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The Court of Appeal in the welcomed decision of Sime Darby Energy Solution Sdn Bhd (sebelum ini dikenali sebagai Sime Darby Offshore EngineeringSdn Bhd) v RZH Setia Jaya Sdn Bhd [1] ('Sime Darby') has affirmed the approach in the earlier decision of the Court of Appeal in Likas Bay Precinct Sdn Bhd v Bina Puri Sdn Bhd [2] ('Likas Bay'), and held that a party armed with a Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) Adjudication Decision may initiate winding-up proceedings without having first registering the Adjudication Decision in Court to enforce the said decision as a judgment of the Court(pursuant to s. 28 of CIPAA).
Before exploring the recent decision of the Court of Appeal in further detail, it should be highlighted that when determining any dispute involving an Adjudication Decision obtained under CIPAA, the Courts always consider (or ought to consider) the purpose of the enactment
of the said act.
The purpose and legislative intent of CIPAA revolves around “speedy and efficient dispute resolution in the construction industry to safeguard public interest” [3]. Further, the purpose of the enactment of CIPAA can conveniently be found in the preamble, which provides as follows:
“An Act to facilitate regular and timely payment, to provide a mechanism for speedy dispute resolution through adjudication, to provide remedies for the recovery of payment in the construction industry and to provide for connected and incidental matters.”
Summary of the Sime Darby Case
High Court Proceedings
The appeal was lodged against the decision of the High Court in granting an injunction to restrain the Appellant from filing a winding-up petition against the Respondent, commonly known as a “Fortuna Injunction”.
The Appellant had obtained an Adjudication Decision on 31.10.2019 against the Respondent for the sum of RM1,806,538.76 under CIPAA. Thereafter, in November 2019, the Appellant filed an application to enforce the Adjudication Decision as a judgment of the High Court [4] (‘the Enforcement Application’). The Respondent opposed the Enforcement Application, commenced arbitration proceedings and filed an application to set aside the Adjudication Decision [5].
Notwithstanding the above, on 3.1.2020, the Appellant also proceeded to serve a notice of demand pursuant to Section 466(1) of the Companies Act 2016 for the amounts due under the Adjudication Decision ('the Notice') to be paid within 21 days, failing which, the Appellant would then be in a position to commence winding-up proceedings against the Respondent.
Prior to the expiry of the 21-day period prescribed in the Notice, the Respondent succeeded in obtaining an ex-parte Fortuna Injunction to prevent the Appellant from presenting the winding-up petition.
Thereafter, on 4.6.2020, upon the inter-partes hearing, the High Court determined as follows:
Consistent with the objectives of CIPAA, the beneficiary of an Adjudication Decision should resort to making an application to Court prior to using any method of enforcement under the Rules of Court 2012 (which would not include a presentation of a winding-up Petition under the Companies Act 2016).
Such modes of execution would be compatible with CIPAA 2012’s objective facilitating cashflows of contractors and service provides in the construction industry.'
A “just and equitable balance” has to be struck between the rights of a successful litigant in adjudication proceedings and rights of the loser in adjudication proceedings to pursue arbitration or court action for a final decision which may overturn or prevail over the “provisionally binding adjudication decision”.
Decision of the Court of Appeal
On appeal, whilst the Court of Appeal agreed with the learned High Court Judge that a “just and equitable balance” has to be struck between the rights of a successful litigant in adjudication proceedings and rights of the loser in adjudication proceedings to pursue arbitration or court action for a final decision, the Court of Appeal inter alia, went to also make the finding that in accordance with the decision of Likas Bay, a successful party in an Adjudication Proceeding is entitled to present a winding-up petition without having to first apply to Court to enforce the same[6].
Commentary
The Court of Appeal in Likas Bay had set out quite clearly that there was no need to proceed with an application to Court to enforce the Adjudication Decision under s. 28 of CIPAA prior to presentation of a winding-up petition under the Companies Act 2016for a debt due arising from an adjudication decision.
