Lavania & Balan Chambers

It is common for companies to be wound up by creditors when they are unable to pay their debts. Winding up is a process where the operation of the company is terminated and its assets are liquidated. The Director General of Insolvency (“DGI”) will distribute the liquidated assets to the company’s creditors to satisfy the existing debts.

Whilst the avenue to wind up a company is expressly provided in the Companies Act 2016 (“CA 2016”), is this remedy available to creditors of societies that default in their debts?

Registered societies in Malaysia are governed under the Societies Act 1966 (“Act”). The Act provides clear guidelines and regulations on the affairs of societies and sets out certain circumstances when a society can be wound up.

Societies can be wound up and its process and effect are akin to winding up of companies. Nevertheless, it bears highlighting that unlike companies, societies cannot be sued or sue in their own name as per section 9(c) of the Act. Any proceedings brought against societies must name the registered officers or office bearers of the society instead of the society itself.

Generally, a society can be wound up by the DGI or by petition of creditors.

Winding up by the DGI

The statutory right to wind up a society is provided in section 17 of the Act. There are 3 circumstances when a society can be wound up by the DGI:

1.     When the Minister declared the society to be unlawful under section 5 of the Act;

2.     When the Registrar refused to register a local society as per section 7 of the Act; or

3.     When the society is cancelled pursuant to section 13 of the Act.

Upon the abovementioned declarations or decisions made, the properties of the society shall vest either in the DGI, or any officer appointed by the Minister for the purpose of winding up the affairs of the society under section 5 of the Act.

The law on winding up of societies under the statutory regime was discussed in the recent Court of Appeal case of Ketua Pengarah Insolvensi v Setiausaha, Lembaga Wakaf Hindu Negeri Pulau Pinang^[1]. Here, the Society was cancelled and the Plaintiff pleaded that all properties of the Society to be vested in him as there were no objections by the Registrar of Society to the same, in which the trustee of the temple strenuously objected to.

In denying the Plaintiff’s claim, the Court of Appeal gave an overview on section 17 of the Act, and held that in the event a society being cancelled, all the properties belonging to the society shall vest in the DGI and no other persons. The word ‘shall’ connotes that this provision is mandatory in nature as it is the duty of the DGI to realise the properties of a wound up society.

Then the court highlighted section 17B of the Act as an alternative for the DGI in this scenario.

Section 17B

After a society has been wound up and its properties are vested in the DGI, (“old society”), section 17B of the Act provides a saving provision where if the DGI is satisfied that another similar society had been registered under this Act (“new society”), upon application by the DGI, the High Court can grant an order ordering all the assets and liabilities of the old society to be vested into the new society, subject to certain conditions which is set out under s17B(1).

Therefore, when facing disputes among trustees pertaining to management of assets of wound-up societies, section 17B of the Act serves as a win-win solution for all parties if a new society is registered.

Petition by creditor(s)

Another method to wind up a society is through winding up petitions by creditors. Although there is no express provision that allows a winding up petition to be filed against a society, courts have permitted such petitions to be made.

Section 544 CA 2016 defines unregistered company as an association of more than 5 members, whilst section 2 of the Act defines society as “any association of 7 or more persons”. As such, a society is automatically qualified as an unregistered company. Flowing from the above, societies can be wound up by creditors, pursuant to the procedures in sections 543 to sections 548 of CA 2016, subject to the restriction that they cannot be wound up voluntarily like registered companies.

Such interpretation of the provisions is affirmed in the Federal Court case of Thein Hong Teck & Ors v Mohd Afrizan bin Husain^[2].

Grounds to Wind Up

A society can be wound up on 4 grounds as stated in section 545(1)(c) of the CA 2016, namely :

(i)             The society is dissolved or has ceased to have a place of business in Malaysia or has a place of business in Malaysia only for the purpose of winding up its affairs;

(ii)            The society is unable to pay its debts;

(iii)          If the Court is of the opinion that it is just and equitable that the society should be wound up; or

(iv)          The society is being used for unlawful purposes or any purpose prejudicial to or incompatible with peace, welfare, security, public interest, public order, good order or morality in Malaysia.

The inability to pay debts is further defined in section 545(2) CA 2016, which is essentially similar to the standards for inability to pay for companies seen in section 466 CA 2016. In summary, a society shall be deemed to be unable to pay its debts if:

(i)             The society is indebted to a creditor for an amount exceeding RM50,000.00. The creditor has served a notice of demand requiring the society to pay the due and the society failed to pay within 3 weeks after service of the notice;

(ii)            An action has been instituted against the member of the society for debt claimed to be due. Following a notice in writing of the institution of the action has been served on the society, the society failed to pay for the debt, or failed to procure the action to be stayed, or failed to indemnify the defendant to his satisfaction against the action, within 10 days after service of the notice;

(iii)          The execution of a judgment obtained against the society; or

(iv)          Otherwise proved to the satisfaction of the court that the society is unable to pay its debts.

 

Powers of DGI

Section 17(e) of the Act states that the DGI, or any other officers appointed by the Minister shall have all the powers vested in the DGI by any bankruptcy laws and /or powers of an official liquidator.

For purposes of the winding up process, the Registrar or the DGI is empowered to require or authorise the governing body, office bearer, member or employee of the society to furnish any information relating to the society. Failure to comply with such directions may render them to imprisonment or fine if convicted by the Court. Nevertheless, the Act provides protection to information providers to the extent that they would not be guilty on any offence under the Act.

Surplus of Assets

How would the DGI deal with surplus of the society (if any) after satisfying all the debts and liabilities?

Section 17(b) of the Act provides that the surplus assets would be paid to the Consolidation Fund of the society if:

(i)             The registration was refused or cancelled by an order under section 5; or

(ii)            It appears that the society is unlawful under section 7(3)(a); or

(iii)          The Registrar finds the society is likely to be used for unlawful purposes under section 13(1)(c)(ii); or

(iv)          The Minister directs so.

In all other cases, the surplus would be paid to the members of the society according to the rules of society. If the rules of the society are silent on the methods of distribution, the DGI shall prepare for a scheme of payment to be approved by the High Court. Generally, the courts would distribute the surplus among the members or contributors per capita or equally, unless the rules provide for unequal distribution.^[3] As such, any donors who made contributions to the society, can make a claim towards the DGI.^[4]

Conclusion

In light of the above, it is submitted that societies can be wound up in Malaysia. As expressly acknowledged by the Federal Court in the case of Lee Tak Suan & Anor v. Tunku Dato Seri Shahabudin^[5], a society is a property-owning entity, and the Act does envisage a registered society entering into contracts and incurring debts and liabilities. Therefore, although societies lack a separate legal entity, they are subject to winding-up proceedings and the members need not be personally liable for the incurred debts to creditors.

What can be said about a society owing monies to parties is that the winding-up procedure is the most straightforward way to demand a repayment from a society, if there are no other or not much competing creditors. The reason being that in order to wind up a society, the petitioner does not need to file a suit to obtain a judgment beforehand. As long as it can be proven that a society failed to respond to the demand of debt within 21 days, a winding up petition can be presented.

This article is authored by Lavinia Kumaraendran (Partner) and Melody Tan Kar Yen (Pupil) of the Commercial Litigation Practice of Lavania & Balan Chambers. It contains general information only. The contents are not intended to constitute legal advice on any specific matter nor is it an expression of legal opinion and should not be relied upon as such.