By Sharmila Ravindran
Under the Companies Act 2016, the definition of director now includes a person (at least 18 years of age) in accordance with whose directions or instructions the majority of directors of a corporation are accustomed to act. A public company must have at least two directors who are residents in Malaysia. As for private company, the requirement is at least one director who is a resident in Malaysia.
A competent board of directors should be able to ensure the company’s affairs are being run efficiently. A capable board of directors will be expected to take care of the interests of its shareholders and other stakeholders. They must also deal with issues pertaining to corporate governance, corporate social responsibility and ethics apart from compliance of the relevant laws and the prosperity of the business and financial affairs of the company.
Directors Duties and Obligations
Directors owe a fiduciary duty to the company whose board they form. Directors as fiduciaries are, among others, subject to the following duties:
- Manage, direct and supervise the management of the business and affairs of the company;
- To act in the best interest of the company and to exercise his/her powers for a proper purpose;
- Not to make improper use of position, information, property or corporate information or to compete with the company;
- To exercise duty of care, skill and diligence;
- To disclose any interest in contracts involving the company to the Board of Directors; and
- To disclose any interest in shares or shareholding.
The Companies Act 2016 imposes criminal liability where general legal duties are breached. However insofar as “business judgement” is concerned, a director is free from any liability if he or she:
- Makes a business judgement for a proper purpose and in good faith;
- Does not have a material personal interest in the subject matter of the said business judgement;
- Is informed about the subject matter of the business judgement to the extent the director reasonably believes to be appropriate under the circumstances; and
- Reasonably believes that the business judgement is in the best interest of the company.
Liabilities and Penalties
Pursuant to the Companies Act 2016, directors face heavier penalties for breach of duties. In that regard, directors now face heavier fines of up to RM3mil and a maximum five-year term of imprisonment, or both, if found guilty of breaching the Companies Act 2016.
A director’s liability arises in the following instances:
- False and misleading statements or reports – Directors are prohibited from knowingly authorising, directing and/or consenting to advertising, circulation or publication of misleading or false statements or reports.
- Restriction from taking loans ─ Companies are prohibited from giving out loans to its directors, subject to certain exceptional circumstances.
- Misusing insider information or other opportunities – Directors dealing with sensitive confidential information regarding business dealings and transactions of the company are prohibited from using such information for their own personal profit. A director is under an obligation to disclose to his or her Board of Directors first and obtain consent before proceeding to use such information for any other purpose, other than for purposes in the best interest of the said company.
A director cannot limit his or her liability. They can, however rely on advice and opinion rendered by professional or expert, appointed by the company to provide such advice or opinion.
Legal proceedings can be brought against directors by third parties in cases of fraudulent trading, and by shareholders when there are sufficient findings of a breach of the said director’s fiduciary duties and obligations to the company.
What Should Directors Do?
It is of utmost importance that directors are able to:
- Understand the company’s financial health because most problems start with bad financial management. As a director of the company you have the statutory right to access all accounting records of the company.
- Exercise care and independent judgement- Do not be confused or swayed by a decision of the majority of the board if it is not in the best interest of the company;
- Attend and pay attention at board meetings. Review the items on the Agenda with care. It is important for all minutes of directors’ meetings to be prepared, approved and maintained by the Company Secretary. Ask for the meetings to be recorded so you can check if the minutes are in accordance with what was said at the meeting;
- Act with reason, integrity and common- sense. Challenge things when you are uncomfortable, and raise concerns promptly. It is necessary for a competent Board to seek external advise or opinion when there are any confusions or a certain matter lacks clarity. It is better to be safe than sorry;
- Abstain from signing any contracts or agreements unless legal advise is obtained on the contents of such contracts or agreements.