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The variation in the outcome depending on methods of assessment has raised the
question of whether there should be one standard practice that must be adopted by
the company. The existence of one standard practice may provide certainty in the
outcome but it may be too rigid and may not be able to respond immediately to any
contingencies. On the other hand, to leave to directors to decide may be flexible but
will lead to uncertainty as well as being open to manipulation by directors.
In the absence of legal definition as to what amounts to assets and liabilities, reliance
has been placed on directors‟ discretion and accounting practice. Directors are free to
choose any accounting format they feel best suited for the company and the court
will not intervene in their decisions unless there are elements of mala fides.
In Malaysia, the balance sheet test is contained in section 218(2)(c) of the
Companies Act 1965, but unlike the UK Insolvency Act 1986 and New Zealand
Companies Act 1993, the provision did not describe the test. In Datuk Mohd Sari bin
Datuk Hj Nuar v Idris Hydraulic (M) Bhd 47 the petitioner relied on the respondent‟s
balance sheet which showed current liabilities exceeded the current assets, to file a
winding up petition.
The court asserted that under section 218(2), there are three ways in which the
petitioner could prove that the respondent is unable to pay its debts and in the
instance section 218(2)(c) is applicable since no statutory notice of demand was
served. The court referred to the UK Companies Act 1948 and concluded that:
Section 218(2)(c) is very clear. To ascertain if a company is unable to pay its
debt the court shall take into account the contingent and prospective liabilities
of the company. In order to ascertain its liabilities, it is proper that its assets
are also ascertained because only upon ensuring that there is insufficient
assets to meet the debts can there be ascertained liabilities. Therefore the
47 [1997] 5 MLJ 377.
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