In an earlier post, I had touched on the Court of Appeal decision which decided on the mandatory obligation to advertise the presentation of a winding up petition. This therefore precluded any injunction to restrain such advertisement.The Federal Court in Savant-Asia Sdn Bhd v Sunway PMI-Pile Construction Sdn Bhd has confirmed the mandatory nature of the advertisement of the winding up petition. This is notwithstanding the fact that post-presentation of the petition, the debt under the petition had already been paid by the respondent company to the petitioner and that the petition was going to be withdrawn.

The single issue to be determined by the Federal Court was whether a petitioner in a winding-up petition may be excused from advertising the fact of the petition after the debt had been fully paid by the respondent.

In the judgment of Arifin Zakaria FCJ (as he then was), held that winding-up proceedings were essentially a class action. It seeks to provide protection to unsecured creditors upon the date of the presentation of the petition. Since it is a class action, there is a need for it to be advertised to give notice to all creditors, and this is a mandatory obligation provided under the Winding-Up Rules.

The Federal Court quoted with approval the finding by Abdul Aziz JCA when the case was before the Court of Appeal, that “to omit to advertise the petition would directly assist the appellants to surreptitiously keep the money exclusively to themselves, in the event that there were other creditors.”

The effect of this judgment is that it not only confirms that it is mandatory to advertise the winding up petition upon presentation, but it now imposes a positive obligation for the petitioner to advertise even after the settling of the debt post-presentation of the petition. I can see the strength of the argument that the statutory scheme for winding up should be to enable the protection of unsecured creditors and to uphold the pari passu principle.

However, the strict application of these principles will potentially lead to disastrous practical effects. It is now imperative for the recipient of a Section 218 Notice to immediately apply for injunctive relief to restrain the presentation of a winding up petition within the 21-day notice period. There cannot be an injunction to restrain the advertisement of the petition, even if the debt is bona fide disputed. Winding up proceedings may be abused to bring undue pressure on a company to pay out on an alleged debt, even if it is disputed, within that 21-day period. For public listed companies in particular, where the advertisement of a winding up petition may lead to irreparable harm to its reputation and even a suspension of its securities on the stock exchange, they may have no choice but to pay out on such debts.

Introduction

A provisional liquidation is the Court appointment of a liquidator to a company in the period between the filing of the application to wind up the company and the Court hearing the application, pursuant to section 231 of the Companies Act 1965 (“the Act”) and Rule 35 of the Companies (Winding Up) Rules 1972 (“the Rules”). The appointment is provisional because the company may not be wound up at that hearing, or another official liquidator may be appointed.

The effect of the appointment of a provisional liquidator is that the powers of the board of directors immediately cease, and the powers of managing the company vests in the provisional liquidator. A sudden ex parte (i.e. without any notice being given to the other party) appointment of a provisional liquidator over a company allows the provisional liquidator to show up at the doorstep of the company’s office, the Order of appointment in hand, and proceed to lock up the office and seize control of all documents, assets and property of the company.

Depending on the circumstances, the terms of the ex parte Order may even allow the provisional liquidator (and his representatives) to enter the homes of the directors or any other place to seize company documents, if there are grounds to believe that these company documents have been secreted away.

The business of the company may well be paralysed as the provisional liquidator may or may not continue with the running of the company. Additionally, there may be irreversible damage to the goodwill and reputation of the company.

The ex parte appointment is normally based on the justification that the assets and affairs of the respondent company are in jeopardy. Such appointment is made to ensure that the assets and property of the respondent are under the control of the provisional liquidator until the determination of the winding up petition. Hence, any notice given to the respondent might result in a dissipation of the assets before the provisional liquidator is appointed.

The ex parte appointment is normally based on the justification that the assets and affairs of the respondent company are in jeopardy.

The ex parte appointment of the provisional liquidator lasts until the disposal of the winding up petition and even then there is no automatic right to an inter partes hearing. Hence it is crucial for the respondent company to quickly apply to set aside this ex parte appointment or the company will continue to be paralysed.

There are several grounds the respondent can rely on, namely:

(i) Failure to Show a Good Prima Facie Case for Winding Up

As held in the case of Kok Fook Sang v. Juta Vila (M) Sdn Bhd [1996] 2 MLJ 666, a court will only appoint a provisional liquidator upon the presentation of a winding-up petition when there is good prima facie evidence that the company will be wound up because the company is obviously insolvent, or its assets are in jeopardy or there are other circumstances which make it imperative for the court to intervene.

