Covid-19: Proposed interim reliefs for financially distressed companies and individuals?

On 11 March 2020, the World Health Organisation officially characterised the Covid-19 outbreak as a pandemic. This was quickly followed by the imposition of lockdowns in various cities, states and countries. This included Malaysia, where the Federal Government imposed a Movement Control Order from 18 March 2020 to 31 March 2020. This has since been extended to 14 April 2020.
The various degrees of movement control restrictions that have been imposed by various countries, and the accompanying market turmoil has increased the risk for companies, particularly small and medium enterprises, to be plunged into insolvency. Governments around the world have therefore started to churn out various measures to help all affected parties, including companies. In most countries, such measures would generally take the form of financial assistance as well as tax exemptions.
However, Australia and Germany went a step further from the rest of the pack by introducing changes to their corporate insolvency laws. On 22 March 2020, the Australian Treasurer, Josh Fryderberg, announced various temporary changes to the Australian corporate insolvency laws to provide temporary relief for Australian companies which were generally profitable and viable but now facing financial distress due to Covid-19. The aim of these measures was to ensure that these businesses could keep their head above water during the market downturn with a lifejacket in place for them until the crisis passes. In Germany, the federal government has expressed its intention to suspend the obligation of companies to file for bankruptcy until 30 September 2020.
This article aims to provide an overview of the proposed interim changes to the corporate insolvency laws in Australia and Germany and discuss whether such an approach should be adopted by the Malaysian legislators.
The Australian approach
  1. Increase in minimum threshold and timeframe to respond to statutory demand in companies’ winding up
Under sections 9 and 459E of the Australian Corporations Act 2001, the minimum debt threshold for creditors to issue a statutory demand against a debtor company is AUS$2,000.00. Under the proposed changes, this current minimum threshold will be increased 10-fold to AUS$20,000.00. There will also be an increase in the statutory timeframe for a debtor company to respond to statutory demands from creditors. Currently, the timeframe for a debtor company to respond is 21 days whereas under the proposed changes, this will be extended to six months. These proposed changes will be effective for a period of six months.
The objective for both these changes is to ensure that companies would only face the risk of being wound-up due to owing relatively high amount of debts, and that the companies would have sufficient time to increase their cashflow to satisfy these debts after the Covid-19 pandemic has, hopefully, settled down.
  1. Increase in minimum threshold and timeframe to respond to bankruptcy notice
In the case of individuals, the changes will see a temporary increase in the minimum debt threshold at which bankruptcy proceedings can be commenced from AUS$5,000.00 to AUS$20,000.00. Individual debtors will similarly also be given more time to respond to a bankruptcy notice with the current 21 days’ timeframe extended to six months.
In addition, where a debtor intends to enter into voluntary bankruptcy, the period of protection during which unsecured creditors cannot take further action to recover debts would equally be extended from 21 days to six months. This is to give the debtors more time to consider the options that are best of them.
All three of the abovementioned changes would apply for six months.
  1. Temporary relief from directors’ personal liability for insolvent trading
Section 488G of the Corporations Act 2001 imposes personal liability on directors who allow a company to trade while insolvent. There is a duty on directors to prevent companies from trading when insolvent. Such duty, coupled with the current outbreak, may put directors under immense pressure to make quick decisions to enter into an insolvency process to avoid any risk of the company trading while insolvent.
Under the proposed changes, directors will be temporarily relieved of their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business. This will apply for a period of six months. The aim is to assist companies that are otherwise well performing from going into liquidation just because of the Covid-19 outbreak and to make sure that companies have confidence to continue to trade through the outbreak with the aim of quickly returning to viability when the crisis has passed.
However, this temporary measure is not a blanket relief which applies across the board. This proposed measure will only apply with respect to debts incurred in the ordinary course of the company’s business. Cases of dishonesty and fraud will still be subject to criminal penalties. Debts incurred by the company would also still remain due and payable.
  1. Providing the Treasurer an Instrument-Making Power under the Corporations Act 2001
The proposed changes will also provide the Treasurer with temporary instrument-making power to temporarily amend provisions of the Corporations Act 2001 to provide relief from specific obligations or to modify obligations to enable compliance with legal requirements amid the Covid-19 outbreak. The instrument-making power will apply for six months, and any instrument made under this power will remain valid only for up to six months from the date it is made.
