10 Common Issues Arising from the Companies Act 2016

With the coming into force of the Companies Act 2016, a number of practical issues and questions have since cropped up. The Companies Commission of Malaysia (SSM) did release its helpful FAQ document. This document has been updated from time to time (presently, it has been updated up until 3 April 2017) and helps to answer the most frequently asked questions.

Nonetheless, there are still other common issues arising from the Companies Act 2016. I come across these queries in my practice or at the talks that I give. I set out below 10 of these key issues. Companies can consider seeking further clarification or advice. These issues range from the constitution, dividends, director-related issues, and transitional matters.

#1: Constitution

A key area that companies are looking into is the review of their existing memorandum and articles of association (M&A). Many companies are considering adopting a constitution. Key questions are then whether their present M&A is compliant with the Companies Act 2016, or whether they can retain their existing M&A provisions.

I have seen a public-listed company now release its draft constitution for adoption at its upcoming AGM. I have also come across some public-listed companies already tabling some amendments to their M&A.

For public-listed companies, the Listing Requirements will make it mandatory to retain the constitution. There will also be upcoming changes to the Listing Requirements and with proposed changes to some of the provisions to be contained in the constitution.

#2: Section 66 – Valid Execution of Documents

Section 66 of the new Act continues to cause uncertainty and concern in the market. I had written about this provision earlier. Essentially, section 66(2) states that a document is validly executed by the company if certain signature requirements are met. For a company with more than one director, the signature requirement is that there must be two signatures, and with the director being a mandatory co-signatory.

SSM’s FAQ answer below attempts to explain the scope of section 66. But it does not fully address the uncertainty. Further, this FAQ answer may be persuasive but does not have force of law.

The answer to this concern may have to be resolved in the courts. If we look more into the law, the wording of section 66 is similar (but not identical) to the UK Companies Act 2006 provision.

#3: Annual Return – Shares Held on Trust

The prescribed form for the Annual Return contains a new provision. Under Section F, it states that there has been due inquiries and that “none of the members of the company is holding shares as a nominee or trustee.”

The common concern is whether the directors or the company secretary must now actively determine whether any of the shares are held beneficially or on trust. This is seen in light of the new section 56 which allows a company to require the member to disclose whether any of the shares are held beneficially or on trust.

#4: Dividends – Application of Solvency Test

When dividends are declared and paid out, the directors must now ensure that the dividends are paid out of profits available and that the company meets a solvency test. This solvency test is defined as the company being able to pay its debts as and when the debts become due within 12 months immediately after the dividends is made.

The common query is then how to apply this solvency test. Directors are understandably concerned in ensuring they comply with the law. From my research, Australian case law is very useful in defining the various elements and in determining the ambit of this solvency test.

#5: Financial Assistance

On a related area dealing with solvency, there has been a relaxation of the financial assistance provisions. The new Act allows for a whitewash provision. I have come across a number of transactions in attempting financial assistance. But there are still some uncertainties on the exact requirements and application of the whitewash requirements. Further, the prescribed form for the Solvency Statement on the SSM website may not exactly meet the solvency test requirements set out under the Act.

#6: Director’s Report and Auditor’s Report in the Financial Statements

There were at least three versions of the SSM FAQ in addressing how companies were to set out their financial statements.

In particular, the manner in which the directors and the auditors state that their respective reports were made in compliance with the Companies Act 1965 or the Companies Act 2016.

For example, for financial statements for the financial year ended 31 December 2016, that should be under the old Companies Act 1965 regime. But the directors’ report may only be made and dated in February 2017 which is when the new Act came into force.

The other ongoing issue is where the financial year may end on 30 June 2017. The company may be straddling both the Companies Act 1965 and the new Act.

#7: D&O Insurance and Indemnity – Interpretation and Scope

This is a very live issue at the moment. It is not easy to interpret the exact scope of the new section allowing for the widening of the indemnity and insurance provisions. For example, a common issue is where a director presently bears a small percentage of the D&O premium. What can be allowed under the new Act? How will the existing policy and coverage be treated under the new Act? There are a host of other issues as well.

#8: Directors Fees and Benefits Payable

The change in law now mandates that directors’ fees and benefits payable must be approved in a shareholders’ meeting. This is the requirement for a public company, and a listed company and its subsidiaries.

For a private company, the directors can approve their own fees and benefits. This is subject to a disclosure requirement and the shareholders can still require the directors to call a general meeting to seek approval.

The common concerns then center on the exact definition of “benefits payable.” For instance, would a meeting allowance be classified as benefits payable? Next, for the situation of a listed company and its subsidiaries, what is the general meeting requirement? Would a general meeting be held at both the listed company level and each of the subsidiaries?

There are a number of permutations for this scenario and also uncertainties at the moment.

#9: Directors’ Service Contracts

For public companies, the directors’ service contracts are open to inspection. Questions are raised as to what falls within the definition of “service contract.” A common scenario may be where there is an employment contract for the CEO. By virtue of the CEO’s position, he may be appointed on to the Board. Would such an employment contract be deemed a service contract and be open to inspection?

