Category Archives: insolvency

The MAS Administration Bill: Malaysia Airlines to Soar Again?

This is my article originally published on LoyarBurok and then picked up by The Malay Mail.

malaysia-airlines-logo

As part of the massive restructuring plans for Malaysia Airlines (MAS), the Malaysian Airline System Berhad (Administration) Bill 2014 was tabled before Parliament on 26 November 2014.

As a general overview, I will just touch on some of the interesting aspects of this Bill.

  1. A new entity, the similar-sounding Malaysia Airlines Berhad (MAB), will be incorporated under the Companies Act 1965.
  2. The Bill proposes for its provisions to apply for 5 years or upon the successful listing of the shares of MAB on the official list of Bursa Malaysia, whichever is earlier.
  3. It appears that MAS and its subsidiaries listed in the Bill may be placed under administration. Malaysia does not have a formal administration regime like in the UK but this is the mechanism referred to in the Bill. It effectively allows MAS and its subsidiaries to be placed under the management and control of an Administrator, and the Administrator will, among others, have the powers to manage the business and operations, manage the assets, assume all the powers of management, and to make any arrangement or compromise.
  4. An Administrator need not hold a liquidator license but merely needs to be an approved company auditor (as under the Companies Act 1965) and one who is, in the opinion of the appointer, capable of performing the duties of an administrator.
  5. Upon the appointment of the Administrator over any of the listed companies, a very wide moratorium will apply. This will essentially prevent any form of legal proceedings to be taken against MAS and its subsidiaries. The moratorium will apply for a period of 12 months, unless the administration is terminated. The 12-month moratorium can be extended by the Minister.
  6. Undue preference would apply on the appointment of the Administrator and with the effective date being the date of the coming into force of the eventual Act. This could pose difficulties and uncertainty for the creditors  of the MAS companies, with a possible clawback period of 6 months before the coming into force of the Act.
  7. Interestingly, there is some scope to ‘cherry-pick’ the assets or liabilities to be transferred into the new MAB entity and to leave other assets or liabilities behind. This will be carried out through a vesting order under the eventual Act. The Administrator has the power to re-negotiate existing contracts of the MAS companies.
  8. Further, MAB has the sole discretion to offer employment to the employees of the MAS companies, on the terms and conditions as MAB may determine. It is made very clear that MAB is not deemed to be a successor employer in any way. This allows MAB to make a very clean break from the MAS employment contracts. There is also a specific provision to deal with MAB negotiating with trade unions and associations.
  9. There can be no Court Orders which stays, restrains or affects the powers of the Administrator or which compels the Administrator to do or perform any act.

The provisions of the Bill appear to be very specific in targeting some of the possible issues that MAS faces in its restructuring. As part of its restructuring, MAS may find that it needs to extricate itself from certain commercial contracts and employment contracts. The Bill will provide the Administrator with very wide powers and with a wide array of options in attempting to restructure MAS. Nonetheless, a balance must be struck in protecting the MAS creditors’ and employees’ interests.

Hopefully, the new entity of MAB will be able to take flight, like a phoenix soaring up again. Nonetheless, a balance must be struck in order to protect the interests of the MAS creditors and employees.

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Unwinding a Winding-Up, Revisited

I had earlier written about the ability of a Court to unwind, or set aside, its winding up Order. For a long while, the weight of authority suggested that a Court could not set aside a winding up Order. The Companies Act 1965 was silent on the possibility of such a setting aside and there was only a provision for a stay of winding up under section 243. I had suggested in my earlier post that there appeared to be a narrow exception of allowing for such a setting aside, and this was implicit in the Megah Teknik decision.

There is now an unreported High Court decision applying Megah Teknik and where Datuk Wong Kian Kheong JC allowed a setting aside of a winding up Order. The grounds of judgment of Panaron Sdn Bhd v Univac Switchgear Sdn Bhd can be downloaded from the KL High Court website (and it contains the watermark). In Panaron, the High Court had unknowingly granted two winding up Orders (one in the Shah Alam High Court and the second in the Kuala Lumpur High Court). Proofs of Debt (POD) were filed in the second winding up and the Official Receiver (OR) then realised there was the earlier first winding up Order. The OR filed an application in KL for a stay of the second winding up Order (under section 243) and to transfer the 5 PODs to the first winding up.

