The Court of Appeal in Likas Bay Precinct Sdn Bhd v Bina Puri Sdn Bhd  3 MLJ 244, held that a successful claimant in adjudication proceedings is not required to enforce the adjudication decision before issuing a statutory notice of demand. However, in ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd (Case No. WA-24NCC-363-07/2019), the High Court recently allowed the plaintiff's application for a Fortuna Injunction, which restrained the successful party in a CIPAA proceeding from presenting a winding-up petition against the losing party who failed to pay the adjudicated sum pursuant to the CIPAA decision.
This article summarizes the decision of the High Court in ASM Development regarding the nature of an adjudication decision and whether a losing party can resist a winding-up petition if it fails to pay the adjudicated sum.
The background facts of ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd (Case No. WA-24NCC-363-07/2019) are as follows:
1. ASM Development (KL) Sdn Bhd is a building contractor ("ASM Development") that appointed Econpile (M) Sdn Bhd ("Econpile") as the main contractor for a construction project. Disputes arose between the parties and Econpile commenced adjudication proceedings pursuant to CIPAA 2012. Econpile's payment claim was for a total sum of RM74,887,164.34.
2. Simultaneously with the adjudication proceedings, Econpile issued a notice of arbitration to ASM Development. Subsequently, ASM Development also issued a separate notice of arbitration to Econpile, which proposed that the two arbitration proceedings be consolidated and heard before one arbitrator.
3. In relation to the CIPAA proceedings, the Adjudicator decided in favour of Econpile and decided that ASM Development shall pay Econpile the following:
(a) The adjudicated sum of RM67,767,269.32, which was later corrected to RM59,767,269.32;
(b) Legal costs in the sum of RM150,000.00; and
(c) Costs of the adjudication proceedings in the sum of RM203,924.40,
(hereinafter collectively referred to as "the Adjudication Decision").
4. Four days after the delivery of the decision by the Adjudicator, Econpile served on ASM Development a statutory notice of demand under section 466(1)(a) of the Companies Act 2016 for payment of the amount owed to Econpile pursuant to the Adjudication Decision.
5. The statutory notice of demand informed ASM Development that it would be deemed unable to pay its debts should it fail to pay the sum demanded within 21 days from the date of the statutory notice of demand, and winding-up proceedings would be commenced against ASM Development.
6. ASM Development filed an originating summons against Econpile, which prayed for an injunction to prohibit Econpile from the presentation or filing of any winding-up proceedings ("Fortuna Injunction").
7. ASM Development further filed an originating summons to set aside the Adjudication Decision, and Econpile filed an application under section 28 of CIPAA to enforce the Adjudication Decision. ASM Development's application to set aside the Adjudication Decision was dismissed, and Econpile's application to enforce the Adjudication Decision was allowed by the High Court. Econpile obtained the order to enforce the Adjudication Decision five months after its statutory notice of demand was issued and served on ASM Development.
8. On 12.2.2020, the High Court allowed ASM Development's application for the Fortuna Injunction where Econpile was restrained from presenting a winding-up petition against ASM Development.
Situations Restraining a Winding-up Petition
The Courts will generally intervene to restrain the presentation of a winding-up petition (or if presented, to restrain the advertisement of the petition presented) should there be an abuse of the process of the Court. The learned High Court judge referred to the case of Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation of the Commonwealth of Australia  V.R. 83, wherein it was recognised that an abuse of the process of the Court may arise to warrant the issuance of an injunction to prohibit the presentation of a winding-up petition in the following two situations:
- Where the intended petition has no chance of success; or
- Where a claimant proposes to assert a disputed claim by a procedure, such as the presentation of a winding-up petition that would cause irreparable damage to a company, rather than by a suitable alternative procedure.
When it comes to the issue of "irreparable damage", there are two possible situations when an injunction may be issued to restrain the presentation of a winding-up petition, which are as follows:
- Where the petition is based on a debt that is genuinely disputed on substantial grounds; or
- Where the existence of the creditor's debt may not be disputed, but the company "genuinely claims on the substantial grounds to have a cross-claim equal to or exceeding the petitioner's debt".
The High Court found that ASM Development's disputes of Econpile's claims and ASM Development's counterclaims and/or set-offs are bona fide and upon substantial grounds. ASM Development's application for the Fortuna Injunction was therefore allowed.
