Category Archives: insolvency

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.

From Star Chamber to Celestial

I write about the Singapore Court of Appeal decision on the liquidator’s ability to obtain audit working papers. This article was originally published in Skrine’s Legal Insights Issue 2/2015.

The Singapore Court of Appeal in PricewaterhouseCoopers LLP and others v Celestial Nutrifoods Ltd (in compulsory liquidation) [2015] SGCA 20 laid down important guidelines on the grant of an Order to summon persons connected with the wound up company and to produce documents. The liquidator had successfully compelled the former auditors of the company to hand over all the audit-related documents including the audit working papers.

The statutory provision is far from being a “Star Chamber” clause (as originally described in In re Greys Brewery Company (1884) 25 Ch D 400 at 408), referring to the secretive Elizabethan court proceedings where prisoners were forced to answer self-incriminating questions.

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Guarding against Champerty: Litigation Funding in Insolvency

The Singapore High Court in its decision in Re Vanguard dated 9 June 2015 dealt with the interesting issue on whether to approve a litigation funding arrangement in insolvency.

Background

It is common in the winding up of a company, there may not be enough money left in the company for the liquidator to fund litigation. This litigation in turn could successfully lead to more assets being paid back to the company, for the benefit of the general pool of creditors. The liquidator may therefore need to obtain funding to fuel this litigation.

This may then sail dangerously close to breaching the common law doctrines of maintenance and champerty. Maintenance is the giving of assistance to a party in litigation by a party who has no interest in the litigation while champerty is the maintenance of an action in exchange of getting a share of the proceeds. These common law doctrines, still existing here in Malaysia, are meant to protect the purity of litigation.

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Strict Requirements for a Stay of a Winding Up Order

A recent High Court decision sets out the strict requirements to be met when applying for a stay of a winding up. In this case, despite there being no objections raised by the liquidator or the other parties, the Court would still scrutinise the evidence before deciding whether to grant the stay or not.

In the Grounds of Judgment dated 2 June 2015 for the case of Percetakan Warni Sdn Bhd, the Court dismissed an application by a shareholder under section 243 of the Companies Act 1965 for a permanent stay of a winding up. This is despite the Petitioner and the Liquidator (being the Official Receiver)) not objecting to the application and where the Respondent (through its shareholder) would be paying off the debts of the Respondent company.

Of interest was that there were uncommon features which the Court insisted should have been met for such a section 243 stay application. The Court took the step of carefully assessing whether all of these requirements were met:

  1. In addition to the established section 243 principles from the leading Federal Court case of Vijayalakshmi and other cases, the Court held that there must be evidence to demonstrate the company will be commercially solvent after the section 243 stay. It is not sufficient to show assets outweigh the liabilities. Commercial solvency can be shown through injection of funds from a “white knight”, evidence that the company will be gaining a lucrative contract, or an expert opinion from a restructuring expert or accountant on the likelihood of the company’s commercial solvency. There was no evidence of any of these.
  2. The company had earlier been granted an ad interim stay of the winding up, since the OR had no objections to that. However, there was no evidence that the Board had even carried on the business or operated the company throughout that ad interim stay.
  3. The Court also scrutinised the Statement of Affairs filed by the directors and compared it with the Liquidator’s report filed by the OR. There were inconsistencies in the directors’ Statement of Affairs and not sufficient disclosure. While no objections were raised by the other parties, the Court held that this showed that the applicant’s evidence was not credible.
  4. The application also did not exhibit the latest audited accounts of the company. The last audited accounts were in 2010 and no updated financial information was provided by the applicant.

As these requirements were not met, the stay application was dismissed. So be aware of the possibly stringent requirements when seeking for a section 243 stay of a winding up Order. These additional requirements would also provide good grounds to object to a section 243 stay application.

 

Arbitration and Liquidation: Never the Twain Shall Meet?

[This article was originally published in the Chartered Institute of Arbitrators, Malaysia branch newsletter Issue 1/2015].

