Beware of the Hidden Winding Up Notice: New Federal Court decision

The Federal Court in Lai Yak Kee v Pembinaan Alam Cemerlang Sdn Bhd [2012] 1 LNS 1464 has clarified important points regarding the statutory demand issued under section 218 of the Companies Act. Any letter of demand, without any reference to possible winding up proceedings, can be an effective statutory demand. Beware of this possible landmine.

Danger Mines

The Federal Court held that the statutory demand need not stipulate that it was issued pursuant to section 218, and there is no need to mention any 3-week payment period. Further, there is no requirement to give any warning that there will be winding up proceedings.

The demand merely needs to be for a sum of more than RM500, issued under the hand of the creditor or his agent, and served on the registered address of the debtor company. This is due to the plain application of the wording of section 218.

This is significant as companies are used to receiving mere letters of demand as precursors to possible civil suits. Companies may even ignore such letters of demand.

On the other hand, when companies receive a clearly-marked statutory demand issued pursuant to section 218, there is an obvious threat of possible winding up proceedings. Companies would know that they must immediately react to oppose this statutory demand.

Companies will now have to be very cautious in assessing every letter of demand that they receive, whether there is a reference to section 218 or not.

If the claim is not paid within the 3-week period, there can be the presumption of insolvency and where the creditor can file a winding up petition against the company.

So, every simple letter of demand could now be a hidden landmine where winding up proceedings may be initiated if the demand is not paid after the expiry of the 3-week period.

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