It was further held that the primary facts set out in the petition if assumed to be true and the uncontested evidence taken as a whole must add up to the conclusion that it is imperative that the winding-up order be made. Therefore, the respondent in applying to set aside the ex parte appointment must demonstrate that there is no good prima facie case for winding up, and that the allegations in the winding up petition do not support a winding up order. This is illustrated in the case of Re Lo Siong Fong [1994] 2 MLJ 72 where the petition had no hope of being successfully prosecuted, and the appointment of the provisional liquidator was set aside.

(ii) Failure to Make a Full and Frank Disclosure of Material Facts

The respondent can challenge the appointment of a provisional liquidator on the ground that there has been material non-disclosure during the ex parte hearing. Malaysian cases like Re Lo Siong Fong [1994] 2 MLJ 72 and Kong Long Huat Chemicals Sdn Bhd v. Raylee Industries Sdn Bhd [1998] 6 MLJ 330, and the Singapore case of Pac Asian Services Pte Ltd v. European Asian Bank AG [1989] 3 MLJ 385 involved material non-disclosures of facts during the ex parte hearing that led to the setting aside of the appointment of the provisional liquidator.

In the English case of Siporex Trade v. Comdel [1986] 2 Lloyd’s Rep 428 the Court held that the applicant must identify the crucial points for and against the application, and not merely rely on general statements and the exhibiting of numerous documents.

This duty of disclosing material facts also extends to the oral hearing of the application itself. In the English case of Memory Corporation Plc v. Sidhu (No. 2) [2000] 1 WLR 1443, the Court made a general statement regarding urgent without notice hearings; that there is a high duty on the advocate to make full and frank disclosure and that extends to the oral hearing of the application itself. The advocate must draw the court’s attention to the unusual features of the evidence and to the applicable law.

(iii) Balance of Convenience

The onus is on the petitioner to establish the urgency and need for the appointment of a provisional liquidator and the Court must have regards to the balance of convenience due to the devastating effect on the company.

Further as held in the Australian case of Zempilas & Ors v. J N Taylor Holdings Ltd & Ors (1990) 3 ACSR 518, the appointment of a provisional liquidator is not to be contemplated if other measures would be adequate to preserve the status quo. Hence, alternative measures in preserving the status quo would shift the balance of convenience to justify the setting aside of the appointment of the provisional liquidator.

(iv) Failure to Give Undertaking for Damages?

Even if the petitioner had failed to give an undertaking for damages in the ex parte application for a provisional liquidator, it appears that this is not a ground to support a setting aside application.

In Pui Chiau Tien v. Foi Chaw Leong & Anor [2004] 5 CLJ 145, the Court considered the contrasting decisions of Eveready Manufacturing (Pte) Ltd v. Explast Industries Sdn Bhd [1998] 5 CLJ 212 and Kong Long Huat Chemicals Sdn Bhd v. Raylee Industries Sdn Bhd [1998] 6 MLJ 330 and clarified that the undertaking in damages by the applicant is not mandatory in an ex parte application for the appointment of a provisional liquidator but it is customary and in accord with general practice. Section 231 of the Act and Rule 35(1) of the Rules do not lay down the requirement that there must be an undertaking as to damages before the appointment of a provisional liquidator. It is entirely up to the court’s discretion and the absence of such an order for undertaking as to damages does not in any way invalidate the Order.

…the setting aside may well represent a hollow victory…

Although the above factors justify the setting aside of the ex parte appointment of a provisional liquidator, it may take a long time to achieve this. Thus, the setting aside may well represent a hollow victory as the respondent company may already have suffered irreparable damage to its business i.e. its business would be suspended and bank accounts frozen during that period.

The true security of companies against the ill-effects of the unjustified ex parte appointment of a provisional liquidator thus resides in the vigilance of the Court in determining whether the grounds in support of the ex parte application truly warrant the appointment of a provisional liquidator.

In light of a few recent Court of Appeal decisions, it is useful to set out the position in law regarding an injunction to restrain the presentation of a winding up petition.A filing of a winding up petition is often used by a creditor as a means to exert pressure on the company to pay its debt. As the presentation of such a petition must be advertised, this would have an adverse impact on the financial standing and the reputation of the company, and may also result in the freezing of the company’s bank accounts.

The companies court should not be used for the collateral purpose of pressuring a company to pay a disputed debt and the law allows the company to apply for an injunction to restrain the filing of such a petition.

When a court restrains the presentation of a winding up petition to that court it exercises part of its inherent jurisdiction to prevent abuse of its process.

Prior to the filing of a winding up petition based on a debt, a creditor must issue a notice (often described as a Section 218 Notice) giving the company 21 days to pay the sum demanded . If this debt is disputed, it is within this crucial 21-day period that the company must then apply for an injunction to restrain the filing of the winding-up petition.

