companies act 2016 directors under the heightened ...directors... · if directors fail to convene...

Heightened Expectations of Directors under The Companies Act 2016

Presented by Mah Li Chen

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Fee, Benefits & compensation

Qualifications

Solvency Tests

One Man Company

Directors

Persons Connected to Directors

Duties and Responsibilities

Substantial Transactions and

Related Party Transactions

Execution of documents

Default & Penalties

Service Contract

Minimum Number

Loans to Directors and persons connected

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Minimum Number of Director

❖ Private limited company - min 1 resident director (s9(d) and s196(1)(a)) (New!)

❖ Public limited company - min 2 resident directors (No change) (s9(d) and s196(1)(b))

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❖ Same person as the single Director and the single Member Private Company only

❖ NOT for public company.❖ Secretary to call for meeting of next-of-kin or other personal

representative(s) as soon as practicable if sole Director dies, disqualified, of unsound mind or has vacated office as per constitution. S 209(3)

❖ Strike off by Registrar - if no replacement Director within 6 months (s209(5))❖ Allowed member’s written resolution (“MWR”) (s297)❖ An exempt private company if member not a corporation (s2)❖ S344 - decision of sole member to be passed as such and as if passed at

a MoM❖ Got to alter or abolish Constitution to allow for a company to be a one-man

company.❖ s234 Non OCB contract with sole member who is also a director -(Note:

May have more than 1 Director here)➢ Not a contract in writing➢ Holds a Board meeting immediately after making the contract➢ Record terms of contract in Board minutes

One-man Company

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Qualifications● Minimum age - 18 years old (s196(2))

● Abolished retirement for ≥ 70 years old for a public company director

● A resident director is one who shall ordinarily reside in Malaysia by having a principal place of residence in Malaysia. (s196(4)(a)) (Changed!) (To refer to Hoh Kiang Ngan & Ors v Hoh Han Keyet (Court of Appeal) on residency.

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Versus the earlier case of Fong Poh Yoke v The Central Construction Co (Malaysia) Sdn Bhd which defined “residence” means residence in one place with some degree of continuity consistent with the English case of Levene v Commissioner of Inland Revenue where “resident” means residence in one place with some degree of continuity, apart from accidental or temporary absences.

Resident DirectorCase law - decision on Residency of Director

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In Hoh Kiang Ngan & Ors v Hoh Han Keyet, the Court of Appeal spelt out the following considerations to determine residence of a director:-

(a) Length of time spent at one place;(b) Connection the person has with that place;(c) Frequency of residence;(d) Element of regular occupation (whether past, present or

intended for the future, even if intermittent) and(e) Some degree of permanency in the occupation of such

residence.

Resident DirectorCase law - decision on Residency of Director

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Qualifications● Deemed control in a corporation - ≥ 20% issued

shares or voting power

● New definition of director” includes any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the majority of directors of a corporation are accustomed to act and an alternate or substitute director. (s2) (Changed!) - to define shadow director

● Definition of “Board” - No. of director ≥ quorum or sole director, that director. (s2)

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Resignation and vacancy

• Sole director or the last remaining director of Private Company cannot resign until a MoM is called to receive the notice of the resignation and to appoint one or more new directors. Same applies for One-man company (s209 (1) & (2)) (New!)

• Other vacancy, Secretary to call a meeting of next-of-kin or other personal representative (sole Director company) to appoint director and if fail to appoint within 6 months thereof, Registrar may strike off the company from the Register. (New!)

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❖ Retires under CA2016 or Constitution or Terms of appointment (s205(1))

❖ Resigns (s208(2)

❖ Removed under CA2016 or Constitution (s206)

❖ Dies

❖ Disqualified (s198 or s199)

❖ MWR (for private company only) (New) (s205(2))

❖ Unsound mind

❖ Vacates office under the Constitution

Vacancy in the office of a Director

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❖ First Director(s) - a person(s) named in application for incorporation;

❖ Subsequent Director(s) is/are appointed

➢ by member(s) by way of ordinary resolution; or➢ by the Board -

■ public company - until the next AGM subject to Constitution (Note - no change from before i.e. all new appointments during the year must retire at the next following AGM); or

■ private company - in accordance with the terms of appointment. (s202)

First Director(s) and Subsequent Director(s)

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NO CONSTITUTION or Terms of Appointment, retirements follow s205(1)

Note - Different for Public Company and Private Company and 1st Directors and subsequent directors

General Rule

Retirement under CA2016

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Retirement and re-election of Directors

