03 December 2019

Introduction

When a Claimant successfully obtained an Adjudication Decision in its favour, CIPAA offers 3 methods to enforce of the Adjudication Decision, where the successful Claimant may:-

1) apply to the Court to enforce the Adjudication Decision as High Court Judgment under Section 28 of CIPAA;

2) suspend the performance of work under Section 29 of CIPAA; and/or

3) request for direct payment from the Principal of the losing party under Section 30 of CIPAA;

However, the former 2 options would not be possible if the project has been completed and/or the losing party has been wound up. In such circumstances, could the winning party requests for direct payment from the Principal, notwithstanding that the losing party has been wound up? This issue was recently canvassed and decided by the Court of Appeal on 25.10.2019 in the case of CT Indah Construction Sdn Bhd v BHL Gemilang Sdn Bhd (Civil Appeal No: W-02(C)(A)-2056-10/2017).

Background Facts

The brief facts of the case are as follow:-

1) BHL Gemilang (“Developer”) was the Developer of the project known as “The Mark” (“Project”).

2) The Developer had appointed BHL Builders (“Main Contractor”) as the main contractor of the Project.

3) The Main Contractor in turn subcontracted the super structure work to CT Indah Construction Sdn Bhd (“Subcontractor”) for the sum of RM43,144,275.98.

4) Subsequently, a payment dispute arose between the Main Contractor and the Subcontractor and following therefrom, the Subcontractor commenced CIPAA proceedings against the Main Contractor.

5) By an adjudication decision dated 13.10.2016, the Adjudicator allowed the principal sum of RM9,065,335.67 (“Adjudicated Sum”) together with interest and costs against the Main Contractor (“Adjudication Decision”)

6) The Main Contractor failed to settle the Adjudicated Sum.

7) Following therefrom, the Subcontractor had issued a statutory demand against the Main Contractor for the Adjudicated Sum. On 07.12.2016, the Subcontractor also avails itself by requesting the Main Contractor’s principal, the Developer for direct payment of the Adjudicated Sum  in accordance pursuant to the Section 30 of CIPAA. For ease of reference, Section 30 of CIPAA is reproduced hereinbelow:-

Section 30 of CIPAA

 

“(1) If the party against whom an adjudication decision was made fails to make payment of the adjudicated amount, the party who obtained the adjudication decision in his favour may make a written request for payment of the adjudicated amount direct from the principal of the party against whom the adjudication decision is made.

 

(2) Upon receipt of the written request under subsection (1), the principal shall serve a notice in writing on the party against whom the adjudication decision was made to show proof of payment and to state that direct payment would be made after the expiry of ten working days of the service of the notice.

 

(3) In the absence of proof of payment requested under subsection (2), the principal shall pay the adjudicated amount to the party who obtained the adjudication decision in his favour.

 

(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) The section shall only be invoked if the 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).”

8) The Developer failed to “show proof of payment” to the Subcontractor or “to state that direct payment would be made after the expiry of ten working days of the service of the notice”.

9) The Main Contractor was wound up by a third party due to an unrelated debt by a Winding Up Order dated 17.08.2017.

10) Following therefrom, the Subcontractor initiated the present action against the Developer for direct payment of Adjudicated Sum.

Issue before the Court

The Developer resisted the Subcontractor’s application for direct payment of Adjudicated Sum and argued that, since the Main Contractor had been wound up, the Subcontractor’s receivables should be under receivership. Following therefrom, any direct payment made by the Developer would amount to undue preference of creditors in the Subcontractor’s favour, thereby infringing Section 293 of Companies Act 1965 (now Section 528 of Companies Act 2016) that prohibits preferential payment.

Whether Section 30 of CIPAA is subjected to the prohibition of preferential payment under Section 293 of Companies Act?

High Court

In the High Court, the Learned High Court Judge dismissed the Subcontractor’s application and held that Section 30 of CIPAA does not create a separate independent obligation and liability on the Developer, as the Principal to make direct payment to the Subcontractor. Any payment by the Developer to Subcontractor would amount to preferential payment as the Main Contractor was in liquidation:-  

[41]With the greatest of respect to learned counsel for the Plaintiff I am afraid I cannot agree. For Parliament to create a separate and independent obligation to pay by the principal of the Respondent in the Adjudication in this case by the Defendant as Developer of the Main Contractor to the Plaintiff as the Subcontractor, there must be clear words expressly employed for this purpose for otherwise there is no contractual obligation to pay direct by the Developer to the Subcontractor.

…

[48]If Parliament had intended the provision of section 30 to prevail over the Companies Act 1965 then one would have expected the use of the device of a non obstante clause as in “Notwithstanding the provision of any law to the contrary…….”

…

[52]In the absence of a non obstante clause and in the light of the legion of authorities that do not follow Glow Heating Limited (supra), I would say that the provision of section 30 of the CIPAA is subject to the rules prohibiting preferential payment to unsecured creditors under the insolvency regime under the Companies Act 1965 or even the Companies Act 2016.

Court of Appeal

Dissatisfied with the High Court’s decision, the Subcontractor appealed to the Court of Appeal, The Court of Appeal reversed the High Court’s decision and reasoned that by virtue of Section 30(3) of CIPAA, there was an independent statutory obligation on the part of Developer/Principal to make direct payment to the Subcontractor:-

[14] In the instant case, the liability of the respondent [Developer] to make payment is imposed by statute, i.e. by section 30(3) of CIPAA. Thus, payment made by the respondent [Developer] to the appellant [Subcontractor]  would not be from the assets of BHL Builders [Main Contractor], but because the adjudicated sum is paid by the respondent [Developer], it will be a debt due from BHL Builders [Main Contractor] to the respondent [Developer] (once the respondent [Developer] makes direct payment to the appellant [Subcontractor]) which the respondent [Developer] will have to recover from BHL Builders [Main Contractor] pursuant to subsection 30(4).

[15] We agree with learned counsel for the appellant [Subcontractor] that a legal obligation to pay may arise either by statute (as in the present case) or by contract. In fact, an obligation imposed by statute, in this case by subsection 30(3) of CIPAA, is stronger because in the absence of proof of payment by BHL Builders [Main Contractor] as requested by the respondent [Developer] under subsection (2), it becomes mandatory for the respondent [Developer] as the principal to pay the adjudicated sum of RM9,065,335.67 to the appellant [Subcontractor].It is a requirement of law which the respondent [Developer] has no discretion not to comply with it.

[16] We are also in agreement with learned counsel for the appellant [Subcontractor] thatsection 30 of CIPAA creates an independent statutory obligation on the part of the respondent [Developer], as a principal in its own right, to pay the appellant [Subcontractor] and that this is a separate obligation to pay imposed by statute which exists in parallel with BHL Builder’s [Main Contractor’s] obligation as the main contractor to pay the appellant [Subcontractor] under the adjudication decision.

Significance of the Judgment

Following the decision of the Court of Appeal, it would now appear that if the Claimant successfully obtained an adjudication decision in its favour and there is money due or payable by the Principal to the losing party, the successful Claimant could request for direct payment from the Principal irrespective of whether that the losing party had been wound up or otherwise.

Having said the above, it remains to be seen whether the direct payment from the Principal remedy is still possible in the event that the Adjudicated Decision was only obtained after the Main Contractor was wound up.

If you have any questions or comments on this article, please contact:-