Pre Empting a Winding Up Petition – Part 1

INTRODUCTION

Alan Teoh outlines the development of the Court’s jurisdiction to grant injunctions to restrain winding up  petitions in the first of a two part series

 

 

Under the Companies Act 1965 (“Companies Act”) a creditor is entitled to file a winding-up petition against a company notwithstanding the fact that the petition is not premised on a judgment debt granted by the court. This is provided for by Section 218(1)(a) to (n) of the Companies Act which lays out the grounds wherein the Court may order that a company be wound up.

 

However, a winding up petition is not an appropriate means of collecting a disputed debt. The courts have held that a winding-up petition must not be used as a means to bring improper pressure to bear on a company. The proper course is to have the matter adjudicated in an action for debt by filing a writ in court.

 

Where a company is faced with a winding-up petition based on a disputed debt and the presentation of the petition would have an adverse impact on the financial position of the company or affect its reputation to its shareholders or the public at large, a company will invariably apply for an injunction from the court to restrain the creditor from filing or proceeding with the winding-up petition. This has resulted in the commercial courts being flooded with applications for injunctions to restrain winding up petition and numerous reported case laws.

 

This two-part article aims to provide an overview of the law governing injunctions to restrain a winding-up petition. The first part will outline the development of the case law in respect of the court’s jurisdiction to grant injunctions to restrain winding-up petitions. The second part will examine the limits whereby the court’s power can be exercised.

 

 

ABUSE OF PROCESS

The Companies Act or the Companies (Winding-Up) Rules 1972 (“Winding-Up Rules”) do not contain any specific provision which enables the Court to grant an injunction to restrain a creditor from presenting a winding-up petition against a company. Instead the Court has the inherent jurisdiction by virtue of section 23(2) of the Courts of Judicature Act 1964 and the common law, to restrain winding-up petitions based on a disputed debt as it amounts to an abuse of process.

 

The Court’s inherent jurisdiction was confirmed in the case of Bina Satu Sdn Bhd v. Tan Construction [1988] 1 MLJ 533. In this case, the defendants petitioned the court to wind up the plaintiff based on a debt which was disputed. The plaintiff applied for an injunction against the defendant from filing the petition. The defendant questioned the inherent jurisdiction of the Court and submitted that it had been excluded by statute, namely section 54(b) of the Specific Relief Act 1950 which provides that an injunction cannot be granted to stay proceedings in a Court subordinate to that from which the injunction is sought. In finding that the Court’s inherent jurisdiction was not restricted by section 54(b) , VC George J said that:-

 

Section 23(2) of the Courts of Judicature Act 1964 provides confirmation that the court continues to enjoy its inherent powers. This includes the power to restrain any abuse of its proceedings. A classic illustration of the abuse of court proceedings is provided in Re A Company [1894] 2 Ch 349 where it was held that where a petition against a company is presented ostensibly for a winding-up order but in reality for another purpose such as to bring pressure to bear on a company, the court has an inherent jurisdiction to prevent such abuse of process and will do so by injunction.”

 

 

Prima facie case

The standard of proof or test required for the plaintiff to succeed in an application for an injunction to restrain a winding-up petition is that of a prima facie case and not merely a serious question to be tried as established in the case of American Cyanamid Co. v Ethicon Ltd [1975] 1 All ER 504.

 

In Bryanston Finance Ltd v. de Vries (No 2) [1976] Ch 63, the defendant who held shares in the plaintiff company and had a personal animosity against the company’s chairman threatened to file a petition under section 222(f) of the English Companies Act 1984 to wind up the company. The plaintiff applied for an injunction to restrain the defendant from petitioning to wind it up the company. In finding that the onus was on the company to prove a prima facie case that the petition was bound to fail and be and abuse of process, Buckley LJ said (at p. 78D) that:-

 

“It has long been recognised that the jurisdiction of the court to stay an action in limine as an abuse of process is a jurisdiction to be exercised with great circumspection and exactly the same considerations must apply to a quia timet injunction to restrain commencement of proceedings. This principles are, in my opinion just as applicable to a winding-up petition as to an action. The right to petition the court for a winding-up order in appropriate circumstances is a right conferred by statute. A would be petitioner should not be restrained from exercising it except on clear and persuasive grounds.”

 

The circumstances whereby the Court will grant an injunction to restrain a winding up petition is where there is a bona fide dispute of the debt allegedly due under the petition. In such a case, the alleged creditor lacks the status of a ‘creditor’ within the meaning of the Companies Act and does not have locus standi to bring a petition for winding-up. Therefore, a company which is applying for an injunction only needs to show a bona fide dispute of the debt.

