Secured Debt ranks in priority against Real Property Gains Tax (RPGT)

Chye Hup Heng Sdn Bhd (in liquidation) v Ketua Pengarah Hasil Dalam Negeri

Judicial Review No WA-25-120-07/2016) (HC)

This is a note on a recent significant decision of the High Court that addresses the issue relating to the entitlement of the Director General of Inland Revenue (“DGIR”) to immediate payment of real property gains tax (“RPGT”) arising from disposal of a charged property by a liquidator.

Chye Hup Heng Sdn Bhd (“CHH”) created a land charge over a piece of property (“the property”) in favour of Malayan Banking Berhad (“Maybank”) to secure banking facilities. After CHH was wound up by the court, the liquidators of CHH took steps to dispose of the property. Arising from the disposal of the property, the DGIR assessed that RPGT was payable on the gains made from the disposal of the property and demanded payment within 30 days. However, the sale proceeds of the property were insufficient to settle the debt due to Maybank which was secured by the land charge (“the secured debt”).

CHH filed an application for judicial review to challenge, inter alia, the entitlement of the DGIR to immediate payment of the RPGT. CHH contended that pursuant to ss 213, 291 and 292 of the Companies Act 1965, and on settled principles, the RPGT due to the DGIR should be ranked below the secured debt due to Maybank. For this reason, CHH contended that the sale proceeds of the property should be first applied towards payment of the secured debt before payment of the RPGT. The DGIR contended that he was entitled to immediate payment under the Real Property Gains Tax Act 1976 in preference over the secured debt.

On 12 January 2017, the High Court allowed CHH’s application and quashed the decision of the DGIR. The court also ordered the DGIR to refund the RPGT paid by CHH. The High Court, in its broad oral grounds, held that it is clear from ss 291 and 292 of the Companies Act 1965 that the secured debt must be paid first in preference over RPGT.

Source : Lee Hishammuddin Allen & Gledhill, Issue 9, January 2017 

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