The objective of this proposed measure is to allow for a flexibility for the Australian Government to make changes as quickly as possible and provide regulatory certainty when issues arise. This is especially so given that the nature of the Covid-19 outbreak means that regulatory issues may arise day-to-day without notice and businesses may struggle to comply with the provisions of the Corporations Act and/or to make individual requests for exemptions to the Australian Securities and Investment Commission.
The German approach
Pursuant to section 15a of the German Insolvency Code, companies have a statutory obligation to file for insolvency within three weeks of incurring a situation of illiquidity. It has been reported that the German Government announced that it will be providing a temporary relief to companies by suspending the obligation to file for bankruptcy until 30 September 2020. This is similar to Australia’s approach in providing temporary relief to directors for insolvent trading. The German Government’s approach in suspending the obligation to file for bankruptcy is aimed at providing companies with some breathing space to obtain financial assistance already promised by the Government.
Existing measures in Malaysia
The Malaysian Government has introduced various plans and measures with the view of helping companies and business mitigate the impact of the Covid-19 outbreak. In particular, the government has required financial institutions to provide financial relief to borrowers in the form of moratorium or restructuring of loans. On 24 March 2020, Bank Negara Malaysia (“BNM”) announced that small and medium sized enterprises as well as individuals will be given a six months moratorium for repayment of loans, starting 1 April 2020. The moratorium will apply automatically to all individuals and small and medium enterprises provided that:
  1. The loan(s) is not in arrears for a period exceeding 90 days as at 1 April 2020; and
  1. The loan(s) is denominated in Malaysian Ringgit.
BNM has also announced that financial institutions have been directed to consider requests by companies to defer or restructure their loans in a way that will allow viable companies to swiftly resume economic activities as soon as the situation improves.
Should Malaysia adopt the same approach as Australia?
While the current measures in place will certainly help individuals and small and medium sized enterprises to weather the Covid-19 storm, such measures without more, may not be sufficient.
Firstly, these measures in place will not stop other creditors (save for financial institutions) from commencing legal action against debtor companies and individuals to recover any defaulting or outstanding debts. After all, the creditors themselves may be facing financial difficulties and pressures from their own creditors and see the debt recovery as an option to ease their concerns.
Secondly, small and medium sized enterprises are not the only companies facing difficulties amid the Covid-19 outbreak. Even the big industry players are facing difficulties. The airline, travel & tourism and retail industries are some examples who have suffered major disruptions due to the near complete ban of movement and travel. For the current measures to be fully effective, there should be a temporary restrain to legal proceedings for the recovery of debts against individuals and companies, big or small, in such difficult times to halt the chain of insolvency filings. It remains to be seen if Malaysian government will consider adopting similar moratorium or protective approach as has been proposed in countries like Australia and Germany.
  1. Winding Up Under Companies Act 2016
The current minimum threshold debt for the issuance of the winding up notice is a relatively low RM10,000.00. Any increase in this threshold should ideally be a meaningful amount in order to reduce the number of winding up proceedings during this period of uncertainty. Further the current 21 days’ timeframe for companies to respond to a statutory demand is also too short and ideally should give companies time to tide over these disruptions caused by Covid-19.
Additionally, in cases where a statutory demand has already been issued and where the 21 days’ deadline is nearing, consideration should be given for an automatic extension of time to respond, particularly bearing in mind the Movement Control Order in place. However, care should be taken to ensure that only companies that are truly facing difficulties due to the Covid-19 outbreak benefit from the change in law. One way of ensuring this is to have in place, clear provisions which either relate to the timing of insolvencies or provide for a rebuttable statutory presumption.
The effect of the increase in the minimum threshold and the statutory timeframe will be twofold. Firstly, it will be harder for creditors to issue a statutory demand and second, in cases where a statutory demand can be issued, the debtor company would nonetheless have sufficient time to respond and satisfy the debt. Both measures will result in the delay of a debtor company being wound up on the grounds of being insolvent but will prevent otherwise well performing companies from going bust and in turn, prevent companies from having to lay their employees, hence increasing the unemployment rate and causing further difficulties for the nation.