Lee Shih analyses the tension between the contractual bargain to arbitrate and the statutory right to bring winding up proceedings based on a debt. Would an arbitration agreement trump the winding up process?

fighting

Introduction: Statutory Right vs Contractual Bargain

Liquidation, or winding up, is a statutory process which leads to the end of the life of a company. It allows for an equitable realisation and distribution of the assets of a company to discharge its debts. It is a procedure of an inherently collective nature, and each creditor forfeits its individual right to take action to enforce any debt owed and must depend on the result of the collective procedure.

By contrast, arbitration arises from the bargain that has been struck between the contracting parties. Disputes arising from the contract between the parties are to be resolved through the private dispute resolution mechanism of arbitration.

This article covers the possible conflict between the statutory right to wind up a company and the contractual bargain to arbitrate disputes with that company. For example, can a creditor, who alleges that a debt is due, bypass the arbitration clause and instead, bring a winding up action? This article will set out how different jurisdictions have attempted to resolve this tension.

Singapore: Larsen Oil

The Singapore Court of Appeal decision in Larsen Oil and Gas Pte Ltd v Petropod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore) [2011] 3 SLR 414 (“Larsen Oil”) dealt with limits of the arbitrability of disputes relating to an insolvent company.

The respondent, Petropod Ltd (“Petropod”), entered into an agreement with the appellant, Larsen Oil and Gas Ltd (“Larsen Oil”). Certain payments were made by Petropod and its subsidiaries to Larsen Oil, which Larsen Oil claimed were payments due under the agreement.

Petropod was subsequently placed under liquidation. Petropod’s liquidators commenced proceedings for the avoidance of a number of the payments made to Larsen Oil on, among others, the ground that these payments were unfair preferences or transactions at an undervalue under the relevant winding up provisions. Larsen Oil applied for a stay of these proceedings in favour of arbitration, relying on an arbitration clause in the agreement.

The Court of Appeal set out the difference in approach for two situations relating to an insolvent company and when these disputes may be non-arbitrable.

Firstly, there may be a dispute involving an insolvent company due to the operation of the insolvency regime. This insolvency regime would trigger statutory provisions to recoup assets for the benefit of the company’s creditors caused by the misfeasance and/or malfeasance of its former management. This is especially true of the avoidance and wrongful/fraudulent trading provisions. A further consideration is that some of these remedies may include claims against former management who would not be parties to any arbitration agreement. Therefore, the insolvency regime’s objective of facilitating claims by a company’s creditors against the company and its former management overrides the freedom of the company’s former management to choose the forum where such disputes are to be heard. Disputes arising from the operation of the statutory provisions of the insolvency regime per se are non-arbitrable.

Secondly, there may be a dispute involving an insolvent company that stem from its pre-insolvency rights and obligations. In instances where the agreement was only to resolve the prior private inter se disputes between the company and another party, the Court would usually observe the terms of the arbitration agreement. The proof of debt process was merely a substituted means of enforcing debts against the company, and did not create new rights in the creditors or destroy old ones. Allowing a creditor to arbitrate his claim against a wound up company in such circumstances would not undermine the insolvency regime’s underlying policy aims.

Based on the above principles, the Singapore Court of Appeal affirmed the Singapore High Court’s decision to dismiss the stay of proceedings since the subject matter of the claim, being inter alia claims of unfair preference, was non-arbitrable.

However, if there was merely a dispute of a debt between the company and an alleged creditor, this may fall within the Larsen Oil formulation of a prior private inter se dispute between the company and alleged creditor. Such a dispute may be allowed to go for arbitration instead of being resolved within the winding up proof of debt process.

Hong Kong: Jade Union

In the Hong Kong Court of First Instance case of Re Jade Union Investment Limited [2004] HKCFI 21 (“Jade Union”), the petitioner presented a winding up petition against the company, Jade Union, based on a debt arising from four interim payment certificates. There was an arbitration clause in the underlying contract. Shortly after the presentation of the petition, the petitioner also commenced arbitration proceedings against Jade Union for outstanding payments under the contract, including the claims under those interim payment certificates. Jade Union applied to stay the winding up petition and one of the grounds was based on the arbitration clause.

