Overcoming Void Dispositions under Section 472 of the Companies Act 2016

by Lavinia Kumaraendran ~ 18 March 2020

Overcoming Void Dispositions under Section 472 of the Companies Act 2016

The laws and procedures that govern a company upon the commencement of winding up proceedings are extensive. Amongst others is the element of void dispositions postulated in Section 472 of the Companies Act 2016 (“CA 2016”). 

Section 472 stipulates that any disposition of property of the company, save for dispositions made by a liquidator or an interim liquidator in the lawful exercise of their powers, after the presentation of a winding up petition shall be void unless otherwise ordered by the Court. This section also prohibits the transfer of shares and an alteration in the status of the members of the company.

However, like every other rule, there are certain exceptions to this concept known as void dispositions.

The analysis below would focus on these exceptions and explicate methods of overcoming void dispositions under Section 472 of the CA 2016. There are essentially two broad exceptions to this rule; first, that the disposition was made by the liquidator or interim liquidator in accordance with the exercise of power conferred on them under Part I, Schedule Twelve of the CA 2016. Second, that the disposition was validated by the Court.

Part I of Schedule Twelve clarifies the various circumstances in which a liquidator may unilaterally exercise his power in relation to the disposal of company property. Amongst other more specific scenarios, a liquidator may make payments in the ordinary course of business of the company which are necessary to the carrying on of the affairs of the company. Such payment would include the settlement of utility bills and statutory fees. The exercise of a liquidator’s powers in this regard is clear and straight-forward. According to numerous case law, the phrase “ordinary course of business” is usually determined on a case by case basis according to the factual matric at hand. However, issues then arise when parties contend that such disposition was not made in the ordinary course of business and the Court is faced with deciding whether or not to void such a disposition or to make the relevant validation order.

The Federal Court in Wong Wee Kheong & Anor v Daya Bersama Sdn Bhd [2013] 3 MLJ 313 laid down two broad considerations in dealing with a validation order, namely 

  1. the transaction(s) must be beneficial to the general body of creditors; or
  2. it was just and fair to allow the transaction(s) with particular regard to the good and honest intention of the person(s) concerned.

The recent decision in Tan Poh Lee v. Tan Kim Choo Holdings Sdn Bhd & Anor Kim Choo Holdings Sdn Bhd & Anor [2018] MLJU 1014 applied the case of Wong Wee Keong and ultimately made a decision taking into consideration whether the payments made were in good faith and honest intention. Here, a hotel owned by the respondent company was under obligation to pay a sum ‘x’ to the company every month as a rental which would, in turn, be used to service a loan. Instead, directors of the company allowed the hotel to not pay rental and instead allegedly pay off obligations of the company directly. In a nutshell, the Court rejected a validation order for monies that were paid directly by the hotel to service an overdraft facility with monies that should have been paid to the company as rent. This was largely due to the fact that there was uncertainty as to the details, particulars and evidence to substantiate that such payments were actually made. The judgement in this case neatly reconciled with the rationale behind Section 472, that is to prevent the unwarranted dissipation of company assets that would largely prejudice creditors.

Additionally, Wong Chee Lin JC in applying the dicta of Mohd Nazlan Ghazali JC (as he then was) in CIMB Bank Bhd v Jaring Communications Sdn Bhd [2017] 4 CLJ 465, went on to state that a contravention of Section 223 (now Section 472 under the CA 2016) in relation to the wrongful disposition of assets may impose liability on a director under Section 305 (now Section 541 under the CA 2016) for misfeasance and breach of trust or duty as a director.

The Supreme Court in Lian Keow Sdn Bhd (in liquidation) & Anor v Overseas Credit Finance (M) Sdn Bhd & Ors [1988] 2 MLJ 449 per Seah SCJ held that the discretion of the Court to make a validation order is an unfettered one. Here, the Supreme Court made reference to the dicta of Vaisey J in Re Steane's (Bournemouth) Ltd [1950] 1 All ER 21 which in summary stipulated that every case must be dealt with on its own particular set of facts and the Court would be free to act according to what the judge opines to be fair and just. Essentially, where transactions are conducted bona fide with honest intentions, such transactions would not be shut out by virtue of Section 472 of the CA 2016. Transactions with regard to payments for insurers, bank charges, wages, charges to staff, utility bills and employee’s EPF and SOCSO, amongst others, will usually be validated by the Courts per the case of Tradebond (M) Sdn Bhd V Halim-O Construction Sdn Bhd [2005] 7 MLJ 624. Although left unexplained, the rational to this is likely that all these transactions are generally necessary to the running of the company and would likely satisfy the test of being in good and honest intention.

Conversely, there exists case law that suggest that such discretion of the Court to make a validation order is not completely unfettered. The case of Re Gray's Inn [1980] 1 All ER 814 COA, held that the court cannot exercise its discretion to make a validation order if the consequence of such an order would result in one or more creditors being paid in full at the expense of other creditors. Such a position was subsequently applied in the Malaysian case of Kimoyama Elektrik (M) Sdn Bhd V Metrobilt Construction Sdn Bhd [1990] 3 MLJ 309.

Additionally, although never expressly addressed, case law suggests that validation order almost always function retrospectively, after such transactions have been concluded. As in the case of Lian Keow, these would be instances where transactions have been concluded and one party seeks to either validate such dispositions or void said dispositions. The Court would then be faced with declaring such dispositions void or granting a validation order allowing the said disposition.

To conclude, the CA 2016 would prohibit the disposition of company property upon the presentation of winding-up petition. This would primarily serve to preserve the assets of the company pending the outcome of the said petition. However, there are certain circumstances where the liquidator may exercise his powers to dispose of company property particularly in the ordinary course of business. Alternatively, the liquidator or the company may apply to the Court for a validation order seeking the permission of the Court to execute such transactions or dispositions, primarily where such transactions are conducted in good faith with honest intention.