Private limited company

❖ First Director(s) (s202(1)), shall remain in office unless he -➢ is disqualified;➢ resigns;➢ is removed;➢ is dead;➢ is of unsound mind➢ retires according to a MWR (s205(2))

With Constitution

No Constitution / terms of appointment


❖ First Director(s) to retire according to Constitution❖ Retires according to a MWR ((s205(2))

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❖ Subsequent Directors shall remain in office unless he -➢ is disqualified;➢ Resigns;➢ is removed;➢ is dead;➢ is of unsound mind➢ retires according to a MWR ((s205(2)

With Constitution

No Constitution / terms of appointment


❖ Subsequent Director(s) to retire according to Constitution

❖ Retires according to a MWR ((s205(2))

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Public limited company

❖ First Director(s)

➢ ALL to retire at First AGM (s205(3)(a))➢ subject to ⅓ or nearest ⅓ retirement by

rotation at subsequent AGMs



❖ First Director(s) ALL to retire according to Constitution (s205(1)

With Constitution

No Constitution

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❖ Subsequent Directors shall retire as follows -➢ If appointed b4 First AGM -

■ at First AGM (s205(3)(a))➢ If appointed after First AGM

■ subject to ⅓ or nearest ⅓ retirement by rotation at subsequent AGMs

Retirement and re-election of DirectorsWith Constitution

No Constitution


❖ Subsequent Director(s) to retire according to Constitution.

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❖ NO RETIREMENT of Directors UNLESS he -➢ is disqualified;➢ Resigns;➢ is removed;➢ is dead;➢ is of unsound mind➢ retires according to a MWR (s205(2))

No Constitution

CONCLUSION

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❖ ALL Directors shall retire as follows -➢ If appointed b4 First AGM -

■ at First AGM (s205(3)(a))➢ If appointed after First AGM

■ at the next following AGM if appointed by the Board; or

■ Others, subject to ⅓ or nearest ⅓ retirement by rotation at subsequent AGMs

No Constitution

CONCLUSION

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Removal of a Director

• No written resolution of members of private companies for the removal of directors. (s297(2)(a) & (b))

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Disqualification of Director

➢ Convicted of offence involving bribery, fraud and dishonesty (Changed!) (s198) Note: within or without Malaysia.

➢ By court, due to habitual contravention of the Act/his duties under the Act. (New!) (s199)

Power of Registrar to remove name of disqualified director - Registrar is empowered to remove the name of directors from the Register (New!) (s200)

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COFFEE BREAK TIME!See you back in 30 minutes!

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Duties and Responsibilities

The Main Principles• Acting Bona Fide (in Good Faith)• Proper purpose• Duty not to fetter his discretion• Duty not to misappropriate Company Assets• Avoiding conflicts of Interest• Statutory Duties• Directors’ Report for AFS• Business Review

Back to Main22

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Provisions in the Companies Act 2016

➢ Functions of Board - s211➢ Fiduciary duties of directors (duty to act in the

best interest of company) ➢ Duty to act with care, skill and diligence - s213➢ Business judgement rule - s214➢ Reliance on information provided by others -

s215➢ Duty of nominee director - s216

Note: Broader definition of directorsunder ss213 - 218, 223 and 228 (Note: Definition of Director in LR also has to be wider) 23

Business Judgement - s214Pearlie MC Koh on Company Law (supra), at page 439

“business judgment rule exist to permit management to make honest decisions without needing to worry excessively about being in breach of their duties to the company”.

In the Petra Perdana’s case : Presumption that directors have acted with due care, skill and diligence if pre-conditions under s214 are met and court would not interfere if directors have acted in the best interest of company.

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Business Judgement - s214Director is deemed met duty of reasonable care, skill and diligence under s213(2) and other equivalent duties under common law and equity if he made business judgment -

1. For a proper purpose and in good faith;2. No material personal interest in the subject matter (“SM”);3. Is informed of the SM to the extent the director reasonably

believe to be appropriate under the circumstances; and4. Reasonably believes it is in the best interest of the

Company.

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Petra Perdana - Latest landmark Federal Court’s decisionBest interest of company - who to decide?

The FC upheld that powers of management remains with the Board and not to be usurped by members at MoM in deciding what is in the best interest of a company - restored the conventional position.

Charterbridge Principle was used - Subjective and objective tests to decide.

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Reliance on information provided by others - s215

In the Petra Perdana’s case reliance was placed on the advice from senior management and also external professional advice:-

❖ No need to verify information from management unless director has doubts on the accuracy or veracity of the information;

❖ Directors have to make independent assessment of the professional external advice.

