The duties of directors in the current corporate world can be very onerous. As a director, it is pertinent to be aware of one’s responsibilities and liabilities particularly under the Companies Act 2016 which requires a director to exercise reasonable care, skill and diligence and act in good faith in the best interest of the company. In addition, directors can come under serious sanctions under income tax legislations in most jurisdictions.
Broadly, a director has oversight responsibility for the operational and strategic policies of the company. A director does not have to be a shareholder or an employee of a company where he holds the office of director. Directors derive their powers from the company’s Articles of Association and the law and act on the basis of resolutions made at director’s meetings. No person who is an undischarged bankrupt can be a director of a company.
Malaysian Income Tax Act 1967
Directors are also responsible for the companies’ tax obligation under the Malaysian Income Tax Act (ITA) 1967. However, even if an individual has not been properly elected or constituted as a director, an individual can still be considered a director under the ITA.
The Malaysian tax law also does not distinguish between directors who are active, passive, de facto or nominee directors. The lack of involvement in the affairs of the company does not absolve a director from liabilities under the ITA. He or she is not treated as a distinct legal person from the company, and thus can be personally liable in the case of tax obligations.
Can a director avail himself of defence? To answer, let us take a look at director’s liabilities in other jurisdictions.
Director’s Liabilities in Canada
Similar to the Malaysian legislation, where a corporation has failed to deduct or withhold an amount as required under the Canadian law, the director of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount are jointly and severally liable, together with the corporation to pay that amount of tax and any interest or penalties relating to it.
The Canadian tax law provides directors with a statutory due diligence defence. A director is not liable for failure to pay tax where the director has exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in similar circumstances.
Director’s Liabilities in Australia
The Australian law provides a number of statutory defences which outlines circumstances in which a director is not liable to director penalties:
- The director did not take part in the management of the company during the period of illness or some other good reason;
- The director took all reasonable steps to ensure that one of the three things happened:
- the company paid the amount outstanding;
- an administrator was appointed to the company;
- the directors began winding up the company.
Director’s Liabilities in Malaysia
Unfortunately, the Malaysian ITA does not accord any defence to the directors, like that of the above jurisdictions. If a person does not directly or indirectly hold any shares or hold shares above 20%, the provision of Section 75A would not apply. Thus, liability as a director arises when the directors own more than 20% shares in the company.
Compared to other jurisdictions, our regime on director’s liability is harsh and directors should be aware of this before committing to an appointment. If you are a director or are about to become a director of a company particularly a private non-listed company, you should make all inquiries, including the company’s exposure to corporate tax liabilities, to avoid unnecessary risk of incurring personal liabilities of the corporation you serve.
Thisha Gunasilan is an Associate Director of Axcelasia Taxand Sdn Bhd (a subsidiary of Axcelasia Inc, a company incorporated in Malaysia and listed on the Singapore Stock Exchange). Axcelasia Taxand is a member firm of the TAXAND Global Organisation of independent tax firms. Thisha can be contacted at email@example.com. The views expressed here are the writer’s personal views.