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Legal Update: Temporary Reliefs to Companies in Times of COVID-19 Crisis

(A) Introduction

As the Covid-19 pandemic continues to escalate, coupled with the Malaysian Government’s imposition of the Movement Control Order (“MCO”), the repercussion it brings to corporations is synchronically intensified. In the spirit of providing a breathing room for companies to stave off winding up, the Malaysian Government had on 23rd April 2020 gazetted the Companies (Exemption) (No. 2) Order 2020 (“the Order”) and the Direction of the Minister Under Paragraph 466(1)(a) (“the Direction”). 


(B) Effect of the Order and the Direction

The Order:

In the normal course, a debtor company shall respond to a statutory demand served under Section 466(1)(a) of the Companies Act 2016 (“CA 2016”) by paying the demanded amount within 21 days after being served with the same, failing which the debtor company is deemed to be unable to pay its debts. By virtue of the Order, a debtor company now has a 6-month window, instead of the ordinary 21 days, to respond to a statutory demand, upon expiry of which the creditors may proceed to file a winding up petition. For the sake of completeness, the Order has revoked the earlier Companies (Exemption) Order 2020 which was gazetted on the 22ndApril 2020 on the same subject matter, so as to provide more certainty with the use of clearer language in the Order.

The Direction:

Ordinarily, a creditor can serve a statutory demand against a debtor company for a debt of RM10,000.00 or more. With the Direction being in place, the debt threshold sum for the issuance of a statutory demand has been increased to RM50,000.00. In other words, a creditor must have a debt of at least RM50,000.00 owing to it by a debtor company before it can serve a statutory demand. It is pertinent to note that the above measures are only temporary and effective from 23rd April 2020 till 31st December 2020 (“the Window Period”) and only affect a statutory demand served between the Window Period under Section 466 (1)(a) CA 2016.It would not apply to the ongoing winding up petitions which have been presented to the court.


Different scenarios are illustrated below for your better understanding of the application of the Order and the Direction.

a.

Scenario 1

:

Where a statutory demand is served before 23rd April 2020

 

Effect

:

The Order will not apply. Debtor company has the ordinary 21-day period to respond to the statutory demand after which a winding up petition can be filed.

The Direction will not apply. Amount of debt demanded must be at least RM10,000.00 for the issuance of a statutory demand.

b.

Scenario 2

:

Where a statutory demand is served between 23rd April 2020 and 31st December 2020

 

Effect

:

The Order will apply. Debtor company has 6 months to respond to the statutory demand after which a winding up petition can be filed.

The Direction will apply. Amount of debt demanded must be at least RM50,000.00 for the issuance of a statutory demand.

c.

Scenario 3

:

Where a statutory demand is served after 31st December 2020

 

Effect

:

The Order will not apply. Debtor company has the ordinary 21-day period to respond to the statutory demand after which a winding up petition can be filed.

The Direction will not apply. Amount of debt demanded must be at least RM10,000.00 for the issuance of a statutory demand.

Notwithstanding the extended response period which may not seem favourable for creditors, it is interesting to note that a creditor who obtains a Judgment for more than RM50,000.00 between August 2020 and December 2020 may have the option to shorten the 6-month period by serving a statutory demand to its debtor company immediately upon the expiry of the Window Period i.e. by 1st January 2021 at the earliest where the Order and the Direction will no longer be applicable. The debtor company would then be obliged to respond to the statutory demand within 21 days upon being served with the same as opposed to the extended 6-month period as illustrated in Scenario 2 above.Having said that, the option of having the 6-month period shortened will not be viable in the event the Window Period granted by the Minister is further extended in the future given the uncertainties surrounding the impact of the Covid-19 pandemic which is yet unfolding.


Service of Statutory Demand during MCO Period

Section 466(1)(a) CA 2016 requires a statutory demand to be left at the registered office of the debtor company. However, with MCO being in place, a creditor may face difficulties in serving the statutory demand at the doorstep of the debtor company’s office. It is worthy to note that the words “by leaving the notice at the registered office of the company” does not require personal service of the statutory demand (see:Teguh Amani Sdn Bhd v Yongvic Sdn Bhd [2017] 1 LNS 63). Since personal service of the statutory demand is not required under Section 466(1)(a) CA 2016, Rule 18 of the Companies (Winding Up) Rules 1972 (“Winding Up Rules 1972”) would apply and a statutory demand can be served at the registered office of the debtor company, by way of A.R registered post, and such service is valid and effective in law (see:Badan Pengurusan Bersama Anson Apartment v CTS Properties Sdn Bhd [2019] 1 LNS 1658).


When Must a Winding Up Petition be Filed?

According to Section 466(2) CA 2016, a petition to wind up a company shall be filed in the Court within 6 months from the expiry date of the statutory demand. In other words, a creditor must file a winding up petition against a debtor company within either 21 days + 6 months OR 6 months + 6 months following the issuance of a statutory demand, depending on when the statutory demand is served (within or outside the Window Period).


