The Do’s and Don’ts of a Company Director

Congratulations, you have just been appointed as a director of a company! Now that you are one, ever wonder what can you do and what you can’t?

With great power comes great responsibility. Being a company director comes with all the glamour and perks, but so does responsibilities. Let us help you navigate through the waters of directorship with a brief list of do’s and don’ts for company directors in Malaysia.

THE DO’S OF COMPANY DIRECTOR

1) Reasonable Care, Skill & Diligence

A director must exercise his powers with reasonable care, skill and diligence. While there are no definitive laws on what constitutes reasonable care, skill and diligence, section 213(2) of the Companies Act 2016 (“the Act”) shed light on these elements in the following two guidelines:

a. The Reasonableness Test

This is an objective test. A company director is expected to perform his duties in a way that can be reasonably expected of a person in the director’s position. In other words, would another director do as you have done in your position?

b. The Best of Ability

This is a subjective test. A company director is expected to perform his duties to the best of his abilities. Such abilities are to include any additional knowledge, skills and experience that the director may profess to have.

2) Duty of Disclosure

Company directors are bound by a general duty to disclose information that may impact the wellbeing of the company and its stakeholders. The two key disclosures that directors ought to make are:

a. To disclose in writing any changes that might affect the internal management of the company. This includes particulars relating to shares, debentures, participatory interests, rights, options, contracts, and any such relevant events and matters, for the purposes of compliance with the Act as required under Section 219; and

b. To disclose any personal interest that may be in conflict of interest with the company, whether directly or indirectly, in contracts, proposed contracts, property, offices and etc as soon as practicable after the relevant facts have come to the director’s knowledge (section 221).

3) Regulatory Compliance

A company director should comply with the statutory requirements under the Act. If the company has a constitution, the rights, powers, duties and obligations of directors and members of the company are to be governed by both the Act and the company’s constitution (to the extent that is permitted under the Act) (section 31).

THE DON’TS OF COMPANY DIRECTOR

1) Transactions with Conflict of Interest

As mentioned above, directors have a duty to disclose information that may impact the wellbeing of the company and its stakeholders. Directors should steer clear from the improper use of the company’s property, information and the director’s position within the company for his personal benefit (section 218).

2) Buying and Selling of Expensive Properties

A director is not allowed to either acquire an undertaking or a property of substantial value, or sell a company property that is of substantial value without the approval of the company. The property is deemed to be of substantial value if it exceeds twenty-five per centum (25%) the the company’s total assets, net profits or issued share capital (section 223).

3) Giving of Loans and Tax Free Payments

A director acting for the company must not hand out company monies for illegitimate reasons, including:

a. By providing loan, guarantee or security to a director of the company or of a related company (section 224), unless a prior resolution has been passed to approve such transaction.

b. By providing loans to individuals that are connected to the directors of the company (section 225) unless any of the exceptions below applies:

i) Loan is made to a subsidiary or holding company or subsidiary of the holding company;

ii) Loans are given in the company’s ordinary course of business; or

iii) Loan is given to a person who is under the company’s or its related corporation’s full-time employment (i) for the purchase of a home, or (ii) according to the company’s allowable employee loan scheme.

c. By giving any tax free payment to a company director as remuneration.

Do keep in mind that a director who contravenes the don’ts list above  may be made liable (if convicted) to imprisonment of not more than five years or a fine of not more than three million ringgit or both.

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