Winding Up proceedings: opposing the set-off claimed

Under the Section 218 of Companies Act, the petition of winding up can only be filed under such circumstances:

(1) The Court may order the winding up if—

(a) the company has by special resolution resolved that it be wound up by the Court;

(b) default is made by the company in lodging the statutory report or in holding the statutory meeting;

(c) the company does not commence business within a year from its incorporation or suspends its business for a whole year;

(d) the number of members is reduced in the case of a company (other than a company the whole of the issued shares in which are held by a holding company) below two;

(e) the company is unable to pay its debts;

(f) the directors have acted in the affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever which appears to be unfair or unjust to other members;

(g) an inspector appointed under Part IX has reported that he is of opinion—

(i) that the company cannot pay its debts and should be wound up; or

(ii) that it is in the interests of the public or of the shareholders or of the creditors that the company should be wound up;

(h) when the period, if any, fixed for the duration of the company by the memorandum or articles expires or the event, if any, occurs on the occurrence of which the memorandum or articles provide that the company is to be dissolved;

(i) the Court is of opinion that it is just and equitable that the company be wound up;

(j) the company has held a licence under the Banking and Financial Institutions Act 1989 or the Islamic Banking Act 1983, and that licence has been revoked or surrendered;

(k) the company has carried on Islamic banking business, licensed business, or scheduled business, or it has accepted, received or taken deposits in Malaysia, in contravention of the Islamic Banking Act 1983 or the Banking and Financial Institutions Act 1989, as the case may be; or

(l) the company has held a licence under the Insurance Act 1996 and—

(i) that licence has been revoked;

(ii) Bank Negara Malaysia has petitioned for its winding up under subsection 58(4) of the Insurance Act 1996; or

(iii) an order under paragraph 59(4)(b) of the Insurance Act 1996 has been made in respect of it;

(m) the company is being used for unlawful purposes or any purpose prejudicial to or incompatible with peace, welfare, security, public order, good order or morality in Malaysia; or

(n) the company is being used for any purpose prejudicial to national security or public interest.

2.   In Malaysia, the common reason for creditor to file the winding up petition is because of the inability to pay debt. The inability to pay debt has been defined in the same provision where:

(2) A company shall be deemed to be unable to pay its debts if—

(a) a creditor by assignment or otherwise to whom the company is indebted in a sum exceeding five hundred ringgit then due has served on the company by leaving at the registered office a demand under his hand or under the hand of his agent thereunto lawfully authorized requiring the company to pay the sum so due, and the company has for three weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor;

(b) execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; or

(c) it is proved to the satisfaction of the Court that the company is unable to pay its debts; and in determining whether a company is unable to pay its debts the Court shall take into account the contingent and prospective liabilities of the company.

3.   However, there are some situations that make attorneys contemplating on whether to start the winding up petition or not. One of the situations is where there is a possibility to set-off.

4.   The set-off application filed by the debtor to the Court pursuant to Section 245, where it provides the permission of set-off to the applicant.

(1) The Court may make an order directing any contributory for the time being on the list of contributories to pay to the company in the manner directed by the order any money due from him or from the estate of the person whom he represents exclusive of any money payable by him or the estate by virtue of any call in pursuance of this Act, and may—

(a) in the case of an unlimited company, allow to the contributory by way of set-off any money due to him or to the estate which he represents from the company on any independent dealing or contract but not any money due to him as a member of the company in respect of any dividend or profit; and

(b) in the case of a limited company, make to any director whose liability is unlimited or to his estate the like allowance,and in the case of any company whether limited or unlimited, when all the creditors are paid in full, any money due on any account whatever to a contributory from the company may be allowed to him by way of set-off against any subsequent call.

