Company Law Reform - A Guide to the Changes in the Malaysian Companies Act 2016

 I. Introduction
 
After a long wait, the much-anticipated Companies Act 2016 has finally come into force on 31st January 2017 replacing the 1965 Act, which has been around for more than half a century. Incorporating new provisions and amendments, the whole Act has overhauled its content from a 374 sections’ Act to a 620 one.
 
This article aims to give a broad overview of the differences between the old act and the new act and its implications.

​II. Differences in the New Act
 
A) Incorporation of Companies
 
A company’s incorporation creates a separate legal entity from the owner, in which a company is capable of suing and being sued under its own name. Furthermore, a company can be incorporated to have limited liability status, where the liability of each member or shareholder is limited. However, under the old act, a company needs at least a minimum of 2 directors and shareholders to be incorporated.[1]
 
Under the new Act, incorporation is made easier by allowing private companies to be incorporated with one individual, being the single shareholder and single director.[2] This means that a director can have complete control of the company while enjoying separate liability as compared to having to register as a sole proprietor. Furthermore, as evidence of registration under the Act, the issuance of a notice of registration will be the legal document replacing the Certificate of Incorporation.[3]

B) Memorandum & Articles of Association
 
Under the old Companies’ Act, a Memorandum of Association (MoA) is a document that contains object clauses of the company. [4] It is designed to define the capacity of the company by referring to its business activities, with activities which fall outside the MoA being deemed, Ultra Vires.
 
On the other hand, Articles of Association (AoA) is the Constitution of the Company. The articles are akin to the bylaws of the company, setting out regulations for internal matters of the company. [5] The articles when registered, are a binding statutory contract between the company and the members qua members as well as the members inter se.
 
However, under the new Companies’ Act, these documents are no longer mandatory to set up a company.[6] The new Act aims to provide all the process and provisions necessary for the smooth running of a company. It is crucial to note that this means that the company has unlimited capacity to venture into various activities without restrictions to the nature of their business.
 
Nevertheless, if a company incorporated under the new Act elects to adopt a Constitution, it can do so, but its content must comply with the provisions of the Act with regards to the rights, power, duties and obligations of directors and members.[7] As for existing companies, their present MoAs and AoAs will be deemed to be the new Constitution of the company.[8]
 
C) Annual General Meeting (AGM)
 
The new Act also provides for lower costs in running a company. In line with this, an AGM for private companies can be dispensed with as it can be simplified by passing written resolutions[9], which are cost-effective measures, while notices for the meeting can be sent electronically.[10]
 
D) Common Seal
 
A common seal which is usually equivalent to the signature of an ordinary individual is now optional.[11] Documents can be validly executed through the signature of two authorized officers by which one of them must be the director or in the case of a sole director, by that director in the presence of a witness who attests the signature.[12]
 
E) Doctrine of Constructive Notice
 
Under the old Companies’ Act, documents such as the MoA and AoA are public documents and are available for inspection. Hence, the doctrine of constructive notice presumes that anyone dealing will the company has read these documents. In such instance, persons engaging with the company cannot hold the company liable for any inconsistent dealings of the company and the memorandum due to the default on his part or due to his negligence.
 
However, as MoAs and AoAs are no longer compulsory, the new Act does not apply this doctrine except for documents relating to an instrument of charges.[13]
 
F) Transparency on Director’s Fees
 
While the Companies Act 1965 was silent on the approval of a director's remuneration, the new Act provides for transparency and accountability on directors’ fees and benefits together with directors’ service contracts. It is now expressly codified that these items must be approved at a general meeting[14] and that it is open to inspection by the members[15].
 
G) No-Par Value Regime
 
Shares of Malaysian companies were previously issued with a par or nominal value. Par value represents the minimum price at which shares can be issued, in a way to protect the shareholders and that they can be confident that no one else will receive a more favorable issue price.
 
Under the 2016 Act, all shares issued before or upon the commencement of this Act shall have no par or nominal value.[16] This is a good approach as par value of shares is not necessarily indicative of its real value and may be confusing and misleading to potential investors, creditors as well as shareholders of a company. Additionally, it also simplifies a company’s accounts and financial statements as concepts of share premium and capital redemption reserves will be removed and under a no-par value regime, a company will have more flexibility in pricing its shares and raising capital as the restrictions on discounts to par value for new shares will no longer apply.
 
H) Derivative Action
 
A derivative action is a proceeding brought by a shareholder on behalf of a corporation. It is a common law concept whereby a minority shareholder brings an action that the company has refused to do so. This often happens when the defendant in the suit is someone close to the company, like a director or a corporate officer.
 