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Provisions in the Companies Act 2016

➢ Responsibility for actions of delegatee - s216➢ Responsibility of nominee director - s217

➢ Prohibition against improper use of company’s property, position, corporate opportunity or

competing with the company - s218

➢ Duty to disclose interests in contracts, property, offices, etc. - s221

➢ Prohibition on interested directors from voting on the contract - s222

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No need members’ prior approval for -● rights issue (s75(2)(a))● bonus issue (s75(2)(b))● allotment to Promoters whom have agreed to take the

shares (s75(2)(c)); or ● as part of or full consideration for acquisition of assets

and shares PROVIDED intention to issue shares notified to members (statement of purpose of proposed issued sent to every member and published in 2 newspapers BM and English within 14 days before date of issue.

Question: Which is cheaper MWR or publish in newspapers for a private limited company?

Directors’ powers to issue and allot shares

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Directors’ refusal or delay registration of transfer

Directors may at its discretion refuse or delay registration of transfer of shares provided -

❖ Constitution expressly permits for the reasons as stated therein;

❖ Directors pass a resolution within 30 days setting in full reasons for refusal or delay; and

❖ Notice of resolution sent to transferor and transferee within 7 days of the passing of the resolution (Note: if public company notice must include reasons for refusal or delay)

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Rights of shareholder - Power to convene MoM

❖ Power to require directors to convene MoM (s311) ➢ Members ≥ 10% or lower (if Constitution allows) of

total issued capital (excluding Treasury Shares)■ If Directors fail to convene MoM, ALL or ≥ 50% total

voting rights of all requisitionists may call for a MoM (s313) within 3 months from date directors received the requisition under s311(1) (s313(3))

(Note : private limited company members with ≥ 5% of total paid up capital may requisite for directors to convene a MoM if 12 months has elapsed from last MoM requisition by members (s311(4))

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Members’ Rights - circulate statementPublic Company Only

≥ 2.5% (instead of 5%) paid up capital or ≥ 50 (instead of 100) members with right to vote to demand, alter or add items into MoM Agenda or circulate statement (≤ 1,000 words) to members (s323) (Changed!)

Directors NEED NOT circulate if -

❖ rights abused by members for needless publicity; ❖ matter is defamatory, frivolous or vexatious; or ❖ not in the best interest of the company. (s325(1))

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Solvency Test● Introduction of solvency tests and solvency statement

by directors. (New!)

● Transaction involving reduction of share capital, redemption of preference shares**, financial assistance, share buy-back and dividend requires directors to do solvency test and ALL except for dividend, require a solvency statement to be signed by directors. (s113)

** s72(6) - applicable only if redeem out of capital

Signed by ALL DIRECTORS -• reduction of share capital• redemption of preference shares

Signed by a MAJORITY of DIRECTORS• financial assistance (Company to prepare but no need to

lodge with SSM)• Share buy-back (No mention in s127 about solvency

statement)• Dividends (No mention in the Act for solvency statement)

Solvency Statement

Company must prepare Solvency Statement and lodge with SSM

s223 v s228 CA 2016▶ Section s223 applies to substantial acquisition or

disposal of an undertaking or property with valuable consideration with BFPFVCWN (bona fide purchaser for valuable consideration without notice). Please see Practice Note 8/2010 for the definition on substantial.

▶ Whereas, section s228 relates to transactions involving Directors or substantial shareholders (which the latter includes related companies i.e. holding and/or subsidiaries) of shares or non-cash assets of requisite value.

▶ Similarities between s223 and s228 are that both are void if no prior approval and no ratification is allowed.

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General Rule : Notwithstanding anything in Constitution, directors shall not enter or carry into effect any arrangement or transaction for -

○ Acquisition of any undertaking or property of a substantial value;

○ Disposal of a substantial portion of the company’s undertaking or property

Note: if PLC use LR’s thresholds and ratios

Members’ approval for disposal of company’s undertaking or property by directors - s223

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Exception : UNLESS

● (i) the entering into the arrangement or transaction is made subject to the approval of the company by way of a resolution; or

● (ii) the carrying into effect of the arrangement or transaction has been approved by the company by way of a resolution.

Members’ approval for disposal of company’s undertaking or property by directors - s223

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S223 (4) The Court may, on the application of any member of the company, restrain the directors from entering into or carrying into effect an arrangement or transaction which is in contravention of subsection (1).

