Tag 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.

torture Continue reading →

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.

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.

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.

 

 

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.

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.