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The Companies Act 2016 (CA 2016) repealed the Companies Act 1965 (CA 1965)

and changed the landscape of company law in Malaysia. The CA 2016 reformed
almost all aspects of company law in Malaysia. This article will provide an overview
of the CA 2016.

Minimum Number of Members

Section 9(b) CA 2016 Act stipulates that ‘A company shall have one or more
members…’. This provision allows the incorporation of a company with only one
member.

Types of Companies

Companies can generally be classified as (1) limited and unlimited liability


companies; and (2) public and private companies.

Limited and unlimited liability company


Section 10(1) CA 2016 states that a company may be incorporated as ‘(a) a
company limited by shares; (b) a company limited by guarantee; or (c) an unlimited
company.’ Where the company is a company limited by shares, the member’s
liability is limited to the amount unpaid on their shares, and where the company is a
company limited by guarantee, a member’s liability is limited to the amount they
agreed to contribute in the event the company is wound up. There is no limit placed
on the liability of a member of an unlimited company.

To differentiate an unlimited company from the others, section 25(1) CA 2016


provides that the name of an unlimited company shall end with the word ‘Sendirian’
or the abbreviation ‘Sdn.’.

Private company and public company


A company can also be classified as either a private or a public company. Under the
CA 2016, a private company is required to have the following characteristics:

 It is a company limited by shares (s42(1))


 It has not more than 50 shareholders (s42(1))
 It restricts the transfer of its shares (s42(2))
 It cannot offer its shares or debentures to the public (s43(1)). Under s15(1) of the CA
1965, a private company was prohibited from inviting the public to subscribe its
shares or debentures
 It cannot allot shares or debentures with a view of offering them to the public
(s43(1)). This prohibition was not found in the CA 1965
 It cannot invite the public to deposit money with the company (s43(1)).
Other than the above characteristics, s25(1) mandates that the name of a private
company should end with the words ‘Sendirian Berhad’ or its abbreviation ‘Sdn.
Bhd.’.

In the case of a public company, its name should end with the word ‘Berhad’ or its
abbreviation ‘Bhd.’. A public company may have one or more of the characteristics
imposed on a private company. For example, most public companies are limited by
shares.

Apart from the name, the other main differences between a private and public
company prescribed in the CA 2016 are as follows: First, the statutory minimum
number of resident directors for a private company is only one, whereas a public
company is required to have at least two resident directors. Second, only a private
company may pass a written resolution (s290). Third, only a public company is
mandated to hold its annual general meeting (s390). Fourth, certain categories of
private companies are exempted from having its accounts audited (s255).

Formation of Company

Under the CA 2016, the process of incorporating a company is simplified. The Act
introduces a super form for incorporation. Section 15 provides that the Registrar of
Companies (‘ROC’) will assign a registration number to the company and issue the
notice of registration upon compliance of the procedure and payment of the
appropriate fee. The notice of registration is conclusive evidence that the company is
duly registered (section 19). The ROC may issue a certificate of incorporation only
upon an application by the company and payment of the prescribed fee.

Pre-incorporation contract

A pre-incorporation contract is defined in s65(1) CA 2016 as ‘a contract or


transaction that purports to be made by or on behalf of a company at a time when
the company has not been formed’. Section 65(1) provides that the person who
signs the pre-incorporation contract will be personally liable on the contract or
transaction accordingly. Unlike their previous position under the CA 1965, they
cannot exclude their liability. Nevertheless, the position of the company with regards
to its liability under the pre-incorporation contract remains the same. Section 65(2)
permits the company to ratify the contract after its incorporation. If the company does
ratify the contract, ‘the company shall be bound by the contract or transaction as if
the company has been in existence at the date of the contract or transaction and had
been a party to the contract or transaction’.

Publication of Company Name

Section 30(1) CA 2016 requires the display of both registered name and company
registration number at its registered office and every place where its business is
carried on, and also every place where its books are kept. ‘Books’ is defined in s2(1)
to include any register or other record of information and any accounts or accounting
records, however compiled, recorded or stored, and also includes any document’. In
addition, s30(2) also requires the company to disclose its registered name and
company registration number in its business correspondence and documentation
including its website.

Company Constitution

Under the CA 1965, every company was required to have a memorandum and
articles of association. The memorandum and articles of association are now
collectively known as the constitution, and it is expressly stated in s31 and 38 CA
2016 that only a company limited by guarantee shall have a constitution; other types
of company may or may not have a constitution. It is optional for them.

