Ho Hup's case goes to Fed Court this week

KUALA LUMPUR (May 14): The long drawn out legal tussle over the development rights of Ho Hup Construction Co Bhd's 60 acre land in Bukit Jalil will go before the Federal Court this week.

The ailing construction outfit, which is squaring off against the Malton group controlled by influential businessman Datuk Desmond Lim, is seeking to overturn a decision by the Court of Appeal, which prohibits the company from carrying out any plans on the disputed parcel of land.

The dispute revolves around a joint development agreement (JDA) on the 60-acre plot, which was signed in March 2010 between Ho Hup's subsidiary, Bukit Jalil Development Sdn Bhd (BJD) and Malton's unit Pioneer Haven Sdn Bhd.

The JDA was signed by Ho Hup's previous board led by Datuk Vincent Lye, but then a new board backed by substantial shareholder Datuk Low Tuck Choy took over and decided to revoke the agreement. The new board declared that the 60-acre land it holds is crucial to Ho Hup's revival and the company should have a major role in its development.

Ho Hup's application for leave for appeal is fixed for hearing this Thursday. It could also be the final attempt for the company to gain back control of the land, after its win in the High Court last June was overturned by the Court of Appeal in December.

Last June, the High Court ruled in favour of Ho Hup when it declared the JDA between BJD and Pioneer Haven invalid. The High Court ruled that Ho Hup's previous board, led by Vincent Lye, "had acted in breach of their duties" by signing the agreement a day before they were ousted in an EGM.

"The High Court also found that Pioneer Haven had knowingly assisted in these breaches. Significantly, the High Court found that the JDA was, in substance a disposal of BJD's 60-acre landbank and as such required the approval of shareholders under Section 132C of the Companies Act 1965," the ruling stated.

However, the judgment was overturned by the Court of Appeal six months later.

"The Court of Appeal ruled that the JDA is not tantamount to a disposal of land. As such, it does not need shareholder's approval. The Court of Appeal also found that there was commercial justification for the directors (of Ho Hup at that time) to sign the JDA," said a lawyer representing one of the appellants against Ho Hup.

According to documents reviewed by The Edge Financial Daily, the Court of Appeal raised several critical issues why Ho Hup and BJD could not develop the land on their own nor sell the land. Under these circumstances it ruled that the JDA remained the most viable option.

It noted that Ho Hup was categorised as a Practice Note 17 (PN17) company and had to submit a regularisation plan to Bursa Malaysia. Secondly, Ho Hup and BJD had to show that it has funds to develop the land.

"Thirdly, there was a need to make timely repayment of outstanding loans of RM101.1 million with the banks. Ho Hup and BJD had defaulted on their obligations to CIMB which held a charge of the land," it said.

The Court of Appeal added CIMB rejected proposals for rescheduled loan repayments, and was about to commence foreclosure proceedings on the land.

"The sale of the land was not feasible since it would not comply with Bursa's requirements under PN 17, since Ho Hup would then not have sufficient income-generating assets to maintain its listing status after the land was disposed of," said the Court of Appeal.

It added the option to develop the land was not feasible as Ho Hup did not have funding and could not secure financing.

"In our view, the JDA is a sound commercial deal for BJD, since it afforded BJD a minimum guaranteed entitlement of RM265 million, whatever the outcome of the development," it said.

The Court of Appeal also took the position that the JDA did not require shareholders' approval as it was not a disposal. Under the JDA, BJD was clearly stated as landowner while Pioneer Haven is the developer.

"They do not intend to transfer the beneficial interest of the land, but are simply contractual provisions, allowing the developer the right to develop the land without interference," it said.

BJD's entitlement from the project is RM425 million, or 17% of the total GDV of RM2.5 billion. Nevertheless, BJD would receive a minimum guaranteed entitlement of RM265 million.

The court noted that BJD's entitlement of RM425 million was more than the returns if Ho Hup sold the land then. As at June 30, 2010, the land was valued at RM119.5 million.

"The JDA cannot be said to be a bad deal, since the projected revenues are more than the market value for the land estimated at RM197 million by Henry Butcher and Hakimi Associates. The projected revenue is also more than the profits to be generated by BJD should it develop the land from its own resources of funding," it said.

Based on these findings, the Court of Appeal ruled that the JDA was a commercially viable decision by the then Ho Hup board. It also held that the directors led by Lye did not act in breach of their duties. "We find nothing sinister in the JDA and nothing adduced in evidence is sufficient to nullify the said JDA," it said.