Tutorial 8

Question 4

Timber Sdn. Bhd.(TSB) contracted with All Machines Sdn. Bhd.(AMSB) for the purchase of wood cutting
machines for RM380,000. Mr. Woods the Managing Director of TSB executed a guarantee in favour
AMSB for the said amount. Delivery of the machines was made over a period of several months. TSB
rejected some of the machinery as not meeting specifications. Unfortunately, neither TSB nor AMSB
kept any records of the deliveries or rejections or redeliveries if any. Consequently TSB alleged that only
wood cutting machines worth RM350,000 was delivered. However, despite negotiations AMSB issued a
bankruptcy notice against Mr. Woods for RM380,000 with interest at 12% per month and costs until
final settlement.

Answer:

The first issue is whether ASMB can issue a bankruptcy notice against TSB?

Section 5 (3) of Insolvency Act 1967 states that, unless the creditor has received leave from the
court, the creditor is not entitled to bring any bankruptcy proceedings against a guarantor other than a
social guarantor. Therefore, the question that needs to be established is whether ASMB is a creditor. In
the case of Ganda Holdings Bhd v Pamaron Holdings Sdn Bhd, the court found that creditors include a
creditor whose debt is not genuinely disputed by the company on substantial grounds. Furthermore, in
the case of Jurupakar Sdn Bhd v Kumpulan Good Earth, the respondent company in this case challenged
the alleged debt alleged by the petitioner, alleging that the alleged debt emerged on the part of the
petitioner as a consequence of some breaches of contract and that, in reality, the petitioner is in debit
balance. In addition, in the same case, the court held that it is common ground that there is no
judgement debt and whether the petitioner is a creditor and the respondent company is the debtor is
the matter for the court to decide. If he merely has a cause of action for unliquidated damages for
breach of contract against the company, an individual may not petition as a creditor.

It is evident from the facts that the respondent company denied the alleged debt alleged by the
petitioner and argued that it was in a debit balance for the petitioner. In these cases, as specified in
Section 217 of the Companies Act 1965, the petitioner is not a creditor. This is further confirmed by the
case of Mark Jaya Engineering Sdn Bhd v LFY Construction Sdn Bhd, in which the court held that a
petitioner would not qualify as a creditor where there was a serious debt dispute.

The contract between TSB and AMSB, serving as the guarantor for AMSB, was entered into by
Mr Wood. The loan for benefit is the essence of the guarantor, so Mr. Wood falls into the other
guarantor category since the arrangement is for commercial purposes. The bankruptcy notice against
Mr. Wood can be issued by AMSB because only the lender has the power to issue the bankruptcy notice.
However, the evidence claimed by AMSB were that some of the wood cutting machines were AMSB
shall present its proof on any deliveries or rejections or re-deliveries records if it does not meet the
requirements and only RM350,000 worth of machine was delivered. Clearly, it is there that AMSB and
TSB are unable to provide proof and there is a dispute over the contract and there is no settlement of
the amount owed. The AMSB was unable to claim, under Section 465(1)(e) of the Companies Act, that
the TSB was unable to pay the debts within 12 months with a clear and determined amount that the TSB
was unable to pay. TSB was already owed to AMSB, but AMSB did not qualify as a lender and presented
TSB with a winding-up company.

In conclusion, whether ASMB cannot issue a bankruptcy notice against TSB since AMSB did not
qualify as a lender.

The second issue is whether winding up petition is based upon final judgement?

For ABSB to present a winding up petition to TSB, it is not necessary that ABSB should make his
judgement against the company a final judgment. Even if the judgement is not a final judgement, a
winding up petition could still be issued to TSB because a winding up petition does not based upon final
judgement even though lawyers will normally get final judgement before they file in winding up petition.
However, final judgement is not mandatory for winding up petition to be issued. Even though section
466 (1) (a) of CA 2016 provides that petition for winding up generally made after a final judgement, it
must also be taken note that section 466(1)(a) also provides that winding up petition may also be
presented without a final judgment but after the service of a notice of demand. If the debtor does not
respond within 21 days as stipulated in the section, then it will presume that the debtor company is
unable to pay its debts because the test of ‘inability to pay debts’ is of commercial insolvency. This
means even if the company is wealthy but cannot realize immediately and cannot pay its current debt
which fall due, winding up petition could still be issued against it if the debtor company does not
respond within 21 days as stated under Seri Jeluda Sdn Bhd v Pentalink Sdn Bhd where the case requires
the debtor company to prove that it was able to pay its debt. In addition, the respond time has been
increased to 6 months for the period between 23.4.2020 and 31.12.2020 through exemption order no. 2
and it was not mentioned on whether this respond time will be further extended.

Applying these, if the notice is given within this period of time, winding up petition should not
be issued against TSB until the period of 6 months has lapsed. Despite this, winding up petition could be
issued against TSB because winding up petition does not based upon final judgement, but on the notice
as stated in Section 466 (1) (a) of CA 2016.

In conclusion, the winding up petition is not based upon final judgement, instead it should be
based on the S. 466 (1) (a) statutory notice.

The third issue is whether Mr Woods is able to strike out the bankruptcy notice?

Under Section 3(2)(ii) of the Insolvency Act, a bankruptcy notice is not invalidated solely on the
ground that the amount stated in the notice exceeds the amount due. The sum is actually due, unless
the debtor notifies the creditor within 7 days of payment that he denies the validity of the notice on the
ground of such error.

According to the evidence, the AMSB reported that only RM350,000 of goods had been shipped
and only part of the machines did not meet the requirements, but no records on the delivery or
rejection are available. This implies that the amount of the bankruptcy notice contains conflicts. TSB
shall file an application to set aside the notice of bankruptcy within 7 days in the event of an amount
dispute that has not complied with the formalities of the notice of bankruptcy. In addition, the AMSB
bankruptcy notice against Mr. Woods is premature before the judgment amount is determined, the
bankruptcy notice is therefore faulty and incurable.

Not only that, Mr Woods is a guarantor other than a social guarantor. Based on S. 5 (3) IA 1967,
AMSB will need to obtain leave from court to take action against such a guarantor. S. 5 (4) states that
the creditor will need to exhaust all modes of execution and enforcement to recover debts owed to him
by the debtor first. As per S. 5 (6) states that such modes and execution includes on seizure and sale,
judgment debtor summon, garnishment and bankruptcy or winding up proceedings against the main
borrower. Thus, this can be another reason as to why a bankruptcy notice against Mr Woods should be
set aside.

In conclusion, Mr Woods is able to strike out the bankruptcy notice because the bankruptcy
notice against Mr. Woods is premature before the judgment amount is determined.