Key Changes in The Implementation of Amended Companies Act Phase 2
With the passing of the Companies Amendment Act in parliament in October 2014, the Companies Act (“CA”) underwent sweeping amendments. The first phase of the Amendment Act came into effect on 1 July 2015. The Accounting and Corporate Regulatory Authority of Singapore (“ACRA”) has announced that the second phase of the Amendment Act will be implemented on 3 January 2016.
The amendments are aimed at reducing the compliance burden for companies and to enhance the ease of doing business while improving the country’s corporate governance landscape. The following article is an overview of the key amendments that are especially relevant to private companies.
Liberalising electronic transmission of notices and documents
Under the amended regime, companies, both private and listed, are endowed with greater freedom to communicate electronically with their members/shareholders. They are now allowed to pass written resolutions by email and also to use electronic means to transmit notices and other documents to their shareholders. However this must be stated as an approved mode of communication in the company’s constitution.
This amendment is in line with the current business environment where much of the transactions are carried out online. This amendment will save time and reduce administration costs for companies.
Electronic registers of members of private companies to be kept by ACRA
Pursuant to the amendment, ACRA will maintain an electronic register of all members of private companies. All private companies will be required to file information regarding the share ownership and any changes in the share ownership. Date of filing of such information will be the effective date of registration as member or cessation as member. Therefore filing returns on allotment and transfer of shares must be done promptly.
Prior to the amendment, private companies were required to maintain a physical register of members. The electronic register maintained by ACRA will lift this administrative requirement and the updated register of members will be made available to public. Maintenance of the electronic register by ACRA will accurately depict the actual ownership of a private company at any point in time and will be helpful in resolving disputes involving ownership issues.
Electronic registers of directors and other officers of all companies to be kept by ACRA
ACRA will also maintain an electronic register of directors and officers such as CEOs, secretaries and auditors. This will serve as the authoritative register for private companies as well. Any changes in directors or officers, such as removal, resignation and retirement, must be promptly notified to ACRA by filing a notice within 14 days.
As well as simplifying administration processes, it also improves public access to such records and facilitates due diligence of companies.
Statutory disclosure requirement now extended to CEO
Presently only directors of companies are required to make statutory disclosures regarding their shareholding in the company and other related companies and any conflict of interests. The amended regime requires that CEOs now also must make such statutory disclosures. For that matter, it must be noted that the definition of CEO would encompass all C-Suite Officers. It would be applicable to any person who is actively involved in the conduct of the business or part of the business of the company.
This is consistent with the requirement of listed companies, and given the key role played by the C-Suite officials in the management of a company, it is deemed essential in the evolving private enterprise scenario.
Shareholders approval not required to appoint directors aged seventy years and above
The requirement of approval from shareholders to appoint directors aged 70 years and above has been done away with. The approval was mandatory in such appointments in public companies and their subsidiaries.
The amendment has taken consideration of the current situation with enterprise boards where invariably the directors are much older yet efficient, and age does not hinder their ability to fulfil the responsibilities of their office. Therefore, it is good to remove the previous requirement of approval from shareholders.
Memorandum and articles will be merged into a single constitution
The Articles of Association and the Memorandum will be merged into one single document to be known as the ‘Constitution’. No action is required from existing companies and they may choose to continue under their existing Memorandum and Articles of Association or change to the new format. Model constitutions will be available on ACRA’s website and companies can follow the format in whole or in parts. Going forward, new company incorporations will be required to submit the Constitution. If a company adopts a model constitution without amendments, then there is no need to file the document at the point of registration. They can instead simply refer to the Constitution title at the time of registration.
This will reduce the cost of setting up a company and streamline the administration requirements for companies.
Directors are allowed to report alternate address
The amendment allows directors, CEOs and Company Secretaries to provide an alternate address instead of their residential address for ACRA’s records. These records are accessible by the public and providing residential addresses previously raised security and privacy concerns among directors and officers. The amendment was made to address this concern.
It must be noted that the alternate address must be an address where the directors can be located and must be in the same jurisdiction as the residential address. It cannot be a PO box number. If the person is not locatable at the alternate address or if ACRA has reasons to believe that the provision has been misused, legal actions will follow and the person will not be allowed to use another alternate address for three years.
Extension of the types of loans permitted to directors to include quasi-loans, credit transactions and related arrangements
The CA prohibits a company (excluding Exempt Private Companies (EPCs)) from providing loans or providing guarantee or security in connection with loans made to its directors or family members of directors, or to directors of a related company. The CA also prohibits a company from making loans to another company where the directors of the lending company have a stake of 20% or more.
Pursuant to the amendment bill, such prohibition has now been extended to cover quasi-loan, credit transactions and arrangements of a similar nature. The indirect prohibition involving other companies, in which directors’ hold a stake of 20% or more, has also been extended to cover Limited Liability Partnerships in which directors’ have 20% or more interest. Breach of the prohibition will attract a fine of up to S$20,000 or a prison term up to 2 years.
