Leave to Proceed Against Company in Voluntary Liquidation

The Court of Appeal departed from well-established insolvency principles that leave of Court is not required for an action or proceeding against a company in a members’ voluntary winding up. The Court of Appeal in Westech Sdn Bhd (in voluntary liquidation) v Thong Weng Lock (as surviving partner of Thong Kee Trading Co) [2014] 3 MLJ 427 held that case law had established that leave of Court under section 263 of the Companies Act 1965 (“Act”) was required whether the winding up was a members’ voluntary winding up or otherwise. This finding appears to have been made obiter dictum since the the company before the Court was in creditors’ voluntary winding up, and not in a members’ voluntary winding up.

By way of background, there are two forms of voluntary winding up. The first is termed a members’ voluntary winding up. The company must be solvent, and the directors and members resolve to wind up the company. The creditors must be paid in full in such a situation. The second is a creditors’ voluntary winding up. The company in this case is insolvency. The decision to wind up the company is still made by the directors and members, but the creditors (through a creditors’ meeting) have the ability to choose the liquidator of the company. These forms of voluntary winding up is contrasted with a compulsory winding up, or otherwise known as the Court-ordered winding up. Here, the common situation is of a creditor filing a Petition to wind up the company on the grounds of insolvency.

It is quite clear that section 263 of the Act applies only in a creditors’ voluntary winding up situation. Section 263(1) refers to the “commencement of a creditors’ voluntary winding up” and where section 263(2) states that after the “commencement of the winding up no action or proceeding shall be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.” Further, section 263 is contained in the section of the Act titled “Subdivision (3) – Provisions applicable only to Creditors’ Voluntary Winding up.” This provision requiring leave of Court is similar to a compulsory winding up situation where section 226(3) provides for a similar stay and no action or proceeding shall be proceeded with or commenced against the wound up company except by leave of Court. The legislative intent of these two provisions is that the liquidator of the wound up company should not be forced to incur unnecessary expenses through defending legal actions if the creditors can obtain their relief within the winding up process through the filing of a Proof of Debt.

On the other hand, the situation is different in a members’ voluntary winding up. The company would have been solvent and the creditors should be paid off in full. Therefore, the Act is silent in providing any form of statutory stay of proceedings or enforcement. In fact, ordinarily in a members’ voluntary winding up, the onus is then on the liquidator to formally apply to the Court for an order for a stay of such actions and proceedings. This could be done through an application under section 274(1)(b) read with section 226(3) of the Act. There is some discussion of these circumstances in a members’ voluntary winding up in the English Court of Appeal decision of Gerard v Worth of Paris Ltd [1936] 2 All ER 905.

Having set out the law, we then come to the facts of Westech. The High Court had allowed a leave application filed under section 263(2) of the Act and where the Court of Appeal overturned this High Court decision. I will not touch on the merits of the decision although it was an unusual leave application and on the merits, the Court of Appeal had very good grounds in setting aside the High Court decision. It is important to emphasise that it appears that Westech concerned a creditors’ voluntary winding up. Publicly available information shows that Westech Sdn Bhd commenced its creditors’ voluntary winding up process on 26 October 2006. However, it appears that the arguments made before the Court of Appeal (see for example [24]) was on the basis that the company was in a members’ voluntary winding up. Hence, the reference to the Declaration of Solvency made under section 257 of the Act (which applies only to a members’ voluntary winding up).

Nonetheless, I am unable to agree with the finding by the Court of Appeal at [34] of the decision that the language of section 263(2) of the Act makes no distinction between a voluntary winding up by members of the company or winding up by a creditor on the ground of the company’s insolvency. I have set out the analysis above on how section 263 of the Act should only apply to a creditors’ voluntary winding up situation.

 

 

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