Taxes do not rank first during a winding-up

Taxes are a form of unsecured debt which ranks after secured debt when a company is being liquidated. Under Section 527 of the Companies Act 2016, payment of taxes ranked 6th in the list of priorities of unsecured debt after:

  • Payment of liquidator fees;
  • Wages owed to employees of the company;
  • Workers compensation;
  • Remuneration payable to employees; and
  • Contributions payable.

In the recent high court case of Carotech Berhad (in liquidation) v Government of Malaysia and others (Civil Appeal AA-28PW-2-01/2022), the High Court held that taxes do not take priority over other unsecured debt even if the same is paid. The High Court boldly held that payment under protest is a common law right of ancient origin and the mere fact that the liquidator paid the taxes under protest does not mean that there is no debt accruing and arising.

The matter is now pending before the Court of Appeal.


Carotech Berhad (“Applicant”) had owned a few pieces of land (“Land”) which were charged as security to Maybank International (L) Ltd in this case. The Applicant was ordered to be wound up on 30.11.2012. The Land was subsequently ordered to be vested in Malayan Banking Berhad on 11.10.2013.

The Land was sold through public tender for RM24 million on 10.1.2020. As required under Section 21B (1) of the Real Property Gains Tax Act 1976 (“RPGTA”), the purchaser must remit 3% of the purchase price (a sum of RM729,000) to the Director General of Inland Revenue (“DGIR”) within 60 days of the disposal. If the taxes are not paid within the period, they will be increased by 10% and collectively as a debt owing to the Government of Malaysia.

After the taxes were paid, the Applicant requested a refund of the entire sum of tax. Instead of effecting the refund, the Applicant was required to pay a further sum of RM686,090.40 as the balance of the RPGT payable vide a notice of assessment by the DGIR. The Applicant paid the same under protest.


The Applicant argued that the provisions of the CA dictate specifically the order of distribution of the Applicant’s assets. Under the statutory list of priority of payments, in which the Government of Malaysia is bound by Section 434 CA, taxes, including RPGT, rank 6th after secured debts are paid.

Following the case of Director of Customs Federal Territory v Ler Cheng Chye (Liquidator of Castwell Sdn Bhd (In Liquidation)) [1995] 3 CLJ 316, the Supreme Court held that mechanisms for recovery of taxes under the taxing legislation “merely directs the setting aside of moneys sufficient to provide for taxation but does not provide that Government debts shall rank in priority to all other secured debts.”

The Respondents argued that the RPGT is regulated by the RPGTA instead of the CA and hence does not bind the Respondents. Specifically, the Respondents assert that the CA only applies if the tax due as a debt arises before the winding up of the Applicant or was assessed before the time fixed for the proving of debts has expired. In this case, the debt arose vide a notice of assessment after the Applicant was ordered to be wound up.

Kerajaan Malaysia v. Mudek Sdn Bhd [2017] 10 CLJ 159 was cited in support of this, where the Federal Court held that taxes are due and payable upon service of a notice of assessment. If the taxes are a form of debt which requires proof of debt, it does not sit well with Section 523(3) of the CA, whereby the description of debts are those “which the company is subject at the date of the winding up order”.

Decision of the High Court

1. Whether payment of taxes is governed under the CA or RPGTA

The High Court agreed with the Applicant that the RPGT is subjected to the CA; hence, they ranked 6th as a form of unsecured debt as canvassed by the Supreme Court in Ler Cheng Chye (supra.). The RPGTA only provides when RPGT is payable but does not set out the order of priority of payment when the RPGT as assessed is payable by a company in winding up or liquidation. Instead, the specific section housed under Section 527 CA and the maxim specialia generalibus derogant imbues the Court to conclude that the payment of RPGT in the case of a company under liquidation is under the CA.

2. Whether the fact that payment of the RPGT has been effected gives rise to a debt

In response to this, the High Court held that the Applicant’s payment was made under protest in response to an illegal demand and paid for purposes of avoiding being mulcted. The Applicant is entitled to seek recovery by condictio indebiti, which is described as “where money is illegally demanded and paid, the payer adding to his act of payment a more or less formal declaration to the effect that the money so paid is wrongfully exacted”.

3. Whether the RPGT assessed after the date of winding up order is provable under Sections 523(3) and 527(1)(f) CA

In another case of Priority Artificial Lift Services, Llc v. Eastern Energy Services Sdn Bhd [2021] 1 LNS 637, the Learned Judge held that the Respondents do not need to submit proof of debt under Section 523(3) CA. They may still lodge a proof of debt if they wish to claim it.

The High Court found that Section 523(3) CA is wide enough to encompass future and contingent liabilities as legislated below:

(3) Save as provided in subsections (1) and (2), all debts and liabilities present or future, certain or contingent, to which the company is subject at the date of the winding up order, or the resolution, or to which the company may become subject before dissolution by reason of any obligation incurred before the date of the winding up order, shall be deemed to be debts provable in winding up.”

In this case, the debts and liabilities include the Applicant’s banking facilities which have yet to be repaid. Any gains from the sale of the lands would subject the Applicant to the future or contingent liability of being assessed for RPGT. Section 523(3) of the CA 2016 expressly provides that such future or contingent liability shall be deemed provable in winding up.

The fact that the RPGT was assessed after the winding-up order and hence is not governed by the CA is untenable as Section 527(1)(f) CA stipulates “all federal tax assessed … or assessed at any time before the time fixed for proving of debts has expired”. The time for proving debts has not expired. The case of Mudek (supra.) does not apply as the Applicant is not challenging the RPGT save for the Respondents’ priority.