If a company has no constitution, the company, each director and each member of
the company shall have the rights, powers, duties and obligations as set out in the
Act. And ‘if the company has a constitution, the company, each director and each
member of the company shall also have the rights, powers, duties and obligations as
set out in the Act, except to the extent that such rights, powers, duties and
obligations are permitted to be modified in accordance with this Act, and are so
modified by the constitution of the company’ (s31(2) CA 2016).

In other words, the rights, powers, duties and obligations of the company, director
and member are prescribed by the CA 2016 unless modified by the company’s
constitution. The company’s constitution can modify any of those rights, powers,
duties and obligations only if the Act permits it.

For companies which were registered prior to the coming into operation of the CA
2016, s619(3) provides that the memorandum and articles of association of a
company existing before the operation of the Act shall have effect as if made or
adopted under the Act unless otherwise resolved by the company. Thus, a
company’s existing memorandum and articles shall form the company’s constitution
until the company alters it by passing a special resolution.

Company’s Objects

Section 21 CA 2016 provides that a company shall have the capacity to carry on or
undertake any business or activity. Nonetheless, if the company has a constitution
which states the company’s objects, s35(1) provides that the company shall be
restricted from carrying on any business or activity that is not within those objects.

The CA 2016 does not prescribe the consequences of a transaction outside the
company’s objects clause. Thus, the consequences of an ultra vires transaction are
uncertain. Drawing from the provisions in the Act, specifically s21 and 39, it is
submitted that a third party dealing with a company can assume that the company
has full capacity to carry on or undertake any business or activity. This is because
s39 provides that the doctrine of constructive notice applies only to documents
relating to instrument of charges. No person shall be deemed to have notice or
knowledge of the contents of the constitution or any document (other than charges)
related to the company which has been registered by the ROC or which is available
for inspection at the company’s registered office. Thus, a third party dealing with a
company can rely on s21 and 39 and assume that the transaction in question is
within the capacity of the company, for the company has full capacity to carry on or
undertake any business or activity.

Share Capital

With effect from 31 January 2017, all companies with share capital migrated to no
par value regime. It is immaterial that the company was incorporated under the CA
1965 or any previous enactment. Section 74 CA 2016 reads, ‘All shares issued
before or upon the commencement of this Act shall have no par or nominal value.’.

Nevertheless, a member who did not fully pay up on their shares before 31 January
2017 would still be liable to the company for the unpaid amount. Section 618(1)(b)
still recognises the amount unpaid on shares as the difference between the issue
price of the share (excluding premium) and the amount paid.

With regards to the credit balance standing in the share premium account as at 31
January 2017, s618(2) provides that the moneys will become part of the company’s
share capital unless the company uses the moneys according to subsections (3) and
(5).

Authority to issue shares


The general power to allot shares, grant rights to subscribe in the shares, convert
any security into shares and allot shares under an agreement or option or offer is
vested in the members by passing a resolution (s75 of the CA 2016). There are
exceptions to this general principle. They are as follows:

 First, the directors may allot shares or grant rights under an offer to existing
members in proportion to the members’ shareholding.
 Second, the directors may allot shares or grant rights on a bonus issue of shares to
existing members in proportion to the members’ shareholding.
 Third, the allotment of shares to the company’s promoter that the promoter has
agreed to take.
 Fourth, the shares are issued as consideration or part consideration for the
acquisition of shares or assets by the company.

The CA 2016 has also included a provision in s85 to safeguard existing


shareholders. It provides that where a company issues new shares which rank
equally to existing shares as to the voting or distribution rights, the company must
first offer the new shares to the holders of existing shares on a prorated basis unless
the company’s constitution provides otherwise. This means all issues of shares shall
be right issues unless otherwise prescribed in the company’s constitution.

Classes of shares
In general, the different classes of shares can be categorised into ordinary shares
and preference shares. ‘Preference shares’ is defined in s2(1) to mean a share by
whatever name called, which does not entitle the holder to the right to vote on a
resolution or to any right to participate beyond a specified amount in any distribution
whether by way of dividend, or on redemption, in a winding up, or otherwise.

The CA 1965 did not permit the class rights to be varied if the rights were
incorporated in the company’s memorandum of association. However, the class
rights could be varied if they were found in the company’s articles and its
memorandum or articles allowed it.

