The Malaysian Government has finally decided to jump on the global bandwagon to introduce temporary changes to the Malaysian insolvency laws in order to help companies and businesses in Malaysia weather the storm caused by Covid-19 and the Movement Control Order.
On 10 April 2020, Datuk Alexander Nanta Linggi, the Minister of Domestic Trade and Consumer Affairs (“
Minister”),
announced that the Companies Commission of Malaysia (“
CCM”) will be increasing the minimum threshold of indebtedness under section 466 of the Companies Act 2016 (“
CA 2016”) from the current threshold RM10,000.00 to RM50,000.00 until 31 December 2020. Additionally, the time frame to respond to a statutory demand will also be increased from 21 days to six months. This article will provide an overview on these changes.
The validity of the changes
Based on the announcement made by the Minister, it appears that CCM will be the body responsible for implementing the changes to the minimum threshold of indebtedness and the time frame for responding to a statutory demand. The question that arises is whether CCM is empowered in itself to introduce such changes? The answer appears to be in the negative.
The minimum threshold of indebtedness before a statutory demand can be issued is embodied in a secondary legislation which can be amended by the Minister. In this regard, section 466(1)(a) of CA 2016 confers upon the Minister the power to prescribe the said minimum threshold of indebtedness. As such, CCM is not the correct regulatory body to introduce any such change. For instance, when CA 2016 came into effect in January 2017, it was the Minister who increased the minimum threshold from RM500.00 to the current threshold of RM10,000.00. This was done by gazetting a
prescription order. As at the time of writing of this alert, no such prescription order has been gazetted by the Minister in respect of the increase of the minimum threshold from RM10,000.00 to RM50,000.00.
As for the deadline to respond to a statutory demand, it is expressly provided for under section 466(1)(a) of CA 2016, a primary legislation. Any amendment to this time frame can only be done by way of an act of Parliament. As such, the amendment of the 21 days’ time frame would also not fall under the purview of CCM. Parallels can be drawn with the neighbouring nation of Singapore, where the time frame to respond to a statutory demand is provided for under a primary legislation, the Singapore Companies Act
[1]. As such, it was necessary for the amendment to the time frame to be enacted through an act of Parliament. This was done through the passing of the
Covid-19 (Temporary Measures) Act 2020 on 7 April 2020.
As such, it is clear that CCM cannot, on its own, be the body which brings about these changes as it would otherwise leave such changes open to challenges by creditors for being invalid. However, CCM can recommend to the Minister to increase the minimum threshold of indebtedness, and to pass an act of Parliament to temporarily amend section 466(1)(a) of CA 2016. Thus far, the Malaysian Government has not announced that it would convene an emergency sitting of Parliament.
Alternatively, CCM could also recommend to the Minister whether any person, corporation or class of corporations should be exempted from all or any of the provisions of CA 2016 pursuant to section 615(1) of CA 2016. For example, CCM could propose to the Minister that companies should be exempted from the 21-days’ time frame to respond to a statutory demand. While section 615(2)(c) of CA 2016 gives the Minister power to impose any terms and conditions as he deems fit, it is still questionable whether it is actually within the Minister’s power to impose a new time frame as the time 21 days’ time frame is embodied in a primary legislation. All roads therefore seem to lead us to the Parliament.
Are these changes sufficient?
While it cannot be denied that these proposed changes to the insolvency laws would assist companies in remaining viable, there is still room for improvement.
Firstly, there is currently no mention of any proposed changes to the laws on bankruptcy. As stated in our Alert titled
“Covid-19: Proposed interim reliefs for financially distressed companies and individuals?” published on 27 March 2020, it is equally important to increase the time frame for individual debtors to respond to bankruptcy notices during such difficult times. Without extending the time frame for individuals to respond, businessmen trading as sole-proprietorships and partnerships are still exposed to the risk of being adjudged bankrupt. This is a real risk given the current economic turmoil due to the Covid-19 outbreak and the Movement Control Order.
Secondly, the mere increase in the minimum threshold of indebtedness and time frame to respond to a statutory demand without further steps, may not necessarily ease a debtor’s financial concerns. A creditor is still not prohibited from filing claims against debtors for unpaid amounts. Companies and businesses may choose to wind down now to avoid having to face various litigations which they fear are incoming.
Thirdly, in order to be effective in reducing the number of winding up proceedings filed during this period of uncertainty, the proposed changes must be enacted to have retrospective effect and there must also be provisions to cater for situations where statutory demands and winding up petitions have already been issued. For example, it may be necessary to amend the law so that winding up petitions cannot be filed in respect of statutory demands already issued for debts below RM50,000.00. In terms of winding-up petitions that has already been filed, the law would equally have to be amended such that winding-up petitions filed after a certain cut-off date will be automatically stayed for a period of six month. In this regard, there is currently nothing in CA 2016 which provides for such an automatic stay of a winding up petition. Without such a provision, debtor companies would have to apply to the Court to seek a stay of the winding up petition, hence incurring more costs. This is certainly counterproductive.
A study must also be done to identify the date or period when the impact of COVID-19 started to be significantly felt in Malaysia’s economy. Ideally, the changes should take effect from a date where the impact first started to have a significant effect on Malaysia’s economy. This is to ensure that only companies that are struggling due to the Covid-19 outbreak are protected.
Fourthly, it appears that company directors will still be faced with the possibility of being personally liable for insolvent trading under section 539(3) of CA 2016 as there is no indication that the insolvent trading offence will be suspended temporarily. Without such measures, company directors of companies which are otherwise performing well will still be pressured to enter into an insolvency process just to avoid incurring any personal liability.
Conclusion
Whilst the changes announced by the Minister is a step in the right direction, such measures, without more, may not be sufficient to protect companies as well as small and medium sized enterprises from the full economic impact of the Covid-19 pandemic. Given the current situation, being forced into winding up is merely one of the many threats that are currently facing companies and small and medium sized enterprises. In order for them to be properly protected, more comprehensive measures would have to be introduced which extend beyond the mere amendments to the insolvency laws. For example, we have seen how Singapore’s Covid-19 (Temporary Measures) Act 2020 has provided temporary relief to individuals as well as small and medium sized enterprises that are unable to perform their contractual obligations amid the Covid-19 outbreak. Malaysia should consider adopting a similar approach and it remains to be seen whether we will travel down the path set by our neighbours.
This Article is written by Nimalan Devaraja (Partner) and Janice Ooi (Senior Associate).