In Malaysia companies Act 1965 (CA), is one of the vital statutes which govern and regulate the formation and operation of a company. All the sections in this statute govern each and every part of company governance. In this case section 176 of Companies Act plays a very important role on arrangements and reconstruction of a company when the company heavily burdened with debt. Financial crisis is the most dangerous and a serious disadvantage for a company, in such situations companies normally will use this provision to escape and avoid liabilities against their creditors. This section allows the company to make arrangement and reconstruction where they can negotiate with the other parties such as creditors regarding the debt they owe. Section 176(5) of CA, must be read together with section 176 (3) of CA, where this section stress that the order made under subsection (3) is not valid until a copy of the said order is given to the registrar and only after the order is lodged, the said order will carry a binding effect from the date of the order lodgment.
On the other hand, if the court find is reasonable than the court may determine any earlier date as specified in the order. This section basically talks about the date and effectiveness of the notice which been agreed by members and creditors as per subsection (3) of this provision.1 According to subsection (6), a copy of the order which made under subsection (3), must be put together or annexed with every single copy of the company’s memorandum which is issued after the order made under subsection (3).2 In the event where the company does not have a memorandum, than the order should be annexed to all instruments constituting or defining the constitution of the company. This is generally to give knowledge to a third party about the agreement between the company and the members or creditors. In this case the court may and have power to determine the period of time where the company shall comply to subsection (6).
This can be seen in subsection (7) of the same provision.3 Any company fail to follow subsection (6) will be guilty of an offence against subsection (9) of the same provision where penalty of RM 2,000.00 will be imposed.4 Section 176 (10) of CA, govern the power of court to restrain proceedings.5 Here in this subsection, when there is no resolution or arrangement is made by members and creditors with company, the court have power to restrain further proceedings in any action against the company. There are certain things the company has to do once the company obtains such order from the court. First, the company shall lodge a copy to Suruhanjaya Syarikat Malaysia (SSM). Second, the company should publish the obtained order in newspapers so that all the members and creditors of the company can know about the restrain order.
Subsection (10A) says that the court may grant the restrain order for a period of not more than 90 days but there are four situations where the courts can extent the period of the restrain order for good reason. Firstly, the court must be satisfied that there is a proposal for compromise or arrangement between the company and the creditors and the creditor who representing this must hold one half of the value of all creditors which is basically 50 percent. Secondly, the court must feel that the restraining order is important for the company and the creditors to make arrangements or scheme of compromise for the approval of the creditors. Thirdly, a statement in the prescribed form must be made before three days before of the application of the order. Fourthly, the court must approve a nominated person among the creditors to act as a director of the company.
These four things must be satisfied by the court for the court to give extension of time for the restrain order.6 In the case of PECD Bhd & Anor v. Merino-ODD Sdn Bhd & Ors the court held that, for the court to grant the extension of time more than 90 days, the company should and must follow the entire four things which stated in subsection (10A) of section 176.7 About the good reasons, Justice Vincent Ng have stated that the word good reason in section 176(10A) of CA, refers to the applicants’ bona fide intention and action to make arrangement or scheme of compromise in the case of Metroplex Bhd& Ors V Morgan Stanley Emerging Markets Inc.8
Section 176 on the CA is actually a sealed but not a sword. The intention of section 176 CA is actually to help companies which face some serious financial problems and debts to the creditors. This provision is must be used by the companies to prevent bankruptcy and as a chance to settle the debts to the creditors. However, some companies may misuse this section for their own enjoyment or benefit which was not and never the intention of parliament for enacting this provision. When companies start to misuse this provision, the objective of this provision is misinterpretated. This misinterpretation can be said as one of the reason for financial crisis in 1997.
Some companies may use these provisions to cheat the creditors of the company; in this case the improper usage of this section may lead to injustice to creditors. As a conclusion, section 176 of CA is very important provision which should be interpreted as per the original intention of the enactment. This provision is very helpful for the companies in financial difficulties and it will provide room for the companies to run their business and gain profit to overcome the debts. This provision also does not violate the rights of the creditors where by using this provision the company cannot escape the debt but only can obtain some time extension to repay it. This section must be used in a good manner so that the company and also the creditors do not held in injustice.