CHANGES TO THE COMPANIES ACT IN MALAYSIA

The corporate landscape has been changing recently and directors need to be aware of how these changes will impact the business environment they operate in. One such change is the replacement of the current Companies Act 1965 with the new Companies Act 2016 (“new Act”). The new Act was gazetted on 15 September 2016 and is expected to be implemented in stages starting in 2017.

The new Act includes many changes that will:

• Ease the administration of business
• Promote corporate governance and director accountability
• Migrate to a no-par value share regime
• Introduce corporate rescue mechanisms

 Easing Business Administration

Single Director and Shareholder

It will now be easier for companies to be incorporated as only one director will be needed for incorporation. The director may also be the sole shareholder of the company. This change means that sole proprietors can now consider incorporation to take advantage of the added flexibility and protections of doing business as a private company.

No AGM and Easier Passing of Written Resolutions for Private Companies

To help reduce business costs, private companies will not be required to hold an annual general meeting (AGM). Audited reports will be circulated amongst shareholders within a set timeframe and auditors can be reappointed automatically, unless prevented by the shareholders. With the move away from physical meetings, written resolutions will only need approval from the majority of shareholders, rather than a unanimous decision.

No Memorandum and Articles of Association

The concept of a constitution that governs a company will be introduced with the new Act. This replaces the requirement for a memorandum and articles of association. For private companies, constitutions are optional as the new Act will automatically be adopted as the constitution. However, there may be situations where it is advisable for a company to adopt a constitution. As such, advice should be sought where necessary. For existing companies, the memorandum and articles of association will automatically be adopted as the constitution.

 Increased Corporate Governance

Increase in Sanctions on Directors

The new Companies Act 2016 will significantly increase sanctions on directors for breaches under the new Act. Serious breaches can result in a RM3 million fine, 5-year imprisonment, or both in the case of a criminal conviction. It is advisable that all directors be well-versed in the compliance requirements of the new Act.

New Solvency Test Requirement

The new Act introduces solvency tests that a company will be required to meet when performing certain exercises including capital reduction, share buyback, or dividend payout. In the case of a dividend payout, the directors must ensure that the company is able to pay its debts as and when they fall due within the immediate 12 months. Any director who wilfully pays or authorises the payment of any improper or unlawful distribution shall be liable on conviction to a RM3 million fine, 5-year imprisonment, or both.

No-Par Value

Under the Companies Act 1965, a company must set a par value for its shares which is the minimum value at which shares can be issued. The new Act introduces a no-par value regime, meaning that companies will not need to set any minimum value for its shares. This gives companies more flexibility in pricing shares and raising capital.

When the no-par value regime is introduced, share premium accounts will no longer be required and any existing amount in a share premium account will automatically become part of the company’s share capital.

To assist with the transition, there is a two year grace period where companies may utilise the amount in the share premium account for specific purposes listed under the new Act.

Corporate Rescue Mechanisms

For companies that are in financial duress, the new Act provides two corporate rescue mechanisms which companies can use to avoid winding up.  The two mechanisms are known as Corporate Voluntary Arrangement and Judicial Management. Both mechanisms make use of an independent insolvency practitioner who will form a debt restructuring proposal of which the company’s creditors must approve.

Under Corporate Voluntary Arrangement, court intervention is kept to a minimum making it a cheaper and faster process compared to Judicial Management, where the insolvency practitioner must be court-appointed. During the Judicial Management process, the insolvency practitioner will take over all management of the company until a resolution has been achieved. Judicial Management does have an advantage in that a company will enjoy a wider moratorium, meaning it will be protected against any legal proceedings being initiated against it during the Judicial Management process.