 

The instances where the Courts have found that there exists a bona fide dispute of the debt are not closed. According to McPherson: The Law of Company Liquidation 1999, 4th edition by Andrew Keay at p. 94 “whether or not there is a dispute on substantial grounds is a matter to be decided in each case. The dispute envisaged is one which involves to a substantial extent disputed questions of fact which demands viva voce evidence.”

 

Mann v. Goldstein [1968] 2 All ER 769 (“Mann v Goldstein”) is the locus classicus case on injunctions to restrain winding-up. When this case was decided, there were only a handful of authorities in respect of the law on injunctions to restrain winding-up. The facts of Mann v. Goldstein are as follows. Two defendants had filed separate winding up petitions for monies owed by the plaintiff company. The company was seeking an order restraining the defendant from advertising or taking any further steps in prosecuting the winding up petitions. Both of the winding up petitions were based on disputed debts. Ungoed Thomas J found that a petition which was based on a disputed debt amounts to an abuse of process of the Court which can be restrained by way of an injunction. In explaining the jurisdiction of the Court to grant an injunction, Ungoed Thomas J said that:-

 

“I would prefer to rest the jurisdiction on the comparatively simple propositions that a creditor’s petition can only be presented by a creditor, that the winding-up jurisdiction is not for the purpose of deciding a disputed debt (that is, disputed on substantial and not insubstantial grounds) since, until a creditor is established as a creditor he is not entitled to present the petition and has no locus standi; in the Companies Court; and that therefore, to invoke the winding-up jurisdiction when the debt is disputed on substantial grounds) or after it has become clear that it is so disputed is an abuse of the process of the court.”

 

 

MALAYSIAN POSITION

The Malaysian position in respect of injunctions to restrain winding-up is similar to that of the English position. Generally, the Malaysian Courts are of the view that a winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the company (see Sun Soon Heng Coach Works Sdn Bhd v. Nima Travel Sdn Bhd [1986] 2 MLJ 374). The High Court have held that the most appropriate stage for a creditor to wind up a debtor company is after the crystallization of the claim into a judgment sum. Such a judgment would effectively eradicate every  endeavour to raise any dispute on the judgment sum at the hearing of the winding up petition (per Low Hop Bing J in the case of Molop Corp Sdn Bhd v. Uniperkasa (M) Sdn Bhd [2003] 6 MLJ 311 at p. 322 B).

 

 

Bound to fail test

There are some Malaysian authorities which have held that in order to succeed in an application for an injunction to restrain winding-up, the applicant must prove to the court to the requisite standard of proof that the winding-up petition is bound to fail (see the case of Sri Binaraya Sdn Bhd v Golden Approach Sdn Bhd [2000] 3 MLJ 465 and JB Kulim Development Sdn Bhd v. Great Purpose Sdn Bhd [2002] 2 MLJ 298). This places a heavy burden of proof on the applicant for an injunction. Although the two cases were not overturned by the Appellate or Apex Court, they were subsequently addressed by Vincent Ng J in Pembinaan Lian Keong Sdn Bhd v. Yip Fook Thai (practising as Messrs Yip & Co) [2005] 5 MLJ 786 (“Pembinaan Lian Keong”). In Pembinaan Lian Keong, Vincent Ng J rejected the ‘bound to fail’ test on the grounds that it was based on the wrong application of the law and as such cannot be regarded as laying out the correct test for granting an injunction to restrain winding-up. Vincent Ng J said (at p. 798) that:-

 

Should this court rule that to secure an injunction against the filing of a winding-up petition, the onus is on the company sought to be wound up to satisfy the court that the creditor’s claim is ‘bound to fail’, most litigants who claim to be creditors would take the short-cut petition for winding-up route to enforce their claims rather than to have recourse to the common law courts. Indeed, such a heavy onus of proof if placed on the company would result in the companies court being inundated with the welter of winding-up petitions, which may lead to irretrievable damage to a company’s business and reputation, and far-reaching effects consequential upon the ensuing mandatory gazettal and advertisement entailed in a petition.”

 

 

CONCLUSION

It is settled law that the Courts have an inherent jurisdiction to restrain the winding up petition where there is an abuse of process. The jurisdiction is often exercised where a winding up petition is presented by an alleged creditor merely as a means of applying improper pressure on a company and to circumvent the legal process of filing a writ in court. The second installment of this article will cover the limits of the court’s jurisdiction to grant injunctions to restrain winding up petitions and the remedies available to a company who has suffered damages as a result of the wrongful presentation of a winding-up petition.

 
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