Introduction
The Companies (Amendment) Act 2024 (“Amendment Act”) came into force on 1 April 2024, with four provisions namely on changes to the content of a company’s annual returns, changes to the kinds of companies exempted from Division 8 Subdivision I , and a new option to publish or advertise information on the CCM website to come into force at a later date. It lays out a framework for the identification of a company’s beneficial owners, and revises existing provisions on scheme meetings and corporate rescue mechanisms.
Domestic Trade and Cost of Living Minister Armizan Mohd Ali said the Amendment Act aims to combat money laundering, terrorist financing, corruption and tax evasion. Furthermore, the Companies Commission of Malaysia (CCM) chairman Ahmad Sabki Yusof said the revised corporate rescue mechanisms will help companies avoid being wound up.
This article summarises the Amendment Act’s key provisions relating to the identification of beneficial owners, the revised corporate rescue mechanisms, and other minor changes.
Beneficial owners
What are beneficial owners?
Section 2 of the Companies Act 2016 (“Principal Act”) defined a beneficial owner as the ultimate owners of shares, excluding any nominees. The Amendment Act expands this definition to include natural persons who have ultimate ownership and control over a company, and persons who exercise ultimate effective control over a company.
The CCM has issued guidelines to help companies comply with the Amendment Act. The guidelines clarify that persons who own at least 20% of a company’s shares have ultimate ownership and control over the company. Additionally, persons who hold less than 20% of shares but still have significant control or influence over a company’s directors and management are said to have ultimate effective control.
Register of beneficial owners
Under the new s 60B, all companies are required to keep a register of beneficial owners’ particulars (“Register”).
The Register must contain:
- a beneficial owner’s full name, address, nationality, identification, residential address;
- the date the person became a beneficial owner;
- the date the person ceased to be a beneficial owner; and
- any other information as required by the Registrar (the Chief Executive Officer of the CCM)
The Register is to be kept at a company’s registered office, or any other place in Malaysia as notified to the Registrar. Furthermore, the Registrar must be notified of any changes to the Register.
Power to require disclosure of information
Section 60C imposes a duty on companies to identify its beneficial owners. To fulfil this duty, companies are given the power to require disclosure of beneficial owners.
When a company knows or reasonably believes:
- a person is a beneficial owner; or
- a member/any other person can identify a beneficial owner; or
- there are changes to the particulars of a beneficial owner; or
- particulars in the Register are inaccurate
it shall require the beneficial owner/member/any other person to provide the relevant information as far as possible.
Apart from this, companies shall require any of its members to disclose whether he is a beneficial owner via written notice. If the member is a beneficial owner, he shall provide the necessary information for the Register. If not, the member shall identify the beneficial owners as far as possible.
Companies must also update the Register within 14 days of receiving information from members, beneficial owners or any other persons.
Offences
Failure by the company to comply with the above duties is an offence. Any person who fails to comply with the company’s requests commits an offence, unless he can prove that the requested information was already known to the company. Any person who knowingly or recklessly provides false information also commits an offence.
Beneficial owner’s duty to provide information
Under s 60D, beneficial owners have a duty to notify the company that they are the beneficial owners, if they have reason to believe so. They shall provide the necessary information for the Register, and notify the company of any changes in their particulars.
If a person ceases to be a beneficial owner, he shall notify the company of this change in status as soon as practicable.
Any person who contravenes this Section commits an offence.
Application to Foreign Companies
A new s 573A is inserted into the Principal Act, which provides that provisions relating to beneficial ownership shall apply to foreign companies.
Amendments to compromise/arrangement scheme procedures
Scheme Meetings
Section 366 of the Principal Act provides for persons who may apply to the Court to order a compromise or arrangement scheme meeting (“scheme meeting”) to be summoned. Scheme meetings are held to approve proposed compromise or arrangement schemes. Under the Principal Act, companies, creditors, members, liquidators, and judicial managers may apply to the Court for an order under this Section.
Following the Amendment Act, a class of creditors or a class of members may apply to the Court. For example, the secured creditors of a company may collectively make an application. Prior to the Amendment Act, the Principal Act only provided for individual creditors and members to make such applications.
Furthermore, the addition of s 366 (2A) requires scheme meetings held under this Section to be chaired by an insolvency practitioner appointed by the court under s 367(3). If an insolvency practitioner has not been appointed by the court, the meeting shall be chaired by a person elected by the majority in the value of the creditors/class of creditors/members/class of members. This change helps ensure the chairperson’s impartiality, as the Principal Act did not provide for the appointment of the chairperson.
Revised Section 367
Section 367 of the Principal Act previously provided for the Court’s power to appoint an approved liquidator, upon an application under the above s 366. The approved liquidator was tasked with assessing the viability of the proposed compromise/arrangement scheme. The approved liquidator would then table his report at scheme meetings held under s 366.