As a company’s memorandum and articles are now combined to form its


constitution, the CA 2016 allows the rights attached to the preference shares to be
modified or varied. If the company’s constitution has provided the procedure for the
variation of class rights, then the procedure is to be followed (section 91(1)(a)). If the
constitution does not prescribe the procedure, then the company may do so with the
consent of the holders of the shares in that class (section 91(1)(b)). The consent of
the holders may be obtained as follows:

First the approval may be by way of written consent representing not less than 75%
of the total voting rights of the holders of shares of that class.

Second, the approval may be given by passing a special resolution of the holders of
shares of that class.

Maintenance of capital
At common law, a limited company shall not return its capital to its members.
However the CA 2016 has prescribed some exceptions to this general principle.

Reduction of capital
Section 115 provides that a company may reduce its share capital following the
procedures prescribed in the section unless its constitution provides otherwise.
According to s115, a company may reduce its capital by either (1) a special
resolution supported by a solvency statement from all directors; or (2) a special
resolution confirmed by the court.

Share buyback
Generally, a company is not permitted to purchase its own shares or that of its
holding company (s123 and 22) unless it is (1) a redemption of preference shares
(s72); (2) a cancellation of shares (s. 116 and 177); (3) a share buyback by public
listed companies (s127); or (4) a remedy awarded by the court in a case of
oppression (s346).

Financial assistance
Section 123 CA 2016 also does not permit a company to give any financial
assistance for the purchase of its own shares or that of its holding company. There
are exceptions prescribed in s125 and 126 namely (1) where the lending of money is
part of the company’s ordinary business; (2) where it is for a trust scheme for
employees; (3) where the financial assistance is given to employees for their own
benefit; (4) where the company is regulated by written laws relating to a bank,
insurance or takaful or which are subject to the supervision of the Securities
Commission; or (5) where the company is not a public listed company and it has
complied with the conditions listed in s126.

Dividend
In the CA 2016, the dividend rule is found in s131. It has two principles – ie (1) the
dividend is to be paid out of the company’s profits; and (2) the dividend should not be
paid if the payment will cause the company to be insolvent. As the directors are the
ones who authorise the payment of dividends, they must be satisfied that the
company will be solvent after the distribution is made.

Section 133(2) provides for the liability of the director and manager who wilfully paid
or permitted to be paid dividends out of what they knew to be not profit. They are
liable to the company to the extent of the amount exceeding the value of any
distribution of dividends that could properly have been made.

The CA 2016 also prescribes the new liability imposed on the member. Section
133(1) states that the company may recover the amount of distribution received by a
shareholder which exceeds the amount which could properly have been made
unless the shareholder (1) has received the distribution in good faith; and (2) has no
knowledge that the company did not satisfy the solvency test.

Share Certificate

Section 97 CA 2016 provides that it is no longer necessary for a company to issue a


share certificate to a shareholder unless the company’s constitution requires it or the
shareholder applies to the company for one to be issued to them.

Transfer of shares

Section 106(1) provides that the company shall register the transfer of shares within
30 days from the receipt of the instrument of transfer unless the following conditions
are fulfilled: (1) the CA 2016 or the company’s constitution expressly permits the
directors to refuse or delay the registration for reasons stated; (2) the directors have
passed a resolution to refuse or delay the registration of the transfer within 30 days
from the receipt of the instrument of transfer and the resolution states the reasons for
the rejection or delay, as the case may be; and (3) the notice of the resolution is sent
to both transferor and transferee within seven days of the resolution, and where the
company is a public company, the notice of the resolution must also include the
reasons for rejection or delay of the transfer.

Directors

Minimum number of directors


The CA 2016 prescribes the minimum number of directors in a company. Section
196(1) provides that a private company shall have a minimum of one director who
ordinarily resides in Malaysia by having a principal place of residence in Malaysia
(‘resident director’). For a public company, it shall have a minimum of two resident
directors.

Service contracts
The CA 2016 has also provided for public companies to make available for
inspection at its registered office a copy of every director’s service contract with the
company or its subsidiary. Members holding at least 5% of the total paid up capital
are entitled to inspect the documents.

Directors’ fees and benefits


Section 230 CA 2016 provides that the fees of the directors, and any benefits
payable to the directors of a public company, or of a listed company and its
subsidiaries, shall be approved at a general meeting. However, for a private
company which is not a subsidiary of a listed company, the directors’ fees and
benefits may be approved by the board unless the company’s constitution states
otherwise.

