Lenders and Borrowers: What you need to know about the Companies Act 2016

 

In this article, we highlight certain aspects of the Companies Act 2016 (“CA 2016”) that have implications for Lenders and Borrowers.

A) Execution of documents: common seal is optional

Section 61 of CA 2016 now provides that a company may, but does not need to have the common seal.

Section 66 of CA 2016 is titled “Execution of Documents” where “document” is defined as having “the meaning assigned to in in the Evidence Act 1950”. This includes a very wide category of physical and electronic documents.

The CA 2016 provides that valid execution of documents will need to meet certain signatory requirements, in particular, if a company does not have a common seal, a document is deemed validly executed by a company if it is signed on behalf of the company by at least two authorized officers, one of whom shall be a director; or in the case of a sole director, by that director in the presence of a witness who attests the signature. Essentially, any document which is executed without a common seal but in accordance with section 66 would have the same effect as if it was executed under the common seal.

For the purpose of execution, “Authorised Officer” means
• A director of the company;
• A secretary of the company; or
• Any other person approved by the Board

Practical Implication:

Note that if a company opts not to have common seal, it does not override the provisions/requirement of Government authorities, for example the Land Authority still requires the company to use a common seal for registration of transfer and charge of property. As such, despite the provisions of the CA 2016, the company may still need to adopt a common seal when it becomes necessary to comply with the requirements of other written laws, for example when dealing with the Land Authority.

B) Amount of Indebtedness of a company

The notice on “Prescription of Amount of Indebtedness of Company” has been gazetted confirming that the amount of indebtedness of a company for the purpose of “inability to pay debts” shall be an amount exceeding RM10,000.00.

Practical Implication:

This is a significant increase in the threshold for the issuance of the statutory notice under what was previously section 218 of the Companies Act 1965. The previous threshold was a mere RM500.00. Lenders should take note of this significant change as it will affect their debt recovery options.

C) Secured Creditors

Section 524 (1) of CA 2016 provides for the rights and duties of secured creditors upon the winding up of the company which reads as follows:-

A secured creditor may:-
(a) realise a property subject to a charge, if entitled to do so;
(b) value the property subject to the charge and claim in the winding up as an unsecured creditor for the balance due, if any, or
(c) surrender the charge to the liquidator for the general benefit of creditors and claim in the winding up as an unsecured creditor for the whole debt.

Section 524(8) CA 2016 also provides that the liquidator may at any time, by notice in writing, require a secured creditor , within twenty-one days from the receipt of the notice to:-

(a) elect which of the powers referred to in [S 524(1) of CA] the creditor wishes to exercise; and
(b) if the creditor elects to exercise the power referred to in paragraph [S524(1) (b) or (c)], exercise the power within that period.

Practical Implication:

Secured creditors (mostly mortgage lenders) should be alert during the winding up of a company and must act quickly and decide which option it wishes to exercise. If the secured creditor fails to exercise any of the options (having received the notice from the liquidator as referred to in section 524(8) CA 2016), it is taken as having surrendered the charge to the liquidator for the general benefit of creditors, and hence may only claim in liquidation as an unsecured creditor for the whole debt (section 524 (9) CA 2016).

D) Corporate Rescue Mechanism

Under the Companies Act 1965, there were limited options available to an insolvent company. An insolvent company could only enter into receivership, winding-up or commence a scheme of arrangement with its creditors. CA 2016 introduces two alternative corporate rescue mechanisms (1) corporate voluntary arrangement and (2) judicial management to assist companies in financial difficulties to restructure its debts, to continue with its business operation and to avoid the death knell of winding up. However, the provisions relating to the new corporate rescue mechanism, along with the provision requiring registration of company secretaries, have not been brought into force yet (the other provisions of the CA 2016 came into force on 31 January 2017).

Changes to the Bankruptcy Act

Clients are also advised to note that there are proposed chances to the bankruptcy regime currently going through Parliament. The Bankruptcy (Amendment) Bill 2016 which seeks also to bring substantial changes to bankruptcy law was recently passed by the lower house of Parliament in March 2017. Some key changes initially sought to be brought about by the amendments are discussed in a previous article – http://www.cclc.com.my/legallink/upcoming-overhaul-malaysias-bankruptcy-law/ . Such proposed changes, once it comes into effect, will clearly also have implications to lenders and borrowers.

Conclusion

The changes to the CA 2016 as well as the upcoming amendments to the bankruptcy regime will have far reaching effects for lenders and borrowers. Lenders in particular are advised to take the time to understand the changes, and to revisit and update their own internal credit approval, credit check as well as recovery processes, in light of these changes.

Contact:

Christina Chia – ccle@cclc.com.my

Liew Siew Pen – lsp@cclc.com.my

Joshinae Wong – jwong@cclc.com.my

CCLC Corporate and Commercial advises and supports clients on an extensive range of matters including in mergers and acquisitions, takeovers, security dealings, capital and fund raising, restructuring, joint ventures, financial instruments, and general regulatory and compliance issues.