THE OFFICIAL REPOSITORY OF
MALAYSIAN JUDGMENTS & RULINGS

[2018] MYCA 43 ENGLISH

RHB Bank Berhad v Malaysia Pacific Corporation Berhad and Another Appeal
Suit Number: Civil Appeal Nos. W-02(IM)(NCVC)-1811-10/2016 & W-02(IM)(NCC)-1812-10/2016 

Corporate law – Winding Up – Notice under section 218 of the Companies Act 1965 – Petition to wind up – Fortuna injunction

JUDGMENT

Introduction

[1] These two appeals by the same appellant are in relation to two applications made by the respondent in the Court below for what is in essence, a Fortuna injunction [see Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation [1978] VR 83]. The respondent was seeking to restrain the appellant from presenting a winding up petition after the appellant’s notice issued pursuant to section 218 of the Companies Act 1965 failed to elicit payment by the respondent of monies ordered under a judgment dated 11.4.2016. Not only was the restraining order granted, the notice was also declared as invalid.

[2] Upon proper consideration of the submissions, records of appeal and the applicable principles of law, we were unanimous in our decision to allow both the appeals. We found merit in the argument of learned counsel for the appellant and these are our reasons in full.

Undisputed facts

[3] On 11.4.2016, the appellant obtained a summary judgment against the respondent vide High Court Civil Suit No: 22NCC-397-11/2015. The civil suit relates to revolving credit facilities and overdraft facilities granted by the appellant to the respondent to which the respondent had defaulted in their repayments. The respondent’s application to strike out the claim was dismissed whilst the appellant’s application for summary judgment was allowed. The judgment sum was for over RM112,212,565.24 together with interest and costs [judgment sum]. The respondent appealed. On 4.10.2016, this Court dismissed the respondent’s appeal.

[4] The appellant commenced foreclosure proceedings in respect of the respondent’s property situated at Lot 1203, Section 57, Bandar Kuala Lumpur, Daerah Kuala Lumpur, Negeri Wilayah Persekutuan together with the building constructed on the property [“the subject property”] which had been charged by the respondent to the appellant. On 10.8.2016, the High Court at Kuala Lumpur granted an order for sale of the subject property by way of a public auction. The respondent appealed. At the time of the hearing of the two applications before the High Court, the appeal had not been disposed. By the time of the hearing of the present appeals, this Court had dismissed the respondent’s appeal in respect of the foreclosure proceedings.

[5] On 8.6.2016, the appellant issued a notice pursuant to section 218(2)(a) of the Companies Act 1965 seeking payment of the judgment sum [“section 218 Notice”]. The respondent filed an Originating Summons [Amended Originating Summons-enclosure 14] challenging the validity and enforceability of the section 218 Notice and seeking in addition, an injunction restraining the appellant from presenting a winding-up petition based on that section 218 Notice. By application in enclosure 7, the respondent sought an interim Fortuna injunction. This application was granted on an ex parte basis on 14.6.2016. On 18.9.2016, both this application and enclosure 14 were heard inter partes.

The contentions in the Amended Originating Summons

[6] The respondent claimed that the section 218 Notice is oppressive and an abuse of process because of the peculiar circumstances in the case. First and foremost, the respondent is a public listed company. It is listed on the Bursa Stock Exchange. The respondent is undergoing restructuring and such action is with Bursa’s approval. Next, pending the hearing of the foreclosure proceedings, the respondent had suggested to the appellant that the subject property be sold to a third party, Terra Pontus Ltd, a Singaporean company, proposed by the respondent for RM250 million, a sum which was obviously more than the judgment sum. The respondent claimed that with the sale, it would then be in the position to settle the judgment sum.

[7] The respondent further claimed that the section 218 Notice is void, a nullity and is ineffective because it is vague and ambiguous. The section 218 Notice failed to specify terms for compliance, whether payment has to be made or that the respondent has the option to secure or compound the debt in question. According to the respondent, the critical words in section 218(2)(a) of the Companies Act 1965, that the respondent had “neglected to pay the sum” or “to secure or compound”, were missing in the section 218 Notice; and this omission rendered the notice void and ineffective.