Directors’ indemnity
Section 289 CA 2016 provides that a company may indemnify its director for their
costs in defending a legal action if judgment in the action is given in their favour or
where the court action is discontinued. In addition, the company may with the
approval of its board of directors effect an insurance policy to cover its director’s
liability.

Non-cash asset transactions involving directors and substantial shareholder


Section 228 CA 2016 provides that a non-cash asset transaction of the requisite
value involving directors or substantial shareholder requires members’ approval. The
section has raised the threshold of the requisite value to a minimum of RM50,000.
Thus it is not a transaction of the requisite value if its value is less than RM50,000. It
is a transaction of the requisite value if its value is (1) between RM50,000 and
RM250,000 and exceeds 10% of company’s net assets, or (2) exceeds RM250,000.

Company Secretary
Citizenship and residency
Section 235(1) CA 2016 provides that the company must have at least one company
secretary who is a citizen or a permanent resident of Malaysia. In addition, they must
ordinarily reside in Malaysia by having their principal place of residence in Malaysia.
A company may have more than one company secretary; and all of them must fulfil
these requirements.

Removal and resignation


The CA 2016 provides the procedures for the removal as well as the resignation of a
secretary. However, the procedures are not absolute and are still subject to the
company’s constitution or the terms of their appointment.

Section 239 provides that the board of directors may remove a secretary from their
office in accordance with the terms of their appointment or the constitution. In
addition, unless the company secretary has entered into a contract to the contrary,
they may on their own accord resign at any time by submitting to the board a letter
stating their intention. Section 237(3)(a) provides that they cease to be the secretary
on the expiry of 30 days from the date of the notice or the period specified in the
company’s constitution or terms of their appointment.

Company Accounts

The CA 2016 decoupled the submission of the financial statements from the annual
return. Section 259 CA 2016 requires a company to lodge its financial statements
and reports (collectively called ‘the accounts’) with the ROC. For a private company,
it must be done within 30 days from the day the accounts are circulated to the
members (s259(1)(a)). The accounts must be circulated to the members within six
months from the end of its financial year (section 258). In the case of a public
company, the accounts must be lodged with the ROC within 30 days from its annual
general meeting (‘AGM’).

However, s. 68 requires the company to lodge its annual return with the ROC every
calendar year within 30 days from the anniversary of its incorporation date. Thus,
whilst the submission of the accounts is referenced to the company’s financial year
end, the submission of its annual return is linked to the anniversary date of its
incorporation.

Auditor

Another area of reform is the appointment of an auditor. The CA 2016 provides for
the automatic re-appointment of an auditor for a private company, whereas for a
public company, their appointment is until the conclusion of the company’s next
AGM. In addition, under s255(3) CA 2016, the ROC may exempt certain classes of
companies from appointing an auditor. On 4 August 2017, the ROC issued Practice
Directive 3/2007 exempting three categories of private companies, namely dormant
companies, zero revenue companies and threshold-qualified companies.
The CA 2016 also contains provisions to regulate the establishment of new audit
firms. Section 265 requires the following. First, the ROC will maintain a register of
firm of auditors. Second, a new audit firm is to notify the ROC within 30 days of the
commencement of its business. Third, a reconstituted firm of auditors due to
retirement, withdrawal or death of a partner, or due to the admission of a new
partner, must lodge a notice with the ROC within 30 days of such alteration.

Company Meetings

Annual General Meeting (AGM)


The CA 2016 reforms the requirement for an AGM. Section 340 provides that only a
public company is required to hold an AGM.

Notice of meeting
Section 321(1) CA 2016 provides that notice of a company meeting must be given to
‘every member, director and auditor of the company’. Section 319 (1) provides that
the notice shall be in writing. It can be given in hardcopy or in electronic form or in
hybrid form (ie partly in hardcopy and partly in electronic form).

Venue
Section 327 CA 2016 prescribes that the members’ meeting may be held anywhere
so long as the main venue is in Malaysia. The chairperson of the meeting shall be at
the main venue.

Proxy
A member need not attend the company meeting in person. They may appoint
another person to attend the meeting on their behalf. This person may participate,
speak and vote on the member’s behalf at the meeting. They are known as the
member’s proxy.

The CA 2016 has removed the restriction on who is qualified to be appointed as a


proxy and currently, a member can appoint anyone to be their proxy.

