Case Update: Winding Up Petition Can Proceed Based on an Enforced Adjudication Decision

Lee Shih and Peyton Teo write about this recent High Court decision on whether there can be a challenge of a disputed debt against an enforced adjudication decision.

The recent High Court decision of Maju Holdings Sdn Bhd v Spring Energy Sdn Bhd (see the grounds of judgment dated 21 August 2020 of Ong Chee Kwan JC) dealt with the issue of whether an enforced adjudication decision relied upon as a debt in a statutory demand under section 466 of the Companies Act 2016 (CA 2016) is a disputed debt.

Further, the Court also looked at whether a cross-claim or counterclaim for a sum equal to or more than the debt. That can justify the grant of an injunction to restrain a presentation of a winding up petition.

Summary of the Decision and Significance

First, the Court found that an enforced adjudication decision is an undisputed debt for the purpose of a presentation of a winding up petition under sections 465 and 466 of the CA 2016.

Ordinarily, where there is a dispute on the debt in a statutory demand for winding up, the debtor company can apply to the Court for an injunction known as a Fortuna injunction (with its name taken from the Australian case of Fortuna Holdings Pty Ltd [1978] VR 83). The Fortuna injunction is to restrain the presentation and filing of the winding up petition based on that statutory demand.

Ong Chee Kwan JC took a different approach from an earlier High Court decision by Darryl Goon J in ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd [2020] MLJU 282 (ASM) where it was held that an enforced adjudication decision can still be a disputable decision. In ASM, the Court granted a Fortuna Injunction despite there being an enforced adjudication decision.

Second, although the enforced adjudication decision is an undisputed debt, it does not mean that the statutory demand cannot be challenged. If there is a bona fide cross-claim or counterclaim that is equal to or exceeds the debt, that can be sufficient for the Court to grant a Fortuna Injunction.

Brief Facts

In January 2019, via a Subcontract Agreement, Maju Holdings Sdn Bhd (Maju Holdings) appointed Spring Energy Sdn Bhd (Spring Energy) as its subcontractor for a project on pavement works for a proposed highway.

In breach of the Subcontract, Maju Holdings failed to pay the Spring Energy a total sum of more than RM 8 million under the Interim Payment Certificates for works done.

In May 2019, Spring Energy sent a Notice of Adjudication and commenced adjudication proceedings against Maju Holdings.

On 20 August 2019, simultaneously with the adjudication proceedings, Maju Holdings issued an arbitration notice against Spring Energy.

As part of the adjudication proceedings, Maju Holdings also brought a counterclaim of more than RM26 million against Spring Energy.

On 21 August 2019, the adjudication decision was delivered in favour of Spring Energy and Maju Holdings’ counterclaim was dismissed.

Due to the Maju Holdings’ failure to comply with the adjudication decision, Spring Energy applied to enforce the adjudication decision in Court. On 4 February 2020, the High Court enforced the adjudication decision as if it is a judgment or order of the High Court. At the same time, Maju Holdings’ applications to set aside and to stay the Adjudication Decision were both dismissed by the same Court. Maju Holdings did not appeal against these decisions.

On 20 February 2020, Spring Energy issued a statutory demand pursuant to section 466(1) CA 2016 premised on the enforced adjudication decision against Maju Holdings claiming for the sum of more than RM 9 million.

This led to Maju Holdings filing an application for a Fortuna Injunction to restrain Spring Energy from commencing a winding up petition pursuant to the statutory demand. Maju Holdings argued that notwithstanding the enforced adjudication decision, there was a bona fide dispute of debt. Further, Maju Holdings argued that it had a counterclaim of more than RM26 million and this exceeded the enforced adjudication decision.

Decision

First, the Court held that an enforced adjudication decision is an undisputed debt and is therefore capable of forming the basis for a presentation of a winding up petition.

Here, the Court distinguished another High Court decision of ASM where it was held that an enforced adjudication decision is a disputable decision. ASM decided that the nature of an enforced adjudication decision is of ‘temporary finality’ as opposed to a Court judgment.

Ong Chee Kwan JC opined that to treat such decision as still being ‘disputable’ will only adversely affect the enforceability of the said decision. It would run counter to the objectives of the Construction Industry and Payment Adjudication Act 2012 (CIPAA) to ease the cash flow of contractors.

Second, the Court held that even where an enforced adjudication decision is an undisputed debt, there can still be grounds to injunct the statutory demand.

To justify the grant of a Fortuna Injunction, a party can raise the ground that there is a genuine cross-claim or counterclaim that exceeds the debt stated in the statutory demand. Therefore, there is a likelihood that the intended winding up petition may fail or that it is unlikely that a winding up order will be made.

The Court found that Maju Holdings had established to the satisfaction of the Court through its affidavit and exhibits that its cross-claim or counterclaim was based on substantive grounds. The cross-claim or counterclaim was in excess of the amount in the statutory demand. Maju Holdings’ application for the Fortuna Injunction was therefore allowed.

Finally, after the filing of the application for the Fortuna injunction in March 2020 and before the hearing, Spring Energy had proceeded to file the winding up petition in July 2020. Ong Chee Kwan JC referred to his earlier decision in Permata Trans Offshore Sdn Bhd v New Wing Energy Sdn Bhd [2019] MLJU 922. That decision held that where winding up proceedings had already commenced before the winding up court, any application to restrain such winding up proceedings should be made in that winding up court. The only exception is the rare and exceptional cases  where irreparable harm would be suffered by the company.

The Court then decided that it would be a grave injustice to Maju Holdings if it was now precluded from seeking the Fortuna injunction and had to make a fresh application before the winding up court. This was an exceptional case to justify the Court to grant the Fortuna injunction notwithstanding that the petition had already been filed.

Comment

On the issue of enforced adjudication decisions, there are now conflicting High Court decisions on the following issue. Whether a non-paying party can raise a challenge of there being a dispute of debt against an enforced adjudication decision. It would appear that the objectives under the adjudication regime would be best met by allowing the unpaid party to fully execute and to issue winding up demands based on an enforced adjudication decision. It will be interesting to see how the appellate courts decide on these conflicting decisions.

It is also interesting that the Court still allowed an injunction to restrain the further steps in the winding up petition despite the petition having already been filed.

First, it is unusual that Spring Energy proceeded to file the petition. It is normal for the debtor company to obtain some form of ad interim Fortuna injunction to restrain the filing of the petition while waiting for the full inter partes hearing.

Second, once the winding up petition has been presented, there are appellate authorities that the Court can no longer restrain the advertisement and gazetting of the petition (see the Court of Appeal decision of People Realty Sdn Bhd [2008] 1 MLJ 453).

Co-written by Peyton Teo. Peyton is currently a paralegal with Lim Chee Wee Partnership and will be sitting for her CLP at the end of 2020.

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