The Court (correctly, I think) rejected the reliance of section 243 for a stay of the second winding up. That section could not properly apply to these sort of facts. The Court instead relied on the decision of Megah Teknik to exercise its inherent jurisdiction to set aside the second winding up Order.

In my earlier article, I was of the view 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 the Court to do justice.”

This Panaron decision at least shows one instance where there is such a defective winding up Order falling within the Badiaddin principle. That allows the exceptional ability to set aside a winding up Order. Here, the Kuala Lumpur High Court had no jurisdiction to make the second winding up Order. I would also add that the second winding up proceedings should have been void for breaching section 226(3) where all legal actions are automatically stayed upon a winding up Order being made and cannot be commenced without leave of Court. This decision of Panaron appears to lay down a wider principle that if the winding up Court had no jurisdiction to grant the winding up Order in the first place, then that winding up Order can be set aside.

In future, this Panaron decision could possibly be extended, for example, to facts where there was defective service of the 218 Notice or the winding up Petition. The respondent company might not have known about the winding up proceedings and the Order is made in default of its appearance. Before Megah Teknik and this decision, such a company would have to convince the Court to apply section 243 for a stay of the winding up Order. Perhaps, Panaron and Megah Teknik now opens the door for the argument that the winding up Court had no jurisdiction to grant the winding up Order in the first place and therefore the Order can be set aside.

I would like to also add that the new Companies Bill (to amend the Companies Act 1965) will not specifically address the issue of whether the Court can set aside a winding up Order. The Bill will tweak the present section 243 stay provision to allow for two things. The first is that the stay of a winding up will take on a more natural meaning in that the stay is for a limited time only. Presumably, this is to allow for a stay of a winding up pending appeal for instance or for a short stay to give time for the company to settle the debts. There will be a new termination provision which allows for the winding up to be terminated (i.e. permanently). This suggests that the termination will also be prospective and takes effect from the date of the termination. It does not have the same effect of a setting aside. Therefore, the Court’s exercise of an inherent jurisdiction to set aside a winding up Order will still play a significant role in the future.

Speaking at the Regional Insolvency Conference 2014 in Singapore

On 25 August 2014, I will be speaking at the Regional Insolvency Conference 2014 organised by the Law Society of Singapore. I will be a speaker at the first Plenary Session focusing on a regional update and trends in insolvency in India, Malaysia and Vietnam. I will be speaking on the Malaysian perspective.

insolvency

The main areas I will briefly touch on will be on an introduction to Malaysia’s insolvency laws, in particular, on any cross-border insolvency provisions. And then I will introduce the upcoming changes to insolvency with the new Companies Bill. Malaysia will be introducing the Corporate Voluntary Arrangement (borrowing it from the UK) and judicial management (borrowing it from Singapore).

Substituting two Petitioners into a Winding Up Petition

The High Court in Allied Empire Plantations Sdn Bhd v Chip Lam Seng Berhad [2014] 6 CLJ 81 (“Allied Empire”) touched on some of the principles on the substitution of a Petitioner in a winding up Petition and where two parties were allowed to be substituted in as co-Petitioners.

The law governing the substitution of a party as Petitioner in a winding up Petition is contained in rule 33 of the Companies (Winding-up) Rules 1972 (“Rules”). Rule 33 provides that:

“… the Court may upon such terms as it thinks just substitute as petitioner any person who, in the opinion of the Court, would have a right to present the petition and who is desirous of proceeding with the petition.”

The case of Allied Empire involved two parties applying to be substituted as a petitioner. The first was Jadeline and the second was AmBank.