The Court dismissed the stay application. It was held that a winding up petition is different from an action between the parties, in which the parties seek the court’s determination as to their respective rights and liabilities. In a winding up petition, a creditor invokes the court’s jurisdiction under the Companies Ordinance to wind up a company on one or more of the grounds set out in the Ordinance. In doing so, the creditor exercises a class right available to all of the company’s creditors.

Even if a winding up order is made, the creditor is still obliged to submit a proof of debt, along with other creditors of the company, and the liquidator will then decide how much the creditor is entitled to receive from the assets of the company. It follows that by making a winding up order the court does not thereby adjudicate the petitioner’s rights to recover any particular amount from the company.

Therefore, the existence of an arbitration agreement did not affect the Court’s jurisdiction under the Companies Ordinance and it appeared that the winding up regime took precedence over the arbitration agreement.

England: Salford Estates

The legal position in England on this area has been evolving and now it appears that a Court would not automatically apply the stay provision in the arbitration legislation to stay a winding up petition.

Initially, the English High Court decision of Rusant Ltd v Traxys Far East Ltd [2013] EWHC 4083 (Ch) (“Rusant”) held that if a petition is based on a disputed debt identified in a statutory demand and that dispute is the subject of an arbitration agreement, it must be referred to arbitration first. The High Court therefore granted an injunction to restrain the presentation of the winding up petition.

However, the English Court of Appeal in Salford Estates (No. 2) Limited v Altomart Limited [2014] EWCA 1575 Civ (“Salford Estates”) has now disagreed with the decision in Rusant. In Salford Estates, a winding up petition was presented against the company based on the ground of its inability to pay its debts. The company applied under the English Arbitration Act 1996 for a stay of the winding up petition as the debt on which the petition was based arose out of a contract containing an arbitration agreement.

The English Court of Appeal held that the stay provision under the English Arbitration Act 1996 would have no application to the winding up petition. Firstly, if the petition proceeded, there could be no reference to arbitration of any of the debts because the making of the winding up order bring into effect the statutory scheme for proof of debts which supersedes any arbitration agreement. Secondly, it would be highly improbable that Parliament, without any express provision to that effect, intended the stay provision to confer on a debtor such a right to a non-discretionary order. That would strike at the heart of the jurisdiction and discretionary power of the Court to wind up companies in the public interest where companies are not able to pay their debts.

However, the Court proceeded to consider the winding up provision under the English Insolvency Act 1986 which confers a discretionary power to wind up a company. It was held that this discretion should be exercised in a manner consistent with the legislative policy embodied in the English Arbitration Act 1996. Therefore, the Court exercised its discretion under the Insolvency Act 1986 to stay the petition so as to compel the parties to resolve the dispute on the debt through arbitration.

So while the English position is that the statutory jurisdiction for winding up is unaffected by the statutory stay provision under the arbitration framework, the English Courts can still exercise its discretion as to whether to compel parties to adhere to their contractual bargain to arbitrate.

One Approach in Malaysia: Company Court would not adjudicate on the disputes subject to arbitration

In Malaysia, a winding up petition may be presented on the ground of the company’s inability to pay its debts (section 218(1)(e) of the Companies Act 1965 (“CA 1965”)). A creditor may issue a statutory demand under section 218(2)(a) of the CA 1965 to seek payment of any debt of more than RM500 and thereafter, present a winding up petition. The underlying debt may however be disputed by the company and the company may want to rely on the arbitration agreement in the contract.

The Malaysian Courts have addressed the issue on whether to proceed with a winding up petition where the underlying dispute between the parties is subject to arbitration.

