Whether Stay Of Execution of Judgment Impedes Winding Up Proceedings & Alternative Legal Recourse

It is well established that a stay of execution of the Judgment, if granted, cannot in law prevent the presentation of a winding up petition as winding up proceedings are not execution proceedings that fall within the ambit and meaning of "execution" proceedings as provided under the Rules of Court 2012.

In Maril-Rionebel (M) Sdn Bhd & Anor v Perdana Merchant Bankers Bhd and other appeals [2001] 4 MLJ 187 the Court of Appeal speaking through Gopal Sri Ram JCA (who wrote a separate judgment), aptly said at p 198 that:-

“But a petition for winding up is not execution, for a winding up petition is not based upon any judgment of a court. Normally, it is based on the inability of a company to pay its debts as and when they fall due. Such inability is normally evidenced by the company's inability to satisfy or compound a notice of demand issued pursuant to s 218 of the Act. But the issuance of such a notice is not a sine qua non for the presentation of a winding up petition.”

A winding-up petition is not “execution” in the context of Order 46 r 1, for it is not based on any judgment of the Court. This proposition has been made abundantly clear in Juara Aspirasi (M) Sdn Bhd v Tan Soon Ping [2012] 1 MLJ 50, Zaleha Zahari JCA (as he was then) in delivering the decision of Court of Appeal held that:-

“[10]… even if there was an ad interim order in place, there was no legal impediment for the petitioner to file a winding up petition against the company. An ad interim stay does not mean that a winding up petition cannot be filed as bankruptcy and winding up proceedings was not within the ambit and meaning of 'execution' proceedings as provided by O 46 r 1 of the Rules of High Court 1980 which states as follows:

In this Order, unless the context otherwise requires, 'writ of execution' includes a writ of seizure and sale, a writ of possession and a writ of delivery.

[11[The fact that it is based on a judgment does not necessarily make it a continuation of the existing proceedings. It is a proceeding by way of petition just like divorce, winding up or election to name a few, bears the characteristics of a fresh proceeding unlike an execution proceeding. This principle is equally applicable to winding up proceedings.”

In light of the above, a stay of execution of a judgment in a civil action could not prevent the presentation of a winding-up petition. It follows therefore the Judgment Creditor is at liberty to proceed with the issuance of the 466 Notice and Petition under the Companies Act 1965.

The learned High Court Judge in Rotating Offshore Solutions Pte Ltd v TH Heavy Engineering Bhd [2017] MLJU 904 has described that:

“The use of the stay of execution application as a backdoor attempt to obtain an injunction to restrain the presentation of a winding-up petition is thus a form of a tactical manoeuvre which is deprecated and cannot be countenanced by the Court.”

At this juncture, it is pertinent to consider other legal recourse in objecting to a winding up petition, such as filing an Affidavit in Opposition during the hearing of petition rebutting the presumption of its insolvency or an application for a Fortuna Injunction. To rebut that presumption the company must show that it is able to pay its debts when it becomes due and payable. The test to be applied to determine its ability to pay is cash flow solvency or commercial solvency test as exemplified in Pacific & Orient Insurance Co Bhd v. Muniammah Muniandy [2011] 1 CLJ 947.

A Fortuna Injunction is an injunction to prevent the filing of a winding up petition. It is emanated from the Australian case of Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation of the Commonwealth of Australia [1978] VR 83. The principles were adopted and applied by our Court of Appeal in Mobikom Sdn Bhd v Inmiss Communications Sdn Bhd [2007] 3 MLJ 316, where‎ Gopal Sri Ram JCA (as he then was) summarized that:-

“(3) The kind injunction by which an intended winding up petition is sought to be restrained is known as “Fortuna injunction”. The phrase takes its name from Fortuna Holdings Pty Ltd v. The Deputy Commissioner of Taxation where the juridical basis for the relief was first explained. Fortuna Holdings made it clear that the courts have established a principle that the presentation of a winding up petition may be restrained by injunction where its presentation would amount to an abuse of the process of the court. It was also clear that two distinct branches emanate from the principle - of which the first applies in cases where the presentation of the petition may produce irreparable damage to the company and where the proposed petition has no chance of success, and the second in cases where a petitioner proposing to present a petition has chosen to assert a disputed claim, by a procedure which might produce irreparable damage to the company, rather than by a suitable alternative procedure”.

In this regard, the Applicant has to satisfy the Court that there is a bona fide dispute of debt demanded in the winding up notice which precedes the petition intended to be restrained, based on the substantial grounds.

Otherwise, the only viable option is to pay up where the directors of the company may propose a moratorium scheme of arrangement or a compromise scheme. However, it might be difficult in getting all creditors to agree on a particular scheme. Thus, the new Companies Act 2016 provides for a mechanism for a statutory scheme which will bind all creditors, which is detailed in sections 365 to 369. The company will apply to court for a court convened meeting of all creditors. If Creditors holding at least 75% of the value of debts present at the meeting agree to the scheme, the court may grant its approval to the scheme which will bind all the company and all creditors including those who objected to the scheme once it is lodged with the Registrar of Companies.

In addition to that, on 1^st March 2018, the Companies Commission of Malaysia (SSM) has enforced Division 8 Part III of the Companies Act 2016 as part of the insolvency framework to help in rehabilitating the financial and business viabilities through two new corporate rescue scheme, namely (i) Corporate Voluntary Arrangement (CVA) which is governed under sections 395 to 402; or (ii) Judicial Management (JM) which is governed under sections 403 to 430 of the Companies Act 2016.

TONG SIEW HUA