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.

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Strict Requirements for a Stay of a Winding Up Order

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

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

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

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

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

 

Time can be Extended for Affidavits in Winding Up

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

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

Court of Appeal decision in Kilo Asset

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

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

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

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

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

Commentary

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

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

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

 

 

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.

 

 

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.