The Amendment Act completely revises s 367 by appointing an insolvency practitioner instead of an approved liquidator. The insolvency practitioner remains tasked with assessing the proposed compromise/arrangement scheme’s viability. However, the amended s 367 now clearly defines the extent of the insolvency practitioner’s powers. The insolvency practitioner is entitled to access all of the company’s records, and to require information from any officer of the company for the purposes of performing his duty. The amended s 367 also ensures that the insolvency practitioner receives remuneration for his services.
Section 367(3) requires an insolvency practitioner to be appointed when applications under ss 368A, 368B, 368C or 369C are made (further explanation below). When an insolvency practitioner is appointed under s 367(3), he is required to prepare and submit a report on the proposed compromise/arrangement scheme to the court before it is approved by the court under s 366(4).
Overall, the revised s 367 greatly clarifies the insolvency practitioner’s role and powers when compared to the previous version.
Court’s power to order a re-vote
The Amendment Act introduced the new s 369A. When deciding whether to grant approval for a company’s proposed compromise/arrangement scheme under s 366(4), the court may order a new meeting of creditors/class of creditors/members/class of members if it sees fit. This is for the purpose of conducting a re-vote on the proposed scheme.
The court’s re-vote order may also provide for:
- how the meeting is to be summoned and convened;
- the class that a creditor belongs to, for the purpose of voting;
- the amount of a creditor’s debt that is to be admitted for the purpose of voting; and
- what weightage is to be attached to a creditor’s vote
Proof of debt process
The new s 369B provides the procedure for creditors to prove their debts, and the rights of the creditors after proving their debts.
When the court orders a scheme meeting to be summoned under s 366(1), the notices sent by the company to the attendees must instruct how the creditors are to file their proof of debt. Moreover, the notice must contain the time frame for creditors to file their proof. However, the company or a creditor may apply to the court for an extension of this time frame.
The meeting’s chairperson is tasked with deciding on the admissibility of the proof of debt, and informing the creditors of his decisions. Creditors who have filed proof of debt are entitled to inspect another creditor’s proof of debt, except for proof that is confidential under professional conduct, contract, written law, or any other obligation of secrecy. On the other hand, creditors who have not filed their proof are not entitled to vote at the meeting, and are not entitled to
Creditors who have filed their proof also have the right to:
- inspect another creditor’s proof of debt, except for proof that is confidential under professional conduct, contract, written law, or any other obligation of secrecy;
- object to the chairperson’s rejection of the creditor’s proof;
- object to the chairperson’s admission of another creditor’s proof; and
- object to another creditor’s request to inspect the creditor’s proof.
Section 369B also provides for the dispute resolution process for matters between the chairperson and the company or its creditors. In short, disputes may be adjudicated by an independent assessor appointed by either the agreement of all parties to the dispute, or by the Court.
Pre-pack scheme of arrangement
Section 369C introduces “pre-pack schemes of arrangement”. A similar provision was enacted in Singapore with the Insolvency, Restructuring and Dissolution Act 2018. Under s 369C, a company may pre-negotiate an arrangement scheme with their creditors which would be used in the event of financial distress.
Under s 369C, courts are now allowed to approve a pre-negotiated compromise/arrangement scheme without requiring a meeting of creditors to be convened. By skipping the meeting of creditors, companies in financial distress have a greater chance of recovery as they are able to give effect to the compromise/arrangement scheme sooner.
The court may only approve a pre-negotiated scheme if:
- it is satisfied that if a meeting of creditors had been summoned, the creditors would have approved the scheme;
- the company has provided the creditors to be bound by the scheme with a statement containing information on the company’s properties, assets, business activities, and financial position. The statement must also contain the manner in which the proposed scheme will be carried out, and any other information a creditor needs to make an informed decision.
Court’s power to clarify the terms of a compromise/arrangement scheme
The Amendment Act then introduced s 369D. It allows companies or creditors bound by an approved compromise/arrangement scheme to apply to the court for a clarification of any of the scheme’s terms. The court also has the power to order remedial action if the scheme has been breached.
Cramming down
Cramming down is a mechanism for the court to impose a compromise/arrangement scheme on dissenting creditors. The Amendment Act inserts s 368D, which empowers the court to approve a proposed scheme and order all classes of creditors to be bound by it.
The preliminary conditions for a cramming down order are as follows:
- a vote on a compromise/arrangement scheme has taken place at a meeting
- creditors to be bound by this scheme have been placed into at least two classes of creditors;
- 75% of the total value of creditors/ at least one class of creditors agree with the scheme, while other classes of creditors do not agree (“dissenting class”).
The court may give the cramming down order if it is satisfied that the scheme is fair to the dissenting class, and does not discriminate between classes.
Section 368D sets out what is fair and equitable to a dissenting class:
- for secured creditors, cash payments equivalent to the value of the security held by the creditor must be provided. If the security is to be disposed of, the secured creditors must receive a charge over the proceeds of sale. The scheme must also ensure that creditors are entitled to realise the value of the security held by them;
- for unsecured creditors, the scheme must ensure that the creditors will receive property of a value equal to their claim. Additionally, a lesser claim of a creditor who approves of the scheme cannot usurp the claim of a creditor who disapproves of the scheme.
