CORPORATE DEBT MORATORIUM OF 6 MONTHS DURING COVID-19
Posted on 27th April 2020
The government has provided temporary relief against winding up petitions for companies between 23 April 2020 to 31 December 2020 (“Prescribed Duration”). This has come about by increasing the minimum amount of indebtedness needed for a deemed statutory insolvency and by exempting the compliance period for a statutory demand for payment of 21 days, and permitting compliance within 6 months. This was done by gazetting Companies (Exemption) (No 2) Order 2020 (the “Exemption Order”) pursuant to S.466 of the Companies Act 2016 (the “Act”).
One of the grounds for a winding up of a company is prescribed under paragraph 465(1)(e) of the Act is “if 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—(a) the company is indebted in a sum exceeding the amount as may be prescribed by the Minister and a creditor by assignment or otherwise has served a notice of demand, by himself or his agent, requiring the company to pay the sum due by leaving the notice at the registered office of the company, and the company has for twenty-one days after the service of the demand neglected to pay the sum or to secure or compound for it to the satisfaction of the creditor to pay its debts”.
The Exemption Order gazetted on 23 April, 2020 now prescribes that the minimum indebtedness under the Act is increased from RM10,000 to RM50,000, raising the threshold by 500% for the Prescribed Duration (a change considered long overdue in any case, as it was out of step with other insolvency laws). The Exemption Order also exempts compliance with the 21 days demand period, permitting compliance within 6 months from the demand instead. The Exemption Order states that companies are exempted from complying “… subject to the condition that any company shall be deemed to be unable to pay its debts … (only) if the company neglects any notice of demand by any creditor to pay its debts … within a period of six months after the notice of demand is served on him.”
The sum result is that for the Prescribed Duration, a company will only be liable to be wound up under S.465 for being unable to pay its debts if it fails to pay a debt exceeding RM50,000 within 6 months of a notice of demand being served upon it. The changes do not affect other legal obligations of companies to comply with other enforcement orders, such as garnishee orders, writs of seizure and injunctions, nor does it affect the ability of a creditor to show that there was a de facto inability to settle debts contrary to the statutory presumption under S.466. Also excluded from the exemption are demands made prior to 23 April, 2020 and demands made against individuals and partnerships.
This would mean that the legislation does not go far enough in protecting unincorporated businesses or those already suffering the consequences of Covid-19 from an earlier period.
It is noted that no corresponding amendment has been made under the Exemption Order to Paragraph 466(2) of the Companies Act which provides that ”A petition to wind up a company shall be filed in the Court within six months from the expiry date of the notice of demand issued under paragraph (1)(a).” This creates a lacuna since creditors can only file a winding up petition against a debtor company 6 months after the service of the notice of demand as a result of the Exemption Order which would put them just beyond the time limit prescribed under Paragraph 466(2) of the Companies Act. It is curious that the current Exemption Order, being a reiteration of a previous order which it revoked, had not been amended to include a provision to address this issue.
RLSE Regulations Team (admin@rlse.law)