Sabah Development Bank Berhad v TYL Land Development Sdn Bhd (Court of Appeal) (Civil Appeal No: W-02(A)-743-04/2022)

This case discusses the following 3 novel questions:

(1) Whether the secured creditor (Appellant) can amend the Secured Creditor’s Valuation (Security), withdraw or amend the Secured Creditor’s Claimed Sum (Unsecured Debt Portion) pursuant to sections 524(1)(a), (b) and (2) of the Companies Act 2016 (“CA”) and paragraphs 13 and 15 of Schedule C to the Insolvency Act 1967 (“IA”) read with section 4(1) of the Civil Law Act 1956 (“CLA”) and section 42 of IA, where:

• • (a) The secured creditor had filed proofs of debt (“PODs”) in the company’s liquidation and the PODs had stated:
    • (i) the secured creditor’s valuation of the security which is an asset of the company charged in favour of the secured creditor (“Security”); and
    • (ii) the secured creditor’s claim in the liquidation of a certain sum as an unsecured debt from the company to the secured creditor;
  • (b) the company’s liquidator had accepted the PODs;
  • (c) the secured creditor had applied to the winding up court to replace the company’s liquidator;
  • (d) the secured creditor had voted in a creditors’ meeting regarding the replacement of the company’s liquidator; and
  • (e) the secured creditor had opposed an application by a company’s unsecured creditor to replace the company’s liquidator?

(2) Does rule 126 of the Companies (Winding-Up) Rules 1972 (“CWUR”) bar the secured creditor from:

• • (a) amending the Secured Creditor’s Valuation (Security); and
  • (b) withdrawing or amending the Secured Creditor’s Claimed Sum (Unsecured Debt Portion)?

(3) Due to the facts stated above, does the equitable estoppel doctrine bar the secured creditor from amending the Secured Creditor’s Valuation (Security), withdrawing or amending the Secured Creditor’s Claimed Sum (Unsecured Debt Portion)? In this regard, can a case law doctrine of equitable estoppel override section 524(1)(a) and (2) of CA read with paragraphs 13 and 15 of IA?

The Court of Appeal allowed the Appeal and in the main, held as follows:

(1) The secured creditor (Appellant) can amend the Secured Creditor’s Valuation (Security), withdraw or amend the Secured Creditor’s Claimed Sum (Unsecured Debt Portion) under section 524(1)(a), (b) and (2) of CA read with paragraphs 13 and 15 of IA;

(2) The secured creditor did not and is not deemed to have surrendered the Security, and thus, rule 126 of CWUR cannot be invoked;

(3) The secured creditor had inadvertently filed the 4 PODs, and the expungement application was not an afterthought; and

(4) The doctrine of estoppel cannot bar the effect of section under section 524(1)(a), (b) and (2) of CA read with paragraphs 13 and 15 of IA. The equitable doctrine is invoked to achieve justice. If estoppel is applied, there will be injustice to the secured creditor because the extent of the secured creditor’s interest will be unjustly reduced.

Summary of the Grounds of Judgment by Wong Kian Kheong, JCA

Background Facts

The Appellant/ secured creditor (“Bank”) had granted term loans, bridging loans and credit facilities (“Credit Facilities”) to the Respondent company. The repayment of the Credit Facilities was secured by way of Debentures, and a charge over a piece of land.

On 3.1.2019, the High Court ordered the winding up of the Respondent where the Official Receiver (“OR”) was appointed as the liquidator.

As a holder of the Debentures, the Bank appointed a receiver and manager (“R&M”). Thereafter, the Bank’s then solicitors filed 4 PODs with the OR. The PODs did not demarcate which part of the Bank’s debt was secured and which portion thereof was unsecured.

On 17.1.2020, the OR sent an email to the Bank’s then solicitors informing the Bank, among others, that as the Bank’s debt is a secured debt by way of the Security, the OR will reject the 4 PODs filed. Nevertheless, if the Bank wants to proceed with the filing of the POD, the Bank will have to surrender the Security.

The Bank’s then solicitors responded that the Bank will maintain the 4 PODs as filed. In the response, the Bank explained, among others, that the Bank is a secured creditor and holder of the Debentures. The Bank will not surrender the Security at the moment, and will only do so when the Security is realised.

The OR therefore accepted the Bank’s 3 PODs as follows:

• (a) the value of the Bank’s Security was accepted at RM13million; and
• (b) the Bank was ranked as unsecured creditor of the Respondent for a sum of RM23,600,758.57.

On 12.2.2020, during a creditors’ meeting, the Bank (via proxies) voted as an unsecured creditor of the Respondent for a sum of RM23,600,758.57.

On 4.9.2020, the Winding Up Court appointed Datuk Ooi Woon Chee and Mr Tam Kok Meng (“Liquidators”) as private liquidators of the Respondent to replace the OR.

Following the appointment of the Liquidators, on 14.4.2021, the Liquidators’ solicitors wrote to the Bank to demand the Bank to remove the R&M since the Bank had given up its Security and would prove the whole debt in liquidation.

At around the same time, the Bank was informed by the R&M that the R&M received a proposal from a third party to acquire the Project and the charged land at a price of RM44,823,072.44.

On 19.4.2021, the R&M responded to the Liquidators’ letter and informed the Liquidators, among others, that:

• (a) the Bank never had the intention to surrender its Security;
• (b) it was expressly stated in the 4 PODs that the Bank was a secured creditor of the Respondent;
• (c) the Bank’s vote at the creditors’ meeting was premised only on the unsecured portion of the debt;
• (d) the Bank has now ascertained that the current realizable value of its Security had exceeded RM13 million and hence, would apply to withdraw its 4 PODs.

