Brief Background Facts

The Respondent, Ga Yee Furniture Sdn Bhd (“Ga Yee”), was controlled by two shareholder-directors (collectively, the “Directors”), who also controlled Encony Development Sdn Bhd (“Encony”) and Eramas Konsortium Sdn Bhd (“Eramas”).

According to the findings of the High Court (“HC”), the Directors orchestrated transfers totalling approximately RM 9.4 million from Ga Yee to Encony and Eramas, which were characterised as purported loans. The money trail was briefly as follows:-

Following the discovery of the transactions, the Directors resigned and transferred their interest in the relevant companies to third parties. Ga Yee then commenced proceedings seeking, amongst others, recovery of the misappropriated funds, declaration of constructive trust and tracing relief.

The HC found in favour of Ga Yee, holding, amongst others, that the transfers were fraudulent and that Ga Yee was entitled to trace the misappropriated funds into the Property.

Court of Appeal Decision: Spotlight

For purposes of this case digest, we focus on some of the CA’s key findings concerning the transfers and the circumstances leading to the tracing of the funds.

(1) Nature of Transactions – Were They Legitimate?

In rejecting the contention that the transfers were “related-party transactions”, the CA held that Ga Yee, Encony and Eramas were not “related companies” within the meaning of the Companies Act 2016 (“CA 2016”)[4]. Ga Yee, Encony and Eramas were separate legal entities, and the mere fact that the Directors held positions in these companies did not bring them within the statutory definition. Therefore, it did not legitimise the transfers of monies between them[5].

The CA further observed that inter-company loans between companies with common directors are not inherently prohibited under CA 2016, but necessarily attract closer scrutiny given the inherent risk of conflicts of interest and the potential misuse of corporate funds.[6]

The CA affirmed the HC’s finding that the purported “loans” were fraudulent in nature, noting, amongst others, the absence of the essential features of genuine commercial loans and non-compliance with the applicable requirements under the CA 2016.[7]

In affirming the HC’s findings that the Directors had breached their fiduciary duties to, and conspired against Ga Yee, the CA considered the cumulative effect of various circumstances, including their role in authorising and directing the transfers, the purported resolutions approving the transfers, inconsistencies in the audited accounts and their subsequent conduct.[8]

(2) The Money Trail – What Did the Money Become?

The HC found that the transfers were sham transactions disguised as loans and ordered, amongst others, that Eramas pay Ga Yee RM 11,178,313.90 (“RM 11.18m”) pursuant to the tracing process.

Eramas argued that its liability should only be limited to the RM 4,034,917.70 (“RM 4.03m”) that it had originally received from Ga Yee. The CA rejected this approach and affirmed the HC’s reliance on Foskett v McKeown[9] as a leading authority on the equitable principles of tracing, reiterating that:-

…where misappropriated funds were used to acquire a new asset, the claimant’s proprietary interest was not extinguished but may be traced into that substitute asset. The claimant may then elect to assert a proportionate beneficial interest in the asset, including any increase in its value, or alternatively claim an equitable lien to secure repayment of the original amount misapplied.[10]

Importantly, the CA clarified that the tracing exercise does not depend on establishing unconscionability or unjust enrichment. Rather, the pertinent inquiry is whether a proprietary connection between the claimant’s property and the substitute asset can be established.[11]

On the facts, the RM 4.03m transferred from Ga Yee funded approximately 39.1% of the purchase price of the Property. The CA held that Ga Yee’s proprietary right followed that money into the Property and subsequently into the RM 25 million sale proceeds. Ga Yee was therefore entitled to 39.1% of the sale proceeds, amounting to RM 9.775 million. A visualisation of the tracing process is as follows:

The CA emphasised that this was not treated as a mere “repayment” of the RM 4.03m, but as Ga Yee’s proprietary entitlement to what the RM 4.03m had become.[12]

The CA also distinguished between the proprietary remedy arising from tracing and the personal remedies arising from the breaches of fiduciary duty and conspiracy.[13]

(3) Constructive Trust – Does It Need to be Pleaded?

Notably, in rejecting Eramas’ contention that Ga Yee had failed to plead a sufficient basis for constructive trust relief, the CA held that a constructive trust is not an independent cause of action but an equitable remedy which may be granted where the facts pleaded justify such intervention.

The relevant question was therefore not whether “constructive trust” was specifically pleaded, but whether the material facts establishing a basis for such relief had been pleaded and proved. The CA found that Ga Yee had satisfied this requirement[14].

Conclusion

Eramas Konsortium illustrates the operation of equitable tracing in the context of misappropriated corporate funds following a breach of fiduciary duty. Its significance lies not simply in recovering the monies originally misappropriated, but in determining whether the plaintiff’s proprietary interest can be traced into what those monies became, including the resulting asset and, where applicable, its eventual sale proceeds.

