COVID-19 & MCO: Impact On Businesses In Malaysia

April 6, 2020

Throughout the MCO, all government and business premises are to be closed, save for those which fall under “essential services”. The “essential services” updated on 1 April 2020 by virtue of a second regulation issued by the Government (“Regulation No. 2”) includes any activity and processes in the supply chain involving food, water, energy, communication and internet, security and defence, solid waste and public cleansing management and sewerage, healthcare and medical including dietary supplement, banking and finance, hotels and accommodations, e-commerce and logistics confined to the provision of “essential services”.

Manufacturing Companies

MITI has given assurance that companies manufacturing “essential goods” for instance, food, medical supplies and pharmaceutical products can continue their operations during the MCO provided that prior approval is obtained by such companies from MITI. Approvals previously accorded by MITI to companies producing “essential goods” will remain valid during the extended MCO. As at the date of this article, MITI has maintained that it will not accept any further applications from companies after the last prescribed date of submission, which fell on 24 March 2020. The disruption caused by lack of production to supply chains may potentially result in decentralisation of logistics players into multiple smaller satellite distribution hubs nationwide with a view of supporting local distribution channels.

MITI has further clarified that logistics and transport service arm of approved manufacturing companies (including warehousing) are not required to submit a separate request for authorisation to MITI. Manufacturers using private or individual logistics or transport service providers are advised by MITI to obtain the approval of the Ministry of Domestic Trade and Consumer Affairs.

Meanwhile, employees listed in the applications approved by MITI can work during the MCO. Employers are required to furnish their employees with a copy of MITI’s approval letter.

Import & Export Activities

The following activities may continue as usual during the MCO:

(a) the processing of applications and approvals in respect of import and export permits; (b) the import of live animals into Malaysia; (c) the import or export of agricultural goods; and (d) the automatic approval by MITI of complete applications in respect of import and export permits relating to agricultural and fish commodities.

Additionally, MITI has announced that effective 30 March 2020 up until 14 April 2020, an alternative avenue will be introduced by MITI for Malaysian companies to seek endorsement of the ‘Certificate of Origin’ under Free Trade Agreement schemes (other than ASEAN Trade in Goods Agreement). This is to ensure that all import and export activities between Malaysia and its (i) ‘Free Trade Agreement’ partner countries; and (ii) ‘Generalised System of Preferences’ donor countries can smoothly continue during the MCO following the temporary closure of MITI Services Counter at Menara MITI and its state offices during the MCO.

Construction Projects

Construction and maintenance works have been directed to cease in the course of the MCO, save for those infrastructure projects which are deemed by the MOW to be “critical works” that affect public safety and security, which, if not carried out, may bring harm to employees, the public or the environment. Th exceptions cited by MOW include slope repairs, pothole repairs, traffic management control, the repair of elevators/escalators and other works which if not completed would result in danger.

Additionally, Regulation No. 2 now permits works to be carried out on any infrastructure related to any “essential services” which, if not carried out, would affect the provision of the “essential service” or would affect the safety and the stability of the infrastructure. Proof of such work is required to be furnished by a person moving from one place to another place in carrying out such work if so requested by an authorised officer. The suspension of construction and maintenance works during the MCO will significantly impact companies involved in these sectors in terms of cash flow and bottom line.

Construction contractors, landlords, tenants and borrowers should therefore assess the aforesaid impact in relation to the provisions or clauses on force majeure for extension of time, variation order, variation of contract price and termination in their existing contracts and take note of the risks/legal positions and consequences affecting the parties under such contracts and be prepared for potential claims and re-negotiation of such contracts.

Property/Real Estate Sector

The real estate sector has not been spared from the repercussions of implementation of the MCO. With a sizeable chunk of society instructed to remain at home, demand for office and retail space has declined tremendously. Tenants in commercial or residential premises will likely to be unable to pay rent (or are facing financial difficulty in doing so) due to a drastic drop in their business activities as a result of “social distancing”, travel bans and stay home order, as most businesses are experiencing a massive decrease in turnover.

In addition, it has been reported that the residential property market has been brought to a “grinding halt” as a result of the MCO with real estate agents being unable to assist potential buyers in conducting viewings of properties and securing vacant possession for purchasers. Employee layoffs and unemployment may potentially cause house buyers to default on their mortgage and rental payments which would further impair the residential property market. The closure of land offices/registries nationwide up until the expiry of the MCO has also inadvertently resulted in a delay of completion of real estate/property transactions. With the demand for real estate and property severely declining, the construction sector would naturally follow suit due to protracted delays, shortage of workforce and the lack of purchasing power.

In an effort to provide relief to individuals and businesses who face temporary financial constraints arising from COVID-19, Bank Negara Malaysia has ordered an automatic 6 month deferment/suspension of loan/financing payment obligations (save for credit card balances) which remain outstanding as at 1 April 2020. This measure may, to a certain extent, assist borrowers in their financial planning and tide them over for a short term in respect of the repayment of their loans and mortgages.

