INSOLVENCY LEGAL ISSUES IN THE REHABILITATION OF ABANDONED HOUSING PROJECTS–PART TWO

ISSUES

Certain questions can be raised emanating from the rehabilitation abandoned housing projects whose developers are wound up by the court, i.e:

  • Whether the liquidator is obliged to carry on the development and rehabilitation of the project left abandoned by the developer company?
  • Can the purchasers and other stakeholders in abandoned housing projects request the liquidator to carry on the balance construction of the projects?
  • Is there a statutory and legal duty on part of the liquidator to carry on the balance construction for the benefit of the stakeholders, particularly the purchasers?

Based on the reading of the above provisions, in particular sections 236(1)(a), 236(2)(d), 236(2)(i) and 236(2)(j) of the Companies Act 1965 (“CA”), it is clear the duty to carry on the balance incomplete construction of abandoned housing projects can fall on the shoulders of the liquidator.

However, if there are many problems in the attempt to rehabilitate which can lead to a possible failure to duly complete the project or the available funds to generate the rehabilitation are not sufficient, whether, under these situations, the liquidator has breached the statutory duties as prescribed by the CA, if the liquidator fails to effectively implement the purported rehabilitation?

In the opinion of the author, there is no clear cut answer to the above question. In the observation of the author, if the liquidator of the company is the Official Receiver (OR), he may not carry out the rehabilitation. The reasons are as follows:

1) The official assignee has insufficient knowledge and expertise to warrant them to carry out the rehabilitation; and,

2) The official assignee has insufficient staff and manpower to enable them to resume the construction or to rehabilitate the projects.

This position can be illustrated in Taman Harmoni, Balakong, Mukim of Cheras, District of Hulu Langat, Selangor, Taman Lingkaran Nur, Kajang, Mukim of Cheras, District of Hulu Langat, Selangor, Taman Seri Simpang Jaya, Mukim of Kangkung, District of Kota  Setar, Kedah, Taman Seri Marina, Mukim of Kuala Kedah District of Alor Setar, Kedah  and Taman Junjong Jaya, District of Kulim, Kedah.

The most that the Official Receiver (“OR”) or, sometimes, the private liquidator, may do is to find eligible third party buyer to buy up the project together with the liabilities of the wound up housing developer companies. The proceeds of the sale are to be used to pay off the debts of the creditors of the companies in accordance with section 292 of the CA (Priorities of Payment). This approach can be seen in Taman Lingkaran Nur, Kajang, Mukim of Cheras, District of Hulu Langat, Selangor, Taman Cemerlang, Lot No. 3254, Mukim 13, Thean Teik Highway, Bandar Air Itam, Pulau Pinang, Taman Sri Angsana Hilir Ampang, Mukim of Ampang, District of Hulu Langat, Selangor, Taman Kenanga Fasa 2A, 3A, 3B, 4A, 5A, 4B, 5B and 5C, Bandar Baru Salak Tinggi, Mukim of Dengkil, District of Sepang, Selangor  and Desa Beruntung, Mukim of Ulu Yam, District of Hulu Selangor.

However, if the private liquidator is appointed, in most cases, there is a possibility that they will rehabilitate the abandoned housing projects. (Query: Whether the private liquidator is interested to make profit or to help the purchasers?) This is evident in Taman Villa Fettes, Lot Nos 141 and 3622, Mukim 18, North East District, Pulau Pinang and Taman Junjong Jaya, Mukim of Junjong, District of Kulim Kedah.

Nonetheless, the private liquidator may not so proceed with the rehabilitation if there is insufficient fund to revive the projects or the project is too difficult for rehabilitation. This situation happens in Taman Junjong Jaya, Mukim of Junjong, District of Kulim, Kedah Darul Aman. The appointed liquidator was unable to proceed with the rehabilitation of the project as there is a shortage of funds to run the purported rehabilitation.

Several questions can be posed following the above discussion:

  • If they (the liquidators) have defaulted in the carrying out the rehabilitation, whether they can be considered as having breached the statutory or legal duty?
  • Whether they (the liquidators) are under a duty of care and legal duty to protect the interest of the purchasers and other stakeholders in the rehabilitation of abandoned housing projects? Just in as much as the company is liable, under the provisions of Act 118?
  • What is meant by the word “Vendor” which includes its successors in title and permitted assigns’ as enshrined under clauses 13, 35, 31 and 35 of the respective statutory standard sale and purchase agreement (Schedules G, H, I and J)? Is also liquidator (OR or the private liquidator) covered by this provision? If in the affirmative, then the liquidator shall have to act on behalf of the vendor developer (if the vendor is wound up) for completing the construction of the project and likewise be subject to the provisions under Act 118 inasmuch as the vendor would be subject to and are also liable to protect the interests and rights of the purchasers, as required under Act 118.

