Monday, 3 April, 2017

Malaysia to Boost Business with First New Companies Act Since 1965

Replacing a Companies Act is a major undertaking, which is why countries do it so rarely. Such an update, however, can significantly benefit the corporate infrastructure of a jurisdiction and increase its attractiveness as an international business centre. By introducing a new Companies Act in 2016, Malaysia is actively encouraging investment and securing its position in world commerce.

Most of Malaysia’s Companies Act took effect on 31 January 2017 and will come into force in stages. The key changes fall into three broad categories:

  1. Simplifying governance for private limited companies
  2. Protecting third parties that interact with companies
  3. Holding directors to account

The changes seek to achieve an appropriate balance between enforced regulation and self-regulation by industry.

Simplifying governance for private limited companies

The Act introduces a wide range of changes to streamline corporate procedure and reduce costs. These include the following:

  • Companies can be incorporated with just one director and one shareholder. All contracts executed by a sole director or shareholder must be witnessed.
  • Private companies no longer need to hold an annual general meeting (AGM).
  • Companies need to file their annual returns within 30 days from the anniversary of incorporation, rather than after the AGM.
  • Companies no longer have a memorandum and articles of association. These have become a company’s constitution, which can be amended or revoked.
  • Companies only need to issue share certificates if requested by the shareholders.
  • Written resolutions no longer need unanimous shareholder approval. Ordinary resolutions are now passed by majority approval, while special resolutions are passed by 75% approval.

Protecting third parties that interact with companies

While large-scale corporate mismanagement hits the headlines, many smaller businesses fail every year. When this happens, it is important to protect staff, creditors and other stakeholders.

The new Companies Act introduces a solvency test, applying to the declaration of dividends, the redemption of preference shares, financial assistance, share buybacks and capital reductions without a court order. To conduct any of these activities, directors must show the company is both balance sheet solvent (its assets exceed its liabilities at the date of the transaction) and cash flow solvent (the company can pay its debts when they fall due).

The Act also introduces two corporate rescue mechanisms to help financially distressed companies. The first is a Corporate Voluntary Arrangement (CVA). If accepted by creditors, a CVA allows a company to restructure its debts, pay creditors over a fixed period and keep trading. The second is Judicial Management, whereby a company’s directors, shareholders or creditors can apply for a court order to place the company’s management in the hands of an insolvency practitioner. The granting of a Judicial Management order triggers a statutory moratorium of 180 days during which the company cannot be wound up.

Holding directors to account

An essential part of these changes is ensuring directors do not abuse their position.

For public and listed companies, along with their subsidiaries, director fees and benefits must be approved by shareholders. Previously, shareholder approval was only needed for director fees. For private limited companies, fees and benefits must be approved at a board meeting and the approval sent to shareholders within 14 days.

Directors also face increased sanctions for breaching certain rules. For example, breach of the solvency test (see above) is a criminal offence for which directors are personally liable. Criminal convictions can now lead to a five-year imprisonment, an RM3 million fine or both.

 

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