S223 (5) Any arrangement or transaction which is in contravention of subsection (1) shall be void except in favour of any person dealing with the company for valuable consideration and without actual notice of the contravention.

EFFECTS OF TRANSACTION UNDER SECTION 223

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Section 223. Approval of company required for disposal by directors of company's undertaking or property. (continued)

S223 (7) Any director who contravenes the provision of this section shall be guilty of an offence against this Act.

Penalty: On conviction, liable to imprisonment not exceeding five (5) years or thirty thousand ringgit to a fine ≤ RM3.0 million or both.

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Illustration under Practice Note 8/2010AB Sdn. Bhd. wishes to acquire a piece of land belonging to CD Sdn. Bhd. for RM2 million. The assets, net profits and issued capital of AB Sdn. Bhd. are as follows:

� Total assets of AB Sdn. Bhd. - RM8 million

� Net profits of AB Sdn. Bhd. - RM2 million

� Issued capital of AB Sdn. Bhd. - RM10 million

The relevant thresholds for AB Sdn. Bhd. under section 132C(1B) of the CA 1965 are as follows:

� 25% of total assets (RM8million) - RM2million

� 25% of net profits (RM2million) - RM500,000

� 25% of issued capital (RM10million) - RM2.5million (highest)

Since the value of the land (i.e. RM 2million) is less than the highest identified threshold (i.e. RM2.5 million), the directors of AB Sdn. Bhd. are not required to obtain the shareholders’ approval prior to acquiring the land from CD Sdn. Bhd.

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General Rule: No loan or provide guarantee or security for loan to director of company or related corporations UNLESS with PRIOR APPROVAL of members with purpose, amount and extent disclosed.

Exceptions:

● Exempt private company (Exempt Private company)

● Funds for expenditure of the company● Full time Director of company or holding company

to buy a home● Approved loan scheme for employees to full time

Director of company or holding company● Financial institution regulated by Bank Negara

Malaysia (BNM)

Loans to directors - s224

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● If no prior approval, ○ Public company, to give authority at or

before the next following AGM;○ Private company, within six (6) months

from making loan or provision of guarantee or security for loan to director.

● If no authorization, loan to be repaid or liability under guarantee or security discharged -○ Public company, after six (6) months

from the conclusion of the AGM;○ Private company, after twelve (12)

months from making loan or provision of guarantee or security for loan to director.


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● If no approval of the company, directors who authorised making loan or provision of guarantee or security for loan to director○ jointly and severally liable to indemnify

company against loss; and○ Has committed an offence and on

conviction, shall be liable to a jail term ≤ 5 years or a fine ≤ RM3 million..

● Company’s rights to recover loan or amount liable under guarantee or security for loan to director given contrary to s224.


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Persons connected with director

Persons connected with director “a member of that director’s family” means (instead of “shall include”) his spouse, parent, child, including adopted child and stepchild, brother, sister and the spouse of his child, brother or sister. (Changed!) (Narrower!) (s197(2)(a))

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General Rule

● No loan to persons connected with a director of the company or its holding company (PC); or

● No guarantee or security for loan to PC by a 3rd Party.

Prohibition of Loans to persons connected with directors - s225

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Exceptions to the General Rule:

● EPC● Loan or guarantee or security for loan to

related corporations (i.e. subsidiary, or holding company or a subsidiary of its holding company

● OCB of a bank, insurance, takaful or regulated by BNM;

● PC is a full time employee of the company or related corporation -

○ To buy a home;○ Approved loan scheme for employees of the

company


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Company’s rights to recover loan or amount liable under guarantee or security for loan to PC given contrary to s225. (s225(3))

Penalty: Directors who authorised the making of the loan or provision of guarantee or security for loan to PC, has committed an offence and on conviction, shall be liable to a jail term ≤ 5 years or a fine ≤ RM3 million..


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s228 - Entering or carrying into effect any arrangement or transaction with directors, substantial shareholders or connected persons UNLESS

(i) the entering into the arrangement or transaction is made subject to the approval of shareholders at a MoM; or

(ii) the carrying into effect of the arrangement or transaction has been approved by shareholders at MoM.

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Related Party TransactionsIf unlisted subsidiary of PLC, MUST get shareholders’ approval at MoM for both of the PLC and unlisted subsidiary Note: “Requisite Value” = percentage ratios of Bursa Securities.

If a public company or its holding or its subsidiary, the director, substantial shareholder or persons connected must abstain from voting on the resolution at MoM. Private company no need for such an abstention.