Jadeline

After the presentation of the Petition in August 2012, Jadeline had entered into an assignment with the Petitioner for the absolute assignment of the chose in action to claim the underlying debt giving rise to the Petition. The question of law that then arose was whether Jadeline could be deemed to be a creditor at the time of the presentation of the petition (and therefore “would have a right to present the petition) or whether Jadeline’s status as the creditor only crystallised after the entering of the assignment. In essence, the Court found that with the debt having been absolutely assigned to Jadeline by the Petitioner, the effect under the law is that all rights to present the Petition would also now be with Jadeline.

Procedurally though, here are cases that have found that not only must the intended substituting party be a creditor, that party must have also had issued the statutory notice (under section 218(2)(a) of the Companies Act 1965) (“218 Notice”) in order to fall within the definition of “would have a right to present the petition” (see for example, the High Court decision of Teoh Vin Sen v True Creation Sdn Bhd [2008] 4 CLJ 393). Presumably, the High Court in Allied Empire would have considered that the effect of the absolute assignment was that the complete chose in action of presenting the Petition had been absolutely assigned by the Petitioner over to Jadeline. Therefore, even the procedural issuance of the statutory notice would have been deemed to have been “assigned” to Jadeline.

AmBank

Where AmBank was applying for it to be substituted as a petitioner as well, AmBank had issued its statutory notice in December 2012 and applied for the substitution in September 2013. While AmBank had issued its 218 Notice, Jadeline had raised the objection that AmBank had not issued the 218 Notice prior to August 2012 (i.e. the time of the presentation of the Petition). Therefore, in short, AmBank did not fall within the definition of “would have a right to present the petition.” The Judge made short shrift of this argument by finding that the debt owing to AmBank was not seriously disputed. Section 218(2)(c) would also allow for a presumption of insolvency and there i snothing to prevent a creditor from presenting a petition to wind up a debtor without relying on the presumption in the statutory notice if the evidence is so clear that the debtor is in any event insolvent.

Substitution of Both Parties as Co-Petitioners

The Court then had to consider whether to allow only one of the parties to be substituted in as a Petitioner. Jadeline had made its application first while AmBank had the larger debt. The Court ordered that both parties be made Petitioners while AmBank was allowed to be the first Petitioner and which had the responsibility to ensure the necessary advertisement, gazetting and other getting up were complied with (but with costs to be born equally by the two Petitioners).

While it is true that there is nothing to prevent there being two or more Petitioners, there appears to be a general rule that Plaintiffs (or in this case, the two Petitioners) must be represented by the same set of solicitors. Allowing AmBank and Jadeline to be substituted in as Petitioners and yet, being represented by two different solicitors, may not have been possible.

The rationale of having plaintiffs, claimants or petitioners  to have a common set of solicitors appears to be in order to ensure consistency in the prosecution of a claim. The rule can be seen as far back as in Wedderburn v Wedderburn (1853) 17 Beav 158, where Sir John Romilly M.R. held that:

“Mr. and Mrs. Hawkins may, in concurrence with the other four co-plaintiffs, remove their solicitor, and the other four may allow him to conduct the proceedings for all. But if the plaintiffs do not all concur, Mr. Hawkins cannot take a course of proceeding different and apart from the other plaintiffs, for the consequence would be, that their proceedings might be totally inconsistent. When persons undertake the prosecution of a suit, they must make up their minds whether they will become co-plaintiffs; for if they do, they must act together. I cannot allow one of several plaintiffs to act separately from and inconsistently with the others.”

In the English Court of Appeal case of Lewis And Another v Daily Telegraph Ltd. (No. 2) [1964] 2 QB 601, it was held that:

“In my view, it was not regular, and not in accordance with the proper practice, that two firms of solicitors should be placed on the record as representing the plaintiff Lewis and the plaintiff company separately.”

