In the High Court decision of Re SG & Sons Sdn Bhd (grounds of judgment dated 10 February 2021), the Court has confirmed that the local authority’s assessment rates is not a priority debt in a winding up.
Summary of the Case and Significance
The Kuala Lumpur City Hall, or otherwise known as Dewan Bandaraya Kuala Lumpur (DBKL), had filed a proof of debt with the liquidator. The liquidator had sold the wound up company’s sole asset, being an apartment unit in Bangsar Tower.
DBKL asserted that the company continued to owe DBKL a debt for assessment rates (also known as ‘cukai taksiran’) and that the debt continued even post-winding up. Further, DBKL contended that the arrears of assessment is a federal tax and therefore a priority debt in winding up.
The High Court dismissed both these arguments. DBKL was only entitled to prove its debt up to the date of the winding up order. Further, the assessment is not a federal tax and therefore not a priority debt.
In December 1997, the company in question was wound up and the Official Receiver appointed as the provisional liquidator.
In March 2019, a private liquidator was appointed by way of a Court Order.
The company only had one asset, being an apartment unit in Bangsar Tower. In January 2020, the liquidator sold the property.
Thereafter, DBKL lodged a proof of debt with the liquidator. DBKL’s proof of debt claimed a sum for the arrears of assessment for the period 1999 to September 2017. The liquidator’s position was that DBKL’s claims were post-winding up debts and not debts accrued before the winding up order.
The liquidator filed a court application essentially to seek the Court’s directions on two issues. First, that DBKL shall waive the claims for assessment for the period 1999 until September 2017. Second, that if the proof of debt is allowed in full or in part, that the amount claimed shall be an unsecured debt and that DBKL shall rank equally with the other unsecured creditors of the company.
The Honourable Nadzarin Wok Nordin JC decided as follows.
First, the Court dismissed DBKL’s argument that there was any form of estoppel. DBKL argued that the Official Receiver had earlier received the proof of debt and not rejected it. The Court decided there cannot be an estoppel against the issue of priority of debts.
Second, the Court considered the argument of whether the assessment rates is a priority debt.
Under section 292(1)(f) of the Companies Act 1965 (CA 1965) (and identical to section 527(1)(f) of the CA 2016), federal tax is a priority debt that ranks above unsecured debts.
DBKL cited section 146 of the Local Government Act 1976 (LGA) which referred to “[a]all rates shall be paid by the persons who are the owners of the holding for the time being, and until so paid shall, … be a first charge on the holdings in respect of which they are assessed …” The Court held that this said section 146 does not provide that arrears of rates under the LGA shall rank in priority to other debts, but that it shall be a “first charge on the holdings”.
On whether the assessment rates is a federal tax, the Court referred to the Federal Constitution. Article 74 of the Federal Constitution states that Parliament may make laws on the matters with respect to any of the matters enumerated in the Federal List or the Concurrent List (that is to say, the First or Third List set out in the Ninth Schedule). In turn, the First or Third List in the Ninth Schedule does not refer to any matters on the purview of local government and no reference to any assessments or rates under the LGA.
Therefore, the Court found that the rates claimable under the LGA is only a rate payable to the local authority. Here, the local authority is DBKL. It is not a federal tax falling within the definition of taxes due to the government within the context of the Federal Constitution.
Third, whether DBKL’s debt for unpaid assessment continued to run even after the winding up. With the company having been wound up in 1997, DBKL’s claim for unpaid assessment ran up to the period of September 2017.
The wording of sections 146 and 147 of the LGA effectively meant that the rates shall be paid by the owners of the holdings for the time being. So, while the property was still held by the wound up company, the rates would seemingly continue to be owed to DBKL.
The Court held that the winding up regime under the CA 1965 is a specific regime with provisions for debts provable in winding up. Hence, the specific proving of debts would override the general provisions of sections 146 and 147 of the LGA. The Companies Act regime only allows for the proving of debts up to the date of the winding up order.