Key Changes About The New Companies Act In Malaysia

Q:  What are the key highlights of the changes for the newly implemented Companies Act 2016 compared to the old Act?

• Under the Companies Act 1965 (“Old Act”), a memorandum and articles of association (“M&A”) is required for a company to be incorporated. Under the Companies Act 2016 (“New Act”), the M&A is replaced by Constitution. Companies incorporated post 31 January 2017, being the effective date of the New Act, have the option of whether to have a Constitution. The default provisions in the New Act will apply to companies without Constitution, namely the proceedings of the Board (Third Schedule). For existing companies registered under the Old Act, their M&A remains valid and enforceable under the New Act, unless otherwise resolved by the company.

• You can now incorporate a private limited company by just having 1 shareholder and 1 director (previously 2) – a sole director can also be the sole member of the private company. The director has to be a resident director. The sole director or the last remaining director of a private company cannot resign until a meeting of members is called to receive the notice of resignation and to appoint one or more new directors.

• Previously, a company can only declare dividends out of its profits. Under the New Act, a company is able to declare and distribute dividends to the shareholders out of profits of the company available if the company is solvent. A company is considered “solvent” if the company is able to pay its debts as and when the debts become due within 12 months immediately after the distribution is made.

• Definition of “director” is wide enough to include shadow director. A person is regarded as a company’s director if “the majority of directors of a corporation are accustomed to act in accordance with the person’s instructions and directions.”

• Previously under the Old Act, every share issued shall have a nominal or par value. For instance, RM1 for each share. Under the Old Act, a company is allowed to issue shares in excess of its par value. This excess is called “premium” and must be transferred to a “share premium account”. The New Act adopts no par value regime. Under the New Act, the share premium account and capital redemption reserves (CRR) account are no longer applicable. All amounts credited to the share premium account and CRR account will become part of the company’s share capital. A transitional period of 24 months will be given to utilise the amount standing in credit in the company’s share premium account and CRR account.

• Use of common seal becomes optional. Execution of a document by a company is valid if it is signed on behalf of the company by:
• at least 2 authorised officers, 1 of whom must be a director (“authorised officer” means director, secretary or any other person as approved by the board); or
• in the case of sole director, that sole director and must be witnessed.

Document signed in accordance with the above shall have the same effect as if the document is executed under the common seal of the company.

Note: Common seal should be kept for time being because execution by company under common seal is still required on instrument of transfer, charges, caveats and other forms prescribed by National Land Code 1965.

• Annual general meetings (AGM) are no longer required for private companies. Despite audited financial statement (AFS) is no longer put before the AGM, it must be circulated to members within 6 months of financial year end and lodged with the SSM within 30 days of circulation to members.

• Decoupling of lodgement of AFS with Annual Return. Annual return of private companies must be lodged within 30 days from the anniversary date of incorporation. The SSM may strike off a company for failure to lodge 3 or more consecutive Annual Returns.

• The New Act imposes heavier fines and longer jail term on directors for breach of directors’ duties and the law. For example, a director who improperly uses the company’s property or his position as director without consent to gain benefit for himself or to cause loss to the company, or who breaches his statutory duty as a director to act in good faith, exercise reasonable care, skill and diligence and make business judgement in accordance with the prescribed rules, shall upon conviction be liable to a maximum of 5 years jail term or up to RM3 million fine, or both as compared to maximum of 5 years jail term or up to RM30,000 fine, or both under the old law.

• Under the Old Act, a company may be wound up if it owes anyone for more than RM500. The amount is now increased to RM10,000.

• Qualification of proxy under the Old Act is removed. A member can now appoint another person to be his proxy instead of another member of the company or an advocate, auditor or person approved by the SSM.

• New corporate rescue mechanisms to become available under the New Act i.e. judicial management and corporate voluntary arrangement.

• Under judicial management, if there is reasonable probability of rehabilitating an insolvent company as a going concern, the shareholders, directors or creditors of the company may apply to Court to place the management of the company in the hands of an independent and qualified judicial manager. From the time the application is made and for the duration of any judicial management order made, a moratorium will be in force to prevent any winding up order or any other legal proceedings against the company without leave of court. During this moratorium, the judicial manager will prepare and table a workable restructuring plan for creditors’ approval and to supervise its implementation. Such proposal requires approval of 75% in value of creditors whose claims have been accepted by the judicial manager. Once approved by the creditors and sanctioned by the Court, the restructuring plan will be implemented. Like a liquidator, a judicial manager is also subject to a degree of control and supervision by the Court.

• The corporate voluntary arrangement is conceptually similar to the scheme of arrangement mechanism under the Old Act, where the existing management of a financially distressed company remains in control during the restructuring. The fundamental difference is that the implementation of the debt restructuring proposal will be assessed and overseen by an insolvency practitioner with minimal court intervention. A moratorium on actions by creditors will automatically commence from the time of filing of the proposal to the Court by the applicant, who may be the directors of the company, the liquidator or a judicial manager.  A meeting of the company and its creditors must be held by the insolvency practitioner who has agreed to act as a nominee. The voluntary arrangement proposal requires approval of 75% in value of company’s creditors present and voting at the meeting either in person or by proxy, and a simple majority of the members of the company. Once approved, the proposed voluntary arrangement will take effect and bind all creditors of the company.

Note: Division 8 of Part III – provisions relating to corporate rescue mechanisms on corporate voluntary arrangement and judicial management have yet to be effective.