Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2020 MarsdenLR 812

FEDERAL COURT PUTRAJAYA
DUBON BERHAD – Appellant
Versus
WISMA COSWAY MANAGEMENT CORPORATION – Respondent
[Civil Appeal No: 02(f)-50-05-2019(J)]

Petitioner Advocates:Andrew Teh,Tan Chong Pei ,Respondent Advocate: Sivabalan,Goh Wan Ping,M/s Mastura Partnership

Section 77 of the Strata Management Act does not confer secured creditor status on debts owed to management corporations within the insolvency framework, reaffirming that such debts remain as unsecured within the statutory priority regime.

Headnote:(A) Strata Management Act 2013 – Section 77 – Companies Act 1965 (now Companies Act 2016) – Whether s 77 elevates debts under SMA to secured status in insolvency – The court held that s 77 does not accord priority but merely guarantees debt recovery, remaining an unsecured debt under insolvency laws. (Paras 9, 24, 27, 28, 34)

(B)

Insolvency Law – Principles relating to preference and priority in payments – The importance of the pari passu rule is paramount, ensuring equal treatment of unsecured creditors. (Paras 35, 36)

(C)

High Court decision – The High Court rightly declined the MC's application for leave to proceed as the claim could be resolved through normal winding-up procedures. (Paras 40, 42)

Judgement Key Points

Key Points: - Section 77 of the Strata Management Act 2013 does not create secured creditor status or priority over assets in insolvency (!) (!) (!) . - Debts owed to a management corporation under Section 77 remain unsecured and are subject to the statutory insolvency regime and pari passu distribution (!) (!) (!) . - The word "guaranteed" in Section 77 signifies a statutory obligation to pay undisputed debts, not a secured or priority status (!) (!) (!) . - Recovery of the debt does not require separate court proceedings; it can be adequately handled through the winding-up process by lodging a proof of debt (!) (!) (!) . - Granting leave for separate proceedings was inappropriate because the claim was straightforward, capable of resolution in winding-up, and did not justify additional litigation (!) (!) . - The pari passu rule and the priority framework under the Companies Act must be respected, and management corporations are treated as unsecured creditors (!) (!) (!) .

Does Section 77 of the Strata Management Act 2013 create a secured creditor status or priority right equivalent to a secured debt in insolvency?

What is the correct approach for a management corporation to recover outstanding sums from a company in liquidation?

Do insolvency principles such as the pari passu rule and statutory priority regime apply to debts owed to a management corporation under Section 77?

JUDGMENT

Nallini Pathmanathan FCJ:

Introduction

[1] In the field of insolvency, the law on the rights of secured and unsecured creditors, as well as that relating to priorities and preference payments, is well settled in statute, and consequently by case-law, which provides both certainty and judicial precedent.

[2] This appeal was necessitated by reason of a failure to apply these well-settled principles. This judgment serves primarily to restate certain fundamental principles of law in this area.

[3] The sole leave question allowed by this court on 9 May 2019, reads:

"Whether the right of a Joint Management Body or a Management Corporation to collect and receive payment from a proprietor under ss 33 and 77 of the Strata Management Act 2013 respectively, gives it a lawful preference as a secured creditor over the assets of a company in liquidation?"
[Emphasis Ours]

[4] In essence the question before us relates to whether s 77 of the Strata Management Act 2013 (' SMA ') has the effect of elevating the status of a debt incurred under it, to that of a secured or preferential debt within the insolvency regime, where the proprietor of the parcel concerned is in liquidation, or is bankrupt.

[5] In other words, do payments received or recovered by a Management Corporation ('MC') as a debt, from the proprietors of properties held under the SMA who are in liquidation or bankrupt, enjoy priority or preference over other creditors, equivalent to that accorded to secured creditors under an insolvency regime.

[6] This question requires a consideration of s 77 of the SMA , and how its provisions are to be construed in light of the insolvency regime as statutorily governed at the material time by s 292 of the Companies Act 1965 (now s 527 of the Companies Act 2016 ).

[7] Section 77 of the Strata Management Act 2013 (' SMA 2013' or 'the Act') provides (in part):

"Recovery of sum as a debt due to management corporation or subsidiary management corporation
77. (1) The payment of any amount lawfully incurred by the management corporation or the subsidiary management corporation in the course of the exercise of any of its powers or functions or carrying out of its duties or obligations shall by virtue of this section be guaranteed by the proprietors for the time being constituting the management corporation or the subsidiary management corporation.
(2) ...
(3) ...
(4) ..."
[Emphasis Added]

[8] The principal argument in the courts below was that the phrase "shall by virtue of this section be guaranteed" in s 77(1) of the SMA 2013 supports the interpretation that the sum outstanding and due to the MC or the Joint Management Body ('JMB') constitutes a debt which is accorded priority such that it enjoys the status of a secured debt within the insolvency regime.

[9] We heard this appeal on 5 November 2019, unanimously allowed it, and set aside the decision of the court of Appeal. We answered the leave question in the negative, meaning that s 77 SMA does not accord any form of priority or preference in relation to payments received by a MC from an insolvent parcel proprietor.

[10] This judgment states the reasons for our decision.

Salient Background Facts

[11] We adopt the summary of facts in both parties' submissions with modification. The appellant, Dubon Berhad (in liquidation) ('the company') is the beneficial owner of a lot known as Unit 22.05 ('the Unit') in Wisma Cosway. The respondent, Wisma Cosway Management Corporation, is the management corporation of Wisma Cosway ('MC').

[12] The company was wound up by an order of the Johor Bharu High court dated 18 January 2000. As part of the process of realising the company's assets, which included the Unit, the liquidators required the execution of the transfer of the Unit into the company's name. This was necessary for the purposes of a sale of the subject property. The liquidators were exercising their statutory duties to sell the property so as to bring in and pay off the debts of the company in liquidation.

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