WINDING-UP. Every stake-holder is bound to have mixed-feelings when a company is seen to be headed for winding-up, voluntarily or not. For many, the presentation of a winding-up petition against a company is the beginning of its end and hence many believe that the company has no assets, is financially incapable or insolvent.
This isn’t always true. The test, in a winding-up brought by a creditor, is actually when the court is convinced that the company is ‘unable to pay its debts’.
Practically speaking, I would rather rephrase the test to be whether the company has sufficient liquidity to pay its debt within 21 days upon being served with a statutory notice under Section 466 of the Companies Act 2016.
A company with millions of ringgit in immovable assets may still be found ‘unable to pay its debts’ if it does not liquidate such assets in time.
Even after winding-up proceedings have begun against a company, the Companies Act 2016 (“CA 2016”) provides certain safeguards to ensure that the assets of the company are preserved for fair distribution and not exhausted unnecessarily.
Statutory Safeguards: Section 470 Companies Act 2016
The few statutory safeguards that will be discussed in this article include Section 470, Section 471 and Section 472.
Part 1 of this topic will consist of Section 470 only.
Section 470 CA 2016 primarily states that “the company or any creditor or contributory may, where any action or proceeding against the company is pending, apply to the Court for an order to stay or restrain further proceedings in the action or proceeding, and the Court may stay or restrain the action or proceeding“, at any time after the presentation of a winding up petition and before a winding up order has been made.
The ‘restraint’ or ‘stay’ applied for under this section is against all other proceedings against the company in any other court not being that Winding Up Court. The Court of Appeal in Sri Jeluda Sdn Bhd v Pentalink Sdn Bhd [2008] 4 CLJ 359 on Section 222 of the Companies Act 1969 (equivalent of Section 470 CA 2016 under previous enactment) clarified that the stay application is intended to stay actions and proceedings other than the hearing of the winding up petition.
This section, notably the Court’s power under this section, was discussed by the Court of Appeal in International Construction & Civil Engineering Sdn Bhd v Jittra Sdn Bhd [2018] 1 LNS 1252.
The Court adopted the jurisprudence from the text to state that such stay must be judicially considered upon examination of all relevant facts. It then dismissed the stay application and stated the following:-
- The threshold is very high as trial courts are required to dispose of cases within a specific time, expeditiously and fairly. It is the Court’s overriding objective that every case is dealt with economically, expeditiously and justly.
- If the application is not made bona fine, it must be dismissed in limine.
- If the application also relies on the Court’s inherent jurisdiction to stay proceedings, the Court will not exercise such jurisdiction unless it is in the interest of justice.
- Citing the case of Bowkett v Fulles United Electric Works Limited [1923] 1 KB, the Court reiterated that where the application is a genuine application; in the absence of special circumstances, the court ought to exercise its discretion by staying or restraining the proceedings with a view of securing equal distribution of the assets among creditors of the same class.
The Court’s jurisdiction to stay any and all other proceedings against the company while winding up proceedings are under way is part of the necessary legal safe guard put in place to ensure that the assets of the company is preserved for equitable and just redistribution. This prevents other creditors from obtaining judgment and executing the same against the company before the disposal of the winding up petition.
However as seen above, the Court must strike a balance between the overriding objective that every case is dealt with economically, expeditiously and justly, against the preservation of company assets to secure equal distribution of company assets among creditors of the same class. This balance becomes ever more relevant and vital in light of the Practice Direction No. 1 of 2020 and Chief Justice Tan Sri Tengku Maimum Tuan Mat’s speech at the opening of the legal year 2020, which emphasized on improving efficiency of court processes by, among others, limiting interlocutory proceedings.
This section is also concurrently cited with Section 25(2) of the Courts Judicature Act 1967 and Para 11 of its Schedule, which are commonly referenced to in respect of the Court’s power to order a stay. Both the Courts in Team Four Sdn Bhd v Ang Kim Cheng @ Ang Teng Kok [2017] 1 LNS 1406 and Wang Po v Fong Soong Metal Works Sdn Bhd [2019] 1 LNS 1597 allowed the respective applications for stay on the ground that special circumstances existed where there would be contradictory decisions or a multiplicity of proceedings if the respective suits are not stayed / restraint.
This application of Section 470 prevents inconsistent and / or contradictory decisions being given by different Courts affecting the company.
Conclusion
Section 470 CA 2016 is a very practical provision provided to safeguard the interest of the company, its directors, its members, its contributories and its creditors as a collective. It is one of the many statutory safeguards enacted to preserve company assets for the purposes of a fair and just distribution.
In deciding applications made under the section, the Court must remain prudent and cautious in balancing the relevant factors of the case in the interest of justice and the overriding objective.
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