This extension of prohibition is to prevent errant directors from evading the prohibition by disguising loans in the form of quasi-loans and credit transactions. Companies will have to scrutinise transactions to rule out any benefits to directors that may potentially lead to breach of the prohibition.
Extension of summary financial statements to all companies
Prior to the amendment, listed companies were allowed to send summary financial statements to their members and a penalty was imposed on directors if the summary statement was not in compliance with the provisions of the act.
Pursuant to the amendment, this provision of summary financial statements has been extended to unlisted companies as well.
This provides greater clarity on the onus of compliance on directors of all companies.
Exemption from preparation of financial statements for dormant non-listed companies
Prior to the amendment, dormant companies were required to prepare financial statements, though they were exempted from statutory audits. The amendment bill now exempts dormant private companies (excluding the subsidiaries of listed companies) from preparing financial statements if they pass the ‘substantial asset test’ and the company has remained dormant since its formation or since the end of the previous financial year. However, the position remains unchanged for dormant listed companies and dormant private companies that fail the asset test; they are still required to prepare financial statements but are exempted from audits.
This will reduce the compliance costs for dormant private companies. Private companies do not impact the public, therefore the exemption from financial statement preparation will not have any significant consequence.
Companies allowed indemnifying directors against third party claims
Pursuant to the amendment bill a company can indemnify its directors and officers against third party claims. However this may exclude specific liabilities.
This is a much-needed clause considering the global nature of businesses. Armed with this indemnity, directors and key officers of the company will be able to transact business by prioritising the company interest without the fear of attracting personal liabilities.
Power of registrar to debar directors and secretaries
The registrar is now empowered to debar individual directors and secretaries if they fail to submit any documents within three months of the prescribed deadline. The debarred officer will be banned from accepting any new appointments. All existing appointments will remain unaffected. The debarred individuals will be cleared upon rectifying their defaults.
This is to improve filing compliance among companies and to penalise irresponsible directors and company secretaries who fail to fulfil their duties.
Power of registrar to strike off defunct companies clarified
The registrar has the power to strike off a company from the register if they have reason to believe that the company has not been in operation or carrying on business. The amendment bill lists out the circumstances under which the registrar can do so as follows:
- If the company has failed to file its annual returns or financial statements for a prescribed period of time
- If the company has failed to respond to the correspondence sent by the registrar for a period of time
- If the registrar has received information from credible third party sources, such as government agencies, that the company is not carrying on business and has requested to initiate strike-off process
- If the registrar is unable to contact any of the company directors or if the company is left with no directors or locally resident directors
The amendment provides greater transparency to the strike-off process initiated by the registrar. Application to restore a struck-off company, in the case of strike-offs initiated by the registrar, can be made to the same registrar. Such applications to restore must be made within six years from the date of the strike-off.
Disqualification of directors of struck-off companies
A person who has served as a director of three or more companies which were struck-off as a result of ACRA initiated reviews (within a period of five years) will be disqualified from acting as a director of any company, or participating in the management of any company for a period of five years from the date of strike-off of the last company.
Directors have to be wary of all compliance requirements and must fulfil all filing requirements promptly for their dormant companies and must initiate strike-off procedure for any defunct companies to prevent such disqualification. This amendment reflects ACRA’s commitment to fostering a strong compliance regime.
Updates to the striking–off regime
The following updates have been made to the strike-off regime:
- Any appeal to the court against striking-off of a company has to be made within a period of six years, as opposed to 15 years previously
- A company has to show cause within 60 days, instead of the previous three months, in response to gazette notification of strike-off.
Amendments relating to foreign companies
Reduction of number of agents/authorised representatives of branch offices of foreign companies
Foreign companies prior to the amendment were required to appoint two locally resident agents. Subsequent to the amendment only one locally resident agent is required to be appointed. The term ‘agent’ is replaced by ‘authorised representative’ to emphasise the significance of the nature of the role, as they are responsible for the acts of commission or omission of the foreign company.
Alignment of financial reporting standards with that of locally incorporated companies
Pursuant to the amendment bill, foreign companies will be required to lodge financial statements with ACRA, including components that reflect the requirements expected from that of locally incorporated companies. Depending on the financial reporting standards adopted in the place of incorporation of foreign companies, a more comprehensive disclosure similar to those of local companies is expected from foreign companies. Prior to the amendment only a statement reflecting the financial condition of the foreign company was required.
Expanding the grounds for strike-off of foreign company
The grounds for striking-off a foreign company has been expanded to protect the sole authorised representative. The grounds are as follows:
- Where the authorised representative intends to resign but is unable to do so because there is no one to replace him, and the foreign company has failed to respond or act on this matter within 12 months
- Where the authorised representative has questioned the foreign company on its intention to continue or cancel its Singapore registration, and the foreign company has not responded with any instructions within 12 months of such a query
- Where the foreign company does not appoint an authorised representative for more than six months following the death of the sole authorised representative.
Prior to this a registrar could only strike off a foreign company if they had reason to believe that it had ceased operations or if they believed that it was being used for unlawful purposes and was prejudicial to public peace, good and welfare.