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Related Party Transactions (cont’d)

In contravention and on conviction, director, substantial shareholder or persons connected involved in such arrangement or transaction, who knows or who knowingly authorised to carry into effect such arrangement or transaction shall on conviction be liable to a jail term of not exceeding 5 years (s132E - 7 years) or to a fine of not exceeding RM3 million (s132E - RM250k) or both.

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3 important thresholds

❖ RM50k

❖ 10% Net Assets

❖ RM250k

Thresholds under s228

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Thresholds Approval of members at a

MoM

Minimum in RM < RM50,000 No

Net Assets = RM50k to =RM250k

> 10% Net Assets

Yes

Net Assets = RM50k to = RM250k

< 10% Net Assets

No

Maximum in RM > RM250,000 Yes

Thresholds under s228

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Elimination of the s228

➢ Related party transaction – if no, s228 not applicable. See if s223 applies.

➢ Shares or non-cash assets – if no, s228 not applicable. See if s223 applies.

➢ Consideration < RM50,000 (not RM10k) – if yes, s228 not applicable. Stop here!

➢ Percentage ratio < 10% Net Asset - if yes, s228 may not be applicable. However, if > 10% Net Asset, s228 applies and can stop here i.e. need not consider the RM250k threshold below.

➢ Consideration < RM250,000 - if yes, s228 not applicable. However, if > RM250k, s228 applies.

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Disclosure Requirements ● Changes to personal particulars including other

directorships and service address (includes email address)● Share and interest in shares dealings including closed

period dealings (3 market days outside closed period dealings)

● If also substantial shareholder, dealings disclosure under s137, s138 and s139 as well as s141

● Conflict of interest

Within respective stipulated deadlines to regulators i.e. SSM and Bursa Malaysia

Note: If listed, 3 days and others, 5 days and s141 same day notice given to company to serve to SSM.

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Fee, Benefits and compensation• Public Company or PLC and subsidiaries - Directors’ fees,

benefits and compensation for loss of office, if applicable, payable must be approved by shareholders at MoM (s230(1)) (New!) (Note: SSM clarified if benefits from employment contract no need shareholders’ approval) (PLC to seek approval of securities holders at GM for both ANNUALLY - clarified by Bursa and incorporated into the amended LR)

• S227 - Not lawful for any payment of compensation for loss of office without the prior approval of shareholders. If public company, affected director and persons connected must abstain from voting on the resolution.

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Fees and benefits

● Subject to constitution

● may be approved by the Board

● must be recorded in the Board Minutes (in other words

must hold Board Meeting to approve unless DCR is as if

passed at a meeting of the Board and notify members

with 14 days (s230(3)).

Fees for Directors of Private Companies

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Objection by Members

● holding at least 10%;

● within one (1) month after having knowledge of such payment of

fees and benefits; and

● may require the Company to pass a members’ written resolution

or an ordinary resolution at a MoM (s230(4)) to approve such fees

and benefits.

Effect : If resolution is not carried, director has to pay back.

Note: Art 70 of Table A requires approval of directors’ remuneration

at general meeting. Therefore, the provision above cannot be used for

companies with such Art 70 in their constitution.

Fees for Directors of Private Companies

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Service Contract

• A public company shall keep and maintain a copy of every Director’s service contract for services performed by a director personally or otherwise as a director or otherwise for the public company or its subsidiaries at the RO for inspection. (s232(1)) Right of inspection by members holding 5% shares (New!) (Note: SSM also clarified if contract of services i.e. employment contract no need to keep at RO for inspection. (Briefing held at SSM on 9 March 2017). However, to note the very wide wordings under the CA2016.

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By 2 authorised officers, ONE of whom is a Director - s66

Exceptions

- By Common Seal - s66- For and on behalf of company - s64- Appoint any person by a deed, generally or specifically, to

execute deeds or other documents on its behalf - s67

(Note: the wide definition of documents and therefore SSM may have to revisit to see if there is a need to

change the law)

Fines and Penalties

False and misleading statements or false reports - On conviction, liable to a max jail term of 10 years or RM3 million or both

Generally, on conviction, liable to max jail term of 5 years or RM3 million or both

Plus continuing daily fines of RM500 or RM1,000 post conviction

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Fee, Benefits & compensation

Qualifications

Solvency Tests

One Man Company

Directors

Persons Connected to Directors

Duties and Responsibilites

Substantial Transactions and



Default & Penalties

Service Contract

Minimum Number

Loans to Directors and persons connected

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companies act 2016 directors under the heightened ...directors... · if directors fail to convene...

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