As a Muslim, who has overall control over your estate? Must you completely rely on the mechanics of Faraid (the Islamic law of inheritance) upon your death or is it possible for Muslims to make a Wasiat (Will)? What happens to a property jointly acquired by a married Muslim couple when one of the spouses dies? In the case of an adopted child, how do you, for example, ensure that he or she is cared for after your passing? As a Muslim convert, can you provide for your non-Muslim family?

The above questions are a few possible scenarios or issues that may trouble Muslims at some point in time, especially if you have property (or even debts) and anticipate that death is inevitable. Being prepared for what follows immediately after your passing is extremely important and that is the essence of Islamic Estate Planning and Management.

The primary objectives of Planning and Managing an Estate in Islam are to help those in need by providing assistance and general advice, to plan for several possible contingencies in relation to assets with regards to the available beneficiaries and to see that the execution of what has been instructed by the testator (upon passing) is put into accurate effect.

All of this is done through the instructions provided and is ensured to be within the constraints of Malaysian Shariah practices. For example, Islamic Estate Planning and Management will help you in preparing necessary documents to clarify the position of your assets and what is to be done with them after your passing.

Please don’t be mistaken . It is not to circumvent the Faraid but more to complement it instead .How is this so ? Under Faraid , the distribution is via a specific formula which is ordained under the Quran but there are instances where you would like to specify the assets to be given to your beneficiaries under the Faraid . This is because you may not want the particular asset to be liquidated upon your death just because it has to be shared by the beneficiaries under the formula.

By creating a Wasiat, Muslims can instruct a trusted person or entity as an Executor to administer their estate based on their wishes once they pass. One may also go beyond the realms of division of Faraid but in order to do this, Shariah-compliant customised planning must be done. A Muslim may leave everything to the mechanics of Faraid, but one must note that Faraid, despite its status, will only address a limited class of beneficiaries (ie. legal heirs) and only takes effect upon passing and not otherwise. That said, the entitlement of a beneficiary under Faraid is not automatic upon ones passing as many steps must be taken before a beneficiary can enjoy the fruits of his inheritance.

Prior to the inheritance estate being distributed to legal heirs or beneficiaries through Faraid system, legal heirs are responsible to sort the estate into some components. First and foremost, legal heirs are responsible to isolate the estate that has been gifted (hibah), trusted (amanah) or endowed (waqf). These types of estate do not belong to the deceased and must be separated from the total estate that needs to be distributed.

Second, the balance from the estate should be spent for funeral and mortuary expenses (purchases of shrouds, payment for bath, digging of graves and corpses). Third, refers to debt and is divided into two categories. The first category is debt to Allah which includes Zakah (obligatory charity), Nazar (vows), Fidyah and hajj pilgrimage to Mecca. The second category is debt to mankind which includes loan from financial institutions and debt to friends.

Once dealt with, the fourth step is that the Estate is then distributed according to Islamic Wassiyah (subjected to 1/3 from the estate balance) to non-legal heirs if the deceased has prepared a will and is followed by any claims for matrimonial property. Finally, the then remaining balance of the estate will be distributed to the right legal heirs according to Faraid.

Islamic Estate Planning and Management is seen as a noble service as it raises awareness among Muslims of their familial responsibilities and helps preserve harmony by avoiding unnecessary disputes. It draws similarities to services provided by other financial planning groups such as banks and insurance companies, with the exception that its exclusive focus is on estate planning and is for Muslims only.

No Muslim, irrespective of wealth or status, should underestimate the need to discuss Islamic Estate Planning and Management related issues, as one can ever be too prepared, especially where death is concerned. The fate of surviving loved ones, to a large extent, is dependent on the calculated and informed decisions made during a person’s lifetime.

At MRCO , in view of our expertise in shariah, Islamic finance and corporate law , we are able to assist our clients in structuring and planning their respective estates. Every person will have different needs and specific structures will be addressed to ensure you have a peace of mind.

Please don’t hesitate to call me or your respective contacts at MRCO for any queries . We will be happy to clarify your concerns and schedule an appointment to discuss your needs further. We should not wait until it is too late. Otherwise, give us a call at +603-2092 4822 or email us at ridza@ridzalaw.com.my.

Mohamed Ridza
Managing Partner
MRCO

07/2019

The Malaysian Corporate Dilemma – Do I want to be a board member?

“The irony is that the resolutions relating to the re-election of directors were passed but the resolutions relating to directors’ fees were all not approved. So in short, the message that the board got was that ‘we want you to work but we are not paying you’”, stated FGV Holdings Berhad’s (“FGV”) chairman, Datuk Wira Azhar Abdul Hamid. I am sure all of you would have noticed the FGV remuneration saga in newspapers recently which has sparked discussion and criticism in the corporate sector.

FGV, previously FELDA Global Ventures, is a government-linked company which produces crude palm oil. Other than crude palm oil, FGV also produces rubber plantation products, soybean and canola products and sugar products. FGV’s major shareholders include Federal Land Development (“FELDA”) – 33.6%, Armed Forces Fund Board (“LTAT”) – 1.25%, Koperasi Permodalan Felda Malaysia Bhd (“KPF”) – 5%, Employees Provident Fund (“EPF”) – 2% and several other state governments.

Last month on the 25th, FGV just had their 11th Annual General Meeting (“AGM”) which lasted for five hours. During the AGM, FGV’s major shareholders, namely FELDA, LTAT and KPF had voted against three resolutions pertaining to the directors’ remuneration package. Even though the EPF (which holds 2% of the shares in FGV) did not vote against the three resolutions mentioned above, they had nevertheless raised their concerns on high remuneration package of the directors through a letter to FGV.

