Maintain trust and goodwill

ON Aug 25, 2020, Parliament passed the Covid-19 Bill and the Insolvency (Amendment) Bill 2020, which are closely related to the issue of a moratorium on creditors’ actions against companies and individuals. The likelihood of creditors’ actions leading to bankruptcy of the business owner or the closure of the business has been hovering over businesses like the sword of Damocles. The main challenge lies in managing revenue streams and addressing the ability to pay off debts and business loans.

Generally, Section 465(1) of the Companies Act 2016 allows creditors to apply to wind up a company in court if its total debt is RM10,000 or more. The company is given a period of 21 days from the date of the notice of claim to pay off the debt. If it fails, the company can be wound up.

As a short-term measure to address the impact of Covid-19 on the ability of businesses to continue operating, Section 465(1) was modified through the Company Order (Exemption) 2020, and now companies are given a period of up to six months to pay off the debt and the amount of debt has been increased to RM50,000.

With a moratorium on loan repayment in place, businesses can work on repairing and restructuring finances without having to worry about creditors’ actions. However, there is no denying that while the moratorium can help businesses, preventing creditors from making claims can also cause business to be affected. There is currently a court action challenging the validity of the Exemption order in relation to an arbitration award made prior to the start of the movement control order. One of the arguments, as reported in the media, is that the minister has no authority to make such an order.

It is worth noting that a provision similar to the Exemption order was included in the recently passed Insolvency (Amendment) Bill 2020. A similar move involving the Companies Act 2016 could have addressed the argument about the validity of the exemption order.

Interestingly, in some jurisdictions that have a similar moratorium in place, such as Belgium, the moratorium may be challenged by any person who can petition the court if there are reasons that would justify the moratorium being lifted in whole or in part on a business. These include the company paying dividends or if there is proof that the company is unwilling to pay its debts as opposed to being unable to do so.

There is also the likelihood of personal liability for directors due to Section 539 (3) of the Companies Act 2016, commonly known as the “wrongful trading provision”. Under this section, if a director or officer of a company knowingly causes the company to trade or incur debt when there is no reasonable prospect or reason to expect that the company will be able to pay off its debt when due, he or she is personally responsible for settling all or part of the company’s debt; and this is in addition to the risk of imprisonment.

One way of helping businesses is by suspending this law, as is being done in several countries. No doubt there must be safeguards against scoundrels taking advantage of these measures. Protection should not be given when the decision to carry on trading or incur obligations is made with no intention of paying the company’s debts, as this is done to cheat or defraud creditors, customers or employees.

Directors who receive deposits from customers while knowing that services cannot be provided must not be protected. In Australia, Germany, New Zealand and Singapore, the protection is available for directors if the company is not already in a precarious financial position prior to December 2019 and only if the debts were incurred as part of the ordinary course of business – for example, debts incurred through continuing to pay employees.

The circle of life for a business makes any business both a creditor and debtor in the supply chain. While business owners and managers must concentrate their time and energy on rebuilding their businesses in these challenging times, trust and goodwill must also be maintained to ensure a better future.

PROF DR AIMAN NARIMAN MOHD SULAIMAN , Ahmad Ibrahim Kulliyyah of Laws, International Islamic University Malaysia

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