Similarly, in the Supreme Court of Victoria decision of Goold and Porter Proprietary Limited v Housing Commission [1974] VR 102, it was held that:

“There seems to be a long line of authority to the effect that plaintiffs, where there is more than one plaintiff in an action, must appear by the same counsel. The cases seem very largely to be equity cases but the matter is stated categorically in the authorities Wedderburn v Wedderburn (1853) 17 Beav 158; Davey v Watt (1902) 28 VLR 24; Lewis v Daily Telegraph [1964] 2 QB 622 [*4]; [1964] 1 All ER 705; Odgers on Pleading and Practice, 18th ed., p. 16; Halsbury, 3rd ed., vol. 3, p. 72; Newton v Ricketts (1848) 2 Phil 624; Ballard v White (1843) 2 Hare 158 at p. 159; Swift v Glazebrook (1842) 13 Sim 185; Re Norwoods Patents (1895) 11 RPC 214, at p. 221; Re Wright, [1895] 2 Ch 747 at p. 748) to which I have been referred, including one in this Court which was decided by Holroyd, J, Davey v Watt (1902) 28 VLR 24; 8 ALR 90.

In Lewis v Daily Telegraph (No. 2) [1964] 2 QB 601 at p. 623, [1964] 1 All ER 705, there is a dictum of Russell, LJ, which does indicate his Lordship’s view that where there are a number of plaintiffs in an action, whether that action is a consolidated action or not, there is a discretion to allow separate representation to the plaintiffs. But that appears, on a review of the authorities by counsel, to be the only reference to the possibility in an action of this kind which is not a consolidated action, of plaintiffs appearing by separate counsel. The condition of the plaintiffs so doing is stated to be to avoid injustice, and his Lordship indicates that it must be rare.

In the absence of any other authority suggesting that there is a discretion, I am disposed to the view that there is no discretion in the case of an action which is not a consolidated action, and that, therefore, I should refuse the application which has been made by Mr. Marks and by Mr. Eames, for the plaintiffs, in this action, or some of them, to appear by separate counsel. I say ‘or some of them’ because some of the plaintiffs are not here at this moment, either in person or by solicitor or counsel, so I am told. However that may be, and assuming that I have a discretion, I am of the opinion that no injustice would be done to the plaintiffs by requiring them all to appear by the same counsel. I am satisfied that the only conflict that might arise between them is not related in any way to the relief sought in the action; it might well be that different considerations would actuate different plaintiffs in certain eventualities but those eventualities, which I do not more particularly refer to, seem to me to have nothing to do with the actual conduct of the action as it appears on the pleadings. And I think that the interests of the plaintiffs to the extent that they may differ, could be well looked after by solicitors or solicitors and counsel who are not appearing in the action, and they do not have anything to do with the conduct of the action.”

Therefore, allowing both AmBank and Jadeline to be co-Petitioners may not have been possible since both parties would have wanted their own solicitors. The Court would then have had to make the difficult choice on who to select from the two competing parties. I am not aware of what are the guiding principles on how to select between these two competing parties.

 

 

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.

 

 

Corporate Rescue Talk at MIA

I was invited by the Malaysian Institute of Accountants to deliver a talk on 4 March 2014 focusing on the insolvency-related provisions of the Companies Bill. It was an interesting session, with a lot of questions and a lively discussion among the participants. The areas I touched on were the changes to the receivership, winding up and schemes of arrangement provisions, and the introduction of judicial management and the corporate voluntary arrangement.

rescue

A copy of my slides can be downloaded here.

How to Unwind a Voluntary Winding Up

The Singapore High Court in Zi-Techasia [2014] SGHC 09 analysed the considerations to be applied in staying a voluntary winding up and the effect of such a stay. This case is interesting since as far as I am aware, Malaysia does not have a reported decision touching on these same issues.

Members Voluntary Winding Up

As a quick introduction, this case involved a members voluntary winding up. This process involves the members passing the necessary special resolution to resolve that the company be wound up and the members appoint the liquidator. Unwinding such a voluntary winding up cannot be done through the members subsequently passing a resolution to reverse this process.

Decision

As recognised by the Singapore High Court, the Court has the power under the Companies Act to grant an Order to stay a winding up. In Malaysia, that would be the equivalent power set out in section 243 of the Act. However, this power is only provided to the Court where it involves a Court-ordered winding up and therefore, this section 243 of the Act would have to be read together with section 274 of the Act. Section 274 allows the liquidator or any contributory or creditor to apply to the Court to exercise all or any of the powers which the Court might exercise if it were a Court-ordered winding up. The test to be applied therefore in staying a voluntary winding up would be the same principles for a stay of a winding up under section 243 of the Act (in Malaysia, the leading case on these principles are set out in the Federal Court decision of Vijayalakshmi). In essence, one would have to show that the creditors are not prejudiced.

