Tutorial 8

QUESTION 3

(i) What is the test of a company’s inability to pay its debts? Discuss with reference to cases
under both the CA1965 and CA2016.

Answer:

The test of a company’s inability to pay its debts is called commercial insolvency.

In Weng Wah Construction Co Sdn Bhd v Yik Foong Development, the respondent’s profits
for 1993 were RM97,557 which would cover only three monthly payments at the rate of
RM30,000 a month as proposed by them. The court was of the view that the respondent had no
assets to meet its current liabilities and were therefore commercially insolvent. It was more than
obvious that they are unable to pay their debts,

In the case of Malayan Plant Pte Ltd v Moscow Norodny, the court held that the ability of a
company to meet current demands upon it, goes to the solvency or otherwise of a company

In the case of MBF Finance v Sri Hartamas Development Sdn Bhd, the company contended
that it was not insolvent as it had many assets although they were all locked up and that the
company has assets amounting to Rm597 million. The court held that if the company had assets
but they were all locked up in landed properties, the company had failed to show that it was not
insolvent.

Similarly, in Leon Keow Sdn Bhd v Overseas Credit Finance, the court held that the question
is not whether the debtors assets exceed his liabilities as appeared in the books of the debtor,
but whether there are moneys presently available to the debtor, or which he is able to realize in
time, to meet the debts as they become due. It is not sufficient that the assets might be realizable
at some future date after the debts have become due and payable

In Re Hong Huat Realty v Hong Huat Realty, it was stated that if a company is unable to pay
its debts, it means it is insolvency in the commercial sense; the inability to meet current demands
irrespective if the company has assets which is realized would enable it to be discharged.
Therefore, a company may be wealthy but be insolvent at the same time as the company is
unable to liquidate the assets to meet its current demands of debts. it is insufficient for a
company to just list down all the assets and assert that its company is able to meet is debts. As
stated in the case of Asian Shield Warehouse Sdn Bhd v Darumalinggam Sinniah , in order to
assess the solvency of the plaintiff, a complete account of the plaintiff’s assets and liabilities
have to be submitted

in Illumina Sdn Bhd v Goldenlink Engineering Sdn Bhd , the respondent in this case did not
dispute that it has failed to comply with the statutory demand issued by the petitioner under
s.466(1)(a) of the CA 2016. The court held that the mere fact that the respondent is still in active
business is no proof that it has funds of assets presently available or which the respondent is able
to realize in time, to meet the debts become due. If such was not shown, the respondent is
commercially insolvent.

(ii) Under what circumstances can a company refuse to abide by a demand for payment?

Answer:

A company can refuse to abide by a demand for payment if the debt is disputed on substantial
grounds. However, a company has to show that it has grounds for disputing such sum. As seen in
the case of Ann Joo Metal v Pembenaan Chahaya, the court held that a company would not be
protected from a winding up order under s.218 (now s.466) simply by purporting to dispute
a sum claimed in the notice of demand without substantiating that it was a real bona fide dispute.

In Asian Shield Warehouse v Darumalinggam Sinniah, the court allowed for the application
of interlocutory injunction as the plaintiff was not commercially insolvent so not to be presumed
unable to pay its debts and the debt claimed was disputed on substantial grounds as the debts had
been repaid

Another situation where a company can refuse to abide the payment is when the notice of
demand was not serve to the company. According to rule 18 of CWR, the notice must be served
or sent by prepaid post to the company’s last known address . In the case of Weng Wah
Construction S/B v Yik Foong Development S/B, if there is no proof of actual delivery, there
cannot be said to be a service of the notice of demand to the company.
(iii) Discuss the powers of the Court to grant. a stay of proceedings in a winding-up.

Answer:

There are two forms of stay proceedings; before a winding up order and after a winding up order.

The provision that governs stay of proceedings before a winding up order is under section 470,
it states that where any winding-up action or proceeding is pending against the company it may
apply to Court for an order of stay or restrain further proceedings by way of summons in
chambers supported by affidavit and the Order must be lodged with the Registrar CCM within
14 days of the making of such Order.

In Ga-Seng Paper Marketing Sdn Bhd V Percetakan Warni Sdn Bhd, the court held that
upon granting a stay, several factors has to be looked into. In this case, the company has failed
to prove that it could be commercially solvent if the stay is granted and there was also a delay
of more than eight months in making the application to stay. Therefore, the application for stay
was refused as there was unexplained and excessive delay in making the application to stay and
based on this ground alone, the court is of the opinion that it constitute a ground for refusal.

In Sri Jeluda S/B v Pentalink S/B, Section 222 of CA 1965 only gave the court the power the
power to stay further proceedings in the action of proceedings other than the hearing of the
winding up petition pending before the court.

A power to grant a stay after winding up order is made can be seen under section 471 of the CA.
S.471 CA2016 states that where an Order of stay is granted after a winding-up order or
appointment of interim liquidator, then no action can proceed against the company except by
order of Court. The prerequisite for this section is that an order must have been granted first
before a stay can be given.

In the case of Homewest Sdn Bhd v Vision Peturns Sdn Bhd, it was held that a winding up
petition should be disposed of expeditiously and not stay of lengthy adjournment unless there
are special circumstances. In this case, the respondent had failed to pay any amount of its
debts despite being served with the statutory demand , therefore, the respondent is deemed
to be
unable to pay its debts and since the winding up order has not been made, the respondent by
applying section 471 for a stay is wrong in law.