Overview
A wound-up company must distribute its available assets pari passu or in equal proportions to all creditors of the same class. At the end of the winding up the creditors will receive dividends, which in most cases are only a fraction of the outstanding debts.
The law requires all creditors of the same class to be treated equally and fairly. If transactions are made in favour of one creditor over the other, particularly in the period preceding the commencement of winding-up proceedings, these transactions may be fraudulent and constitute undue preference. Under Section 528 of the Companies Act 2016, any fraudulent transaction tainted with undue preference is void and can be set aside.
The fundamental purpose is to protect the general body of creditors by preventing the insolvent company from dissipating its assets to a chosen or preferred creditor during its “twilight period”.[1]
The twilight period refers to the six-month period preceding the commencement of the winding up petition. When calculating the twilight period, the relevant date is when parties entered into the agreement, and not the date when the agreement was formalised.[2] Transactions falling outside of the twilight period are not caught by undue preference.[3]
Prior to the Companies Act 2016, the predecessor to Section 528 (the now-repealed Section 293 of the Companies Act 1965) was read together with Sections 52 and 53 of the Bankruptcy Act 1967 (now Insolvency Act 1967).[4] Under Section 52 of the Insolvency Act 1967, the twilight period is two years for the settlement of properties in certain cases.
Elements of Undue Preference
The party seeking to set aside a transaction for undue preference must satisfy that the impugned transaction[5]:-
- took place within six months prior to the commencement of winding up;
- took place when the company was insolvent;
- fell within the types of transactions described in Section 528 of the Companies Act 2016;
- benefitted a person who was a creditor of the company; and
- conferred the creditor a preference, priority or advantage over other creditors.
Exceptions
A transaction that might otherwise be an undue preference is not void if it is in favour of any person dealing with the company for valuable consideration and without any actual notice of the fraudulent conveyance. See Section 528(5) of the Companies Act 2016.
Valuable consideration means a consideration of fair and reasonable money value to the value of the property or the known or reasonably anticipated benefits of the contract, dealing, or transaction.
Notice is defined broadly to include:-
- knowledge of the company’s inability to pay a debt;
- knowledge of any winding-up proceedings against the insolvent company; or
- knowledge of facts sufficient to indicate fraudulent conveyance.
Transactions that Amount to Undue Preference
Unilateral set-off. An attempt by a purchaser to set off his claim for Liquidated Ascertained Damages (LAD) against the balance purchase price owed to a wound-up developer was not successful. The Court held that it would amount to undue preference.[6]
Sham Tranfer. The transfer of properties by a company to a related entity shortly before winding up without receiving any payment was undue preference.[7]
Articifical debts. The transfer of assets from an insolvent subsidiary to its holding company, orchestrated by common directors, was held to be a sham transaction. In this case the debt owed by the subsidiary to the holding company was artificially increased. The assets were then transferred to the holding company, at book value, to set off the artificial debt. There was no proper valuation, and the transfer was made hastily without proper documentation. The Court held that the transfer was in violation of Section 528 of the Companies Act 2016.[8]
Payments to Directors. An agreement that allocated monthly payments and a percentage of profits to the directors of an insolvent company was undue preference.[9]
Supplier’s claim. A claim by a supplier against a developer for goods supplied to an insolvent sub-contractor was dismissed for undue preference.[10]
Transactions that Do Not Amount to Undue Preference
Adjudication Award. Direct payment of an adjudication sum under Section 30(3) of the CIPAA by the principal to the sub-contractor, for the debt owed by the wound-up main contractor, was not undue preference. The liability to pay is an independent statutory obligation under the Act.[11]
Trust Fund. Funds held by the insolvent company as a stakeholder or on trust for a third party did not form part of the company’s assets available for distribution to general creditors. Therefore, the release of trust funds did not infringe the pari passu rule.[12]
Scheme of Arrangement. A court-sanctioned scheme of arrangement which may potentially benefit certain classes of creditors or depart from the pari passu principle was not undue inference.[13]
Corporate Guarantee. The mere execution of a corporate guarantee did not infringe the prohibition against undue preference. The guarantee itself simply conferred the recipient the right to be listed as a creditor.[14]
Conclusion
The doctrine of undue preference is rooted in the pari passu principle, which requires that creditors of the same class share rateably in the distribution of an insolvent company’s assets. Where a creditor receives a preference or priority over the general body of creditors, the law intervenes to set aside such transactions or dealings. The effect is to restore any misapplied assets to the common pool for distribution amongst all remaining creditors.
This article does not offer any legal advice and may not be applicable to your circumstances. Kindly consult a lawyer to seek legal advice.
[1] Jaks Sdn Bhd v Jaks Island Circle Sdn Bhd (In Liquidation) [2024] 6 CLJ 257 at [24]; Sime Diamond Leasing (Malaysia) Sdn Bhd v JB Precision Moulding Industries Sdn Bhd [1998] 4 CLJ 557 at p. 568
[2] Jaks Sdn Bhd v Jaks Island Circle Sdn Bhd (In Liquidation) [2024] 6 CLJ 257
[3] Hong Leong Bank Bhd v Wong Soon Fong [2012] 1 LNS 629
[4] Silver Corridor Sdn Bhd v Gallant Acres Sdn Bhd & Anor [2016] 7 CLJ 823
[5] Jaks Sdn Bhd (supra) at [27]; Sime Diamond Leasing (supra) at p. 568
[6] Sazean Development Sdn Bhd v Maha Pesona Sdn Bbhd [2022] 1 LNS 2373; Techno Asia Holdings Bhd v Mount Austin Properties Sdn Bhd [2007] 4 MLJ 576
[7] Heveafil Sdn Bhd v Eye Consolidated Sdn Bhd [2023] 1 LNS 1871
[8] Dan-Bunkering (Singapore) Pte Ltd v The Owners of the Ship or Vessel “PDZ Mewah” of Port Klang & Anor [2020] 1 LNS 1966
[9] Ganda Selat Sdn Bhd (In Liquidation) v MPDT Capital Bhd [2022] 2 CLJ 412
[10] Konsesi Kotapermatamas Sdn Bhd v Tegas Broadcast & Multimedia Sdn Bhd & Anor [2025] 4 CLJ 761
[11] CT Indah Construction Sdn Bhd v BHL Gemilang Sdn Bhd [2020] 1 CLJ 75
[12] Teh Kun Pei v Archright (M) Sdn Bhd [2019] 1 LNS 2409
[13] Francis Augustine Pereira v Dataran Mantin Sdn Bhd & Ors and other appeals [2014] 1 CLJ 161
[14] Dato’ Eii Ching Siew @ Yii Ching Siew & 2 Ors v Rainbow Marble & Tiling Sdn Bhd [2025] CLJU 89
[15] Dan-Bunkering (Singapore) Pte Ltd v The Owners of the Ship or Vessel “PDZ Mewah” of Port Klang & Anor [2020] 1 LNS 1966
