Case Updates

Case Update: Sums due to Management Corporation are Unsecured Debts in the Insolvency Field

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INSOLVENCY
Fundamental principles of the law on rights of secured and unsecured creditors – Status of debt owed to Joint Management Body or a Management Corporation, to that of a secured or preferential debt within the insolvency regime, where the proprietor of the parcel concerned is in liquidation, or is bankrupt – Section 77 – Strata Management Act 2013

Dubon Berhad (in liquidation) v Wisma Cosway Management Corporation
[2020] 1 LNS 503, Federal Court
- see the grounds of judgment here

Facts The Appellant, Dubon Berhad (in liquidation) (the ‘Company’) is the beneficial owner of a lot in Wisma Cosway (the ‘Unit’). The Respondent, Wisma Cosway Management Corporation, is the management corporation of Wisma Cosway (MC). The Company was wound up and as process of realising the Company’s assets, which included the Unit, the liquidators required the execution of the transfer of the Unit into the Company’s name. However, the developer of Wisma Cosway, Stephens Properties Sdn Bhd (‘Stephens’) refused to execute the transfer unless the Company first obtained a “clearance” letter from the MC in relation to an outstanding sum which includes “administrative and application fees” owed to Stephens and service charges owed to MC. The Company denied the claim and took the position that it was not liable to pay the sums sought by Stephens and the MC because the Company was in liquidation, and any payment of its liabilities was subject to the availability of funds for unsecured creditors. Negotiations to resolve the conflict were conducted, but no resolution was reached. The Company then filed a claim at the Strata Management Tribunal at Putrajaya (‘ST Proceedings’), seeking an order that Stephens be directed to execute the memorandum of transfer without imposing any administrative and application fees and the MC issue the clearance letter upon the Company’s payment. The MC filed a counterclaim for the sum it was owed and followed this up with an application in the winding up court for leave to commence or proceed with its counterclaim in the ST Proceedings. The High Court refused the MC’s application, however, the Court of Appeal then reversed the High Court’s decision and allowed the grant of leave for MC to proceed against the Company in liquidation for the purposes of recovery of the debts. Hence, this appeal.

Issue The main issue in this case was whether payments received or recovered by the MC as a debt, from the proprietors of properties held under the SMA who are in liquidation or bankrupt, enjoy priority or preference over other creditors, equivalent to that accorded to secured creditors within the insolvency regime?

Held In allowing the appeal, the Federal Court held that that section 77[1] of the Strata Management Act 2013 does not accord any form of priority or preference in relation to payments received by a MC from an insolvent parcel proprietor, in light of the general regime of insolvency law as set out in the Companies Act, that the outstanding sum payable to the MC is not a secured debt and has no effect on the rights of third party creditors.

ZUL RAFIQUE & partners
{3 July 2020}
[1] Recovery of sum as a debt due to management corporation or subsidiary management corporation