In both the High Court decisions of Syarikat Lian Ping Enterprise Sdn Bhd v Cygal Bhd [2000] 2 CLJ 814 (“Syarikat Lian Ping”) and Liew Yin Yin Construction Sdn Bhd v Yata Enterprise Sdn Bhd [1989] 3 MLJ 249 (“Liew Yin Yin”), a winding up petition was presented against the respondent companies based on a debt due to the petitioner. The debt arose from a contract which contained an arbitration agreement. The High Court in both cases ordered that the petitions be struck out. The underlying reasoning was that the Court, sitting as a Companies Court, would not be used to resolve the disputes between the parties and that the disputes should be resolved by arbitration. The Court would not inquire into the disputes as that would have amounted to the Court adjudicating on the disputes, thereby frustrating the arbitration agreement with a Court should normally act on.

In both the cases, the respondent did not rely on the stay provision under the old Arbitration Act 1952 to attempt to stay the winding up petition. Nonetheless, the decisions appeared to foreshadow the English approach in Salford Estates in demonstrating the Court’s exercise of discretion to effectively put a stop to the winding up petition in order to uphold the parties’ bargain to arbitrate.

Another Approach: Party to an arbitration can still present a winding up petition

A winding up petition may also be founded on another ground to establish a company’s inability to pay its debts. Under section 218(2)(c) of the CA 1965, the Court can take into account the contingent and prospective liabilities of the company.

This was the route taken by the petitioning creditor in the High Court case of KNM Process Systems Sdn Bhd v Mission Biofuels Sdn Bhd [2014] 8 MLJ 434 (“KNM Process Systems”). The petitioning creditor had claims against the respondent for outstanding payments arising from a construction project. The petitioner’s initial suits against the respondent for these payments were stayed pending arbitration.

Despite the ongoing arbitration, the petitioner presented a winding up petition against the respondent based on section 218(2)(c) of the CA 1965.

The respondent applied to strike out the petition and the Court ordered that the striking out be heard together with the petition. The Court found that the petitioner had the locus standi to present the petition. The petitioner was held to be a contingent creditor of the respondent due to the possibility of succeeding in its arbitration against the respondent. The Court then proceeded to determine whether the respondent was unable to pay its debts. After examining the respondent’s financial reports, the Court found that there was insufficient evidence to justify a finding that the respondent was insolvent. Therefore, the Court dismissed the petition.

Although not raised in KNM Process Systems, it may have been open to the respondent to apply for a stay of the winding up petition based on section 10 of the Arbitration Act 2005 (“AA 2005”). What would have been the competing arguments in such an application?

On the one hand, the respondent could have argued that it is mandatory to stay the petition under section 10 of the AA 2005 unless the Court finds that the arbitration agreement was null and void, inoperative or incapable of being performed. The argument would be that the petitioner’s status as a creditor hinged on the ongoing arbitration between the parties. In echoing the Singapore Court of Appeal decision of Larsen Oil, it may be argued that the disputes on the debts were essentially private inter se disputes between the petitioner and the respondent. The legislative policy embodied in the AA 2005 should mandate the staying of Court proceedings in support of arbitration.

On the other side of the divide, the petitioner would have several strong arguments to resist such a stay application. In applying both the Hong Kong decision of Jade Union and the English decision of Salford Estates, the petitioner may argue that the presentation of the winding up petition is essentially a class right available to all the company’s creditors. More so in the case of KNM Process Systems where the winding up petition was not based on any particular debt but based on a company’s overall liabilities. It may have been argued that a stay under the AA 2005 cannot oust the jurisdiction and the discretionary power of the Court, as a Companies Court, to wind up in the public interest when a company is unable to pay its debts.

Conclusion

Arbitration practitioners would generally welcome the approach set out in Syarikat Lian Ping and Liew Yin Yin in that a Companies Court should not be called on to adjudicate on disputes where parties had agreed to arbitrate. A Court, whether exercising its powers under section 10 of the AA 2005 or its discretion under the winding up provisions, may put a stop to the winding up petition.

