Introduction
The direct payment made by an employer of a construction project to a subcontractor is a key feature of statutory adjudication in Malaysia. In BHL Gemilang Sdn Bhd v CT Indah Construction Sdn Bhd(1), the apex court refused to disturb the Court of Appeal’s landmark ruling which tested the efficacy of the direct payment provision under Section 30 of the Construction Industry Payment and Adjudication Act 2012 (CIPAA) in light of insolvency laws.
Facts
BHL Builders Sdn Bhd (“BHLB”), the main contractor of a construction project, appointed CT Indah Construction Sdn Bhd (“CT Indah”) as the subcontractor. BHLB’s employer was BHL Gemilang Sdn Bhd. CT Indah was owed progress payments of approximately RM9 million.
CT Indah commenced adjudication against BHLB pursuant to the CIPAA and obtained an adjudication decision in its favour. BHLB failed to comply with the decision. Winding-up proceedings were then presented against BHLB by CT Indah.
Concurrently, CT Indah applied for direct payment pursuant to Section 30 of the CIPAA against BHL Gemilang. A written request for direct payment had been issued by CT Indah in accordance with Section 30(1). The application was opposed by BHL Gemilang, primarily on the basis that the adjudication decision had yet to be enforced as a High Court judgment under Section 28 and that BHL Gemilang owed no sums to BHLB.
During the hearing, an issue arose as to whether direct payment could be ordered against BHL Gemilang when winding-up proceedings against BHLB were already afoot. To avoid prolonged argument, CT Indah withdrew the winding-up proceedings, but another creditor soon filed a new petition, and BHLB was ultimately wound up in August 2017. Receivers and managers were appointed over BHL Gemilang in September 2018.
Section 30 of CIPAA
Section 30 of the CIPAA creates a statutory obligation for a principal (the employer) to make payment awarded by an adjudication decision to a subcontractor if the main contractor fails to do so, provided that the principal owes such sums to the main contractor.
Section 30 – Direct Payment from Principal
(1) If a party against whom an adjudication decision was made fails to make payment of the adjudicated amount, the party who obtained the adjudication decision 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, 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 ten working days.
(3) In the absence of proof of payment, the principal shall pay the adjudicated amount to the successful party.
(4) The principal may recover the amount paid as a debt or set off the same from any money due to the defaulting party.
(5) This section shall only be invoked if money is due or payable by the principal to the defaulting party at the time of receipt of the request.
The triggering point of a Section 30 direct payment obligation is the issuance of a written notice under subsection (1). In the absence of proof of payment, and if money is due or payable by the principal, the direct payment obligation arises.
High Court Decision
The High Court dismissed CT Indah’s application, holding that such direct payment would amount to a preferential payment in favour of one creditor over others, as winding-up proceedings had already commenced against BHLB.
The court held that the monies for direct payment were in fact due to BHLB, making them assets of BHLB which had to be distributed pari passu among its creditors. Therefore, BHLB (or its liquidator) was entitled to those sums.
The High Court preferred the approach in B Mullan & Sons (Contractors) Ltd v Ross(2) over Glow Heating Limited v The Eastern Health Board(3), finding that the latter’s reasoning conflicted with Malaysian insolvency principles under the Companies Act 1965.
Accordingly, the High Court dismissed the application. CT Indah appealed.
Court of Appeal Decision
The Court of Appeal held that BHL Gemilang’s obligation to make direct payment was an independent statutory obligation under Section 30 of the CIPAA, not a mere contractual one. Once Section 30 was triggered and no proof of payment was provided, the obligation became mandatory.
The court further held that the liquidation of BHLB and receivership of BHL Gemilang did not negate this obligation. Section 30 did not distinguish between solvent and insolvent principals, and the payment did not constitute preferential treatment.
Accordingly, the Court of Appeal allowed CT Indah’s appeal and entered judgment against BHL Gemilang. (CT Indah Construction Sdn Bhd v BHL Gemilang Sdn Bhd [2020] 1 CLJ 75).
BHL Gemilang sought leave to appeal to the Federal Court.
Federal Court Decision
Before the Federal Court, BHL Gemilang argued that Section 30 conflicted with the pari passu principle in insolvency law and cited:
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Sime Diamond Leasing (M) Sdn Bhd v JB Precision Moulding Industries Sdn Bhd (in liquidation)(4)
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Malaysian Trustees v Transmile Group Bhd(5)
BHL Gemilang further referred to Lim Poh Yeoh v TS Ong Construction Pte Ltd(6) and Dubon Bhd (in liquidation) v Wisma Cosway Management Corporation(7), arguing that security of payment laws do not override insolvency regimes.
CT Indah, however, argued that no such conflict existed in this case, as Section 30 creates a mandatory statutory liability on the principal once triggered. The Federal Court agreed, noting that similar reasoning was applied in Glow Heating and Hitachi Plant Engineering & Construction Co Ltd v Eltraco International Pte Ltd(8).
Thus, the Federal Court dismissed BHL Gemilang’s leave application, affirming the Court of Appeal’s decision as the governing law.
Comment
Section 30 of the CIPAA remains a vital mechanism for maintaining liquidity among subcontractors in Malaysia’s construction industry. This case confirms that the direct payment obligation under Section 30 is mandatory, even in circumstances involving insolvency or receivership. The decision upholds the protective intent of the CIPAA and ensures that subcontractors are not left unpaid due to upstream insolvency issues.
Author
Foo Joon Liang
Partner, Gan Partnership
joonliang@ganlaw.my
Lee Xin Div
Senior Associate, Gan Partnership
xindiv@ganlaw.my
Endnotes
- BHL Gemilang Sdn Bhd v CT Indah Construction Sdn Bhd, Federal Court Civil Application 08(f)-218-05/2019(W).
- B Mullan & Sons (Contractors) Ltd v Ross (1996) 54 ConLR 163.
- Glow Heating Limited v The Eastern Health Board [1988] IR 110.
- Sime Diamond Leasing (M) Sdn Bhd v JB Precision Moulding Industries Sdn Bhd (in liquidation) [1998] 4 MLJ 569.
- Malaysian Trustees v Transmile Group Bhd [2012] 3 MLJ 679.
- Lim Poh Yeoh v TS Ong Construction Pte Ltd [2016] 5 SLR 272.
- Dubon Bhd (in liquidation) v Wisma Cosway Management Corporation [2020] 1 LNS 503.
- Hitachi Plant Engineering & Construction Co Ltd v Eltraco International Pte Ltd [2003] 4 SGCA 38.
