Insolvency: Rebutting The Presumption Of Insolvency Against An Exempt Private Company

• Published date: 25 November 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy
• Law Firm: Chooi & Company + Cheang & Ariff
• Author: Mr Dennis Yuean Jin Han

A. INTRODUCTION

There are essentially two criteria that makes a private company an Exempt Private Company ('EPC'): (1) its shares cannot be held by a corporation; and (2), it does not have more than 20 members. The concept of an EPC is believed to have been inherited from English company law which was intended to preserve small family businesses against disclosing their financial affairs to the public.

Section 4 of the Companies Act 2016 ('CA2016'): "Exempt private company" means a private company in the shares of which no beneficial interest is held directly or indirectly by any corporation and which has not more than 20 members of whom is a corporation.

Advantages:

One pertinent feature of an EPC is that they are exempted from the duty of having to file financial statements and reports with the Registrar of Companies ('ROC'). They only have to lodge with the ROC: (i) a certificate signed by its directors relating to its status as an EPC; and (ii) an auditor statement confirming that the company has kept proper accounting books and records and that the company appeared to have been able to meet its liabilities as and when they fall due.

Sections 260 & 261 of the CA2016, formerly s165A of the Companies Act 1965) Exempted from filing financial statements and reports with the Registrar of the Company. Only has to lodge with the Registrar: a certificate relating to its status as an EPC; and an auditor's statement stating that the company has kept proper accounting books and records and that the company appeared to have been able to meet its liabilities as and when they fall due.

B. WINDING-UP OF AN EPC ON THE GROUND OF INABILITY TO PAY A DEBT (S 465(1)(E) OF THE CA2016)

Question:

What happens when an EPC is faced with a winding-up petition filed under section 465(1)(e) on the ground of inability to pay a debt?

Winding-Up of a Company A company is deemed commercially insolvent when the company has for 3 weeks after service of the statutory demand neglected to pay the demand sum. (see s466(1)(a) of the CA2016, formerly s218(2)(a) of the CA1965) As a matter of law, the presumption under section 466(1)(a) of the Companies Act 2016 is rebuttable. "A company will not be wound up, even if it fails to heed a valid notice, if it can establish by independent evidence that it is solvent (Re Fabo)". Malaysian Air Charter Co Sdn Bhd v Petronas Dagangan Sdn Bhd [2000] 4 MLJ 657 668 (FC); and Molop Corp Sdn Bhd v Uniperkasa (M) Sdn Bhd [2003] 6 MLJ 331, 322 (HC)

In law, a company is presumed to be commercially insolvent if it fails to make payment pursuant to a statutory notice of demand. In this situation, the company then has to rebut the presumption by proving its solvency to the Court.

This principle is succinctly laid out in the Federal Court decision of Malaysian Air Charter. As held by the FC, a company will not be wound up, even if it fails to heed a valid statutory notice of demand, if it can establish by independent evidence that it is solvent.

However, will the similar test be applicable to an EPC in rebutting a presumption of insolvency made against it? This is an interesting scenario for an EPC which did not file its accounts with the ROC...