[8] The respondent ran yet a further argument, and that is that the appellant was in fact not entitled to issue the section 218 Notice. Under section 218(2)(a) of the Companies Act 1965, the appellant was entitled to have the debt compounded and secured. In this case, the debt, no doubt is the judgment sum, is already secured in the subject property the value whereof exceeded the judgment debt. That charge is valuable security in the hands of the appellant and it disentitled the appellant from issuing the section 218 Notice.

[9] Lastly, the respondent argued that it had offered to secure the judgment debt by getting Terra Pontus Ltd, to buy the subject property. At no time did the appellant intimate to the respondent that it objected to this sale or that this “offer to secure” was unacceptable or not to its reasonable satisfaction. The foreclosure proceedings already underway were therefore said to be akin to compounding the judgment debt.

[10] For all these reasons, the respondent argued that the appellant was not entitled to issue the section 218 Notice. According to the respondent, threatening to wind-up the respondent and taking foreclosure proceedings to recover the judgment debt in the circumstances described amount to an oppression.

[11] The appellant on the other hand, maintained that it was entitled to take the several courses of action. This was provided for under the contractual arrangements between the parties, that it had concurrent rights in personam and ad rem, and this has been acknowledged by the Court-see Chan Boi Loi v Public Bank Bhd [2009] 6 CLJ 81.

[12] As for the section 218 Notice, the appellant submitted that the respondent cannot possibly be said to have fulfilled the requisite conditions for the issue of a Fortuna injunction set down in Mobikom Sdn Bhd v Inmiss Communications Sdn Bhd [2007] 3 MLJ 316; and followed in a long line of cases including Pacific & Orient insurance Co Bhd v Muniammah Muniandy [2011] 1 CLJ 947. Those conditions involved establishing that the petition to wind-up the company has no chance of success and that the presentation will produce irreparable damage to the company. Since the section 218 Notice not only stems from but is based on the seeking of payment under a valid and enforceable judgment of the Court, which judgment has not been stayed or set aside, the injunction cannot be granted.

[13] Relying on Lafarge Concrete (Malaysia) Sdn Bhd v Gold Trend Builders Sdn Bhd [2011] 1 LNS 1763, the respondent is also commercially insolvent as it has admitted that it is not ready, able and willing to satisfy the appellant’s demand in the section 218 Notice and has instead directed the appellant to realise the charge on the subject property. When a company is not able to meet the debts as they become due, the company is commercially insolvent for the purposes of section 218 of the Companies Act 1965.

Decision of the High Court

[14] On the issue of the validity of the section 218 Notice, the learned Judge disagreed with the respondent finding the notice not at all void or a nullity for the following reasons.

[15] First, the learned Judge accepts that it is an undisputed fact that the appellant had obtained a valid and enforceable judgment against the respondent on 11.4.2016. Although certain words complained of were not in the section 218 Notice, the learned Judge found from a reading of the whole notice that the respondent had been given the requisite 21 days from the date of service of the notice to pay the sum demanded. The learned Judge further found that where there is a failure to pay the sum demanded, under section 218(2)(a) of the Companies Act 1965, the respondent is deemed unable to pay its debt. Thereafter, winding-up proceedings may properly be commenced against the respondent.

[16] Second, in the complaint that the notice fails to state the right of the respondent to secure or compound the sum to the reasonable satisfaction of the appellant, the notice is nevertheless effective in relation to raising a presumption under section 218(2)(a). Applying Hongkong and Shanghai Banking Corporation Ltd v Kemajuan Bersatu Enterprise Sdn Bhd [1992] 2 MLJ 370, it was clear from the terms of the notice that it was a section 218(2)(a) notice; suffice that the respondent was given 3 weeks to meet the demand.

