The Court of Appeal in Kumpulan Liziz Sdn Bjd (in liquidation) v Pembinaan Azam Jaya Sdn Bhd (grounds of judgment dated 25 November 2021) ruled that the judicial management moratorium will extend to restraining any advertisement or gazetting of a winding up petition.
Summary of Decision and Significance
Grounds of Judgment by: Lee Swee Seng JCA
The Court of Appeal decision focused on overturning the High Court decision in making a winding up order.
On 4 February 2020, the employer in a construction contract had issued a statutory demand for winding up against its contractor. The demand was for more than RM8.6 million. This was not based on a judgment sum.
On 15 June 2020, the employer-petitioner filed the winding up petition against the contractor. This was on the ground that the contractor had repudiated the contract and there there was an advance payment sum due to the employer.
On 3 July 2020, the contractor filed a judicial management application. The filing of judicial management would trigger a moratorium and stay legal proceedings.
On 13 October 2020, the judicial management application was dismissed.
On 18 November 2020, the High Court ordered the winding up of the contractor. The contractor appealed to the Court of Appeal.
In reversing the High Court decision, the Court of Appeal held that there were disputes on the debt. The Court also found that there may be a genuine and serious counterclaim raised by the contractor against the petitioning employer.
However, this case update will focus on certain aspects of the decision on the interaction between judicial management and the winding up petition.
Issue 1: Whether the filing of judicial management would stay all winding up proceedings, including staying the advertisement and gazetting
Although the judicial management application was pending, the High Court decided that the employer-petitioner could still proceed with the necessary steps to advertise and gazette the winding up petition. The petitioner could do all that was necessary to get the petition ready for hearing. It was only that the Court could not make a winding up order while the judicial management was pending.
The Court of Appeal disagreed with this point.
The Court of Appeal explained that the company applying for judicial management cannot be expected to resist all legal actions from different fronts when it is warding off these actions.
The company’s efforts during this time are to focus on convincing creditors to support its rescue scheme. Once a winding up order is made, the whole rescue plan would have been scuttled unless a stay order could be contained.
The Court of Appeal found it inconsistent that there shall be no winding up order after the filing of a judicial management and yet, all requirements under the Winding Up Rules for advertisement and gazetting may still be proceeded with.
Even if advertisement and gazetting of the petition are not strictly speaking steps in the proceedings, the filing of the Affidavits for the advertisement and gazetting to enable the issuance of the Registrar’s Certificate would be proceedings stayed by the moratorium.
The Court of Appeal noted that the High Court was concerned about possible abuse of the judicial management application and the stay of proceedings. The solution is in section 410 of the Companies Act 2016 (CA 2016) where leave to proceed can be applied from the judicial management Court. The Court can impose such terms as the Court may deem fit in granting the leave. The Court may consider applying the considerations of leave to continue proceedings in Top Builders Capital Bhd & Ors [2021] 10 MLJ 327 for leave in relation to a restraining order.
Issue 2: Whether the respondent being insolvent in a judicial management application would be sufficient for making a winding up order
In applying for judicial management, a company would have to be shown to be insolvent or near insolvent. This is due to section 405(1)(a) of the CA 2016 stating that the Court may make a judicial management order if “the Court is satisfied that the company is or will be unable to pay its debts“.
The Court of Appeal held that even where a respondent company admits to its own insolvency in a judicial management application, that does not derogate from the principle that only a creditor for an undisputed debt has the legal standing to present a winding up petition.
If the petitioner fails to show that there is indeed a debt owing by the respondent to the petitioner, the petitioner cannot proceed to nonetheless say that the respondent should be wound up due to the respondent’s admission of insolvency. It is for other genuine creditors to decide that question.
I am aware that there is a pending application for permission to appeal to the Federal Court against this Court of Appeal decision.
Commentary
First, the Court of Appeal has confirmed the wide moratorium that comes into effect the moment a judicial management application is filed. The Court gave a wide interpretation of section 410(c) of the CA 2016 which has the effect that “no other proceedings … shall be commenced or continued … against the company … except with leave of the Court.” The restraint of “proceedings” would prevent further steps in winding up proceedings, including carrying out advertisement and gazetting.
It would likely follow that a restraining order as part of a scheme arrangement (see section 368(1) of the CA 2016) would similarly have a wide enough application to restrain such further steps in ongoing winding up proceedings and to restrain the advertisement and gazetting. Section 368(1) of the CA 2016 uses similar language of “restrain further proceedings in any nation or proceeding against the company except by leave of the Court.”
Second, the moratorium in judicial management can be contrasted with case law that an injunction (also known as a Fortuna injunction) cannot be granted to restrain the advertisement and gazetting of a winding up petition.
The Court of Appeal of People Realty Sdn Bhd v Red Rock Construction Sdn Bhd [2008] 1 MLJ 453 decided that once a winding up petition is filed, the court is precluded from injuncting the advertisement and gazetting of the petition. This is due to the mandatory language in Rule 24 of the Companies (Winding Up) Rules 1972 stating that every “petition shall be advertised“.
Third, the Court of Appeal has also usefully set out that a failed judicial management application will not automatically mean an admission of insolvency and for a winding up order to be then follow. The petitioning creditor must first establish that it is indeed a genuine creditor and that there is no dispute on the debt. This Court of Appeal decision is to be contrasted with the High Court decision in Jacdex Interlogistics Sdn Bhd v Action Apparel Sdn Bhd [2021] MLJU 763 (covered in this earlier post). The winding up Court held that with the earlier judicial management applications, the company has admitted that it is unable to pay its debts.