Creditor’s Voluntary Winding-Up: When There is No Majority in Number and Value

INTRODUCTION

Under Section 450 of the Companies Act 2016, the creditors in a Creditor’s Voluntary Winding Up[1] (“CVW”) are given the power to select their liquidator of choice.  This statutory provision expressly gives preference to the creditors’ choice of liquidator above and beyond the company’s own choice.

When a company initiates a CVW to bring the business to an end, it is required to call for a creditors’ meeting to determine important matters such as the appointment of a liquidator to carry out the company’s liquidation process.  

Under the Companies Act, the Companies (Winding-Up) Rules 1972 (“Winding-Up Rules”) sets out the procedures and rules which apply in matters relating to the winding up of a company. These rules govern various aspects of the winding-up process, which include the creditors’ meeting. Specifically, Rule 119 of the Winding-Up Rules provides for the manner in which a resolution may be passed at a creditors’ meeting:-

“At a meeting of creditors or contributories a resolution shall be deemed to be passed when a majority in number and value of the creditors or, as the case may be, contributories present, personally or by proxy, and voting on the resolution, have voted in favour of the resolution, the value of the contributories being determined according to the number of votes conferred on each contributory by the regulations of the company.”

As seen above, there needs to be a majority in both number and value in order for a resolution to be passed in a creditors’ meeting. However, what happens when there are only 2 creditors for a company in liquidation, and these creditors do not see eye to eye with one another? Such a scenario arose in the case of Coca-Cola Refreshments Malaysia Sdn Bhd v Leejin Capital Sdn Bhd [2021] MLJU 1700[2] (“Coca-Cola Refreshments Malaysia”), where the appointment of a liquidator was successfully challenged by a creditor who is the majority creditor in value but not in number.

A TALE OF TWO CREDITORS

In Coca-Cola Refreshments Malaysia, the Plaintiff (Coca-Cola) commenced legal proceedings against the Defendant (Leejin Capital) after it failed to pay a sum of approximately RM1.4 million being the amount owed for goods sold and delivered. 2 weeks after the suit was filed, Coca-Cola was notified that Leejin Capital had initiated a CVW pursuant to Section 441 of the Companies Act 2016. As a result, Coca-Cola had to withdraw the suit against Leejin Capital. About a month later and pursuant to the CVW, Leejin Capital called for a creditors’ meeting (“Creditors’ Meeting”) during which the following matters (among others) were informed to the parties in attendance:-

1. Leejin Capital only has 2 creditors, namely, Coca-Cola and another individual who is a former director and shareholder of the company (to be referred as TSD in this article); and

2. The value of the debts owed by Leejin Capital to Coca-Cola is higher than what was owed to TSD (hence, Coca-Cola is the majority creditor in value).

During the Creditors’ Meeting, Leejin Capital proposed for one Mr Lim (LTH) to be appointed as the liquidator whereas Coca-Cola (as the majority creditor in value) nominated one Mr Onn (OKH) to be the liquidator. It is pertinent to note at this juncture that TSD did not nominate any person for the liquidator position, nor did he support Coca-Cola’s nomination. Instead, he had seconded Leejin Capital’s proposal for LTH to be appointed as liquidator.

The Chairman of the Creditors’ Meeting (who is also a representative of the company) took the position that since there was no seconder to Coca-Cola’s proposal for OKH (as well as no majority in number as required by Rule 119 of the Winding-Up Rules), the liquidator to be appointed would be LTH. This was objected to by Coca-Cola and it argued that its nomination of OKH should be allowed since it is the majority creditor (in value) and that the Companies Act did not require a seconder for the nomination.

Despite Coca-Cola’s objections, the Chairman rejected the nomination and proceeded to appoint LTH as the liquidator. Coca-Cola then filed an action in the High Court to challenge the appointment of LTH as liquidator and sought for his removal from the position.

THE HIGH COURT’S DECISION

The Creditors’ Choice Prevails

 In allowing Coca-Cola’s application, the High Court also declared that LTH’s appointment as liquidator was invalid. In reaching its decision, the Judge referred to the case of QB Khidmat Teguh Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd & Anor [2017] 8 MLJ 376 and held that the creditors’ choice of liquidator prevails over that of the members of a company. The voting is also based on the value of the creditors’ claims.

The Applicability of Rule 119 of the Winding-Up Rules

Crucially, in dealing with the issue of Rule 119 of the Winding-Up Rules which required majority in both number and value in order for a resolution to be passed, the Judge held that Rule 119 must be read subject to Section 521(2) of the Companies Act 2016, which states that regard shall be had to the value of each creditor’s debt. Furthermore, the Judge also found that Rule 119 did not provide for a situation similar to that in Coca-Cola’s case – where there are only 2 creditors. It was observed that in such a scenario, there can never be a majority in number for the purposes of voting, especially if the 2 creditors do not agree with one another:-

“[38] I hold that the said principles enunciated by His Lordship Mohd Nazlan in QB Khidmat Teguh Sdn Bhd (supra) that a creditors choice of liquidator prevails over that of the members of a company and that the voting is based on the value of the creditors claims as being equally applicable in a matter which concerns the present section 450 of the Companies Act 2016.