Other Reasons for Winding Up a Company

For avoidance of doubt, the operation of the Order and the Direction does not completely preclude the possibility of a company being wound up during the Window Period. The above temporary measures merely apply to one form of winding up proceedings which is commenced pursuant to Section 466(1)(a) CA 2016 where a debtor company is deemed to be unable to pay debts following its failure to respond to a statutory demand within the prescribed period. It must be noted that a company may still be deemed to be unable to pay its debts under other circumstances as illustrated in Section 466(1)(b) and 466(1)(c), whereby:

  • execution or other process issued on a judgment, decree or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part; or
  • it is proved to the satisfaction of the Court that the company is unable to pay its debts and in determining whether a company is unable to pay its debts the Court shall take into account the contingent and prospective liabilities of the company.

Furthermore, a company may also be wound up based on other circumstances as laid down in Section 465(1) CA 2016. For example, where a company has by special resolution resolved that it is to be wound up by the Court; where the directors have acted in the affairs of the company in any manner which appears to be unfair or unjust to members; or where the Court is of the opinion that it is just and equitable that a company be wound up.


Alternative Remedies Available to Creditors

While waiting for the expiration of the 6-month period of a statutory demand, creditors who are armed with a monetary judgment may pursue other viable modes of execution such as garnishee proceedings, judgment debtor summons and seizure and sale of the debtor company’s assets. Although a creditor may appear to be deprived of an immediate access to a legal avenue to recover its debts under Section 466(1)(a) CA 2016 at this economically difficult juncture, the creditor is certainly not left with no remedy at all against its debtors.


Issue on the Legality of the Order

Despite the need to provide a safety net to companies to prevent them from being unnecessarily shoved into winding up in such challenging times, the means of coming up with the Order remains disputable. Section 615 CA 2016 expressly empowers the Minister, upon the recommendation of the Commission, by order to exempt any person, corporation or class of corporations from all or any of the provisions of the 2016 Act. However, it does not allow the Minister to amend the provision itself. The first issue lingers on the extent of the application of Paragraph 3 of the Order which reads, “The Minister exempts all companies from paragraph 466(1)(a) of the Act  which providesthat 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”.

Paragraph 3 of the Order above shows that the exemption granted is with regards to Section 466(1) CA 2016. However, a scrutinized reading of the said paragraph shows that the exemption is only applicable to those underlined part of the section but failed to or did not even mention the mode of service of the statutory notice of demand to be effected.

As such, it can be argued that Paragraph 3 of the Order would beultra viresof the Companies Act 2016 as the Minister’s power to grant exemption should be in respect of “all or any provisions of the Act” and not only just part of.

The second issue lies in Paragraph 4 of the Order which revised the statutory response period from 21 days to 6 months and this, essentially, changed the express wording of Section 466(1)(a) CA 2016.

This is also arguablyultra vires of the Companies Act 2016 as the power of the Minister is only limited to granting exemption to a company from any provision in the Companies Act 2016 and the Minister’s act of imposing a new statutory response period is tantamount to an amendment of the Act. We are of the view that Section 615 of the CA 2016 does not confer such power to the Minister to amend or modify the provisions under the 2016 Act (see:Ang Ming Lee & Ors v Menteri Kesejahteraan Bandar, Perumahan Dan Kerajaan Tempatan & Anor And Other Appeals [2020] 1 CLJ 162).

Further, while the Direction to increase the threshold to RM50,000.00 is legally and properly made pursuant to the Minister’s express power which is delegated to him under Section 466(1)(a) CA 2016, there is no such express provision which allows the Minister to revise the statutory response period.Thus, the Order clearly does not come within the ambit of the authority conferred on the Minister by the Parliament.

When Parliament delegates its legislative power to the Minister, this power must be exercised judiciously to ensure that there is no abuse of the delegated power. A provision in a statute conferring power on a member of the executive to enact subsidiary legislation must be construed strictly (see:Palm Oil Research And Development Board Malaysia & Anor v Premium Vegetable Oils Sdn Bhd [2004] 1 MLRA 137).

For an amendment to an Act of Parliament to be deemed legally valid, the legislative proposal must go through the scrutiny of both Houses of Parliament. However, the Order in question lacks this very criterion, thereby rendering it susceptible to challenges in the courts of law in the future.


Conclusion

Accepting the legislation as it presently is, unfortunately, creditors have to be more patient than ever in the process of winding up a company. As discussed above, the validity of the temporary relief provided by the Government through the introduction of the Order, is open to be tested in the courts of law. It is hoped that the Parliament will move to enact a legislation to properly implement the above temporary measures in order to avoid any disputes as to the legality of the Order in the future. Although the legality of the Order remains disputable, it shall be binding upon the concerned parties until and unless the same is declaredultra viresby the courts of law. As such, it is advisable for creditors to comply with the Order during the Window Period to avoid unnecessary expense of protracted litigation, bearing in mind that it is only a temporary relief mainly introduced to ease the case flow problems faced by many companies during this unprecedented global economy crisis caused by the Covid-19 pandemic. We are also to be mindful that further changes to existing laws or enactment of new laws is to be expected in the upcoming weeks or months under this unprecedented Covid-19 phenomenon.

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