[17] Despite so finding, the learned Judge nevertheless granted the orders sought in the Amended Originating Summons and the Fortuna injunction, principally on the basis that the judgment debt is compounded and secured. The learned Judge accepted and agreed with the respondent’s argument that the debt was compounded or secured; and that where the judgment debt is secured, the appellant is not entitled to issue the section 218 Notice. In the learned Judge’s understanding-

“The word “compound” means “Settle by mutual concession; to compound a debt, is to abate a part on receiving the residue. Haskins v Newcomb 2 Johns 408; Penell v Rhodes 9 QB 129” - Words, Phrases & Maxims (Legally & Judicially Defined by Anandan Krishnan at page 776." The word “to secure” means “to guarantee or make safe against loss, and are not a synonym for the words “to obtain" or “to procure”, Re Smith [1952] OR 135, at 147 Ont CA, per Hogg JA. The plaintiff refers to Words and Phrases Legally Defined Fourth Edition under the General Editorship of David Hay (Volume 2: L-Z)”. The word “security” has been defined as A “security", generally speaking, is anything that makes the money more assured in its payment or more readily recoverable, as distinguished from e.g. a mere I.O.U. which is only evidence of a debt. See SECURITIES. See Further, per Stirling LJ British Oil Mills Co v Inland Revenue Commissioners [1903] 1 KB 697.”

[18] Although the learned Judge found that the appellant was entitled to recover monies simultaneously through foreclosure proceedings, it has to be seen in context. That context being that there was already a charge or security in hand as “valuable security”. Even then, the security’s worth far exceeded the judgment debt of RM118,164,679.86. According to Her Ladyship, by proceeding with the foreclosure proceedings, the appellant was “admitting that the debt is secured and is realising the security to settle the debt and this is akin to compounding the debt”. It was the view of the learned Judge that if the appellant was allowed to proceed with the winding-up petition, it would render the word “to secure” in section 218(2)(a) of the Companies Act 1965superfluous or otiose". The declaratory orders and the injunction were consequently granted in the interest of justice to prevent abuse of process.

Decision of this Court

[19] The same submissions were articulated before us-see written submissions filed by both parties. Having had the opportunity to consider the written grounds of decision, with respect to the learned Judge, we found ourselves most constrained to disagree with the learned Judge’s consideration of the principles applicable in an application for a Fortuna injunction.

[20] But first, we shall deal with the matter of the section 218 Notice. We agree with Her Ladyship that the notice is valid and enforceable. There is no appeal or cross-appeal on this finding. In alluding to section 218 of the Companies Act 1965 both in its title caption and in the body of the Notice itself where the statutory provision is more specifically identified as “Section 218(2)(a) of the Companies Act 1965”, the appellant has satisfied the requirements for a valid section 218(2)(a) notice. The notice, quite clearly, describes itself as a “Statutory Demand Pursuant to Section 218 of the Companies Act 1965 (Act 250) for Payment of a Debt”. It alludes to the respondent’s indebtedness for the various sums detailed. The debt for the various sums was obtained by the appellant against the respondent vide “High Court Civil Suit No. 22NCC-397-11/2015 where on execution has not been stayed”. This shows that the debt stipulated in the Notice is a judgment debt. It is true that the summary judgment was not stayed and the High Court’s decision was later affirmed by this Court on 4.10.2016.

[21] Furthermore, the respondent was given the requisite twenty-one days from the date of the service of the notice to pay the sum demanded. The appellant has also alerted the respondent that it, the appellant, claims reliance on the statutory presumption in section 218(2)(a), that the respondent would be deemed unable to pay its debt and thereafter the appellant may commence winding-up proceedings against the respondent. As propounded in Hongkong and Shanghai Banking Corporation Ltd v Kemajuan Bersatu Enterprise Sdn Bhd [1992] 2 MLJ 370, so long as the two limbs in section 218(2)(a) of the Companies Act 1965 are met, the notice would be valid and the statutory presumption of insolvency may be relied on. The two limbs being the proper service of the notice and the provision of time to meet the demand in the notice:

“In my judgment, s 218(2)(a) has to be read as having two limbs, the first of which prescribes what the creditor has to do to invoke the presumption. What the creditor has to do is to serve on the company by leaving at its registered office a demand under his hand or under the hand of his authorised agent requiring the company to pay the sum then due. The second limb prescribes that the debtor company has three weeks within which to pay the sum or to secure or compound for it. Since what the debtor company can do is statutorily prescribed, there is no call for the creditor to spell out what the law prescribes. It is sufficient that it is clear from the contents of the letter of demand that it is a s 218(2)(a) notice which clarity can be achieved, inter alia, by a reference in the letter to the subsection and by the letter giving the debtor three weeks to meet the demand. The effect of the debtor company not complying with one or the other of the three courses open to it as prescribed by the second limb of the sub-section need not be spelled out in the letter.”