Inherent Jurisdiction of the Court

There is no specific provision under the Companies Act or the Companies (Winding-Up) Rules which allows for such an injunction. The Court exercises its inherent jurisdiction to prevent an abuse of its process when it issues such an injunction. As recognised in Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation of the Commonwealth of Australia [1978] VR 83:

“When a court restrains the presentation of a winding up petition to that court it exercises part of its inherent jurisdiction to prevent abuse of its process. Mann v Goldstein, [1968] 1 WLR 1091, at pp. 1093-4; [1968] 2 All E.R. 769.

Usually a court acts against abuse of its process after proceedings have been commenced. Thus, existing proceedings may be stayed or dismissed, or documents delivered as a step in the proceedings may be struck out. This is done to relieve a party to the proceedings from an oppressive and damaging situation in which he has been placed through abuse of court process.

The law has long recognized that with proceedings to wind up a company, intervention after the commencement of proceedings would often be too late to relieve the company of oppression and damage. The courts have recognized that irreparable damage may be done to a company merely through public knowledge of the presentation of a petition. Usually the damage flows from the loss of commercial reputation which results. The courts have also been conscious of the pressure which may be put on a company, by a person with a disputed claim against it, threatening to present a winding up petition unless the company meets his claim. While that threat exists, the company, in order to avoid the damage involved in the presentation of a petition, is pressed to meet the claim although it may have substantial and genuine grounds for regarding itself as not required to do so.”

…the test to be applied is whether there is a bona fide dispute of debt based on substantial grounds.

‘Bona Fide Dispute of Debt on Substantial Grounds’

The position under Malaysian law has been confirmed in the Court of Appeal case of Tan Kok Tong v Hoe Hong Trading Co Sdn Bhd [2007] 4 MLJ 355 where the Court quoted with approval the above passage. When deciding whether to grant an injunction to restrain a petition that is based on a statutory demand for a debt, the Court must be satisfied that there is a prima facie case and not merely a serious issue to be tried. In demonstrating this prima facie case, the Court of Appeal held that the test to be applied is whether there is a bona fide dispute of debt based on substantial grounds.

This helps to clarify the somewhat conflicting High Court authorities which held that the test in granting such an injunction is whether the winding up petition is bound to fail (for instance, see Sri Binaraya Sdn Bhd v Golden Approach Sdn Bhd [2000] 3 MLJ 465 and as discussed in Pembinaan Lian Keong Sdn Bhd v Yip Fook Thai (practising as Messrs Yip & Co) [2005] 5 MLJ 786).

For a creditor to resist such an injunction and to demonstrate that there is no ‘bona fide dispute of debt on substantial grounds’, a creditor should come armed with a judgment sum or with a clear admission of debt (as seen in the Supreme Court case of Chip Yew Brick Works Sdn Bhd v Chang Heer Enterprise Sdn Bhd [1988] 2 MLJ 447).

Injunction to Restrain Advertisement of Petition?

If the petition has been filed, can the company apply for an injunction to restrain the creditor from advertising the petition? In Chip Yew, the Supreme Court refused to grant an injunction to restrain the advertisement and this was similarly followed in the High Court decision of Azman Tay & Associates Sdn Bhd v Sentul Raya Sdn Bhd [2002] 2 MLJ 395.

…once a winding-up petition is filed, the court is precluded from granting an injunction against advertisement or gazettal of the petition.

Now, the Court of Appeal in People Realty Sdn Bhd v Red Rock Construction Sdn Bhd [2008] 1 CLJ 632 has confirmed that once a winding-up petition is filed, the court is precluded from granting an injunction against advertisement or gazettal of the petition. (Ed: The Appellant’s leave to appeal to the Federal Court was dismissed. Hence, the case of People Realty continues to remain as binding authority on this point)

This Court of Appeal decision must surely lay to rest the anomalous High Court decision of Celcom (Malaysia) Bhd v Inmiss Communication Sdn Bhd [2002] 3 MLJ 178 where the Court granted an Erinford injunction to restrain the advertisement and gazettal of the petition. People Realty confirms the mandatory requirements of advertisement and gazetting as set out in the Companies (Winding-Up) Rules.

Echoing the words of Vincent Ng J (as he then was) in Azman Tay, “…the court is not empowered to make any order to restrain or injunct the petitioners from carrying out their statutory obligation to comply with r.24.”

This makes it even more imperative for the company to obtain an injunction during the 21-day window after the issuance of the Section 218 Notice, since the filing of the petition would prevent any injunction restraining the advertisement and gazetting of the petition.