Once a valid and enforceable judgment has been obtained by one party against another, a winding-up court will not revisit the judgment to determine whether the sum can be considered disputed, with the intent to defeat a winding-up petition against a company.
The recent Court of Appeal in Bludream City Development Sdn Bhd v Pembinaan Bina Bumi Sdn Bhd [2024] CLJU 545 discusses whether a company can be wound-up pursuant to an adjudication decision made under the Construction Industry Payment and Adjudication Act 2012 (CIPAA).
Brief Facts
The dispute stemmed from a construction project at the Mines Resort City, Selangor (Project). In 2014, Bludream City Development Sdn Bhd (Developer) contracted Pembinaan Bina Bumi Sdn Bhd (Contractor) for building and infrastructure work on the Project. A disagreement arose over unpaid interim certificate no. 4R, amounting to RM 5,510,197.91 for work done on the Project. On 17.7.2019, the Contractor initiated CIPAA adjudication proceedings against the Developer regarding the unpaid interim certificates (Adjudication Proceedings).
After the adjudication process, on 4.2.2020, the adjudicator ruled in favour of the Contractor, ordering the Developer to pay RM 5,510,197.91 (Adjudicated Amount), along with interest and costs of RM 61,289.00 (Decision).
Dissatisfied with the Decision, on 4.3.2020, the Developer commenced proceedings in the High Court to set aside the Decision and stay its enforcement. Meanwhile, on 11.8.2020, the Contractor commenced proceedings in the High Court to enforce the Decision.
Later, on 13.8.2020, the Developer’s architect issued a valuation report no. 37, interim certificate no. 37 and revised statement of final account claiming no outstanding sum was due from the Developer but that there had been an overpayment to the Contractor. The Contractor was dissatisfied and referred the interim certificate no. 37 and revised statement of final account to arbitration on 26.8.2020. Subsequently, the Developer cross referred its dispute on the Decision to the same arbitration.
On 10.12.2020, the High Court dismissed the Developer’s setting aside and stay applications and granted the Contractor's enforcement application (Enforcement Order). Following the High Court’s decision, the Contractor served the Developer with a statutory demand pursuant to Sections 465(1)(e) and 466(1)(a) of the Companies Act 2016 (CA 2016), demanding payment of RM 6,175,669.10 premised on the Enforcement Order (Debt). However, the Developer failed to comply with the statutory demand, prompting the Contractor to initiate a winding-up petition against the Developer in the Winding-Up Court (Petition).
Decision Of The Winding-Up Court
The Winding-Up Court granted the Contractor’s Petition based on several grounds:
1. The Decision was treated as a judgment debt due to the High Court’s Enforcement Order, which had temporary finality.
2. The issuance of valuation report no. 37, interim certificate no. 37 and revised statement of final account by the Developer were seen as attempts to frustrate the Contractor’s claims and evade payment for work done on the Project. These actions were carried out unilaterally and aimed at reducing the final contract sum certified and received by the Contractor, particularly notable as they were undertaken after the Adjudication Proceedings and the Decision.
3. Under Section 28 of the CIPAA, the Developer was obligated to make payments even before the Decision’s enforcement. If Parliament intended for an adjudication decision to be bona fide disputed, it would not have expressly stated adjudication decisions as “binding" in Section 13 and Section 30(1), "If a party against whom an adjudication decision was made fails to make payment of the adjudicated amount...".
4. The Developer’s failure to pay the Debt following the statutory demand raised the presumption of insolvency. Although this presumption was rebuttable, the Developer failed to do so by not settling the Debt despite awareness of the Enforcement Order. The test of solvency is cash flow solvency and not balance sheet solvency. Hence, the Developer’s possession of assets not readily realisable to meet its current liabilities did not establish commercial solvency.
5. The Developer's cross claims of overpayment and liquidated damages against the Contractor in arbitration proceedings amounting to RM 1,780,805.83, were deemed insufficient grounds to oppose the Petition. These claims were unproven and did not invalidate the Decision or the Enforcement Order.