[22] As for the matter of the Fortuna injunction, although the learned Judge started out correctly by referring to the leading authority on this remedy, there is a misdirection on the principles that are applicable. In Mobikom Sdn Bhd v Inmiss Communications Sdn Bhd [supra], this Court had opined that the Court has jurisdiction and power to grant what it then described as “an anti-suit injunction whenever the interests of justice call for or demand it"; and that the Court has power to issue injunctions restraining the institution or prosecution of a suit in a foreign jurisdiction where this would lead to a multiplicity of proceedings. It is true that this Court gave another example where it may be in the interest of justice that “a party may be restrained from presenting a winding-up petition if it is found, for example, that there is a bona fide dispute about the debt on which the notice of demand issued under s 218 of the Companies Act 1965 is based. See, Bina Satu Sdn Bhd v Tan Construction [1988] 1 MLJ 533; Stoneeate Securities Ltd v Gregory [1980] 1 CH 576. Once the debt on which the proposed petition is based is bona fide disputed it matters not that the debtor company is in fact insolvent. See, Mann v Goldstein [1968] 2 All ER 769.”

[23] In fact, in Mobikom itself the injunction was to restrain the presentation of a winding-up petition based on a section 218 notice demanding payment of an arbitral award. The parties had referred their dispute to arbitration, as was agreed under their underlying contractual arrangements. However, pending the hearing of the plaintiff’s application to set aside the award, the defendant presented a petition to wind-up the plaintiff.

[24] The observations of this Court in Mobikom must be understood to have been made in that context, that once a debt on which a petition is based is bona fide disputed, it matters not that the debtor company is in fact insolvent. In our view, where the debt is disputed, it would be in the interest of justice that an injunction be granted. A debt may be said to be in bona fide dispute where the award upon which the debt arises is challenged. Since the challenge, which is permitted under the Arbitration Act 2005, was already pending in Court at the material time, the presentation of the winding-up petition in those circumstances ought to be restrained.

[25] In the instant appeal, the learned Judge accepted that the debt was founded on a judgment debt. Despite this, the learned Judge agreed with the respondent that the debt is in bona fide dispute because the debt due and owing to the appellant “is secured” - see paragraph 8.2 of the grounds. The learned Judge considered the “valuable security in the form of the plaintiff’s property which is worth around RM250,000,000.00, which far exceeds the judgment sum” and which the appellant “already holds”, meant that the debt was already secured. Consequently, the appellant “is not entitled to issue a notice under s 218 CA.” It was the view of the learned Judge that if the appellant was “allowed to proceed with the winding-up petition, it would render the word “to secure" in the s 218(2)(a) CA superfluous or otiose...” Although Her Ladyship agreed with the appellant that the appellant was entitled to recover the monies owed simultaneously through foreclosure proceedings, “it has to be seen in the context that the defendant has in their hand a security worth in excess of the amount owed by the plaintiff. Further by proceeding with the foreclosure proceedings, the defendant is admitting that the debt is secured and is realising the security to settle the debt and this is akin to compounding the debt...”

[26] With respect to the learned Judge, the debt was neither secured nor compounded. The contractual arrangements merely gave the appellant in this case, two corresponding causes of action in the event the respondent breached its obligations to repay the credit facilities provided by the appellant. Unless there was an agreement to the contrary, the appellant was entitled to pursue both or all remedies available against the respondent borrower “simultaneously, contemporaneously or successively to recover the monies lent...” - see Chan Boi Loi v Public Bank Bhd [supra].

