Consequences of Breach of Directors’ Duties
As Malaysia has recently overhauled the laws that governs companies with the new Companies Act 2016, directors can be sued for breaching their duties. While there are many matters a director must focus upon, one of the most important concern 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 observes a stricter standards and higher responsibilities for directors, which include heavy fines and longer terms of imprisonment for violations.
Directors are Subject to Variety of Sanctions for any Breach of their Duties.
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.
Criminal Offences and Fines
Breaching of the company law may be regarded as a criminal offence and subject to fines. For instance, breaching of the Companies Act requirements on the corporate administration of the company such as upkeep of company registers and filings, may constitute an offence for which the director or every officer in default may be liable. Statutory provisions in legislations are present for criminal offences as well the sanctions that may apple to companies upon conviction. The types of sanctions that may be imposed on the company as follows:
- Fines of minimum or maximum amounts which is determined according to the applicable legislation
- Suspension of trading
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.
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. The possible grounds for disqualifications are extensive, and this include a persistent breach of company law such as not making requisite filings, fraudulent trading, and where the company has become insolvent which the director is unfit to be handling the management of a company.
Form of relief for breach of General Duties
If the director is found to breach any of the general duties owed to the company, there are some possible form of relief that can be performed:
- In some circumstances, the breach may be ratified by resolution of the company’s shareholders.
- In some circumstances, the court may grant relief if the director acted reasonably and honestly.
- The company may have arranged insurance for the benefits of its directors.
- The company may 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.
Given the various responsibilities of a director, it is in the hands of the director to promote good accountability and not take a hands-off approach in caring for the companies although the law is present to prevent them from acting beyond their powers. The future of the company and business is in the hands of the director and since they are conferred with wide management powers, the law sets a limit to curb any mismanagement of a company.