Introduction

The COVID-19 Pandemic has raised much concern to claimants on their prospects of recovery from a company where legal action/court proceedings has been commenced. This skepticism and apprehension of the claimants cannot be faulted as many ailing companies may face winding-up actions in the current and post COVID-19 Pandemic period.

The Movement Control Order (“MCO”) which was imposed by the Government on 18th March 2020 was initially supposed to last for two (2) weeks until 31st March 2020. However, now with the Conditional Movement Control Order (“CMCO”), there has been an extension on four occasions until 9th June 2020. The main reason being to contain the spread of the virus.

The stay at home advice, travel bans internally and overseas as well as border closure and quarantines have made it worse off for companies to mobilize their work force and hampered their operations. As a result of the closure of operations, companies have been struggling to pay overheads and expenses.

For some companies, there has been a permanent closure due to theMCO and CMCO resulting in colossal amount of losses recorded in terms of income on a daily basis. To put things into perspective, if a company was shut from 18th March 2020 until 9th June 2020, that company would have been shut for almost one-quarter of the year and would have sustained an approximate 25% loss of income for the year.

The question to ponder, is whether it will be an exercise in futility for a claimant to proceed with legal action as against these companies bearing in mind of the imminent threat of the said company being wound up and the bleak prospects of recovery.

Liquidation

The Liquidation process may provide relief for the concerned claimants on the prospects of recovery from a wound-up company. It is a process whereby the assets of the wound-up company are distributed to settle the debts and liabilities of the wound-up company.

Despite the fact that many companies are wound-up, the Companies Commission of Malaysia (Suruhanjaya Syarikat Malaysia) (“SSM”) searches and the Credit Tip-Off Services (“CTOS”) searches more often reveal large amount of assets that these wound-up companies possess.

Realization of Assets

This is where, the amounts realized from the sale of these assets may generate sufficient income to settle off in full or a portion thereof the claim amount/debts owing to these claimants who now assume the role of a creditor of the said wound-up company.

The Liquidation process may be undertaken by the Official Receiver (“OR”) from the Malaysian Department of Insolvency appointed on the day the debt saddled company is wound-up.

Private Liquidator / Court Appointed Liquidator

Whether it is a compulsory winding up or a voluntary winding up, a Liquidator would be appointed, whose paramount task is to realize the assets of the wound-up company for the subsequent distribution of the assets to the creditors of the said company.

For a compulsory winding-up scenario, the OR as mentioned above will become a Liquidator pursuant to Section 477(1)(a) of the Companies Act 2016 if there is no appointment of a Liquidator.

However,many at times a prospective Private Liquidator may be named in the Winding-Up Petition of the company or subsequent to the winding-up. The Court vested with the power to endorse and/or sanction that appointment pursuant to Section 478 of the Companies Act 2016.

When this happens, the Private Liquidator who is a Court Appointed Liquidator, is accountable and answerable to the Court and takes over the task and functions of the Liquidation process from the OR thereafter.

It is to be noted that the appointment of a Liquidator is further expressly stated in Rule 46 of the Companies (Winding-Up) Rules 1972, whereby the said appointment would generally be on the recommendation of the OR, creditors and contributories via a meeting amongst them to decide on the suitable choice.

Creditors must be cautioned on the appointment of Joint-Liquidators in view of the fairly recent decision of our Court of Appeal in the case of Shencourt Sdn Bhd (in liquidation) (in receivership) v Shencourt Properties Sdn Bhd (in liquidation) [2019] 12 MLJ 184 where strong sentiments were expressed by removing the Joint-Liquidators who had consistently acted in a dysfunctional manner and had failed to protect the primary assets of the company.

The Court of Appeal in appointing the OR as the Liquidator in place of the Joint-Liquidators who were removed had this to say: “It will also appear that the threshold to remove the joint liquidator who do not act as per the court’s order and/or conflicts between them and inability to work together, is lower when contrasted with the removal of a single liquidator”.

Proof of Debt

What a Creditor of the wound-up company files, to list down the details of what is being claimed accompanied by a Statutory Declaration is called a Proof of Debt. It is supported by documents of proof of indebtedness. The purpose of filing the Proof of Debt may be for two crucial reasons namely:-

1. If the Creditor intends to vote on matters relating to the Liquidation process;
2. If the Creditor intends to receive Dividend Distribution from the insolvent estate.

For a company that is wound up by the Court and the OR is appointed, the time period to file the proof of debt is three (3) months from the date of the Winding-Up Order of the company.

Alternatively, if a Private Liquidator is appointed, then the time period to file the Proof of Debt can be stipulated by way of a Notice known as the Notice to File Proof of Debt which shall not be less than twenty-one (21) days from the date of the notice.

The relevant law governing Proof of Debt is the Companies (Winding-Up) Rules 1972 and the salient rules are as follows:-

Appeal by Creditor or Contributory on Rejection of Proof of Debt

Herein, Rule 93 of the Companies (Winding-Up) Rules 1972 is of relevance. It provides that an appeal by a Creditor or contributory, dissatisfied with the decision of the liquidator in respect of proof must give the notice of application before the expiration of twenty-one (21) days from the date of service of the notice of rejection by the liquidator. Discretion to enlarge time is of course vested with the Court provided an extension is granted. The two (2) important decisions of our Court of Appeal on this issue of rejection of proof of debt which will be of useful guide and reference are:-

A. ANDREW CHRISTOPHER CHUAH CHOONG ENG CHUAN V OOI WOON CHEE & ANOR [2007] 2 CLJ 405 (“ANDREW CHRISTOPHER”)

The sentiments as expressed by our Courts in Andrew Christopher can be seen from the judgment of Augustine Paul JCA (as he then was later Retired Federal Court Judge) had this to say:

“The Court will not interfere with the decision simply because its opinion might differ from that of the liquidator. Generally, the court will recognize that the discretion has been vested by statute in the liquidator and will not interfere unless it is shown that he did not address himself to the correct questions or hasmade errors of law or has not exercised his discretion bona fide or has acted in a way in which no reasonable liquidator would have acted.”

