High Court Reiterates Some Principles on a Winding-Up Petition Based on Inability to Pay Debts
19 April 2019
In Wing Woh Trading Sdn Bhd v Irama Jaya Development Sdn Bhd  2 AMR 296, the petitioner and the respondent were parties to a joint venture agreement under which the respondent was to develop a piece of land owned by the petitioner.
The petitioner filed a winding-up petition against the respondent under the sections 465(1)(e) and 466 of the Companies Act 2016 (‘Act’) on the ground that the respondent was unable to pay an alleged debt of RM1,214,266.74 which the petitioner claimed was the final entitlement due to it under the joint venture agreement plus interest of RM103,017.02.
The respondent opposed the petition, contending that petitioner’s final entitlement could not be determined until all properties on a piece of land had been sold. The respondent also contended that eight units of unsold properties could not be sold and realised into cash as the petitioner had, in breach of the joint venture agreement, caveated those properties. The respondent also argued that the accounts relied on by the petitioner as the basis for the winding-up petition were not the final accounts and that such accounts had been attached to a “without prejudice” letter.
The High Court dismissed the petition on the five grounds set out below.
(a) Whether the alleged debt is a bona fide disputed debt
The Court was satisfied that there was a bona fide dispute over the alleged debt and that it was seriously and substantially disputed by the respondent. Thus, the petitioner was not a creditor as envisaged in section 464 of the Act. The Court added that the respondent could not be considered as having neglected to pay the alleged debt and that it could not be said that the amount being claimed in the notice was due and owing to the petitioner.
The Court held that the notice issued by the petitioner under section 466 of the Act was not evidence of the debt. Hence, to invoke winding-up proceedings when the alleged debt is disputed constitutes an abuse of the process of court. In coming to these conclusions, the Court relied on a number of cases, including Bank Utama (Malaysia) Bhd v GKM Amal Bhd  2 CLJ 525, Jurupakat Sdn Bhd v Kumpulan Good Earth  2 CLJ (Rep) 618, Pembinaan Purcon v Entertainment Village (M) Sdn Bhd  1 MLJ 545 and Re: Ban Hong Co Ltd 1 MLJ 100.
The Court noted that under the joint venture agreement and the power of attorney, the petitioner had allowed the respondent to build, develop and sell all the units developed on the land. It had also agreed to ensure that the land remains unencumbered and to do everything within its control to ensure that the respondent could sell and transfer the relevant properties. The Court was of the view that the petitioner’s actions in caveating the unsold properties were unlawful and in breach of its obligations under the aforesaid documents. The Court, relying on Su Wee Lip @ Philip Su v Hj Lassim Abdul Rahman  1 MLJ 580 and Lee Nyan Hon & Brothers Sdn Bhd v Metro Charm Sdn Bhd  1 AMR 501, held that the petitioner could not rely on its own breaches and unlawful actions to benefit itself.
(b) Existence of a valid counterclaim/cross claim against the petitioner
As the caveat lodged by the petitioner in breach of the joint venture agreement and power of attorney had prevented the respondent from fulfilling its obligation to transfer some of the units that had been sold to purchasers of those units, the Court was satisfied that the respondent had a valid counterclaim/cross claim against the petitioner which could be set off against the sum which is allegedly owed to the petitioner. Based on the decision in Re Nima Travel Sdn Bhd; Sun Soong Heng Coach Works Sdn Bhd v Nima Travel Sdn Bhd  2 MLJ 374, the Court held that the proper forum to resolve this dispute is not in the winding-up petition but in a civil suit.
(c) Final account affixed with “without prejudice”
The Court found that as the alleged final accounts were annexed to a “without prejudice” letter, it should be declared inadmissible and cannot be relied upon by the petitioner as the basis for the winding-up petition. The Court said that it is clear from Malayan Banking Bhd v Foo See Moi  2 MLJ 17 and Animation Theme park Sdn Bhd v ZJ Advisory Sdn Bhd 3 CLJ 225 that without prejudice correspondences and offers cannot be referred to or relied on unless there was a final settlement between the parties from that.
(d) Solvency of the respondent
The Court said that the solvency of the respondent is to be determined by its ability to pay its debts and is a question of fact. The onus of proof lies on the creditor to prove to the satisfaction of the Court that the debtor was unable to pay its debts (KNM Process Systems Sdn Bhd v Mission Biofuels Sdn Bhd  8 MLJ 434). Hence the burden is on the petitioner to prove that the respondent is insolvent either by showing that the debtor is dormant, no longer in business, has significant unpaid cheques or unsatisfied judgments. Based on the respondent’s audited accounts for 2017, there was evidence that it was solvent and still functioning. The Court added that if the petitioner had not caveated the unsold units, the respondent could have liquidated and realised its assets and the monies raised could have been used to pay the petitioner. Hence the petitioner’s allegations that the respondent was insolvent was dismissed by the Court as being baseless and unsupported by documentary evidence.
(e) Petitioner coming to court with unclean hands
According to the Court, it was clear that petitioner was in breach of the joint venture agreement and the power of attorney by caveating the unsold units. Such action had prevented the respondent from realising the assets, i.e. the unsold units, into monies and had caused the respondent to suffer grave losses and damages as well. The Court held that the petitioner could not come to court to take advantage of its own wrongdoings and denied the petitioner of the relief sought as it had come to court with unclean hands (Eng Man Hin @ Ng Mun Geng & Anor v King’s Confectionary Sdn Bhd & Ors  4 MLJ 421).
This case does not break new legal grounds. Nevertheless it is a useful reminder of some of the basic legal principles that apply where a petitioner is unable to rely on a court judgment or a respondent’s admission of the debt to support a winding-up petition that is grounded on a respondent’s inability to pay its debts. In particular, it is a reminder that “without prejudice” correspondences are inadmissible unless a final settlement ensued between the parties on the terms set out in those correspondences.