[39] I further hold in amplification and not in derogation of the said QB Khidmat Teguh Sdn Bhd (supra) that in a situation where there are only 2 creditors in a creditors meeting, the application of Rule 119 of the Companies (Winding Up) Rules 1972 in respect of a majority in number and value of the creditors must be read subject to the provisions of section 521(2) of the Companies Act 2016 i.e “regard shall be had to the value of each creditor’s debt” and that the said section must prevail over the Companies (Winding Up) Rules 1972 which does not provide for a situation similar to that as is before this Court i.e where there can never be a majority in number voting due to the fact that the company has only 2 creditors in number and where there will be an obvious impasse created when the said creditors are unable to agree with one another.

[40] My reasoning for the above is premised on that the provisions in a statute, being the primary legislation, must always prevail over that of the rules which are contained in a subsidiary legislation…”

No Need for a Seconder

The Court also held that Leejin Capital’s contention that there was a need for a seconder before Coca-Cola’s nomination could be put to a vote is erroneous as the wordings of Section 450 of the Companies Act 2016 and Rule 119 of the Winding-Up Rules did not require such a seconder. However, the Court also held that even if a requirement for seconder did in fact exist, it would be unfair to insist on having a seconder in the circumstances of Coca-Cola’s case. It would also be unjust as the effect of insisting on a seconder would be to deprive Coca-Cola of its statutory and legal right pursuant to Section 521(2) of the Companies Act 2016, where regard is to be had to the value of its debt as a majority creditor in value of Leejin Capital.

There Must Be a Nomination

An additional point to highlight from Coca-Cola’s case is the court’s finding that LTH was never nominated by any party at the Creditors’ Meeting. Upon reviewing the minutes of the Creditors’ Meeting, the Court found that LTH was pushed through as the liquidator purely on the basis of the Chairman putting his name to a vote and TSD voting on the same.

The minutes did not mention that a nomination was made at the Creditors’ Meeting to nominate LTH as a liquidator. In this regard, the Judge placed emphasis on the wording used in Section 450 (1) to (3) of the Companies Act 2016 and found that the word “nominate” was expressly used. Therefore, any person to be appointed as a liquidator must be nominated. As there was no nomination by any party for LTH to be appointed as the liquidator, the court held that this was further evidence that his appointment was invalid.

The Defendant’s Actions at the Creditors’ Meeting

An interesting point to note from the judgment of Coca-Cola Refreshments Malaysia is that the Court also took into account Leejin Capital’s actions at the Creditors’ Meeting vis-à-vis the Chairman, its solicitors, TSD as well as the representatives of LTH. It was observed by the Judge that they had effectively shut out and prevented Coca-Cola from exercising its right to appoint a liquidator of its choice.

It would be virtually impossible for Coca-Cola to obtain a seconder to its nomination of OKH since there was only 2 creditors, leading to it being “checkmate” in the Creditors’ Meeting. TSD’s position as a creditor and related party to Leejin Capital also led the Judge to the “inescapable conclusion” that he is an interested party in ensuring that LTH would be voted in as liquidator. Based on this and the findings mentioned earlier, the Court granted the primary reliefs sought by Coca-Cola which included the appointment of OKH as the liquidator for Leejin Capital.

CONCLUSION

The High Court’s judgment in Coca-Cola Refreshments Malaysia is a welcomed decision as it enforces the rights accorded to creditors in a CVW to appoint their liquidator of choice. It is also in line with the court’s decision QB Khidmat Teguh, in which the court observed that the relevant provisions under the Companies Act are meant to protect the creditors in a CVW:-

“[127] In my view, it certainly cannot be emphasised enough that the mechanism and process governing a creditors’ voluntary winding up or creditors’ voluntary liquidation (‘CVL’) is enacted to protect exactly what it says — the creditors’ rights in liquidation, and for that reason the interests of the creditors, collectively, are decidedly at the forefront during this process, for the overarching objective is after all the realisation of company assets and payment of dividend to the creditors.

[128] The various provisions which I have discussed earlier in this judgment are all intended to ensure the CVL process proceeds in a fashion that is not detrimental to the interests of the creditors. The decision to liquidate is for the members to make, and the only powers available to the creditors are those related to the supervision of the liquidation exercise. And the starting but key point is the power to nominate the liquidator for that process, at the first meeting of the creditors.”

This decision also serves as a good reminder that the legal rights granted to creditors under the Companies Act 2016 in a CVW must be upheld and their exercise of such rights should not be prevented without good reason or basis. It further shows that the courts would not hesitate to intervene in situations such as Coca-Cola’s case to prevent any injustice from occurring. Any attempt to unreasonably deny the creditors their rights will not be allowed.