Conditional Winding Up Order – The Sword of Damocles?

It has often been said that the route of winding up a company is the remedy of last resort in a creditor’s odyssey to recover a debt owed to it. This is as not only would the granting of a winding up order have drastic repercussions for the debtor company, but there is also no guarantee that the creditor would be able to recover the full debt thereafter. After all, it is trite that an unsecured creditor would have to share the remnants of the wound up company with all other unsecured creditors in the equivalent proportion of their debt, and even then, only after all preferred and secured debts are paid.
Notwithstanding both the uncertainty of recovery and the drastic repercussions, it has become increasingly common for winding up petitions to be the weapon of choice of creditors against debtors who have failed to make repayment of debts upon the issuance of a statutory notice of demand. Upon the sword being unsheathed, it is almost certain that the thrust of the same would meet its target as the Malaysian Courts would almost certainly grant a winding up order with immediate effect if there is no credible dispute over the existence of the debt.
However, in Prolink Marketing Sdn Bhd v Ambank Islamic Bhd [2022] 10 CLJ 247, the Court of Appeal opened the door for a debtor company to have one last opportunity to avoid falling on its sword even after the pronouncement of a winding up order, albeit a conditional one.
In the present case, Ambank had obtained a final judgment in excess of RM50 million against Prolink Marketing. A failure by Prolink Marketing to make payment of the judgment sum was met by the presentation of a winding up petition by Ambank. In a surprising twist to the usual course of events, the High Court ordered that the winding up of the company would only be effective five months from the date of the order, and subject to the Prolink Marketing continuing to fail to make payment of the debt to Ambank prior to the said date.
Despite the High Court having compelled Ambank to return the sword to its scabbard, at least temporarily, Prolink Marketing chose to open up another battlefront by asserting in the Court of Appeal that the High Court had erred in granting a ‘prospective’ order to wind up the company. Ambank responded to this manoeuvre by contending that the High Court was indeed empowered to grant such a conditional winding up order dependent on the payment of the debt owed within a stipulated time period.
Having heard parties, the Court of Appeal took the position that the determination of the appeal centred on the interpretation of section 469(1)(c) of the Companies Act 2016. Section 469(1) of the Companies Act 2016 provides as follows: -
On hearing the petition for winding up, the Court may, by order: -
  1. dismiss the petition with or without costs;
  2. adjourn the hearing conditionally or unconditionally; or
  3. make an interim order or any other order that the Court thinks fit.” 
Giving section 469(1)(c) of the Companies Act 2016 its natural and ordinary meaning, the Court of Appeal held that the phrase “any other order that the court thinks fit” was wide enough to confer discretion on the Court to make any order that it thinks fit, on the condition that the said order relates to the winding up petition. This wide power was not restricted only to the granting of an interim order given the presence of the word ‘or’ in the provision.
Having interpreted the relevant provision, the Court of Appeal went on to apply the same. Here, the Court of Appeal held that the subject condition imposed by the High Court was not an independent remedy outside the winding up petition as the ultimate result of the order, should Prolink Marketing fail to comply with the condition imposed (i.e. to make payment of the judgment sum within five months) was the winding up of the company. As such, the granting of such a conditional winding up order fell squarely within the powers afforded to the Court pursuant to section 469(1)(c) of the Companies Act 2016.
The Court of Appeal went on to hold that the condition imposed was fair, reasonable, and relevant to the winding up petition. In fact, the Court of Appeal went further to find that the imposed condition was ultimately beneficial to Prolink Marketing as it granted it time to pay the judgment sum instead of being immediately wound up.
Leading on from the last point above, it is clear that the decision of Prolink Marketing would be beneficial to a debtor as it would enable the said company to obtain breathing space by gaining additional time to make payment of the debt instead of being wound up immediately. Similarly, the creditors would also benefit as it would undoubtedly be more advantageous to it to obtain payment of the debt, even if slightly delayed, as opposed to being one of many creditors unsheathing their swords to draw blood from the hapless debtor through the winding up process.
Equally, it can be said that the Court of Appeal’s decision in Prolink Marketing would also be beneficial to the Courts. This is as when faced with a situation where the debtor company is prepared to pay the debt owed but just requires slightly more time to do so, the Courts are now empowered to make a conditional winding up order which would take immediate effect in the event payment is still not forthcoming, as opposed to having to consider exercising its powers under section 469(1)(b) of the Companies Act 2016 to adjourn the hearing thereby adding on to an increasing backlog. However, to ensure that this option is not abused by a debtor company, the Courts should require the debtor to adduce substantive and credible evidence of its ability and/or plan to pay the debt within the additional time before granting such a conditional winding up order. Upon a conditional winding up order being granted, the threat of liquidation will hang over the debtor company like the sword of Damocles until it pays its just dues.
Case Note by Nimalan Devaraj (Partner) of the Dispute Resolution Practice of Skrine. Nimalan’s practice includes Commercial Litigation, Company Law and Shareholders’ Disputes, and Restructuring and Insolvency.

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