28 June, 2018
You sued Company X. After a lengthy trial, you won. The High Court ordered Company X to pay you the debt owed (the “Judgment Debt”). Dissatisfied with the decision, Company X lodges an appeal to challenge the decision of the High Court Judge. Further to that, Company X also applied for a Stay of Execution to stay the decision of the High Court pending the outcome of the appeal, and they successfully obtained an order (the “Stay Order”).
After several demands, Company X still refuses to pay the Judgment Debt, you then consider to initiate a winding-up proceeding against Company X as a redress for the Judgment Debt. However, you now face the issue of the Stay Order. The issue then arises: despite the Stay Order, can you still wind-up Company X on the grounds of them being unable to pay its debts?
Firstly – what is an “execution” and what is a “stay of execution”?
An execution is a process in continuation of the existing proceeding to enforce a Judgment or Order including a Writ for Seizure and Sale, Garnishee proceeding or Judgment Debtor Summons. (For more information on the common types of execution processes – please read our previous article: Layman’s Guide to Enforcement of Judgments)
A stay of execution is an order obtained from the Court to prevent a judgment creditor from taking steps to enforce or execute a judgment obtained in his favour. A stay of execution is usually applied in situations where there is an appeal pending against the judgment, or there are some special circumstances which require the status quo to be maintained.
Can a stay of execution prevent a winding-up proceeding?
However, a winding-up proceeding, akin to a bankruptcy proceeding, is not a writ of execution and is governed by separate law and rules (Winding-up Rules 1972 and Insolvency Act 1967) filed entirely separate in the Winding-up Court. The reasoning of this principle is that the focus of a winding-up is the judgment debtor, not the debt, and the objective is to appoint a receiver in the person of the official assignee over the assets of the debtor and to convert the status of the debtor into a bankrupt/wound-up with the loss of control over his properties to the official assignee. It was found in the Federal Court in Perwira Affin Bank Bhd. v Lim Ah Hee @ Sim Ah Hee [2004] 3 MLJ 253 that:
“The fact that it (winding-up) is based on a judgment does not necessarily make it a continuation of the existing proceedings. It is a proceeding by way of petition just like divorce, winding up or election to name a few, bears the characteristics of a fresh proceeding unlike an execution proceeding. This principle is equally applicable to winding up proceedings.”
See Maril-Rionebel (M) Sdn Bhd & Anor v. Perdana Merchant Bankers Bhd & Other Appeals [2001] 4 MLJ 187, where the Court of Appeal held:
“…But a petition for winding up is not execution. For a winding up petition is not based upon any judgment of a court. Normally, it is based on the inability of a company to pay its debts as and when they fall due. Such inability is normally evidenced by the company’s inability to satisfy or compound a notice of demand issued pursuant to s. 218 of the Companies Act . But the issuance of such a notice is not a sine qua non for the presentation of a winding up petition.
What is needed is compelling evidence of the company’s inability to pay its debts as and when they fall due.”
When a Stay of Execution is obtained, its mechanism is to only halt and stay (ie: suspend) an execution proceeding. As a winding-up proceeding is outside of the definition of an “execution”, a Stay of Execution bears no legal impediment and effect over a winding-up proceeding. (At this juncture, it is important to note that there are two (2) recourses in opposing a winding-up petition namely, to oppose during the hearing of the petition and by filing an application for a Fortuna Injunction.)
Therefore, even if Company X has obtained the Stay Order, the judgment creditor is still able to commence winding-up proceedings. This position was made clear in Juara Aspirasi (M) Sdn. Bhd. v Tan Soon Peng [2012] 1 MLJ 50 where the Court held:-
…we are of the view that the learned High Court was right in ruling that, even if there was an ad interim order in place, there was no legal impediment for the petitioner to file a winding up petition against the company. An ad interim stay does not mean that a winding up petition cannot be filed as bankruptcy and winding up proceedings was not within the ambit and meaning of ‘execution’ proceedings as provided by O 46 r 1 of the Rules of High Court 1980 which states as follows:
In this Order, unless the context otherwise requires, ‘writ of execution’ includes a writ of seizure and sale, a writ of possession and a writ of delivery.
The above position was also echoed in the recent case of Ekuiti Setegap Sdn. Bhd. v Plaza 393 Management Corporation & 13 Ors.[2018] 1 LNS 406 wherein the High Court held:-
Since the stay of execution, cannot in law prevent the presentation of a winding-up petition, the petition was correctly and validly presented by the 1st Defendant. The 1st Defendant was only precluded in law from pursuing the execution proceedings stipulated in O.46 r. 1 of the Rules of Court.
However, there seems to be a contradicting view in the decision of Poh Loy Earthworks Sdn. Bhd. v Mascon Sdn. Bhd. [2007] MLJU 224 on the effects of a stay of execution order over a winding-up proceeding. The decision in Poh Loy seems to suggest that a stay order is able to halt and impede a winding-up proceeding because the Stay Order obtained is not a Stay of Execution, but a “Stay of Judgment” functioning to the stay an entire judgment, thereby able to restrain a winding-up proceeding. The Court also distinguished the Court of Appeal judgment in Maril-Rionebel which had ruled that a winding-up petition does not fall under the definition of “execution”. In Poh Loy, the Court was of the view that Maril-Rionebel was referring to winding-up petitions that are “not based on any judgment of the court”; as such, if a winding-up petition is premised on an unpaid judgment debt, a stay of execution should encompass a stay of all matters that pertain to that judgment, including a winding-up petition.
The Poh Loy decision is worth re-examining since it contrary to the plethora of authorities that state that a Fortuna Injunction (and not a stay of execution) is required to restrain a petitioner from commencing with a winding-up proceeding. Further, there is no legal doctrine or special category of stay such as a “stay of judgment” to mean staying an entire judgment and all things related to that judgment.
This case aside, the correct legal position appears to be that a stay of execution should not be a legal impediment to winding-up proceedings where a company is not able to pay its judgment debt. However, where a stay of execution has been granted, judgment creditors should still be mindful that the winding-up petition itself may ultimately be unsuccessful since a judgment debt which has been stayed may be construed as a disputed debt. Further, if a statutory notice of winding-up is issued with the sole purpose of co-ercing a judgment debtor to pay a judgment debt which has been stayed, this may be viewed by the courts as an abuse of process.
For further information, please contact:
Donovan Cheah, Partner, Donovan & Ho
donovan@dnh.com.my