[27] At the material time, the charge was created over the subject property in order to secure the credit facilities. It could not have been created to secure any debt, certainly not in the sense envisaged under section 218(2)(a) of the Companies Act 1965 as none was in existence at the time the charge was created and registered. Until and unless the respondent breached its obligations to repay the appellant, there was no debt to secure, and the appellant would not be entitled to foreclose on the subject property. However, the moment the respondent is in breach, the appellant has a right to sue in personam to recover the monies due while the charge gives the appellant a right ad rem to foreclose on the charged property.

[28] Therefore, foreclosing on the subject property does not and cannot be said to amount to realising the security to the debt within the purpose and intent of section 218(2)(a) such as to turn the judgment debt into a disputed debt. The reading and construction given by the learned Judge to the presence of the charge, that it is “valuable security” that disentitled the appellant from issuing a notice under section 218 of the Companies Act 1965 was clearly erroneous. Such reading and construction meant that the contractual terms that the appellant was entitled to pursue all remedies “simultaneously, contemporaneously or successively to recover the monies lent...” as recognised by the Federal Court in Chan Boi Loi v Public Bank Bhd [supra] would be rendered meaningless and of no effect. It would mean that the appellant would have to enforce its rights to recover the facilities afforded to the respondent either one at a time or pursue certain actions first before pursuing other remedies. And, even then, the appellant would only be able to contemplate initiating winding-up proceedings where there is still balance due of the judgment debt to be settled. Such a reading runs counter to both settled principles and to the terms of the contract, and in neither case is this Court in the position to change nor are we so inclined.

[29] Such a construction and conclusion as reached by the learned Judge also runs contrary to another settled principle, that winding-up proceedings are not enforcement or execution proceedings, though in this case, they may appear to be part of the appellant’s efforts to enforce the summary judgment.

[30] In respect of the Fortuna injunction, we agree with the submissions of the appellant that the conditions for the grant of such an injunction were not met on the facts and in law. The two requisite conditions or principles as laid down in Mobikom Sdn Bhd v Inmiss Communications Sdn Bhd [supra] and reiterated by this Court in Pacific & Orient Insurance Co Bhd v Muniammah Muniandy [supra] are described as follows:

[26] The first principle laid down in that case is that an injunction of that nature may be granted by court where the presentation of the petition might produce irreparable damage to the company and where the proposed petition has no chance of success. In order to succeed in getting an injunction under this principle, the applicant must satisfy both limbs of the principles, i.e.:

(i) the intended petition has no chance of success, as a matter of law as well as a matter of fact; and

(ii) the presentation of such petition (which has no chance of success) might produce irreparable damage to the company.

(see: Re A Company [1894] 1 Ch 349; Charles Forte Investment Ltd v Amanda [1964] 1 Ch 240, [1963] 2 All ER 940; and Bryanston Finance Ltd v De Vries (No 2) [1976] 2 WLR 41, [1976] 1 All ER 25])

[27] This principle is not applicable to the present case. The respondent herein had obtained a valid and enforceable judgment against the insured as well as the insurer (appellant). The intended petition if filed is not bound to fail. He has a good chance to succeed. Therefore whether or not it causes irreparable damage is of no consequence. Thus the injunction applied for by the appellant in the present case cannot be granted by court under this principle.

[28] The second principle established in the Fortuna case is that an injunction of that nature may be granted in cases where a petitioner proposing to present a petition has chosen to assert a disputed claim, by a procedure which might produce irreparable damage to the company, rather than by a suitable alternative procedure.

[29] This principle applies only to disputed debt. It does not apply to cases where the debt in question is undisputed. As long as the debt cannot be disputed, it is not [sic] consequence whether or not it will cause irreparable damage to the company, if presented. A valid and enforceable judgment of court as in the present case, (unless set aside or stayed) cannot be considered a disputed debt. The law is settled on this point. Therefore, an order for injunction as prayed for by the appellant in the present case, also cannot be granted under this principle.

[emphasis added]

[31] We agree with the above propositions. As we shall soon see, even the first principle is not met, whether on the law or on the facts and consequently, the orders ought not to have been granted by the learned Judge. The first principle requires an examination of the debt itself, whether it is disputed or otherwise.