The “PRIHATIN Rakyat Economic Stimulus” package unveiled by the Prime Minister (PRIHATIN) sought to mitigate some of the economic and financial impact due to the MCO, including the financial constraints of the Rakyat. It is has been said that the plight of SMEs and corporations across the country has not been adequately addressed by the stimulus packages introduced by the Government. Notwithstanding the economic standstill brought about by the MCO, employers are nevertheless required to pay full salaries, rentals and make statutory contributions.

Consequently, companies facing financial constraints and cash flow issues as a result of the MCO may be compelled to rely on relevant clauses to terminate or re-negotiate its obligations under certain contracts or, in the case of loans/financing from lenders, borrowers/guarantors may potentially face demands for early repayment from lenders seeking to invoke “material adverse change” or “material adverse effect” clauses in existing facilities agreements or loan agreements. Such clauses are designed to primarily protect lenders against unforeseen events which could adversely affect a borrower’s ability to repay the loan, typically allowing for early termination and acceleration of repayment of loans.

That said, it is pertinent to note that on 1 April 2020, it has been announced that a Special Cabinet Committee has been established to develop measures to address the concerns raised by the small and medium-sized enterprises (SMEs), manufacturers and investors. Findings of the committee will be reported to the Prime Minister during the Economic Action Council meeting on 6 April 2020. In this regard, SMEs are anticipating an announcement by the Government to be made soon on further refinements to the stimulus package, with provisions to address and assist their businesses and financial predicaments more effectively.

Other Sectors

Businesses involved in the food supply chain and e-commerce activities can continue to operate provided that minimal workforce is employed whilst adhering with the relevant control measures determined by the Ministry of Health. Such companies are however required to cease all non-essential operations during the MCO. As a result, SMEs and corporations involved in retail and food industry are therefore incentivised to further establish their presence in e-commerce to accelerate the growth of their food and products delivery businesses.

Corporate

The capital market in Malaysia is operating as usual during the MCO, with all listed intermediaries expected to remain open and fully operational. In this regard, listed issuers are still expected to comply with the requisite listing obligations, in particular, adhering to the continuing disclosure obligations and making immediate announcements of material information pursuant to the Bursa Malaysia Securities Berhad (Bursa Malaysia) listing requirements.

To facilitate the nationwide restrictions on physical meetings and the movement of people so as to curb the spread of COVID-19, the Securities Commission (SC) has allowed listed corporations that are required to hold an annual general meeting (AGM) during the MCO to apply to the Companies Commission of Malaysia (CCM) to defer holding their AGM. The applications for extension of time must be made after CCM’s re-opening of offices upon the expiry of the MCO. In addition, a two (2) month extension has been granted by the SC for REITs managers of listed REITs with financial year-end of 31 December 2019 which are ordinarily required to hold AGMs by 30 June 2020.

Bursa Malaysia had on 17 March 2020 issued a circular to similarly allow companies a degree of flexibility on the holding of AGMs, the issuance of annual audited financial statements and its auditors’ and directors’ reports.

As the services of CCM have also been suspended during the MCO, companies will be required to lodge all statutory filings, submissions and notifications when CCM’s offices re-open. CCM has assured that a moratorium period of 2 weeks commencing from the expiry of the MCO will be given to take into consideration the period of closure of the CCM offices and that any late filing fee will be waived.

Travel Restrictions

Commercial properties, especially hotels, motels and Airbnb vacation rental homes have been vastly affected by the travel bans imposed, mandatory quarantine requirement for foreign visitors and returning citizens and the cancellation of conferences/meetings as a result of the restriction on mass gatherings. Pursuant to a directive issued by the Immigration Department of Malaysia and statement issued by the Defence Minister on 31 March 2020, restrictions regarding travel during the MCO which have been imposed, include amongst others, the following:

(a) Malaysian citizens are restricted from travelling out of Malaysia; (b) Malaysian citizens seeking to return to Malaysia may do so provided that they undergo medical examinations upon their arrival and be brought by authorities to be quarantined at designated quarantined centres for 14 days; (c) foreign tourists are barred from entering Malaysia during the MCO. Exceptions are granted to spouses and children of Malaysians, diplomats on duty together with their families and expatriate pass holders who are involved in essential services subject to restrictions under the directive; (d) existing foreign tourists on social visit passes are able to leave Malaysia and may do so without any special pass provided that they possess a valid passport and do not return to Malaysia during the MCO; and (e) travel between West Malaysia and East Malaysia is prohibited.

Employers

The Government has issued a directive stating, amongst others, that salary payments of employees must be made in full in accordance with the employee’s contract of employment during the MCO and that an employer cannot (i) pay reduced salaries; or (ii) compel an employee to utilize one’s annual or unpaid leave, without the consent of the employee.

As salaries typically make up a significant portion of an employer’s overhead expense, employers who are faced with financial difficulties as a result of compliance with the directive may have to resort to retrenchment or temporary lay-off of its employees to reduce its operational costs, provided that the applicable industrial relations law and regulations are adhered to.

Conclusion

As the spread of COVID-19 rapidly increases worldwide, businesses are advised to watch out for the latest developments surrounding the MCO to ensure that the short- term and long-term impacts arising from the evolving nature of the crisis can be addressed and managed effectively and efficiently.