Introduction

A recent decision of the Federal Court, Dubon Berhad (in liquidation) v Wisma Cosway Management Corporation [2020] 6 CLJ 589 (“Dubon Berhad”) dated 21.05.2020 was delivered by Nallini Pathmanathan FCJ where the Federal Court addressed the following Question of Law:-

“Whether the right of a Joint Management Body or a Management Corporation to collect and receive payment from a proprietor under sections 33 and 77 of the Strata Management Act 2013 respectively, gives it a lawful preference as a secured creditor over the assets of a company in liquidation?”

Brief Facts

The Appellant, Dubon Berhad (in liquidation) (“Dubon”) is the beneficial owner of a unit in Wisma Cosway. Naturally, the Respondent, Wisma Cosway Management Corporation (“MC”) is the management corporation of Wisma Cosway.

The Appellant was wound up on 18.01.2000. To realize the company’s assets, and for the purposes of sale of the subject property, the liquidators required the execution of a unit into the company’s name.

Stephens Properties Sdn Bhd (“Stephens”), Wisma Cosway’s developer made a request but refused to transfer the property unless a clearance letter was obtained from the MC regarding “administrative and application” fees and outgoings and service charges, totaling to RM180,070.26.

Dubon denied this claim on four (4) reasons:-

1. Dubon was in liquidation;
2. Any payment of liability is subject to funds available for unsecured creditors;
3. Such payment had to adhere to the order of priority of creditors who have proven their debt and the pari passu rule;
4. MC had not filed a proof of debt.

As a result, Dubon commenced a claim at the Strata Management Tribunal for Stephens to execute the transfer without imposing any fees & the MC to issue a clearance letter upon payment of a lesser sum of RM43,805.34. The MC counterclaim for the full sum owed and applied for leave to commence its counterclaim in the Winding Up Court.

Decision of the High Court

The High Court dismissed the MC’s application for leave to commence any claim against Dubon for the following reasons:-

1. Limitation period had kicked-in for claims before 31.05.2011;
2. MC is an unsecured creditor and was subject to the principle of pari passu;
3. MC had not filed a proof of debt;
4. The monetary claim did not involve complex issues of fact and law which could be dealt in the winding-up process in the Winding Up Court.

Decision of the Court of Appeal

On appeal, the Court of Appeal granted leave to proceed against Dubon for the following reasons:-

1. Section 77 of the Strata Management Act 2013 (“SMA”) provides for any sum due to the MC to be a “guaranteed sum” and as a result, the point of law arose whether MC remains an unsecured creditor or is elevated to be a secured creditor;
2. MC was entitled to recover the guaranteed sum owed in the Tribunal under the SMA;
3. The word “shall” in Section 77 of the SMA indicates a mandatory requirement for Dubon to pay the sum owed to the MC.

Decision of the Federal Court

The Federal Court refused the grant of Leave to commence any claim against Dubon and restored the decision of the High Court.

The Court referred to Section 292 of the Companies Act 1965 (the law applicable to the case) in pari materia to Section 527 of the Companies Act 2016 with regards to the priority of payments to secured and unsecured debtors in liquidation.

The Federal Court held that any interpretation that attempts to circumvent such statutory provisions and settled principles of liquidation must not be condoned. As such, Section 77 of the SMA does not have the effect to elevate debts owed to the MC to the status of a secured debt.

The Federal Court further ruled that if any provision seeks to circumvent statutory provisions and settled principles of liquidation to achieve priority status, itmust be done vide positive, clear and unambiguous words. Parliament never intended to dislodge the liquidation regime with Section 77 of the SMA.

The reading of Section 77 of the SMA shall be that the debt owed by a proprietor to the MC is a guaranteed debt between both the proprietor and the MC. It has no bearing on rights of third-party creditors.

The MC is an unsecured creditor and subject to the principle of pari passu.

In short, the liquidator must first settle the preferential debts as statutorily provided for, and secondly, to pay the unsecured debts of the company pari passu.

MC could recover its debt in the winding-up proceedings by the filing of a proof of debt form.

Conclusion

The position as taken by the Federal Court in Dubon Berhad reaffirmed the established test in the English case of Re Cuthbert Lead Smelting Co Ltd [1886] WN 84 which held that if the party applying for leave could obtain all the relief in the winding up, leave would be refused.

It has now been clarified that any debt owed by a proprietor company, in liquidation, under the SMA, is an unsecured debt. A MC will remain an unsecured creditor and its only avenue to recover such debt will be by way of filing a proof of debt form in the winding-up proceedings.