[update: The Bill has received Royal Assent on 31 August 2016 and has been gazetted on 15 September 2016 as the Companies Act 2016. I have written briefly about this in my latest post.]
The new Companies Act will undoubtedly transform Malaysia’s corporate landscape. Underpinning the changes are the aims of spurring entrepreneurship, making the corporate vehicle more attractive for businesses, deregulating certain aspects of the corporate process, and to introduce the concept of corporate rescue for ailing companies.
It is anticipated that the new Companies Act itself will not be brought into force until a year’s time or so. This is because the new regulations, rules and guidelines will still need to be drawn up.
I set out below 7 of the more significant areas we will see in the new Companies Act.
1. Easier Incorporation of Companies
The Act will introduce the ability to incorporate a company with one individual being the single shareholder and single director. This will make incorporating a company more attractive for businesses, entrepreneurs and the businessman. A single individual can have complete control of the company, and still enjoy the separate liability of the corporate entity.
2. Lower Costs of Running Companies: No AGM for Private Companies
In line with this, there will be no more need for an annual general meeting (AGM) for private companies. Some important things flow from this. For private companies, audited accounts are no longer put before the AGM. Instead, there will be a timeline to circulate the audited accounts among the shareholders. There is also a mechanism for the automatic reappointment of auditors, unless the shareholders decide otherwise.
3. Easier Passing of Written Resolutions for Private Companies
With the move away from physical general meetings, private companies will also find it easier to pass written shareholder resolutions. A majority of shareholders can sign off on the written resolution to pass it as an ordinary resolution. There is no more need to have the unanimous written resolution.
4. No More Memorandum and Articles of Association
Under the Act, the company will no longer have a Memorandum and Articles of Association. The new Act aims to provide all the processes and provisions necessary for the smooth-running of a company. However, if a company wishes to tailor certain provisions for itself, it can then adopt a Constitution. Existing companies will have its Memorandum and Articles of Association deemed to be the new Constitution.
5. Added Safeguards: New Solvency Test Requirement
Going hand-in-hand with making corporate processes easier, certain safeguards will be put in place. This is to protect third parties doing business with companies and where their rights as creditors should not be prejudiced.
There will be different varieties of a new ‘solvency test’ that will be applied for different situations. Directors must sign on the equivalent of a statutory declaration to verify that the company is solvent when the company undertakes the following:
(i) Declaration of dividends;
(ii) Capital reduction without a court order, financial assistance and redemption of preference shares; and
(iii) Share buyback.
Where there is a breach of this solvency test, the directors then face personal liability and may face criminal sanctions.
6. Increase in Sanctions on Directors
There is a general increase in the sanctions that directors will face for breaches under the Act. The more serious infractions can result in a 5-year imprisonment and RM3 million fine or both, if there is a criminal conviction.
7. Corporate Rescue: Corporate Voluntary Arrangement and Judicial Management
The new Act will introduce two new corporate rescue mechanisms to help financially distressed companies. The aim is to allow these companies to restructure their debts, to remain as a going concern and to avoid winding up.
Firstly, there will be the new corporate voluntary arrangement process, adopting the provisions from the UK. This is meant to be a quick and cheaper process, with minimal Court involvement. The company’s management will have its debt restructuring proposal assessed by an independent insolvency practitioner. 75% in value of the company’s creditors will then vote on whether to accept this proposal. If passed, it then binds all the creditors.
Secondly, judicial management is a mechanism based on the Singapore provisions and UK’s administration model. The management of the company itself is ceded over to an independent insolvency practitioner i.e. a Court-appointed judicial manager. The company will enjoy a very wide moratorium which gives it protection from legal proceedings. This is to give the company and the judicial manager breathing room and to maintain the company as a going concern. The judicial manager formulates a restructuring plan and presents it to the creditors for their approval.