Winding Up Based on an Arbitral Award vs an Adjudication Award

A. Introduction

Upon issuance of a statutory notice under section 466(1)(a) of the Companies Act 2016, a creditor can present a winding up petition pursuant to sections 465(1)(e) and 466(1)(a) of the Companies Act 2016 if the debtor fails to pay the debt within 21 days.

When faced with a statutory notice, a debtor can file a Fortuna injunction to restrain the presentation of a winding up proceeding. The Fortuna injunction will be granted if the debtor can show that there is a bona fide dispute on the debt alleged.

Two recent High Court decisions shed light on whether a Fortuna injunction can be granted pending the registration or enforcement of an arbitral award and an adjudication award.

A creditor can only present a winding up petition after an arbitral award is registered. It is premature for a creditor to present a winding up petition if an arbitral award has yet to be enforced under section 38 of the Arbitration Act (“AA 2005“). In Mammoth Empire Construction Sdn Bhd v Kenwise Sdn Bhd [2020] 1 LNS 240 (“Mammoth Empire“), the High Court granted a Fortuna injunction pending the disposal of the applications to enforce and to set aside the arbitral award respectively.

On the contrary, in Kuddus Construction Sdn Bhd v Heng Guan Soon Piling & Construction Sdn Bhd (“Kuddus Construction“), the High Court held that a creditor can present a winding up petition even if the adjudication award is not registered under section 28 of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA“). A debtor can only show a bona fide dispute on the debt alleged after the adjudication award is set aside.

B. Mammoth Empire: Arbitral Award

In Mammoth Empire, the plaintiff filed an application for an ad interim Fortuna injunction to restrain the defendant from proceeding or acting upon the statutory notice issued, and filing the winding up petition.

The defendant is the plaintiff’s subcontractor for a project. The defendant commenced arbitration proceedings against the plaintiff for sums due. An arbitral award was issued in favour of the defendant for the sum of RM1,165,605.78. The plaintiff filed an application to set aside the award under section 37 of the AA 2005, and an application to refer questions of law to the High Court under section 42 of the AA 2005. The defendant, on the other hand, applied to enforce the arbitral award under section 38 of the AA 2005.

The defendant argued that the plaintiff’s application for an ad interim Fortuna injunction is tainted with bad faith as section 42 of the AA 2005 has been repealed at that point in time. The defendant also argued that its application for enforcement of the arbitral award could not proceed because of a last minute stay application by the plaintiff.

The defendant raised an interesting point, on the distinction between section 17 of the Arbitration Act 1952 (“AA 1952“) and section 36 of the AA 2005. It was argued that cases decided under section 17 of the AA 1952 were inapplicable, as the principle in these cases require that the arbitral award to be first registered as a judgment by leave of court. For instance, the Court of Appeal decision in Mobikom Sdn Bhd v Inmiss Communications Sdn Bhd [2007] 3 MLJ 316 (“Mobikom“).

It was argued that section 36 of the AA 2005 is distinct, in that the defendant is empowered to commence winding up proceedings even before the registration of the arbitral award.

The High Court held that the principles in Mobikom still applies. In Mobikom, the plaintiff similarly filed an application to set aside an arbitral award. In the interim, the defendant issued a statutory notice under an arbitral award. The plaintiff applied for a Fortuna injunction. The Court of Appeal granted the injunction and held that an application to set aside an arbitral award constitutes a bona fide dispute of an alleged debt.

The High Court in Mammoth Empire rejected the defendant’s argument on the distinction between section 17 of the AA 1952 and section 36 of the AA 2005.

Section 17 of the AA 1952 provides:

"Unless a contrary intention is expressed therein, every arbitration agreement shall, where such a provision is applicable to the reference, be deemed to contain a provision that the award to be made by the arbitrator or umpire shall be final and binding on the parties and the persons claiming under them respectively."

Section 36 of the AA 2005 provides:

"(1) An award made by an arbitral tribunal pursuant to an arbitration agreement shall be final and binding on the parties and may be relied upon by any party by way of defence, set­off or otherwise in any proceedings in any court.
(2) The arbitral tribunal shall not vary, amend, correct, review, add to or revoke an award which has been made except as specifically provided for in section 35.”

The High Court held that “there is in effect hardly any significant difference in the wording of the finality clause in both the sections, except for the usage of different words which for all intents and purposes convey the same meaning“.

The High Court in Mammoth Empire granted the plaintiff the Fortuna injunction as there is a serious and bona fide dispute between the parties as to the validity of the arbitral award. The High Court opined that it is premature for the defendant to commence winding up proceedings pending the disposal of the setting aside, reference and enforcement applications in relation to the arbitral award.

It is now clear that a winding up petition can only be issued after an arbitral award is registered and where there is no pending setting aside application before the court.

C. Kuddus Construction: Adjudication Award

In Kuddus Construction, the plaintiff filed an application for a Fortuna injunction to restrain the defendant from presenting a winding up petition based on an adjudication award between the parties. The adjudication award was obtained for the sum of RM321,600.40 in favour of the defendant.

The plaintiff argued that the alleged debt between parties is disputed. In so doing, the plaintiff relied on Mobikom.

However, the High Court in Kuddus Construction opined that Mobikom is inapplicable as it is a case on arbitration award while the case of Kuddus Construction concerns an adjudication award. The High Court held that when an adjudication award is concerned, the Court is typically duty-bound to uphold the adjudicator’s decision. This principle was adopted from the Court of Appeal case of Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd (Civil Appeal No. W-02(C)(A)-1496-08/2016), where it was held that “the Courts’ prima facie duty must be to uphold the adjudicator’s decision and not to look at it with a fine-tooth comb with the aim to find the faults in the adjudicator’s decision“.

The High Court in Kuddus Construction further held that it is now settled law, that a winding up petition can be issued based on an adjudication award even before enforcing such award under section 28 of the CIPAA. A debtor can only be entitled to a Fortuna injunction, showing bona fide dispute of the debt, once the adjudication award is set aside. This principle was elucidated by the Court of Appeal recently, in Sime Darby Energy Solution v RZH Setia Jaya Sdn Bhd [2021] 9 CLJ 880:

"[39] As to whether a successful party in an adjudication proceeding is entitled to present a winding up petition, the law is now settled with the advent of the Court of Appeal decision in Likas Bay Precinct Sdn Bhd v Bina Puri Sdn Bhd [2019] 3 CLJ 499; [2019] 3 MLJ 244, it was held that one may proceed to wind up a company based on an adjudication decision under CIPAA, even without having to first apply to enforce the same under s. 28 of CIPAA.
...
[48] It is important to bear in mind that the Court of Appeal in Likas Bay (supra) pronounced in no uncertain terms without qualification that a party who is armed with an AD in its favour would be entitled to present a winding up petition based on the award.
...
[50] … until and unless the AD is set aside, it can in law form the basis for the statutory notice which was the position in the present instance. 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. We are not convinced that an unproven cross-claim can be the basis for restraining the filing of a winding up petition based on a valid and enforceable AD.”

D. Conclusion

Parties must now bear in mind the difference in timing as to when a creditor can issue a statutory demand and thereafter file a winding up petition, if the winding up is premised upon an arbitral award, as opposed to an adjudication award.

It is relatively easier and faster for a creditor to recover its debt when obtaining an adjudication award as compared to an arbitral award. Even when a creditor successfully obtains an arbitration award in its favour, the debt recovery process can be easily impeded with the debtor filing a setting aside application.


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