Companies Act 2016

January 2017
by Wong Mei Ying, Yoon Ming Sun, Ng Vi Kee

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

@2018 Chooi & Company + Cheang & Ariff.
All rights reserved.

The Companies Act 2016 (“Act”) came into force on 31 January 2017 (save for section 241 in relation to the requirement of a secretary to register with the Registrar and Division 8 of Part III in relation to corporate rescue mechanism). The Act replaced the Companies Act 1965. This article summarises the key changes under the new Act below:

Single Shareholder and Director

The new Act removes the requirement for private companies to have at least two directors at the date of incorporation. The new Act allows a company to be incorporated and operate with one individual being the single shareholder and single director. (section 9 of the new Act)

Minimum Number and Age of Director

The minimum number of director(s) required under the new Act is one director in the case of a private company and two directors in the case of a public company, who must be resident director(s) and natural person(s). The new Act removes the maximum age of a director of 70 years old but specifies the minimum age of at least 18 years of age. (section 196 of the new Act)

No more Memorandum and Articles of Association

Under the new Act, constitution replaces memorandum and articles of association. Constitution is optional save for a company limited by guarantee. If a company elects not to adopt a constitution, the new Act would govern the rights, powers, duties and obligations of the company, its director and members. However, if a company adopts a constitution, the rights, powers, duties and obligations of the company, its directors and members would be governed by the new Act, except where modified by the constitution of the company to the extent permitted by the new Act. The constitution has no effect to the extent it contravenes or is inconsistent with the new Act. (sections 31 and 32(2) of the new Act)

Object Clauses are Optional

If a company adopts a constitution, there is no mandatory requirement for objects clause in the constitution save for a company limited by guarantee. (sections 35 and 38 of the new Act)

Abolishment of Par Value

There is no longer a requirement for shares to have a par or nominal value, which also leads to the abolishment of share premium accounts and reserves. (sections 74 and 618 of the new Act)

New Solvency Test Requirements

The new Act prescribes different solvency tests for different transactions. Directors must sign solvency statement to confirm that the company is solvent when undertaking certain transactions. When there is a breach of the solvency test, the directors may face criminal sanctions. The transactions and the corresponding solvency tests which would apply are set out below:

  • Distribution: A company is solvent if it is able to pay its debts as and when the debts become due within 12 months immediately after the distribution is made. (section 132(3) of the new Act)
  • Redemption of preference shares, reduction of share capital and financial assistance: A company is solvent if: (1) immediately after the transaction, there will be no ground on which the company could be found to be unable to pay its debts; (2) the company will be able to pay its debts in full within 12 months after the commencement of the winding up if it is intended to commence the winding up within 12 months after the date of the transaction or in any other case, the company will be able to pay its debts as the debts become due during 12 months immediately following the transaction; and (3) the asset of the company is more than the liability of the company at the date of the transaction. (section 112(1) of the new Act)
  • Share buyback: A company satisfies the solvency test if (1) the company is not insolvent at the date of the solvency statement. It is able to continue to pay its debts as and when the debts become due after the share buyback without any substantial disposition of its assets outside the ordinary course of its business, restructuring its debts, externally forced revisions of its operations or other similar actions; (2) its capital is not being impaired at the date of the solvency statement (value of net assets is not less than the aggregate amount of all the shares of the company after the share buyback); and (3) the company will remain solvent after each buyback during the period of six months from the date of the declaration in solvency statement. (sections 112(2) and 112(3) of the new Act)

Alternative Capital Reduction Without A Court Order

The new Act introduces an alternative method of share capital reduction without involving the court (unless there is objection from creditor) by way of special resolution supported by a solvency statement based on a solvency test. All directors of the company must make a solvency statement in relation to the reduction of share capital. (sections 112, 115, 117 and 118 of the new Act)

Enhancement to Share Buyback Procedures

Share buybacks of listed companies is subject to a solvency test. A majority (but not all) of the company’s directors are required to make a solvency statement. Shares that are purchased by a company are deemed to be cancelled immediately on purchase unless held in treasury. A cancellation of shares following a share buy-back is no longer be deemed to be share capital reduction. (sections 112 and 127 of the new Act)

No AGMs Necessary for Private Companies

There is no mandatory requirement for an annual general meeting (“AGM”) for private companies under the new Act. Following this, a private company must send a copy of its financial statement and report to its members within six months of its financial year end. Members of a private company representing at least 5% of the paid up capital of the company may require a general meeting to be convened if a general meeting has not been held in the past 12 months provided that the proposed resolution is not defamatory, vexatious or frivolous. (sections 258 and 311(4) of the new Act)

Abolishment of the Unanimity Rule of Written Members’ Resolution

Majority shareholder of a private company may sign off written resolution to pass it as an ordinary resolution (as opposed to unanimous written resolution under the Companies Act 1965). A shareholder of a private company having a total of 5% or such lower per centum as specified in the constitution, of the total voting rights may require the company to circulate a resolution accompanied by a statement on the subject matter of the written resolution prior to the passing of the written resolution. (sections 291 and 302 of the new Act)

