The Law of Undue Preference in Malaysia

Law of Undue Preference in Malaysia – Section 528(1) of the Malaysian Companies Act 2016 provides that:-

Any transfer, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company which is unable to pay its debts, as the debts become due, from its own money in favour of any creditor or any person in trust for any creditor shall be deemed to have given such creditor a preference over other creditors in the event of the company being wound up on a winding up petition presented within six months from the date of making or doing the same and every such act shall be deemed fraudulent and void.

The law on unfair preference aims to protect creditors from company which is insolvent from dissipating its assets to another creditor and thus giving such creditor an unfair preference over the other creditors.

However, conflict may arise for example, whereby the insolvent company needs to settle outstanding payment to its supplier of raw materials so that the insolvent company can continue to receive sufficient raw materials from the supplier to continue production and hopefully rehabilitate itself. Would such payment then be seen as preferring the supplier over the other creditors? Section 528(1) is a merely a deeming provision and like any presumption, should be rebuttable if such application of the deeming provision leads to injustice or absurdity.

It is worth noting the Singaporean position on this whereby the particular transaction sought to be reversed on grounds of unfair preference must be fuelled with the ‘desire to prefer’ i.e. desire to produce the effect of putting such creditor into a position which, in the event of bankruptcy, a better position than the position such creditor would have been in if that thing had not been done. Before the Court reverses transactions which give unfair preference to certain creditors, the Court will scrutinise the surrounding circumstances and ascertain the intention behind such transactions (based on the peculiar facts of each case) whereby, it must be clearly proved that such transactions were not motivated by a desire to prefer.

The law on unfair preference only applies to company which is insolvent. According to Section 528(1) of the Malaysian Companies Act 2016, such insolvency refers to inability to pay debts, as the debts become due. Nonetheless the Court in Arab Malaysian Merchant Bank Berhad v. Orient Apparel Berhad & Ors [2002] 1 MLJ 89 has differentiated liquidity problem and insolvency within the meaning of Section 528(1) :-

“To reiterate, this court is of the view that at the material time when these instruments were created, OAB was not insolvent. OAB, as discussed earlier, was facing liquidity problems and not insolvent within the concept, as laid down in Sandell v. Porter.

“An inability to pay debts as they fall due out of the debtor’s own moneys. But the debtor’s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms, though no doubt experts may speak as to the likelihood of any of the debtor’s assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.”

Author: Lim Ching Yong
Disclaimer : This article is for information purpose only and is not intended to create solicitor-client relationship.

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