What Directors Must Keep In Mind When Dealing with Substantial Assets - Section 223, Companies Act 2016

It is common practice for the director of companies to dispose of or acquire company properties or undertakings. Now in light of the COVID-19 pandemic resulting in the expected downturn in the economy, it is inevitable that such practice would be occurring even more so. However, there are certain obligations that have to be taken into consideration by company directors when they are required to deal with company properties and / or undertakings of a ‘substantial value’ in which shall be neatly summarized in this article.

First of all, it is pertinent to note that a director has a ‘statutory’ duty/obligation under section 223(1) of the Companies Act 2016 (previously known as s 132C of the Companies Act 1965) to ensure that company resolutions be passed when dealing with substantial undertakings or properties. Such resolutions must be passed at the following stages to ensure that the acquisition and / or disposal of a ‘substantial asset’:

1. When entering into the arrangement or transaction of the substantial asset; or
2. When such an arrangement or transaction is being carried into effect.

(NOTE: A company’s resolution is only required to be passed at either one of these stages and that it does not need to be conducted at both stages of the acquisition/disposal)         

In view of this statutory duty, you may then ask yourself the following questions as a company director:

1. “In reference to ‘company’s undertakings or properties, exactly what type of assets would fall under such definition?”;
2. “What then would be considered as a ‘substantial value’?”;
3. “Am I allowed to bypass the requirement imposed under section 223 of the Companies Act 2016?”; and
4. “What happens when I do not adhere to such statutory obligations?”

All these questions shall be dealt with accordingly below.

Assets Falling Under the Definition of ‘Undertakings or Properties’

Upon referring back to the statutory provision of section 223(1) of the Companies Act 2016, one will come to realize the very specific express wording of ‘undertakings or properties’ only. Would this cover all sorts of company assets? By referring to subsection 223(2) of the Companies Act 2016, it is clear that the term “undertaking or property” includes the whole or substantially the whole of the rights, including developmental rights, benefits or control in the undertaking or property.

Subsection 223(2) of the Companies Act 2016 went on to further add that this duty also applies to the company’s as well as its subsidiary’s shares listed on a stock exchange. It was further noted that when dealing with such shares, the term ‘substantial value’ or ‘substantial portion’ shall mean the same value prescribed in the listing requirements of the stock exchange where approval of the shareholders at a general meeting is required.

The subsection of 223(2) of the Companies Act 2016 has even gone on to refer to matters where directors of an unlisted subsidiary with a listed holding company are involved in the transactions and dealings of substantial assets. In such a scenario, it was found that the director an unlisted subsidiary may proceed with a transaction or arrangement of substantial assets as well. However, an additional step must be procured by the directors of the holding company to obtain the shareholders’ approval of the holding company in a general meeting on top of obtaining the approval of the general meeting by the directors of the unlisted subsidiary.

          However, the requirement of section 223(1) of the Companies Act will NOT apply to proposals for disposal of the whole or substantially the whole of the company’s undertaking or property made by a receiver or receiver and manager of any part of the undertaking or property of the company that has been appointed via an instrument or by a Court. This also applies to substantial disposals of the company’s assets made by a liquidator that has been appointed in a voluntary winding up. Reference is made to section 223(6) of the Companies Act 2016.       

Substantial Value

 It has been clearly stipulated in section 223(3) of the Companies Act 2016 that an undertaking or a property shall be of a substantial value and or that the portion of the company’s undertaking or property shall be considered to be of a substantial portion if whichever of the following is found to be the highest:-

1. Its value exceeds twenty-five per centum (25%) of the total assets of the company;
2. The net profits, after deducting, all charges except taxation and excluding extraordinary items, attributed to it amounts to more than twenty-five per centum (25%) of the total net profit of the company; or
3. Its value exceeds twenty-five per centum (25%) of the issued share capital of the company.

To further better your understanding as to when a transaction of a substantial property/undertaking is about to take place, the following are some examples of scenarios in where substantial property transactions are being carried out:

1. Company A has made a proposal to acquire/dispose of X number of ordinary shares of RM 1 each of Company B in where the value of X number of shares would constitute a total of more than 25% of Company A’s assets at that material time.
2. Company A wishes to acquire/dispose of a property with a value of RM X. By comparing to the total value of Company A’s current assets, it was found that RM X was worth more than 25% of Company A’s assets at that material time.

Can I Bypass the Requirement of section 223(1) of the Companies Act 2016?

A company director may wonder if there are alternatives to the requirements of section 223(1) of the Companies Act 2016  where one may hope to bypass the requirement to obtain the approved resolutions and proceed with the acquisition and/or disposal of the substantial assets.

It was expressly held by Ramly Ali FCJ in the Federal Court decision of Tan Chee Hoe & Sdn Bhd v Code Focus Sdn Bhd [2014] 3 MLJ 301 that this is a mandatory statutory requirement which must be adhered to. It is further noted that there are no express provisions in the Companies Act 2016 that acts as an ‘exception’ to the requirement of section 223(1) of the Companies Act 2016.

Instead, Ramly Ali FCJ in Tan Chee Hoe (refer to above) went on to further elaborate that failure to adhere to such statutory requirement would even cause the company directors to face several consequences.

Consequences of Failing to Adhere to section 223 Companies Act 2016

 Where a company director has failed to adhere to the requirements of section 223(1) of the Companies Act 2016, the company director would have committed an offence and shall on conviction be liable to imprisonment for a term not exceeding five (5) years or to a fine not exceeding three million ringgit (RM 3,000,000.00) or both as stipulated in section 223(7) of the Companies Act 2016.

 Additionally, if another member of the company has found that a director has acted in contravention of the requirements of section 223(1) of the Companies Act 2016, they may also make an application to the Court to restrain the directors from entering into or carrying into effect such an arrangement or transaction of substantial assets as expressed in section 223(4) of the Companies Act 2016.

What happens in the event where the resolutions passed were found to be impugned due to circumstances? In such a scenario, such resolutions would be deemed VOID as it would be in contravention to the requirements of section 223(1) of the Companies Act 2016 expressed in section 223(5) of the Companies Act 2016 (The High Court decision in Rayston Resources Sdn Bhd v LGB Engineering Sdn Bhd & Ors [2020] 7 MLJ 627). In other words, it would be taken as if no shareholder’s approval had been obtained to approve such an acquisition.

Conclusion

          As a company director, you must be aware of your duties in every company related matters and that would even include being knowledgeable in the most unexpected areas such as having to deal with substantial company assets.