In light of a few recent Court of Appeal decisions, it is useful to set out the position in law regarding an injunction to restrain the presentation of a winding up petition.A filing of a winding up petition is often used by a creditor as a means to exert pressure on the company to pay its debt. As the presentation of such a petition must be advertised, this would have an adverse impact on the financial standing and the reputation of the company, and may also result in the freezing of the company’s bank accounts.

The companies court should not be used for the collateral purpose of pressuring a company to pay a disputed debt and the law allows the company to apply for an injunction to restrain the filing of such a petition.

When a court restrains the presentation of a winding up petition to that court it exercises part of its inherent jurisdiction to prevent abuse of its process.

Prior to the filing of a winding up petition based on a debt, a creditor must issue a notice (often described as a Section 218 Notice) giving the company 21 days to pay the sum demanded . If this debt is disputed, it is within this crucial 21-day period that the company must then apply for an injunction to restrain the filing of the winding-up petition.

Inherent Jurisdiction of the Court

There is no specific provision under the Companies Act or the Companies (Winding-Up) Rules which allows for such an injunction. The Court exercises its inherent jurisdiction to prevent an abuse of its process when it issues such an injunction. As recognised in Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation of the Commonwealth of Australia [1978] VR 83:

“When a court restrains the presentation of a winding up petition to that court it exercises part of its inherent jurisdiction to prevent abuse of its process. Mann v Goldstein, [1968] 1 WLR 1091, at pp. 1093-4; [1968] 2 All E.R. 769.

Usually a court acts against abuse of its process after proceedings have been commenced. Thus, existing proceedings may be stayed or dismissed, or documents delivered as a step in the proceedings may be struck out. This is done to relieve a party to the proceedings from an oppressive and damaging situation in which he has been placed through abuse of court process.

The law has long recognized that with proceedings to wind up a company, intervention after the commencement of proceedings would often be too late to relieve the company of oppression and damage. The courts have recognized that irreparable damage may be done to a company merely through public knowledge of the presentation of a petition. Usually the damage flows from the loss of commercial reputation which results. The courts have also been conscious of the pressure which may be put on a company, by a person with a disputed claim against it, threatening to present a winding up petition unless the company meets his claim. While that threat exists, the company, in order to avoid the damage involved in the presentation of a petition, is pressed to meet the claim although it may have substantial and genuine grounds for regarding itself as not required to do so.”

…the test to be applied is whether there is a bona fide dispute of debt based on substantial grounds.

‘Bona Fide Dispute of Debt on Substantial Grounds’

The position under Malaysian law has been confirmed in the Court of Appeal case of Tan Kok Tong v Hoe Hong Trading Co Sdn Bhd [2007] 4 MLJ 355 where the Court quoted with approval the above passage. When deciding whether to grant an injunction to restrain a petition that is based on a statutory demand for a debt, the Court must be satisfied that there is a prima facie case and not merely a serious issue to be tried. In demonstrating this prima facie case, the Court of Appeal held that the test to be applied is whether there is a bona fide dispute of debt based on substantial grounds.

This helps to clarify the somewhat conflicting High Court authorities which held that the test in granting such an injunction is whether the winding up petition is bound to fail (for instance, see Sri Binaraya Sdn Bhd v Golden Approach Sdn Bhd [2000] 3 MLJ 465 and as discussed in Pembinaan Lian Keong Sdn Bhd v Yip Fook Thai (practising as Messrs Yip & Co) [2005] 5 MLJ 786).

For a creditor to resist such an injunction and to demonstrate that there is no ‘bona fide dispute of debt on substantial grounds’, a creditor should come armed with a judgment sum or with a clear admission of debt (as seen in the Supreme Court case of Chip Yew Brick Works Sdn Bhd v Chang Heer Enterprise Sdn Bhd [1988] 2 MLJ 447).

Injunction to Restrain Advertisement of Petition?

If the petition has been filed, can the company apply for an injunction to restrain the creditor from advertising the petition? In Chip Yew, the Supreme Court refused to grant an injunction to restrain the advertisement and this was similarly followed in the High Court decision of Azman Tay & Associates Sdn Bhd v Sentul Raya Sdn Bhd [2002] 2 MLJ 395.

…once a winding-up petition is filed, the court is precluded from granting an injunction against advertisement or gazettal of the petition.

Now, the Court of Appeal in People Realty Sdn Bhd v Red Rock Construction Sdn Bhd [2008] 1 CLJ 632 has confirmed that once a winding-up petition is filed, the court is precluded from granting an injunction against advertisement or gazettal of the petition. (Ed: The Appellant’s leave to appeal to the Federal Court was dismissed. Hence, the case of People Realty continues to remain as binding authority on this point)

This Court of Appeal decision must surely lay to rest the anomalous High Court decision of Celcom (Malaysia) Bhd v Inmiss Communication Sdn Bhd [2002] 3 MLJ 178 where the Court granted an Erinford injunction to restrain the advertisement and gazettal of the petition. People Realty confirms the mandatory requirements of advertisement and gazetting as set out in the Companies (Winding-Up) Rules.

Echoing the words of Vincent Ng J (as he then was) in Azman Tay, “…the court is not empowered to make any order to restrain or injunct the petitioners from carrying out their statutory obligation to comply with r.24.”

This makes it even more imperative for the company to obtain an injunction during the 21-day window after the issuance of the Section 218 Notice, since the filing of the petition would prevent any injunction restraining the advertisement and gazetting of the petition.