Whitewash Procedures for Financial Assistance

A company (other than a company which has its shares quoted on a stock exchange) may give financial assistance (1) for the purpose of acquisition of a share in the company or its holding company; or (2) for the purpose of reducing or discharging a liability incurred for such an acquisition if the following conditions are met:

  • the financial assistance is approved by a special resolution of the company;
  • the financial assistance is approved by a majority of the directors of the company;
  • each director who voted in favour of the financial assistance makes a solvency statement on the same day of the directors’ resolution;
  • the aggregate amount of the assistance and any other financial assistance previously given that has not been repaid, does not exceed 10% of the aggregate amount received by the company in respect of the issue of shares and the reserves of the company;
  • the company receives fair value in connection with the giving of financial assistance;
  • the assistance is given not more than 12 months after the day on which the solvency statement is made. (section 126 of the new Act)

Stricter Requirements for Dividend

Whilst the new Act maintains the requirement under the Companies Act 1965 for distribution to shareholders to be made out of profit, the new Act imposes additional requirements. The directors of a company may authorise a distribution if the directors are satisfied that the company will be solvent immediately after the distribution is made. The company may recover from a shareholder, dividend which was not properly paid unless the shareholder has received the dividend in good faith and has no knowledge that the company did not satisfy the relevant solvency test. (sections 131, 132 and 133 of the new Act)

Auditor May Resign Without Replacement

Unlike the Companies Act 1965 which permitted an auditor to resign only when a new auditor had been appointed, the new Act permits an auditor to resign by giving notice in writing to that effect at the company’s registered office, which will take effect 21 days from which the notice is given or from the date as may be specified in the notice. (section 281 of the new Act)

Further Indemnity and Insurance for Officers and Auditors

The new Act permits a company to indemnify its officers (which includes directors) and auditors against liability and costs incurred during civil proceedings brought by a third party (and not the company) whilst proceedings are ongoing. A company, may with the prior approval of its board of directors, effect insurance for its officers and auditors in respect of civil liability in their capacity as officers or auditors. It is unclear from the new Act if the company can purchase insurance on behalf of its officers and auditors only in respect of claims involving a third party or claims brought by the company itself. (section 289 of new Act)

Introduction of New Corporate Rescue

The new Act introduces two alternative rescue mechanism, corporate voluntary arrangement (“CVA”) and judicial management. As of 31 January 2017, the provisions in relation to corporate rescue mechanism provided in Division 8 of Part III of the Act have not come into force.

  • CVA: The directors of a company other than a company which is under judicial management order or is being wound up, may make a proposal to the company and its creditors for a CVA. The proposal must include the appointment of a nominee who will take on the role of supervising the implementation of the CVA. The directors will submit the terms of the proposed CVA and statement of affairs to the nominee. The nominee will then submit to the directors a statement with his view on, amongst others, whether the proposed CVA has reasonable prospect of being approved and implemented. A judicial manager (if the company is under a judicial management order) or liquidator (if a company is being wound up) may also make a proposal for a CVA and be the nominee for the CVA. A nominee must be a qualified insolvency practitioner. A moratorium will commence automatically for a period of 28 days from the time of filing of the prescribed documents with the Court and may be extended up to 60 days subject to the necessary approvals. During the moratorium, the company may not be wound up, no judicial manager can be appointed, no steps may be taken to impose any security over the company’s property, etc. Unlike judicial management, a secured creditor may appoint a receiver to deal with the charged property of a company. The CVA must be approved by a simple majority of shareholders and at least 75% of the total value of creditors present and voting at a creditors’ meeting. Once approved by the requisite majority, the proposed CVA will take effect and be binding on all creditors of the company. (Subdivision 1, Division 8, Part III of the new Act)
  • Judicial management: A company or its creditors may apply to the Court to place the company under a judicial management if: (1) the company is or will be unable to pay its debts; and (2) there is a reasonable probability of rehabilitating the company or preserving its business as a going concern or that the interests of creditors would be better served than by resorting to a winding up. Once a judicial management order is granted, the order will be in force for six months and may be extended by the Court for another six months on application of a judicial manager. While judicial management order is in force, the company may not be wound up, no receiver or receiver and manager can be appointed, no legal process can be commenced or continued against the company, no security can be enforced and no shares can be transferred. Within 60 days of the judicial management order, the judicial manager will prepare a restructuring plan which must be approved by a majority of 75% in value of creditors present and voting at a creditor's meeting and whose claims have been accepted by the judicial manager. The restructuring plan will take effect once approved by the creditors. (Subdivision 2, Division 8, Part III of the new Act)

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

@2018 Chooi & Company + Cheang & Ariff.
All rights reserved.