Strike Three – You’re Out!

 

A commentary on the curious (winding up) case of Smartframe v Anjung Bahasa by Shannon Rajan

 

 

INTRODUCTION

The ground most commonly relied upon in a petition to the Court for an order to wind up a company is Section 218(1)(e) of the Companies Act 1965 (“the Act”) wherein the Court may order a company to be wound up if it is unable to pay its debts.

 

However, the Court will not order a winding up of a company where the debt is bona fide disputed on substantial grounds. In the present case, Smartframe Sdn Bhd v Anjung Bahasa Sdn Bhd [2011] 4 CLJ 416, the Respondent inter alia disputed the judgment debt on the ground that it had a substantial cross-claim against the Petitioner.

 

 

BACKGROUND FACTS

On 17 February 2006, the Petitioner obtained a summary judgment against the Respondent and 3 others for the principal sum of RM1,538,239.26 together with interest and costs (“Judgment Sum”) before the Senior Assistant Registrar. The judgment was based on a corporate guarantee given by the Respondent in respect of a contract undertaken by another company.

 

The Respondent appealed against the decision of the Senior Assistant Registrar to the Judge-in-Chambers who dismissed the appeal. The Respondent’s appeal to the Court of Appeal was subsequently dismissed. The Respondent then applied for leave to appeal to the Federal Court but its application was rejected.

 

The Petitioner filed a winding up petition against the Respondent in respect of the Judgment Sum on 10 March 2006. On 28 July 2007, the Court dismissed the petition upon the Petitioner's request to withdraw the same.

 

Thereafter, the Petitioner filed a second winding up petition against the Respondent in respect of the Judgment Sum on 31 October 2007 and the same was struck out by the Court on 17 September 2008 on technical grounds.

 

On 5 February 2010, the Petitioner served a statutory notice pursuant to Section 218(2)(a) of the Act (“Section 218 Notice”) on the Respondent demanding payment of the Judgment Sum. The Respondent did not pay the Judgment Sum or any part thereof within the 3-week period prescribed by that section.

 

The Petitioner filed a third winding up petition to wind-up the Respondent on 10 March 2010.

 

On 3 May 2010, the Respondent filed an action against the Petitioner for damages not exceeding RM5 million for malicious prosecution and abuse of the Court’s process for commencing the third winding up petition after the High Court had dismissed the 2 previous winding up petitions filed by the Petitioner against the Respondent on the same Judgment Sum.

 

The Respondent objected to the third winding up petition and alleged inter alia that by filing its cross-claim for damages for malicious prosecution against the Petitioner, it has established that a valid and justifiable cross-claim has been made against the Petitioner and accordingly, the petition should be struck out or stayed.

 

 

DECISION OF THE HIGH COURT

The Court held that not every claim filed by a respondent after a winding up petition has been filed against it will amount to a cross-claim which will afford the respondent with good grounds to strike out or to stay the petition. The Respondent’s cross-claim must be a claim which arises out of or in some way connected to the Petitioner’s claim.

 

The Court found that the Respondent’s cross-claim was not a genuine or serious claim as there was little or no evidence to support its claim for damages for malicious prosecution. The High Court allowed the Petitioner’s petition and ordered that the Respondent be wound up.

 

 

THE GROUNDS OF DECISION

The Court held that the Respondent’s cross-claim was not a genuine or serious claim for the reasons set out below.

 

The Petitioner had obtained a valid judgment against the Respondent. As the Respondent had exhausted all venues of appeal against the judgment, the Petitioner had the locus standi to present the winding up petitions against the Respondent. Accordingly, the petitions were not presented falsely or maliciously without reasonable cause calculated to injure or exert undue pressure on the Respondent.

 

The Petitioner’s petition was filed on 10 March 2010 whereas the purported cross-claim was filed on 3 May 2010. The Respondent’s solicitors, in response to the Section 218 Notice, failed to mention any intended cross-claim against the Petitioner. The Respondent also failed to provide any explanation for the delay in filing the purported cross-claim, which would have crystallised as early as 2007 or 2008. The learned Judicial Commissioner concluded that the only plausible conclusion is that the purported cross-claim was made mala fide and filed for the purpose of delaying the disposal of the third winding up petition.

 

The Judge further observed that the Respondent’s claim for general damages for malicious prosecution of a sum not exceeding RM5 million was an arbitrary figure plucked by the Respondent.

 

The Court also held that there was little or no evidence adduced in the Respondent’s affidavit to support its cross-claim for damages for malicious prosecution. The Respondent had merely stated in its affidavit opposing the winding up petition that it had filed a suit for damages for malicious prosecution but failed to set out the facts on which its cross-claim was based so that the Petitioner could have a fair opportunity to state its case on affidavit.

 

The Court further held that in an action for malicious prosecution, it is essential for the Respondent to aver and prove that the previous petitions were terminated in its favour. As the two previous petitions were dismissed on technical grounds without addressing the merits of the same, they could not be said to be terminated in the Respondent’s favour. Accordingly, the Court concluded that the purported cross-claim had little or no reasonable prospect of success.

 

 

CONCLUSION

The Smartframe Case illustrates that the mere fact that a respondent company in a winding up petition has filed a cross-claim against the petitioning creditor may not be a sufficient ground to stave-off a winding up order. The respondent must pursue its claim in a diligent manner as the failure to do so may give rise to an inference that the cross-claim is not a genuine or serious one.

 

 

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