When a company is served with a Notice pursuant to Section 466 of the Companies Act 2016 (the “Notice”) by a creditor without Judgment, it generally means that there exists a minimum debt of RM10,000.00 that has yet to be settled by the company to the creditor. The Notice is the first step by the creditor to initiate a winding-up proceeding against the company, by demanding for the debt owed to be paid within 21 days, failing which the company may be presumed to be insolvent and unable to pay its debts.
However, there will be many situations where a company who has been served with a Notice does not agree that they have a debt. A company that intends to dispute the debt and resist winding-up proceedings, has two possible options to fight back:
- the company could file what is known as a Fortuna Injunction to restrain the presentation of a winding-up petition; or
- if the winding-up petition is already presented, the company can attend the hearing of the winding-up and oppose it
What is a Fortuna Injunction?
An injunction, in its most simple understanding, is an authoritative order, directed by the Court to do, or not do something. In this connection, a Fortuna Injunction, is a specific injunction ordered by the High Court to restrain or halt a creditor from filing and presenting the winding-up petition after the serving of the Notice. If the company successfully obtains the Fortuna Injunction, the creditor is not able to initiate the winding-up proceeding against the Company.
Of course, there must exist reasonable grounds for a company to apply for the Fortuna Injunction, which was established in the case of Fortuna Holdings Pty Ltd v Deputy Federal Commissioner of Taxation [1978] 2 ACLR 349 (which is also the name the injunction is based on). In that case, the Court explained that there are two grounds in which a company can be granted a Fortuna Injunction:
- 1st ground: where the winding-up petition, if presented, has no chance of success or is bound to fail; or
- 2nd ground: the creditor is intending to present a winding-up petition on a disputed claim, which will produce irreparable damage to the Company, rather than by a suitable alternative procedure
Malaysian courts have consistently held that a Fortuna Injunction will be granted when the Notice is based on a clearly disputed debt. This is because the proper alternative in such cases would be for the creditor to commence a civil suit and obtain a judgment before attempting to wind-up the company. Otherwise, a Notice based on a disputed debt may be seen as an attempt to cooerce a company into paying the amount which may be an abuse of process of the Court.
Opposing the Petition on the Day of Hearing
The second recourse is to oppose the winding-up petition during the day of the hearing. However, by the time the hearing is held, there would already be an advertisement to notify the public that the company is being wound up pursuant to the Companies Winding-up Rule 1972. In this regard, the company may have already suffered reputation loss since the market may (erroneously) believe that the company is insolvent and unable to pay its debts, even though a winding-up order has not been granted yet.
That being said, where the company opposes the winding-up petition during the hearing, they must establish that the debt is “bona fide” disputed. The company would need to engage a lawyer to draft and file affidavits in reply and written submissions in opposing a winding-up petition through a hearing. The Company would also need to exhibit proper evidence and documents to prove that there is a substantial dispute over the debt which should have been properly litigated first instead of going through the winding-up route.
Although having a judgment debt is not a prerequisite to filing a winding-up petition, creditors should be mindful that a winding-up petition is not an appropriate way to enforce payment of a debt which has not been clearly determined. Courts are unlikely to wind-up a company if it is apparent on the face of the evidence that the debt is being disputed and there was no clear admission to the debt by the company.
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This article was written by Donovan Cheah (Partner) and Zi-Han Lim (Associate), from the firm’s employment law and dispute resolution practice group.
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