The Companies Act 2016 (“CA 2016”) of Malaysia repealed the Companies Act 1965 (“CA 1965”) with effect from 31 January 2017. The CA 2016 introduces some important changes relating to directors. This article highlights ten changes under the CA 2016, which  directors should take note of.

1. Definition of Directors 

Under the CA 1965, a “director” included a person in accordance with whose directions or instructions the directors of a corporation were accustomed to act. Under the CA 2016, the definition of “director” has been amended to refer to, amongst others, a person in accordance with whose directions or instructions the majority of directors of a corporation are accustomed to act. The rationale for this definition under the CA 1965 and CA 2016 is to hold any person who is able to control the board, sometimes called a “shadow director”, accountable. However, the CA 2016 recognises that it may be difficult to prove that the entire board of directors is acting in accordance with the directions or instructions of the shadow director and that it is sufficient to show that the majority of the directors is doing so instead. Therefore, it should be noted that any person who controls the majority of directors of a corporation will be subject to the same duties and liabilities of an appointed director under the CA 2016.

2. Heavier Penalties

The CA 2016 provides for heavier penalties than the CA 1965 for offences committed by directors. As an illustration, the penalty for a director who carried out acquisition of an undertaking or property of a substantial value or disposal of a substantial portion of the company’s undertaking or property without the required members’ approval under the CA 1965 was imprisonment for up to five years or a fine up to RM30,000 or both. Under the CA 2016, the penalty for the same offence is imprisonment for up to five years or a fine not exceeding the RM3,000,000 or both. The maximum fine has been increased 100 times under the CA 2016 for the same offence. Further, unlike the CA 1965 which empowered the Registrar of Companies to compound any offence committed under the CA 1965, such power to compound is not provided under the CA 2016.

3. Directors’ remuneration

The substantive provisions under the CA 1965 was silent on whether directors’ or members’ approval was required for a director’s remuneration. Instead, regulation 70 of Table A of the CA 1965 (which only applied if a company adopted the articles of association contained in Table A of the CA 1965) provided that the remuneration of directors shall be determined by members in general meeting.

The CA 2016 promotes greater accountability through the following requirements.

Public companies

• The fees and benefits payable to directors of public companies, listed companies and their subsidiaries including any compensation for loss of employment of a director or former director must be approved by members. A company which contravenes this provision commits an offence, which on conviction, shall be liable to a fine not exceeding RM3,000,000 and any payment in contravention of this provision shall constitute a debt due by the director to the company.

Private companies

• Board of directors of private companies, may approve the fees and benefits payable to the directors including any compensation for loss of employment of a director or former director, subject to the constitutions of the private companies.
• The approval of the board of directors of such private companies must be recorded in the minutes of the directors’ meeting and the directors must notify the members of the approval of the fees within 14 days from the date of the approval. Contravention of this requirement may render a company and its officers (including directors) liable to a fine not exceeding RM250,000.
• Members holding at least 10% of the total voting rights and who consider the payment to be unfair, within 30 days after they have knowledge of such payments, may require the payment to be subject to members’ approval. In such instance, unless approval has been obtained, the payment shall constitute a debt due by the director to the company. 

4. Solvency Statements

The CA 2016 introduces the concept of solvency test and solvency statement. A company has to satisfy the solvency tests prescribed under the CA 2016 in order to undertake redemption of preference shares, reduction of share capital, financial assistance or share buyback. Directors are then required to confirm the satisfaction of the solvency tests through solvency statements. The requirement for solvency test and solvency statement imposes obligations on directors to inquire into a company’s state of affairs and prospects and take into account all liabilities of the company. It is an offence for a director to make a solvency statement without reasonable grounds and, on conviction, a director is liable to imprisonment for a term not exceeding five years or to a fine not exceeding RM500,000 or to both.

