Blitzkrieg Ex Parte Appointment of a Provisional Liquidator

Introduction

A provisional liquidation is the Court appointment of a liquidator to a company in the period between the filing of the application to wind up the company and the Court hearing the application, pursuant to section 231 of the Companies Act 1965 (“the Act”) and Rule 35 of the Companies (Winding Up) Rules 1972 (“the Rules”). The appointment is provisional because the company may not be wound up at that hearing, or another official liquidator may be appointed.

The effect of the appointment of a provisional liquidator is that the powers of the board of directors immediately cease, and the powers of managing the company vests in the provisional liquidator. A sudden ex parte (i.e. without any notice being given to the other party) appointment of a provisional liquidator over a company allows the provisional liquidator to show up at the doorstep of the company’s office, the Order of appointment in hand, and proceed to lock up the office and seize control of all documents, assets and property of the company.

Depending on the circumstances, the terms of the ex parte Order may even allow the provisional liquidator (and his representatives) to enter the homes of the directors or any other place to seize company documents, if there are grounds to believe that these company documents have been secreted away.

The business of the company may well be paralysed as the provisional liquidator may or may not continue with the running of the company. Additionally, there may be irreversible damage to the goodwill and reputation of the company.

The ex parte appointment is normally based on the justification that the assets and affairs of the respondent company are in jeopardy. Such appointment is made to ensure that the assets and property of the respondent are under the control of the provisional liquidator until the determination of the winding up petition. Hence, any notice given to the respondent might result in a dissipation of the assets before the provisional liquidator is appointed.

The ex parte appointment is normally based on the justification that the assets and affairs of the respondent company are in jeopardy.

The ex parte appointment of the provisional liquidator lasts until the disposal of the winding up petition and even then there is no automatic right to an inter partes hearing. Hence it is crucial for the respondent company to quickly apply to set aside this ex parte appointment or the company will continue to be paralysed.

There are several grounds the respondent can rely on, namely:

(i) Failure to Show a Good Prima Facie Case for Winding Up

As held in the case of Kok Fook Sang v. Juta Vila (M) Sdn Bhd [1996] 2 MLJ 666, a court will only appoint a provisional liquidator upon the presentation of a winding-up petition when there is good prima facie evidence that the company will be wound up because the company is obviously insolvent, or its assets are in jeopardy or there are other circumstances which make it imperative for the court to intervene.

It was further held that the primary facts set out in the petition if assumed to be true and the uncontested evidence taken as a whole must add up to the conclusion that it is imperative that the winding-up order be made. Therefore, the respondent in applying to set aside the ex parte appointment must demonstrate that there is no good prima facie case for winding up, and that the allegations in the winding up petition do not support a winding up order. This is illustrated in the case of Re Lo Siong Fong [1994] 2 MLJ 72 where the petition had no hope of being successfully prosecuted, and the appointment of the provisional liquidator was set aside.

(ii) Failure to Make a Full and Frank Disclosure of Material Facts

The respondent can challenge the appointment of a provisional liquidator on the ground that there has been material non-disclosure during the ex parte hearing. Malaysian cases like Re Lo Siong Fong [1994] 2 MLJ 72 and Kong Long Huat Chemicals Sdn Bhd v. Raylee Industries Sdn Bhd [1998] 6 MLJ 330, and the Singapore case of Pac Asian Services Pte Ltd v. European Asian Bank AG [1989] 3 MLJ 385 involved material non-disclosures of facts during the ex parte hearing that led to the setting aside of the appointment of the provisional liquidator.

In the English case of Siporex Trade v. Comdel [1986] 2 Lloyd’s Rep 428 the Court held that the applicant must identify the crucial points for and against the application, and not merely rely on general statements and the exhibiting of numerous documents.

This duty of disclosing material facts also extends to the oral hearing of the application itself. In the English case of Memory Corporation Plc v. Sidhu (No. 2) [2000] 1 WLR 1443, the Court made a general statement regarding urgent without notice hearings; that there is a high duty on the advocate to make full and frank disclosure and that extends to the oral hearing of the application itself. The advocate must draw the court’s attention to the unusual features of the evidence and to the applicable law.

(iii) Balance of Convenience

The onus is on the petitioner to establish the urgency and need for the appointment of a provisional liquidator and the Court must have regards to the balance of convenience due to the devastating effect on the company.

Further as held in the Australian case of Zempilas & Ors v. J N Taylor Holdings Ltd & Ors (1990) 3 ACSR 518, the appointment of a provisional liquidator is not to be contemplated if other measures would be adequate to preserve the status quo. Hence, alternative measures in preserving the status quo would shift the balance of convenience to justify the setting aside of the appointment of the provisional liquidator.

(iv) Failure to Give Undertaking for Damages?

Even if the petitioner had failed to give an undertaking for damages in the ex parte application for a provisional liquidator, it appears that this is not a ground to support a setting aside application.

In Pui Chiau Tien v. Foi Chaw Leong & Anor [2004] 5 CLJ 145, the Court considered the contrasting decisions of Eveready Manufacturing (Pte) Ltd v. Explast Industries Sdn Bhd [1998] 5 CLJ 212 and Kong Long Huat Chemicals Sdn Bhd v. Raylee Industries Sdn Bhd [1998] 6 MLJ 330 and clarified that the undertaking in damages by the applicant is not mandatory in an ex parte application for the appointment of a provisional liquidator but it is customary and in accord with general practice. Section 231 of the Act and Rule 35(1) of the Rules do not lay down the requirement that there must be an undertaking as to damages before the appointment of a provisional liquidator. It is entirely up to the court’s discretion and the absence of such an order for undertaking as to damages does not in any way invalidate the Order.

…the setting aside may well represent a hollow victory…

Although the above factors justify the setting aside of the ex parte appointment of a provisional liquidator, it may take a long time to achieve this. Thus, the setting aside may well represent a hollow victory as the respondent company may already have suffered irreparable damage to its business i.e. its business would be suspended and bank accounts frozen during that period.

The true security of companies against the ill-effects of the unjustified ex parte appointment of a provisional liquidator thus resides in the vigilance of the Court in determining whether the grounds in support of the ex parte application truly warrant the appointment of a provisional liquidator.

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