12 October 2016

The New Companies Act 2016: Raising the Bar for Directors

The new Companies Act 2016 (“new Act”), recently gazetted on 15 September 2016, is expected to come into force in stages starting from 1 January 2017.

Among other major reforms, the new Act aims to strengthen corporate governance and promote accountability of directors when running companies.  While the new Act will ease the doing of business and make Malaysian company law more competitive and flexible, this also means that directors will be held to higher expectations and will have to shoulder more responsibility to ensure that companies are managed properly.

Key changes affecting directors:

Increased sanctions

The new Act imposes heavier fines and longer terms of imprisonment on directors for breaches under the new Act. For example, the improper use of property and position by a director to gain a benefit for himself or to cause detriment to the company can result in up to a 5-year imprisonment or up to a RM3 million fine, or both upon conviction. The RM3 million fine is a 100-fold increase from the fine of RM30,000 under the present Companies Act 1965 and this serves as a stronger deterrent against improper behavior and practices by directors. The power of the Registrar to compound any offence committed by any person as provided under the present Companies Act 1965 is also conspicuously absent from the new Act.

Solvency statements

The new Act provides a series of solvency tests that companies must take into account to undertake certain corporate exercises. These include non-court capital reduction exercises, share buyback exercises, redemption of preference shares and financial assistance. These solvency tests generally relate to the company’s cash flow solvency and balance sheet solvency. Directors are required to confirm the satisfaction of these solvency tests in a solvency declaration.

These requirements to satisfy solvency tests and provide solvency declarations will impose more onerous demands on directors who will have to inquire into the company’s state of affairs, prospects and financial position. If a solvency statement is made without reasonable grounds, directors can be subject to up to 5 years imprisonment or a RM500,000 fine or both upon conviction. Directors should be well advised not to make any solvency statement unless they can be reasonably certain that the solvency tests are satisfied.

Directors’ remuneration

Under the new Act, the remuneration and benefits of directors of public companies, listed companies and subsidiaries of listed companies must be approved by shareholders at general meeting. In the case of private companies, the remuneration of directors may be approved by the board of directors. However, shareholders of a private company holding at least 10% of the voting rights of the company may request that a director’s remuneration be subject to shareholders’ approval if they view the remuneration determined by the Board as being unfair.

Public companies are also required to keep a copy of every director’s service contract, including those of its subsidiaries for inspection at the registered office of the company. These service contracts can now be scrutinised by members of the company holding at least 5% of the total paid-up capital of the company.

These new requirements will promote greater transparency which in turn will raise the accountability of directors. Public companies will need to review their directors’ service contracts to see if appropriate carve-outs need to be made to confidentiality provisions to allow for inspections to be made.

Directors’ indemnity and insurance

Under the Companies Act 1965, a company may only indemnify its directors for the liability incurred from the proceedings of the court if the judgment is made in favour of the directors. It is therefore common practice for companies to subscribe to Directors and Officers (D&O) insurance to protect directors from monetary liability arising from potential legal suits in the course of performing their function as directors of the company.

The new Act now regulates which losses incurred by the directors are insurable and which are not. Under the new regime, companies can only effect insurance for a director with the prior approval of the board of directors in specific instances. Such instances include civil liability for any act or omission in his capacity as director and costs incurred in defending a civil claim or criminal claim (provided that the director is acquitted in the criminal claim, the director is granted relief under the new Act or where proceedings are discontinued). Where insurance is effected without complying with the provisions, the director will be personally liable to the company for the cost of such insurance, unless the Court finds otherwise.

Further, no indemnity can be given, and no insurance can be effected, by a company in favour of its directors in respect of any civil or criminal liability in respect of a breach of the general duty of directors to exercise their powers in accordance with the new Act for a proper purpose and in good faith and in the best interests of the company.

It is therefore advisable for companies to re-assess their current practices relating to directors’ indemnity and taking up D&O insurance policies to ensure that these comply with restrictions under the new Act.

If you have any questions or require any additional information, you may contact Ahmad Zulkharnain Musa or the ZICO Law partner you usually deal with.

This alert is for general information only and is not a substitute for legal advice.