What You Need to Know Before Sign Up to be a De Facto Director

Before we go further, you might want to read our previous articles about Type of Director in Malaysia and The Dos and Don’ts of Company Director.

Learn more about De Facto Director:

What is a De Facto Director?

A de facto director, as noted by the court, is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such1.

Question No. 1: Does the law distinguish who’s who?

No. The Companies Act2 lays down a blanket definition in defining a director3:

“Director” includes any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the majority of directors of a corporation are accustomed to act and an alternate or substitute director.

What it means is this- under the Act, a person is a director as long as:

  1. The person is occupying the position of a director, regardless of what the position is called; or
  2. The majority of the directors of the company is accustomed to received instruction from the person and act upon it; or
  3. The person calls themselves/ appointed by the company to be an alternate/ substitute director.

Question No. 2: How to establish whether one is a de facto director?

To establish that a person was a de facto director of a company, the court noted that it is necessary to plead and prove that a person undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company’s affairs or undertook tasks in relation to its business which can properly be performed by a manager below-board level4.

Question No. 3: Can a de facto director enter into a legally binding agreement with another individual/ entity?

No. This was one of the issues that the court noted in Tan Sri Dato’ Wan Sidek Bin Wan Abdul Rahman v Rahman Hydraulic Tin Bhd5. In this case, two companies entered into a service agreement between them. However, the directors who signed the service agreement on behalf of both companies were the de facto director. The court held that as they are not validly appointed under the company’s articles of association (as compared to an actual director who is appointed according to the articles of association), they have no legal capacity to enter any agreements on behalf of their respective company.

Question No. 4: Does it mean that a de facto director owes no fiduciary duty to a company?

No. This issue was dealt with (albeit very briefly) in Pharmmalaysia Bhd v Dinesh Kumar Jashbhai Nagjibha Patel & Ors6. In that case, Pharmmalaysia alleged that Dinesh, the managing director of the company, had breached various fiduciary duties as he had caused and procured payments to himself, 13 other companies, and various third parties that were neither in the ordinary course of a business nor referable to any legitimate purpose of Pharmmalaysia. The court sided with Pharmmalaysia, and income to its decision, has this to say about the matter:

“It is a correct statement of the law to say that directors have some of the attributes of trustees especially in regard to the assets of the company which is in their hands or under their control generally…Even de facto directors are regarded as trustees of the company assets under their watchful control…”

Therefore, always think twice before one sign up to be a de facto director for a company, for a de facto director can still be held liable for not doing a proper job for the company, even if he is never validly nor legally appointed by the company to be a director in the first place.

Want to learn more about De Facto Director?

1. Pendakwa Raya v Dato’ Sri Mohd Najib bin Hj Abd Razak [2020] MLJU 1254, quoting the case of Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180.
2. 2016.
3. Section 2, Companies Act 2016.
4. Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180.
5. [2012] 6 MLJ 681.
6. [2004] 7 CLJ 465

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