To Restrain or Not To Restrain Winding-up Proceeding

We have assisted numerous client with winding-up proceeding:

Imagine this scenario: Company A is potentially facing a winding-up. To make matters worse, Company A is being bombarded with civil suits left, right, and center. These suits could potentially drain Company A of its assets in its entirety, leaving nothing to its creditors.

What can be done in such a scenario? In comes a statutory safeguard in the form of section 470 of the Companies Act1 (the Act).

What is it all about

Section 470 of the act states that:

“At any time after the presentation of a winding-up petition and before a winding-up order has been made, the company or any creditor or contributory may, where any action or proceeding against the company is pending, apply to the Court for an order to stay or restrain further proceedings in the action or proceeding, and the Court may stay or restrain the action or proceeding accordingly on such terms as it thinks fit.”

Essentially, section 470 is a safeguarding mechanism that is put in place to ensure that a company’s assets are preserved (in the event the company is wound up) and the company is able to distribute the assets accordingly to its debtors. This is achieved by putting all legal proceedings against the company on hold except that of the winding-up petition against the company.  As noted by the court2:

“The purpose of giving the court the power under s. 222 (now section 470) of the Act to stay further proceedings in action or proceeding (other than the hearing of winding-up petition pending before the court), is to enable the court to ensure that no creditor shall gain priority over others of his class.”

The law in regards to this section

When?Anytime after the presentation of winding-up and before the court makes a winding-up order against the company3.
Who can apply?The company itself, it’s contributory or even its creditors4.
Where?The application should be filed in the court where a legal proceeding is pending against the company, and not in the court where the winding-up petition was filed5.
Whats happens after (assuming the court allows the application)?Lodge with the Registrar of Companies the copy of the order within fourteen days from when the court makes such an order6.
Whats kinds of proceedings are temporary put on hold?All kinds of proceedings whether civil, criminal, or revenue, and will apply also to proceedings in foreign courts7.
What does the court have to say about such an application?The order to grant such an application will not usually be granted automatically. The order must be made judicially upon an examination of all the facts in the particular case8. For example:
  1. The application will not be granted if the object of applying for it appears to be merely to delay adjudication on a claim9;
  2. The application will not be granted if the legal proceedings have no relevance to the winding-up proceedings10;
  3. The application will be granted if it was necessary for the interest of rehabilitating a company and that the company should not become the victim of conflicting court orders11.

Why? The court noted that the threshold to satisfy such an application is high because the trial court is required to dispose of the cases within a specific time, expeditiously and fairly. In the interest of all parties, if the bonafide of the application is in doubt, a stay application must be dismissed immediately12.

In conclusion, while it is an effective weapon that can be utilized to prevent company assets from being dissipated unnecessarily, applicants who wish to rely on section 470 of the Act must thread this path cautiously, for the court will still have to consider all factors and balancing the interest of both parties before such an application will be granted. Simply put, failing to justify the need for it would render the applicant’s application futile.

We have assisted numerous client in regards to winding-up proceeding:

1. 2016.
2. Sri Jeluda Sdn Bhd v Pentalink Sdn Bhd [2008] 1 MLRA 357.
3. Section 470(1), Companies Act 2016.
4. Ibid.
5. International Construction & Civil Engineering Sdn Bhd v Jittra Sdn Bhd [2018] 1 LNS 1252.
6. Section 470(2), Companies Act 2016.
7. Re Vocalion (Foreign) Ltd [1932] 2 Ch 196.
8. Official Liquidator Golcha Properties (P) Ltd v Dharti Dhan (P) Ltd [1977] 47 Com Cases 420.
9. Official Liquidator Golcha Properties (P) Ltd v Dharti Dhan (P) Ltd [1977] 47 Com Cases 420.
10. Hind Syntex Ltd v Dewas Textile Mills (P) Ltd [1988] 1 Comp LJ 178.
11. Shree Vallabh Glass Works Ltd v Industrial Credit and Investment Corporation of India Ltd [1987] 62 Com Cases 101.
12. International Construction & Civil Engineering Sdn Bhd v Jittra Sdn Bhd [2018] 1 LNS 1252.