Unjustified Winding Up Petitions? Malaysian Companies Can Fortuna-tely Get Protected

Here’s a common scenario: A company becomes subject of a winding-up petition presented by a creditor on the grounds of its inability to pay debt. The procedure typically begins when the company receives a Notice of Demand pursuant to Section 466 of the Companies Act 2016 (“CA2016”) (“Statutory NOD”) for payment of debt within 21 days, failing which the creditor may present a winding-up petition, seeking liquidation of its assets for settlement of debt among the creditors.

There will be several instances, however, in which a company that has received the Statutory NOD disputes the existence of such debt. Alternatively, they may also argue that they are able to pay the said debt hence the petition was baseless.

But time is running out, and the winding-up petition may be served on them.

Now, this is where Fortuna Injunction comes into play.

Saving Grace, Saving Face: The Fortuna(te) Injunction

What is Fortuna Injunction?

A Fortuna Injunction is a court order to restrain a creditor from presenting a winding-up petition against a company after the creditor has issued a Statutory NOD.

Taking its name “Fortuna” from a landmark Australian case,?Fortuna Holdings Pty Ltd v Deputy Federal Commissioner of Taxation[1], the case established two (2) principles on which a court can grant Fortuna Injunction to prevent the presentation of a winding-up petition:-

“First, where the presentation of a winding up petition which has?no chance of success?as a matter of law and fact, might produce?irreparable damage?to the company.

“Second, where the party seeking to present the winding up petition chooses to assert a?disputed claim, by a procedure which might?produce irreparable damage to the company, rather than by a suitable alternative procedure.”

Note that under the 1st principle, it must be satisfied that:-

1. The winding-up petition presented has no chance of success; and

2. The presentation of the winding-up petition would cause irreparable damage to the company.

In this regard, the company must show that the intended winding-up petition was bound to fail due to the law or evidence, such as the petitioner presenting the winding-up petition on the grounds that are not listed under Section 465(1) of CA2016 AND the presentation of the winding-up petition would cause irreparable damage. This might include (but not limited to) damage to the company’s business or reputation, affecting third parties, or disruption to ongoing projects or contracts.

Whereas for the 2nd principle, there are basically three elements which are as follows:

1. The aforesaid debt is a disputed debt (not yet adjudicated);

2. The presentation of the winding-up petition would cause irreparable damage to the company; and

3. There is a better alternative forum to adjudicate the said debt, rather than in a winding-up proceeding.

Admission of debt = End of dispute, the debt-ly truth

(An Example of Recent Case)

In?Sime Darby Energy Solution Sdn Bhd v RZH Setia Jaya Sdn Bhd[2], the Court held that a debt that has been admitted cannot be considered a disputed debt to restrain the presentation of a winding up petition. Any application to grant the order under such circumstances should be regarded as an abuse of process.

In this case, the Appellant appealed against the decision of the learned judicial commissioner in granting Fortuna Injunction to restrain the Appellant from filing a winding up petition. The Appellant submitted that there was no bona fide dispute on the debt as the respondent had admitted the debt. The Appellant’s appeal is allowed.

Conclusion

A Fortuna Injunction is a powerful tool to restrain the recovery of disputed debt in unwarranted fashion by the creditor. However, it is a discretionary remedy whereby the key to success in obtaining the Fortuna Injunction is in the company having acted promptly and proved that the winding-up petition is or will be presented with a disputed debt or has no chance of success.

About the Author

Lum Man Chan?is a partner at HHQ specialising in Dispute Resolution, Employment, Liquidation & Restructuring, Regulatory & Corporate Compliance.

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