SIME DARBY ENERGY SOLUTION SDN BHD
V
RZH SETIA JAYA SDN BHD
COURT OF APPEAL – CIVIL APPEAL NO. B-02(NCC)(A)-695-06/2020
6 AUGUST 2021
The Court of Appeal has, in the recent case of Sime Darby Energy Solution Sdn Bhd v RZH Setia Jaya Sdn Bhd, confirmed that a party may file a winding up petition pursuant to an Adjudication Decision.
The brief facts of the case are as follow:
RZH Setia Jaya Sdn Bhd (“the Respondent”) was the main contractor while Sime Darby Energy Solution Sdn Bhd (“the Appellant”) was one of the subcontractors of a construction project at Melaka River. Disputes arose between the parties. The Appellant commenced an adjudication proceeding against the Respondent. Eventually, an adjudication decision was delivered in favour of the Appellant in the amount of RM1,806,538.76 (“Adjudication Decision”).
Thereafter, the Appellant applied to enforce the Adjudication Decision as a court judgment, which was opposed by the Respondent (“Enforcement Application”). At the same time, the Respondent took steps to refer the dispute to arbitration. The Respondent also filed an application in the High Court to set aside the Adjudication Decision (“Setting Aside Application”).
Before the Enforcement Application and Setting Aside Application were decided, the Appellant served on the Respondent a statutory notice under Section 466(1)(a) of the Companies Act 2016 to demand for payment of the adjudicated sum pursuant to the Adjudication Decision (“466 Notice”). In light of this, the Respondent applied for an injunction to restrain the Appellant from filing or continuing any winding up petition based on the 466 Notice (“Fortuna Injunction”).
High Court’s Decision
The High Court allowed and granted the Respondent the Fortuna Injunction. In granting the Fortuna Injunction, the High Court found, among others, that:
- whilst it is appropriate for the beneficiary of an adjudication decision to enforce and execute the adjudication decision according to one or more modes of execution of judgment under Orders 45 to 51 of Rules of Court 2012, it is necessary to strike a balance between the rights of a successful litigant in adjudication proceedings in collecting cashflow and the rights of the losing party in adjudication proceedings to pursue arbitration or court action for a final decision to overturn the temporary binding adjudication decision;
- since the Respondent had successfully proved that it has a bona fide dispute of the debt, the High Court may issue Fortuna Injunction to restrain the drastic or extreme measure of resorting to winding up proceeding; and
- in any event, the Appellant could seek for alternative remedies to recover the adjudicated sum by way of ordinary modes of execution provided in Orders 45 to 51 of Rules of Court 2012.
Court of Appeal’s Decision
The Court of Appeal concurred with the Learned Judicial Commissioner (“LJC”) that a just and equitable balance ought to be struck between the rights of a successful litigant in adjudication proceeding and the rights of the loser to pursue arbitration or court action for a final decision. However, the Court of Appeal held that the point of contention in the appeal was whether the LJC was right in his view that as the final decision by the High Court or the Arbitrator may overturn or prevail over the provisionally binding Adjudication Decision, the Adjudication Decision should be considered disputable in the context of winding-up proceedings.
The Court of Appeal unanimously allowed the appeal and held as follows:
- The LJC was wrong in failing to strictly apply the principle pronounced in Likas Bay Precinct Sdn Bhd v Bina Puri Sdn Bhd [2019] 3 MLJ 244 that a party who is armed with an adjudication decision will be entitled to present a Winding Up Petition. It was wrong for the LJC to have decided that the eventual Court action or Arbitration may eventually prevail over or reverse the Adjudication Decision, when this was still an uncertainty. This ought not to have been used to preclude the statutory right of the Appellant to pursue a winding up action.
