CIPAA over-rides Companies Act provision against preferential payment of creditors

Ordinarily, once a company is facing winding-up proceedings, it is not allowed to prefer one unsecured creditor over another. Otherwise, it would be construed as the company defrauding one of its creditors.

However, the Court of Appeal in CT Indah Construction Sdn Bhd v BHL Gemilang Sdn Bhd held that a successful claimant pursuant to CIPAA is entitled to claim for direct payment against the principal of the respondent even though the respondent has already been wound up. Effectively, this means that the successful claimant in CIPAA had effectively leap-frogged over other unsecured creditors (and potentially even secured creditors whose security is insufficient) because once the money is claimed from the principal, then that sum of money is no longer available for distribution to creditors pari passu.

Whilst this is a welcome decision for CIPAA claimants, one cannot help but wonder whether the principle is right in law. After all, there was no express provision in CIPAA that over-rides the Companies Act 2016. S.30 CIPAA specifically provides that the successful claimant can seek direct payment only if there is a debt due by the principal to the respondent. Surely a debt due to the respondent forms part and parcel of the respondent’s financial assets, being an account receivable. In a situation of a winding-up, the respondent’s assets are to be applied to the benefit of all its creditors pari passu.

This decision is all the more perplexing in light of the earlier Federal Court decision of SK M&E Bersekutu Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd (in creditors’ voluntary liquidation) and another appeal, whereby the Federal Court held that retention monies (which should be held in trust for the contractor) are still part of the wound-up company’s general assets which are liable for distribution amongst all creditors pari passu unless a specific trust has been set up (i.e. the monies have been set aside in a separate trust account). If retention monies which are expressly stated to be trust monies are deemed susceptible for general distribution when an express trust is not set up, what more accounts receivables which are not even designated as trust monies?

With respect, whilst the CT Indah Construction Sdn Bhd case may be advantageous to CIPAA claimants, it however goes against established principles of distribution of assets of wound-up companies. It may also be inconsistent with at least the spirit behind SK M&E Bersekutu Sdn Bhd.

Hence, it leaves to be seen whether the Federal Court will reverse the CT Indah Construction Sdn Bhd case in due course, if an appeal were lodged.

If you have any questions on CIPAA, email us at [email protected]