The Companies (Exemption) Order 2020: Is it exempted from Legal Challenge?

Recently, we heard the news that a construction company in Penang has filed an action in the High Court to challenge the validity of the Companies (Exemption) Order 2020 (the “Exemption Order”).

The said construction company succeeded in an arbitration proceeding and obtained an Award dated 24.02.2020 against another company. Due to the Exemption Order, the construction company was unable to commence winding up proceedings to enforce the Award.

On 23.04.2020, the Government issued a Gazette and announced that the Exemption Order came into force with immediate effect. This was done as part of the Government’s initiative to assist companies during the Movement Control Order (“MCO”) and the COVID-19 pandemic. The Exemption Order provides as follows:

1. All companies will be exempted from the presumption in Section 466(1) (a) of the Companies Act 2016 (the “CA”), which provides that any company shall be deemed to be unable to pay its debt if it fails to satisfy the debt within 21 days after it is served with a statutory demand issued pursuant to Section 466(1)(a) of the CA;
2. Companies are now given an extension of time from 21 days to 6 months to respond to any statutory demands issued pursuant to Section 466(1) (a). This applies to statutory notices of demand served from 23.04.2020 to 31.12.2020. 

Prior to the Exemption Order, a company is deemed to be unable to pay its debts IF it is indebted in a sum exceeding the RM10,000 and it fails to satisfy the debt within 21 days after the service of a statutory notice of demand.

The said construction company is now seeking to challenge the Exemption Order on the basis that it is inconsistent with the CA. Also, there are claims as to the legality of the Exemption Order since it had the effect of amending the CA but was without going through the necessary parliamentary process.

We will now examine whether such an Exemption Order can be challenged in Court.

Challenge by way of Judicial Review

Since the Exemption Order is an act and/or decision made by the Government, the same can be challenged by way of an application for Judicial Review. Judicial review is a legal avenue available to an aggrieved party to challenge the decision-making process of a public authority.

It must be noted that the court does not allow anyone to seek Judicial Review. An applicant must first satisfy the court that they have the necessary locus standi to apply for judicial review pursuant to Order 53 Rule 2(4) of the Rules of Court 2012.

For someone to have locus standi pursuant to Order 53, they must be “adversely affected” by the decision sought to be challenged. This means they have a real and genuine interest in the subject matter. This was decided by the Federal Court in Malaysian Trade Union Congress & Ors v Menteri Tenaga, Air dan Komunikasi & Anor [2014] 3 MLJ 145.

Generally, a Judicial Review application can be brought on the following 3 main grounds:-

1. Illegality - when the decision or conduct of the public authority is ultra vires or is beyond the limits / powers provided under the law;
2. Irrationality - when the decision or conduct challenged is so outrageous that no sensible person who has applied his mind to the question to be decided could have arrived at the same decision. This is called the Wednesbury unreasonableness which is derived from the English case of Associated Provincial Picture Houses Ltd v Wednesbury Picture Houses Ltd v Wednesbury Corporation [1947] 2 All ER 680.
3. Procedural impropriety - Where reaching its decision, the public authority has failed to observe the mandatory procedures and/or the principles of natural justice.

Is the Exemption Order Legal?

The Exemption Order was issued by the Minister of Domestic Trade and Consumer Affairs. Looking at paragraph 3 of the Exemption Order, it appears that the Minister has granted an exemption of the presumption in  Section 466(1)(a) of the CA to ALL companies.

Section 2 of the CA defines Minister as ‘the Minister charged with the responsibility for companies’. Section 615 of the CA allows the Minister to exempt any person, company, or class of companies from all or any of the provision of the CA.  This is a power delegated to the Minister to deal with certain matters within the CA.

Being an order made under delegated powers, the Exemption Order must be read subject to and consistent with the provisions of the substantive parent Act, in our case the CA. This was decided by the Federal Court in Positive Vision Labuan Ltd v Ketua Pengarah Hasil Dalam Negeri and other appeals [2017] 2 MLJ 421.

In Positive Vision, the Appellant is a Labuan offshore company. The Appellant made an irrevocable election to be charged under Income Tax 1976 (“ITA”) and no longer taxed under the Labuan Business Activity Tax Act 1990 (“LABATA”). The Ministry of Finance then issued an Income Tax (Exemption) Order 2007 where companies taxed under the ITA will no longer be entitled to certain income tax exemptions available under LABATA.

The Appellant was dissatisfied with this decision and applied for a judicial review to challenge the Income Tax Exemption Order on the basis that it is ultra vires. The deciding factor here was the interpretation of the ITA, LABATA and Income Tax Exemption Order as a whole.

The Federal Court held that in light of the Appellant’s election to be taxed under the ITA, the Appellant can no longer rely on the exemptions as provided in the Income Tax Exemption Order.

