What to Do When Your Company is Served with a Notice of Demand under Section 466 of the Companies Act 2016?

A. Introduction

Before a creditor is entitled to present a winding-up petition against a debtor company, the creditor must first issue a statutory notice of demand pursuant to section 466(1)(a) of the Companies Act 2016.

The entire Section 466 deals with a debtor company’s “inability to pay debts”, which is a ground under section 465(1)(e) to commence winding-up proceedings against the debtor company.

More or less, the statutory notice will contain the following components:-

the particulars of the purported debt owing and payable by the debtor company to the creditor;
the demand for the purported debt to be settled within a period of 21 days;
an express notice that the debtor company will be deemed unable to pay debts should the debtor company fail to satisfy the creditor’s demand; and
legal action will be taken against the debtor company, i.e., winding-up proceedings.

In other words, it is a threat to wind-up the debtor company if the creditor’s demands are not met.

Undoubtedly, the process can be weaponized to create pressure on companies based on malicious or unfounded claims. This is because the mere presentation of a winding-up petition against a company can cause severe commercial repercussions. The court in Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation [1976] 2 ACLR 349 held that:

“The courts have recognized that irreparable damage may be done to a company merely though public knowledge of the presentation of a petition. Usually, the damage flows from the loss of commercial reputation which results. The courts have also been conscious of the pressure which may be put on a company, by a person with a disputed claim against it, threatening to present a winding up petition unless the company meets his claim. While the threat exists, the company, in order to avoid the damage involved in the presentation of a petition, is pressed to meet the claim although it may have substantial and genuine grounds for regarding itself as not required to do so.”

Rather than being a sitting duck, the company may make the first move and prevent the matter from escalating further. A company can apply to the court for a Fortuna Injunction to restrain the presentation or prosecution of a winding-up petition. In this regard, prosecution essentially refers to the mandatory advertisement of the said winding-up petition.

B. The Fortuna Principle

The case of Fortuna Holdings established the test to determine if the presentation of a winding-up petition will constitute an abuse of court process, thereby justifying an injunction.

First, it must be shown that the presentation of the winding-up petition has no chance of success.

Second and in the alternative, the threat of a winding-up petition is proven to be based on a bona fide disputed claim. This burden falls on the company to show a prima facie case (Best Re (L) Ltd v Hanwha General Insurance Co Ltd [2014] 9 MLJ 125). If the debt is undisputed, the only viable option is to pay up (Josu Engineering Construction Sdn Bhd v TSR Bina Sdn Bhd [2014] 11 MLJ 916).

One should note that the trite principles regarding interlocutory injunctions as propounded in American Cyanamid Co v Ethicon Ltd [1975] AC 396 will not be applicable (Bryanston Finance Ltd v de Vries (No 2) 1976 Ch 63).

(i) No Chance of Success

In Dolomite Readymixed Concrete Sdn Bhd v Zalam Corporation Sdn Bhd (No Syarikat: 258971-P) [2008] MLJU 270, the company refused to pay and contended that there was a pending counterclaim against the creditor which exceeded the amount claimed. Nonetheless, the company demonstrated its ability to pay the judgment debt by depositing the money in its solicitor’s account. Hence, the court held that the company was not commercially insolvent and therefore should not be subjected to a winding-up petition. The petition if presented would have no chance of success and was bound to fail. The court made reference to the case of RHB Bank Bhd v Gunasingam Ramasingam [2002] 5 CLJ 544:

“It is significant to note that s. 218(1)(e) of the Act speaks of the company being “unable to pay its debts” as opposed to merely an unwillingness on its part to pay any isolated debt that it may owe to any creditor, although such a refusal would attract the deeming provision in s. 218(2) of the Act thereby placing upon the company the burden of proving that it is able to pay its debts. But once the company proves to the satisfaction of the court that it is not commercially insolvent, that is to say it is perfectly capable of paying all its debtors every sen in the ringgit, the fact that it would not pay the individual debt of the petitioner for whatever reasons private or otherwise, is quite irrelevant when deciding whether a winding up order should be made. The judgment debtor must in such a case take his remedy elsewhere – properly this should be by way an execution on the asset of the bank or even for committal for refusing to obey the order of the court…”

This is consistent with the established position of law that winding-up proceedings are extreme and drastic in nature, and should only be reserved as a last resort (Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1977) 2 ACLR 307).

(ii) Bona Fide Disputed Claim

In Mobikom Sdn Bhd v Inmiss Communiations Sdn Bhd [2007] 3 CLJ 295, the creditor issued a statutory notice of demand based on an arbitral award that was not registered. Further, there was an application by the company to set aside the arbitral award. The Court of Appeal then proceeded to grant a Fortuna Injunction. In so deciding, Gopal Sri Ram JCA held that:

“I entirely agree with the law as stated by the learned judge and his approach. I would apply it here. Here too the defendant has not registered award. All it has is a cause of action at common law to enforce the award in the usual way by means of a civil suit. The application by the plaintiff to set aside the award constitutes, in my judgment, a bona fide dispute of the alleged debt. The present case, in my view, comes within the second branch of the Fortuna principle.”

Further in Sanjung Suria Sdn Bhd v PLB-KH Bina Sdn Bhd [2014] 7 MLJ 1, the court opined that a stay of execution pending appeal of the judgment debt would constitute a disputed debt, even though the commencement of winding-up proceedings is not considered an execution under the law. Besides that, if the Fortuna Injunction was not granted, it would render the stay an inefficacious and impotent judicial pronouncement.

C. Conclusion

Always ascertain if the purported debt issued under a statutory notice of demand is properly accounted for. If the purported debt can be disputed either by reason of its liability or quantum, or if there are any legal encrumbrances which will have the effect of suspending enforceability, these consitute good grounds to obtain a Fortuna Injunction.