The Singapore High Court expressed some doubts as to whether the Court could ever exercise its inherent jurisdiction to set aside or stay a winding up and made a passing reference to the Malaysian Court of Appeal decision of Megah Teknik (I have written about this decision previously).

In determining when such a stay should come into effect, the Singapore High Court held that the stay should only take effect from the date of the stay Order and is not backdated to the date of the winding up Order or date of the commencement of the voluntary winding up. The winding up is merely stayed moving forward, and not set aside or rescinded. Therefore, such a stay does not undo the actions of the liquidators but only halts the proceedings. The Court was guided by the Malaysian Court of Appeal decision in American International Assurance Bhd (another decision I had written on previously).

Postscript

By way of postscript, the Court also highlighted two interesting questions in the present stay regime that may require legislative intervention. The first is the proper procedure if the defendant company were to be wound up in future. It might be thought that as the winding up is only stayed, it would be open to any interested party to apply to court to have the stay order set aside or varied so that winding up could, in a sense, continue. However the present winding up proceedings were commenced on the footing of a members’ voluntary winding up and it is uncertain whether, in future, should the company become insolvent, a creditor could apply afresh for the company to be wound up by the court. In Re Intermain, Hoffmann J was of the opinion that an existing petition should be regarded as exhausted by a perfected winding up order which being stayed would make it necessary for a fresh winding up petition to be presented. But nothing was said whether this principle would apply also to cases of voluntary winding up.

The second issue is on the powers of directors. There is an issue that were the directors to quit office whether through the efflux of time or by the effect of provisions in the Articles of Association, there could be nobody to take up the reins of the company in the case that winding up was stayed altogether. This was the concern raised by Young J in Austral Brick. In such a case the court may need to make further orders to appoint new directors, but we currently have no statutory provisions dealing with that. By way of comparison, s 482(3) of the Australian Corporations Act 2001 states that where a court has made an order terminating a winding up, it may also give directions for the resumption of the management and control of the company by its officers, including directions for the convening of a general meeting of members of the company to elect directors of the company to take office upon the termination of the winding up. Also, I do not doubt that there may be other conceptual conundrums thrown up because a permanent stay of winding up is, in the words of Tipping J in Re Kim Maxwell Ltd [1992] 1 NZLR 69, a contradiction in terms. The insolvency regime may benefit from legislative clarity on the issue.

Malaysia’s Amendments to the Companies Act

Under the pending Companies Bill, we will be introducing a mechanism (as set out in Clause 477 of the present version of the Bill) to give the Court the power to also terminate a winding up. This is in addition to the present power to order a stay of winding up. In deciding on a termination of winding up, the Court may take into account the satisfaction of debts, agreement by parties or other facts that the Court considers appropriate. This would in future allow for an easier route to unwind a winding up. However, based on the present termination clause in the Bill, it would still not resolve the above two issues highlighted by the Singapore High Court. Further, the power to terminate a winding up would also appear to only take effect from the date of the Order. It does not appear to provide for the winding up to be rescinded or set aside and therefore have retrospective effect as if the winding up never was.

Singapore’s Insolvency Law Review Committee Report

When I have the time, I will slowly read through Singapore’s Insolvency Law Review Committee Report (there is also its Executive Summary). I may then highlight some of the more interesting points especially on how the recommendations also reflect on the state of insolvency law here in Malaysia. This is especially pertinent since Malaysia is also undergoing its own revamp of corporate insolvency laws through the Companies Bill 2013. I am just parking the reports on my blog for the time being.

Singapore’s Ministry of Law has also opened the report for public consultation until 2 December 2013 as seen here.