However, the approach in KNM Process Systems would effectively allow a party to an arbitration agreement to bypass the arbitral process by filing a winding up petition. This is particularly in a case where the petition is based on section 218(2)(c) of the CA 1965. This route would not require any statutory demand giving the 21-day notice and where the respondent company would have no notice until the petition was served. Even if the winding up petition is eventually dismissed, the company may have still suffered from the prejudicial effects of the presentation of the petition, through the advertisement and the possible freezing of its bank accounts.

The Court may also find it more difficult to stay or strike out any winding up petition in favour of arbitration if other parties are involved in the petition. For instance, creditors and contributories can file a Notice of Intention to Appear and are effectively treated as parties to the winding up proceedings, or the Court may have appointed a Provisional Liquidator pending the hearing of the petition.

This tension between the private dispute resolution process of arbitration and the public statutory winding up process is not easy to resolve. The Court would have to carefully examine the different considerations in play to balance these two different processes.

A Singularis Approach to Cross-Border Insolvencies

[Originally published in Skrine Legal Insights Issue 1/2015]

The Privy Council in Singularis Holdings Ltd v Pricewaterhouse Coopers [2014] UKPC 36 (“Singularis”) has clarified the extent to which courts can render common law assistance for cross-border insolvencies.

In summary, there is a limited common law power to assist a liquidator appointed by a foreign court by ordering the production of information. Such information must be necessary for the administration of the foreign winding up and this power is only exercisable if the foreign court could have made such an equivalent order.

BACKGROUND: MODIFIED UNIVERSALISM

In a cross-border insolvency, courts may be faced with difficult questions. Should a domestic court apply its domestic laws as if the case had no international aspects or should a domestic court defer to the foreign laws of the main jurisdiction of incorporation of the wound up company?

In other words, should a ‘territorialist’ approach be applied where the domestic court only applies its domestic laws? Alternatively, should a ‘universalist’ approach prevail in allowing a single set of the foreign laws of the main winding up jurisdiction to govern all of the global winding up proceedings?

A middle ground between these two concepts is that of ‘modified universalism.’ The courts of all countries should cooperate, as far as possible, with the laws of the main jurisdiction, except where the domestic jurisdiction has a compelling reason to apply its domestic laws.

It is against this backdrop of the increasing recognition of modified universalism that the facts of Singularis are set out below.

BRIEF FACTS OF SINGULARIS

Singularis Holdings Limited (“Singularis”) had been wound up in its place of incorporation, the Cayman Islands. The liquidators of Singularis (“Liquidators”) obtained court orders in the Cayman Islands against the company’s former auditors, PricewaterhouseCoopers (“PwC”) in Bermuda, to deliver up to the Liquidators certain documents. This was in order to facilitate the Liquidators’ investigations to trace certain assets. However, the law of the Cayman Islands only provided for documents “belonging to” a company to be delivered up to a liquidator. There was no dispute that this would not include material belonging to PwC itself, principally their audit working papers.

Subsequently, in Bermuda, while there was no ancillary liquidation of Singularis, the Liquidators obtained an order from the Bermudan court recognising their status as liquidators. Where a company is wound up in Bermuda, Bermudan law had a wider provision where documents “relating to” a company are to be delivered up to the liquidator of the wound up company. Relying on this Bermudan provision, the Liquidators applied for a Bermudan court order for PwC to deliver up its audit working papers.

At first instance, the Bermudan court allowed the Liquidators’ application and relied on the principle of modified universalism. The Bermudan court exercised a common law power to order PwC to produce the same documents which they could have been ordered to produce under the relevant Bermudan provision.

PwC appealed the decision and on appeal, the Bermudan Court of Appeal set aside the first instance decision. The Liquidators appealed to the Privy Council.

PRIVY COUNCIL DECISION

The Privy Council, by a three to two majority decision,  dismissed the appeal on grounds that the Liquidators would not have had the power to require PwC to produce the documentation under the laws of the Liquidators’ main winding up jurisdiction i.e. Cayman Islands law. While the Privy Council was deciding on Bermuda law, the common law of Bermuda is the same as that of England.

