What Happens if Directors Breach Their Duties in Malaysia?

7 min read|Last Updated: May 2, 2024|

Directors are important and are likely to be one of the highest ranks of authority in a company, but this does not mean that they can exploit or neglect the company. By law, they need to fulfil both fiduciary and statutory duties to make sure they are acting in the best interest of the company. There are consequences if directors breach their duties in Malaysia, which we will discuss in this article.

Companies in Malaysia

The foundation of any company is laid on 4 main pillars which include the directors, shareholders, auditors, and the company secretary. In Malaysia, a company director must be present in all types of companies be it a public listed company or a private limited company.

For private companies limited by shares, there are usually more than one director, as a minimum of 2 directors is required. A company of this kind is owned by its shareholders, but the responsibility for the management of the company’s business lies on the board of directors.

Malaysia Corporate Secretary Eric

It is vital to understand the general responsibilities of a company’s directors as they have wide powers within management. Majority shareholders influence directors, but the directors retain the authority to make decisions they believe are in the company’s best interest.

These powers do not mean that directors are given free rein to act irrationally. Malaysian law places a safeguard to protect the shareholders against any negligent or errant directors.

General Responsibilities of a Company Director

By becoming a director of a Malaysian company, you need to act in the best interests of the company, its shareholders, employees and creditors. This is the fiduciary duty or duty of care.

Commonly, as a director, you will not be personally liable for paying the company’s debts, so if the limited company does not pay its debts and if the creditor takes legal action, only the company assets are at risk.

The Companies Act 2016 (CA) is the main piece of legislation which governs the company laws in Malaysia. The Companies Act 2016 aims to enhance internal control and strengthen the corporate governance structure in relation to the affairs of the company directors.

As per the Companies Act, some of the general responsibilities of a director in Malaysia include:

  • Directors must exercise their powers for a proper purpose and in good faith, in the best of the company at all times
  • Directors should also exercise reasonable care, diligence, and skill

Some other responsibilities include:

  • Make the business judgement for a proper purpose and in good faith
  • Must not have a material personal interest in the subject matter of the business judgement
  • Always need to inform on the subject matter of the business judgement to the extent that the director reasonably believes to be appropriate under the circumstances
  • To always act within powers
  • To constantly promote the success of the company for the benefit of its members as a whole
  • To exercise independent judgement
  • Avoid conflicts of interests
  • Not to accept benefits or bribes from third parties
  • Declare interests in transactions or arrangements with the company

Director’s Fiduciary Duties In Malaysia

A director holds the duty to act in the best interests of the company, the no conflict and no profit principles, and the equitable duty of confidence. They should reflect a relationship of trust and loyalty between oneself and the company and consider all members when exercising any judgment. One’s interest must also be declared before the company enters into an arrangement.

Who Can Be a Director In Malaysia

Below are the criteria to qualify as a director in Malaysia:

  • A natural person of at least 18 years of age.
  • Must reside in Malaysia (have a principal place of residence in Malaysia).
  • Must not be an undischarged bankrupt.
  • Must not be convicted of an offence relating to the promotion, formation, or management of a corporation.
  • Must not be convicted of an offence involving bribery, dishonesty, or fraud.
  • Must not be convicted under Sections 213, 217, 218, 228, 539 of the Companies Act
  • Must not be disqualified by the court under Section 199 of the Companies Act.
Malaysia Corporate Secretary Eric

Consequences of Breach of Directors’ Duties in Malaysia

While there are many matters a director must focus on, one of the most important concerns is the financial statements of the company. The Companies Act has myriad of compliance requirements for accounts, record keeping, disclosures, and filing of annual returns for which a director is responsible, with criminal sanctions in any event of breach of duty.

The new law also implements a stricter standard and more responsibilities for directors, this includes heavy fines and longer terms of imprisonment for violations.

Sanctions for Any Breach of Their Directors’ Duties in Malaysia

Directors are subject to a variety of sanctions for any breach of their duties. These include:

1. Personal liability

The limited liability afforded by a limited liability company only applies to its shareholders rather than its directors. The directors may be personally liable if they fail to meet their responsibilities, such as:

  • A breach of the director’s general duties owed to the company, including to account to the company for profits made from transactions where a conflict of interest was present or did not declare an interest as required
  • Failing to comply with specific duties such as making unlawful distributions
  • Any false or misleading reporting in which the company suffers a loss
  • Being under insolvency law such as for any fraudulent or wrongful trading
  • Unable to pay debts
  • In case of any disqualification proceedings, a contribution order is made against the director

2. Criminal offences and fines

Breaching of the company law may be regarded as a criminal offence and subject to fines and other punishments.

Statutory provisions in legislation are present for criminal offences as well as the sanctions that may apply to companies upon conviction. The types of sanctions that may happen on the company are as follows:

  • Fines of minimum or maximum amounts according to the applicable legislation
  • Compounding
  • Suspension of trading
  • Reprimands
  • Delisting
  • Dissolution

3. Cease and desist orders

During the investigative phase of any criminal proceedings, courts may choose to make orders requiring companies to disclose their records or make a freezing order over the company’s assets such as bank accounts.

4. Disqualifications or undertakings in lieu

The court may disqualify an individual from being a director of a company. Undertakings not to act as a director may be accepted in lieu.

A persistent breach of company law such as not making requisite filings, fraudulent trading, and where the company has become insolvent where the director is unfit to be handling the management of a company are considered possible grounds for disqualification. If the company wishes to terminate the director, it may call for an extraordinary general meeting (EGM) in Malaysia.

Change of Director in Malaysia

There are 2 scenarios where you opt to change directors.

  1. Change by Resignation of Director:
    The resigning director can hand in a written notice to the board of directors who will then inform the company secretary to start a board resolution.
    The company secretary will submit the relevant documents to the Companies Commission of Malaysia (SSM) if the board approves of the resignation.
  2. Change by Removal of Director:
    In a situation where the board of directors rejects the resignation of a director, they can opt for the removal of the director.

The Companies Act (2016), Section 207, grants directors the right to a hearing before their removal.  The director also has the right to make an oral or written representation about the resolution to remove him/her.

Forms of Relief for Breach of General Directors’ Duties in Malaysia

A breach of general duties by a director can trigger various remedies for the company.

  • A breach may be ratified by resolution of the company’s shareholders
  • Grant relief if the director acted reasonably and honestly
  • Arranged insurance for the benefit of its directors
  • Offer assistance to the director by indemnifying him or her against costs incurred in successfully defending a claim for breach of duties owed to the company

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FAQs

Is Malaysia a good place to invest in?2024-05-02T11:40:17+08:00

Malaysia is attractive to businesses due to its strategic location, its good infrastructure and world class amenities. This is seen by the big expat community in Malaysia and international students that come to Malaysia to study.

Is Malaysia a good place to move to?2024-05-02T11:40:50+08:00

There is a large expat community that feels that Malaysia is welcoming to foreigners. Even more so, Malaysia is an attractive destination to set a company due to numerous reasons, one of them being ease of doing business and low cost of living.

Can a foreigner be a director of a Malaysian Company?2024-05-02T11:40:52+08:00

A Malaysian company requires a minimum of one director who is above the age of 18 and resides in Malaysia. This individual can be a Permanent resident, a foreigner with a Resident Talent Pass or MM2H holder.

Are Directors owners of the company?2024-05-02T11:40:54+08:00

The owners of a limited liability company are the shareholders. They are the ones with the authority to appoint a limited director of the company, however it is also possible that an individual take up the role as director and shareholder of the company simultaneously.

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