and in concerted fraud with the management company to defraud the investors.
Submissions of the Parties
At the hearing, on behalf of our client, we contended that the principle of res judicata and issue estoppel barred the plaintiff from reventilating the issues which were raised or ought to have been raised in the previous suit against the management company (i.e. Round 1). Essentially, the thrust of the plaintiff’s case was the contention that the scheme was a “scam” and that the trustee had been in cahoots with the management company in an attempt to defraud the investors - the contention that the scheme was a scam had been considered and dismissed by the High Court in the previous suit. While there was a difference of semantics, i.e. the use of the word scam in Round 2 and “ponzi scheme” in Round 1, the plaintiff’s claim was still barred by the principles of res judicata and issue estoppel - simply utilising new nomenclature should not defeat these established principles. The principle of res judicata, and issue estoppel in particular, seeks to prevent there being different findings made by the Courts on the same issue, coming out of different suits or actions. In this case, if the scheme was found to be a scam, it would result in there being two contradicting decisions of the High Court – with the Court finding, during Round 1, that the scheme was not a “ponzi scheme”.
The plaintiff contended that the principle of res judicata did not apply on the basis that the trustee was not a party to previous suit. Further, the plaintiff argued that the causes of action in the present suit were different from the cause of action in the previous suit. In response, on behalf of the trust company, we argued that, regardless of the fact that the trustee was not a party to the previous summons and that the causes of action were different, issue estoppel would still apply to bar the plaintiff. In fact, there is a litany of prior decisions of the High Court in support of this point.
High Court's Decision
The High Court held in our client’s favour and struck out the plaintiff’s claim. The High Court agreed with our submissions that:
- the plaintiff’s case was premised on the contention that the scheme was a scam or fraud;
- with the effect of the High Court’s decision in the previous suit, the plaintiff could not now relitigate the same core issues before the court;
- the bar to relitigate of the same issue encompasses parties who had not been involved in the earlier case; and
- the principle of res judicata applied and the Plaintiff’s claim was found to be unsustainable.
The plaintiff has filed an appeal to the Court of Appeal against the High Court’s decision.
Authors: Harish Nair and Casper Tey