Construction firm sues govt for bypassing Parliament with new rules protecting companies who can’t pay debts for six months

Ida Lim
Penang-based construction company Wabina Constructions & Engineering Sdn Bhd argued it was wrong for the government not to go through Parliament to change an existing federal law which gives 21 days before such companies have to be wound up. — Picture by Shafwan Zaidon

KUALA LUMPUR, June 29 — A construction company has filed a court challenge against the government for skipping Parliament when introducing new rules to allow indebted companies a longer protection period of six months to pay off their debts to creditors to avoid being wound-up.

The company argued it was wrong for the government not to go through Parliament to change an existing federal law which gives 21 days before such companies have to be wound up.

The Penang-based construction company Wabina Constructions & Engineering Sdn Bhd said the new rules introduced during the movement control order (MCO) period was unconstitutional and had affected its rights as a creditor to claim a RM7 million sum owed by another company.

Wabina’s lawyer Ong Yu Shin said the High Court in Penang today allowed Wabina to proceed with its court challenge against the government, by granting the company leave for judicial review.

Ong told Malay Mail that the Attorney-General’s Chambers’ senior federal counsel Rahazlan Affandi Abdul Rahim — who represented the government — did not object to Wabina’s application for the court’s nod to proceed for a judicial review.

Ong said that High Court judge Datuk Rosilah Yop agreed “there is a prima facie case by allowing our application” for leave for judicial review.

Ong said his client had today verbally asked the High Court to move the case to the Federal Court to have the matter decided once and for all as constitutional issues were involved, but the High Court had asked the company to file in a formal written application for the constitutional reference to the Federal Court before July 14.

Ong said his client would be making the constitutional reference under Section 84 of the Courts of Judicature Act.

The case will come up for case management in the High Court on July 14.

The Dewan Rakyat is set to reconvene for 25 days from July 13 to August 27, with the government expected to table a new law for temporary measures to minimise the impact of the Covid-19 pandemic including to provide relief from certain contractual obligations.

About the case

On May 12, Penang-based construction firm Wabina Constructions & Engineering Sdn Bhd filed its legal challenge against the Malaysian government, the Domestic Trade and Consumer Affairs Ministry (KPDNHEP), Datuk Alexander Nanta Linggi in his capacity as the domestic trade and consumer affairs minister, the Companies Commission of Malaysia, Seal Properties (KL) Sdn Bhd.

Following a dispute over contract payments that Seal was due to pay to its main contractor Wabina, Wabina had obtained an adjudication award where Seal was ordered to pay over RM7.33 million on or before March 26, court documents filed by Wabina said.

But with Seal still failing to pay the amount to Wabina since March 27 which meant their relationship is now that of a debtor and creditor, Wabina said it had the right under Section 466 of the Companies Act to issue a notice of demand to Seal to demand for the payment. 

Under Section 466, a company which fails to pay the sum demanded in a notice of demand within 21 days after being served the notice, will be considered as unable to pay its debts. The company can then be wound up.

But due to the MCO which was imposed since March 18 and which was later extended to May 4, Wabina said it was unable to issue and deliver the notice of demand for payment to Seal.

On April 23, KPDNHEP minister Linggi made a new written order — Companies (Exemption) (No. 2) Order 2020 — to exempt any companies that fail to pay the debt demanded in the notice of demand from the Companies Act’ Section 466 provision with the 21-day requirement, instead stating a new period of six months.

In other words, the new order on April 23 means that companies who owe debts are now given an extended period of six months — instead of the original 21 days — to pay up as demanded in notice of demands from their creditors to avoid being wound up.

The order — which becomes a subsidiary legislation of the Malaysian government — applies to any notice of demand served during the April 23 to December 31, 2020 period.

Why this is important

In the court documents filed by Wabina, it argued that the new rules had retrospective effect and had affected its substantive rights as a creditor under the Companies Act.

Wabina also said its constitutional rights to equal treatment under the law were infringed on, arguing that the new government order allegedly gave Seal as the debtor more protection under the law than Wabina as the creditor.

Among other things, Wabina argued that the KPDNHEP minister had acted beyond his powers under the law to issue the April 23 order, arguing that the 21-day period in the Companies Act could not be amended by a mere ministerial order and that only Parliament has the powers to make changes to such a substantive law.

Wabina also accused the government, KPDNHEP and its minister of “usurping” Parliament’s powers to make laws and of infringing the doctrine of separation of powers by issuing the April 23 order.

Claiming that the government had acted unreasonably and disproportionately by allegedly giving legal protection only to debtors via the April 23 order, Wabina also argued that the government had failed to take into account that the six-month extension in the government order was allegedly “adverse” and “counter-productive” to the “revival of the Malaysian economy”.

While acknowledging the KPDNHEP minister’s powers under the Companies Act’s Section 615 to make orders to exempt the Companies Act from applying to “any person, corporation or class of corporations”, Wabina argued that it was wrong for the KPDNHEP minister to make an order with a blanket exemption on all companies in Malaysia from any Companies Act provision.

In its judicial review application, Wabina is seeking for several orders from the court, including an order to quash or set aside the April 23 order, and an order to compel all those sued to comply and recognise the court’s decision in this lawsuit.

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