[39] Insofar as the exemption order is concerned, this order is a statutory order made under power delegated to the Minister. Being an order made under delegated power, the exemption order must necessarily be read subject to and consistent with the provisions of the substantive or parent Act. The exemption order is clear in that it applies only to 'offshore company' which must be interpreted as defined under the ITA.

The Income Tax Exemption Order had to be read subject to and consistent with the provisions of the ITA. The said order was only intended to apply to companies who are subject to the tax regime under LABATA. The Federal Court held that the Appellant did not fall under the Income Tax Exemption Order because the Appellant elected to be taxed under the ITA. This means that the Appellant can no longer be described as an offshore company under the same act.

Shifting the focus to the present situation, paragraph 4 of the Exemption Order provides that a company has up to 6 months after the statutory demand is served to settle its debt. Although paragraph 4 is described as an ‘exemption’, it has an actual effect of substituting the 21 days’ time limit provided in Section 466 CA 2016 with an extended 6 months period.

 The CA, particularly Section 615 empowers the Minister to only exempt companies from the provisions of the Act. Instead of merely exempting the applicability of Section 466, the Exemption Order went one step further by substituting the time limit provided to parties to settle their debts.

This is a problem as Section 615 of the CA does not expressly allow the minister to alter and/or amend the provisions of the CA. Therefore, it can be argued that the Exemption Order particularly paragraph 4 is inconsistent with the CA because it has given a new statutory time limit for companies to settle its debt.

Further, Section 615 of the CA is clearly intended to confer powers on the Minister to exempt any person, company or class of companies from the provisions of the CA. The express wording in Section 615 does not empower the Minister to grant exemption to ALL companies from the provisions of the Act. Such Exemption Order is thus, contrary to the clear wordings of Section 615.

This was illustrated by the Federal Court in Government State of Penang & Anor v Government of Malaysia & Anor [2014] MLJU 955, where it was held that an exemption order issued by the Penang State Government which exempts all the areas under the municipal councils from the application of s 15 of the Local Government Act 1976 is ultra vires of s 1(4) of the 1976 Act which provides that the permissible exemption is only for “any area within any local authority area”.  

Can the Minister of Domestic Trade and Consumer Affairs issue the Exemption Order?

Another issue to consider is whether the power to make the Exemption Order under the CA is actually vested in the current Minister of Domestic Trade and Consumer Affairs.

In AEH Capital Sdn Bhd v AM-EL Holdings Sdn Bhd and another appeal [2008] 4 MLJ 487 (COA), the issue here was whether the Minister of Housing and Local Government has the power to make an Exemption Order under the Moneylenders Act 1951. The ambiguity arises as Section 2A of the Act does not specify which Minister has such powers.

Reference was made to the Schedule in the Federal Government Order 1983 (P.U (A) 202/83) pursuant to the powers conferred by S.2 of the Ministerial Functions Act 1969. The Schedule states that the Minister of Housing and Local Government was responsible for ‘pawnbrokers, moneylenders and moneylending’. The Court of Appeal held that this Schedule must be read in light of the amendments by the Moneylenders (Amendment) Act 2003 which defines ‘Minister’ as ‘the Minister charged with responsibility for Local Government’.

Similarly, in the present situation, the term “Minister” is vaguely defined as the minister charged with responsibility for companies under Section 2 of the CA. By virtue of Section 2 of the Ministerial Functions Act 1969, the Yang di-Pertuan Agong would usually make an order in relation to the role of the ministers, which is gazetted as the Ministers of the Federal Government Order. The latest order in relation to the ministerial function is the Ministers of the Federal Government (No. 2) Order 2020 which was gazetted on 04.03.2020. The Order states that:-

“Prime Minister, Tan Sri Dato Haji Mahiaddin bin Md. Yasin shall be charged with the responsibility in respect of all departments of the Federal Government and the subjects for which the departments are responsible until the appointment of the other Ministers in the Cabinet.”

However, the cabinet ministers who were subsequently appointed by the Prime Minister on 10.03.2020 and their respective portfolios have not been gazetted as of to-date.

This could be another ground to challenge the Exemption Order as the current Minister of Domestic Trade and Consumer Affairs is not the minister charged with responsibilities for companies when the Exemption Order was issued. The Exemption Order was made prior to the gazettement of the Minister’s appointment and ministerial role.  In view of the above, the Minister may not even have the necessary powers to make such orders and/or directions in relation to the CA.

Conclusion

This legal challenge will definitely be eagerly observed as any decisions will have serious repercussions in the areas of company and public administrative law.  It is interesting to note that in trying to assist companies during the COVID-19 pandemic with the Exemption Order, the Government may have done so illegally. As the saying goes, the road to hell is paved with good intentions.