Pre Empting a Winding up Petition – Part 2

Alan Teoh Kheng Huat wraps up his discussion on restraining a winding up petition

 

 

INTRODUCTION

In the First Part of this article that appeared in the previous issue (Issue 3/2006), it was highlighted that the jurisdiction of the Court to grant an injunction to restrain a winding-up petition arises from its inherent jurisdiction to restrain an abuse of process by virtue of section 23(2) of the Courts of Judicature Act 1964 and the common law.

 

The test wherein the Courts will grant an injunction is ‘bona fide dispute of the debt’. The circumstances where such a dispute exists are not exhaustive and the Court’s approach can be surmised by the following passage in McPherson: The Law of Company Liquidation 1999, 4th edition by Andrew Keay which says that:-

 

‘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’

 

The Second Part of this Article covers the limits of the Court’s jurisdiction to grant an injunction to restrain a winding-up petition and the remedies available to a company which has suffered damages due to the wrongful presentation of a winding-up petition.

 

 

ADVERTISING THE PETITION

Once a winding-up petition has been filed, a court has no jurisdiction to grant an injunction to restrain the advertising of the winding-up petition as the requirements for advertisement as prescribed in Rule 24 of the Companies (Winding-Up) Rules 1972 (“Rule 24”) are mandatory in nature. Rule 24 reads:-

 

Every petition shall be advertised in Form 4 seven clear days or such longer time as the Court may direct before the hearing’.

 

The scope of Rule 24 was construed in the case of Azman Tay & Associates Sdn Bhd v. Sentul Raya Sdn Bhd [2002] 2 MLJ 395 (“Azman Tay”). In this case, the company applied for an injunction to restrain the advertising of the winding-up petition. In construing the wording of the rule, Vincent Ng J said (at p. 396G) that:-

 

…once a winding-up petition is filed, the court is precluded from granting an injunction against advertisement or gazettal of the petition. Due to the deliberate choice of the words ‘Every petition shall be advertised…’ in Rule 24 in contradistinction to the words in the dissimilar provision for advertisement in the English and Australian Rules, I would hold that our legislature had intended gazettal and advertisement to be mandatory procedures concomitant with the petition itself which debars the courts from restraining it’.

 

Vincent Ng J in Azman Tay relied on the Supreme Court (“SC”) case of Chip Yew Brickworks Sdn Bhd v. Chang Heer Enterprise Sdn Bhd [1988] 2 MLJ 447 (“Chip Yew”). In Chip Yew, the appellant served a sec. 218 Notice on the respondent in respect of a sum for costs of bricks supplied. No payment was made and the respondent filed a petition for winding up. The appellant applied for an injunction to restrain the advertising of the petition. In the affidavit in support of the application, the respondent had admitted part of the debt but however, contended that it was solvent. The respondent relied on inter alia its balance sheet, trading, contract, profit and loss account to show that it was solvent and would be prejudiced by the advertising of the said petition. In dismissing the application for injunction, the SC found that the Winding-Up Rules require that every petition should be advertised and it was immaterial whether the effect of such advertisement in a particular case would result in damage being caused to the company proposed for winding-up and if the advertisement would in fact cause such damage, that would not be a ground to prevent a bona fide purchaser from advertising.

 

This case was also applied by Vincent Ng J in two other cases, namely Malaysian Resources Corporation Bhd v. Juranas Sdn Bhd [2002] 3 MLJ 169 (“Juranas”), which was decided in the same year as Azman Tay and the more recent decision in Pembinaan Lian Keong Sdn Bhd v. Yip Fook Thai (practising as Messrs Yip & Co) [2005] 5 MLJ 786 (“Pembinaan Lian Keong”).