Amendments to Restraining Orders
Automatic, temporary restraining order
The Amendment Act has introduced a new mechanism for what is essentially an automatic, temporary restraining order to take effect when a company applies for a restraining order. Pursuant to s 368(1A), when a company files for a restraining order under s 368(1), no insolvency-related actions may be taken against the company for a period of two months, or until the Court makes a decision, whichever comes first.
Extent and limitations of restraining order
Previously, s 368 of the Principal Act did not specify the orders that may be made pursuant to the restraining order. The Amendment Act added s 368(3A), which explicitly states the kinds of orders that may be made.
The Amendment Act also includes a limitation clause in s 368(3B), which provides that restraining orders shall not be granted if a prior order had been issued under ss 368(1), 368A, 368B, 368C, or 368D within the past 12 months. This prevents companies from continuously relying on restraining orders.
Restraining orders for related companies
Related companies are the subsidiary, holding or ultimate holding companies of a subject company (a company which has applied for a restraining order). When a company has obtained a restraining order under s 368(1), a related company may also apply for a restraining order. This restraining order cannot end after the subject company’s restraining order has ended.
Under s 368A, the extent of the order is the same as that of the subject company’s. The conditions for granting the restraining order are also identical to that of the subject company’s, save for one additional condition: the related company plays a necessary and integral role in the subject company’s compromise/arrangement scheme.
With this amendment, subject companies may include their related companies in their compromise/arrangement schemes with the assurance that action will not be taken against the related companies.
Protection for creditors
Creditor’s restraining order
Section 368C, introduced by the Amendment Act, allows creditors to make an application to the Court for any of the following orders:
- an order restraining the disposal of property, other than in the ordinary course of business;
- an order restraining the transfer of shares;
- an order restraining the alternation of any member’s rights.
These orders must not last longer than the subject company’s restraining order. By restricting the disposal of property, transfer of shares or change in member’s rights, the creditors are assured that some form of asset can be recovered, if necessary.
Super priority rescue financing
Sections 368B and 415A provide for “super priority rescue financing” for companies seeking approval for a scheme, and companies undergoing judicial management respectively.
Rescue financing is defined by these sections as financing necessary for a company’s survival, a compromise/arrangement scheme, or a more advantageous realisation of its assets.
Under these sections, the Court may make, among others, an order for the debt arising from rescue financing to be given “super priority”, meaning that it is to be paid immediately after the costs and expenses of compromise/arrangement scheme or winding up. It is a debt that has precedence over all other debts.
Changes to judicial management process
Judicial management is a corporate rescue mechanism, whereby a company applies to the Court for a Judicial Manager to be appointed. The Judicial Manager is tasked with rescuing a financially distressed company. If this is not possible, the Judicial Manager’s role is to dispose of the company’s assets in the best interest of the creditors. The Amendment Act has made three main changes to the Principal Act’s judicial management process.
Expansion of precluded companies
Section 403 was amended to expand the list of companies precluded from the Judicial Management subdivision of the Principal Act. The list now includes companies approved, registered, licensed or recognised under Part II, Part III, Part IIIA or Part VIII of the Capital Markets and Services Act 2007, and companies approved under Part II of the Securities Industry (Central Depositories) Act 1991.
Extension of judicial management order
Prior to the amendment, Courts could only extend the period of judicial management for up to six months. Section 406 was amended to allow the Court to extend the period of judicial management for more than six months.
Recovery of assets during a judicial management order
Prior to the amendments, s 411(4)(d) prevented secured creditors from recovering certain kinds of assets during a judicial management order without the judicial manager’s consent.
The Amendment Act introduced s 411(5), allowing secured creditors to recover those assets by notifying the judicial manager beforehand. This is subject to the condition that the judicial manager has confirmed that the assets are not required by the company, the assets are highly likely to be disposed of during the judicial management order, and the assets depreciate due to the judicial management order.
Other amendments
Restriction on supplier’s right to terminate contracts
The new s 430A protects the supply of essential goods and services during insolvency proceedings. These goods and services are listed in the new Schedule 9, and include the supply of water, electricity and gas, website hosting, computer software and hardware etc.
Section 430A states that any insolvency related clause in a contract for the supply of essential goods and services shall not be exercised against any company. Insolvency related clauses are defined as a contractual term that allows for the termination or modification of contractual rights simply because the company has become involved in compromise/arrangement, voluntary arrangement, or judicial management proceedings.
Suppliers of essential goods and services who wish to enforce an insolvency related clause will have to notify the company of his intentions at least 30 days before actually enforcing the clause. This amendment aims to help companies stay afloat during insolvency proceedings, by preventing basic necessities from being abruptly terminated and giving time to find a solution.
Extension of time to circulate financial statements and reports
Section 258 has been amended to allow private companies to apply to the Registrar to extend the period within which financial statements and reports must be circulated.
Conclusion
On the whole, the extensive provisions on beneficial ownership, the true ownership of companies becomes far more transparent. In addition to that, the widening of existing corporate rescue mechanisms and the introduction of brand new mechanisms are clearly intended to aid financially distressed companies in staying afloat, as far as possible.
