Being appointed as a company director in Malaysia is both an honour and a significant responsibility. Under the Companies Act 2016, directors are bound by strict statutory and common law duties that, if breached, can result in serious personal liability — including financial penalties and even imprisonment.
Whether you are a first-time director or a seasoned business leader, understanding these duties is crucial to protecting yourself and fulfilling your role effectively.
Who is Considered a Director Under Malaysian Law?
The Companies Act 2016 defines a director broadly. It includes any person occupying the position of director, regardless of their title. This means that shadow directors (those whose instructions the board habitually follows) and de facto directors (those acting as directors without formal appointment) can also be held liable for breaching directors' duties.
If you exercise real influence over a company's decisions, you may be treated as a director under the law — even without the official title.
The Core Statutory Duties of Directors
Sections 211 to 217 of the Companies Act 2016 codify the key duties that every director must observe. These duties apply at all times and cannot be contracted out of.
1. Duty to Act in Good Faith and in the Best Interest of the Company (Section 213)
Directors must act honestly and in good faith in the best interest of the company. This is a fiduciary duty, meaning directors must place the company's interests above their own personal interests.
This duty requires directors to:
Consider the long-term consequences of their decisions. Take into account the interests of employees, where appropriate. Avoid conflicts between personal interests and the company's interests. Not exploit corporate opportunities for personal gain.
A director who secretly diverts a business opportunity meant for the company to their own personal venture would be in clear breach of this duty.
2. Duty to Exercise Reasonable Care, Skill, and Diligence (Section 213)
Directors are expected to exercise the care, skill, and diligence that a reasonably diligent person would exercise in the same position. This standard is both objective and subjective — meaning the law considers both what a reasonable director would do and the specific knowledge and experience of the individual director.
A director with accounting qualifications, for example, would be held to a higher standard when it comes to reviewing financial statements than a director without such expertise.
Practical steps to fulfil this duty include: attending board meetings regularly, reading and understanding board papers before meetings, asking questions when something is unclear, and seeking professional advice when necessary.
3. Duty to Exercise Powers for Proper Purpose (Section 214)
Directors must only exercise their powers for the purposes for which those powers were conferred. Issuing new shares to dilute a shareholder's voting power for personal reasons, rather than for genuine capital-raising purposes, would be a breach of this duty.
4. Duty to Avoid Conflicts of Interest (Section 215)
Directors must not place themselves in a position where their personal interests conflict with their duties to the company. Where a conflict arises, the director must disclose it to the board immediately.
Section 221 requires directors to disclose any interest in contracts or proposed contracts with the company. Failure to disclose can result in the contract being voidable and the director being liable to account for any profits made.
5. Duty Not to Misuse Information or Position (Section 216)
Directors must not improperly use their position or any information obtained by virtue of their position to gain an advantage for themselves or someone else, or to cause detriment to the company.
Using confidential company information to trade shares or to benefit a competing business would be serious breaches of this duty.
Personal Liability Scenarios: When Directors Pay the Price
Breaching these duties can expose directors to significant personal liability. Here are common scenarios where directors face personal consequences:
Insolvent Trading
Under Section 539 of the Companies Act 2016, if a company continues to trade while insolvent and incurs further debts, directors can be held personally liable for those debts. Directors must monitor the company's financial health and take appropriate action if insolvency looms — including seeking professional advice and, if necessary, ceasing to trade.
Breach of Fiduciary Duties
Directors who breach their fiduciary duties may be required to account for any profits made and compensate the company for any losses suffered. In serious cases, they may also face disqualification from acting as a director.
Failure to Maintain Proper Records
Section 245 requires companies to keep proper accounting records. Directors who fail to ensure compliance can face personal penalties, especially if the failure contributes to the company's inability to pay its debts.
Criminal Liability
Certain breaches can result in criminal prosecution. For example, fraudulent trading under Section 540 can lead to imprisonment of up to ten years. Providing false information to the Companies Commission of Malaysia (SSM) is also a criminal offence.
Practical Advice for Directors
Protecting yourself as a director requires proactive steps:
Stay informed. Attend meetings, read all board papers thoroughly, and keep up to date with the company's financial position. Ignorance is not a defence.
Document your decisions. Ensure that board minutes accurately reflect discussions and the reasons for decisions. This creates a record showing that you acted reasonably and in good faith.
Disclose conflicts immediately. If you have any personal interest in a matter before the board, declare it and, where appropriate, recuse yourself from the decision.
Seek professional advice. When facing complex legal, financial, or strategic decisions, engage qualified professionals. Reliance on expert advice can demonstrate that you acted with reasonable care.
Consider Directors and Officers Insurance. D&O insurance can provide a financial safety net if claims are made against you personally. While it does not cover fraud or intentional misconduct, it can protect against claims arising from honest mistakes.
Know when to resign. If you believe the company is heading towards illegal or unethical conduct and your concerns are being ignored, resignation may be the appropriate course of action — documented in writing with your reasons.
Conclusion
Serving as a director comes with significant legal responsibilities. The Companies Act 2016 sets out clear duties that every director must follow, and the consequences of breach can be severe — from financial penalties to imprisonment and personal liability for company debts.
By understanding your duties, staying actively engaged in the company's affairs, and seeking professional guidance when needed, you can fulfil your role effectively while protecting yourself from personal liability.
Disclaimer
This article is intended for general informational purposes only and does not constitute legal advice. The information provided should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. If you are a company director or are considering becoming one, we strongly recommend consulting with a qualified lawyer to understand your duties and obligations under Malaysian law. Naidu Chambers expressly disclaims any liability for actions taken or not taken based on the contents of this article.