The Privy Council had to consider two issues:

(1)    Whether a common law power existed to assist foreign liquidators by ordering parties to provide information in circumstances where the equivalent statutory power did not apply to foreign liquidators; and

(2)    Whether, if such a power existed, it should be exercised where an equivalent order could not have been made by the court in the main winding up proceedings.

Firstly, the Privy Council upheld the general principle of modified universalism as set out in the Privy Council case of Cambridge Gas Transport Corp v Navigator Holdings plc Creditors’ Committee [2006] UKPC 26 (“Cambridge Gas”). At common law, the Court has power to recognise and grant assistance to foreign insolvency proceedings. However, the Privy Council overruled some of the other wider principles set out in Cambridge Gas and held that a domestic court does not have the common law power to assist the foreign court by doing whatever it could have done in a domestic insolvency.

In dealing with the issues in the appeal, the majority decision held that there is a common law power to assist a foreign insolvency court by ordering the production of information, whether oral or documentary, which is necessary for the administration of a foreign winding up.

However, this common law power is subject to the following five limitations:

(i)    It is only available to assist the officers of a foreign insolvency court. It would not be available, for example, to assist a voluntary winding up, which is essentially a private arrangement and is not conducted by or on behalf of an officer of the court.

(ii)    It is a power of assistance and exists to enable courts to surmount the problems posed for a world-wide winding up of the company’s affairs. It is therefore not available to enable foreign liquidators to do something which they could not do under the law by which they were appointed.

(iii)    It is available only when it is necessary for the performance of the office-holder’s functions.

(iv)    Such an order must be consistent with the substantive law and public policy of the assisting domestic court, in this case that of Bermuda. Following from this, it is not available to exercise such a common law power to obtain material for use in actual or anticipated litigation. Further, in some jurisdictions, it may be contrary to domestic public policy to make an order which there would be no power to make in a domestic insolvency.

(v)    The exercise of this power is conditional on the applicant being prepared to pay the third party’s reasonable costs of compliance.

Therefore, the Bermuda court had both the right and the duty to assist the Cayman court in so far as it properly could within the limits of its own inherent powers. This was to enable the officers of the Cayman court to do in Bermuda that which they could do in the Cayman Islands.

However, the Bermuda court could not exercise a common law power which was not exercisable by the Cayman court and could not apply the legislation applicable to its domestic winding up by analogy ‘as if’ the Cayman winding up was a domestic (i.e. Bermudan) winding up. It was not a proper use of the Bermuda court’s common law power of assistance for it to purport to use a power analogous to the Bermudan statutory provision to compel disclosure and production of information which belonged to PwC rather than the company.

LOCAL APPLICATION

In Malaysia, the Privy Council decision would not be binding but would be persuasive. Where a foreign company is wound up by the court of its main jurisdiction, and there is no ancillary winding up in Malaysia, the foreign liquidator would likely be able to obtain a Malaysian order recognising its status as a liquidator and possibly obtain an order for the production of information which is necessary for the administration of the foreign winding up.

Similarly, a local court-appointed liquidator of a Malaysian company with worldwide links may also apply for such orders for production of information in other common law jurisdictions.

It appears that this broad principle of allowing a production of information, both oral and documentary, would allow a foreign liquidator to also apply for orders allowing for private or public examination of persons in connection with the affairs of the company in winding up (assuming that there are such equivalent provisions in the foreign liquidator’s main jurisdiction).

Decades ago, the Singapore High Court in Re China Underwriters Life and General Insurance Co Ltd [1988] 1 MLJ 409 held that the court had no inherent jurisdiction or power to order the private or public examination of persons and dismissed the Hong Kong liquidator’s application. It was recognised in that case that such a power of examination was an extraordinary one which invoked images of the Inquisition and of the Court of Star Chamber. This decision was upheld by the Singapore Court of Appeal in Official Receiver of Hongkong v Kao Wei Tseng & Ors [1990] 2 MLJ 321. At that time, it was held that it was only a statutory power available in a domestic winding up.