5. Members’ Rights for Management Review

Section 195 of the CA 2016 expressly provides that the chairperson of a meeting of members of a company must allow a reasonable opportunity for members at the meeting to question, discuss, comment or make recommendation on the management of the company. Section 195 of the CA 2016 also gives a meeting of members, the right to pass a resolution which makes recommendation to the board of directors on matters affecting the management of the company. This goes further than the usual right of members to speak and ask questions at general meetings. Under the CA 2016, any recommendation is not binding on the board of directors, unless the recommendation is in the best interest of the company and the rights to make recommendations is provided for in the constitution of the company or passed as a special resolution. This potentially puts management powers, which are traditionally vested in directors, in the hands of members.

Section 195 of the CA 2016 raises several questions. Do directors or members determine what is in the best interest of a company? In the event directors and members could not concur on what is in the best interest of a company, how would this disagreement be resolved?  We have to await caselaw to see the actual implementation and effect of this provision.

6. Power of Directors to Allot Shares and Grant Rights

Under the CA 1965, prior approval of members of a company must be obtained before directors could exercise any power to issue shares but members’ prior approval was not required where shares were issued in consideration of acquisition of shares or assets by the company and members had been notified of the intention to issue the shares at least 14 days before the date of issue of the said shares.

The CA 2016 prescribes more circumstances where prior approval of members are required or not required for allotment of shares and grant of related rights. Under the CA 2016,

prior approval of members is required for directors to exercise any power to:

• allot shares in the company;
• grant rights to subscribe for shares in the company;
• convert any security into shares in the company; or
• allot shares under an agreement or option or offer;

prior approval of members is not required for directors to exercise any power to:

• allot shares, or grant rights, under an offer made to the members in proportion to the members’ shareholdings;
• allot shares, or grant rights, on a bonus issue of shares to the members in proportion to the members’ shareholdings; and
• allot shares to a promoter of a company that the promoter has agreed to take; or
• issue shares in consideration of acquisition of shares or assets by the company where members have been notified of the intention to issue the shares at least 14 days before the date of issue of the shares.

It should be noted that public listed companies are subject to the Listing Requirements issued by Bursa Malaysia Securities Berhad which require approval of members for certain transactions involving issuance of shares.

7. Statutory Minimum Number of Directors

Under the CA 1965, each company, regardless of whether a private or public company, must have at least two directors who each has his principal place of residence in Malaysia (“resident director”). Under the CA 2016, the requirement is maintained for a public company but a private company is permitted to have only one resident director.

8. Resignation, Vacation or Death of Sole Director or Last Remaining Director

Both the CA 1965 and CA 2016 prohibit a director of a company from resigning or vacating his office if the number of resident directors is reduced below the statutory minimum number of directors required, by his resignation or vacation from office.

The CA 2016 goes further and provides that if the office of a sole director or the last remaining director of the company is vacated due to disqualification of the director, the director becomes of unsound mind, dies or otherwise vacates his office in accordance with the constitution of the company, the secretary of a company shall call a meeting of the next of kin, other personal representatives or a meeting of members to appoint a new director. If the next of kin, personal representatives or members fails to appoint a director within six months of the death of the last director, the Registrar of Companies may direct the company to be struck off.

9. Contract with Sole Member Who is Also a Director

The CA 2016 provides that where a limited company with only one member, enters into a contract which is outside the ordinary course of the company’s business, with the sole member who is also a director of the company, the company shall ensure that the terms of the contract are duly recorded in the minutes of the directors immediately after the making of the contract (unless the contract is in writing). Failure to do so is an offence and on conviction, the company and every officer (including director) shall be liable to a fine not exceeding RM1,000,000.

10. Age Limit for Directors

Under the CA 1965, a director of a public company or of a subsidiary of a public company must not be of or over the age of 70 years. This age limit has been abolished under the CA 2016. Instead, the CA 2016 provides that a director, regardless of a public company or private company, must be at least 18 years old.

The changes under the CA 2016 are positive steps geared towards strengthening corporate governance of companies. Directors should take note of the above in carrying out their directors’ duties.

The information in this article is intended only to provide general information and does not constitute legal opinion or professional advice.