In the recent case of Dubon Berhad v Wisma Cosway Management Corporation [2020] 5 AMR 33, the Federal Court held that outstanding amounts due to the management corporation (“MC”) under section 77 of the Strata Management Act 2013 (“SMA”) is not a secured debt and will not give the MC lawful preference as a secured creditor over the assets of a company in liquidation, notwithstanding the word “guarantee” under section 77 of the SMA.  
 
Brief Facts
 
Dubon Berhad (“Company”) is the beneficial owner of a unit in Wisma Cosway (“Unit”). The Company was wound up and in the process of realising the Company’s assets, the liquidators required the developer, Stephens Properties Sdn Bhd (“Developer”) to execute the transfer of the Unit into the Company’s name in order for the liquidators to sell the Unit to pay off the Company’s debts.
 
The Developer refused to execute the transfer instrument without a clearance letter from the MC in relation to an outstanding sum which includes administrative and application fees owed to the Developer, as well as outgoings and service charges owed to the MC in respect of the Unit.
 
The Company, through the liquidators, took the position that the MC should be treated as an unsecured creditor, and any payment to them for the sums owed was subject to the availability of funds for unsecured creditors. Moreover, any such payment had to adhere to the order of priority of creditors who had proven their debts, as well as the pari passu rule.
 
The Company, through the liquidators, filed a claim at the Strata Management Tribunal (“Tribunal”), seeking, inter alia, an order that the MC issues the clearance letter upon the Company’s payment of a portion of the outstanding sum. The MC on the other hand, filed a counterclaim for the sum it was owed followed by an application in the winding up court for leave to commence or proceed with the counterclaim in the Tribunal under section 226(3) of the then Companies Act 1965.
 
Decision of the High Court
 
In refusing the MC’s application for leave, the High Court held that the MC is an unsecured creditor and any payment of the sums demanded by the MC would amount to an undue preference in favour of the MC which contravenes the statutory insolvency regime prescribed under section 292 of the then Companies Act 1965 (currently section 527 of the Companies Act 2016).
 
Decision of the Court of Appeal
 
The MC appealed against the decision of the High Court and relied on section 77 of the SMA.
 
The Court of Appeal reversed the High Court’s decision and granted leave to the MC to proceed against the Company in liquidation to recover the sums of money owing to the MC. The Court of Appeal was of the view that the use of the word “shall” in section 77 imposes a mandatory obligation on the parcel proprietor to pay any outstanding amount due to the MC prior to the disposal of the unit. Further, by virtue of section 77 which uses the phrase “guaranteed” sum, the claim of the MC is no longer an unsecured debt but is accorded priority and elevated to a position equivalent to that of a secured creditor.
 
Decision of the Federal Court
 
The Company was granted leave to appeal to the Federal Court. The relevant leave question posed to the Federal Court was “whether section 77 of the SMA creates a preferred or priority status equivalent to a secured debt within the insolvency regime?”
 
The Federal Court referred to section 292 of the then Companies Act 1965 (currently section 527 of the Companies Act 2016), which sets out the priority of payments due to secured and unsecured debtors in liquidation. The Federal Court decided that section 77 does not dislodge the statutory priority regime in the Companies Act or elevate the payment of management fees to the status of a secured debt.
 
Nallini Pathmanathan FCJ, who delivered the judgment of the Federal Court, was of the view that the word “guaranteed” in section 77 denotes at best, a statutory obligation between the MC and a parcel proprietor, entitling the MC to recover maintenance and other related service charges from the proprietor.
 
According to the Federal Court, this is reinforced by subsection (3) of section 77 which refers to the sum due from a parcel proprietor to the MC as a “debt” which is actionable by the MC vide a suit filed in court or in the strata tribunal. That right to sue for a debt is a right in personam and not a right in rem. The MC therefore enjoys a right in personam to recover the debt from the parcel proprietor and it goes no further than that.
 
The Federal Court went further to explain that section 77 was never crafted nor intended to encroach upon, or disrupt the priority regime in the Companies Act. Instead, it served to statutorily provide that the non-payment of management fees creates an undisputed debt. The term ‘guaranteed’ ensures the fact of the existence of such a debt, and the recovery of such debts is thus assured and can simply be effected under the section.
 
Therefore, the outstanding sum payable to the MC under section 77 of the SMA is not a secured debt. It is a guaranteed debt vis a vis the Company and the MC, and has no effect on the rights of third party creditors. The Federal Court answered the leave question in the negative and ordered the decision of the Court of Appeal to be set aside and the order of the High Court to be restored.  
 
This case is noteworthy as it authoritatively determines that the sums owed by a parcel proprietor to an MC under section 77 of the SMA has the character of an undisputed debt, but not a preferential debt which is conferred priority over unsecured debts under the insolvency law regime in Malaysia.
 
The principles laid down by the Federal Court will apply equally to sums owing by a parcel proprietor to a joint management body under section 33 of the SMA.
 
Article by Jesy Ooi (Partner) and Seen Qin Ying (Associate) of the Real Estate Practice Group of Skrine.