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.

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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.

Scheme of Arrangement – Revival of Abandoned Housing Projects

I was a speaker at the joint seminar on 8 October 2013 by the Insolvency Practitioners Association of Malaysia (iPAM) and Bar Council focusing on liquidation and legal issues arising from abandoned housing projects.

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My short segment focused on the use of schemes of arrangement in reviving such abandoned projects. A copy of my slides can be downloaded here.