[OP-ed] Legal Update: Permanent Increase in the Winding-Up Debt Threshold to RM50,000

The Prime Minister in his PEMERKASA speech on 17th March 2021 officially announced that the statutory demand threshold for winding-up petitions will be permanently kept at RM50,000.

The Minister of Domestic Trade and Consumer Affairs through the Gazette Notice Prescription of Amount of Indebtedness of Company under Paragraph 466(1)(a) (Gazette Notification No. 4159/2021) has set the amount of indebtedness to an amount exceeding RM50,000 with effect from 1st April 2021.[1]

What does this mean for companies and businesses moving forward as they attempt to settle their debts whilst navigating the uncertain economic landscape and turmoil brought on by the Covid-19 pandemic?

 

Introduction of Temporary Reliefs

The Malaysian Government (upon the recommendation by the Companies Commission of Malaysia) first announced two winding-up reliefs which came into force from 23rd April 2020 until 31st December 2020. The reliefs contained in both the Companies (Exemption) (No.2) Order 2020[2] and Direction of the Minister under Paragraph 466(1)(a) (Gazette Notification No. 8032/2020) [3] attempted to afford greater protections to local companies by:

  1. Increasing the winding-up debt threshold from RM10,000 to RM50,000; and
  2. Increasing the statutory demand period from a period of 21 days to 6 months.

This meant that a company served with a statutory notice of demand during 23rd April 2020 until 31st December 2020 shall only be deemed unable to pay its debt under Section 466(1)(a) of the Companies Act 2016 where it neglects to pay the stated sum within 6 months of receiving such notice.

On 23rd December 2020, the Minister extended the RM50,000 debt threshold requirement with effect from 1st January 2021 until 31st March 2021 through Gazette Notification No. 21841/2020.[4] For avoidance of doubt, this Gazette only maintains the debt threshold amount and the statutory demand period effectively expired on 31st December 2020, bringing the statutory demand period back to the usual 21 days period as set out in the Companies Act 2016.

The latest Gazette, unlike its predecessors, does not contain a sunset clause and will be the new statutory amount of indebtedness required to bring a winding-up petition as of 1st April 2021.

Effect on the Present Day

Empirical data shows a significant decrease in the number of winding up petitions filed in Malaysia during 2020. The Companies Commission of Malaysia stated that 1,595 winding-up petitions were lodged in 2020, nearly half of what was received in the previous year (a total of 3,022 winding-up petitions in 2019) despite the Covid-19 pandemic pushing Malaysia to its worst recession since the Asian Financial Crisis of 1997/98.[5] The Companies Commission of Malaysia attributes this decline to the various forms of incentives provided by the Government including the temporary measures and reliefs which would have discouraged creditors from obtaining court orders to wind-up companies.

The Minister of Domestic Trade and Consumer Affairs welcomes this downward trajectory in winding-up petitions and recently stated that this RM50,000 indebtedness threshold was considered appropriate, as it was not too low, forcing companies to wind-up due to small amounts of debt, nor was it too high, which could burden small creditors for not being able to take action against companies in debt.[6]

Conclusion

In practice, the RM50,000 indebtedness threshold is still relatively small and is likely to only assist in keeping small-to-medium enterprises (“SMEs”) afloat whilst having little effect on larger companies. With the expiry of the extended 6-month statutory demand period (which presented the largest obstacle to creditors in bringing a winding-up petition), we can expect the number of winding-up petitions to gradually increase once again throughout 2021.

The temporary reliefs previously introduced are a welcomed tool in assisting otherwise viable companies and businesses from being wound-up. However, unless further and more robust protections and safeguards are implemented (as our neighbouring jurisdictions of Singapore and Australia have continuously done), it remains to be seen how struggling businesses will continue to weather the storm.

[1] https://www.ssm.com.my/Pages/Legal_Framework/Document/GN%20No.%204159_Penetapan%20Amaun%20Keterhutangan%20Syarikat.pdf

[2] https://www.ssm.com.my/Pages/Legal_Framework/Document/PUA123_2020.pdf

[3] https://www.ssm.com.my/Pages/Legal_Framework/Document/Direction%20of%20Minister%20under%20para%20466(1)(a).pdf

[4] https://www.ssm.com.my/Pages/Legal_Framework/Document/GN%2021841_KPDNHEP%2030.12.pdf

[5] https://www.theedgemarkets.com/article/fewer-companies-wound-2020-compared-2019

[6] https://www.theedgemarkets.com/article/ssm-raises-indebtedness-threshold-companies-rm50000-permanent-basis

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Author: Shawn Zachary Tan, LL.B. (Hons) Queen Mary University of London (UK), Middle Temple.

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