Changes to Key Provision Relating to the Winding Up of Companies

The global pandemic as well as the imposition of a nationwide Movement Control Order, now extended to 12 May 2020, has seen various ministries and industry regulators scrambling to unveil measures which purport to address the economic impact of Covid-19.

A raft of such measures was announced by the Minister of Domestic Trade and Consumer Affairs on 9 April 2020. The announced changes to a provision dealing with the winding-up of companies is discussed below. 

Under the Companies Act 2016 (“Act”), the courts may order a company to be wound up on several grounds, one of which is that the company is unable to pay its debts. 

Section 466 (1)(a) of the Act provides that a company shall be deemed to be unable to pay its debts if it fails to meet or satisfy a demand for a sum exceeding a minimum amount prescribed by the Minister (“Threshold Indebtedness”) for a period of 21 days (“Requisite Period”) following service of the demand. 

One of the measures announced was an increase to the Threshold Indebtedness from its present level of RM10,000.00 to RM50,000.00. Another measure was to extend the Requisite Period from 21 days to 6 months. It was announced that both measures were temporary and would be in effect until 31 December 2020.

Questions immediately emerged as to when and how the Government would take the requisite steps needed to implement these measures and when exactly the announced changes would come into force.

The answer began to present itself some 2 weeks later when, on 22 April and 23 April 2020, a number of Government Gazettes were published with the apparent aim of implementing the announced changes to Section 466(1)(a) of the Act.

Increasing the Threshold Indebtedness

It had been anticipated that the changes to the Threshold Indebtedness would be implemented by way of publication in a Government Gazette. This was done on 23 April 2020. Following the publication of the said gazette, the Threshold Indebtedness was increased to RM50,000.00 with effect from 23 April 2020 until 31 December 2020

Extending the Requisite Period

It was also anticipated that implementing the proposed change to the Requisite Period would pose a challenge as it appeared to require legislation to amend the Act which in turn would entail a significant delay, as Parliament is not in session nor is it expected to sit, at least until 18 May 2020.

The Minister’s solution to the conundrum was to make orders under Section 615 of the Act which gives the Minister the power to make an order that any person, corporation or class of corporations be exempted from all or any of the provisions of the Act, upon the recommendation by the Companies Commission of Malaysia. In exercising the power granted under section 615 of the Act, the Minister may attach any terms and conditions to the exemption as he thinks fit.

On 21 April 2020, the Minister made the first of 2 orders under Section 615 of the Act. This order was named the Companies (Exemption) Order 2020 (“Exemption Order 1”) and was to take effect from 23 April 2020 until 31 December 2020. Exemption Order 1 was published in a Government Gazette dated 22 April 2020. For completeness, the relevant parts of Exemption Order 1 read as follows:

2. Subject to paragraph 3, the Minister, for the purpose of determining whether a company shall be deemed unable to pay its debt under paragraph 466(1)(a) of the Act, exempts the provision which determines that any company shall be deemed unable to pay its debt if the company neglect any notice of demand by any creditor to pay its debt or to secure its debt or compound of its debt to the satisfaction of the creditor within the period of twenty-one days after a notice of demand is being served upon him.

3. Notwithstanding paragraph 2, the company referred to in paragraph 2 shall be deemed unable to pay its debts under paragraph 466(1)(a) of the Act if the company neglects any notice of demand by any creditor to pay its debt or to secure its debt or compound its debt to the satisfaction of the creditor within the period of six months after the notice of demand is being served upon him.

Immediately following its publication, questions were raised concerning Exemption Order 1. For instance, the order failed to identify a corporation or class of corporations to which the exemption would apply; further, the fate of companies that had been served with statutory demands prior to 23 April 2020 was unclear. 

The Minister or his advisers must have realized the confusion which would ensue in light of Exemption Order 1 as, the very next day, the Companies (Exemption)(No.2) Order 2020 (“Exemption Order 2”), which revoked Exemption Order 1, was published in a Government Gazette.

The relevant portions of Exemption Order 2 read as follows:

2. This Order applies in relation to any notice of demand under paragraph 466(1)(a) of the Act which is served within the period from 23 April 2020 to 31 December 2020.

3. The Minister exempts all companies from paragraph 466(1)(a) of the Act which provides that any company shall be deemed to be unable to pay its debt if the company neglects any notice of demand by any creditor to pay its debt or to secure its debt or to compound its debt to the satisfaction of the creditor within a period of twenty-one days after the notice of demand is served on him.

4. The exemption under paragraph 3 is subject to the condition that any company shall be deemed to be unable to pay its debts under paragraph 466(1)(a) of the Act if the company neglects any notice of demand by any creditor to pay its debt or to secure its debt or to compound its debt to the satisfaction of the creditor within a period of six months after the notice of demand is served on him.

Notwithstanding Exemption Order No.2, questions remain concerning the Minister’s use of his powers under section 615 of the Act to implement the changes to the Requisite Period. It would, for instance, be less controversial if it was clear that the Minister’s powers had been applied in respect of a provision which imposed a liability or an obligation upon companies from which they could be exempted. Arguably, section 466(1) of the Act does not impose any liability or obligation upon companies. 

Regardless, until and unless the Minister’s use of the powers granted under section 615 of the Act is successfully challenged through judicial review proceedings brought for such purpose, the position in so far as creditors who have issued statutory demands are concerned is as follows:

  1. for statutory demands served before 23 April 2020, the presumption of insolvency under section 466(1) of the Act, arises, and may be relied upon by the creditor upon whose behalf the demand was issued, if the debtor company fails to pay after 21 days; and
  1. for statutory demands served between 23 April 2020 and 31 December 2020, the creditor upon whose behalf the demand was issued may only rely on the presumption of insolvency if the debtor company fails to pay after 6 months.

Furthermore, it appears that a petitioning creditor relying on the presumption of insolvency under section 466(1) of the Act which arose following a debtor company’s failure to comply with a demand served before 23 April 2020 is not affected by Exemption Order No. 2.

From a creditor’s perspective, risk assessment and recovery protocols should be revised with immediate effect to include additional emphasis on exploring alternative modes of enforcement and execution. Furthermore, where circumstances permit, consideration should be given to options to wind-up debtors without having to rely on the deeming provision in Section 466(1)(a) of the Act. 

Contributed by:

Ng Sai Yeang (Partner)
(E): [email protected]

Mark La Brooy (Partner)
(E): [email protected]

Tai Wei Jeat (Senior Associate) 
(E): [email protected]

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