As a result of Singularis, we may now have a broadening of the courts’ power in Malaysia to assist foreign court-appointed liquidators.

Time can be Extended for Affidavits in Winding Up

In winding up proceedings, the Companies (Winding-up) Rules 1972 provide for strict timelines for the filing of the affidavits. Rule 30 provides that the affidavit in opposition to the Petition shall be filed and served at least 7 days before the hearing of the Petition. In turn, the Petitioner’s affidavit in reply to the affidavit in opposition shall be filed and served within 3 days of the date of service of the affidavit in opposition. This makes the timeline very tight, especially for the Petitioner’s affidavit in reply.

Since the Court of Appeal decision in Crocuses & Daffodils (M) Sdn Bhd v Development & Commercial Bank Bhd [1997] 2 MLJ 756, there has been a line of authorities which has applied these timelines strictly. This is due to the use of the word “shall” in the Rule 30.

Court of Appeal decision in Kilo Asset

In the recent unreported grounds of judgment in Hiew Tai Hong v Kilo Asset Sdn Bhd, the Court of Appeal had to consider the issue as to whether there could be an extension of time to allow for the late filing of the various affidavits in a winding up Petition. In this case, the winding up petition involved a shareholder dispute where the petition relied largely on the just and equitable grounds. Extensive facts and the history between the shareholders were set out in the petition. This was not a case where the petition was based on an inability to pay debt and where a creditor was petitioning for winding up.

While the affidavits in opposition by the respondent were filed in time, the Petitioner filed his three affidavits in reply well past the 3-day timeline as set out in Rule 30. The Respondent then filed further affidavits in opposition.  Presumably because of an objection raised on the late filing of the affidavits in reply, the Petitioner filed an application for an extension of time. This application was based on Rule 193 which allows for enlargement or abridgment of time and Rule 194 which provides that no proceedings shall be invalidated by any formal defect or any irregularity unless the Court views that substantial injustice has been caused.

The High Court Judge dismissed the Petitioner’s extension of time application and therefore disregarded the Petitioner’s affidavits in reply. As the High Court Judge viewed that the Respondent’s affidavits in opposition was therefore left unanswered, the Petition was dismissed.

On appeal, the Court of Appeal allowed the extension of time and ordered that the Petition be remitted back to the High Court for a full hearing. Firstly, the Court of Appeal was guided by the wordings of Rules 193 and 194 which would allow for an extension of time. These Rules were not referred to in the judgment of Crocuses & Daffodils. This is consistent with the current approach of the Courts to have regard to the justice of the case and not only to the technical non-compliance.

Secondly, the Court of Appeal also made a distinction between the present just and equitable winding up Petition and a Petition based on an inability to pay a debt (the latter being the Petition in Crocuses & Daffodils). In a just and equitable winding up Petition, involving a dispute among the shareholders and allegations against the directors, it is common for the facts to be hotly disputed and  where there is the possibility of cross-examination of deponents as well. Therefore, it would not be possible for the Court to adopt such a rigid approach to non-compliance.

Commentary

This decision is welcomed in taking a step away from a mechanical rigid approach for such affidavit timelines. Instead, the Court weighs up the justice of the case in deciding whether to allow for an extension of time or not. This is even more important in such a just and equitable winding up scenario where the facts are commonly disputed and where it is very common to have an extensive exchange of affidavits.

In practice, for a just and equitable winding up petition, the solicitors commonly agree among themselves for an extension of time for the filing and exchange of affidavits. It can be very difficult for the Petitioner to comply with the 3-day rule to file in the affidavit in reply. Rule 30 is also silent in allowing for the further filing of affidavits since no timeline is provided. This decision however appears to only apply in the context of such a Petition based on the just and equitable ground. A party seeking such an extension of time must still file in an application under Rules 193 and 194.

However, this decision does not go so far as to outright overrule the Crocuse & Daffodils approach in maintaining strict timelines for the inability to pay debt scenario. It can also be quite common to have a lengthy exchange of affidavits if the debt is heavily in dispute. Nonetheless, to prevent the risk of such a technical objection, all parties had best still comply strictly with the timelines set out in Rule 30.

