The Companies (Amendment) Act 2024 (“CA 2024”) has been gazetted on 2 February 2024 after receiving royal assent but is not yet in force. The tentative effective date for the revised beneficial ownership reporting framework is likely to be around 1 April 2024. The CA 2024 was passed with the aim of enhancing the current provisions within the Companies Act 2016 (“Act”) relating to the corporate governance framework and corporate rescue mechanisms. In addition, the CA 2024 introduces new provisions addressing the disclosure of information on beneficial ownership.
We set out in this article an overview of the amendments introduced by the CA 2024 (“Amendments”), with particular focus on the disclosure of beneficial ownership of companies, and amendments to the provisions on corporate rescue mechanisms.
Disclosure on the beneficial ownership of companies
Definition of “beneficial owner”
Under section 2 of the Act, a “beneficial owner” is defined as the ultimate owner of the shares and does not include a nominee of any description. The Amendments introduce a new section 60A which widens the definition of a “beneficial owner” in the context of a company to “a natural person who ultimately owns or controls over a company and includes a person who exercises ultimate effective control over a company”. Further, the Companies Commission of Malaysia (“CCM”) will be authorised to issue guidelines for identifying a beneficial owner of a company.
Register of beneficial owners
At present, the requirement to maintain a register of beneficial owners of a company is implemented through the Guideline for the Reporting Framework for Beneficial Ownership of Legal Persons issued by CCM (“Guideline”), rather than being explicitly outlined within the Act itself.
CA 2024 introduces a new Division 8A to the Act, which statutorily codifies both the obligation to maintain a register of beneficial owners, and to inform CCM of any changes relating to the particulars of the registered beneficial owners.
The company will also be required to lodge all information of its beneficial owners with CCM through the e-BOS system, a designated online platform. Further guidance and information are anticipated to be provided by CCM.
Under the new section 60B, it is provided that the Minister of Domestic Trade and Cost of Living (“Minister”) will be empowered to prescribe access to the company’s register of beneficial owners or related information lodged with the CCM. The Minister is also authorized to prescribe the terms and conditions for accessing the said register or related information. Generally, forms filed with the CCM can be extracted from CCM’s website for a prescribed fee, this may be the case with the beneficial reporting forms filed with the CCM. We anticipate CCM to issue further guidelines / directions on this.
Reporting duties imposed on companies and beneficial owners
As provided under the existing section 56 of the Act and the Guideline, the reporting of beneficial ownership is not a foreign concept. However under the Act, such reporting is self-regulatory, allowing companies the discretion to determine whether to request for information of its beneficial owners or respond when notified of any third party’s interest in the company’s shares, lacking the obligation to report the information to any statutory body unless expressly directed to do so.
When the relevant CA 2024 provisions come into force, companies will be obliged to obtain information about their beneficial owners or confirm the accuracy of information from any person whom the company knows or believes to be a beneficial owner of the company. Individuals, similarly bear a self-reporting obligation to inform the company of his status as a beneficial owner, along with any changes to his status or particulars. Failure to comply with such duties will constitute an offence. The Amendments mark a significant departure from the existing position, which would notably enhance transparency and provide better assistance to enforcement and regulatory agencies in their efforts to combat crimes involving activities such as money laundering, terrorism financing and tax evasion.
Scheme of Arrangements
Court-appointed insolvency practitioner
Prior to the CA 2024, there are no provisions allowing the court to appoint an external third party on its own initiative to assist in evaluating the feasibility of a proposed scheme, even though companies may have their own advisors for such matters. The Amendments seek to enhance the court’s position by introducing the role of a court-appointed insolvency practitioner.
Not only will the insolvency practitioner be tasked with the responsibility of assessing the viability of a proposed scheme, he will also chair the meeting in relation to the proposed scheme. This is a clarification on the existing legislation, which does not specify who should preside over the meeting. Further, the insolvency practitioner is given the right to access to all records of the company.
Under the new section 367(3) of the Act, the appointment of an insolvency practitioner will be mandatory in cases where the following is involved: (i) super priority financing; (ii) cross-class cram down; (iii) approval of scheme without creditors’ meeting; or (iv) application of a restraining order by a related company.
These amendments highlight the independent assistance offered to the court through the insolvency practitioner’s assessment in determining the viability of such schemes.
Procedural rules for the filing of proof of debt
Under the Act, no specific provisions are provided regarding the procedures for filing proof of debt.
CA 2024 seeks to address this gap by introducing a new section 369B that outlines the procedure to be followed for filing proof of debt. It is further provided that a failure to comply with the requirements would result in the creditor being prohibited from voting, whether in person or by proxy, at the meeting of creditors.
Restraining order
Under the current legislation, a restraint of proceedings will only be applicable upon the application by a company or its creditors. With the new subsection (1A) to section 368 of the Act, an automatic restraining order will take place upon the filing of an application for a restraining order and will remain in effect until the application is decided or until the lapse of 2 months from the date of filing of the application (whichever is earlier). Further, the specific types of proceedings and actions that can be restrained are specifically set out by the Amendments as well, which include proceedings such as winding-up, appointment of a receiver or manager, most legal proceedings (save for those specified under provisions of the Act with the leave of court), enforcement of securities, re-entry or forfeiture proceedings in respect of property of or premises occupied by the company.
