Companies Winding Up Protection Takes Effect (Updated)

In my earlier post, arising from COVID-19, I had written about the Companies Commission of Malaysia (SSM) providing seven reliefs for companies. One of them is a temporary winding up protection for six months and the increase to the debt threshold to above RM50,000 in the statutory demand.

First, the Minister of Domestic Trade and Consumer Affairs (being the relevant Minister under the Companies Act 2016) has now exercised his powers under section 615 of the CA 2016 and gazetted the Companies (Exemption) (No. 2) Order 2020, which I will refer to as Exemption Order No. 2. This provides for the six-month period to respond to a statutory demand.

Second, the Minister has also issued the direction under section 466(1)(a) of the CA 2016 to prescribe the threshold amount to above RM50,000.

Please note that Exemption Order No. 2 has revoked the earlier Companies (Exemption) Order 2020, which I will refer to as the Exemption Order No. 1.

Effect of the Exemption Order No. 2

The most common method of winding up a company is through the issuance of a statutory demand under section 466(1)(a) of the CA 2016 based on the prescribed amount by the Minister. The debtor company then has 21 days to respond to the statutory demand. After the expiry of this period, the creditor can file a winding up petition.

Exemption Order No. 2 now effectively amends the 21-day period. Instead of 21 days, a debtor company now has six months to respond to a statutory demand. Therefore, any filing of a winding up petition based on  the statutory demand will be held in abeyance until at least 31 December 2020 and longer. I explained further below the different scenarios.

The Exemption Order No. 2 entailed a rather creative use of section 615 of the CA 2016. First, section 615(1) of the CA 2016 requires SSM to recommend to the Minister to exempt “any person, corporate or class of corporation” from all or any of the provisions of the CA 2016. Second, under section 615(2)(c) of the CA 2016, the Minister can exercise this power of exemption and impose any terms and conditions as he thinks fit.

I make three points about the Exemption Order No. 2.

First, at paragraph 3 of this Order, the Minister now clearly exempts “all companies” from the entire application of section 466(1)(a) of the CA 2016. This would then exempt all companies from complying with the 21-day demand period. This helps bring this exercise of power within the wording of section 615(1) of the CA 2016.

Second, at paragraph 4 of this Order, the Minister now imposes a condition that any company shall now be deemed unable to pay its debts under section 466(1)(a) of the CA 2016 if, essentially, the company fails to pay within a period of six months after the service of the demand. This imposition of a condition is to bring it within the wording of section 615(2)(c) of the CA 2016.

Third, at paragraph 2 of this Order, it is very clear that the Order is to apply to any statutory demand under section 466(1)(a) of the CA 2016 “served within the period from 23 April 2020 to 31 December 2020.”

Comparison with Exemption Order No. 1

As mentioned, the Exemption Order No. 2 has now revoked the Exemption Order No. 1. This helps to bring better clarity to this important winding up protection mechanism.

In the earlier version of my article, I had pointed out that paragraph 2 of the Exemption Order No. 1 was couched as: “exempts the provision which determines that any company shall be deemed unable to pay its debt” in relation to the statutory demand.” (emphasis added)

Rather than exempting ‘the provision’, there could have been a clearer use of section 615 of the CA 2016. The Minister could have exempted “all companies served with a notice of demand set out in section 466(1)(a) of the Act” from the period of 21 days for the purposes of being deemed unable to pay its debts. This is what has been drafted in Exemption Order No. 2.

Second, paragraph 3 of Exemption Order No. 1 stated that notwithstanding the exemption, the company shall be deemed unable to pay its debts within the period of six months after the service of the notice of demand. Exemption Order No. 2 now includes the clear language that the Minister has imposed terms and conditions.

I next set out three scenarios. They are on how the winding up protection will take effect.

Scenario 1: Statutory Demands served before 23 April 2020

It is clear from the Exemption Order No. 2 that it will not affect statutory demands served on the company before 23 April 2020. So, for example, a statutory demand served on 22 April 2020 will still apply the 21-day notice period and after which, the creditor can file a winding up petition.

This Exemption Order No. 2 will also not affect winding up petitions already filed.

Scenario 2: Statutory Demands served up to 31 December 2020

From the reading of the Exemption Order No. 2, even if a statutory demand is served on 31 December 2020 itself, the debtor company still enjoys the full six-month period until 30 June 2021 before a winding up petition can be filed.

But if a statutory demand were to be served on 1 January 2021, the situation reverts back to the default section 466(1)(a) of the CA 2016 situation: 21 days applies.

Scenario 3: Statutory Demands served during this Exemption Order No. 2

Companies do not enjoy a complete moratorium from this method of winding up until the rest of the year. If a creditor were to serve a statutory demand on 24 April 2020 on a company, the company has until 24 October 2020 to respond to the demand. After that date, the creditor is free to file a winding up petition.

Conclusion

This Exemption Order will have to be read together with the direction under section 466(1)(a) which has increased the statutory threshold amount from RM10,000 up to RM50,000.

The increase to RM50,000 may not be that significant but this six-month protection does provide breathing room for companies. However, companies have to be aware that it is merely a six-month window in relation to one form of winding up. Other legal proceedings can still be taken out against the company.

Further, there have been some legal views questioning whether such an Exemption Order made under section 615 of the CA 2016 can effectively amend the clear language in the CA 2016. I can understand the need to utilise all urgent tools to provide essential breathing space for distressed companies. But it may be that the wording of the Exemption Order No. 2 may still be tested in the courts.

As I had written elsewhere, this amendment is significant. It helps Malaysia stay ahead of the curve and helps companies stave off winding up. These modifications are to be lauded and they are similar to measures taken by Australia and Singapore. The Exemption Order No. 2 was also issued on the very same day to revoke the earlier Exemption Order No. 1, and helps bring greater certainty to this important protection.

One thought on “Companies Winding Up Protection Takes Effect (Updated)

  1. Avatar S Kumar 29 May, 2020 / 5:58 pm

    Good read.Thanks a lot for the update. So any winding up case filed after 23rd April 2020, will have a window of 6 months before a winding up process can be mooted. It will revert back to 21 days period for cases after 1st Jan 2021

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