The CA 2016 does not specify the maximum number of proxies which may be
appointed by a member. However, where the member appoints more than one
proxy, then they must specify the proportions of their holdings to be represented by
each proxy (sections 294(2)(b) and 334(2)). The proxy may vote on poll. The proxy
may vote by show of hands if they are the sole proxy for the member.

Resolutions

Members’ resolution is the decision made by the members. There are companies
with few members, and sometimes it is cumbersome to call for a meeting of
members to pass a resolution.
Under the CA 2016, only private companies can pass a written resolution. Thus, for
a private company, its members may pass a resolution either at a meeting or by
circulation (s290(1)). Whereas for a public company, a resolution of the members
shall be passed only at a meeting of the members (s290(2)).

The CA 2016 has reformed the procedure of a written resolution. First, s301 provides
that the written resolution may be proposed by the directors or by any member
holding at least 5% of the voting rights in the private company. A lower threshold
may be provided in the company’s constitution (s302).

Second, s306(4) CA 2016 needs only the required majority of eligible members to
agree to it. Thus, for a matter which requires an ordinary resolution, it is passed if it
is agreed by a simple majority, and if it requires a special resolution, it is passed if it
is agreed by at least 75% of the members.

Third, the period for agreeing to the written resolution is now capped at 28 days from
the circulation date unless the constitution provides otherwise (s307). A member’s
agreement to the proposed written resolution shall not be effective if it is received
after the expiry date.

Corporate Restructuring

The CA 2016 provides a mechanism for a statutory corporate restructure scheme


which will bind all creditors. However, the company is in a vulnerable state between
the formulation of the scheme and the approval by the court, for a creditor who does
not agree with the scheme may take legal action to recover their loan. Thus, the
company or any of its members or creditors may apply to the court for an order to
restrain further proceedings against the company except with the court’s leave.

The CA 2016 provides that the court can grant a restraining order for a period of not
more than three months. On the application of the company, the court may extend
the period for not more than nine months (s368(2)).

In addition, the CA 2016 has introduced two new corporate rescue schemes – ie
corporate voluntary arrangement and judicial management. These schemes came
into effect on 1 March 2018.

Liquidation of Companies

There are two ways to wind up a company: (1) voluntary winding up where the
members have passed a resolution to wind up the company; and (2) compulsory
winding up where the court has ordered the company to be wound up (s432(1)).

Commencement of winding up
Generally, the voluntary winding up of a company commences when the members’
resolution to voluntarily wind up the company is passed. However, where an interim
liquidator is appointed before the members’ resolution is passed, then the winding up
will commence when the directors declaration on the company’s insolvency is lodged
with the ROC (s441).

In a compulsory winding up, the winding up commences at the passing of the


members’ resolution if the company has passed a resolution to voluntarily wind up
the company before the presentation of the winding up petition. In other cases, the
winding up commences on the date of the winding up order (s467).

Unable to pay debts


One of the grounds for the winding up of a company is its inability to pay its debts.
Section 466 CA 2016 provides that a company is deemed to be unable to pay its
debts if it fails to pay a debt exceeding the amount prescribed by the Minister, within
21 days after it is served with a notice of demand at its registered office. Currently
the amount prescribed by the Minister is RM10,000. Section 466 also states that the
unpaid creditor must file the petition to wind up the company within six months from
the expiry date of the notice of demand.

Secured creditor
The debts of a company can be secured or unsecured. Section 524 CA 2016 gives
the secured creditor three options with regards to the property charged by the
company to them as a security. First, if the secured creditor is entitled to realise the
charged property, they may do so and claim for any shortfall as an unsecured
creditor (s524(1)(a) and (3)(a)). Second, the secured creditor may value the charged
property and claim for the balance as an unsecured creditor (s524(1)(b)). Third, the
secured creditor may surrender the charge to the liquidator for the general benefit of
creditors and claim as an unsecured creditor for the whole debt (s524(1)(c)).

Conclusion

It can be seen that the CA 2016 has reformed almost all aspects of company law in
Malaysia.

Chan Wai Meng is an associate professor at the Faculty of Business and


Accountancy, University of Malaya, 50603 Kuala Lumpur, Malaysia. She
authored the book Essential Company Law in Malaysia: Navigating the
Companies Act 2016, published by Sweet & Maxwell Asia/Thomson Reuters.

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