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What Would Happen If Directors’ Breach Their Duty?

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 type of companies be it a public listed company or a private limited company. A limited company is legally separate from its directors and shareholders.  

For private companies limited by shares, there are usually more than one director, as a minimum of 2 directors are 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. Directors of the company have special legal position as those with responsibility and authority within the company for the acts and omissions of the company.  

It is necessary to understand what the general responsibilities of a company’s director are as they are conferred with wide powers within a management. Directors are generally guided by the will of majority shareholders, but they are not necessarily shackled by the decisions of the shareholders since they may take actions deemed in the best interest of the company. These wide powers do not mean that directors are given free rein to act irrationally. The 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, you are required to act in the best interests of the company, its shareholders, employees and creditors. This is called the fiduciary duty or duty of care. Usually, as a director, you will not be personally liable for paying the company 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 the 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 include:  

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

 

In the context of business judgement, the directors have several responsibilities to take up as well such as: 

  • 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 be informed on the subject matter of the business judgement to the extent that the director reasonably believes to be appropriate under the circumstances.  

 

Other general responsibilities that need to be carried out by the director at all times include:  

  1. To always act within powers
  2. To constantly promote the success of the company for the benefit of its members as a whole 
  3. To exercise independent judgement 
  4. Avoid conflicts of interests
  5. Not to accept benefits form third parties  
  6. Declare interests in transactions or arrangement with the company 

 

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. 

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.  

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  
  • Compounding 
  • Suspension of trading  
  • Reprimands  
  • Delisting  
  • Dissolution  

     

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.  

 

Summary 

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.  

Paul Hype Page & Co – SSM service provider and Asean Chartered Accountant.

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Website: www.paulhypepage.my

Posted on April 8, 2019 at 12:32 pm
Categories: Company Formation

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