Unwinding a Winding-Up?

This article was originally published in Skrine’s Legal Insights and I drew inspiration from Fahri Azzat’s article on LoyarBurok which featured the Federal Court decision below.

A commentary on Megah Teknik Sdn Bhd v Miracle Resources Sdn Bhd

The law allows the Court to exercise its discretion to set aside a Court Order under specific circumstances, for instance, where an Order has been granted in the absence of one party, or where there has been a contravention of a substantial provision of law.In the case of a winding up Order, the authorities strongly suggest that a Court has no jurisdiction to set aside a winding up Order. Instead, an applicant must apply for a stay of such an Order under the Companies Act 1965 (“the Act”). However, it can be argued that the Court still has some limited jurisdiction to set aside a winding up Order where the Order can be shown to be null and void due to illegality or lack of jurisdiction.All these principles will be analysed in light of the Court of Appeal decision in Megah Teknik Sdn Bhd v Miracle Resources Sdn Bhd [2010] 4 MLJ 651 (“Megah Teknik”). This decision was affirmed by the Federal Court (unreported judgment dated 13 October 2010 in Federal Court Civil Application No. 02(i)-29-2009).

BRIEF FACTS AT THE HIGH COURT

The Court of Appeal decision arose from a decision of the Kuala Lumpur High Court dismissing an application to set aside a winding up Order.

The petitioning company (“the Petitioner”) had presented a winding up Petition against the respondent company (“the Company”). The Company failed to enter an appearance and failed to file an affidavit to oppose the Petition. The Court then made a winding up Order against the Company.

Almost a year later, the Company filed an application to set aside the winding up Order on the ground that the winding up Order was made in default as the Company had no knowledge of the winding up proceedings. The Company claimed that it only became aware of the winding up Order when one of its directors had been blacklisted.

In the unreported grounds of judgment (Miracle Resources Sdn Bhd v Megah Teknik (M) Sdn Bhd [2008] 1 LNS 362), the High Court held that it was bound by the Court of Appeal decision in Vijayalakshmi Devi d/o Nadchatiram v Jegadevan s/o Nadchatiram & Ors [1995] 1 MLJ 830 (“Vijayalakshmi”). This decision held that a winding up Order cannot be discharged or rescinded after it had been made and the only remedy was to apply for a stay of the winding up under section 243 of the Act.

The High Court declined to follow other High Court authorities which allowed for the setting aside of a winding up Order.

THE COURT OF APPEAL

The Court of Appeal adopted the approach of the High Court in upholding the decision of Vijayalakshmi. It was pointed out in Vijayalakshmi, and noted in Megah Teknik, that there are no express provisions in the Act or the Companies (Winding up) Rules 1972 (“the Rules”) which allow for a setting aside or variation of a winding up Order. This is unlike the English Insolvency Rules 1986 which contain such a provision.

In Megah Teknik, the Court of Appeal held that a Court cannot invoke the general provision under the Rules of the High Court 1980 allowing for the setting aside of an Order made in default. This was because the Act set out specific provisions pertaining to winding up, including a stay of a winding up, but the Act was silent on allowing for a setting aside. Hence, the proper remedy in Megah Teknik was to apply for a stay under section 243 of the Act or to appeal against the winding up Order.

However, the Court of Appeal did leave the door open for a possible exercise of inherent jurisdiction to set aside a winding up Order under certain circumstances. The Court of Appeal did not explicitly list out these circumstances but adopted the Federal Court decision of Badiaddin bin Mohd Mahidin & Anor v Arab Malaysian Finance Bhd [1998] 1 MLJ 393 (“Badiaddin”). It was held by the Federal Court that there was inherent jurisdiction to set aside an Order where there was a contravention that defied a “substantive statutory prohibition so as to render the defective order null and void on ground of illegality or lack of jurisdiction.”

THE FEDERAL COURT

Leave to appeal to the Federal Court against the Court of Appeal decision was allowed. The question of law was whether a winding up Order could be set aside when obtained in the absence of the Respondent company. However, the Federal Court felt it was not proper to address the question as the Petitioner was not present and was not represented by solicitors. While declining to answer the question of law, the Federal Court nonetheless also held that there was no merit in the appeal and dismissed the appeal. Therefore, the Court of Appeal decision in Megah Teknik was upheld.

COMMENTARY

The upshot of Megah Teknik is that in general, one can only apply to stay a winding up Order. In circumstances like Megah Teknik, where the winding up Order was obtained in default, this decision suggests that there is no recourse to apply for a setting aside.

However, the Court of Appeal recognised that there would still be circumstances where the Court can exercise its inherent jurisdiction to set aside a winding up Order. Such circumstances could be where there was illegality or lack of jurisdiction. For instance, there may have been breaches in complying with the requirements under the Act and the Rules. Those breaches may have resulted in a respondent company not even having notice of the winding up Petition. Such an argument did not arise in Megah Teknik as the procedural requirements were complied with.

There are crucial differences between a stay and a setting aside of a winding up. While a stay of a winding up Order amounts to a total discontinuance of the winding up proceedings, there are several hurdles in applying for such a stay. The interests and views of the creditors, contributories and the liquidators must be taken into account in assessing whether a stay should be granted. On the other hand, for a setting aside, such a test would not be relevant as the focus would be on whether the winding up Order was granted illegally or with lack of jurisdiction. Further, for a stay, the records with the Companies Commission of Malaysia would still reflect the winding up but that it was now stayed. For a setting aside, there would not have been a valid winding up Order in the first place and the records should not reflect any winding up.

For the reasons discussed above, it is submitted that the Court ought to have jurisdiction to set aside a winding up Order. Echoing the words of Mohd. Azmi FCJ in Badiaddin, circumstances may exist where there is a “real need to set aside the defective order to enable to Court to do justice.”

It is a pity that the Federal Court in Megah Teknik missed out on the opportunity to clarify whether a Court can set aside a winding up Order and the specific circumstances in which it would do so.

See also my post on The Limits of a Stay of Winding Up.

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One thought on “Unwinding a Winding-Up?

  1. Pingback: How to Unwind a Voluntary Winding Up | Of Counsel

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