Is an adjudication decision which has been ordered to be enforced, disputable?
A valid judgment of the court is indisputable. In addressing the irreparable damage issue, the court in ASM Development had to determine whether an adjudication decision is equal to a judgment of a Court of law and therefore indisputable.
The learned High Court judge made reference to the case of Pacific & Orient Insurance Co Bhd v Muniammah Muniandy  1 CLJ 947, wherein Ramly JCA found that as far as a judgment debt of a court of law is concerned, it cannot be regarded as a disputed debt:
" ... A valid and enforceable judgment of the court as in the present case, (unless set aside or stayed) cannot be considered as a disputed debt. The law is settled on this point. Therefore, an order for injunction as prayed for by the appellant in the present case, also cannot be granted under this principle."
For an adjudication decision, the learned High Court judge considered the wordings of section 28 of CIPAA in relation to the enforcement of an adjudication decision. Section 28 of CIPAA reads:
"Enforcement of adjudication decision as a judgment
- (1) A party may enforce an adjudication decision by applying to the High Court for an order to enforce the adjudication decision as if it is a judgment or order of the High Court.
(2) The High Court may make an order in respect of the adjudication decision either wholly or partly and may make an order in respect of interest on the adjudicated amount payable.
(3) The order made under subsection (2) may be executed in accordance with the rules on execution of the orders or judgment of the High Court."
The learned High Court judge then found that an adjudication decision, which has been ordered to be enforced, is nonetheless a disputable decision, as the nature of an adjudication decision is of "temporary finality", as opposed to a judgment given by the Court.
Mode of Enforcement Allowed under Section 28 of CIPAA
The High Court contrasted the wordings used in section 28 of CIPAA and section 38 of the Arbitration Act 2005 ("AA 2005"), being the statutory provisions in relation to the enforcement of an adjudication decision and arbitration award respectively.
Section 28 of CIPAA provides that a party may "... enforce the adjudication decision as if it is a judgment or order of the High Court", whereas section 38 of AA 2005 provides that an arbitration award is to be enforced by entry as a judgment in terms of the award:
"Recognition and enforcement
- (1) On an application in writing to the High Court, an award made in respect of an arbitration where the seat of arbitration is in Malaysia or an award from a foreign State shall, subject to this section and section 39 be recognized as binding and be enforced by entry as a judgment in terms of the award or by action."
Accordingly, the High Court took the view that because section 38 of AA 2005 provides that arbitration awards are to be enforced "as a judgment", the arbitration award is in effect transformed into a judgment of the Court.
On the other hand, section 28 of CIPAA does not provide that an adjudication decision may be entered "as a judgment", rather, an application under section 28 of CIPAA "only provides for the enforceability or enforcement of an adjudication decision "as if it is a judgment". It does not go so far as to deem or to allow for an adjudication decision to be converted into a judgment of the Court."
A CIPAA decision enforced under section 28 of CIPAA is not a judgment of the Court, but section 28 provides for the enforceability or enforcement of the adjudication decision "as if it is a judgment by various modes of enforcement under Order 45 of the Rules of Court 2012 such as enforcement by way of a writ of seizure and sale, garnishee proceedings, an order of committal, charging orders and the appointment of a receiver".
However, it does not include a statutory right of enforcement by way of winding up proceedings simply because the presentation of a winding-up petition is not a mode of enforcement or execution under Order 45 of the Rules of Court 2012.
ASM Development's claims against Econpile's disputes were Bona Fide & Upon Substantial Grounds
The High Court examined the facts of the case and noted the following:
- The statutory notice of demand was issued five (5) months before the order to enforce the adjudication was obtained. Accordingly, based on the fact that the statutory notice of demand was issued and the parties had already served their respective notices of arbitration, it must have been clear to Econpile that disputes in relation to the subject matter of the Adjudication Decision were being brought to arbitration.
- The claims raised in Econpile's notice of arbitration included payments awarded to Econpile under the Adjudication Decision.