So what were the three resolutions that the shareholders have voted against? Under the first resolution, FGV sought its shareholders’ approval for the payment of directors’ fees amounting to RM2.55 million in respect of Financial Year 2018. Next, FGV sought its shareholders’ approval on the payment of a portion of director’ fees to non-executive directors up to an amount of RM1.18 million from 26th June 2019 until the next AGM in 2020. The third resolution involved payment of benefits to non-executive directors from 26th June 2019 until the next AGM.

In the first quarter ended March 31 this year, FGV reported a net loss of RM3.37 million. Further, FGV has suffered a net loss of RM1.08 billion in 2018 compared to a net profit of RM130.928 million in 2017. Perhaps the major shareholders rejected the directors’ remuneration package because the company made a loss. The remuneration package amounted to RM5.74 million for Financial Year 2018. This is evident in LTAT’s statement that they are of the view that directors’ pay should commensurate with the current state of affairs at FGV and its prospects ahead.

The main reason why all this sparked discussion in the corporate sector is because despite voting against resolutions pertaining to the directors’ remuneration, the shareholders had voted in with an overwhelming show of support to retain FGV’s chairman, Datuk Wira Azhar Abdul Hamid and other directors on the board. Datuk Wira Azhar commented that “it’s as though the shareholders still want us to be directors but do not intend to pay us” when interviewed by The Edge Markets.

The decision of the major shareholders who has voted against the remuneration package at the AGM was not short of criticism. Particularly, Lya Rahman, the former general manager of the Minority Shareholders Watch Group (“MSWG”) said in her article that this can invite repercussion which put FGV at the risk of mass resignation of the board and consequently, FGV will have to waste more time and resources to recruit new directors. At the same time, LTAT has defended its decision to vote against the directors’ remuneration package by stating that: “We wish to emphasise that this decision was not taken lightly and was reached following considerable discussion and deliberation. The decision was premised on the fact that LTAT strongly believed in shareholder activism, particularly to protect the interests of our contributors, client members of the armed forces”.

While it is understandable from the perspective of financial performance, it seems unfair to ask the board of directors to continue to serve after their remuneration package is rejected by the shareholders. It is hard to expect people to work without being duly compensated for their efforts and commitments nowadays. To be fair, the board of directors should be allowed some sort of allowances and benefits as a form of appreciation towards their hard work. Reports state that the losses incurred by FGV mentioned in the earlier paragraph were due mainly to impairments of assets acquired by the previous management. As stated by FGV, ‘FGV’s abysmal financial performance in 2018 was the culmination of several years of poor choices and decisions that this board was not responsible for but has been forced to address’. Interesting enough, FGV was not the only company which board had decided to impair for past investments after the recent general elections in Malaysia. I wouldn’t be surprised if a new “MFRS” comes into the picture giving new rulings on impairment . The more the merrier right ?

As Lya Rahman noted in her article, the outcome of FGV’s recent AGM may be too harsh on the directors who are all expected to commit and work hard to provide directions to turnaround the company. She also asked to give the newly appointed board of directors some time to bring about a desired degree of turnaround bearing in mind the atrocious financial situation FGV is in right now. After all, the board of directors had only been appointed for the past 18 months to steer the FGV ship in the right direction.

Nevertheless, what is done is done. It is argued that all this could have been avoided if FGV has had discussions with its shareholders behind closed door and reach an understanding before putting the resolutions on directors’ fees at the AGM. Also, if the major shareholders are unhappy with the performance of the board, they should have voiced out their concerns and made it clear to the board of directors before the AGM. Otherwise, the major shareholders should at least warn the board of directors of their decision before the AGM so that the board could anticipate the shareholders’ decision.

It is all too late now because the FGV’s board of directors is in a bind post-AGM and the only option to remedy the situation is to call for an Extraordinary General Meeting (EGM) to seek a fresh mandate on the directors’ remuneration package. As we all know, calling for an EGM will incur more time ,costs and resources which can be better used to manage the array of challenges on the business front that FGV is facing. This is true as an insider stated that the cost for holding an EGM would be at least half-a-million ringgit. Therefore, it is suggested that companies should have sound shareholder communication especially with major shareholders and institutional investors to avoid aftermath like this.

To sum up, this recent FGV remuneration saga may seem to be a case of shareholder activism and is said to be unprecedented in Malaysia. Lessons to be learnt from this are the continuous engagement between shareholders and management. At the same time, not forgetting is the role of directors in this challenging environment. Board client members are now being sued which may deter good people from sitting in the boards of companies. In addition, the remuneration must be attractive enough to get talented individuals and not by virtue of “connections” to certain parties. Unfortunately, politicians or those close to certain politicians are still appointed to the boards of directors. Where have all the professionals gone to ?

In law, the board of directors is conferred with powers under Companies Act 2016 (“CA 2016”) to manage the business and affairs of the company. Although the board may take actions they deemed that are in the best interest of the company, they are still bound by the law and also the shareholders. Section 213 CA 2016 provides that directors must at all times exercise their powers for a proper purpose and in good faith in the best interest of the company. The directors should also exercise reasonable care, skill and diligence.

Further, Section 213(3) CA 2016 specifically provides that a director who contravenes Section 213 CA 2016 commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or to a fine not exceeding three million ringgit or to both. In other words, if a director breached any of his duty under the law, it attracts personal liability and he could be sued for his breach. For this reason, it is conventional for all directors to be paid a fee and given other allowances for their services to attract talented people to be board members. Otherwise, who would want to be a board client member with the accompanying responsibilities and possible liabilities? And for those wanting to be appointed to boards for the glamour and the perks, just ensure that all these comes with responsibilities. You may lose sleep, think again. It truly is a dilemma.

Mohamed Ridza & Co

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