Stopping a Disputed Winding Up – Fortuna Injunctions

As we all know, a company which fails to its debts when they fall due could be wound up by its creditors. Usually, this process beings when the company is served a notice of demand pursuant to Section 466 of the Companies Act 2016 (“the s. 466 Notice”). Once the s. 466 Notice is served, the company has 21 days to pay its debt failing which a winding up petition can be filed by the creditor. 

Given that there is a strict 21-day requirement to make payment upon service of the s. 466 Notice, some creditors may take advantage of such procedure to file a winding up petition without any genuine ground in order to exert pressure on the company to pay a disputed debt.

So, what can the company do to prevent this?

What is a Fortuna Injunction?

Fortunately, there is relief as a company can apply for a Fortuna Injunction to counteract such an abuse. A Fortuna Injunction is an order from Court to prohibit or restrain a creditor from filing and presenting a winding-up petition after a threat to do so has been issued by the creditor (usually in the form of a s. 466 Notice). If the company successfully obtains an order for Fortuna Injunction, the creditor would be prevented from initiating a winding-up proceeding against the company. 

The law has long recognized that once a winding-up proceeding is commenced against a company, any intervention after the fact would often be too late to relieve the company of damage. As such, the Court would not want a company to be affected by a baseless or frivolous winding up petition which would likely fail. 

How does it work?

Prior to the filing of a winding-up petition based on a debt, a creditor must have issued the s. 466 Notice giving the company 21 days to pay the sum demanded. If this debt is disputed, the company must apply for a Fortuna Injunction within this crucial 21-day period to restrain the filing of the winding-up petition. 

The principles of a Fortuna Injunction were set out in the Australian case of Fortuna Holdings Pty Ltd v Deputy Federal Commissioner of Taxation (1976) 2 ACLR 349, wherein the court laid down two grounds needed to be fulfilled when a company applies for a Fortuna Injunction:

• Firstly, where the presentation of the petition might produce irreparable damage to the company and where the proposed petition has no chance of success; AND
• Secondly, where a petitioner has chosen to assert a disputed claim by a procedure which might produce irreparable damage to the company rather than by a suitable alternative procedure.

First Limb: “No Chance of Success”

In order to succeed under the first ground laid down in Fortuna, the applicant must satisfy both limbs of the principle:

• That the petition has no chance of success, as a matter of law as well as a matter of fact; AND
• The presentation of such a petition (which has no chance of success) might produce irreparable damage to the company.

The Court may find that a winding up petition has no chance of success where the debt in issue is a debt which is bona fide disputed on substantial grounds i.e., a debt which the company believes it does not owe at all. Such instances include: 

• Where there is no judgment obtained and the debt is being disputed; or
• Where the notice of demand and the threat to present a winding up petition is made for a collateral purpose to coerce payment of the debt. 

A bare allegation by a company that the debt is now owed is not enough to amount to a bona fide dispute. Instead, a company would need to show that it has a viable defence in law as well as prima facie evidence of the facts of the dispute; Lafarge Concrete (Malaysia) Sdn Bhd v Gold Trend Builders Sdn Bhd [2012] 6 MLJ 817

Second Limb: Irreparable Damage

Under the second ground in Fortuna, the creditor must have intended to initiate a winding-up proceeding on a disputed debt which would cause irreparable harm to the company. Examples of irreparable harm caused by a winding-petition include disruptions to ongoing projects or damage to the company’s business and reputation. 

A Fortuna Injunction will also be granted if it can be shown that there is a suitable alternative remedy or a more efficient dispute resolution mechanism to recover the disputed debt. This may include making a claim for payment in the Civil Courts and to obtain a proper judgment; Seawealth Nautical Sdn Bhd v Kekal Kaya Marin Sdn Bhd [2011] 9 CLJ 577 and Ecofitz Hartz Sdn Bhd v Poon Mun Cheong & Anor [2018] 1 LNS 947.

Notwithstanding, the issue of a suitable alternative procedure will only be considered if the debt is in bona fide dispute. If the debt cannot be disputed, it is immaterial and of no consequence whether or not the winding-up petition will cause irreparable damage to the company.