- In ASM Development's notice of arbitration, it sought for a
declaration that Econpile had unlawfully terminated the
construction contract and claimed for, inter alia, the following:
- Liquidated ascertained damages ("LAD") claim of RM142,222,574.84 at the rate of RM49,840.00/day based on an architect's certificate of non-completion dated 7.4.2018;
- Cost of rectification amounting to RM3,459,480.00 and for all ongoing rectification works;
- Liquidated damages for end purchasers due to Econpile's delay in completing the project, amounting to RM98,037,211.23;
- Rental of RM496,584.00 which was incurred due to Econpile's alleged erroneous installation of a single storey portable site office on a neighbouring land;
- An omission to deduct from the payment due to Econpile or to take into account a sum of RM17,330,819.00 based on a Quantity Surveyor's valuation dated 30.1.2019;
- Repair costs of RM3,755,500.00 and RM1,625,200.00 for leaks due to cracks;
- RM1,988,004.20 transportation of excavated rocks which Econpile allegedly failed to transport;
- A sum of RM1,524,735.62 allegedly owed under what was described as a Block Purchase Agreement dated 25.8.2017.
- The total amount claimed by ASM Development exceeds the amount found to be due to Econpile under the Adjudication Decision.
- Econpile alleged that ASM Development, through the Supervising Officer, had interfered with or obstructed the issuance of interim certificates and that ASM Development had been in breach of the construction contract for failing to issue the relevant interim certificates within 30 days from its receipt of Econpile's progress claims. Based on the above, Econpile issued the notice of termination dated 13.3.2019.
- ASM Development issued its own notice of termination dated 23.4.2019 based on its allegation of breaches of contract by Econpile.
- The defences raised by Econpile in relation to ASM Development's claims.
In light of the above, the High Court Judge held that "there are disputes and arguments against each party's claims. However, based on the evidence made available, I am of the view that the Plaintiff's disputes of the Defendant's claims allowed by the Adjudication Decision and its counterclaims and/or set-offs, save for its claim of RM1,524,735-62 allegedly based on the Block Purchase Agreement, are bona fide and upon substantial grounds."
Distinguishing the case of Likas Bay
In the case of Likas Bay, Bina Puri obtained an adjudication decision against Likas Bay, and thereafter served a statutory notice of demand on Likas Bay. As Bina Puri contended that Likas Bay had neglected and/or failed to satisfy the adjudicated debt stipulated in the statutory notice of demand, Bina Puri presented a winding-up petition against Likas Bay on the grounds that Likas Bay was unable to pay its debt and it was just and equitable for Likas Bay to be wound up. The High Court granted the winding-up order, which was subsequently appealed to the Court of Appeal.
At the Court of Appeal, one of the issues raised by Likas Bay was that the adjudication decision had not been registered with the High Court, thereby rendering the winding-up notice premature. The Court of Appeal made reference to the language used under section 28 of CIPAA, and found that section 28 of CIPAA does not necessarily mean that an adjudication decision must be registered with the High Court prior to the issuance of a statutory notice. Accordingly, the Court of Appeal held that there was no provision in section 28 of CIPAA, which requires an adjudication decision to be registered as a judgment prior to the presentation of a winding-up petition.
In the case of ASM Development, the learned High Court judge made a clarification towards the decision in Likas Bay, to which he clarified that winding-up proceedings can still be commenced based on a debt that arose out of an adjudication decision provided that there is no genuine dispute towards the adjudication dispute. If there is a genuine dispute, an injunction may be allowed to restrain the presentation of a winding-up petition and the application will be subject to the principles referred to in the case of Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation of the Commonwealth of Australia  V.R. 83.
The High Court also found that Econpile's threat to commence winding-up proceedings against ASM Development was made in terrorem (by way of a threat) in order to secure payment of the Adjudication Decision.
In light of the above, the decision of the High Court in ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd (Case No. WA-24NCC-363-07/2019) does not contradict the decision in Likas Bay.
A successful claimant in an adjudication proceeding may still issue a statutory notice of demand for a debt due and owing based on an adjudication decision. However, an adjudication decision, regardless whether it is enforced, remains disputable and therefore, a statutory notice of demand based on such adjudication decision may still be subject to a Fortuna Injunction.
The case of ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd (Case No. WA-24NCC-363-07/2019) is currently subject to an appeal to the Court of Appeal. As such, there is a possibility that the High Court judgment may be overturned.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.