Reconciling Direct Payments under Section 30 of CIPAA 2012 with the Pari Passu Principle

KTCC Mall Sdn Bhd v TCS Construction Sdn Bhd [Civil Appeals No. B-02(C)(A)-130-01/2024 & B-02(C)(A)-131-01/2024]

Unpaid parties who are successful in statutory construction adjudications have long viewed Section 30 of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA 2012“) as a vital cash flow lifeline. However, a conflict has emerged between the Section 30 recovery mechanism and the established principles of corporate insolvency.

Recent judgments from the Court of Appeal have now clarified that the right to direct payment is not an absolute priority and must yield to the pari passu principle in insolvency law.

Operation of Section 30 of CIPAA 2012

Section 30 of CIPAA 2012 provides a recovery mechanism where, if a losing party in an adjudication fails to pay, the winning party may request payment directly from the principal of that losing party. Upon receiving a written request, the principal must serve a notice on the losing party to show proof of payment. In the absence of such proof, the principal is statutorily required to pay the adjudicated amount directly to the winning party.

The principal may then recover this payment as a debt or set it off from any money they owe to the losing party. However, the entire section is governed by Section 30(5) of CIPAA 2012, which stipulates that the remedy can only be invoked if money is “due or payable” by the principal to the losing party at the time the request is received.

The pari passu principle

The pari passu principle is a fundamental principle of liquidation, which requires that all unsecured creditors who are similarly situated in the same class must be treated equally in the distribution of an insolvent company’s assets. Section 527 of the Companies Act 2016 sets out a strict priority of payments (such as costs of winding up and employee wages) but expressly provides that debts within each class shall rank pari passu.

Conflicting authorities regarding the relationship between CIPAA 2012 and the pari passu principle

In the 2019 case of CT Indah Construction Sdn Bhd v BHL Gemilang Sdn Bhd [2020] 1 CLJ 75, the Court of Appeal held that Section 30 of CIPAA 2012 creates an “independent statutory obligation” on the principal to pay. The court ruled that this obligation was a separate requirement of law that existed in parallel with the contractor’s own debt and remained mandatory even if the contractor was in liquidation. This decision was largely based on foreign precedents from jurisdictions like Ireland, Hong Kong, and Australia, which suggested that such direct payment mechanisms do not interfere with the pari passu distribution of an insolvent company’s actual assets.

However, the decision in JDI Builtech (M) Sdn Bhd v Danga Jed Development Malaysia Sdn Bhd [2024] 4 MLJ 29 took a different course, bringing critical focus to the Section 30(5) of CIPAA 2012 pre-condition. The court clarified that Section 30(5) is the foundation of the entire remedy i.e., if no money is “due or payable” by the principal to the contractor, the section cannot be invoked at all.

The court in JDI Builtech further established that:

• The initial evidential burden is on the subcontractor to prove that the principal owes money to the contractor.
• If the principal shows a bona fide dispute — such as a lawful termination of the main contract or valid claims for Liquidated Ascertained Damages (LAD) — they can successfully argue that no sums are “due or payable”, thereby defeating the Section 30 claim.
• It is “discomforting” to force a principal to pay a subcontractor first when the contractor is in liquidation, as the principal would likely never recover that “debt” from the wound-up company.

Clarity in KTCC Mall

The conflict between these authorities was recently resolved in the Court of Appeal decision of KTCC Mall Sdn Bhd v TCS Construction Sdn Bhd [Civil Appeals No. B-02(C)(A)-130-01/2024 & B-02(C)(A)-131-01/2024]. This was a majority decision, featuring a main judgment and supplemented by two supporting judgments.

KTCC Mall (the employer) (“KTCC“) appointed MPM Project Management (“MPM“) as the main contractor in February 2015. MPM in turn engaged TCS Construction (“TCS“) as its subcontractor in September 2018, with KTCC providing TCS a Letter of Undertaking on the same date. A Certificate of Practical Completion was issued in January 2020, and the Quantity Surveyor’s final account assessed the contract sum at RM224,053,767, which the employer maintained had been paid in full. MPM was wound up on 28 February 2022. Several months later, the adjudicator awarded TCS RM6,141,557.77 against MPM. TCS then served a Section 30 of CIPAA 2012 request on KTCC for direct payment.

