Stopping a Winding Up Petition by Depositing Monies into Solicitor’s Client’s Account

[A Case summary of SETIA FONTAINES SDN BHD v PRO TECH ENTERPRISE SDN BHD [2023] MLJU 628]

Key Points: 

1. Lower threshold of a prima facie dispute test when a statutory notice is presented and where there exists an arbitration clause;

2. Security deposited under the solicitors’ clients’ account rebutted the presumption of insolvency and inability to satisfy the alleged debt under Section 466 of the Companies Act 2016.

Brief Background Facts:

Setia Fontaines Sdn Bhd (“the Plaintiff”) appointed Pro Tech Enterprise Sdn Bhd (“the Defendant”) as the Main Contractor for a project located at Seberang Perai Utara, Pulau Pinang.

Payment disputes arose between the Plaintiff and the Defendant in connection with the Project, and this led to the Defendant initiating an adjudication proceeding against the Plaintiff pursuant to the Construction Industry Payment And Adjudication Act 2012 (“CIPAA 2012”), claiming for, among others, performance bond, loss and expense, unpaid invoices and progress claim totalling RM3,006,411.47. On 22.2.2022, the Adjudicator decided in favour of the Defendant (“Adjudication Decision”). 

Therefore, the Plaintiff filed an application to set aside the Adjudication Decision, whereas the Defendant applied to enforce the Adjudication Decision. On 26.8.2022, the High Court allowed the Plaintiff’s application to set aside in part (in respect of the performance bond sum), and enforced the Adjudication Decision save for the performance bond. Dissatisfied with the High Court’s decision, the Plaintiff appealed against the decisions to the Court of Appeal (“Appeals”).

Prior to the High Court’s decisions above, the Plaintiff had, on 27.4.2022, commenced arbitration proceedings against the Defendant.

On 1.7.2022, the Plaintiff further filed an application for a stay of the Adjudication Decision pending arbitration, pursuant to Section 16(1) of CIPAA 2012. On 21.9.2022, the High Court allowed the Plaintiff’s application for a stay pending arbitration in respect of Defendant’s claim for loss and expense amounting to RM624,405.91 (the sum to be placed in a fixed deposit account held by the Plaintiff’s solicitors). The balance sum of RM909,465.38 was not stayed (“Balance Sum”).

Then, on 19.10.2022, the Defendant issued a Statutory Notice to the Plaintiff to demand for the Balance Sum as well as costs and interests. In light of the Statutory Notice, the Plaintiff sought for a Fortuna Injunction to retrain the presentation of a winding up petition.

In determining whether to grant a Fortuna Injunction, the High Court Judge considered the following common elements and/or grounds of warranting a Fortuna Injunction:

a) whether there is a bona fide dispute on the debt, and if there is a genuine cross claim exceeding the debt;

b) whether the Plaintiff is a commercially solvent company and is able to satisfy the debt (if any); and

c) that winding-up is considered an extreme measure, and whether the Plaintiff would suffer irreparable harm if a winding up petition is presented or advertised.

Having considered the above, the High Court Judge allowed the Plaintiff’s application for a Fortuna injunction.

In coming to this decision, the High Court Judge had, in particular, considered the fact that prior to the injunction hearing and/or right after the Statutory Notice was presented, the Plaintiff had deposited into their solicitors’ client account the sum demanded under the Statutory Notice. The High Court Judge also noted that the Plaintiff has paid the High Court’s costs for the enforcement and setting aside proceedings to the Defendant.

In light of the above, the High Court Judge found that the presumption of insolvency and inability to satisfy the alleged debt under Section 466 of the Companies Act 2016, is rebutted. In addition, the High Court Judge was of the view that the payment of the alleged debt into the Plaintiff’s solicitors’ client account constitutes a security or a compounding of the sum demanded under the Statutory Notice. Thus, the petition, if presented, would have no chance of success, and is bound to fail.

It is also worth noting that the High Court Judge held that there is a ‘lower threshold of a prima facie dispute test in respect of the granting of a fortuna injunction when a statutory notice is presented and where there exists an arbitration clause’. 

Conclusion

Accordingly, this case appears to suggest that courts are inclined to allow a Fortuna injunction if the party who allegedly fails to pay the debt deposits the disputed debt amount into the solicitor’s clients’ account. However, one might wonder if a step towards this direction would then undermine the effectiveness of the adjudication mechanism under CIPAA 2012.

About the Author

Felicia Lai Wai Kim
Senior Associate
Civil Litigation, Construction Energy & Egineering, DIspute Resolution (Arbitration & Adjudication)
Harold & Lam Partnership
felicia@hlplawyers.com