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2011 MarsdenLR 1242
HIGH COURT (KUALA LUMPUR)
MOHAMAD ARIFF BIN MD YUSOF, J
TEE SIEW KAI – Plaintiff
Versus
AFFIN BANK – Defendant
SAMAN PEMULA NO D-24 NCC-294-2010
S.S. Soo (Paul Ong & Associates) For the plaintiff in Originating Summons No: D-24NCC-294-2010
Yoong Sin Min (Lee Weng Shinh with her) (Shook Lin & Bok) For the 1st defendant in Originating Summons No: D-24NCC-294-2010
T.H. Goh (Karen Tee with him) (Azhar & Goh) For the 2nd defendant in Originating Summons No: D-24NCC-294-2010
T.H. Goh (Karen Tee with him) (Azhar & Goh) For the plaintiff in Originating Summons No: D-24NCC-105-2010
S.S. Soo (Paul Ong & Associates) For the defendants in D-24NCC-105-2010
The validity of security documents created during the 'twilight period' of a company's winding-up is contingent upon proving fraudulent preference, requiring satisfaction of specific legal criteria regarding insolvency and creditor advantage.
Headnote:(A) Companies Act 1965 - Sections 293 and 294 - Bankruptcy Act 1967 - Section 53 - Dispute over sale proceeds of shares held in trust amidst liquidation of Kumpulan Berjaya Berhad - Liquidator claims invalidity of supplemental agreements and debentures due to fraudulent preference established within 'twilight period' - Receiver and Manager contends validity of charges created prior to winding-up proceedings. (Paras 1, 3, 5, 3)
(B) Fraudulent Preference - Concept explored in the context of the validity of security documents created during the twilight period prior to winding-up proceedings - Key elements for establishing fraudulent preference delineated, including insolvency at the time of execution and preference conferred over creditors. (Paras 1, 5)
Facts of the case:
The company in liquidation engaged in a dispute regarding the proceeds from the sale of Lion Land Berhad shares, with the Liquidator seeking to invalidate certain supplemental agreements and debentures created shortly before the commencement of winding-up proceedings. The core legal question revolves around whether these documents established a fraudulent preference according to the governing insolvency laws. (Paras 1, 3)
Findings of Court:
The court determined that the Liquidator did not successfully establish all conditions necessary to declare the supplemental agreements and debentures void as a fraudulent preference, allowing the Receiver and Manager’s claims regarding the shared proceeds. (Paras 5)
Issues: The primary questions addressed are whether the creation of the supplemental agreements and debentures constituted fraudulent preference and the timeliness of their execution relative to the winding-up petition. (Paras 1, 5)
Ratio Decidendi: The court concluded that despite being dated within the twilight period, the security documents were executed before its commencement, and the charges were valid as part of a bona fide banking transaction, reinforcing that insolvency alone does not equate to fraudulent preference. (Paras 5)
Result: Liquidator's claims dismissed; Receiver and Manager's claims allowed.
| Table of Content |
|---|
| 1. examination of financing terms and agreements (Para 1) |
| 2. conclusion on liabilities and costs associated (Para 5) |
MOHAMAD ARIFF BIN MD YUSOF J
Introduction
[1]There are two suits before this court which have been heard together since they raise common questions of law and fact. There are also common parties in that both the Liquidator and the Receiver and Manager of the Company concerned, namely Kumpulan Berjaya Berhad ("KKB"), are parties to the dispute. One of the parties, the Chargee Bank (Affin Bank Berhad), is the named litigant in one of the suits; the Bank is not a party in Suit No. D-22NCC-105-2010. This latter suit is instituted between the Receiver and Manager against the Liquidator of the Company.
[1]By common consensus, the parties have agreed to have as the main Suit No. D-22NCC-294-10, where the Liquidator is the Plaintiff and the Receiver and Manager and the Bank are Defendants.
[1]The immediate challenge posed by the Liquidator concerns the proceeds from the sale of what has been identified as the Lion Land Berhad shares (TLB shares") amounting to RM3,307,334.07 which are currently held in a stakeholder's Fixed Deposit account. The dispute is on the right to have custody of these proceeds. The Liquidator maintains, for reasons to be elaborated below, that it has the right to have custody over the shares and the proceeds arising from the sale. The Receiver and Manager, on the other hand, argues that the LLB shares and the proceeds resulting from the sale, are subject to either a valid fixed or floating charge, and as such the Receiver and Manager is the rightful party to have custody of the proceeds.
[1]In the suit instituted by the Liquidator, however, the issues framed and argued are broader than this immediate question of the proceeds. The Liquidator in Suit No. D-22NCC-294-10 is questioning the validity of two supplemental agreements executed between that the Bank and the Company as Borrower, as well as questioning the validity of two debentures created by the Company as security for the Bank in respect of the facilities grated.
[1]The legal complications, which have been fully argued before this court by counsel for all parties concerned, arise from the legal status of this Company in liquidation and its effect on the banking documents and charges created in view of their alleged creation during the so-called "twilight period". This "twilight period" refers to the six months prior to the commencement of the Winding-Up of the Company/Borrower which is taken to be the date of presentation of the Winding-Up Petition, namely 17.4.2000. It is perhaps conducive to clarity to set out the relevant critical dates in the Winding-Up proceedings. These dates are as follows:
| 1. Statutory notice under section 218 of the Companies Act presented by a Creditor Company (Terus Maju Industrial Hardware Sdn Bhd): | 25.2.2000 |
| 2. Winding-Up Petition presented against KKB: | 17.4.2000 |
| 3. Winding-Up Order made against the KKB: | 16.8.2000 |
| 4. Six months prior to commencement of Winding-Up: | 17.10.1999 |
[1]There is no dispute on the law that the six months is to be calculated from the date the Winding-Up Petition is presented against the company, being the date of commencement of Winding-Up proceedings.
[1]The legal issues in the two disputes therefore revolve around the effects of the Winding-Up proceedings on the facilities and security documents created within this so-called "twilight period". The relevant sections argued extensively before this court are sections 293 and 294 of the Companies Act 1965 , read together with section 53 and 54 of the Bankruptcy Act.
The Essence of the Dispute
[1]The kernel of this dispute relates to the important issue of "fraudulent preference" in the liquidation process. This is the essential basis on which the Liquidator is seeking to invalidate the relevant security documents and charges created (allegedly created during the twilight period) and by the same token is staking its claim to custody of the proc