 

 

The MAS Administration Act is Gazetted

I had earlier written about the Bill relating to Malaysia Airlines. As an update, the Bill has received Royal Assent on 30 December 2014 and Gazetted on 5 January 2015.

It is now known as the Malaysian Airline System Berhad (Administration) Act 2015. However, the Act will only come into operation on a date to be appointed by the Prime Minister by notification in the Gazette.

One particular significant change between the Act and the Bill has been the removal of certain powers of the Administrator. The Act has removed the provisions which originally allowed the Administrator to assume control over the property and business of a transition service provider and to carry on that business, if that transition service provider refused to provide such goods and services to the new MAB.

Such very wide powers have been dialed down such that if the transition service provider refuses, the new MAB and its subsidiary companies shall only have the right to recover any costs incurred or damage suffered.

Insolvency and Arbitration: Will a winding up petition be stayed in favour of arbitration?

I am just setting out my thoughts and where I will be planning to write a more extensive article on this area. I have always been fascinated on the interaction of the statutory process of winding up and the contractual bargain of arbitration. Will one process always necessarily trump the other?

There are now several cases which try to deal with whether there can be a form of a stay of the Court winding up proceedings in favour of arbitration. The winding up itself can arise from either a creditor petitioning on the grounds of insolvency or a shareholder petitioning on the just and equitable grounds. In the former scenario, the petition may be grounded on a debt arising from a contract containing an arbitration clause. In the latter, the shareholder’s complaints may be arising from a shareholders’ agreement with the other shareholders. I now just record down some cases in the scenario of a petition being presented by a creditor on the grounds of insolvency.

There is a recent English Court of Appeal decision in Salford Estates (No. 2) Limited v Altomart Limited [2014] EWCA 1575 Civ  which held that the mandatory stay provisions in the English Arbitration Act would not apply to stay winding up proceedings. Instead, the Companies Court would exercise its usual discretion in whether to stay or dismiss a winding up petition, for example, if there was a bona fide dispute of the debt on substantial grounds.

This is a similar approach taken in Hong Kong, where its Arbitration Ordinance closely follows the Model Law (and therefore, may be more persuasive in Malaysia). The case of Jade Union Investment Limited [2004] HKCFI 21 also similarly held that the mere existence of an arbitration clause does not mean that the mandatory stay provisions under the Arbitration Ordinance would apply. The Court would still apply the test as to whether there was a bona fide dispute of debt when hearing the petition. Another case of Re Sinom (Hong Kong) Ltd [2009] HKCFI 2201 similarly followed Jade Union when deciding whether to grant an injunction to restrain the presentation of a petition.

It will be interesting to see how such a situation would play out in Malaysia. I am not aware of any such case involving a stay of a winding up petition or an injunction to restrain presentation based on the Arbitration Act 2005 (“AA”). I know of one or two cases under the old Arbitration Act 1952 where a stay of winding up proceedings was sometimes granted and sometimes not.

If there is an arbitration clause in a contract and a statutory demand is made for payment under the contract, would the other contracting party be able to apply under section 11 of the AA for an injunction to restrain the presentation of the petition? What would the test for such an injunction be? Would it still be the Tan Kok Tong Court of Appeal test of a bona fide dispute of debt on substantial grounds? Or would the mere existence of an arbitration clause be sufficient? Or would an application for an injunction have to be grounded outside of the AA and the Court would exercise its inherent jurisdiction to grant a Fortuna injunction to restrain the presentation?

If the Petition was filed, would a stay of those Court proceedings be allowed under section 10 of the AA? The test for a stay under section 10 of the AA will not require the Court to decide on whether there is a bona fide dispute (that original provision has been taken out) and it is almost mandatory for a stay unless the arbitration clause can be questioned (e.g. the clause is null and void or inoperative).

I will try to deal with these questions in my more extensive article and after I have done more research.