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.
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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.
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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:
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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?
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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)".
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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 but instead only filed a Certificate relating to their status as an EPC and an Auditors Statement confirming that they have been able to meet their liabilities as and when they fall due. Is the production of the Certificate and the Auditor Statement in the winding up court as evidence of solvency arguably sufficient to rebut the presumption of insolvency?
In ("Consolidated Credit') Co Sdn Bhd v Gladys Loh & Ors (as the executrix of the estate of Loh Hoot Yeang, deceased) and another suit [2014] 10 MLJ 329, the Court held that it is axiomatic that the contents of statutory filings must be regarded as true and accurate and therefore taken as the gospel truth. Further, in Ghanesh a/l Periasamy & Ors v Glamjaya Sdn Bhd & Ors [2017] MLJU 1923, the Court held that indeed an EPC does not need to file its audited accounts with the Companies Commission of Malaysia ('CCM') under s165a of CA1965 (now s261 of CA 2016).
The pertinent question of law arising out of such a scenario is this – should a winding up court look past the statutory filed documents i.e. the Auditors statement to determine an EPC's solvency when winding up an EPC? In other words, whether an EPC needs to produce more than the statutory documents i.e. the Auditors Statement to the winding up court to rebut the presumption of insolvency?
C. REBUTTING THE PRESUMPTION OF INSOLVENCY AGAINST AN EPC
The statutory effect of s165a of CA 1965 (now s261 of CA 2016) is clear. An EPC's auditor statement certifies its solvency.
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Section 165A of CA1965 |
| Section 261 of CA2016 Auditor's Statements 261 (1) A company that is not required by this Act to lodge financial statements with the Registrar shall lodge with the Registrar a statement relating to the financial statements of the company required to be circulated to its members, signed by the auditor of the company – (a) Stating whether the company has in his opinion kept proper accounting records and other books during the period covered by those accounts: (b) Stating whether the financial statements have been audited in accordance with this Act: (c) Stating whether the auditor's report on the financial statements was made subject to any qualification, or opinion under any applicable auditing standards, or included any comment made under subsection 266(3), and, if so, particulars of the qualification or comment; and (d) Stating whether as at the date to which the financial statements has been made up, the company appeared to have been able to meet its liabilities as and when the liabilities fall due. |
Indeed, as found in the official parliament's Hansard
Report – on the construction of s165a of
CA1965 (now s261 of CA2016), there were no extraneous
reasons for the construction of s165a besides reasoning that small
businesses ought to be exempted from having their financial affairs
disclosed.
| The Official Report (Hansard) of the Parliamentary
Debates and the Dewan Ra'ayat second reading of the official
Companies bill (Companies Act 1965) dated 9.8.1965 page 1563: 'In conclusion, Sir, I must refer to the vexed question of the publication of accounts of companies. Although there is a very strong case for requiring all companies to publish their annual accounts and indeed this has been recommended by the Jenkin's Committee the Government, on the recommendation of Raja Mohar's Committee, has decided that there should be an exemption from the requirements of filing annual accounts in the case of the small family company and in the case of a company, which is more like a partnership. This exemption, which is provided for in Part II of the Eighth Schedule of this Act, will apply to a private company which has not more than 20 members and in which a corporation is not a member. The Government believes that this decision will meet with general approval.' |
In addressing this issue, the High Court in Aeon Big (M)
Sdn Bhd V SSM Management Sdn Bhd [2017] LNS 1897 applied
the quintessential test of commercial insolvency which is not
inconsistent with the common law position and held that even though
the subject company is an EPC, the burden of proving that
the company is solvent is not in any way different from an ordinary
company that has the statutory obligation to file its annual
return. It is clear that s165a CA1965 (now s261 CA2016) does not
dispense with the requirement for an exempt private company from
having to prepare its audited accounts. The pertinent
excerpts from the decision are reproduced below.
| Aeon Big (M) Sdn Bhd v SSM Management Sdn Bhd
[2017] LNS 1897 [51] In the instant case, although the Respondent is an exempt private company, the Respondent's burden of proving that the Respondent is solvent is not in any way different with the company that has the statutory obligation to file its annual return. It is clear that Section 165A does not dispense with the requirement for an exempt private company from having to prepare its audited accounts. [52] However, in the instant case the Respondent, instead of producing its audited financial statements, only furnished the Auditors' Statement and the EPC Statement to support its alleged solvency status. This in my view is not sufficient to rebut the presumption of insolvency. [53] At the minimum, any company contending that it is not insolvent must produce its latest audited financial statements. It must then show from the assets available whether it is able to make payment of the debt being claimed as and when the debt is due. This, the Respondent almost absolutely falls short of. |
On appeal, the Court of Appeal in SSM Management Sdn Bhd V
Aeon Big (M) Sdn Bhd [2019] 4 MLJ 826 affirmed the High
Court's decision. The Court of Appeal agreed that any attempt
to displace the presumption of insolvency must go beyond opinions
of insolvency by auditors. Rather than mere assertions of
insolvency even by professionals, a company must produce the best
evidence of its financial position in the form of audited
statements and accounts. Even an EPC has an obligation in law to
maintain audited accounts.
| SSM Management Sdn Bhd V Aeon Big (M) Sdn Bhd
[2019] 4 Mlj 826 [22] On this score, we do not think there is merit in the appellant's submission. In our view, any attempt to displace the presumption of insolvency must go beyond opinions of insolvency by auditors. We agree that rather than mere assertions of insolvency even by professionals, a company must produce the best evidence of its financial position in the form of audited statements and accounts. The appellant, even if it was an exempt private company, had an obligation under the law to maintain audited accounts. [23] Having failed to produce its latest audited financial statements, as noted by the learned judge, we agreed with the finding that the appellant fell far short of establishing its solvency. Given the presumption of insolvency, the appellant ought to have taken seriously its duty and burden of displacing the presumption by putting all its card on the table and not hide merely behind opinions of the auditors through the two documents. In this context, we have also noted that the appellant failed to respond to six letters of demand, which we agree had weakened the probative force of the argument against insolvency as advanced by the appellant. In the upshot, this contention of solvency must fail. |
The Appellant (SSM Management Sdn Bhd) then went on to file an
application in the Federal Court for leave to appeal against the
Court of Appeal's decision. The Federal Court agreed that this
is an area of law that needs to be ironed out and
it would appear that a decision would be to public
advantage. For this reason, the FC granted leave to the
following question of law:
"For the purposes of rebutting the presumption of insolvency of an Exempt Private Company, should a winding up Court look behind the Statutory Auditor's Statement and Certificate relating to an Exempt Private Company which certify the solvency of the company and are duly lodged with the Companies Commission of Malaysia?"
The appeal was heard by the Federal Court on 21.1.2020. It was disallowed. The Federal Court did not expressly provide any reasons for the dismissal of the appeal nor gave an answer to the question of law where leave was granted. It would appear, however, that the Federal Court affirms the decisions of the Court of Appeal and the High Court.
D. KEY TAKEAWAY
This irrefutably dictates that the answer to the question of
'whether an EPC needs to produce more than the statutory
required documents i.e. the Auditors statement to the winding up
court in order to rebut the presumption of
insolvency?'' is in the positive.
Yes, an EPC, not dissimilar to conventional companies, needs to
produce more than the statutory required documents, i.e. the
Auditors statement under section 261 of the CA2016 to the winding
up court in order to rebut the presumption of insolvency. An EPC
must produce the best evidence of its financial position in the
form of audited statements and accounts to assist the Court in
rebutting the presumption of insolvency.
Originally published January 2022
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