A creditor can apply to the court to have a company liquidated under the Companies Act 2016 (“the Act”) if the debt is unpaid when it is due. A creditor who intends to wind up a company must first serve a statutory notice under Section 466 of the Act (“S.466 Notice”) to demand the sum due before filing a winding-up petition. After receiving the S.466 Notice, the debtor company has 21 days to pay off its debt. Later, a petition to wind up a company must be filed at the High Court no later than six months after the S.466 Notice has expired.
The courts have acknowledged preemptive measures accessible to and can be done by the debtor company with a legitimate dispute on the debt due to the company’s precarious position if a winding-up petition is filed against it. This preventative action, known as Fortuna Injunction, is an interlocutory injunction against the creditor filing a petition for winding up the company. An injunction is a judicial order prohibiting a person from doing or continuing to commit a specific act or omission.
Any company that receives a S.466 Notice but believes there are no compelling reasons for it to be wound up may seek the relief of a Fortuna Injunction. If the company successfully obtains the Fortuna injunction, the creditor is unable to initiate the winding-up proceeding against the company.
What is a Fortuna Injunction?
Generally, a corporation will utilise or rely on a Fortuna injunction to prevent its creditors from winding up the company without a valid reason under Section 466. There is no particular provision in the Act that grants the court the authority to issue Fortuna Injunction. However, the court’s power is derived from its inherent jurisdiction as illustrated from the case of Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation of the Commonwealth of Australia [1978] VR 83, which held as follows:
“When a court restrains the presentation of a winding up petition to that court, it exercises part of its inherent jurisdiction to prevent abuse of its process.”
A longstanding principle of corporate law is that once winding-up proceedings have begun, it is usually too late for intervention to free the company from oppression or damage. The courts have acknowledged that the mere public disclosure of a petition’s presentation can cause irreparable harm to a firm. The courts are also aware of the pressure that can be put on a firm by a person having a contested claim against it if the company does not satisfy the claim. Because of this risk, the company is under pressure to settle the claim, even if it has good reasons to believe it is not obligated to do so on legal grounds. Otherwise, the petition for winding up could cause the company significant harm.
Situations where a Fortuna injunction may be granted
The Fortuna case, which was upheld by the Malaysian Court of Appeal in Mobikom Sdn Bhd v Inmiss Communications Sdn Bhd [2007] 3 CLJ 295, established the instances in which the court may grant a Fortuna injunction.
- Where the presentation of the petition has no chance of success, and the presentation might produce irreparable damage to the company;
For the first principle, the plaintiff must establish both limbs: 1) the petition has no chance of success and 2) the presentation may cause irreparable harm to the company.
An example of the first limb is when the petitioner has no legal standing to present the winding-up petition in the first place, as in Re A Company [1984], where the petitioner lacked the requisite shareholding period to be qualified to petition for winding-up as a contributory. The petition, therefore, had no chance of success and was doomed to fail.
- Where a petitioner proposes to present a petition using a procedure that might harm the company irreparably without exploring appropriate and viable alternatives.
The second principle applies only when the debt is disputed. It is not applicable in situations when the debt in question is uncontested. As long as the debt cannot be denied, it is irrelevant whether or not it will cause irreparable damage to the company if presented. Therefore, a court order that is legitimate and enforceable can only be termed a contested debt once it is set aside or stayed by the court.
Practical steps which a company may consider when served with a S.466 Notice
It would be wise for a company that has been served with a S.466 Notice to notify the matter to its solicitors as soon as possible so that they can guide how to proceed. This would ensure the company has adequate time to respond to the notice.
The law does not require the creditor to file the winding-up petition upon expiration of the 21-day time restriction, even though there is a risk that the creditor will present the petition as soon as feasible after the expiry of the time limit. Hence there is the possibility that the creditor would not act on its S.466 Notice demand. This can leave the company in a state of uncertainty as to its next course of action. For example, whether it should file for a Fortuna injunction or take other appropriate steps.
One approach that solicitors often employ for the company to eliminate this uncertainty is by writing to the creditor or its solicitors Stating the company’s position that it is disputing the debt and further outlining the reasons or grounds for dispute and requesting a written undertaking from the creditor or its solicitors by a specific date that they will not proceed to present any winding-up petition against the company.
If the creditor fails to provide the undertaking or responds to the written request within the allotted time frame, the company’s lawyer will know it is time to start considering filing for a Fortuna injunction, among other measures to mitigate the risk.
When a Notice is based on contested debt, Malaysian courts have often held that a Fortuna injunction will be issued. This is due to the fact that, in such a scenario, the creditor should instead file a civil lawsuit and collect judgment before trying to wind up a corporation. Otherwise, the court’s process may be abused if a S.466 Notice is filed based on a disputed debt to coerce or push a company to repay its debt.
