Company directors play a crucial role in corporate governance, ensuring ethical business practices and legal compliance. In Malaysia, directors owe fiduciary duties to act in the best interests of the company. A breach of these duties can result in serious legal consequences, including fines, imprisonment, and civil lawsuits.
The Companies Act 2016 (CA 2016) serves as the primary legislation governing the responsibilities of company directors. Sections 210 to 234 of CA 2016 outline key obligations, emphasizing that directors must act in the best interests of the company and exercise their powers responsibly.
The core fiduciary duties of directors include:
- Duty to Act in Good Faith and in the Best Interests of the Company
- Directors must prioritize the company’s welfare over personal or third-party interests.
- Decisions should be made honestly, for proper purposes, and in a manner that benefits the company and its stakeholders.
- Duty to Avoid Conflicts of Interest
- Directors must disclose any personal interest in company transactions.
- S.218 of CA 2016 requires directors to declare conflicts of interest at board meetings and refrain from participating in decisions where they have a personal stake.
- Duty to Exercise Reasonable Care, Skill, and Diligence
- Directors must perform their duties with the level of care and diligence that a reasonable person with their knowledge and experience would apply.
- This duty ensures directors remain informed, actively participate in decision-making, and take necessary precautions to protect the company’s interests.
- Duty to Not Improperly Use Information or Position
- Directors are prohibited from using their position or access to company information for personal gain or to the company’s detriment.
Example Case Law: Illustrations of Breach of Duty
- Misappropriation of Company Assets: In Simmah Timber Industries Sdn Bhd v David Low See Keat & Ors [1999] 5 MLJ 421, a director transferred company assets to another party without proper disclosure or documentation. The transaction was done through a lease-back agreement, which placed additional financial burdens on the company. The court found that the director had secretly profited from the deal and committed fraud against the company. As a result, he was ordered to return the profits obtained through the misappropriation.
- Breach of Fiduciary Duties in Financial Management: In Oh v Syn [2019] 2 MLJ 379, the Court of Appeal reaffirmed the principle that company executives owe a fiduciary duty to act in the best interests of their employer, particularly in financial management. The appellant, who served as the CEO, was found to have engaged in irregular business transactions that caused substantial financial losses to the company. This case underscores the importance of corporate officers exercising diligence, honesty, and accountability in financial decisions, as well as the necessity for plaintiffs to substantiate financial losses when seeking damages.
Legal Consequences of Breaching Directors’ Duties
Directors who fail to uphold their fiduciary duties may face civil and criminal penalties. Under S.213 of CA 2016, breaches can lead to fines of up to RM3 million and imprisonment of up to five years.
Shareholders also have legal recourse against errant directors. Under S.347 of CA 2016, derivative actions allow shareholders to initiate legal proceedings on behalf of the company. Courts may also impose asset freezes and disqualify directors from holding office in cases of misconduct.
Conclusion
Directors in Malaysia are bound by fiduciary and statutory duties that require them to act in good faith, maintain transparency, and avoid conflicts of interest. Failure to comply with these obligations can result in severe legal repercussions.