Extension of a restraining order to a related company
The Amendments revised section 365 of the Act to define a “related company” as a company which is a subsidiary company, holding company or an ultimate holding company of a subject company.
The new section 368A of the Act extends the protection granted by a restraining order. Where a subject company has been granted a restraining order, a related company is permitted to apply for a restraining order as well.
However, certain conditions must be satisfied for the application to be considered. The related company seeking a restraining order must demonstrate, among others, that it plays a necessary and integral role in the proposed scheme and that the creditors of the related company will not be unfairly prejudiced by the restraining order.
Court’s authority to cram down
The new section 368D of the Act empowers the court to sanction a scheme of arrangement or compromise despite the dissenting classes of creditors, however such approval is subject to consensus among the creditors and ensuring that fairness is not compromised.
The court will only issue such a cram down order upon the fulfillment of the following conditions:
(i) an agreement to the proposed scheme by a majority of 75% of the total value of creditors (irrespective of class) present and voting at the meeting is achieved; and
(ii) the court is satisfied that the proposed scheme does not discriminate unfairly and is fair and equitable to each dissenting class of creditors.
Approval of a proposed scheme without creditors’ meeting
Pursuant to the new section 369C of the Act, the court will be empowered to issue an order to approve or sanction a scheme of arrangement or compromise even without convening a meeting of creditors. This is likely to expedite the process for scheme approval and reduce unnecessary costs.
However certain requirements are required to be fulfilled prior to the granting of such order, among which include notification to the existing creditors in accordance to the prescribed requirements, and that the court is satisfied that the creditors would have agreed to such scheme had the meeting of creditors been convened.
Corporate Voluntary Arrangements
Widening the application
Prior to the enactment of CA 2024, public companies and companies with a charge created over its property or any of its undertaking are excluded from undergoing a corporate voluntary arrangement. The Amendments seek to broaden the scope of applicability of this mechanism.
With the exception of licensed institutions or operators of designated payment systems regulated under laws enforced by Bank Negara Malaysia and companies registered or approved under certain parts of the Capital Markets and Services Act 2007 or the Securities Industry (Central Depositories) Act 1991, the amendments to section 395 of the Act provides that all companies, whether private or public, and regardless of whether a charge was created over its property or undertaking, can utilize the corporate voluntary arrangement mechanism. Such out-of-court negotiations will undoubtedly reduce the cost of rehabilitating companies facing financial difficulties.
Judicial Management Regime
Widened scope
The revision to section 403 of the Act is similar to the amendments to corporate voluntary arrangements, whereby only companies regulated by the Central Bank of Malaysia and companies which are licensed, approved or registered under the Capital Markets and Services Act 2007 and the Securities Industry (Central Depositories) Act 1991 will be exclude from utilizing the judicial management regime.
Extension of judicial management order
Under the existing legislation, a judicial management order may be extended beyond a period of 6 months upon the applicable by a judicial manager.
With the revision to section 406 of the Act, the extension of a judicial management order is no longer limited to 6 months, but rather subject to the court’s discretion.
General amendments
Protection for essential goods and services
The Amendments introduce a new Division 9 to the Act, restricting the right of a counterparty to terminate a contract that relates to the supply of essential goods and services. This is essentially to provide relief to companies undergoing a scheme of arrangement, corporate voluntary arrangement or a judicial management regime.
The scope of essential goods and services has been provided as well and includes the supply of water, electricity, gas, point of sales terminals, computer software and hardware, information, advice and technical assistance in connection with the use of information technology, data storage and processing, and website hosting.
Suppliers who intend to exercise such termination rights are required to notify the company in question of his intention to do so in writing at least 30 days before exercising his right under the insolvency related clause.
Enhancement of the rights of secured creditors
The new sections 398A and 411(5) of the Act aim to provide better safeguards to secured creditors of companies undergoing corporate voluntary arrangements or judicial management.
During the moratorium period of a corporate voluntary arrangement or a judicial management order that is still in force, secured creditors are allowed to recover secured movable property under any of the following conditions: (i) the goods are not required by the company; (ii) the moratorium or judicial management order poses a high risk to the existence of the goods; or (iii) the value of the goods decreases due to the moratorium or judicial management order.
Super priority for rescue financing
The CA 2024 introduces the concept of super priority rescue financing through the new sections 368B and 415A of the Act. This mechanism will apply to companies undergoing schemes of arrangement or judicial management.
“Rescue financing” refers to financing that meet any of the following conditions: (i) necessary for preserving a company’s existence or the continuity of its operations; (ii) essential for the court’s approval for a proposed compromise or scheme; or (iii) essential for optimizing the realization of the company’s assets.
Under the Amendments, rescue financiers are granted better priority and security over all the preferential debts and all other unsecured debts in the event the company is wound up. It is hoped that such a mechanism will encourage financiers to extend further financial aid to distressed companies, fostering an environment conducive to their revival and sustainability.
Conclusion
The revisions and new provisions of the Act strive to enhance corporate governance practices and facilitate corporate rescue mechanisms. In particular, public access to beneficial owners’ register will bring about efficiencies in the know-your-customer processes by reporting institutions.
