Introduction
When a company is served with a Notice pursuant to Section 466 of the Companies Act 2016 by a creditor without Judgment, it generally means that there is a claim of a minimum debt of RM50,000.00 [The Minister of Domestic Trade and Consumer Affairs through the Gazette Notice Prescription of Amount of Indebtedness of Company under Paragraph 466(1)(a) (Gazette Notification No. 4159/2021) has set the amount of indebtedness to an amount exceeding RM50,000 with effect from 1st April 2021] that has yet to be settled by the company to the creditor.
The Notice is the first step by the creditor to initiate a winding-up proceeding against the company, by demanding for the debt owed to be paid within 21 days, failing which the company may be presumed to be insolvent and unable to pay its debts.
A company that intends to dispute the debt and resist winding-up proceedings, has two possible options:
First: – Fortuna Injunction
A Fortuna Injunction is a specific order by the Court directing that the creditor be restrained from presenting a winding-up petition against the company. If successful, the company would be able to prevent the creditor from commencing winding-up proceedings against it.
Of course, there must exist reasonable grounds for a company to apply for the Fortuna Injunction, which was established in the case of Fortuna Holdings Pty Ltd v Deputy Federal Commissioner of Taxation [1978] 2 ACLR 349 (which is also the name the injunction is based on). In that case, the Court explained that there are two grounds in which a company can be granted a Fortuna Injunction:
• 1st ground: where the winding-up petition, if presented, has no chance of success, or is bound to fail; or
• 2nd ground: the creditor is intending to present a winding-up petition on a disputed claim, which will produce irreparable damage to the Company, rather than by a suitable alternative procedure
A Fortuna Injunction is a powerful tool to restrain the recovery of disputed debt in unwarranted fashion by the creditor. However, it is a discretionary remedy whereby the key to success in obtaining the Fortuna Injunction is in the company having acted promptly and proved that the winding-up petition is or will be presented with a disputed debt or has no chance of success.
Second: – Opposing the Winding Up Petition during hearing
The second recourse is to oppose the winding-up petition during the day of the hearing. In the hearing, the one who alleged that there is a debt owing is known as the petitioner while the one whom the debt is made against is known as the respondent.
Where the company opposes the winding-up petition during the hearing, they must establish that the debt is “bona fide” disputed i.e., the petition is defective, the debt is unsubstantiated, the petitioner failed to prove that it is a creditor, the absence of any judgment to support the alleged debt, the respondent is commercially solvent and financially capable of paying except that the debt is disputed, the petition is an abuse of court process or any other possible grounds not specifically mentioned herein to which the respondent can rely on .
The company would need to engage a lawyer to draft and file affidavits in reply and written submissions in opposing a winding-up petition through a hearing. The respondent would also need to exhibit proper evidence and documentation to prove that there is a substantial dispute over the debt which should have been properly litigated first instead of going through the winding-up route.
Conclusion
Winding-up proceedings can be extremely detrimental to the business of a company and directors ought to take urgent steps to save the company, especially in cases where the debts claimed by a creditor is substantially disputed. As such, if a company is presented with a statutory notice of demand, the directors should immediately consult its lawyers to determine the necessary steps to be taken.
Disclaimer: This article is for informational purposes only and does not constitute any legal advice. If you have any questions or require further information on this matter, please do not hesitate to contact us directly.