Legislation to replace the Companies Act 1965 will make it easier for companies to do business in Malaysia, says Ramesh Ruben Louis
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This article was first published in the September 2016 Malaysia edition of Accounting and Business magazine.
The passing of the new Companies Bill 2015 by the Dewan Rakyat (House of Representatives) on 4 April 2016 marks a milestone for corporate Malaysia. In line with international trends, it sets out a refined legal framework for the formation, operation and dissolution of companies.
The bill, which will replace the existing Companies Act (CA) 1965, is intended primarily to simplify how companies do business in Malaysia, but it should also strengthen corporate governance and facilitate management and restructuring of share capital. In addition, it includes a number of deregulatory measures and amendments to insolvency requirements. However, as no date has yet been set for the new legislation to become effective and many industry players do not expect it to come into force for a year or two, there is still time for companies to absorb its implications.
So how will the new bill make it easier to do business in Malaysia? Under its terms, a company can be incorporated with just one individual as its single shareholder and single director. The existing act does not allow a company to carry out a business with fewer than two shareholders for any longer than six months (unless the company’s shares are wholly owned by a holding company), and it requires a company to have a minimum of two resident directors. This simpler setup will definitely be attractive to many businesses, especially smaller entrepreneurs.
The bill also removes the need for private companies to hold an annual general meeting (AGM); the existing CA required that an AGM be held in each calendar year. However, shareholders making up 5% of the paid-up share capital may request a general meeting if an AGM has not been held in the past 12 months. As the AGM requirement has been abolished, audited financial statements no longer have to be routinely tabled at the AGM but may be circulated among shareholders along with an automatic re-appointment of directors’ mechanism. In addition, the bill abolishes the unanimity rule for written resolutions for private companies, so a written resolution can be passed by a major shareholder. However, a shareholder with 5% or more of voting rights may require the company to circulate a resolution and a statement on the matter before passing the written resolution.
The need to have a Memorandum and Articles of Association (M&A) has also been removed, but companies that want to establish certain provisions for their business can customise and encapsulate these in a constitution. Existing M&As will eventually be deemed as a constitution anyway.
Currently, the CA requires shares to be issued with a nominal par value and excludes any premium paid above the par value. Once the bill becomes effective, shares issued will have no par value and share premium will form part of the share capital. To ensure a proper transition, the bill sets out a 24-month transition period with provisions for companies to deal with the existing share premium account and any other obligations/arrangements based on par value of their shares.
All these measures are to some degree deregulating in nature, and making it easier for companies – particularly private ones – to do business in Malaysia will hopefully encourage entrepreneurship.
Solvency and rescue
Making it easier for companies to do business will raise some concerns among third parties such as suppliers and bankers. To protect the rights of these parties, a number of safeguards have been included in the bill. This will see added responsibility placed on directors of companies as they will be required to sign a solvency statement in the form of a statutory declaration that the company is solvent when it undertakes any of the following activities:
- declaring dividends to shareholders
- capital reduction (where there is no court order)
- financial assistance
- redemption of preference shares
- share buybacks.
Different solvency tests will have to be applied in different situations and the bill stipulates that if there is a breach of the solvency test, directors will be personally liable and may even be subject to criminal sanctions.
The bill also sets out new corporate rescue mechanisms to assist financially distressed firms in restructuring their debts and, ultimately, help them stay afloat and continue as a going concern. These are the mechanisms that will be available:
1. Corporate Voluntary Arrangement – this is similar to the Scheme of Arrangement under Section 176 of the existing CA, but has minimal court involvement. Under this mechanism, company directors or management draw up a debt restructuring plan which is assessed by an independent insolvency practitioner. The restructuring scheme must be then be approved by a simple majority of shareholders and no less than 75% in value of creditors. If this is passed, the scheme will be binding in nature.
2. Judicial Management – the shareholders, directors or creditors of the company may apply to the court to place the management of the company in the hands of an independent insolvency practitioner known as a judicial manager. Under this arrangement, there is a moratorium of 180 days, which essentially shields the company from being wound up, from share transfers, from the appointment of receivers, and so on. This enables the judicial manager to formulate a viable restructuring plan to be presented to the creditors for approval. Again, this type of plan must be approved by no less than 75% in value of creditors.
Corporate governance requirements for private companies were considered somewhat lax under the existing CA in comparison to those applied to public listed companies and the new bill seeks to rectify this weakness. The new arrangements are not perfect, but they bring in significant changes to the roles and responsibilities of directors, which are the primary drivers of corporate governance in any corporation.
Let us look first at sanctions. The sanctions imposed on company directors for breaches of the rules have generally increased in severity and now include heavier fines and longer terms of imprisonment. Where the breach constitutes a serious offence, it can attract a five-year term of imprisonment and a RM3m fine, or both, if there is a criminal conviction.
Changes to the definition of a director will also improve governance. The bill clarifies that a person is regarded as a director of a company if ‘the majority of directors of a corporation are accustomed to act in accordance with the person’s instructions and directions’. This would mean that any person who can instruct the company board on how it should act would be subject to the same duties and responsibilities as the directors. This would have implications for companies and boards that operate through a ‘shadow’ director.
Thirdly, the bill requires that the remuneration of directors of public companies – and any benefits payable to them – be approved by the shareholders at a general meeting; remuneration of directors of private companies may be approved by the board of directors. A related safety clause however allows shareholders holding at least 10% pf the voting rights to request that such remuneration be subject to shareholders’ approval.
Dividends and audit
Under existing provisions in the CA, dividends can only be distributed out of profits. The new bill extends the conditions for dividend distribution to require company directors to be satisfied that the company will be able to meet any debts and obligations due within 12 months after the dividend is paid to shareholders. In other words, the company has to be solvent for the foreseeable future after distribution of dividends. This requirement further extends the accountability placed on directors. In addition, the bill empowers companies to claw back improperly paid dividends from shareholders, unless the dividends were received in good faith and the shareholder was not aware that the company did not satisfy the solvency assessment.
The new bill also aims to streamline the accounting and auditing provisions with approved accounting standards and industry practices. The mandatory audit regime is retained but the Companies Commission of Malaysia (CCM) is now empowered to exempt certain categories of companies. The exemption criteria, requirements and thresholds (if any) have yet to be set or determined, but will certainly be an area of considerable interest and concern for audit practitioners and small and medium companies alike, as audit exemption has been the focus of wide debate and contemplation for many years.
While the auditors of public companies are required to attend annual general meetings at which the financial statements are tabled, the auditors of private companies are required to be present only upon request by the board.
The new Companies Bill 2015 is a mixed bag of goodies and woes. There is little doubt that doing business in Malaysia will become more straightforward, and the additional burdens imposed on directors and management of companies will help to ensure proper conduct and running of the business. Even though it appears that directors and management will be most affected by the new responsibilities, company secretaries and auditors will also have to be prepared for the imminent changes that come with the bill brings in.
Ramesh Ruben Louis is a professional trainer and consultant in audit and assurance, risk management and corporate governance, corporate finance and public practice advisory.
"New corporate rescue mechanisms will help financially distressed firms to restructure their debts and stay afloat"