  1. The Insolvency Act 1967
In terms of individuals facing difficulties amid the Covid-19 outbreak, it is worth noting that the existing law in place already provides for a high minimum threshold for the filing of a bankruptcy petition. In this regard, under section 5(1)(a) of the Insolvency Act 1967, the minimum threshold is RM50,000.00. This minimum threshold has already been increased from RM30,000.00 under the previous Bankruptcy Act 1967. As such, there may not be a need to further increase this threshold. However, individuals should be given more time to respond to a bankruptcy notice in difficult times like this. For instance, under section 3(1)(i) of the Insolvency Act 1967, a party must, within seven days after service of a bankruptcy notice, make the necessary payment or satisfy the court that he has a counterclaim, failing which, the creditor can then proceed to file a bankruptcy petition. Seven days is definitely too short a period of time, especially is such trying times and this period should instead equally be increased to at least three to six months to allow an individual to sufficiently recover financially in order to make payment of his debts.  Whilst financial institutions have agreed to provide individuals with a six months’ moratorium, there is no guarantee that other creditors would follow suit. As such, it is important to increase the timeframe for individual debtors to respond to bankruptcy notices.
  1. Relief of directors’ personal liability
Similar to Australia, directors of Malaysian companies may incur personal liability for allowing a company to trade while insolvent. In this regard, section 539(3) of the Companies Act 2016 provides that an offence is committed by a director if in the course of winding up of a company or in any proceedings against a company, an officer of the company who knowingly was a party to the contracting of a debt had, at the time the debt was contracted, no reasonable or probable ground of expectation of the company being able to pay the debt. With such provision in place, directors in Malaysia may similarly be pressured into putting otherwise healthy companies into voluntary winding up proceedings amid the Covid-19 outbreak. By providing temporary relief from personal liability, directors may be more inclined to ensure the companies soldier on in such difficult times. This should of course only be applied towards debts incurred in the ordinary course of business.
However, one possible set back of this approach is that it may be extremely difficult to prove that the difficulties companies are currently facing are direct consequences of the Covid-19 outbreak. If not properly implemented, this temporary relief may instead be abused by irresponsible directors, thus increasing the number of fraud cases. To avoid such problems, the planned statutory revisions must similarly have a clear provision which either relates to the timing of insolvencies or provide for a rebuttable statutory presumption. It will be even more crucial now for directors to have every decision properly recorded together with the supporting documents and to pay particular attention to timely documentation of the specific circumstances.
Even if the Malaysian Government is minded to adopt the same approach as the Australian and German Governments, it must be noted that not all of the changes to the relevant provisions of the Companies Act 2016 and the Insolvency Act 1967 can effected quickly. In this regard, the timeframes to respond to a statutory demand and a bankruptcy notice are provided for under primary legislation, and can only be amended by an Act of Parliament. As the next parliamentary session will only take place on 18 May 2020, any amendments to those timeframes can only take place after 18 May 2020, unless there is an emergency sitting of the legislature. This may be too long for companies and individuals who are currently struggling amid the Covid-19 outbreak. Fortunately, an increase of the minimum threshold to stall any potential winding up proceedings can be effected expeditiously as the requirement is embodied in secondary legislation which can be amended or replaced the Minister of Domestic Trade and Consumer Affairs. As for the temporary relief to be provided to company directors, it may be possible to issue an exemption order under section 615(1) of the Companies Act 2016.
As at the date of this article, no other major country has taken the same approach as Australia and Germany in terms of introducing temporary changes to the corporate insolvency laws. In the UK, the Insolvency Services has begun to consult insolvency professionals this week on urgent changes to company legislation. It is understood that these reforms would see a temporary moratorium on winding up petitions against companies as well as a temporary suspension of the wrongful trading offence against directors. As at the time of writing of this article, no announcement has been made by the UK Government on the proposals.
Given the benefits of the proposed measures, it is worthwhile for the Malaysian Government to consider adopting a similar approach as the Australian and German Governments to proactively protect and shield the Malaysian businesses in these uncertain times. The change in insolvency laws, coupled with the existing measures in place will no doubt assist viable companies in weathering the storm.
The fact sheet prepared by the Australian Government on these measures can be accessed here.
This Article is written by Nimalan Devaraja (Partner) and Janice Ooi (Senior Associate).