Logically, the liquidators are liable to carry out rehabilitation and be subject to the provisions of Act 118, insofar as these are reasonable and within their power and capability. Nevertheless, insofar as the author’s scrutiny none in the case law and in practice, the liquidator are subject to Act 118 and under no duty (legal and statutory) to rehabilitate the abandoned housing projects. The reasons are provided above, i.e no sufficient funds, no expertise and shortage of manpower. On the other hand, it is argued, to impose statutory and legal duty for carrying out rehabilitation and be subject to the provisions of Act 118 is unfair and inequitable for the liquidators. This is being so as the primary duty of the liquidator, insofar as the insolvency law in Malaysia is concerned, is to carry out the business and affairs of the wound up companies to settle the debts of the petitioning creditors and other secured and unsecured creditors. In other words, once a housing developer companies are wound up under the CA, the housing development business carried out are also defunct. The liability to carry on the development by the liquidators, in favour of the aggrieved purchasers, (even though they can be considered the permitted assigns or successors in title to the wound up companies), cannot be imposed or presumed on part of the liquidators. One of the reasons is that there is nothing expressly provided in the CA which imposes a duty on the liquidators to protect the rights of the purchasers, unless, it is expedient and necessary in the opinion of the creditors, in the course of managing the winding up process.

Following the above statement, in abandoned housing projects in Peninsular Malaysia whose housing developer companies have been wound up, there is a strong possibility that the liquidator (OR or the private liquidator) may not rehabilitate the project in the protection of the purchasers’ interests. This also means that, unless the project is taken over by a white knight or interested third party, the projects will be stalled forever without any relief and the interests and rights of the purchases will be detrimental.

It should be noted, provided that there is enough funds to run rehabilitation and the liquidator is willing to undertake rehabilitation of abandoned housing projects, in carrying out the business and affair of the wound up company, and that the creditors have consented, the liquidator (OR and private liquidator) may appoint special manager to help them in dispensing with the duties and to smooth out the rehabilitation works. This is provided in section 246(1)(2) of the CA. This special manager, it is opined, may consist of project manager or architect or engineer or building contractor.

CASE LAW INVOLVING REHABILITATION OF ABANDONED HOUSING PROJECT OF THE WOUND UP HOUSING DEVELOPER COMPANY

There is a reported case law on the rehabilitation abandoned housing project of a wound up housing developer company. The case is Hongkong and Shanghai Banking Corporation Ltd v Kemajuan Bersatu Enterprise Sdn Bhd [1992] 2 MLJ 370; [1992] 1 LNS 26. In this case, the developer company (respondent company/judgment debtor) was in the course of winding up by the petitioning creditor (Hongkong and Shanghai Banking Corporation Ltd), where later provisional liquidators were appointed pursuant to section 231 of the Companies Act 1965, for the purpose of carrying out the rehabilitation of the housing development project left abandoned by the developer company (the judgment debtor). The rehabilitation of the abandoned project was financed by a loan from TPPT, Bank Negara (Tabung Pemulihan Projek Perumahan Terbengkalai). The provisional liquidators were appointed by the High Court on the application of the creditor for the purpose of rehabilitating the abandoned housing project. The power to appoint a provisional liquidator is given to the court pursuant to section 231 of the Companies Act 1965. It can be exercised at any time after the presentation of a winding-up petition and before the making of a winding-up order. Rule 35(1) of the Companies (Winding-Up) Rules 1972 elaborates on the power—the application for the appointment has to be made by ‘any creditor or contributory’ who should prove ‘sufficient ground’ for the appointment by affidavit. Provisional liquidators, in this case, had been appointed to investigate the affairs of the respondent company in its own right or in its capacity as a trustee, to enable the respondent company to complete current contracts, to enter into new contracts and execute the relevant documents; and to represent the respondent company in legal proceedings. The High Court also ordered that the provisional liquidators ought to file a preliminary evaluation report on the respondent company, together with a feasibility report on whether the abandoned housing project can be successfully revived and completed together with specific recommendations as to the ways and means of achieving the required objectives. The provisional liquidators’ costs, charges, and expenses for works carried out until the hearing of the petition shall be paid by TPPT Sdn. Bhd. The help from TPPT came only in the mid-1990, while the project was abandoned since 1984. This means that, it is submitted, the project had been abandoned without any rehabilitation, for about 10 years (1984 to mid-1990). The provisional liquidators were, finally, also appointed as liquidators of the respondent company through the winding up order made the court on 22 January 1992.

