When Winding Up Winds Down Direct Payment

The Provision

Sections 30(1) to (3) of CIPAA establish the mechanism for direct payment: the unpaid party makes a written request, the employer gives the main contractor 10 working days to provide proof of payment, and, failing that, the employer is required to make payment. Two further subsections are particularly relevant here¹:

(4) The principal may recover the amount paid under subsection (3) as a debt or set off the same from any money due or payable by the principal to the party against whom the adjudication decision was made.

(5) This section shall only be invoked if money is due or payable by the principal to the party against whom the adjudication decision was made at the time of the receipt of the request under subsection (1).

The Brief Facts

In February 2015, KTCC Mall Sdn Bhd (“KTCC”) appointed MPM Project Management Sdn Bhd (“MPM”) as the main contractor for a mixed commercial development in Kuala Terengganu. By a letter of acceptance dated 19 September 2018, MPM subsequently appointed TCS Construction Sdn Bhd (“TCS”) as the subcontractor for the main builders’ works.

There was an added layer of comfort for TCS. On the same day, KTCC issued a letter of undertaking to TCS, undertaking to settle MPM’s outstanding amounts in the event of MPM’s default².

The chronology is what matters:

1. 23 January 2020: KTCC issued the certificate of practical completion. The quantity surveyor subsequently assessed the final contract sum at RM224,053,767.00, which KTCC maintained had been paid to MPM in full.
2. 28 February 2022: MPM was wound up.
3. 13 September 2022: The adjudicator awarded TCS RM6,141,557.77 against MPM, payable within 14 days, by 27 September 2022.
4. 21 September 2022: Six days before the payment deadline, TCS made a request to KTCC under Section 30 of CIPAA for direct payment of RM6,922,576.82, comprising the adjudicated sum, interest and costs.
5. 5 October 2022: KTCC denied liability and wrote to MPM and its liquidator requesting proof of payment.

TCS subsequently commenced proceedings against KTCC to recover the amount directly, while KTCC sought a declaration that TCS was not entitled to such payment³.

Note the timing. Unlike in VKPT, TCS could no longer pursue winding-up proceedings against its paymaster. By the time TCS obtained the adjudication decision, MPM had already been in liquidation for more than six months.

The High Court allowed TCS’s claim. Relying on CT Indah Construction Sdn Bhd v BHL Gemilang Sdn Bhd [2019] MLJU 1215, the High Court treated Section 30 of CIPAA as creating an independent statutory payment obligation that was unaffected by MPM’s liquidation. The High Court also questioned the sufficiency of KTCC’s evidence that it had paid MPM in full³.

KTCC appealed.

The First Hurdle: Was Any Money Due?

The Court of Appeal found that KTCC owed MPM nothing. The final account, which MPM had accepted in full and final settlement, and a penultimate certificate certifying “nil”, showed this on a balance of probabilities.

The Court of Appeal had already reached the same finding in a Section 30 of CIPAA claim by another of MPM’s subcontractors on the same project (the Better One case). Under the doctrine of stare decisis, that decision bound the High Court⁴. Without money due, Section 30(5) of CIPAA was not satisfied and the claim failed.

The Second Hurdle: Section 30 of CIPAA Meets Winding Up

That was enough to decide the appeals. But the Court went on to hold that Section 30 of CIPAA cannot be used once the main contractor is in liquidation. This is the part of the decision with the widest reach.

CT Indah reasoned that the employer pays under its own statutory duty, so nothing leaves the main contractor’s estate. The Court of Appeal rejected that view. Any debt owed to a wound-up company is an asset of that company, to be distributed among all creditors under Section 527 of the Companies Act 2016 (“CA”). Paying it straight to one subcontractor shrinks the pool for everyone else⁵.

The Court gave four reasons why Section 30 must give way:

1. Undue preference. Direct payment would give the subcontractor an unfair advantage over other creditors, contrary to Section 528 of CA. Section 30 of CIPAA cannot override, circumvent or bypass Sections 527 and 528 of CA⁶.
2. Pari passu is the cornerstone. Equal treatment of creditors lies at the heart of insolvency law⁷.
3. Specific beats general. Under the maxim generalia specialibus non derogant, CIPAA is general law, and the winding-up provisions of the Companies Act 2016 are specific law that prevails⁷.
4. No clear words. Applying the Federal Court’s reasoning in Dubon Bhd v Wisma Cosway Management Corporation [2020] 4 MLJ 288, nothing in Section 30 of CIPAA clearly displaces the statutory priority regime or makes the debt a secured one⁸.

There was also the unfairness to the employer. Its safety net under Section 30(4) of CIPAA, recovery from the main contractor, is effectively worthless once the main contractor is in liquidation.

The Turning Point: Has the Main Contractor Been Wound Up?

In VKPT, registration under Section 28 of CIPAA was the watershed. In KTCC Mall, it was the winding-up of the main contractor. Either way, what an unpaid party can recover turns on the sequence of events.

What Is Left of CT Indah?

The main judgment distinguished CT Indah on the basis that the question of whether any money was due or payable had not arisen in that case. The two concurring judgments went further. Lim Chong Fong JCA held that CT Indah was decided per incuriam, while Muniandy Kannyappan JCA considered that its reasoning appeared to have been so. Both cautioned against allowing an applicant under Section 30 to obtain a “back-door” priority that only Parliament can confer⁹.

CT Indah has not been formally overruled, and the issue may yet be considered by the Federal Court. For now, relying on CT Indah to pursue direct payment after the main contractor has been wound up is a steep climb.

A Glimmer for Subcontractors: Express Trusts

Both concurring judgments point towards where meaningful protection may lie. A mere contractual or statutory right to direct payment does not, by itself, make an unpaid party a secured creditor. The position may be different where the relevant arrangement creates an express trust, such as a properly drafted retention sum arrangement.

Applying the Federal Court’s decision in SK M&E Bersekutu Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd [2019] 4 CLJ 590, money held on trust does not form part of the assets of the wound-up company¹⁰.

For subcontractors, the lesson is to secure protection at the contract stage, rather than waiting until the main contractor has collapsed.