1.0 The Landscape of the Law on Recovery of Property of a Wound Up Company – Undue Preference
The law on undue preference aims to protect creditors against an insolvent company from dissipating its assets to another creditor and thus giving such creditor an unfair preference over the general body of creditors.
The statutory provisions that are relevant to the determination of undue preference are as follows:
Section 293(1) of the Companies Act 1965 (‘CA1965’):-
‘Any transfer, mortgage, delivery of goods, payments, execution or other act relating to property made or done by or against a company which, had it been made or done by or against an individual, would in his bankruptcy under the law of bankruptcy be void or voidable shall in the event of the company been wound up be void or voidable in like manner.’
The corresponding and equivalent provision in Companies Act 2016 (‘CA2016’) to the now repealed CA 1965, section 528(1) of CA2016:-
‘Any transfer, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company which is unable to pay its debts, as the debts become due, from its own money in favour of any creditor or any person in trust for any creditor shall be deemed to have given such creditor a preference over other creditors in the event of the company being wound up on a winding up petition presented within six months from the date of making or doing the same and every such act shall be deemed fraudulent and void.’
Authorities
The undue preference rule has always been encapsulated in s 293 of the CA1965 (now repealed and is closely in pari materia with s 528 of the CA2016) read together with ss 52 and/or 53 of the Insolvency Act 1967 (‘IA’).To further grasp the jurisprudence on undue preference, the decisions of the Federal Court in Silver Corridor Sdn Bhd v Gallant Acres Sdn Bhd & Anor [2016] 5 MLJ 1 and Sime Diamond Leasing (M) Sdn Bhd v. JB Precision Moulding Industries Sdn Bhd [1998] 4 CLJ 557 is of pertinence where, eventhough s 528 of the CA2016 was yet to be considered in these decisions, the effect of the abovementioned provisions (sans s 528 of the CA 2016) of s 293 of the CA 1965 and ss 52 and 53 of the IA were considered. Section 293 of the CA 1965 did not stand alone. It must be read together with the relevant laws of insolvency, particularly ss 52 and/or 53 of the IA.
The difference between ss 52 and 53 of IA:
- for s52 IA, the disputed transfer: (i) was not made in bona fide and/or for valuable consideration within 2 years before the date of the winding-up petition; (ii) the effect of which be detrimental to the interest of the general creditors (particularly unsecured creditors) in the process of liquidation in the event of it being wound up by court.
- for s53 IA, the disputed: (i) transfer was made when the company was already insolvent (i.e. unable to pay its debts and/or when a provisional liquidator has been appointed) and (ii) it was done within 6 months before the date of the winding-up petition. Further, it must be done to (iii) invalidate certain disposals or payments effected to some creditors or beneficiaries, in preference to others or the general body of creditors.
To further postulate, before a transaction can constitute an Undue Preference, it generally has to be established that it contravenes either s52 or 53 of the IA. Once this is established, the onus will shift to the defendant to adduce evidence to rebut the allegations.
Both s52 and s53 IA are in line with the spirit of pari passu rule that all persons similarly situated are entitled to equality in treatment in the distribution of the assets of the company in the process of liquidation and no one shall have the unfair advantage of recovering his debt over the other. If the transfer has violated s528 CA 2016/s293 CA 1965 read together with s52/53 of IA, and in the spirit of the pari passu rule, the creditor must not have the unfair advantage of securing his debt first over other unsecured creditors. The liquidator has the power under s483 CA 2016 to take into his custody or under his control all the property to which the company is or appears to be entitled.
Be it as it may, the jury is still out on whether or not the current s 528 of the CA2016 too, like s 293 CA1965 before this, is to be read together with ss 52 and 53 of the IA. A definitive decision addressing this would be beneficial to the jurisprudence and the public. It would, however, appear that the same legal principles on undue preference rule apply and that the prevalent substance of the law has not changed.
Section 528(4) CA 2016 – Bona fide purchaser
Be that as it may, if evidence is produced to show that valuable consideration has been paid by a creditor or other person dealing with the company, the Court then needs to consider whether the purchaser had notice or knowledge of the company’s inability to pay its debts or of the winding-up proceedings having been commenced against the Company.
As provided under s 528(4) of the CA 2016, a transaction which is in favour of any person for valuable consideration and who did not have the actual notice or knowledge that the transaction is of undue preference is likely to be upheld by the Courts.
However, if the purchaser is found to have had notice or knowledge of the company’s inability to pay its debts or was in winding-up proceedings at the material time, the transaction would still be deemed as void under the principles of undue preference for the transaction was made within the 6 months period prior to the commencement of the winding-up proceedings.
2.0 Right to File A Legal Action
An Official Receiver/Liquidator has the powers conferred unto him or her to appoint an advocate to initiate or defend a legal action without the need to obtain consent or approval from the Court nor the Committee of Inspection.
This is provided under Section 486(1)(a) read together with paragraphs (a) and (j) of Part I of the Twelfth Schedule of the CA 2016.
Section 486(1)(a) reads:
‘Where a company is being wound up by the Court, the liquidator may –
(a) without the authority under paragraph (b), exercise any of the general powers specified in Part 1 of the Twelfth Schedule;’
Paragraphs (a) and (J) of Part I of the Twelfth Schedule reads:
‘The Liquidator may –
(a) bring or defend an action or other legal proceedings in the name and on behalf of the Company;
…
(j) appoint an advocate to assist him in his duties;’
3.0 Limitation Period to Recover Land
Prior to filing an action for the recovery of land, it is axiomatic for one to take into consideration the relevant statutory limitation period. Note that section 9(1) of the Limitation Act 1953 (‘LA 1953’) provides an applicant 12 years from the date of the right of action accrued to him to recover the land. Time also does not begin to run against the applicant until the cause of action, which was concealed by fraudulent conduct, has been discovered by the applicant.
4.0 Key Takeaways
Liquidators, who are conferred with fiduciary duty and who at the same time also hold the role as officers of the Court, are advised to get the ‘ball rolling’ by filing action in the Court of law so as to discharge their duty in inherently securing the interests of the creditors. It would also be prudent for the legal action to be filed as soon as possible to pre-empt any possible argument of laches/delay from opposing parties.
Factoring in any appreciation of value in between, the present value of the impugned property naturally is higher than the price it was transacted at and successful recovery of the property would undoubtedly put the company in a healthier position to realise and distribute its assets to its creditors and shareholders, even after offsetting the costs in recovering the lands.
If you require further advice on the above, kindly contact Dennis Yuean Jin Han at dennisyuean@cheangariff.com.
Disclaimer: The contents of this write-up is intended for general informational purposes only and does not constitute legal advice.