However, the High Court in a subsequent decision of ASM Development (KL) Sdn Bhdv Econpile (M) Sdn Bhd [2020] MLJU 282 ('ASM'), went to great lengths to distinguish Likas Bay, on amongst others, a technical argument that s. 28 of CIPAA only allowed enforcement of an Adjudication Decision “as if it was a judgment or an order” of the High Court as opposed to “as a Judgment or Order of the High Court” and to reinforce the position that an adjudication decision only has “temporary finality” which was held to mean that by its nature, an adjudication decision is “disputable”.
Whilst the learned Judge in ASM was careful to state that an adjudication decision may still be the basis for the issue of a statutory notice under s. 466(1) of the Companies Act 2016, even if not ordered to be enforced as if it were a judgment of the High Court, the Court went on to hold that if a statutory demand is issued under s. 466(1)(a) of the Companies Act 2016 based on a debt or an adjudication decision (even one that has been ordered to be enforced as if it were a judgment of the Court), but not based upon a judgment of a Court of law, an injunction may be issued to restrain the creditor from presenting a winding up petition, if the debt or the adjudication decision is genuinely disputed upon substantial grounds or if there exists a genuine cross-claim, counterclaim or set-off against the would-be petitioner for an amount or amounts greater than the alleged debt upon substantial grounds. The decision of ASM has then been subsequently relied on to justify obtaining a Fortuna Injunction whenever a successful party attempted to commence winding-up proceedings based on an Adjudication Decision. In some instances, despite the Court of Appeal decision in Likas Bay, Fortuna Injunctions were granted relying on the decision of ASM, depending on the factual circumstances of each case. This author has been personally involved in such a case heard in the Shah Alam High Court in February 2020.
This approach in the case of ASM resulted in parties being advised to err on the side of caution and make an application to Court under s. 28 of CIPAA before proceeding with any method of enforcement, including winding-up proceedings. This “cautious” approach inevitably results in a setting aside and/or stay application also being filed by the unsuccessful party and protracted Court proceedings which could span years without any sums being paid in accordance with the adjudication decision obtained.
This “cautious” approach is genuinely frustrating for parties who are “out-of-pocket” and have been successful in obtaining a CIPAA award. The entire purpose of the enactment of CIPAA was to address the cashflow issues in construction projects asset out in the following commentary written at the time that CIPAA was to come into force:
“It aims to remove the practice of conditional payments (‘pay when paid’ and ‘pay if paid’) and reduce payment default by establishing a cheaper, speedier system of dispute resolution in the form of adjudication.
The government’s initiative in introducing the CIPAA 2012 is one of the government’s transformation agenda which is to stabilise the construction industry. This form of dispute is not something new or related solely towards mega construction projects alone. Experience from other countries showed that the consequences of payment default can result in insolvencies.”
…
With such tight scrutiny on payment in the industry, this will lead to improvements in the quality of work and promote a higher level of professionalism in the industry. Employers in the industry will eventually practice good governance with regard to the administration of payment and as such, will minimise payment disputes from proceeding to arbitration or courts.[7]"
If parties are not in a position to enforce and obtain payment in the swiftest method possible, with stumbling blocks at every juncture, then the entire purpose of utilising the dispute resolution mechanism under CIPAA would then be defeated. As such, the recent Court of Appeal decision in the case of Sime Darby, will provide much needed clarity in the approach that ought to be taken when determining a Fortuna Injunction arising from presentation of a winding-up petition based on an adjudication decision.
Aarthi & Associates is a legal firm dealing with varied civil and corporate disputes,including construction disputes, injunctions and CIPAA claims. The firm's philosophy of "Providing Solutions", demonstrates a commitment to providing fast, effective and practical solution to disputes.
References:
[1] [2021] MLJU 1494
[2] [2019] 3 MLJ 244
[3] Sime Darby Energy Solution Sdn Bhd (sebelum ini dikenali sebagai Sime Darby Offshore Engineering Sdn Bhd) v RZH Setia Jaya Sdn Bhd [2021] MLJU 1494 para 55
[4] Pursuant to s. 28 of CIPAA
[5] Pursuant to s. 15 of CIPAA
[6] Pursuant to s. 28 of CIPAA
[7] "Construction Industry Payment and Adjudication Act 2012- An insight" [2013] 3 MLJ lix by Prof. Datuk Sundra Rajoo
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