Ambition is sky-high for Malaysia’s new companies legislation

Malaysia has replaced its companies legislation, which was around for more than 50 years. The new law makes it easier for companies to incorporate, bringing it more into line with international standards.

The Companies Act 2016 came into effect on January 31, replacing the Companies Act 1965. The Act simplifies the process for incorporation, and eliminates the authorised share capital and par value for shares.  A new corporate rescue mechanism, which is also part of the new law, will take effect later in the year.

Dato Razak

“The new Act is generally welcomed by business since it makes processes such as incorporation more efficient,” says Dato Razak, partner at Shearn Delamore & Co. “It’ll bring Malaysia more in line with other jurisdictions when incorporating.”

“It balances corporate governance with attracting business,” says Philip Koh, partner at Mah-Kamariyah & Philip Koh.

Simpler process for incorporation

Under the new provisions, only one person and one director are needed to incorporate a private company, compared to two directors in the previous Act. A business does not have to pay to appoint a company secretary at the point of incorporation and can nominate one within 30 days from the date of incorporation. Instead of multiple forms, incorporation only needs one superform.

Omission of share capital

Under the Act, newly-incorporated companies do not have to have any authorised share capital and no par value for shares. Companies can issue shares at any value they choose. The share capital is determined by the amount investors are willing to pay. Directors have the discretion and duty to determine the appropriate value.

“Previously companies were not permitted to issue shares below par value. This resulted in companies being unable to raise additional capital if the market value of the share is below par,” says Razak.

Corporate rescue mechanism

Provisions under division 8 (corporate rescue mechanism) on a corporate voluntary arrangement and judicial management will come into force later. The introduction of a corporate voluntary arrangement to rehabilitate companies will make it easier for companies since this needs minimal court supervision but does not apply to public companies. A majority of creditors present at the meeting, but no less than 75% of the share ownership of the company, must give its consent in value.

Judicial management allows for a moratorium to be put in place for six months, with a possibility of a six month extension, to prevent any winding-up order against the company without a court decision. During this time, a judicial manager will manage the company and will need to present a restructuring plan for creditor approval. However, judicial management is not accessible for financial institutions, insurance and asset management companies.

Corporate governance

When directors declare company dividends, they should be aware of the solvency rule in the new law, requiring that a company must be able to meets its debts for 12 months after the dividend pay-out. The law allows for civil and administrative proceedings for breaches of this rule, along with financial penalties against officers and directors.

“There will be more stronger corporate governance with the new Act,” says Razak.

Philip Koh

“Directors have the fiduciary duty to make an insolvency statement which helps to strengthen governance,” says Koh.

For public companies, a significant change is that, to increase engagement, a general shareholders’ meeting must approve directors’ fees and benefits.

Auditing accounts           

Private companies, including dormant and small businesses, are exempted from having to appoint auditors each financial year. To avail of the exemption, a company must satisfy two of three criteria: annual revenue of no more than RM300,000 ($67,300), year-end assets of no more than RM500,000, and a year-end headcount of no more than five employees.

“Auditors are objecting to this because this will affect their fees earned, but it’ll make running a small business much easier,” says Koh.

Annual general meetings

Private companies will no longer have to hold an annual general meeting. This eases the burden for companies with few shareholders, but they still have the right to receive audited financial statements. Public companies will lose the option to pass members’ resolutions in written form. These have to be passed at a general meeting.

The changes to the Malaysian Companies Act are welcome but it is still uncertain whether the law can live up to expectations of enhancing corporate governance and facilitating more people to do business in Malaysia. Expect more guidance and clarification of how the legislation will operate in the upcoming months.