- As regards the LJC’s reliance on the High Court case of ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd [2020] MLJU 282, the Court of Appeal clarified as follows:
(i) The Court of Appeal disagrees with the conclusion reached by LJC that the Appellant ought to be restrained from presenting a winding up petition until the dispute has been finally resolved at arbitration. The Court of Appeal in Likas Bay had pronounced in no uncertain terms and without qualification that a party who is armed with an adjudication decision would be entitled to present a winding up petition based on the adjudication decision.
(ii) Although the High Court in ASM Development held that the debt under the adjudication decision can still be disputed, the Court of Appeal is of the view that this does not equate to entitling the party ordered to make payment under the adjudication decision to an order to restrain the successful party from presenting a winding up petition. The party ordered to make payment still has a statutory right to challenge the statutory notice or petition before the winding up Court.
(iii) Until and unless the adjudication is set aside, it can in law form the basis for the statutory notice. Whether or not the Respondent had a bona fide cross-claim against the Appellant on merits to challenge the petition is a matter to be adjudged by the winding up Court. An unproven cross-claim cannot be a basis for restraining the filing of a winding up petition based on a valid and enforceable adjudication decision.
- The LJC’s finding that the Respondent’s cross-claim showed that the debt is bona fide disputed, is flawed. This is because as at the date of the Fortuna Injunction hearing, the Respondent had not provided particulars of a bona fide triable cause of action. The Respondent merely relied on general statements in its grounds in support of the application. Further, the Respondent had yet to issue any Letter of Demand or notice to the Appellant for any claim. The Court of Appeal also notes that as at the date of the Fortuna Injunction Hearing, the Arbitration proceeding has yet to commence.
- The LJC also erred in holding that there was no admission of debt on part of the Respondent. The Respondent had in fact, admitted the debt but only denied liability to pay on the purported ground that it had a set-off of liquidated damages (LAD) claim which is greater than the sum owing to the Appellant. The Court of Appeal confirmed the principle that once a debt has been admitted, it cannot be considered as a disputed debt to warrant a grant of an injunction to restrain a winding up petition.
- The Court of Appeal affirmed the principle that an applicant must act timeously to protect his rights. On this point, the Court of Appeal found that there was a delay on part of the Respondent to file a stay of execution of the Adjudication Decision e. 42 days following the receipt of the Adjudication Decision. In addition, the Notice of Arbitration was served more than 7 months after receipt of the Adjudication Decision. Such conduct is inconsistent with the Respondent’s stance that they would suffer irreparable loss if injunction is not granted to restrain enforcement or winding up petition.
- In addition, the LJC failed to consider the Respondent’s financial capacity to settle the Adjudication Sum. Based on the Respondent’s audited account produced by the Appellant, it was clear that the Respondent was insolvent and did not have the capability to settle the Adjudicated Sum.
- Lastly, the Court of Appeal took the position that the purported negative impact on the Respondent should the winding up petition be not restrained is a baseless ground raised by the Respondent to avoid paying the judgment debt.
In conclusion, the Court of Appeal highlighted the objectives and legislative intent of CIPAA 2012 which revolved around speedy and efficient dispute resolution in the construction industry to safeguard the public interest.
Key Takeaways
The Court of Appeal’s decision in Sime Darby Energy has reaffirmed that a Fortuna Injunction will only be granted if:
(a) the applicant has a bona fide dispute of debt on substantial ground, so that presentation of the winding up petition would amount to an abuse of the process of the Court; and
(b) the winding up petition intended the Appellant would cause irreparable damage to the Respondent.
Further, the Court of Appeal’s confirmation of the strict application of the principles in Likas Bay serves to clarify the position that a winning party armed with an adjudication decision ought to have the right to present a Winding Up Petition based on an adjudication decision.
Note: As at the date of this article, the writer understands that the case of ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd [2020] MLJU 282 is pending appeal in the Court of Appeal. It will be interesting to see if the Court of Appeal in ASM Development will take a consistent view as in this case.
For further enquiries, please contact:
LAM WAI LOON (lam@hlplawyers.com)
JESSICA WONG (jessica@hlplawyers.com)
