Get ready for Companies Act 2016

Multiple-choice questions: In order to be awarded CPD units you must answer the following five random questions correctly. If you fail the test, please re-read the article before attempting the questions again

This article was first published in the November/December 2017 Malaysia edition of Accounting and Business magazine.

The Companies Act 2016 (CA 2016), which came into force on 31 January, is a much-needed revision of legislation that had governed business in Malaysia for over 50 years. The revamped act is the culmination of over a decade’s worth of extensive review, debate and collective insights from regulatory, professional and industry bodies.

CA2016 comprises 620 sections compared with the 350-plus provisions of the Companies Act 1965 which it replaces. The key aspirations governing corporate entities are modernising regulations, reducing the cost of compliance, removing regulatory redundancies and conflicts, streamlining the corporate legal framework and facilitating economic growth. However, many small and medium-sized enterprises (SMEs) remain in the dark on how the changes could affect them.

Khoo Poh Poh, a transaction advisory services partner at EY, says that companies are aware of the CA2016, but may lack understanding of certain parts.

‘Since the CA2016 came into force, there has been a lot of communication between professionals, company directors, shareholders and the Companies Commission of Malaysia (SSM),’ she says.

She notes that the SSM has been regularly updating the ‘frequently-asked-questions’ section of its website, providing greater clarity for businesses. ‘After six months, it is encouraging to see that there has been increased awareness and understanding among companies of the CA2016,’ Khoo adds.

Struggle to keep up

As the act has been beefed up considerably, with close to double the number of provisions of the previous legislation, it is understandable that many company owners and directors are struggling to keep up.

Khoo says that EY has received enquiries from clients about new sections including the accounting treatment of share premium under the no-par value regime, as well as the redemption of preference shares. Questions have also been posed on solvency requirements relating to the declaration of dividends.

Lawrence Chai, a partner at 3E Accounting, notes that most business owners are aware of the basics of the new act. ‘However, there are those who are unaware of changes such as a company no longer needing to hold an AGM, abolishment of authorised share capital, that the company seal is optional and so on,’ he says.

Chai says that his firm has helped many SMEs start up their companies under the new act. Due to the changes, more clients have decided to set up as a company instead of sole proprietorships as they are given better protection of their assets with the limited liability feature.

Matter of time

Given the extensive revamp of the act, Datuk Vimmy Yap, founder and CEO of 6Biz Avenue, says that companies need more time to comply with the changes. She believes that most clients were not aware of the changes until they were informed by the professional firms.

‘The level of awareness is still low due to lack of information and uncertainties on implementation and execution. We were expecting a grace period of a few months to adapt to the new act,’ she says, adding that this would allow companies, especially SMEs, to be educated on the changes and what they need to do to comply.

Yap adds that while professional firms are doing their best to educate clients, they still need more support from the authorities, especially when it comes to the interpretation of some of the new provisions.

Heavier penalties

While CA2016 has generally been well received, non-compliance of key provisions will now see higher penalties imposed. In light of the much-increased penalties, what are the implications for business owners and directors?

Chai points out that penalties under CA2016 have increased substantially, with a general penalty of RM50,000, imprisonment of three years, or both. ‘Directors definitely cannot claim ignorance; they should be prepared to be barred from being directors or slapped with hefty penalties and a term of imprisonment,’ he says.

Yap says the heavier penalties will certainly encourage the owners and directors to take implementation seriously, adding that it is advisable for senior management and directors to attend relevant seminars or to seek professional support.

‘On the other hand, the authorities and professionals should play their role respectively by educating the companies, especially SMEs, on the various changes,’ she adds. ‘Ignorance will increase the cost of doing business and lower business efficiency.’

Lower compliance costs

For many business owners and directors, a key consideration is whether CA 2016 will lead to lower compliance costs for companies. Khoo believes that while initial costs and investment may be required for education, enhancement of systems or changes in processes to adapt to the new requirements, the compliance costs for companies, especially SMEs, are expected to be lower in the future. She points to provisions such as the streamlined process of incorporating new companies, audit exemption for certain companies, and no AGM requirement for private companies.

For Yap, whether the new act will lead to increased or lower compliance costs very much depends on companies’ compliance level. Rather than focusing merely on compliance and avoiding penalties, companies should also consider how they adapt to the new act and how to enhance business efficiency.

‘Looking at it from a different angle, the new act is necessary and will guide companies to achieve efficiency as a whole,’ she says.

MK Lee, journalist