 

However, the position in the aforesaid cases was not followed by the High Court (“HC”) in Celcom (Malaysia) Bhd v. Inmiss Communication Sdn Bhd [2002] 3 MLJ 178 (“Celcom”). In  Celcom, the plaintiff applied for an erinford injunction to restrain the defendant fro taking further steps in a winding-up petition pending the hearing of the plaintiff’s appeal to the Court of Appeal against the decision made by the High Court in dismissing the plaintiff’s application for an injunction to restrain the defendant from filing a winding-up petition. In allowing the application for an erinford injunction, Zulkefli J stated his reasons for granting the injunction as follows:-

 

‘The plaintiff is a public listed company with the Kuala Lumpur Stock Exchange (“KLSE”). It is currently undergoing a merger exercise with TM Cellular Sdn Bhd and upon completion of the same, the plaintiff will have the largest number of subscribers for mobile phones in the country. The filing of the petition will have an adverse impact on its shares and the public perception of the company. The plaintiff as a public listed company is also subject to constant monitoring and supervision by the KLSE and the Securities Commission. The plaintiff is under a duty to apprise the KLSE of the petition at every stage and the plaintiff will have to face likely media attention and speculation arising from the petition. Such consequence cannot be quantified in monetary terms and cannot be compensated. The public interest is a relevant and important factor for consideration’

 

In this case, Zulkilfi J applied the test of ‘public interest’ as held by his Lordship Mohamed Dzaiddin FCJ (as he was then) in the Federal Court case of Vijayalaskhmi Devi d/o Nadchatiram v. Dr Mahadevan s/o Nadchatiram & Ors [1995] 2 MLJ 709. Further, Zulkifli J distinguished Azman Tay on the basis that in that case, the court was dealing with an application for an injunction to restrain from advertising or otherwise publishing the existence or contents of a winding-up petition whereas in the instant case, the court was dealing with an erinford injunction to restrain a winding-up petition from proceeding pending the hearing of the appeal of an application to restrain the filing of the winding-up petition.

 

Therefore, Celcom can be distinguished on the facts from the decisions of Vincent Ng J in Azman Tay, Juranas, Pembinaan Lian Keong and the SC decision in Chip Yew all of which have held that the Court has no jurisdiction to grant an injunction to restrain winding up where the petition has been filed. Further, where there is an issue of ‘public interest’ involved such as where the company is extremely solvent and the presentation of the petition would have an adverse impact on its financial position and the public perception of the company, the Court will lean towards the granting of an injunction.

 

In light of the above, the most appropriate stage to apply for an injunction is before the petition is presented and at the time the company receives a statutory demand for payment, in the form of a sec. 218 Notice. The Court’s power to grant an injunction before the presentation of a winding up petition was confirmed in the case of Instrumech Engineering Sdn Bhd v. Sensorlink Sdn Bhd [2001] 1 MLJ 127.

 

 

MALICIOUS PROSECUTION

Where a winding up petition has been improperly presented by a creditor in order to coerce the company to settle the debt, an action can be brought against the petitioner by the company for malicious prosecution. The Supreme Court case of Si & Si Sdn Bhd v. Hazrabina Sdn Bhd [1996] 2 MLJ 509 illustrates this point. In this case, the appellant had filed a winding up petition against the respondent. By consent of both parties, the winding up order was set aside and the petition was fixed for hearing. Meanwhile, the respondent filed an application to strike out the petition and claimed damages on the basis that as a result of the petition its bank accounts were frozen and that it was unable to carry on its business. Mohamed Dzaiddin FCJ (as he was then) said that an application for a winding up, even if subsequently dismissed as being ill founded can damage a solvent company’s reputation. An action for damages against the petitioner, whose winding up petition has been struck out, can be brought by an entire separate suit founded on the tort of malicious prosecution or abuse of process. His Lordship cited two Australian authorities Quartz Hill Consolidated Gold Mining Co v. Eyre [1883] 11 QBD 674 and QIW Retailers Ltd v. Felview Pty Ltd [1989] 7 ACLC 519 in support of his Lordship’s proposition.

 

 

CONCLUSION

In determining whether to grant an injunction to restrain the presentation of a winding-up petition, the Court must balance an unpaid creditor’s right to file a petition against the company’s right not to have its reputation in the eyes of the public and its credit standing damaged. The Courts are more likely to grant an injunction whenever the winding-up petition is not grounded on a judgment debt and there has been no unequivocal acknowledgement of the debt by the company. To this end, the courts are finding means and ways to overcome the limits of its jurisdiction to grant an injunction to restrain a winding up petition, especially where a winding-up petition has been filed and advertising of the petition therefore becomes mandatory, such as in the Celcom case by finding that the public interest outweighs the interest of the creditor.

 
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