FINDINGS AND SUGGESTIONS

  • There is no provision in the CA which expressly imposes a duty on the liquidator, either the OR or the private liquidator, to rehabilitate abandoned housing projects and to protect the interests of the purchasers;
  • In practice, the liquidator is under no duty to rehabilitate and to protect the interests of the aggrieved purchasers in abandoned housing projects;
  • The duties of the liquidators are to realize the assets and run the affairs of the wound up company for the purposes of settling the debts of the creditors secured or unsecured and in the interests of the creditors;
  • The is a legal and statutory gap in the CA (especially when companies are wound up) when housing projects carried out by the wound up housing developer companies are abandoned for enabling effective rehabilitation be carried out in the protection of the purchasers’ interests;
  • Insofar as the legal situation in Malaysia in concerned, Act 118 needs to be amended by introducing new legal provisions to cater for the problems of abandoned housing projects especially for governing their rehabilitation and to protect the interests of the customers (purchasers) of the wound up companies; and,
  • It is incumbent that all applicant developers should possess housing development insurance to cover any shortfall in funds to run rehabilitation; and,
  • It is a high time for the government to introduce a special legal regime governing rehabilitation of abandoned housing projects, for instance a provision for appointment of a caretaker to manage rehabilitation of the abandoned housing developer companies for the benefit of the aggrieved purchasers and thus can eliminate the problem as to who should carry out rehabilitation of abandoned housing projects.

2 responses to “INSOLVENCY LEGAL ISSUES IN THE REHABILITATION OF ABANDONED HOUSING PROJECTS–PART TWO

  1. Gopal Raj Kumar

    Liquidators have a greater power than merely looking into the meager remains of the assets of a company in liquidation to try to pursue to completion abandoned housing projects especially under Malaysian legislation. There are just too many gaps in it to make any sense particularly in the area of residential development and the powers and responsibilities of government to govern its operation.

    A liquidator for instance can initiate a Public Examination of all parties involved in a failed residential development from directors of the failed companies to their legal advisors, financial advisors, engineers, architects and planners and contractors. The list does not stop there. It included financiers and bankers.

    A vigilant and skilled liquidator will engage a lawyer with experience in Public Examinations making first an ex parte applications to avail himself of the element of surprise to draw in those who will be ordered to attend under an order of a higher court to answer questions at a Public Examination.

    Conventionally in a Public Examination the lawyer acting for the liquidator has the run of the court. Examinees have limited rights with respect to their responses to demands by the liquidator to production of documents, providing information of any sort and answering questions put to them. This is the case even where questions put to them do not directly relate to matters directly concerned with the examination. The normal rules of evidence do not apply. It is more in the form of an inquisition than a trial.

    A Public Examination is a very powerful tool in the hands of a skilled liquidator. It is unfortunately hardly ever used in Malaysia because of the very real fear of uncovering the truth. Often said to be stranger than fiction (never the usual suspects come out of the woodwork) the fact is that many of Malaysia’s large accounting firms and banks are themselves responsible by their conduct for the failures in the very large number of failed residential developments.

    Most people are not aware of the obligations banks and independent accountants as to what they say in their reports. In a decision to lend (as is the case with banks) as to when and how they are at law allowed to exercise their rights to foreclose, the power to sell and to power to appoint a receiver to a ‘failed’ project is governed by a wider law than simply reacting to a failure to receiving payments from a borrower.

    Additionally there are obligations (statutory) on company directors, bankers, lawyers and accountants for their statements in prospectuses or even in mere memorandums where money is being raised from the public. Misstatements in such circumstances carry with it if proved penalties that include heavy fines and or jail terms.

    Whilst too many people are too quick to blame politicians for such failures one has to merely look at the professional sectors and why poorly drafted legislation that allows such corporate failures is allowed to exist without say the legal profession demanding a review and re draft to more precise legislation.

    In its present condition legislation presents rich pickings for those in the know of its weaknesses. These are lawyers, accountants and bankers. Therein lies the devil you seek.

  2. Yes of course, the other professional parties may be liable too. The issues that I raised my open up the eyes of certain people who might have contributed to the gravity of the problem and other innocent parties.

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