Case Update: Federal Court Decides Sums due to Management Corporation are Unsecured Debts

The Federal Court in its grounds of judgment dated 21 May 2020 Dubon Berhad (in liquidation) v Wisma Cosway Management Corporation held that fees due to a management corporation or a joint management body under the Strata Management Act is not a secured debt. Such fees are a pure unsecured debt within the insolvency regime. This will bring clarity for a liquidator of a company which is an owner of a strata property.

Summary of the Decision

The question of law posed to the Federal Court was as follows:

Whether the right of a joint management body or a management corporation to collect and receive payment from a proprietor under sections 33 and 77 of the Strata Management Act 2013 respectively gives it a lawful preference as a secured creditor over the assets of a company in liquidation.

 

The Federal Court answered the question in the negative.

This case involved a management corporation (with the joint management body yet to be formed). The relevant provisions of section 77 of the Strata Management Act (SMA):

(1) The payment of any amount lawfully incurred by the management corporation … in the course of the exercise of any of its powers or functions … shall by virtue of this section be guaranteed by the proprietors

(3) Where any proprietor has not discharged or fully discharged his liability for the purpose of subsection (1), the management corporation … shall be entitled to recover from the proprietor in a court of competent jurisdiction or before the Tribunal as a debt due to it.” (emphasis in bold)

 

The Federal Court held that section 77 of the SMA does not dislodge the statutory priority regime in the Companies Act 2016 (CA 2016) nor does it elevate the payment of management fees to the status of a secured debt. Section 77 merely statutorily provides that the non-payment of management fees creates an undisputed debt. The term “guaranteed” ensures the fact of the existence of such a debt.

This decision overturns the Court of Appeal decision of Wisma Cosway Management Corp v Dubon Bhd [2019] 2 MLJ 649.

Background Facts

Dubon Berhad (in liquidation) (Dubon) is the beneficial owner of a lot known as Unit 22.05 in Wisma Cosway. The management corporation in this case is Wisma Cosway Management Corporation (the MC).

In January 2000, a Court granted a winding up order against Dubon. The liquidators of Dubon realised the assets of Dubon. As part of this process, the liquidators required the execution of the transfer of the unit into Dubon’s name. This was in order for the liquidators to then sell the unit.

The liquidators were then informed that they required a clearance letter from the MC for an outstanding sum of over RM180,000. These were fees and other services charges owing to the MC. The liquidators took the position that Dubon was not liabile to pay these sums. Dubon was in liquidation and the payment of this outstanding sum had to follow the pari passu rule for the unsecured claims. There was an impasse.

Dubon, through the liquidators, filed a claim at the Strata Management Tribunal seeking certain orders. The orders were essentially to direct the execution of the memorandum of transfer and the issuance of the clearance letter. The MC counterclaimed for the sum owing.

In light of the counterclaim, the MC applied in the winding up Court for permission to commence or proceed with the counterclaim against Dubon.

The High Court refused permission to the MC. The High Court decided that the only issue between Dubon and the MC was whether Dubon had to pay the sums claimed by the MC. One of the key reasons for the rejection was that the High Court held that the MC is an unsecured creditor. Any payment of the sums demanded by the MC would amount to an undue preference. This would contravene the statutory insolvency regime.

The MC appealed to the Court of Appeal. The Court of Appeal reversed the High Court’s decision and allowed permission to proceed with the counterclaim. The key reasons for allowing the appeal was that section 77 of the SMA provided for a “guaranteed sum”. There was a valid point of law which required ventilation. Whether the MC remained an unsecured creditor or was elevated to the status of a secured creditor. Section 77 of the SMA utilised the word “shall”. Therefore, this imposed a mandatory obligation on Dubon to pay any outstanding amount due to the MC before the unit was disposed of to third parties.

Leave to appeal to the Federal Court was allowed.

Findings of the Federal Court

First, the Federal Court held that section 77 of the SMA does not dislodge the statutory priority regime in the Companies Act. This would be under section 292 of the-then Companies Act 1965 or under section 527 of the CA 2016.

At best, the word “guarantee” under section 77 of the SMA denotes a statutory obligation between the MC and a parcel proprietor entitling the MC to recover maintenance and other related service charges from a parcel proprietor.

This is reinforced by subsection (3) of section 77 which refers to a “debt” which is actionable by the MC. That right to sue for a debt is a right in personam and not a right in rem.

Second, the language of section 77 of the SMA does not make any reference or purport to oust insolvency principles. Section 77 of the SMA was never crafted or nor intended to encroach upon or disrupt the priority regime in the Companies Act. Any provision which seeks to achieve priority can only be done by way of statutory provision and with positive, clear and unambiguous words.

Third, this rationale is also borne out by section 292 of the CA 1965 (and section 527 of the CA 2016) and the importance of the pari passu rule in insolvency in relation to unsecured creditors. The pari passu rule is the cornerstone of insolvency law. It is one of the most fundamental principles of the law of liquidation and is at the very heart of the whole statutory scheme of winding up. It is an old equitable principle that all persons similarly situated are entitled to equality in treatment in the distribution of the assets of the company in liquidation.

Fourth, the Federal Court then decided on the issue of leave to proceed with the counterclaim. The Federal Court did not see any exceptional issue in this case that precluded the MC from filing a proof of debt in the winding up. It was a straightforward recovery of debt and this is a relief that can be obtained in the winding up through the proof of debt.

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