DUBON BERHAD v WISMA COWAY MANAGEMENT CORPORATION AND ANOR APPEAL [2020] MLJU 613

DUBON BERHAD v WISMA COWAY MANAGEMENT CORPORATION AND ANOR APPEAL [2020] MLJU 613

Federal Court (Putrajaya)

Management Corporation’s status as a secured creditor

Facts

1.    The Appellant, Dubon Berhad is the beneficial owner of a property known as Unit 22.05 (“the Unit”) in Wisma Coway.  The Appellant is currently in liquidation after an order of the Johor Bharu High Court that was made against them on 18 January 2000.

2.    The Respondent is the Management Corporation of Wisma Coway (“MC”).

3.    As a result of the liquidation, the Appellant required an execution of the transfer of the Unit for sale purposes.  Nonetheless, the Appellant were denied the execution of transfer unless they obtained a clearance letter from the Respondent in relation to an outstanding sum of RM 183, 070.26 (“the Outstanding Sum”) payable as outgoings and service charges in respect of the Unit owed to the Respondent.

4.    The Appellant then filed a claim at the Strata Management Tribunal in Putrajaya seeking the Respondent to issue the clearance letter upon the Appellant’s payment of the Outstanding Sum.

5.   The Appellant further contended that they will only be obliged to pay for any liability when there is an available fund, particularly to the Respondent, being the unsecured creditors as they had not filed any proof of debt with the Appellant.

6.    The Respondent then filed a counterclaim which is later refused by the High Court as the High Court found that the Respondent did not fulfil the requirement for leave to proceed against the Appellant.

7.    Dissatisfied with the findings of the High Court, the Respondent appealed to the Court of Appeal for the recovery of the Outstanding Sum.

8.    It is the decision of the Court of Appeal that Section 77 of the Strata Management Act (“Act 757”) provides for the amount due to the Respondent as an MC is a ‘guaranteed sum’.  Therefore, the Court of Appeal pointed out the necessity to determine whether the MC would remain as an unsecured creditor who is entitled together with other unsecured creditors or to be elevated to the status of a secured creditor within the meaning of Section 77 of Act 757.

9.    This is where the question of whether the status of MC would remain as an unsecured creditor or may be elevated to the status of a secured creditor by virtue of Section 77 of Act 757.

Issue

1.    Whether the interpretation by the Court of Appeal within the meaning of Section 77 of Act 757 is correct.

Ratios

1.    The sole leave question allowed by the Court is as follows:

“Whether the right of a Joint Management Body or a Management Corporation to collect and receive payment from a proprietor under Section 77 of Act 757 respectively, gives it a lawful preference as a secured creditor over the assets of a company in liquidation?”

(a) The discussion mainly revolved around the debt of maintenance arrears due to an MC, priority or preference over the creditors, the status of secured creditor or unsecured creditor under the regime of insolvency.

(b) For clarity, Section 77 of Act 757 provides that –

“Recovery of sum as a debt due to management corporation or subsidiary management corporation

77. (1) The payment of any amount lawfully incurred by the management corporation or the subsidiary management corporation in the course of the exercise of any of its powers or functions or carrying out of its duties or obligations shall by virtue of this section be guaranteed by the proprietors for the time being constituting the management corporation or the subsidiary management corporation.”

[Emphasis is added]

(c)  By looking at the above provision, the Court was of the opinion that the above provision does not elevate the payment of the arrears of management fees to the status of a secured debt only by reason of the usage of the term ‘guaranteed’.

(d) The Court agreed with the Appellant’s counsel that Section 77 of Act 757 denotes an obligation for a proprietor to pay the maintenance fees, nevertheless, there is nothing in the language of the provision that purports to oust such insolvency principles of preferential creditor.  It was never the Parliament’s intention to displace any part of the insolvency regime from the interpretation of Section 77 of Act 757.

(e)  The Court further held that Section 77 of Act 757 is construed by taking into account the entirety of Act 757 by putting any outstanding sum payable to the MC as guaranteed debt and never as a secured debt.

(f)   The Court’s rationale is based on Section 527 of the Companies Act 2016 (“Act 777”) as well as the importance of the parri passu rule as cited in the case of Malaysian Trustees Bhd v Transmile Group Bhd & Ors [2012] 3 MLJ 679 as follows :

“The liquidator is obliged firstly to apply the available unencumbered assets to settle the preferential debts as statutorily provided for and secondly to pay the unsecured debts of the company pari passu. As such ‘debts of the same class shall rank equally between themselves and shall be paid in full, unless the property of the company is insufficient to meet them, in which case they shall abate in equal proportions between themselves.”

(g) Therefore, the Court held that the sole leave question mentioned above is answered in the negative.

Decision The Federal Court allowed the appeal and restored the order of the High Court.
Key Take Away

1.     There are two types of creditor –

(a) A secured creditor who is a creditor that has been granted security from a company through either a legal fixed or floating charge over the business’ assets.

(b) An unsecured creditor who is a creditor that will only has their rights to claim for their monies after secured creditors obtained the same.

2.   The position under the Malaysian law is that not all creditors will be called up and included in the same scheme as cited in Jin Lin Wood Industries Sdn Bhd and Others v Mulpha International Bhd [2004] MLJU 497.  Therefore, it is important to take note on the disadvantageous of being an unsecured creditor as only the remainder will be paid to an unsecured creditor.

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