On 20.4.2021, the Bank’s solicitors also responded to the Liquidators, stating that the Bank never had the intention to surrender its Security, and applied to the Liquidators to expunge its 4 PODs.

By letter dated 7.5.2021, the Liquidators rejected the Bank’s expungement application.

In view of the Liquidator’s dismissal, the Bank filed an application to expunge its 4 PODs at the Winding Up Court. The Winding Up Court dismissed the Bank’s application.

Hence, the Bank filed the appeal to the Court of Appeal.

Effect of section 524 of CA

The Court of Appeal recognised that section 524 of CA is a new provision which is not provided in the previous Companies Act 1965.

Having considered the relevant sections, the Court held that the effect of section 524(1) of CA read with section 4(1) of CLA, section 42 of IA, and paragraphs 13 and 15 of IA, as follows:

• (a) section 524(1) of CA confers the following 4 powers on a company’s secured creditor:
  • (i) to “realise a property subject to a charge, if entitled to do so”;
  • (ii) by virtue of section 524(1)(b) of CA, the secured creditor can:
    • (aa) value the security; and
    • (bb) claim in the winding up as an unsecured creditor for the balance due from the company to the secured creditor, if any; and
  • (iii) to surrender the security to the liquidator for the general benefit of the creditors and claim in the winding up as an unsecured creditor for the whole debt.

The secured creditor’s 4 powers above are subject to section 524(8) to (10) of CA, as follows:

• (a) the company’s liquidator may serve a written notice on the secured creditor:
  • (i) to elect within 21 days which one of the 3 paragraphs in section 524(1)(a) to (c) of CA the secured creditor wishes to exercise; and
  • (ii) if the secured creditor elects to exercise the power conferred by section 524(1)(b) or (c) of CA, the secured creditor is required to exercise that power within 21 days;

• (b) if the secured creditor fails to comply with the liquidator’s written notice, the secured creditor:
  • (i) is deemed to have surrendered the security to the liquidator under section 524(1)(c) of CA; and
  • (ii) may claim in liquidation as an unsecured creditor for the whole debt; and
• (c) in the event of a surrender of security under section 524(1)(c) or (9) of CA and before the liquidator realises the security, the secured creditor may apply to the liquidator or the winding up court to:
  • (i) withdraw the surrender and rely on the security; or
  • (ii) submit a new claim under section 524 of CA.

The Court further noted that pursuant to section 524(2) of CA, even if the secured creditor had previously exercised its rights under section 524(1)(b) and/or (c) of CA, the secured creditor may still exercise its power to sell security under section 524(1)(a) of CA thereafter.

Effect of Rule 126 of CWUR

As regards the interpretation and effect of Rule 126 of CWUR, the Court of Appeal opined as follows:

• (a) if a secured creditor votes in the company’s liquidation with regard to the secured creditor’s “whole debt”, the secured creditor “shall be deemed to have surrendered” the security;

• (b) but there is nothing in rule 126 of CWUR which provides that if a secured creditor votes in the winding up matters of the company only regarding the unsecured portion of the debt, the secured creditor “shall be deemed to have surrendered” the security;

• (c) even if a secured creditor has voted in the company’s liquidation with regard to the secured creditor’s entire debt, the secured creditor’s security is not deemed to have been surrendered if:
  • (i) the secured creditor applies to the winding up court and satisfies the winding up court that the secured creditor’s omission to value the security was due to inadvertence; or
  • (ii) upon an application to the winding up court, the court is satisfied that the secured creditor had mistakenly filed a POD.

Findings of the Court of Appeal

Having considered the proper effect of section 524 of CA and rule 126 of CWUR, the Court went on to make the following findings:

Bank has not surrendered security

The Court found that the Bank had not elected to surrender the land as security pursuant to section 524(1)(c) of CA on the following basis:

• (a) If the bank had intended to surrender the security, the Bank would not have appointed the R&M; and

• (b) The Bank had maintained in their letters / emails that they had the intention to realise the land as security for the Credit Facilities.

Bank can revalue security and withdraw 4 PODs

The Court held that pursuant to section 524(1)(a) and (2) of CA, the Bank had the power to revalue the land for the purpose of its realization, and to withdraw the 4 PODs.

Rule 126 of CWUR not applicable

A company’s secured creditor shall only be deemed to have surrendered the security if the secured creditor votes in the company’s liquidation with regard to the secured creditor’s “whole debt”. Since the Bank did not vote with regard to the entire debt, there could not be any room for the invocation of Rule 126 of CWUR.

Bank had inadvertently filed 4 PODs

Based on the Bank’s email/letter where the Bank had explained that the filing of the 4 PODs was premised on an earlier valuation, the Court was of the view that the Court ought to accept the Bank’s explanation that the 4 PODs had been mistakenly filed.

In addition, the Court held that the expungement application was not an afterthought.

Bank is not estopped from withdrawing 4 PODs

The Court held that the doctrine of estoppel which is premised on case law, cannot bar the effect of sections 524(1)(a), (b) and (2) of CA. In addition, the Court was of the view that injustice would be caused to the Bank if the Bank is barred from revaluing the land and to withdraw the 4 PODs.

Comments

The Court of Appeal’s decision in this case clarifies the powers and rights of a secured creditor under section 524 of CA, particularly in relation to their rights to amend valuations and claims (debts) in liquidation.

Whilst section 524 of CA confers the right to a secured creditor to withdraw a proof of debt filed subsequently (depending on the facts of the case), and/or to amend its valuation of its security, this case still serves as a reminder to secured creditors to take extra care when making its election under section 524(1) of CA to ensure that it has not and is not deemed to have surrendered its security.

This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.

About the Authors

Amy Hiew Kar Yi
Partner
Corporate Disputes, Construction,
Projects & Energy
Harold & Lam Partnership
amy@hlplawyers.com