December 31st, 2008

By Zanariah Aziz @ Omar and Puteh Mariam Ismail

The Malaysian Institute of Accountants (MIA) had conducted a half-day programme for academicians to provide updates on the new Companies Act 2016 at Concorde Hotel, Kuala Lumpur on 23 November 2017. The speaker was Mr. Norhisham Abd Bahrin, an Audit Partner at Azmi & Associates.

 Companies Act 2016: Overview of Key Changes

The Companies Act 2016 (CA 2016) was passed by the Dewan Rakyat on 4 April 2016 and Dewan Negara on 28 April 2016.  It obtained the Royal Assent on 31 August 2016 and was gazetted on 15 September 2016.  It was enforced on 31 January 2017 except for Section 241, which relates to registration of company secretaries and Division 8 of part III, which relates to Corporate Rescue Mechanisms. The establishment of CA 2016 has superseded the Companies Act 1965 (CA 1965).

CA 1965 had been in existence for more than 50 years.  The methods of conducting business and dynamisms or corporate exercises have significantly evolved leaving the laws supporting the business to be obsolete.  Thus, CA 2016 encapsulates the dynamic business environment in today’s global corporate scenario and complements the consistent growth of the Malaysian economy.  At the same time, it is at par with global standards and ensures that the route for starting a business in Malaysia is more competitive, which in turn will attract more investments and promote the growth of Small and Medium Enterprises (SMEs) in Malaysia.

Although the CA 1965 was reformed periodically, certain provisions of the act reflect outdated concepts that were inherited from various jurisdictions.  It consists of 374 sections with 10 schedules.  CA 2016 sets out a new legal framework that entirely replaced the 1965 Act.  It consists of 620 sections with 13 schedules and comprises of cross-jurisdictional benchmarking analysis from Singapore, Hong Kong, Australia, New Zealand, The United Kingdom, and South Africa.

The CA 2016 makes it easier for companies to be incorporated and maintained via simpler incorporation process, unlimited capacity for companies, making share certificates and common seal optional. An entity structure may be simplified whereby it is now permitted to have ‘a one-man’ show whereby a person may be a single shareholder, director and company secretary of an entity.

The Annual General Meeting (AGM) now becomes optional for private companies and mandatory for public companies only. The director’s roles and duties have been enhanced resulting in directors having more responsibilities and requires more active participation. Statutory duties of directors, functions, and power of the board remain the same.

The CA 2016 has increased the penalties to more than 100 times over.  For example, under Section 213 of CA 2016, for duties and responsibilities of directors, a heavier monetary penalty will be imposed from RM30,000 to RM3 million maximum fine, but the maximum imprisonment term remains at 5 years.

New provisions provided under CA 2016 are as follows:

• Shareholder’s approval for fees and benefits and benefits for the directors (Section 230)
• Director’s service contracts (Section 231)
• Service contracts to be made available for inspection by shareholders (Section 232)
• Business Review Segment in Director’s Report (Section 253(3)) and Part 2 Schedule 5
• Member’s Right for management review (Section 195)

Under CA 2016, the director’s liability is now extended to senior management, which includes Chief Executive Officer, Chief Financial Officer, Chief Operating Officer or another person primarily responsible to the management.

In terms of remuneration of directors, CA 2016 introduces the concept of shareholder’s approval for fees and benefits. Shareholders will have a greater access to the remuneration of the directors, thus promote better transparency and accountability.  It also codifies the requirement for shareholder’s approval for fees and benefits payable to directors of a listed issuer and its subsidiary.  This is in line with the Malaysian Code on Corporate Governance 2017 on disclosure of remuneration of directors and its policies and procedures.  Under Section 231 of CA 2016, the service contract of all directors should be made available for inspection at the company’s registered office.  Thus, there will be greater transparency for the allocation of resources and enable shareholders to determine the compensation to be given upon removal of directors.

Additionally, CA 2016 requires directors to produce statements of solvency tests, and it generally refers to a statement in writing by all directors which states that there are no grounds on which the company could be found to be unable to pay or otherwise discharge its debts in relation to certain corporate exercises.  Directors must ensure that the solvency test is based on the latest financial position at the relevant point in time since they are liable to a fine and imprisonment for wrong or erroneous solvency test statement.

A business review section is being introduced in the Director’s report in the new Act, focusing on non-financial matters including policies on internal control and corporate responsibility segments.  However, it is optional and not mandatory for companies.  This is done to encourage Public Limited Companies to report on wider social economic and sustainability matters.  The CA 2016 also allows members to question, discuss, comment or make recommendations to the management of the company in the AGM (Under CA 1965, this is only allowed if the Chairman allows it).

CA 2016: New Capital Maintenance Rule and Corporate Rescue Mechanism

The programme also focuses on the new capital maintenance rule, the audit, auditors and financial reporting and the corporate rescue mechanism. The new capital maintenance rule discussed how the CA 2016 introduces the no par value regime, share buyback, alternative capital reduction, financial assistance, dividend distribution and redemption of preference shares.

There is now a no-par value regime. Previously, shares issued had to be separated (example par value to share capital and excess proceeds to share premium). The former was seen to be costly, time-consuming and required a lot of effort. The rationale of removing for the change was because the former does not serve the purpose in business circumstances.

The share buy-back was enhanced whereby the majority of directors were to issue a solvency statement, and the directors may choose to automatically cancel shares purchased or retain such shares as treasury shares. Section 112(2) of CA 2016 provides a solvency test for share buy-back whereby the share buy-back would not result in the company being insolvent and its capital being impaired at the date of the solvency statement. The company will remain solvent after each buyback during the period of 6 months after the date of the solvency statement.

The section on audit, auditors and financial reporting saw an overview of CA 2016 for accountants and auditors, financial statements, annual return and the changes on the format of audited financial statements and reports accompanying the audited financial statements. This section saw changes on the appointment of auditors for private companies and public companies, attendance of auditors of public companies at the Annual General Meeting, resignation, removal, and register of directors. Apart from that, audit exemption was greatly discussed as well as the filing of tax returns.

The corporate rescue mechanism mainly discusses the Corporate Voluntary Arrangement. Under the CA 2016, a private company can enter into a binding compromise with creditors without the need of a court sanction. A Corporate Voluntary Arrangement is a scheme involving minimal court involvement. The directors of a private company can propose a debt restructuring proposal to revive the fortunes of the ailing company. There is a change from the CA 1965 as the Corporate Voluntary Arrangement relies on a qualified insolvency practitioner to supervise and implement the scheme. This is ideal when shareholders and creditors still have confidence in the existing management.

Figure 1: The Corporate Rescue Mechanism Summary

A company will apply for a moratorium between 28-60 days. During this period, the business “freezes” whereby no winding up can be commenced, no Judicial Manager can be appointed, no share transfer or change of members, no landlord may exercise rights, no repossession, and no legal process is permitted. This time is to help the company focus on its business to facilitate towards recovery from debts owed.

For the proposed Corporate Voluntary Arrangement to be approved, a simple majority of creditors present should be obtained, and voting must approve the scheme proposed. At least 75% of the creditors must be present for the voting to approve of the scheme.

The judicial management concept is a court-supervised rescue plan and may be initiated by the company, shareholders, directors, or creditors, whether separately or together through a notice of application if there is a reasonable probability of rehabilitating the company. Judicial management can be utilized by public and private companies in the event that it is satisfied that the company is or will be unable to pay its debts.

Overall the programme was an eye-opener. It shows that, as a result of globalization, and the passing of time, the CA 2016, like all others, needs to change to adapt to the current environment.