RECENTLY, there was news of winding up petitions served on a couple of large corporations.

In general, winding up petitions are served by creditors against debtor companies for their inability to service said debts.

A petition is filed either as a tactic to pressure the companies into paying immediately or where creditors need to write off the debt from their accounts.

Meanwhile, the Inland Revenue Department (IRB) will only allow for debts that are no longer recoverable to be written off if the creditors can show proof that the debtors are in liquidation.

Until and unless the petitioning creditors appoint a private liquidator (PL), the official receiver is the default liquidator appointed by the courts.

Most creditors abstain from nominating a PL because they are aware that all the assets in almost all companies are mortgaged to banks.

Any realisation of these assets after deducting fees to the PL and all other preferential debts, are generally insufficient to repay the loans owing to the secured creditors.

Also, it is the practice of the PL to request to pay fees irrespective of securing the debt, so creditors will only choose a PL if they feel the official receiver cannot handle the case.

Aside from creditors really pursuing the recovery of debts, there are also cases of corporations winding themselves up in favour of a creditor who will be friendly to the company and or its shareholders/directors.

This type of creditor normally has a supply relationship with other businesses owned either by the shareholders/director legally separated from the existing relationship where they will be petitioning for the winding up.

This is immoral and unethical because the companies avoid meeting their obligations to all their creditors, both secured and unsecured.

Importantly, by nominating a PL of their choice, they could, using proxies, repurchase their assets from the PL at no more than their forced sale value, even though the PL has a duty to realise them at the best possible price to maximise the sum for the creditors.

In some cases, the PL will camouflage this act, justifying it by offering a first right of refusal back to the shareholders/directors for them to purchase the same assets at a price slightly higher than the highest offer received from an open tender.

The justification was that the PL feared that the shareholders/directors will sue them for selling the assets at below the estimated market value of the assets and a first right of refusal if accepted by the shareholders/directors would mitigate or eliminate such possibilities.

The PL continuing with the existing contractual obligations of the company through to completion argument does not hold water.

It is a standard clause in every contractual obligation, a winding up of any party to the contract results in an automatic termination of the contracts.

Even if the other side of the contractual obligations agrees to a continuation of the contract, they will require an undertaking from the PL for completion as it is general knowledge that the PL would have liquidity and supply issues owing to its illiquid position.

Importantly, the PL cannot enter into any new legal and contractual obligations on their own or on behalf of the company in liquidation.

A contentious issue is the fees, which are generally determined by agreement between the PL and the committee of inspection – the shareholders and the creditors’ representatives – by resolution passed at a meeting of creditors or, failing those two circumstances, by the court.

Generally, the PL pad their inefficiencies into their fees, many are charges for clerical work even though such matters are generally absorbed as part of the costs of running their insolvency practice.

Sometimes the PL will argue it made a major recovery without legal costs, thus justifying the huge fees.

In cases like these, it is advisable that creditors take an active interest and scrutinise all fees proposed.

Be that as it may, albeit the fact that case law exists, ultimately it is the courts that will determine what is reasonable and fair to be paid to the PL taking into consideration the extent and value of work done.

There have been several cases of improper conduct by PLs in several cases where they helped themselves to compensation without consent or when he is in a position where his duty and interest are in conflict.

Likewise, there are cases where PLs were removed from office where they had been closely associated with promoters or directors whose conduct required investigation; had favoured certain interests at the expense of others; had become too familiar with a major creditor; or was a partner in a firm whose relationship with the company may need to be investigated.

Failing to take reasonable steps to bring liquidation process to an early conclusion is also an example of improper conduct entitling creditors to bring an action against a PL.

In Bina Puri Sdn Bhd v Jambulingan Sethuraman, Raki (c/o Rimbun Corporate Advisory Sdn Bhd [2012] 8 MLJ 141, the court allowed the application of creditor to remove the PL as he had failed to bring the liquidation process to an early conclusion.

In TR Hamzah & Yeang Sdn Bhd v City Centre Sdn Bhd [2012] 1 MLJ 383, the PL in that case, being an officer of court was in gross contempt and/or disrespect to the order of court when he proceeded to act in the liquidation process in the absence of committee of inspection.

In doing so, he had exposed himself to personal liability and he may not only be liable to the creditors and/or contributories but also to other service providers whom he had appointed and now will not be able to be indemnified from the assets of the respondent company.

In that case, the creditors had been waiting since 2004 to recover their debt but that since his appointment as PL, the PL had failed and/or refused to take any proactive steps to do so.

It is trite that the PL’s primary role in winding up proceedings is designed to ensure fair distribution of company’s assets to the creditors and/or contributors.

In discharging his role, a PL stands in a fiduciary position to protect the best interest of the creditors and/or contributors and he is required to perform his duty with high standard of care and diligence attributable to a professional person.

In summary, the petitioning creditors aiming to wind up large corporations should strenuously object to any PL nominated by the companies and propose an independent choice. – May 2, 2022.

* FLK reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.