JUDGMENT

Edgar Joseph Jr FCJ:

The Background Facts

In this appeal the essential facts to be garnered from the affidavits filed fall to be stated within a short compass.

The Appellant ("the Lessor") had entered into an Equipment Lease Agreement dated 30 December 1988 ("the Agreement") whereby it had leased to the Respondent ("the Lessee"), one unit "Elite E 330 B Plastic Injection Moulding Machine" with accompanying parts upon the terms and conditions appearing therein. Pursuant to those terms, the Lessee had deposited with the Lessor a pre-paid rent of RM3,958 ("the prepaid rent") and a sum of RM64,500 ("the security deposit") as security for the due performance of the Agreement. Payment of the security deposit and the prepaid rent was evidenced by a memorandum dated 30 December 1988 ("the memorandum of deposit").

For brevity and convenience we shall, unless the context otherwise requires, refer to the pre-paid rent and the security deposit as ("the deposits").

Clause 14.1(g)(ii) of the Agreement provided, inter alia, that in the event of a Winding-up petition being presented against the Lessee, the Lessor shall be entitled by written notice to determine and end the lease and to retake possession of the equipment.

In the events which happened, on 27 March 1990, the Lessor gave notice of termination of the said Agreement on the ground that the presentation of the Winding-up petition constituted a breach of the Agreement and, at the same time, demanding payment of the amount outstanding after setting-off the deposits pursuant to cl. 4.3 of the Agreement which provided, inter alia, that if the Lessee is in default under any of the provisions of the Agreement, including the events referred to in cl. 14, then the Lessor shall be entitled to apply the deposits or any part thereof against the amount outstanding under the Agreement.

Then, on 4 April 1990, the Lessee was wound up and a Liquidator appointed. On, 23 April 1990, the Liquidator demanded from the Lessor the return of the deposits but the Lessor refused to comply.

The Proceedings

In the upshot, the Liquidator applied by way of originating motion for the refund of the deposits, which had been set-off by the Lessor. The Liquidator relied on the following grounds:

(1) the deposits paid by the Lessee belonged to the estate of the Lessee; this was so, because the Lessor being neither a secured creditor nor a preferential creditor within the meaning of s. 2 of the Bankruptcy Act 1967, and s. 292 of the Companies Act 1965, respectively, was not entitled to keep the same;

(2) the deposits represented the assets of the Lessee and thus the Liquidator must take under s. 233 of the Companies Act;

(3) the forfeiture by the Lessor of the deposits was void against the Liquidator and amounted to a fraudulent undue preference under s. 223 and s. 293 of the Companies Act, read with s. 53 of the Bankruptcy Act. The case of Lian Keow Sdn. Bhd. (In Liquidation) & Anor. v. Overseas Credit Finance (M) Sdn. Bhd. [1988] 2 MLJ 449 was cited in support.

We hope it is not an unfair summary of the submissions of counsel for the Lessee if we put his case thus: upon presentation of the petition - that being the material date - see, Sovereign Life Insurance v. Dodd [1892] 2 QB 673 - the claim in respect of the deposits had been reduced to a right of proof and that any other method of claiming the deposits would be barred by the pari pasu principle of distribution which is fundamental and all pervasive being enshrined in s. 264 and supported by ss. 222, 223 and 224 of the Companies Act. Furthermore, - so the submission ran - to give the Lessor the right of set-off, in the particular circumstances of this case would, in effect, give it an undue preference, over the general body of creditors, contrary to s. 293 of the Companies Act, read together with s. 53(1) of the Bankruptcy Act, and so the provisions of the Agreement which purport to give the right of set-off should be struck down as being in vio