Inability to Pay Debt Requirement Exempted
PUBLISHED ON 1 MAY 2020 BY KHONG JO EE AND ASHVINPAL KAUR A/P JOGINDER SINGH
We have addressed the Winding-Up proceedings in our Article entitled Always A Good Time To Chase Bad Debts dated 20 April 2020. Briefly, Section 466(1)(a) of the Companies Act 2016 has a deeming provision to the effect that a Debtor is deemed to be unable to pay its debts upon expiry of the prescribed time frame and the Creditor may present a Winding Up Petition in Court against the Debtor thereafter.
Section 466(1)(a) of the Companies Act 2016 provides that a company shall be deemed unable to pay its debts if:-
(i) it is indebted in a sum exceeding the amount as may be prescribed by the Minister (the sum prescribed is RM50,000.00 pursuant to the direction under Section 466(1)(a) which increased the statutory threshold amount from RM10,000); and
(ii) a creditor has served a notice of demand requiring the company to pay the sum due by leaving the notice at the company’s registered office; and
(iii) the company has, 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;
Upon fulfillment of these 3 requirements, the Creditor may proceed to file a Winding-Up Petition against the Debtor in Court.
As a result of the onslaught of the Covid-19 pandemic and Movement Control Order (“MCO”) imposed by the Government, many companies face financial difficulties and are unable to comply with the 21 day notice period through no fault of theirs. To assist such Debtors, the Minister of Domestic Trade and Consumer Affairs exercised his powers under Section 615 of the Companies Act 2016 and amended the abovesaid requirements via the Companies (Exemption) (No. 2) Order 2020 on 23 April 2020.
What is the Companies (Exemption) (No. 2) Order 2020?
The Companies (Exemption) (No. 2) Order 2020 is an order that effectively extends the 21-day period to six (6) months after the service of the statutory notice of demand requiring the Debtor to pay, secure or compound the indebted sum to the Creditor.
Only upon failure to do so after expiry of the 6 months period will the Debtor Company be deemed unable to pay the debt and risk having a Winding-Up Petition being presented against it.
When does the Companies (Exemption) (No. 2) Order 2020 take effect?
The Companies (Exemption) (No. 2) Order 2020 only affects statutory demands served on the Debtor Company between 23 April 2020 to 31 December 2020. If a Creditor has served a statutory demand before 23 April 2020, the 21-day notice period is still applicable and the Creditor can file a winding-up petition after the lapse of the 21 day period.
This will give companies some breathing space during these difficult times as the MCO announced by the Government restricts many industries from operating and thus affecting their cash flow.
If you wish to collect debts within this period, you can still issue the statutory notice and commence legal proceedings at the same time to secure a judgment. As the deeming provision would be effective in 6 months, a Creditor may proceed with Winding-Up proceedings immediately upon entering a judgment in its favour.
Increase of the Winding-Up Threshold to a sum exceeding RM50,000.00
Pursuant to the Federal Government Gazette dated 23rd April 2020, a company can only be wound up if it is indebted in a sum in excess of RM50,000.00. The Minister of Domestic Trade and Consumer Affairs increased the statutory threshold amount from RM10,000.00 to exceeding RM50,000.00 temporarily for a 6 month period from 23 April 2020 to 31 December 2020
The directive announced by Minister is to ease the burden of businesses and to protect Debtors who have cash flow problems due to the MCO.
The contents of this article are not intended to constitute legal advice on any specific matter and should not be relied upon as a substitute for specific legal advice on matters or transactions.
For further information, please contact the authors of this article.