The Developer, dissatisfied with the Winding-Up Court’s decision, appealed to the Court of Appeal, contending that:
(a) Winding up a company based on the Decision, which had temporary finality, would contradict the legislative intent of CIPAA due to the absence of a specific provision explicitly allowing that.
(b) The Contractor could not rely on the Decision to commence winding-up proceedings because arbitration proceedings had been initiated by the Developer against the Contractor for cross claims, which would offset the Contractor’s adjudicated claim, leaving only a net sum payable of RM 1,939,987.83.
Decision Of The Court of Appeal
In arriving at a decision, the Court of Appeal concurred with the Contractor’s reliance on the Court of Appeal’s decisions in Likas Bay Precinct Sdn Bhd v Bina Puri Sdn Bhd [2019] 3 CLJ 499 and Sime Darby Energy Solution Sdn Bhd (formerly known as Sime Darby Offshore Engineering Sdn Bhd) v RZH Setia Jaya Sdn Bhd [2021] 9 CLJ 880 and dismissed the Developer’s appeal.
In Likas Bay Precinct, it was established that an adjudication decision could serve as the basis for a winding-up petition, emphasizing that a petitioner, being owed monies by a respondent, qualifies as a creditor under this scenario. Further, Section 31 of the CIPAA supports this interpretation by explicitly stating that "remedies provided by CIPAA are without prejudice to other remedies available in the construction contract or any written law...".
Sime Darby Energy further solidified this stance by affirming that a company may be wound-up based on an adjudication decision in the CIPAA. The Court of Appeal reasoned that the uncertain outcome of potential court or arbitration proceedings initiated by the losing party does not negate a company’s statutory right to pursue a winding-up action. Based on the above established principles, the Court of Appeal rejected the Developer’s contentions.
In tackling the Developer’s contentions of temporary finality of the Decision and the commencement of arbitration proceedings, the Court of Appeal deemed these factors irrelevant to the Developer disputing the Decision in the Winding-Up Court. In this regard, the Court of Appeal expounded on the notion of disputability of a debt:
(a) A debt unadjudicated under CIPAA may be disputable if there are prima facie grounds establishing a bona fide dispute.
(b) However, a debt resulting from an adjudicated decision is not disputable in subsequent winding-up proceedings, having been independently adjudicated by a neutral third party. The sanctity of such decisions should be upheld through court orders refusing to set aside and/or stay, and by allowing enforcement orders pursuant to Sections 27, 16 and 28 of the CIPAA.
Additionally, the Court of Appeal agreed with the High Court’s decision that the Developer failed to rebut the presumption of insolvency, justifying the winding-up. The Court of Appeal highlighted the Developer’s admission of non-operational status during judgment debtor summons proceedings and the limited funds available in the Developer’s bank accounts, which could only be accessed through garnishee proceedings. Thus, the Developer’s appeal had no merits.
Conclusion
The Court of Appeal's ruling serves as a compelling reminder for companies navigating construction disputes, highlighting the pivotal role of adjudication decisions in the enforcement of debts. This decision underscores the critical importance of honouring adjudication outcomes, especially when they are confirmed as enforceable judgment debts through court orders.
In the realm of construction industry dynamics, where financial stakes can be high and disputes common, the Court of Appeal's stance strikes a balance between protecting the integrity of adjudication decisions and addressing the financial challenges faced by construction entities, as envisaged by the CIPAA. By affirming the non-disputability of debts arising from adjudication decisions in subsequent proceedings, the Court reaffirms the significance of respecting and upholding these decisions.
This ruling echoes the legal landscape's demand for accountability and compliance with adjudication outcomes. It signals to industry players the imperative of engaging in good faith during dispute resolution processes, understanding that adjudication decisions carry significant legal weight and should be treated with utmost seriousness.
Ultimately, the Court of Appeal's stance solidifies the legitimacy of using adjudication decisions as grounds for winding-up proceedings under the CIPAA, offering clarity and direction to construction industry stakeholders. It underscores the efficiency and effectiveness of adjudication in resolving disputes within the sector while emphasizing the enforceability and binding nature of adjudication decisions. This decision encourages parties involved in construction disputes to approach adjudication processes with transparency and commitment to upholding the rule of law within the industry.
8 May 2024