5.   In this particular scenario, what are the options for attorney?

6.   In the case Pembinaan Purcon Sdn Bhd v Entertainment Village (M) Sdn Bhd, the High Court held that:

In essence, a set-off is a monetary cross-claim and it is a defence to the claim made in the action. According to Morris L.J. in Hanak v. Green [1958] 2 All ER 141, 152, “The question as to what is a set-off is to be determined as a matter of law and is not in any way governed by the language used by the parties in their pleadings.” It is germane to mention that in regard to a claim arising out of a transaction between the parties there could in effect be a set-off arising under the same transaction whether sounding in debt or unliquidated damages (Morgan & Son, Ltd v. Martin Johnson, Ltd [1949] 1 KB 107, C.A.). So it can be surmised that the right to set-off a sum of money whether the amount is ascertained or otherwise is now expressly recognised. The sum set-off must have accrued and become due at the commencement of the action (Richards v. James [1848] 2 Ex 471) and that all the proper defences may be set up by way of a reply (Rawley v. Rawley [1876] 1 QBD 460 C.A.).

7.   This Court affirms that in order for the petitioner to wind up the company, it must before learn that whether the sum of the set-off has been accrued or not. If not, the commencement of winding up shall not be proceed.

8.   In the recent case Lafarge Concrete (M) Sdn Bhd v Gold Trend Builders Sdn Bhd [2012] 6 MLJ 817, the Court of Appeal held that:

(2) There was also no question that by the time the appellant issued the s 218 notice, all installments were already overdue, by reason of the effluxion of time and not by reason of any default of payment of any one installment. The time granted by the appellant for payment by installments had passed, so the appellant was entitled to issue the s 218 notice to demand for payment of the then six overdue installments and agreed interest. Acceptance of the third installment after issuance of the s 218 notice was of no consequence as the correct amount was claimed (see para 12).

9.   And, the Court of Appeal led by Jeffery Tan JCA delivered his judgment by referring to (The Law of Company Liquidation (4th Ed), by Andrew R Keay at p 91). He said:

‘whether or not judgment had been obtained, an unpaid creditor is, as a general rule, entitled to a winding-up order against a company which is insolvent’. Where there is no judgment, it is not uncommon for companies to argue that the debt is disputed. But ‘in order to oppose a winding up petition, the respondent must raise a bona fide dispute in both a subjective and objective sense. It must be honestly believed to exist and must be based on substantial or reasonable grounds —

10. Here, it gives a general principal that the unpaid creditor is entitled to wind up against the insolvent company due to inability to pay the debt.

 11. Later in the case BMC Construction Sdn Bhd v Dataran Rentas Sdn Bhd [2001] 1 MLJ 356 concerns about the right to contractual set-off in opposing the winding up petition as the respondent alleged that it had a cross-claim or set-off against the petitioner for loss and damage for defective works.

12. The Court affirms that, the appellant is right in petitioning the winding up petition because the company is unable to pay the debt. The question of whether the set-off decision received or not is not the matter, because as long as the petitioner can prove that the company is not able to pay the debt, the petitioner can file for winding up petition.

13. This would also leave the petitioner to prove the proof of debt to the company. This burden of proof is provided under the Section 291 of Companies Act:

In every winding up, subject in the case of insolvent companies to the application in accordance with this Act of the law relating to bankruptcy, all debts payable on a contingency and all claims against the company present or future, certain or contingent, ascertained or sounding only in damages shall be admissible to proof against the company, a just estimate being made so far as possible of the value of such debts or claims as are subject to any contingency or sound only in damages or for some other reason do not bear a certain value.

14. This is backed by the 2015 case Ng Poh Choo v Perwira Indra Sakti Sdn Bhd (in liquidation) [2015] 7 MLJ 148 where the Court held:

As the plaintiff had not filed the proof of debt, the liquidator was not in a position to admit or reject the debt due from the defendant to the plaintiff in the form of the judgment sum. The plaintiff was not a creditor who could exercise his right of set-off under s 41 of the Bankruptcy Act, as the provision did not apply to the instant case. In the circumstances the plaintiff was not a creditor for the purposes of enforcing its claim against the defendant

15. Hence, the winding up petition is possible via this route. As long as the creditor could prove that the company is under the debt, and shows after the set-off decision given, the company could still not pay the debt, the petition shall be filed.