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A winding-up order is used as a last resort when the petitioner has supposedly exhausted all the alternate means to obtain payment. Of course, this is a time consuming and costly process.
In a winding-up process, all the assets of the company are sold off and distributed to its creditors. The remaining ones will be distributed among the shareholders/partners.
What are winding up rules?
If the debtor is a company, winding-up proceedings can be initiated if the company owes the debtor an amount of RM10,000 and above.
To initiate the process, a winding-up petition has to be presented to the court by the debtor. The court will take four to five months to review and approve the request.
After the court has approved the petition, a winding-up order is issued, forcing the company into compulsory liquidation. The entire company assets are then sold off in an auction to pay off the debts.
In one of our previous articles, we mentioned that SSM (Companies Commission of Malaysia) has given several financial assistance to overcome the financial crisis due to the lockdown happening during the COVID-19 pandemic.
The latest update in winding up provisions 2020
As per section 615 of the Companies Act 2016, the minister is allowed to exempt any person, company or class of companies from all the provisions of the Companies Act 2016.
The Minister of Domestic Trade and Consumer Affairs has exercised his power under section 615 of the CA 2016 and produced the exemption order.
On 22.04.2020, the Federal Government gazetted the Companies (Exemption) Order 2020 (“the Order”) under Section 615 CA 2016.
As per the order, an exception is given to all companies who fail to satisfy a statutory notice of demand within 21 days upon receiving. As per the usual definition, a company would be deemed unfit if it failed to reply to a letter of demand within 21 days upon reception.
Unlike the old definition under Section (466(1)(a) CA 2016), the new rule allows a six month period for the companies to reply to a letter of demand. The company is treated as incapable of paying back the debts only if it fails to respond to a letter of demand within six months upon its reception.
With the new order, companies should keep in mind that:
- The order takes effect from 23.04.2020 until 31.12.2020. During this period, if the companies are served with a statutory notice of demand, they will have a six-month period to respond. Thus, in short, the creditor will not be able to file a winding-up petition in the court if the company under debt fails to respond within six months.
- The new order will not have an effect if the statutory demand is served before 23.04.2020 or after 31.12.2020. If in case the statutory demand is served before 23.04.2020, the companies will have a period of only 21 days to respond and not replying to the issued letter will deem the company unfit to pay back the debt. The creditor can file a petition in the court of law for winding up the company if her wishes to do so.
- The order will be applicable only until 31.12.2020 that means from 01.01.2021, the effect of (Section 466 (1)(a) CA 2016) will revert back to the usual period of 21 days as the timeframe to respond to a statutory demand.
- The minister has given a direction that the minimum threshold amount under section 466(1)(a) should be RM50,000. Again, this is for the limited time frame only.
Now, until the exemption is valid, it has to be read together with the direction that comes under section 466(1)(a), where the minimum amount owed by the company under debt is increased to RM 50.000 from RM 10,000.
The six month period of responding when served with a letter of demand will give enough time for companies to tide through the present Covid-19 crisis. This will help the company to prepare enough to handle a possible lawsuit.
Please note that the exemption is valid only for the duration of the company to respond. Other legal actions can still be taken against the debtor company.
Recent changes after December 31-2020
On December 31, 2020, the moratorium period for winding up in Malaysia came to an end.
This means that the two winding-up reliefs provided under the companies (Exemption) Order 2020 are no longer applicable.
The first relief was the temporary winding up protection for six months through the Companies(Exemption)(No.2)Order 2020.
After December 31, 2020, the demand period will be 21-days as per the Companies Act in Malaysia.
The second protection was that the minimum threshold amount should be RM50,000(section 466(1)(a)).
However, after December 31, it should not have been applicable since many small scale businesses haven’t yet recovered from the severe impact of the COVID-19 crisis.
- The prescribed amount of RM 10,000 was revoked Company P.U.(B) 711/2020 dated December 23, 2020.
- The Minister has temporarily set the RM50,000 debt threshold, applicable from January 1 2021, to March 31 2021.
Whether an exemption under section 615 of the Companies Act good enough to amend?
After the temporary amendment order was issued, there have been some views questioning whether an exemption order made under section 615 amends the provisions laid down by the Companies Act 2016.
The order states that “A Company shall be deemed unable to pay its debts under paragraph 466(1)(a) of the Act if the company neglects any notice of demand by any creditor to pay its debt or to secure its debt or compound its debt to the satisfaction of the creditor within six months after the notice of demand is being served upon him.”
As per the general rule, to amend any Act requires the approval of both the houses of the parliament. Whether a Minister can utilise his powers under s.615 to amend a provision of the principal Act itself is still subject to be questioned.
Fortuna Injunction
If a creditor persists to threaten to petition for a winding-up, the legal remedy of Fortuna Injunction can be sought.
In general, an injunction order means an authoritative order, directed by the court to do, or not do something.
Fortuna injunction is a specific order of injunction from the High court temporarily restraining the creditor from filing a winding-up petition against the debtor company after the final letter of demand has been served.
If the debtor company successfully obtains an injunction order, the creditor won’t be able to file a winding-up order against the company.
What are the grounds in which a Fortuna injunction can be granted?
The grounds for Fortuna Injunction is established in the famous case of Fortuna Holdings Pty Ltd v Deputy Federal Commissioner of Taxation [1978] 2 ACLR 349
The court stated that a company under debt could be granted an injunction under two conditions.
First condition: The winding-up petition if presented has no chance of success or is sure to fail.
Second condition: The winding-up petition, if presented by the creditor, is sure to bring irreparable damage to the company. The better option will be to follow some of the alternate options available.
Bottom Line
The COVID-19 pandemic has undoubtedly shaken the pillars of many companies in Malaysia. Being a country where small and medium scale businesses are one of the significant sources of income, the recent update in the winding-up rules are sure to provide some relief to small and medium scale business owners.
