Trigger Point

Tan Lai Yee explains when a scheme of arrangement under Section 176 of the Companies Act triggers a termination of a PAM Contract

In Desa Samudra Sdn Bhd v Bandar Teknik Sdn Bhd & Ors [2012] 1 MLJ 729, the Federal Court was called upon to determine the point in time at which proceedings relating to a scheme of arrangement under Section 176 of the Companies Act 1965 ("Act") would trigger the termination of a standard form Building Contract by the Persatuan Akitek Malaysia ("PAM Contract").

 

FACTS OF THE CASE

The Appellant/Plaintiff (“Appellant”) was the Employer of a construction project under a PAM Contract. The Respondents/Defendants (“Respondents”) were the sub-contractors appointed by the Main Contractor, Autoways Construction Sdn Bhd (“Autoways”), to perform various functions under the project. Autoways was initially named as the 1st Defendant in the court of first instance but did not participate at the trial as it had been wound up.

Clause 25(2) of the PAM Contract (“Clause 25(2)”) provides that "in the event of the Contractor becoming a bankrupt or making a composition or arrangement with his creditors or having a winding up order made … the employment of the Contractor under this Contract shall be forthwith automatically determined."

The Appellant issued a termination letter upon learning that Autoways had made an application to the Court for a restraining or moratorium order ("restraining order") under Section 176(10) (“Section 176(10)”) of the Act.

Subsequent to the issuance of the termination letter by the Appellant, the 1st to 4th Respondents re-entered the site to remove their plant, tools and equipment on the authorization of Autoways and in the process of doing so, damaged the temporary buildings on the site. This resulted in the Appellant claiming damages against the 1st to 4th Respondent for trespass and conversion.

 

DECISIONS OF THE HIGH COURT AND THE COURT OF APPEAL

The High Court ruled in favour of the Appellant and held that the contract was validly terminated under Clause 25(2) and Autoways could not therefore have validly given consent to the Respondents to enter the site.

The Court of Appeal reversed the decision of the High Court on the basis that a restraining order under Section 176(10) did not activate the automatic termination under Clause 25(2). As the contract was not validly terminated, Autoways could validly give consent to the Respondents to enter the site.

The Appellant obtained leave to appeal to the Federal Court.

 

QUESTIONS OF LAW

Among the questions of law to be determined by the Federal Court were the following:

(1) whether a restraining order issued by the Court under Section 176(10) in favour of the contractor is proof of the ‘making of a composition or arrangement’ with creditors for the purpose of Clause 25(2)?; and

(2) whether Clause 25(2) is triggered, causing an automatic termination of the main contract if the contractor petitions the Court under Section 176(1) (“Section 176(1)”) of the Act for approval of a scheme of composition with its creditors?

 

THE DECISION OF THE FEDERAL COURT

The Federal Court upheld the decision of the Court of Appeal.

 

Section 176(10)

The Court held that the issuance of a restraining order under Section 176(10) would not activate Section 25(2). Their Lordships were of the view that the events contemplated in Clause 25(2) were “essentially instances of insolvency” and that an application for, and also the granting of, a restraining order under Section 176(10) was not an instance of insolvency so as to trigger Clause 25(2) even though insolvency was “probable or imminent”.

 

Section 176(1)

According to the Court, the second question turned on the interpretation of the phrase "making a composition or arrangement with his creditors" in Clause 25(2).

In the opinion of their Lordships, the word "making" must for all necessary purposes be read as the composition or arrangement having already been made i.e. it must necessarily be a step further than a mere proposal to enter into a composition or arrangement.

Their Lordships were also of the view that the words “becoming a bankrupt’ and “having a winding up order made” in Clause 25(2) contemplate that bankruptcy orders must have been entered or that winding orders have been made before the Clause 25(2) is activated and that "making" must be construed in a similar context.

Hence, the Court concluded that the presentation of a proposal of a scheme of composition or arrangement to the Court under Section 176(1) would not by itself be sufficient to activate Clause 25(2). In their Lordships' opinion, Clause 25(2) would be triggered only when the Court is called upon to approve the composition or arrangement under Section 176(3) of the Act.

In coming to its decision on this question, the Federal Court followed the approach adopted by the High Court in Sinnadorai v New Zealand Insurance Co Ltd [1968] 2 MLJ 70 which held that a provision similar to Clause 25(2) was only activated once the event has occurred.

 

CONCLUSION

This decision of the Federal Court establishes that the issue of a restraining order under Section 176(10) would not trigger the operation of Clause 25(2). It also establishes that the presentation of a proposal of a scheme of composition or arrangement under Section 176(1) by itself will not trigger the operation of the said provision unless the Court is called upon to approve the composition or arrangement as provided under Section 176(3) of the Act.

It is likely that the Malaysian Courts will apply the principles laid down in this case to interpret the provisions contained in other agreements that are substantially similar to Clause 25(2).

Parties who wish to trigger the termination of an agreement or an event of default upon a party applying for or obtaining a restraining order should draft the relevant clause so that it provides unequivocally that the application for, or the grant of, a restraining order would activate the relevant clause.

 

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