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This new law will protect SMEs from going bankrupt. How does it work?

2020-06-11 Default avatar Ariff Kamil

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This article is for general informational purposes only and is not meant to be used or construed as legal advice in any manner whatsoever.

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During the MCO, it’s not surprising to hear about businesses closing down. Just like the Spanish inquisition, no one expected the Covid-19 pandemic to hit us that hard.

There have been attempts to soften the economic blow, such as a government subsidy for employee wages. But companies which can’t operate online, especially SMEs, might face difficulties after not operating for a few months. They might be unable to pay back loans, or even completing work they’re hired to do pre-MCO.

This can lead to creditors or clients trying to sue them for the money, potentially forcing the company to liquidate and sell their assets.

But Malaysian companies might get some temporary relief from these difficulties. During the announcement of PENJANA, Prime Minister Muhyiddin Yassin mentioned that they were in the midst of drafting a new bill: the Covid-19 (Temporary Measures) bill. This bill potentially allows companies to avoid lawsuits, and from being forced to shut down, at least for awhile.

 

It works by pausing your contract

According to Muhyiddin, the bill will ‘provide temporary relief for written obligations for a certain period.’ In case you don’t know, written obligations just means any contract that is written down. And contracts can cover a pretty big area. 

The important thing in a contract is someone offers a deal, and the other party agrees to it. For example, a loan is a contract. A bank will lend you money, but in exchange you’ll pay them back with interest over a certain time period. Or building someone’s house. The contractor promises to build the house, in exchange for money. 

But when something unexpected like the pandemic happens, you might not be able to fulfil your end of the bargain. You probably couldn’t pay the bank back, or you couldn’t finish building the house in time. Understandably, the other party might start a lawsuit, most likely to get you to pay up, because you couldn’t do what you promised.

So this new bill works by pausing your contract for a length of time, usually around six months. During that time, the other party can’t sue you, seize your property, or force you to liquidate in order to pay them back.

So how do we know how it works, if it’s still being drafted? The answer lies by looking at how other countries have done it, as some of them have created a nearly similar law to deal with this.

 

Most countries have introduced a similar law

We can start with one of our closest neighbour, Singapore. Singapore gazetted their Covid-19 (Temporary Measures) Act 2020 on April 9, just 2 days after it was passed in their parliament. 

As the name implies, this Act is meant to protect businesses affected by the pandemic. Under this law, companies can seek temporary relief from contractual obligations for six months. To do so, they can sign up online to give a relief notice to other party. When the other party gets it, they are not allowed to seek legal action against the company. Not only that, the other party would also be unable to seize the company’s property, or force them to close down and liquidate

If they do attempt to sue the company in court, their application will be rejected. They will also be guilty of an offence for going against the Act. So for six months, the company will be safe from lawsuits, and threats of closing down.

But this is not a free pass to escape your contract. You must show that your business was affected by the Covid-19, and that you couldn’t fulfil your contractual obligations because of that. If both sides couldn’t reach an agreement after the notice, either party can apply for an assessor. The assessor will then determine if the situation is covered by the temporary relief, and will then grant or deny the relief where necessary.

Other countries such as UK and New Zealand have also introduced similar laws to provide temporary relief. The wordings in their law might be different, such as providing a debt moratorium or a safe harbour for companies. But their goal is similar: to help companies recover from the Covid-19 pandemic by pausing contractual obligations, and protecting them from lawsuits.

 

We might have to wait for it 

Even though it’s been announced as early as May, it’s likely that it won’t happen until September. The government has asked for suggestions up till June 5, but it can only be tabled in Dewan Rakyat on July 13, then brought to Dewan Negara on September 2.

Until then, you might need to look into your contract for potential clauses that could save you, such as force majeure. Force majeure is a legal principle which says your contract can’t be valid anymore, due to unforeseen circumstances. For this case, it could be the pandemic and the ensuing MCO to contain it.

[READ MORE: What can you do if your wedding was canceled due to the Movement Order in Malaysia? ]

Another way you can do is to claim that your contract is frustrated. This doesn’t mean that your contract is in an emotional state. Rather, a frustrated contract just means that the terms in your contract can’t be carried out anymore. Under Section 57(2) of the Contracts Act 1950 (CA 1950):

(2) A contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Or do it the old-fashioned way, and try to discuss ways to settle it out of court. This can be as straightforward as having a negotiation, or having a third party to decide on your case.

[READ MORE: 5 ways to "sue" someone in Malaysia without going to court ]

 

 

Tags:
contract
bankrupt
covid-19
force majeure
frustrated contract
temporary relief
closing down
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About the Author Ariff Kamil


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