The question of whether a company can be wound up for failing to make payment in accordance with the terms of an adjudication decision was recently canvassed by the Court of Appeal in Bludream City Development Sdn Bhd v Pembinaan Bina Bumi Sdn Bhd.

The Court of Appeal’s decision can be found here.

Background Facts

The Appellant, a developer of a service apartment located at Mines Resort City, engaged the Respondent to construct and complete the building and infrastructure works of the project.

On 17 July 2019, the Respondent initiated adjudication proceeding against the Appellant for unpaid work done in relation to the Project amounting to RM5,510,197.91. The adjudicator decided in the Respondent’s favour, with the Appellant ordered to pay the adjudicated sum of RM6,175,669.10 to the Respondent (“Adjudication Decision”).

On 4 March 2020, the Appellant filed an originating summons in the High Court to set aside and stay the Adjudication Decision. Simultaneously, the Respondent filed an originating summons in the High Court to enforce the Adjudication Decision.

On 13 August 2020, the Appellant’s architect issued valuation report no. 37, interim certificate no. 37 and a revised statement of final account, attempting to substantially reduce the amount the Appellant owed the Respondent. Consequently, the Respondent commenced arbitration to challenge the interim certificate and the revised statement of final account. The Appellant cross-referred its dispute vis- a-vis the Adjudication Decision to the same arbitration.

In December 2020, the High Court dismissed the Appellant’s application to set aside and stay the Adjudication Decision and granted the Respondent’s enforcement application.

Dissatisfied, the Appellant appealed to the Court of Appeal against both decisions of the High Court; these appeals were also dismissed. Finally, the Appellant’s application seeking leave to appeal to the Federal Court was dismissed in October 2022.  

While that process had been taking its course, following the dismissal of the Appellant’s application in the High Court, the Respondent had served on the Appellant a statutory demand pursuant to Section 465 (1) (e) of the Companies Act 2016, demanding payment of the RM6,175,669.10 premised on the Adjudication Decision. The Respondent received no response from the Appellant.

Winding-Up Petition

With the Appellant failing to respond to the demand within the prescribed timeframe, the Respondent instituted a winding-up petition against the Appellant (“Petition”) on 23 September 2021.

The Appellant applied to strike out the Petition, but the application was dismissed. Subsequently, the Appellant filed an application seeking a Fortuna injunction to restrain the Respondent from continuing with the winding-up proceeding against the Appellant, but this application was also dismissed.

On 15 November 2022, the Petition was granted by the High Court (“Judgment”). In allowing the Petition, the High Court held that:

• the Adjudication Decision had been enforced as a court judgment and the debt demanded in the statutory demand (which was based on the Enforcement Order) was an undisputed judgment debt;
• the fact that the Adjudication Decision had the element of “temporary finality” did not mean that it  was denuded and devoid of any effect unless it had been stayed;
• the valuation report no. 37 and the interim certificate no. 37 were issued to frustrate the Respondent’s claims and to avoid paying for the work carried out;
• the failure on the part of the Appellant to pay the judgment debt triggered the presumption that the Respondent was unable to pay its debt; and
• in any event, the Appellant had failed to adduce sufficient evidence to show that the Respondent was commercially solvent, financially fit, and capable of paying its debts to the Respondent.

Dissatisfied with the Judgment, the Appellant lodged an appeal to the Court of Appeal.

In the Court of Appeal

On appeal, the Appellant contended, amongst others, that:

• the Respondent could not rely on the Adjudication Decision to commence winding-up proceedings when the disputed Adjudication Decision was pending final determination through arbitration or through Court proceedings;
• since the status of an adjudication decision was one of “temporary finality” only, the right to wind up a company based on the Adjudication Decision contradicted the legislative intent of CIPAA; and
• the cross-claims raised by the Appellant in the arbitration extinguished the Respondent’s adjudicated claim allowed in the Adjudication Decision, leaving a sum of RM1,939,987.83 payable to the Appellant.

The Appellant’s contentions were primarily based on the decisions delivered in ASM Development (KL) Sdn Bhd v. Econpile (M) Sdn Bhd [2021] 8 MLJ 99 and Setia Fontaines Sdn Bhd v. Pro Tech Enterprise Sdn Bhd [2023] MLJU 628.

In reply, the Respondent argued that:

• it was trite that the Appellant could be wound up based on an adjudication decision, particularly in light of the Court of Appeal decision in Sime Darby Energy Solution Sdn Bhd (formerly known as Sime Darby Offshore Engineering Sdn Bhd) v. RZH Setia Jaya Sdn Bhd [2022] 1 MLJ 458; and
• given the Appellant’s failure to make payment of the indisputable debt determined in the Adjudication Decision, the High Court correctly ordered the winding up of the Appellant.

In addressing the pivotal question of whether a company can be wound up for a failure to comply with a CIPAA adjudication decision, the Court of Appeal analysed a plethora of cases pertaining to the threshold for winding up, including the decision in  Sime Darby Energy Solution. Following that analysis, some appellate Court’s key findings were that:

• although the right to wind up a company based on an adjudication decision is not expressly provided for in CIPAA, the principles governing winding up in response to an inability to pay debts is plainly provided in Sections 465 and 466 of Companies Act 2016;
• a company may be wound up for an inability to pay debts even if the payment sought was not based on a judgment debt;
• an unpaid debt that had been adjudicated ceases to be disputable in a subsequent winding-up proceeding; and
• it was immaterial in the winding-up court that the non-paying party was still disputing the adjudicated debt or that it had referred the dispute to arbitration or the court for final determination.

The Court of Appeal therefore affirmed its decision in the Sime Darby Energy Solution case that a successful party in adjudication proceedings may wind up the non-paying party based on an adjudication decision.

In this regard, the Court of Appeal in its grounds of judgment expressly held that the decisions in ASM Development (KL) Sdn Bhd v. Econpile (M) Sdn Bhd [2021] 8 MLJ 99 and Setia Fontaines Sdn Bhd v. Pro Tech Enterprise Sdn Bhd [2023] MLJU 628 were erroneous.

In other parts of the judgment, the Court of Appeal found that:

• the architect’s act of unilaterally revising previously certified variation orders after the Adjudication Decision lacked bona fide and were contrived merely to defeat the Petition;
• the Appellant’s allegations of late completion that surfaced in 2021 (the project had been completed in December 2017) were repugnant to common sense; and
• the Appellant did not have cash flow solvency and that was sufficient to justify the winding up of the Appellant under Section 465 of the Companies Act 2016.

Moving Forward

Previously, the Court of Appeal in Likas Bay Precinct Sdn Bhd v Bina Puri Sdn Bhd [2019] 3 MLJ 244 and Sime Darby Energy Solution had decided that an unpaid party could wind up a non-paying party based on an adjudication decision.

However, a conflicting stance emerged when the High Court in ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd [2021] 8 MLJ 99 held otherwise. This position was subsequently echoed in Maju Holdings Sdn Bhd v Spring Energy Sdn Bhd [2020] 1 LNS 1332 and Setia Fontaines Sdn Bhd v Pro Tech Enterprise Sdn Bhd [2023] MLJU 628.

With the Court of Appeal expressly overruling the High Court decision in ASM Development (KL) Sdn Bhd and Setia Fontaines Sdn Bhd v. Pro Tech Enterprise Sdn Bhd, there is now more clarity surrounding the question of whether an adjudication decision constitutes an undisputed debt in winding up proceedings.

Author: Casper Tey