The Court of Appeal in Lextrend Sdn Bhd & 3 Ors v Sotella Fund Pte Ltd [2026] 1 AMR 853 has recently ruled that the obligation to redeem preference shares does not crystallise if the statutory conditions under section 72(4) of the Companies Act 2016 (“CA 2016”) are not satisfied.
Background Facts
This case turned on the alleged failure by the first appellant, Lextrend Sdn Bhd (“Lextrend”), to redeem the redeemable preference shares (“RPS”) which it had issued to the respondent, Sotella Fund Pte Ltd (“Sotella”).
The RPS were issued by Lextrend to Sotella pursuant to a share subscription agreement dated 21 December 2016 (“SSA”), which was subsequently varied by a letter agreement dated 5 January 2017 and a supplemental agreement dated 7 September 2021 (collectively, “Principal Agreements”).
A memorandum of deposit (“MOD”) over a freehold land and a deed of undertaking and indemnity (“DOU”) were executed by third parties as security for Lextrend's obligations under the Principal Agreements. Clause 9.2 of the SSA required Lextrend to redeem the RPS within the specified timeline, as outlined in the Principal Agreements.
Sotella alleged that Lextrend had defaulted in redeeming the RPS and paying the redemption sums as stipulated under the Principal Agreements, thereby triggering events of default. Sotella commenced arbitration proceedings against Lextrend. It also commenced proceedings in the High Court to enforce its rights under the MOD and DOU against the security providers. The High Court granted all reliefs sought by Sotella.
The appellants appealed against the High Court’s decision.
Issues in the Court of Appeal
Among the issues considered by the Court of Appeal are the following:
- Have Lextrend’s redemption obligations in respect of the RPS crystallised?
- Was liability under the MOD and DOU contingent upon the enforceability of the Principal Agreements?
- Was the SSA in fact a moneylending transaction?
- Did the appellant/s admit liability?
This case note will primarily focus on the first issue, that is whether Lextrend’s redemption obligations in respect of the RPS have crystallised. The decision on the Court of Appeal on the other issues will be addressed in summary fashion.
An overview of redeemable preference shares
In Malaysia, preference shares are commonly issued by companies seeking to raise capital. An investor who agrees to subscribe for shares will typically enter into a share subscription agreement (“subscription agreement”) with the company. The subscription agreement sets out, among others, the investment sum, conditions precedent, and key terms of the preference shares — including whether they are convertible or redeemable, and whether they carry fixed yields and preferential dividends. Section 90(4) of the CA 2016 also requires the terms of the preference shares to be incorporated into the company’s constitution.
Where the shares are redeemable, the subscription agreement and the company’s constitution will provide for the redemption date or maturity period, events triggering redemption, and the redemption sum payable to the investor.
Upon the occurrence of the relevant redemption event, the company would have a legal obligation to redeem the preference shares and pay the agreed redemption sum to the preference shareholder. However, the redemption of preference shares is also governed by section 72(4) of the CA 2016, which reads:
“Subject to subsections (5) and (6), the shares shall be redeemable only if the shares are fully paid up and the redemption shall be out of-
- profits;
- a fresh issue of shares; or
- capital of the company.”
Decision of the Court of Appeal
Have Lextrend’s redemption obligations in respect of the RPS crystallised?
To determine whether Lextrend’s redemption obligations have crystallised, the Court of Appeal held that it was necessary to apply the “business efficacy test” to imply a term stipulating that the redemption obligations under the Principal Agreements are contingent upon the fulfilment of the conditions set out in section 72(4) of the CA 2016.
The Court of Appeal held that the High Court erred in failing to consider that the redemption obligations under the Principal Agreements had not crystallised as the conditions under section 72(4) of the CA 2016 could not be fulfilled. The provision permits redemption only from distributable profits, fresh issuance of shares, or capital.
Given that there was no evidence of available distributable profits at the material time, there was no present and owing obligations towards Sotella under the Principal Agreements. Sotella also did not assert that the appellants' operations were profitable or that there was a surplus of cash available for redemption of the RPS. Hence, Lextrend was not in breach of its obligations under the Principal Agreements.
Was liability under the MOD and DOU contingent upon the enforceability of the Principal Agreements?
The Court of Appeal answered this question in the affirmative. The SSA had explicitly required Lextrend to “lawfully redeem” the RPS on specified dates.
The MOD provides that the security is only activated where Lextrend is “unable to secure the redemption and repayment in full in accordance with the Agreement”, whilst the DOU imposes obligations upon the guarantor only upon “default in a Lawful Redemption.” The MOD and DOU also stated that they were executed “pursuant to”, “in consideration of” or “as security for” the SSA.
According to the Court of Appeal, it was clear from the above that the MOD and DOU were inextricably linked to the SSA and the High Court had erred by failing to appreciate the inherent connection between the three agreements, and that the MOU and DOU are specifically conditional upon the existence of a lawful redemption default.
In light of its finding that Lextrend was not in breach of the Principal Agreements by reason that the redemption obligations under section 72(4) of the CA 2016 had not crystallised, the Court of Appeal held that there were no corresponding obligations under the MOD and DOU.
Was the SSA in fact a moneylending transaction?
The Court of Appeal was of the view that taken as a whole, the SSA’s features comprising the fixed repayment schedule, the guaranteed 14.7% per annum yield, the absence of meaningful equity (profit) participation, and the use of conventional loan-type securities, strongly indicated that it was in fact a vehicle for an unlicensed moneylending arrangement rather than a genuine equity subscription.
The Court of Appeal noted that the total redemption sums was twice the subscription amount. This worked out to be interest of approximately 14.7% p.a. - which exceeded the maximum interest of 12% p.a. permitted under the Moneylenders Act 1951 (“MLA”) for secured loans.
As Sotella did not rebut the presumption of moneylending under section 100A of the MLA, the SSA was void ab initio as an illegal moneylending transaction and could not be cured by the anti-illegality clauses under the SSA, MOD and DOU.
Did the appellant/s admit liability?
The Court of Appeal held that High Court had erred in finding that Lextrend’s failure to respond to the letter of demand amounted to an admission of breach. First, the finding was contrary to the Court of Appeal’s decision in Small Medium Enterprise Development Bank Malaysia v Lim Woon Katt [2016] 9 CLJ 73, where it was held that the failure to respond to a demand or notice must not be equated to admission of a claim. Second, there was evidence that Lextrend had disputed the default in its response to the arbitration notice.
In view of the above reasons, the Court of Appeal allowed the appellants’ appeal.
Comments
This case confirms that redemption of preference shares is subject to section 72(4) of the CA 2016 notwithstanding the parties’ contractual arrangements under a subscription agreement or the terms of issue of the RPS embodied in the company’s constitution. The decision is particularly significant for investors who rely on redemption as their primary exit mechanism.
Investors should therefore ensure that they have adequate visibility over the financial position and profitability of the investee company. This includes incorporating robust financial reporting and information rights into the issue documents, such as access to audited accounts, management accounts, and relevant board materials.
More importantly, investors may wish to consider additional or alternative exit mechanisms, such as unconditional put options to major shareholders of the company that are exercisable after the maturity or redemption date of the preference shares to better safeguard their position.