Key Takeaways

Our Dispute Resolution practice specialises in high-stakes civil, commercial and corporate disputes, including shareholders’ disputes, breach of contract, and debt recovery. We have experience representing clients at all levels of the Malaysian Courts, providing strategic and commercially sensible solutions to complex legal challenges.

If you require advice or representation in a legal dispute, please reach out to our team via our contact page.

Disclaimer: The content of this article is intended for general informational purposes only and does not constitute formal legal advice. Kindly refer to the complete decision and reasoning in Eramas Konsortium Sdn Bhd v Ga Yee Furniture Sdn Bhd (Civil Appeals No. P-02(NCvC)(W)-1792-10/2024 & P-02(NCvC)(W)-1991-11/2024).

If you found this article useful, please feel free to download the PDF document in the link here.

Understanding how a COC clause operates is crucial for both buyers and sellers in managing risk, timelines and deal certainty.

COC clauses can quietly shift the landscape of a deal, but the risks are often underestimated.

Clarifying COC trigger points early ensures smoother negotiations and protects the business post-completion.

In Essence:

Disclaimer: The content of this article is intended for general informational purposes only and does not constitute formal legal advice.

Our Corporate team regularly advises local and international corporations on mergers and acquisitions (M&A), cross-border transactions, joint ventures, and corporate restructuring. We also provide comprehensive support for shareholders’ agreements and general commercial advisory to help businesses navigate the Malaysian regulatory landscape.

For legal assistance or further inquiries regarding your corporate matters, please feel free to contact us.

NVIDIA has agreed to acquire Hugging Face, a leading open AI platform used by more than 18 million developers and over 200,000 companies worldwide, for approximately US$12.9 billion. The proposed acquisition marks a significant expansion of NVIDIA’s footprint beyond AI hardware and further into the software and developer ecosystem, giving it ownership of a platform hosting millions of AI models, datasets and applications.

From a strategic standpoint, the deal strengthens NVIDIA’s position across the AI chain and reinforces its investment in open AI development. At the same time, NVIDIA’s acquisition of a platform valued for its open access and cross-platform compatibility raises competition and platform-neutrality considerations, with NVIDIA committing that Hugging Face will continue to support different models, frameworks, cloud providers and computing platforms – including those outside NVIDIA’s ecosystem.

Taken together, the proposed acquisition demonstrates the strategic value of controlling critical infrastructure across the AI chain, while highlighting the competition and regulatory considerations that may arise when a dominant technology player acquires a widely used open platform.

Our Corporate team regularly advises local and international corporations on mergers and acquisitions (M&A), cross-border transactions, joint ventures, and corporate restructuring. We also provide comprehensive support for shareholders’ agreements and general commercial advisory to help businesses navigate the Malaysian regulatory landscape.

For legal assistance or further inquiries regarding your corporate matters, please feel free to contact us.

What Does S.85 CA 2016 Actually Protect?

S.85(1) CA 2016 provides that:

“Subject to the constitution, where a company issues shares which rank equally to existing shares as to voting or distribution rights, those shares shall first be offered to the holders of existing shares in a manner which would, if the offer were accepted, maintain the relative voting and distribution rights of those shareholders.” (emphasis added)

At first glance, the provision appears straightforward: where a company issues qualifying new shares, the existing shareholders should first be given the opportunity to subscribe to preserve their relative voting and distribution rights in the company.

However, there is an important qualification in the opening words of S.85 – “subject to the constitution”. Ex facie, this suggests that the shareholders may, through the company’s constitution, determine the extent to which their pre-emptive rights apply.

This was recognised by the Federal Court (“FC”) in Dato’ Azizan bin Abd Rahman & Ors v Concrete Parade Sdn Bhd & Ors and other appeals[1] (“Dato’ Azizan”), where the FC held that the pre-emptive rights afforded by S.85(1) are:-

“dependent on how the shareholders, as investors, have contracted in their AA (or constitution), firstly with the company and secondly with other shareholders or members inter se”.[2]

Accordingly, where a company has a constitution, the constitution should be the starting point in determining whether and to what extent pre-emptive rights apply. The constitution may fortify such rights, modify their operation, or provide for their disapplication[3]. Where there is no constitution, S.85 provides the statutory framework governing those rights.

How Are Pre-Emptive Rights Displaced or Waived?

At its core, a pre-emptive right is a right of priority or first preference. It does not confer an interest in the shares themselves; rather, it gives shareholders a right of first choice. Such a right may be waived even if it arises from statute[4].