[32] As recognised by the learned Judge, the section 218 Notice issued here is based on the judgment debt. The debt arises from and is the judgment debt which was already affirmed by this Court at the material time of the consideration of the application for a Fortuna injunction. This judgment debt is valid and enforceable. Such a judgment debt is an undisputed debt.

[33] Where this undisputed debt is not paid by the respondent within the time prescribed, the appellant is entitled to rely on the presumption under section 218(2)(a) that the respondent is deemed unable to pay its debt as and when it falls due. In other words, the respondent is deemed insolvent. A company which is insolvent may be wound-up on such grounds upon the presentation of a winding-up petition- Lafarge Concrete (Malaysia) Sdn Bhd v Gold Trend Builders Sdn Bhd [2011] 1 LNS 1763.

[34] In this appeal, the respondent is admittedly unable to pay the judgment debt. This can be readily inferred from the respondent’s explanation that it can only pay the judgment debt upon the sale of the subject property to Terra Pontus Ltd. With such admission, over and above the presumption in section 218(2)(a), it is quite clear that the presentation of a winding-up petition under such conditions is not bound to fail, that the appellant has a good chance of success, both in law and on the facts. Under such circumstances, whether or not the intended petition causes irreparable damage is of no consequence.

[35] As explained earlier, the learned Judge’s treatment of the judgment debt as being secured or compounded was erroneous. Since the debt has not been secured, and more importantly since the debt is not disputed and cannot be considered as disputed in law or on the facts, it is therefore apparent that the respondent has not met the first principle for the grant of a Fortuna injunction. The respondent has clearly failed to show that in law and on the facts, the petition, if presented, has no chance of success and is bound to fail. On the contrary, the appellant has shown that it has every chance of success.

[36] While the learned Judge has discretion on whether to prevent abuse of process and grant orders in the interest of justice, such exercise must be made according to judicial and guiding principles as propounded either in statute law or case law. In this case, the applicable principles are the two principles enunciated in Mobikom Sdn Bhd v Inmiss Communications Sdn Bhd [supra] and followed in Pacific & Orient insurance Co Bhd v Muniammah Muniandy. As opined in Pacific & Orient Insurance Co Bhd, the right of the appellant to initiate winding-up proceedings is a substantive right and enforcing such a right by issuing a section 218 Notice as was done in the present appeals, cannot amount to an abuse of Court process. We further agree with the view expressed in Pacific & Orient Insurance Co Bhd that “Neither procedural nor inherent jurisdiction of the Court can deprive the respondent [appellant in these appeals] of that right." With respect, the learned Judge has clearly misdirected herself on those principles and consequently has wrongly exercised her discretion.

[37] For these reasons, the appeals must be and are hereby allowed. The orders of the High Court are set aside and the applications in enclosures 7 and 14 must stand dismissed.

Dated: 30 January 2018

Signed

MARY LIM THIAM SUAN
Judge
Court of Appeal, Putrajaya
Malaysia

COUNSEL

For the Appellant: Chan Kean Li (Lim Poh Leong with him), Messrs Gibb & Co, Suite 7B, 7th Floor, Wisma MTT, 26, Weld Quay, 10300 Pulau Pinang

For the Respondent: T. Gunaseelan (Keshvinjeet Singh with him), Messrs Gunaseelan & Associates, Unit B-2-1, VIVA, No. 378, Jalan Ipoh, 51200 Kuala Lumpur

Legislation referred to:

Companies Act 1965, Sections 218, 218(2)(a)

Arbitration Act 2005

 

Judgments referred to:

Chan Boi Loi v Public Bank Bhd [2009] 6 CLJ 81

Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation [1978] VR 83

Hongkong and Shanghai Banking Corporation Ltd v Kemajuan Bersatu Enterprise Sdn Bhd [1992] 2 MLJ 370

Lafarge Concrete (Malaysia) Sdn Bhd v Gold Trend Builders Sdn Bhd [2011] 1 LNS 1763

Mobikom Sdn Bhd v Inmiss Communications Sdn Bhd [2007] 3 MLJ 316

Pacific & Orient insurance Co Bhd v Muniammah Muniandy [2011] 1 CLJ 947

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