However, under the new Act, the right of any person to bring, intervene in, defend or discontinue any proceedings on behalf of a company at common law is abrogated[17], leaving only statutory derivative action as provided for in section 347.
 
I) Duties of Directors – Solvency Test Requirement
 
It is settled law that directors, being the brain and mind of the company, owe statutory and fiduciary duties. Essentially, the primary duty is owed to the company. However, such duty expands to include shareholders, creditors, and employees, save in exceptional cases such as nominee directors or when the company is insolvent.
 
The new Act has provided for additional safeguards through the new solvency test requirement.[18] This will protect third parties dealing with the company where their rights as creditors should not be prejudiced. Different solvency tests will be applied in various situations. Directors are to sign on the equivalent of a statutory declaration to verify that the company is solvent when the company declares a dividend, when there’s a capital reduction without a court order, financial assistance, and redemption of preference shares and share buyback. Any breach by the directors will result in personal liability, and they may face criminal sanctions.[19]
 
J) Increase in Sanctions onto Directors
 
It is also important to note that there’s a general increase in the sanctions that the directors will face for any breaches of the Act. In a more serious and severe offense, directors can face up to a 5-year imprisonment and RM3 million fine or both, if there is a criminal conviction.
 
K) Corporate Rescue Mechanism
 
One major highlight of the new Act would be the corporate rescue mechanism involving corporate voluntary arrangement and judicial management. This helps companies going through financial distress to restructure their debts in order to avoid winding up of the company. The new corporate voluntary arrangement process, adopted from the United Kingdom, is quick and cheap, with minimal Court involvement. The company’s management will have its debt restructuring proposal assessed by an independent insolvency practitioner.[20] 75% in value of the company’s creditors will then vote on whether to accept this proposal.[21] If passed, it then binds all the creditors.
 
L) Judicial Management Mechanism
 
Under the Companies Act 1965, there are limited options available to an insolvent company i.e. it can enter into receivership, wind-up or undertake a scheme of arrangement with its creditors.
 
The new act introduces the judicial management mechanism, which is based on the Singapore provisions and UK’s administration model, allows the management of the company itself to be ceded over to an independent insolvency practitioner; a Court-appointed judicial manager. The company will enjoy a very wide moratorium which gives them protection from legal proceedings from its creditors while giving the judicial manager sufficient power to do all things as may be necessary for the management of the affairs, business, and property of the company[22] to maintain the company. The judicial manager formulates a restructuring plan and presents it to the creditors for their approval.[23]              
 
III) Conclusion
 
All in all, the new Companies Act has indeed transformed Malaysia’s corporate landscape to be more in line with global standards. The Attorney General Chambers and Corporate Commission Malaysia (CCM) has done a magnificent job in drafting the provisions which took into account the report and recommendations by the Corporate Law Reform Committee (CLRC) which was comprised of renowned experts in the field of company law and whose members have devoted hundreds of hours in deliberation and consultation with relevant stakeholders in arriving at their recommendations. It is now time to put the law to the test.

---

This article was written by Liew Yen Fern, a law student at the University of Malaya (Reviewed by Dr. Kalavathy a/p Maruthavanar) (Edited by Leeroy Ting Kah Sing) 

---

Footnotes

[1] Section 16(7), Companies Act 1965, Act 125

[2] Section 9(d), Companies Act 2016, Act 777

[3] Section 15, Companies Act 2016, Act 777

[4] Section 18, Companies Act 1965, Act 125

[5] Section 29, Companies Act 1965, Act 125

[6] Section 31, Companies Act 2016, Act 777

[7] Section 32, Companies Act 2016, Act 777

[8] Section 34(c), Companies Act 2016, Act 777

[9] Section 290(1)(a), Companies Act 2016, Act 777

[10] Section 300(1), Companies Act 2016, Act 777

[11] Section 61, Companies Act 2016, Act 777

[12]Section 66(2), Companies Act 2016, Act 777

[13] Section 39, Companies Act 2016, Act 777

[14] Section 230, Companies Act 2016, Act 777

[15] Section 232, Companies Act 2016, Act 777

[16] Section 74, Companies Act 2016, Act 777

[17] Section 347(3), Companies Act 2016, Act 777

[18] Section 112, Companies Act 2016, Act 777

[19] Section 114, Companies Act 2016, Act 777

[20] Section 397, Companies Act 2016, Act 777

[21] Section 400(2), Companies Act 2016, Act 777

[22] Section 414(3)(a), Companies Act 2016, Act 777

[23] Section 420, Companies Act 2016, Act 777