The position in Andrew Christopher was endorsed by the Federal Court in Wong Sin Fan & Ors v Ng Peak Yam @ Ng Peak Yeow & Anor [2013] 2 MLJ 629 where Zulkefli CJ delivering the judgment of the Court had this to say:-

“Based on the above principles of law, we are of the v iew that the court should be slow to interfere with any act or decision of the liquidators in discharging their roles in company liquidation and will do so only if it is so unreasonable and absurd that no reasonable person would have acted in that way. The court will not interfere with the decision simply because its opinion might differ from that of the liquidator (see the case of Andrew Christopher Chuah Choong Eng Chuan v Ooi Woon Chee & Anor [2007] 2 MLJ 12).”

B. KERAJAAN MALAYSIA V CHEN BOON HEOW (AS LIQUIDATOR FOR SYARIKAT SIN HWA PLANTATIONS SDN BHD) [2002] 2 MLJ 266 (“KERAJAAN MALAYSIA”)

I n Kerajaan Malaysia, the Court held as follows:-

“It is clear to us under those rules [the court referring to the Companies (Winding up) Rules 1972] that the debt due must be proved. In the present application, it is obvious to us that the proof of debt filed has not been proven yet”.

The Court in the Kerajaan Malaysia expressed these sentiments in respect of the proof of debt that was filed following thewinding-up of the company and which was the same amount as claimed and yet to be proven in the civil suit filed, to determine the actual amount of tax owed by the company.

However, the position in both Andrew Christopher and Kerajaan Malaysia should be contrasted with the High Court decision of Torita Rubber Works Sdn Bhd v Chew Chong Eu [2009] 9 CLJ 280 (“Torita Rubber”) whereby Hamid Sultan Abu Backer JC (as he was then, now Court of Appeal Judge) had this to say:-

“I note even a liberal reading of s. 269 and the whole s. 236 does not give any power to the liquidator to reject the creditors claim. The so-called powers, spelt out in r. 92 of WR 1972 which is only a subsidiary legislation run foul of the Parent Act (see s. 23 of Interpretation Act). But courts have often recognized r. 92. As both parties did not address this issue, I do not want to deliberate further save to say that r. 92 must not be considered as a power but merely a procedural formality, subject to appropriate directions of court, pursuant to s. 279 and r. 93 of WR 1972.”

It is the respectful views of the Authors that there is a grave error in the decision of Torita Rubber which cannot be the correct proposition of the law that the liquidator has no discretion to reject a creditors claim/proof of debt.

This is because Rule 92 of the Companies (Winding Up) Rules 1972 confers the said discretion upon the Liquidator to either admit or reject a proof of debt that has been filed/lodged with the liquidator.

It will be incorrect in law, as decided in Torita Rubber to state that Companies (Winding-Up) Rules 1972 runs afoul of the Companies Act 2016 and is a mere procedural formality.

The opening words of the Companies (Winding-Up) Rules 1972 explicitly mentions that “In exercise of the powers covered by Section 372 of the Companies Act 1965 and Section 16 of the Courts of Judicature Act 1964, the Rules Committee hereby makes the following rules”. In short, the Companies (Winding-Up) Rules 1972 are a creature of statute and clearly have the force of law.

It can be concluded that the sentiments as expressed in Torita Rubber does not form the ratio of that case, in view of the acknowledgment by the Court that parties had not even addressed on this issue.

Are Creditors guaranteed of payment in the Liquidation?

The answer will regrettably be a NO as the filing of the Proof of Debt and the acceptance of the said Proof of Debt does not guarantee payment. Payment will essentially depend on what are the assets of the wound up that are left over.

The payment to creditors is dependent on the priority like a queue as follows:-

Secured Creditor with a Fixed Charge
Usually Banks and other asset-based lenders who hold title over a business asset. Example: Assets covered by a fixed charge include property, plant, machinery and vehicles.

Preferential creditors
Includes former employees entitled to arrears of wages and holiday pay claims.

Secured Creditor with a Floating Charge
Assets subject to a floating charge often include cash at bank, stock, raw materials, work-in progress, fixtures & fittings.

Unsecured creditors
Includes trade creditors, suppliers, customers, contractors.

Shareholders
Right at the bottom of the pile and the final group to be paid as they have taken the business risk in their investment. They are only entitled to distribution after all other creditors have been paid.

Conclusion

Liquidation Laws in Malaysia undoubtedly does provide the much-needed relief to a claimant on the prospects of recovery of its claim from a company that has been wound-up current and post COVID-19 Be that as it may, it must be appreciated that the lodgment of a Proof of Debt does not guarantee any sort of recovery from the wound-up Company, as it all depends on whether the said Company possesses any assets that can be realized and which proceeds can thereafter be distributed amongst the Creditors for the satisfaction of their debts. It is indeed a guessing game for sure.