Validation Order in a Just and Equitable Winding Up

This post will feature the different considerations for a validation Order (to allow for dispositions of property after the presentation of a winding up Order) in a just and equitable winding up Petition compared to that of a Petition based on the company’s inability to pay its debts.

Introduction to Section 223: Void Dispositions

In a compulsory winding up in Malaysia, winding up is deemed to commence upon the presentation of a Petition rather than at the date of the actual winding up Order. Therefore, there is the real risk that any disposition of property after the presentation of a Petition will be deemed void (under section 223 of the Companies Act).

The purpose of section 223 is to protect the interests of the creditors, especially since such winding up proceedings by the Court is predicated on the fact that the company is insolvent.

In the English High Court decision of Re A.I. Levy (Holdings) Ltd [1964] 1 Ch 19, Buckley J stated the following of the identical provision under the English Companies Act (at page 27):

“It appears to me that the object of the section is to protect the interests of the creditors from the possibly unfortunate results which would ensue from the presentation of a petition, and to protect their interests as much during the period while the petition was pending as after an order has been made on it.”

Difference in Winding Up Petition based on Alleged Insolvency and that of a Shareholders Dispute

However, the law draws a distinction between a creditor’s petition based on alleged insolvency and a contributory’s petition for winding up not based on insolvency. The Court ought not interfere with mere disagreements of business management or judgments.

As observed in Low Siew Cheang ‘Corporate Powers – Accountability’ (2nd Edition, 2002) (at page 1275):

“In a contributory’s petition for winding up and the ground is not insolvency, the general principles of law applicable to director’s powers in the management of the business and affairs of the company assume greater significance in cases where the company is an active company. This is but an application of common sense – the court does not interfere with mere disagreements in matters of business management or judgments.”

The English High Court decision of Re Burton & Deakin Ltd [1977] 1 WLR 390 (“Burton & Deakin”) involved a shareholders dispute (albeit concerning an oppression petition). The company in that case sought for a validation order under the equivalent provision of the English Companies Act and the petitioners therein opposed the application. Slade J allowed the validation and held the following (at page 397):

“At least so long as a winding up petition has not been presented, the court will not generally, save in the case of proven bad faith or other exceptional circumstances, interfere with the exercise of the discretion conferred on the directors by a company’s articles of association at the instance of a shareholder.

I can see no good reason why the rights of interference by a shareholder vis-à-vis the company or its directors should, in this kind of situation, for practical purposes be drastically improved during the interim period, merely because he happens to have presented a winding up petition which is not demurrable and which has not yet been heard.

If on an application under section 227 relating to a solvent company, (a) evidence is placed before the court showing that the directors consider that a particular disposition, falling within their powers under the company’s constitution, is necessary or expedient in the interests of the company, and (b) the reasons given for this opinion are reasons which the court considers that an intelligent and honest man could reasonably hold, it will in the exercise of its discretion normally sanction the disposition, notwithstanding the opposition of a contributory, unless the contributory adduces compelling evidence proving that the disposition is in fact likely to injure the company.”

The case of Burton & Deakin was referred to approvingly and applied in the High Court decision of Lim Pin Chuan v Delimec Hygience Sdn Bhd & 4 Ors [2000] 1 AMR 454. This case similarly involved a winding up petition based on the just and equitable ground. Mohd Ghazali b Mohd Yusoff J (as he then was) allowed an application for validation and applied Burton & Deakin.

In the High Court decision of BSN Commercial Bank (M) Bhd v River View Properties Sdn Bhd and another action [1996] 1 MLJ 872, Abdul Malik Ishak J (as he then was) allowed the validation of payments to run its daily affairs. His Lordship held (at page 882):

“It is my judgment that the court will always have regard as to whether the disposition was made bona fide in the course of the company’s current trade, and if not validated, the trade of the company would be paralysed without any advantage … Likewise here, as Mr Wong Kim Fatt rightly pointed out that River View needed the money to pay dividends and to run its daily affairs, without which River View would be paralysed, and on these grounds, the validation of the dispositions should be ordered in favour of River View and I so ordered accordingly.”

Conclusion

The reality is that upon the presentation of any winding up Petition, whether based on insolvency or the just and equitable ground, many banks will immediately freeze the bank accounts of the company. So even where a perfectly solvent company is subjected to a shareholder dispute between competing groups of shareholders, this company may find that its business operations come to a grinding halt when its bank accounts frozen. It is common to even have the Petitioning shareholder(s) to immediately inform the banks of the presentation of the Petition in the hope of exerting pressure on the responding group of shareholders when the company finds it difficult to operate.

It is therefore imperative that the Court quickly hears applications for validation Orders and where the Court gives different considerations where the Petition is based on a shareholder dispute.

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