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The Effect And Purpose Of A Stay Order In A Winding-Up Proceedings

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The Effect And Purpose Of A Stay Order In A Winding-Up Proceedings

What is the purpose of a stay order in a winding-up proceeding? Scroll down to find out more.

What is the purpose of  a stay order in a winding-up proceeding? This was briefly mentioned in the Court of Appeal case of American International Assurance Bhd v Coordinated Services L Design Sdn Bhd. We will briefly look at it.

Brief fact of the case

Coordinated Services obtained a commercial insurance fire policy from American International in 2002. The policy was renewed all the way until 2004. 

A fire broke out at Coordinated Services premises in 2004 and they made a claim under the policy. It was at this juncture certain events occurred:

  1. Whilst conducting an investigation, American International discovered that Coordinated Services have been wound up in 2001.
  2. American International immediately repudiate the policy and attempted to refund the insurance premium paid by Coordinated Services under the policy. However, Coordinated Services refused to accept the refund and threaten to sue American International should they fail to cough up the monies under the claim.
  3. To make matters worse, American International subsequently found out (when they were served) that Coordinated Services have filed a notice of motion in 2009 to stay the winding-up order permanently. The court granted the stay and even noted that all dealings and agreements entered into by Coordinated Services from the time of winding up until the stay is valid.  

Aggrieved, American International filed an originating summons to seek a declaration that the stay order was obtained in breach of section 243(1) of the Companies Act 1965 (currently section 492(1) of the Companies Act 2016) and for that order to be set aside.

The parties’ contention

American International (amongst others) argued that: 

  1. The second part of the order (namely all dealings and agreements entered into by Coordinated Services from the time of winding up until the stay is valid) granted by the court amounts to an indirect complete discharge of the winding-up order which the winding-up court has no jurisdiction to do so;
  2. The stay order was obtained in breach of and beyond the powers conferred in section 243 (1) of the Companies Act 1965.

Coordinated Services (amongst others) argued that:

  1. The stay order in question was granted within the jurisdiction of the court and no injustice has been caused to any creditor, shareholder, or the public; and
  2. The court has the jurisdiction to validate all dealings and agreements entered into after the commencement of winding up of the company and to grant a perpetual stay.

Findings of the High Court

The High Court dismissed American International’s application and noted (amongst others) that:

  1. American International in making the application was to evade liability in respect of the fire policy. He further held that just because a company had been wound up does not mean any of the transactions during the material time or after the winding-up cannot be sustained; it depends on whether the act was for the benefit of the company which was essential in the process of winding up; and
  2. The stay order was made within the power and jurisdiction of the winding-up court; and the second part of the said order cannot be said to be in excess of jurisdiction as it is a necessary order to ensure that all transactions after the winding-up process has commenced are duly validated, failing which all steps are taken in the course of winding up proceedings would be subject to challenge.

The decision and rationale of the Court of Appeal

On appeal, the Court of Appeal sided with American International and reversed the decision of the High Court. In coming to its decision, the Court of Appeal noted (amongst others) that:

  1. Once a company is wound up, the board of directors of the company becomes functus officio (i.e. they cannot do a single thing other than bringing an appeal against the winding-up order). The liquidator displaces the directors and the control of the activities of the company is vested with the liquidator. No one but the liquidator can act for the company (unless approval was obtained prior to such act);
  2. The second part of the stay was not made according to any provision of the Companies Act 1965 and is ambiguous, too wide, and too general. It covers all dealings and agreements entered into by Coordinated Services from the date of the winding-up until the date of the stay order. The court is in no position to be satisfied with what the particulars of the dealings and agreements are; whether they are really ‘necessary for the beneficial winding up of the company;
  3. Whilst the court may impose terms and conditions as it thinks fit, it must be noted that any terms and conditions imposed must not defeat the purpose of the order itself- If the validation of all previous dealings and agreements is against the universal spirit of a winding-up order and cannot be allowed under the section, then the court cannot impose any term and condition to the same effect under the same section, which may in effect defeat the purpose of the said section.

So what is the purpose of the stay order?

As the court noted, the purpose is for the winding-up order to become inoperative without being revoked. Proceedings are not ended by a stay though nothing can be done to pursue them without a further court order. In other words, the effect of a stay order is that the winding-up process comes to an end — the whole effect of the winding-up ceases and the company can thereafter resume the conduct of its business and affairs as if no winding-up order existed. It is essentially a second wind for a company that was about to go south. 

Having said that, the court noted that a stay order does not wipe the winding-up order out of existence but would only be operative from the date of the granting of the stay order. Coordinate Services contention and the judge’s order was, therefore, invalid. 

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