The more difficult question is: what is sufficient to establish a valid disapplication or waiver of pre-emptive rights?

Interaction Between S.75 and S.85 CA 2016

Briefly, S.75 CA 2016 requires shareholders’ approval before directors may exercise certain powers to allot shares. S.75(2) provides the exceptions to this general rule.

In Pan Choon Weng, the defendants argued that S.75 and S.85 should be construed such that, where an allotment falls within an exception under S.75(2), the shares need not first be offered to existing shareholders under S.85[14].

The High Court ultimately dismissed the plaintiff’s claim. In this regard, the High Court held that the two provisions should be construed so as to “complement” each other and applied according to the circumstances of each case; otherwise, the statutory exception under S.75(2)(c) would be deprived of its efficacy[15].

However, this position must be considered alongside the subsequent FC decision of Dato’ Azizan. While the FC also emphasised that S.75 and S.85 should be read harmoniously, it expressly observed that S.85(1) is “not subject to s.75”[16].

The extent to which an exception under S.75(2) affects the operation of S.85 therefore warrants careful consideration.

What Happens When Pre-Emptive Rights Are Breached?

When a company proceeds with issuance of shares without complying with applicable pre-emptive rights, the affected shareholder may have various remedies depending on the circumstances, including declaratory relief[17], rectification of the register of members[18], oppression relief[19] or other appropriate orders.

However, a breach of pre-emptive rights does not necessarily mean that the resulting allotment is incapable of being cured. The Court may, in appropriate cases where it is just and equitable to do so and where no substantial injustice would result, exercise its statutory powers to validate or regularise any issuance or allotment of shares that would otherwise be irregular[20].

[1] [2024] 3 MLJ 223.

[2] ibid, para 136-138 & 15

[3] ibid, para 122 & 158.

[4] LGB Engineering Sdn Bhd & Ors v Rayston Resources Sdn Bhd [2022] MLRAU 196, para 82-83.

[5] Dato’ Azizan (n 1), para 174-176.

[6] ibid, para 171-187.

[7] [2026] MLRHU 2410.

[8] ibid, para 80-87.

[9] [2023] 10 MLJ 544.

[10] ibid, para 83 & 90-91.

[11] ibid, para 85-89.

[12] [2019] CLJU 2392, para 133-135.

[13] [2003] 1 MLRA 264, pg 267.

[14] Pan Choon Weng (n 9), para 49.

[15] ibid, para 80-81.

[16] Dato’ Azizan (n 1), para 128 & 134.

[17] TAS Capital (n 7), where the Plaintiff successfully sought inter alia a declaration that the issuance of shares was void and illegal.

[18] Pioneer Motor (n 13), where the Respondent sought inter alia rectification of the register of members under S.162 of the Companies Act 1965 to remove a third-party company as the holder of shares.

[19] Chiptar Holdings Sdn Bhd v THC Rice (K.L.) Sdn Bhd & Ors [2023] 1 LNS 585, where the Plaintiff successfully established a case of oppressive conduct under S.346 of the CA 2016.

[20] CA 2016, S.108. See also Kelapa Sawit (Teluk Anson) Sdn Bhd v Dr. Yeoh Kim Leng & Ors [1991] 1 CLJ (Rep) 194 at pg 204, where the Supreme Court drew a distinction between an act which does not bind the company and an act that is capable of regularisation or validation.

Our Dispute Resolution practice specialises in high-stakes civil, commercial and corporate disputes, including shareholders’ disputes, breach of contract, and debt recovery. We have experience representing clients at all levels of the Malaysian Courts, providing strategic and commercially sensible solutions to complex legal challenges.

If you require advice or representation in a legal dispute, please reach out to our team via our contact page.

Disclaimer: The content of this article is intended for general informational purposes only and does not constitute formal legal advice.

If you found this article useful, please feel free to download the PDF document in the link here.

In many M&A transactions, third-party approvals are one of the most underestimated hurdles. Whether from regulators, landlords, banks, or key customers, these approvals can materially affect the deal timeline, risk allocation, and even price negotiations.

Third-party approvals are more than procedural – they directly impact deal timing, risk, and commercial certainty. Spotting them early through legal due diligence helps prevent avoidable delays and keeps the deal moving.

In Essence:

Disclaimer: The content of this article is intended for general informational purposes only and does not constitute formal legal advice.

Our Corporate team regularly advises local and international corporations on mergers and acquisitions (M&A), cross-border transactions, joint ventures, and corporate restructuring. We also provide comprehensive support for shareholders’ agreements and general commercial advisory to help businesses navigate the Malaysian regulatory landscape.

For legal assistance or further inquiries regarding your corporate matters, please feel free to contact us.