A material feature of the appeal was the earlier Court of Appeal decision in Lua Yik Hor t/a Better One Marketing [Civil Appeal No. B-02(C)(A)-1503-08/2022], in which another subcontractor on the same project had been refused direct payment from KTCC on the ground that no sums were due or payable to MPM. The Court of Appeal in KTCC Mall found that the High Court Judge, having been informed of the Better One decision before delivering judgment, had erred in not following it and stated that the High Court should have been bound by Better One on materially identical facts.

KTCC Mall: Sums due and payable

Further, on the Section 30(5) of CIPAA 2012 threshold, the Court of Appeal accepted KTCC’s contemporaneous documentation, such as the Statement of Final Account, the penultimate certificate certifying “nil” owing to MPM, and the supporting payment records, and held that no sums were due or payable. The court also noted that MPM in fact owed KTCC RM7,950,000 in LAD, supported by a Certificate of Non-Completion. With Section 30(5) not satisfied, the Section 30 claim could not be invoked.

KTCC Mall: The pari passu mandate

Further, the court provided the following key clarifications on the wider conflict between Section 30 of CIPAA 2012 with insolvency law:

• An unpaid party is not a secured creditor. Section 30 does not create a trust or a charge. It confers no priority over other unsecured creditors in a winding-up.
• Allowing a Section 30 of CIPAA 2012 claim to override a winding-up order would create an impermissible “back-door” priority, contravening Sections 527 and 528 of the Companies Act 2016. Applying the generalia specialibus non derogant maxim, CIPAA 2012 (as a general payment statute) must yield to the specific insolvency regime.
• The court drew direct support from the Federal Court’s decision in Dubon Bhd (In Liquidation) v Wisma Cosway Management Corp [2020] 4 MLJ 288, holding that a statutory payment obligation cannot displace the pari passu regime without express and unambiguous language.
• CT Indah was decided per incuriam. As Lim Chong Fong JCA explained in his Lordship’s supporting judgment, CT Indah had relied on foreign authorities concerning contractual direct payment clauses without addressing the conflicting English and Singapore authorities, and a contractual direct payment clause does not itself secure the unpaid party absent an express trust.
• Until legislators enact a specific carve-out, the Section 30 of CIPAA 2012 remedy remains subservient to the collective rights of the general body of creditors.

Conclusion

KTCC Mall sends a clear message: while CIPAA 2012 is meant to support cash flow in the construction industry, it cannot be used to dismantle the established rules of corporate insolvency.

For principals in the chain of construction contracts, the decision strengthens the defensive position against a Section 30 of CIPAA 2012 application. A bona fide dispute over whether sums are “due or payable” e.g., set-off, LAD, defective works, contested final accounts, would defeat a Section 30 of CIPAA 2012 application at the threshold. Contemporaneous documentation is decisive, so record-keeping discipline during the project directly determines the strength of any future defence.

For unpaid construction parties, Section 30 of CIPAA 2012 is now understood as an upstream remedy that is effectively unavailable once the contractor is wound up. Act early while the contractor is still solvent, and where solvency is in doubt, look beyond Section 30 e.g., letters of undertaking, security arrangements, and prompt proof of debt with the liquidator may be more productive than relying on the statutory mechanism alone.

The legislative gap remains. All three judgments invite Parliament to address it, whether by amendment to CIPAA 2012 or by a carve-out within Section 527 of the Companies Act 2016. Until that intervention comes, the pari passu principle prevails, and the protection of the general body of creditors remains the priority.

This article was authored by Shaun Tan (Partner) and Rachel Tan (Associate).

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Shaun Tan | Partner, Construction & Arbitration / Dispute Resolution