Company Law

What is the meaning of “indebted” under the law?

debt

The meaning and the scope of the word “indebted” used in s.9(1)(b) of the Companies Act, 1965 with particular reference to credit card, housing loan and HP facilities with companies which are related companies of audit client are as follows:

S.9(1)(b) of the Companies Act, 1965 states as follow:

(1)  A person shall not knowingly consent to be appointed, and shall not knowingly act, as auditor for any company and shall not prepare, for or on behalf of a company, any report required by this Act to be prepared by an approved company auditor –

(b)  if he is indebted to the company or to a corporation that is deemed to be related to that company by virtue of section 6 in an amount not exceeding two thousand five hundred ringgit.

Hereinafter, this provision will be referred to as “the said provision”.

According to The New Shorter Oxford English Dictionary, the word “indebted” carries the meaning “involve in debt”. Besides that, The New Shorter Oxford English Dictionary also stated that “indebted” would mean:

  • Under obligation to another on account of some liability incurred or claim unsatisfied; liable for some omission of duty, or in other word, “bound”.
  • Under obligation on account of money borrowed; owing money, in debt (to).
  • Under obligation for favours received; owing gratitude to (someone or something) for a benefit.

Stroud’s Judicial Dictionary of Words and Phrases (Sixth Edition) provides that “indebted” has a similar meaning to “due”, i.e. presently payable, as in Re Stockton Malleable Iron Company [Chancery Division] 2 Ch D 101, where the Court gave judgment that the word “due” meant due and payable, and the word “indebted” had a similar signification. In this case, it was said that “moneys due” may mean either owing or payable, and what it means is determined by the context.

In Words and Phrases Legally Defined (Third Edition), the word “indebted” is stated to have the same meaning as “owing”, and that the word “indebted” describes the condition of a person when there is a present debt, whether it be payable in present or future, and that the words “all debts owing or accruing” mean the same thing. They describe all debt in present, whether solvent in future, or solvent in present. Future possible debts are not included in this definition. This was adopted from Webb v Stenton and others [1881 – 1885] All ER 312.

In Webb v Stenton and others [1881 – 1885] All ER 312, the word “is indebted” and the words “debts owing or accruing” refer to the same subject matter. There must be an actual present debt, either equitable or legal. The requirements of the rules are satisfied by a present debt, whether payable now or in the future, and that the words include all such debts.

The meaning of a present debt, whether payable in the present or in the future would also require the Court to look into the present situation of their case at hand. In this case, since there was clearly no debt payable in the present from the trustees, hence it is in question whether there is going to be debt payable in the future. Fry LJ was of the opinion that in this case, trustees are not equitable debtors until they have money in hand which they are bound to pay over, or until they are made liable for breach of trust, or for default in the performance of their duties as trustees. Since they were under no liability to pay money now, there may be no question of debt in the future as well.

 Conclusion

Therefore, in our present context, the words “if he is indebted to the company” would mean if there is an obligation on the auditor to pay debt that is already due, or debt that is presently owing and accruing to the company.

Debt that is not currently due is not included in the meaning of the word “indebted”. Hence, debt that is only going to be owing and accruing in the future would not be included in this context.

Thus, an auditor who is a credit card holder of companies which are related companies of audit clients would not fall within the meaning and scope of the word “indebted” used in the said provision unless there is a debt due and payable by the auditor to the company.

If an auditor has acquired housing loan from the company, and the loan is not yet accruing, then he is not prohibited to act as the auditor of the company.

Similarly, if an auditor is under an obligation to make payment to the company in the form of installments in HP facilities, it is not a prohibition to him to act as the company auditor as well, unless the payment is already due and accruing.