CIPAA Adjudication Decisions are Undisputable Debts: Bludream City Development Sdn Bhd v. Pembinaan Bina Bumi Sdn Bhd [2024] 6 CLJ 149

The question of whether an adjudication decision rendered under the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) can form the basis for winding-up a company has frequently been challenged by non-paying parties. They often argue that the adjudicated debt is bona fide disputed on substantial or reasonable grounds and therefore the winding-up petition is bound to fail. On some occasions, such arguments have been successful, such as in the High Court cases of:

• ASM Development (KL) Sdn Bhd v. Econpile (M) Sdn Bhd [2021] 8 MLJ 99 (“ASM Development”); and

• Setia Fontaines Sdn Bhd v. Pro Tech Enterprise Sdn Bhd [2023] CLJU 559; [2023] 1 LNS 559; [2023] MLJU 628 (“Setia Fontaines”).

The Court of Appeal in Bludream City Development has now settled this area of law by ruling that an adjudication decision constitutes an undisputable debt that can be used to wind-up a company.

Background Facts

Bludream City Development Sdn Bhd (“Appellant”) engaged Pembinaan Bina Bumi Sdn Bhd (“Respondent”) as a contractor for building and infrastructure works. The Respondent commenced adjudication proceedings under CIPAA for unpaid work and obtained an adjudication decision in its favour for RM 5,510,197.91.

The Appellant’s attempts to set aside and stay the adjudication decision were dismissed, while the Respondent successfully enforced the decision. Premised on the adjudication decision, the Respondent then presented a winding-up petition against the Appellant.

The High Court allowed the petition, ruling that since the adjudication decision had been enforced as a court order, the winding-up proceedings were premised on a judgment debt. As such, the adjudicated debt was indisputable, even if arbitration proceedings were pending between the parties.

On appeal, the Appellant argued that:

1. a party who has enforced an adjudication decision should not be allowed to initiate winding-up proceedings where the dispute has been referred for final determination by arbitration or court; and

2. the status of the adjudication decision was that of temporary finality and the right to wind-up a company premised on an adjudication decision would be contrary to the legislative intent of CIPAA, as the company would be wound up that had permanency from which the company could not recover.

Court of Appeal’s Findings

Reaffirming that a company can be wound up based on an unpaid adjudication decision

The Court of Appeal reaffirmed that an adjudication decision can be used to wind-up a company, as expressly permitted under Section 31(2) of CIPAA. The Companies Act 2016 (Sections 465 and 466) allows for winding-up on the basis of inability to pay debts.

“[35] The law on winding up a company based on an adjudication decision has thus already been adequately settled by this court. The crux of it is the unpaid successful party who obtained the adjudication decision may opt to wind-up the non-paying party.

[36] That notwithstanding, the appellant implored us that there is nowhere in the CIPAA that expressly provided for winding up as a remedy to enforce an adjudication decision unlike other remedies expressly prescribed in ss. 28 to 30 of the CIPAA. In other words, it is suggested that the court either has no jurisdiction or power to wind-up the company. We are however of the view that albeit not so expressly provided in the CIPAA, winding up is plainly permissible as expressly stated in s. 31(2) of the CIPAA if the remedy is available in a written law. The remedy of winding up of the company for inability to pay debts is plainly provided in ss. 465 and 466 of the CA. As a matter of fact, this has already been dealt with in Likas Bay Precinct (supra) and there is nothing per incuriam in our view.”

An adjudicated debt is undisputable in winding-up proceedings

Once a debt has been adjudicated, it ceases to be disputable in winding-up proceedings. This is because the disputed debt has already been independently adjudicated by a neutral third-party.

This is especially so where the adjudication decision has survived subsequent challenges, including applications where the High Court had refused the setting aside and/or stay and allowed the enforcement of the adjudication decision pursuant to Sections 16, 27 and 28 of the CIPAA. It is therefore not left to the non-paying party to argue that it still disputes the adjudicated debt by having referred the matter to arbitration or court.

