Case Update: Receivers Can Seek For Continuation of Essential Supplies

The Court of Appeal in Boulevard Plaza Sdn Bhd v Gas District Cooling (Putrajaya) Sdn Bhd [2019] MLJU 1965 allowed the receiver and manager’s application to compel a chilled water provider to continue with the supply of chilled water to the company under receivership. This is a far-reaching ability to compel the continuation of certain essential supplies. This decision would also apply to the situation of a judicial manager seeking for the continuation of such supplies.

Summary of the Decision

This decision centres on the interpretation of section 392(6) and (7) of the Companies Act 2016 (CA 2016).  This is a new provision introduced under the CA 2016. I had previously written about the Court of Appeal Order but the grounds of judgment have now been released.

These subsections essentially state the following:

If a receiver or receiver and manager (R&M) makes a request for the giving of any supplies including water, electricity, gas and telecommunications, the supplier may make it a condition that the receiver or R&M personally guarantees the payment of any charges for the supply after the appointment.

Further, the supplier cannot make it a condition of the giving of the supply that there must be the payment of any outstanding charges incurred before the appointment of the receiver or R&M.

The above provisions are identical in the situation of a judicial manager making such a request under section 414(7)(a) and (b) of the CA 2016.

The Court of Appeal held that firstly, chilled water would fall within “supplies“. The provision was not restricted to merely water, electricity, gas and telecommunications. Chilled water was a public utility which was essential and beneficial to the public in Putrajaya. The respondent had a monopolistic control over the chilled water supply and there was no other viable suppliers.

Second, the Court of Appeal took a purposive interpretation to section 392(6) and (7) of the CA 2016. The Court of Appeal held that the purpose of the provision was to ensure that suppliers with monopolistic control must continue to provide supply to a company under receivership or judicial management as long as new debts incurred are paid.

Background Facts

Boulevard Plaza Sdn Bhd is the owner of the building called Menara Ikhlas in Putrajaya. Boulevard Plaza was placed under receivership. Gas District Cooling, or GDC, is the sole supplier of chilled water for all the air conditioning systems in premises within Putrajaya. GDC was appointed as the sole supplier by Perbadanan Putrajaya acting on behalf of the Federal Government.

In March 2015, Boulevard Plaza and GDC had entered into an agreement  for GDC to supply chilled water to the building for 25 years. After some time, Boulevard Plaza was in default of payment for the supply of chilled water in the sum of more than RM4 million.

In November 2017, a R&M was appointed over Boulevard Plaza and the R&M took over the management of the company. GDC sought for the payment of the pre-receivership charges of the RM4 million.

In January 2018, GDC issued a notice of termination and gave the R&M 14 days to remedy its default, failing which, the R&M would cease the supply of chilled water.

In late January 2018, the R&M filed an action to prevent GDC from ceasing the chilled water supply and for an injunction to compel GDC to continue the chilled water supply (subject to the R&M paying the charges for chilled water supply incurred during the receivership period).

The High Court dismissed the application. Essentially, the High Court held that chilled water did not fall within the phrase “supplies including water, electricity, gas and telecommunications” in section 392(6) of the CA 2016.

The R&M appealed to the Court of Appeal.

Decision

On the first issue on chilled water and “supplies“, the Court of Appeal held that the supply chilled water would fall within the phrase “supplies” in section 392(6) and (7) of the CA 2016. However, the Court of Appeal focused on trying to give meaning to the terms ‘public utility’ and ‘utilities’. The Court of Appeal then considered the factors of monopolistic control, whether it was an essential service and then the finding that chilled water is a public utility in Putrajaya.

Second, the issue on whether there can be an order to compel the continuation of the supplies. The Court of Appeal adopted a purposive approach in considering the similar provisions of section 392(6) and (7), along with the judicial management provisions of section 414(7)(a) and (b) of the CA 2016. The Court reviewed the Corporate Law Reform Committee report where the rationale was that utility suppliers with monopolistic control such as Tenaga Nasional or Telekom Malaysia should be obliged to provide supplies to a company with respect to which a judicial management order had been made. This was so long as new debts incurred are paid.

The Court of Appeal considered provisions in the United Kingdom (section 233 of the Insolvency Act 1986 which is similarly worded), Australia (section 600F of the Corporations Act 2001) and New Zealand (section 40 of the Receivership Act 1993).

The Court of Appeal then briefly held that GDC should continue with the supply of chilled water as long as the R&M pays the new charges incurred during the receivership. GDC cannot insist on payment of pre-receivership charges as a condition for continuous chilled water supply.

Commentary

I make five comments on this decision.

First, it appears that the Court of Appeal took a narrow interpretation of the term “supplies” when it focused on whether chilled water supply fell within public utility, utilities and whether the supply was subject to monopolistic control. Unlike the jurisdictions like the United Kingdom, Australia and New Zealand, our Malaysian wording has an intentionally wide phrasing of the general term “supplies“.

So for example, we take the situation where a company under receivership or judicial management requires the critical supply of essential raw materials. For instance, specific latex for the manufacturing of a particular grade of rubber gloves. On a plain reading of the word “supplies“, that may fall within these provisions to allow for continuation of supply. But reading this decision, raw materials would not fall within the categories of public utility, utilities or monopolistic control.

As another example, in the case of telecommunications, what happens if there is no monopolistic control? So for instance, broadband charges are outstanding to a particular service provider. The argument may be raised that the company in receivership should then go to a different service provider altogether and cannot seek the continuation of “supplies” by the original service provider. Sections 392(6) and (7), and sections 414(7)(a) and (b) of the CA 2016, do not make any reference to the requirement of having monopolistic control before those sections can apply.

Second, the plain words of section 392(6) and (7) of the CA 2016 do not refer to the ability to compel the continuation of the supply. The provision appears to only envisage that where the supplier agrees to continue with the supply, there are then two stages to the mechanism. Section 392(6) states that the R&M may have to personally guarantee the new debts. Section 392(7) states that the supplier cannot ask for payment of the old debts in continuing with the supply.

Our section 392(6) and (7) is very similar to section 233 of the UK Insolvency Act 1986. However, the UK recognised the problem with merely section 233 since the utility provider could still exercise valid contractual termination rights (like what GDC tried to do) and call an event of default. Alternatively, the utility provider could hold the insolvent company to ransom by exercising contractual rights to switch tariffs, raise prices or change payment terms. The UK therefore introduced section 233A of the UK Insolvency Act 1986 to try to address some of these issues. We do not have the equivalent of section 233A.

Third, the Australian section 600F of the Corporations Act 2001 contains different wording. The words used are that “the supplier must notrefuse to comply with the request for the reason only that the amount is owing“. This is clear wording that there must be the continuation of supply (i.e. must not refuse to supply).

Fourth, the New Zealand section 40 of the Receivership Act 1993 also has different wording. The words used are that “… a supplier of an essential service must notrefuse to supply the service to a receiver …” Again, there is clear wording that there must be the continuation of supply (i.e. must not refuse to supply).

Finally, this is a very useful provision to support the continued going concern status of a company in receivership or in judicial management. The continuation of supply, especially of essential utilities, is critical to preserving the running of the company, the employees’ jobs and the value of the company. The R&M or judicial manager can utilise this very useful mechanism to ensure continued supply. This is also in line with the recommendations made by the Corporate Law Reform Committee. However, there is concern on whether the plain wording of these sections support the ability to obtain a mandatory injunction to compel the continuation of supplies.

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