Winding Up Petitions and Cross-Claims

I came across the unreported case of Josu Engineering Construction Sdn Bhd v TSR Bina Sdn Bhd [2013] MLJU 279 where Mary Lim J made a very thorough analysis of the issue of cross-claims and winding up petitions.This is a rare case where a cross-claim was successful in grounding an injunction to restrain the presentation of a winding up petition, even though the section 218 notice was based on a judgment debt.

There is a seemingly inconsistent position as to whether a genuine cross-claim (which exceeds the initial debt) is sufficient to oppose a winding up petition or to even ground an injunction to restrain the presentation of a winding up petition but this case carefully dissects the different Malaysian appellate authorities as well as other authorities from other jurisdictions.

BRIEF FACTS

The facts in Jose Engineering are important in understanding why the High Court allowed the injunction to restrain the presentation of a winding up petition. The Plaintiff and Defendant were earlier involved in litigation against each other in two different cases, and for ease of reference, I will call them the First Suit and the Second Suit.

In the First Suit, the Defendant succeeded in its counterclaim against the Plaintiff and then issued a section 218 notice seeking for payment under the counterclaim. There was an application filed for a stay of execution but with no hearing date fixed yet.

In the Second Suit, the Plaintiff in turn had obtained a judgment with damages to be assessed by the Senior Assistant Registrar. This was a final judgment as it was upheld by the Court of Appeal and leave to the Federal Court was dismissed. The assessment of damages had yet to be fixed for hearing and with the Plaintiff claiming that it had filed its bundles of documents and had prepared its witness statements. The Plaintiff’s contention is that its claim under the Second Suit judgment would far exceed the quantum of the First Suit’s counterclaim which was claimed in the section 218 notice.

LEGAL PRINCIPLES

The High Court’s analysis of the different authorities ran the gamut from the Malaysian cases of Pontian United Theaters Sdn Bhd v Southern Finance Berhad [2006] 1 CLJ 1067 (C.A.), People Realty Sdn Bhd v Red Rock Construction Sdn Bhd [2008] 1 MLJ 453 (C.A.) and Zalam Corporation Sdn Bhd v Dolomite Readymixed Concrete Sdn Bhd [2011] 9 CLJ 705 (C.A.) (where all the cross-claim arguments were dismissed) to the Singapore Court of Appeal cases of Metalform Asia Pte Ltd v Holland Leedon Pte Ltd [2007] SGCA 6 and Pacific Recreation Pte Ltd v SY Technology Inc & Another Appeal [2008] SGCA 1.

In general, where a debt is undisputed, an injunction to restrain the presentation of a winding up petition is generally refused. And a judgment debt is a clear undisputed debt. However, the High Court found guidance in the Singapore Court of Appeal Metalform decision which allowed an injunction to restrain the presentation of the petition even based on an undisputed debt due to the cross claim. The Singapore Court of Appeal rejected the New Zealand test of having to show that the winding up petition is “bound to fail.” In cross-claim cases, the appropriate test in allowing such an injunction that “there is a likelihood that the petition may fail or that it is unlikely that a winding up order would be made.”

APPLICATION

The High Court noted that unlike the facts before the Court, the earlier Malaysian cases did not involve a cross-claim in the nature of an interlocutory judgment. While the Defendant had a final judgment through the counterclaim, the Plaintiff was also armed with an interlocutory judgment which was also a final judgment. It was only the quantum of damages which had to be assessed. The cross-claim was therefore found to not only be genuine but also bona fide.

The injunction was allowed in restraining the presentation of the petition but on terms that the Plaintiff pay the full judgment sum to its solicitors to be held as stakeholders pending the assessment of damages.

CONCLUSION

This case, and the various authorities referred to in the decision, demonstrate the high threshold to be met in allowing a cross-claim to effectively defeat the right of a judgment creditor to present a winding up petition. This is understandable since the judgment creditor already comes armed with an undisputed debt through the judgment and has a statutory right to present a winding up petition. Whether the petition will be allowed at the hearing is another issue altogether. In litigation, the allegation of a cross-claim is sometimes only raised once the section 218 notice is presented and a cross-claim, exceeding the judgment sum, is cobbled together in order to try to prevent the presentation of the winding up petition.