On this issue, our Act’s reference to “service contract” is quite similar to the UK Companies Act 2006. So the UK case law will come in useful in helping the interpretation and in answering the practical concerns.

#10: Transition of Winding Up

Lastly, there are transition concerns relating to winding up. On the one hand, some practitioners take it that the Companies Act 1965 has been repealed and want to apply the new Act completely. But the new Act does preserve ongoing winding up proceedings and where these proceedings must continue on under the Companies Act 1965.

A common question I am asked is where there was a statutory demand issued under section 218 of the Companies Act 1965 at that time. Should the winding up petition be filed under the old Act or the new Act? Or should some other steps be taken? There are also other transitional or other winding up-related issues that I have come across.

For my other Companies Act 2016 articles, click below:

 

Advertisements

17 thoughts on “10 Common Issues Arising from the Companies Act 2016

  1. Rani Nadesan 11 April 2017 / 12:53 pm

    Thanks. Useful.

    Like

  2. SOH SIT SING 21 May 2017 / 2:02 pm

    Is board of direcor meeting is compulsary or a sdn bhd company if there is one of company policy, states every quarter annualty. If company is making money ? can the profit distributes to shares holders and directors. Thanks.

    Like

    • Lee Shih 22 May 2017 / 9:45 am

      Ordinarily, a board of directors meeting is not compulsory. This is unless the constitution (or articles of association) states that it is compulsory. The board of directors can still make decisions by passing the written directors’ resolutions.

      If the company has profits and continues to remain solvent, then the company can pay out dividends to its shareholders.

      Like

  3. Helene 24 May 2017 / 1:27 pm

    can a company sell its asset to any of its existing shareholders. Which section of the company act 2016 should i refer this issue to.

    Like

  4. Johnny Ng 31 May 2017 / 9:47 am

    Hi. May i know what is the scope of the insurance policy that the Company may purchase for its directors? Is the insurance policy in relation to kidnapping of the Directors can be purchased at the expense of the Company?

    Like

  5. Johnny Ng 31 May 2017 / 9:51 am

    Hi. May i know what is the scope of the insurance policy that the Company may purchase for its directors? Is the insurance policy in relation to kidnapping of the Directors can be purchased at the expense of the Company?

    Like

  6. Johnny 31 May 2017 / 9:53 am

    Hi. May i know what is the scope of the insurance policy that the Company may purchase for its directors? Is the insurance policy in relation to kidnapping of the Directors can be purchased at the expense of the Company?

    Like

  7. Johnny 31 May 2017 / 10:20 am

    Hi may I know what is the scope of the insurance policy that the company may purchase for its directors? Is the insurance policy in relation to the kidnap and ransom can be purchased at the expenses of the company?

    Like

  8. yong ching ching 31 May 2017 / 2:06 pm

    Hi Lee Shih,

    Just wonder how is the replacement of S.350 Companies Act 1965 for the service of documents in the new Act 2016. Or it could be a lacuna or just to rely on the case law.

    Like

    • Lee Shih 14 June 2017 / 11:17 am

      There is no equivalent provision for section 350 of CA1965. So, I think it is a gap in the statutory provisions and we will have to rely on case law.

      Like

  9. Andrew 7 June 2017 / 5:41 pm

    Hi Lee Shih~ just to confirm the last para of your blog, should a 218 notice duly issued before the Act, hence which act should be follow to file the winding up Petition ?

    Like

    • Lee Shih 14 June 2017 / 11:16 am

      In such a situation, to be safe, I would re-issue the statutory notice and to have it issued under the Companies Act 2016 (and assuming the demand is above RM10,000). The reason is that the issuance of the section 218 notice may not mean that the company is in the course of winding up and the transitional provision under the CA2016 may not allow for the petition to be filed under CA1965.

      Like

  10. yeoh kheng nan 29 June 2017 / 1:15 am

    hi Lee Shih, what are the major difference after they amended the old company act ? im actually 15 years old and im interested in law. Please tell me, i have some limits on reading those explanation.

    Like

  11. SH Lim 10 August 2017 / 5:24 pm

    Hi Lee Shih. Section 66 (2) states that document is validly executed by company if it is signed on behalf of the company by at least 2 persons.

    a) What are those documents that would fall under this requirement in the case of company opening account with banks? Does account opening form, letters signed by company or cheques issued by company subject to the requirement under Section 66(2).

    b) At one of the courses that was attended by a staff of the Bank, a lawyer was of the opinion that cheques, account opening forms, letter of indemnities etc which are company documents are required to be signed in the manner as stated above. My question is does the Bank follows the board resolution or the requirement above? Which one overrules?

    Kindly advise. Thank you.

    Like

  12. siti syahida idayu 15 August 2017 / 12:09 pm

    Hi Mr Lee, i would like to get your clarification in my case whereby the company is taking loan from the Bank, however the property is registered under the name of one of the director. Which means 3rd party legal charge. Whether this is permissible under the new companies act 2016?
    Thank you Mr Lee.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s