Companies Act

Part 5 - Local Authority Companies

The Maldives parliament has passed a new Companies Act 7/2023 (the “Act”) which has recently been assented to by thepresident. The law is set to replace the existing framework for company laws in Maldives and comes in force on 1 January2024.

Existing companies under the old law are automatically recognized and subject to the new law. Immediate action isn’trequired, but certain actions outlined in the sections below must be taken within one year of the law coming into effect.

This memo series by S&A explores some of the key changes which has been brought by this Act. This memo series will be split up as follows with a separate memo for each of the following:

• Private Limited Companies;
• Foreign Investment Corporations;
• Public Companies;
• State Owned Entities; and
• Local Authority Companies.

Local Authority Companies – KeyConsiderations

What are Local Authority Companies?

Local Authority Companies (LACs) are established by one or multiple local councils to meet constituents’ basic needs andconduct economic activities.

Applicability of Rules for State Owned Entities

In the absence of dedicated governance laws and regulations for LACs, the governance laws for State Owned Entities are deemed applicable to LACs, including rules for listing and de- listing.

Conversion of LACs

1. Conversion of a LACs to a Public Company
   • Members can convert LACs to a public company through a special resolution.
2. Conversion of a LACs to a Private Company
   • The Act permits converting an LAC into a private company if shares are transferred to a party other than the localcouncil(s).

Number of Directors and Company Secretary

• LACs must have at least three directors, unless the parent law specifies otherwise.

• Additionally, unlike private companies, LACs are required to appoint a company secretary.

Conclusion

Before the enactment of the Act, LACs were categorized as government companies, governed by section 95 of the former Companies Act 1996. A specific regulation, under the Decentralization Act, outlined rules for LACs, such as the formation process requiring a decree from the majority of council members. Notably, in certain situations, LACs could be formed withprivate individuals upon approval from the Registrar of Companies, as per the Regulation on Local Authority Companies(Regulation No.: 2021/49).

However, post the Act’s ratification, its provisions and regulations take precedence over any prior laws or regulations related to LACs and their formation. This shift indicates a restructuring of the legal framework, emphasizing the Act’s supremacy ingoverning LACs.

The governance flexibility in the earlier regulatory landscape prompts consideration of the impact on transparency andaccountability. The transition from government company status to a more adaptable structure might raise questions about the balance between regulatory leniency and ensuring effective community service delivery by LACs. Academic inquiry coulddelve into the practical consequences of this transition and the evolving dynamics in local governance.