“[39] For winding up proceeding based on unpaid construction payment debts arising after the advent of the CIPAA, particularly where the debt is based on an adjudicated decision, it is our view critical to properly understand the notion of disputability of the debt. Put in another way, disputability must be seen in its proper context. In this regard, we hold that an unpaid debt unadjudicated in a CIPAA proceeding will be disputable if the non-paying party has prima facie established a bona fide dispute of the debt on substantial or reasonable grounds. However, if the dispute on the debt has been adjudicated, which resulted in an adjudication decision obtained in favour of the unpaid party, the debt ceases to be disputable in an ensuing winding up proceeding. This is because the disputed debt has been independently adjudicated by a neutral third party. More pertinently, it should not be open to the non-paying party to again dispute the debt when the sanctity of the adjudication decision has been preserved by the subsequent court orders refusing to set aside and/or stay as well as allowing enforcement of the adjudication decision as a judgment pursuant to ss. 27, 16 and 28 of the CIPAA, respectively. Consequently, it is immaterial in the winding up court that the non-paying still disputes the adjudicated debt and has referred the dispute to arbitration or the court for final determination; see Barisan Performa Sdn Bhd v. Hype Park City Sdn Bhd [2019] CLJU 1096; [2019] 1 LNS 1096; [2018] MLJU 10. The disputability of the dispute can only be done in the arbitration or the court to enable the parties to finally re-contest the dispute de novo unabated by the adjudication decision as well as without attracting res judicata because the adjudication decision enjoyed temporary but not perpetual finality; see G-Pile System Sdn Bhd v. CMMC Sdn Bhd & Anor [2021] CLJU 1727; [2021] 1 LNS 1727.”

In this regard, the Court expressly overruled ASM Development and Setia Fontaines.

“[42] In the premises, we are, with respect, constrained to hold that the decisions in ASM Development (KL) Sdn Bhd v. Econpile (M) Sdn Bhd (supra) and Setia Fontaines Sdn Bhd v. Pro Tech Enterprise Sdn Bhd (supra) relied upon by the appellant were erroneously made…”

The legislative intent of CIPAA must be upheld

The Court of Appeal acknowledged that winding-up is a draconian procedure which may result in irreparable damage to business and reputation. However, it emphasized that the legislative intent of CIPAA must be upheld.

“[40] We are nonetheless mindful that the winding up proceeding is a draconian procedure which may result in irreparable damage to business and reputation but we think we have to heed the legislative objective of the CIPAA to alleviate the financial woes prevalent in the Malaysian construction industry. The objective of CIPAA is threefold as stated in the preamble thereto, viz.:

(i) facilitate regular and timely payment;

(ii) provide a mechanism for speedy dispute resolution through adjudication; and

(iii) provide remedies for recovery of payment in the construction industry.”

In this regard, the Court of Appeal also noted that even if a company is wound up, the liquidator may still recover from the respondent should the appellant ultimately succeed in arbitration.

"[41] …On the other hand, we have also duly considered and find that if the appellant is wound-up, the appellant, through the liquidator, may still recover from the respondent should the appellant ultimately succeed instead in the ongoing arbitration proceeding between them.”

Case Commentary

The Court of Appeal in Bludream City Development provides much-needed clarity on whether an adjudication decision under CIPAA can be used as a basis for winding-up a company, in particular, on the disputability of an adjudicated debt. By holding that an adjudicated debt is undisputable in winding-up proceedings (even where the non-paying party has referred the matter to arbitration or court); the argument that an adjudicated debt remains disputed now appears significantly weakened.

Notwithstanding the draconian nature of winding-up proceedings, it would appear that the need for effective enforcement of adjudication decisions made under CIPAA ought now to take precedence so as to meet the legislative objectives of CIPAA.

This decision serves as a strong deterrent against non-payment in the construction industry. Employers ought to be mindful that the refusal or neglect to render payments after an adverse adjudication decision has been rendered against it may ultimately result in the winding-up and liquidation of its company, regardless of any pending arbitration or litigation.