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Bankrupt builder
22/08/2006 The Star ARTICLES OF LAW By BHAG SINGH
A READER who is a house-buyer wants to know how the winding up of the
company that is the developer affects him, and what winding up really
involves. What happens to the plot of land on which the house is to be built
and which has already been sold to him?
This is a complex scenario. Buying a house involves a relationship between
the house-buyer and the developer. As far as the loan is concerned, the bank
will deal with the house-buyer when it comes to repayment.
Where the same bank or another bank has earlier lent money to the developer
on the security of the land, then as long as the security exists the bank
will assert its right based on the security it holds and will not be
interested in the plight of the house-buyer.
Winding up may occur because the developer has taken advances or loans from
a bank and is unable to repay the debt. Such a winding up will be ordered on
the application of the creditor. Winding up does not mean the end of the
company.
The Board of Directors cease to hold office and a liquidator takes over. In
some cases a receiver and manager may be appointed.
The role of the liquidator is to liquidate the company to collect assets and
dispose of them. If the company has valuable assets it may well be possible
to meet every person's claim.
Unfortunately this is not usually case. In most cases the financial status
of the company that is wound up is so bad that few people or hardly anyone
except the secured creditors are likely to get paid.
This is because in the case of a winding up, Section 292 of the Companies
Act 1965 provides for the order of priority of payment after all the secured
creditors have been paid. Below is a categorisation of the order in which
unsecured creditors will be paid.
1. The costs and expenses of the winding up, including the costs of a
petitioner, the remuneration of the liquidator and the costs of any audit
carried out under the Act.
2. All wages or salary including any amount payable by way of allowance or
reimbursement under any contract of employment or award or agreement
regulating conditions of employment, not exceeding RM1,500 in respect of
services rendered within a period of four months before the commencement of
the winding up.
3. All amounts due in respect of employee compensation under any written law
relating to worker’s compensation accrued before the commencement of the
winding up.
4. All remuneration payable to any employee in respect of vacation leave, or
in the case of his death to any other person in his right.
5. All amounts due in respect of contributions payable during the 12 months
before the commencement of the winding up by the company as the employer of
any person under any written law relating to employees superannuation or
provident funds.
6. All federal tax assessed under any written law before the date of
commencement of the winding up or assessed at any time before the time fixed
for the proving of debts has expired.
The house buyer, in any claim against the developer, will have to stand at
the very end of the line to receive whatever is left. Even then the
unsecured creditors will have to share whatever is left after the secured
creditors and the parties entitled to priority have been paid to the extent
provided.
What if the plot of land on which the house has been partially built has
already been transferred to the house-buyer?
In such a case the property belongs to the house-buyer and will not be part
of the developer’s assets. The developer would be entitled to any progress
payment for work done but not paid for, subject to set-off.
The plot of land with an uncompleted house and possibly uncompleted
infrastructure is likely to have its value severely impaired. In such a
state its market value may well be far less then the loan that has been
advanced to the house-buyer by the lending bank.
When this happens the bank is likely to demand payment. Unless the
house-buyer is able to pay off the bank and wait for further events to
unfold, the bank may want to attach and dispose of the property.
The bank is unlikely to be concerned with the house-buyer’s problems with
the developer.
In some cases there may be intervention by a third party, whether a
commercial entity or a specially set up agency to salvage the situation.
This will often involve concessions which the house-buyer has to make.
The house buyer may have to forego compensation for delay in completion
which he would otherwise have been entitled to. Labour and material costs
may have risen and the house-buyer may have to pay further sums beyond what
was originally agreed to.
In such a case the house-buyer will have to be decide whether it is
preferable to abort the deal or continue with it at a higher cost. This is a
choice that any house-buyer caught in such a situation has to make. |
