A Review of the Companies Bill 2013 - Part IV

Sheba Gumis and Shermaine Lim conclude our review of the Companies Bill 2013

We commenced our review of the Companies Bill 2013 ("Bill") in our newsletter three issues ago. We now conclude the review with a commentary on auditors, financial statements, management review, and the miscellaneous provisions of the Bill.

AUDITORS

Policy Statement 10 of the Public Consultation Document on the Bill issued by the Corporate Law Reform Committee ("CRLC") reflects the intention to strengthen the corporate governance structure through the refinement of the auditors' role and responsibilities in the Bill. There are now new provisions in the Bill relating to auditors. We set out some of the salient provisions below.

Appointment of auditors

 

The provisions for the appointment of an auditor for a private company are set out in clauses 262 to 265 of the Bill, whereas those for the appointment of an auditor for a public company are contained in clauses 266 to 268. The provisions are generally similar, with slight differences in the time of appointment and the term of office of the auditors.

In relation to a private company, clause 264(1)(b) of the Bill provides that an auditor will cease to hold office 30 days after the circulation of the financial statements to the members, unless he is re-appointed. Where the office of an auditor is vacated in the manner set out in clause 264(1)(b), and no auditor has been appointed by the members of the company, the auditor who held office immediately before the vacancy arose is deemed to be reappointed, save for the circumstances specified in clause 264(2) or where he is prevented from being appointed under clause 265 of the Bill by members holding not less than 5% of the total voting rights in the company.

A casual vacancy in the office of the auditor of a public company is to be filled by the Board of Directors ("Board"), or by the members of the company (where the Board fails to do so) or by the Registrar (where the Board and members fail to do so) (clauses 266 and 267).

The procedure for appointment of a new auditor in place of another whose term of office has expired or is about to expire (whether by way of written resolution of a private company or at a meeting of members) is now clearly set out in clauses 274 and 275 respectively. The Companies Act, 1965 ("CA") does not have such detailed provisions for the appointment of auditors.

Removal of auditors

An auditor may not be removed from office before the expiration of his term of office except by resolution pursuant to clause 271. The procedure for removal of an auditor under the Bill is similar to that under the CA, but with minor differences.

 

Clause 271 provides that an auditor may be removed from office by an ordinary resolution at a general meeting and in accordance with clause 272 of the Bill. Clause 272 requires special notice to be given, and a copy of the notice to be sent to the auditor concerned. The auditor is entitled to make representations which are to be circulated to the members, unless the representations are received too late. If the representations are not circulated, the auditor may require his representations to be read out during the meeting.

The Registrar must be notified of a resolution being passed to remove an auditor within 14 days.

Resignation of auditors

Clause 276 states that an auditor may resign his office by depositing a notice in writing at a company's registered office. In such event, his term of office will end upon the expiry of 21 days after the notice is deposited, or on such later date as specified in the notice. This procedure differs from the CA which does not permit the resignation of a sole auditor to take effect until a replacement has been appointed. The company is required to notify the Registrar within seven days of the resignation notice being deposited at the company's registered office (clause 277).

 

An auditor of a public company who resigns from office and submits a statement of the circumstances connected with his resignation together with his notice of resignation is entitled under clause 278(2) of the Bill to require the directors of the company to convene a general meeting to receive and consider his explanation of the circumstances connected with his resignation.

The directors are required to convene the meeting within 21 days from receipt of the auditor's request under clause 278(2) and to hold the same no later than 28 days after the date on which the notice convening the meeting is issued.

Registration of auditors

The Bill now makes provision for the Registrar to maintain a register of firms of auditors (clause 261(1)). Clause 261 requires a new firm of auditors to notify the Registrar of its name, firm number, address and other prescribed information within one month of its commencement of business.

FINANCIAL STATEMENTS

The references in the CA to profit and loss accounts and balance sheets are replaced with the term "financial statements", which is given the same meaning as used in the approved accounting standards issued or approved by the Malaysian Accounting Standards Board under the Financial Reporting Act 1997.

The requirements under the CA for a company to prepare and audit the financial statements are retained in the Bill.

The financial statements of the company will be required to comply with the requirements set out in clauses 245 and 246 of the Bill. The Ninth Schedule of the CA, which sets out the contents of a profit and loss account and a balance sheet, has now been condensed (albeit with some differences) into clauses 245 and 246.

The financial statements are also required to disclose, inter alia, directors' emoluments, retirement benefits and loans in favour of directors (clause 245(6)). This is in line with the Bill's aim of promoting greater transparency and accountability.

Unlike the CA which requires the profit and loss accounts and balance sheet to be laid before the shareholders at the annual general meeting, the Bill only requires the financial statements and reports to be circulated to every member of the company, debenture holder, auditor and person who is entitled to receive notice of general meetings (clause 254(1)).

In the case of a private company, the financial statements and reports are to be circulated within six months of its financial year end. A public company is required to do so at least 21 days before the date of its annual general meeting, or any shorter period agreed by all members entitled to attend and vote at the annual general meeting (clause 255).

Exempt Private Company Certificate

In the case of an exempt private company, its directors may, in each financial year, lodge a certificate relating to its status as an exempt private company with the Registrar within one month after the financial statements and reports are circulated (clause 257(1)). Under the CA, the certificate is included in the annual return of the company.

 

Business Review

The requirement under the CA to prepare a directors' report to accompany financial statements is retained under clause 248. While the contents of the directors' report under clause 249 and the Sixth Schedule of the Bill are similar to those of a directors' report under section 169 of the CA, the Bill permits a directors' report to include a business review (clause 251). The word "may" indicates that the business review is optional.

Clause 251(2) sets out the information (to the extent necessary for an understanding of the development, performance or position of the company's business) which may be included in a business review. These include, inter alia, a fair review of the company's business, a description of the principal risks and uncertainties facing the company and an analysis of the company's development and performance during the financial year.

MISCELLANEOUS PROVISIONS

Management Review

 

The Bill contains a new provision which confers the right on members to review the management of a company. Clause 194(1) of the Bill imposes a duty on the chairman of a meeting of members to give members a reasonable opportunity to question, discuss, or comment on the management of the company.

The members may also pass a resolution at a meeting of members to make recommendations to the Board on matters which affect the management of the company (clause 194(2)). Such recommendations are not legally binding on the Board unless they are passed as special resolutions or the company's constitution provides otherwise.

Increased penalties

In line with the CRLC's aim to enhance the enforcement regime, the penalties for non-compliance with the provisions of the Bill will be increased significantly. For example, in respect of offences where the penalty is not specified, the general penalty is a fine of RM5,000.00 under section 369 of the CA, as compared to a fine of RM50,000.00 or imprisonment for a term not exceeding three years or both under the Bill (clause 608).

CONCLUSION

The Bill introduces concepts which have been adopted from other countries, such as the concept of a single member and a single director company, the migration to a no par value share regime and the enhancement of shareholders' rights and protection.

 

The Bill also introduces the concept of a "solvency test" which will improve business efficacy and reduce the cost of certain corporate exercises, such as share buy-backs, provision of financial assistance and capital reduction by companies that are able to satisfy this test.

The company law framework in Malaysia will be significantly modernised if a substantial number of the provisions in the Bill are incorporated into the new Companies Act.

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