Malaysia: New Companies Bill Will Further Improve Corporate Governance In Malaysia

Last Updated: 12 September 2016
Article by Lim Lee Kuan

The new Companies Bill will transform Malaysia's corporate landscape. It will support start-ups and entrepreneurship, simplify compliance, reduce the cost of doing business, strengthen and enhance internal control, corporate governance and corporate responsibility.

Malaysia is taking steps to transform itself into a nation of high-incomes and quality growth by 2020. The New Economic Model and the Economic Transformation Programme provided the economic framework to significantly increase productivity, innovation and creativity, leading to a more favourable investment environment and increased business opportunities. Following on from these major policies, the Dewan Rakyat recently passed the Companies Bill, which is expected to come into force at the end of 2016.

The new Bill has the full support of the Companies Commission of Malaysia (CCM) as it is in line with the CCM's goal to ensure that the corporate law framework maintains its edge in attracting foreign and domestic investments and expanding entrepreneurship. The commission also aims to ease and cheapen the cost of doing business in Malaysia, whilst giving strong emphasis on corporate governance. Hence, it is anticipated that in the upcoming months, the CCM will release new regulations under the Companies Bill for public consultation.

The strengthening of corporate governance practices is key in attracting private sector investments into the country. A 2015 study by ACCA and KPMG showed that Malaysia is leading other developing nations in this area.

This has been achieved by regulations and policies being developed in recent years specifically designed to improve corporate governance. For example, the Malaysian Code on Corporate Governance 2012 (MCCG 2012) is targeted at companies listed on Bursa Malaysia. However, all Malaysian companies are encouraged to adopt the principles and recommendations of MCCG 2012 and make good corporate governance an integral part of their business dealings and culture.

Key changes introduced by the Companies Bill

The Companies Bill, which will replace the existing 50 year-old Companies Act 1965, will include many key changes including:

Easier Incorporation of Companies

The Bill will introduce the ability for a single person to incorporate a company. That same person can be both the sole shareholder and sole director. This will make incorporating a company more attractive for businesses and entrepreneurs. A single individual can have complete control of the company, and still enjoy the separate liability of the corporate entity.

No requirement for private companies to hold Annual General Meetings (AGMs)

In line with making it easier to run companies, there will be no need for private companies to hold an AGM.

For private companies, audited financial statements are no longer tabled before the AGM. There will be a timeline to circulate the audited accounts among the shareholders and for filing with the CCM.

Easier Passing of Written Resolutions for Private Companies

With the intention to move away from physical general meetings, private companies will find it easier to pass written shareholder resolutions.

The Bill outlines a process for shareholders to pass ordinary or special resolutions by having the required majority signoff on the written resolution. There is no need to have the unanimous written resolution signed by all the shareholders.

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 ensure their rights as creditors are not prejudiced.

There will be multiple varieties of a new 'solvency test' that will be applied for different situations. Hence, it will be important to understand and to seek advice on the different solvency tests applicable.

For the more common situation of declaration or pay-out of dividends, directors must now ensure that the defined solvency test has been met. To release dividends, a company must be able to pay its debts as and when they become due within 12 months. The failure to meet this solvency test may result in the directors becoming personally liable.

In other situations, directors must meet a solvency test (but with a different definition). Directors must sign a Solvency Statement, which is akin to a statutory declaration, verifying that the company is solvent.

This new Solvency Statement is required when the company undertakes the following:

  1. Capital reduction without a court order;
  2. Financial assistance;
  3. Redemption of preference shares; and
  4. Share buyback.

Increase in Sanctions on Directors

The Companies Bill introduces harsh sanctions for directors who breach regulations. Serious infractions can result in a five-year imprisonment and RM3 million fine or both.

Concluding comments

Effective corporate governance structures encourage companies to create value (through entrepreneurialism, innovation and development) and provide accountability and control systems which correspond with the risks involved. When companies are well governed, they are better able to attract capital investment.

The new Companies Bill will transform Malaysia's corporate landscape. It will support start-ups and entrepreneurship, simplify compliance, reduce the cost of doing business, strengthen and enhance internal control, corporate governance and corporate responsibility.

Through the changes mentioned above, the Companies Bill will assist and support Malaysia's corporate community in achieving their business objectives whilst generating economic growth for the nation.

Corporate governance is a shared responsibility. It is not the sole preserve of the regulators but the obligation of all participants to exercise greater care and responsibility in promoting value creation and sustainability through mutually-reinforcing efforts. The initiatives taken by the Malaysian Government and the CCM are set to ensure Malaysia continues to lead the way in corporate governance and becomes a preferred place to do business in the region.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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