With Great Powers, Comes Great Responsibility: Duties of Directors

i. Introduction

Directors of a company play a crucial role in the management and success of a company. Section 2 of the Companies Act 2016 (“CA 2016”) describes a “Director” to include 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. While the legal system in Malaysia recognizes the doctrine of separate legal entities, which at face value acts as a shield to directors, in certain precedented situations, the directors may be held accountable for any default in their tenure in the company.[1]

This is where the popularized adage “with great power comes great responsibility” comes in, directors are indeed held to high standards of conduct under the CA 2016. Hence, this article will discuss the duties imposed to directors and the consequences that follows in cases of breach of such director duties.

ii. Directors’ Duties

A director’s duties can be derived from several key areas. Firstly, the CA 2016 outlines the statutory duties of directors and the specific penalties for non-compliance. Secondly, a company’s constitution (even it may not be mandatory for a company to have a constitution) may set out the duties of directors that are not explicitly defined in the CA 2016. Common law and equity have also established that directors have a duty of care and skill, as well as fiduciary duties towards the company and the shareholders. Lastly, in several other statutes, such as the Malaysian Anti-Corruption Commission Act 2009
(“MACCA”) or the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (“AMLA”), impose additional duties on directors. It is essential for directors to be aware of their duties, roles, responsibilities and obligations to ensure that they avoid any legal consequences for non-compliance.

Section 213 of the CA 2016 encompass the duties and responsibilities of a director. Under the section, every director of a company has a legal obligation to act in the best interest of the company and use their powers for a valid purpose and with good faith. Directors are under a duty to exercise reasonable skill, care and diligence when performing their duties. Section 213(2) of the CA 2016 states as follows: –

“(2) A director of a company shall exercise reasonable care, skill and diligence with –

(a) the knowledge, skill and experience which may reasonably be expected of a director
having the same responsibilities; and

(b) any additional knowledge, skill and experience which the director in fact has.”

This duty is assessed based on two standards: an objective standard in limb (a) and a subjective standard in limb (b). The objective standard in limb (a) requires directors to meet the minimum level of skill, care, and diligence expected of any director in their position. On the other hand, the subjective standard in limb (b) applies when a director possesses additional knowledge, skill, or experience, and this expertise is considered when assessing whether the director has met the appropriate standard.

Besides the explicit duty a director owes to his company mentioned in Section 213 of the CA 2016, the CA 2016 also mentions the statutory prohibitions against the improper use of the company’s property, position, corporate opportunity or competing with the company.[2] This section manoeuvres around the common law principle of the “no profit rule” and “no conflict rule”. This section prohibits directors from engaging in any business that competes with the company and benefits either themselves or any other person or causes detriment to the company. However, with the consent or ratification of a general
meeting, the prohibition does not apply. This can be seen in the High Court case of The Board Of Trustees Of The Sabah Foundation V Datuk Syed Kechik Bin Syed Mohamed[3] where the Defendant had made use of the opportunity and knowledge acquired by him as a fiduciary agent of the Plaintiffs to make profit for himself and to the detriment of Sabah Foundation. The High Court held that the Plaintiffs were entitled to restitutionary remedy which is the benefits/profits obtained in the course of the Defendant’s tenure as a director.

iii. Breach of Duties by the Directors

In the event a director breached their statutory duties, specifically on their duty to exercise reasonable care, skill and diligence, to an extent the directors can be charged to a criminal offence which carries penalties up to RM 3 million or up to 5 years imprisonment or both if found guilty of such contravention of duties.[4]

The court also has the powers to grant relief under Section 581 of the CA 2016 where a director is sued for negligence, default, breach of duty or breach of trust. However, the court is empowered to relieve the director either wholly or partly from his liabilities if it appears to the court that he has acted honestly and reasonably and that, having regard to all the circumstances of the case. In the case of Pioneer Haven Sdn Bhd v Ho Hup Construction Co Bhd & Anor and other appeals[5], the Plaintiff had made claims against the Defendants for breaching several fiduciary and statutory duties as directors.
However, the Court determined that the Defendants had acted in good faith and for a legitimate purpose when making the business decision. The decision did not involve the Defendants in any material personal interest, and the Defendants had made a sound business judgment as they reasonably believed was appropriate. The Court granted relief to the Defendants under Section 581 of the CA 2016, exempting them from their liabilities.

iv. Conclusion

Directors are subject to various duties under the CA 2016 and other statutes, and any breach of these duties may result in civil and criminal liability. Directors must act with due care and skill, avoid conflicts of interest, and most importantly, act in the best interests of the company. Failure to do so can lead to severe consequences, including fines, imprisonment, and disqualification from holding any directorship position. It is essential for directors to maintain proper corporate governance, prevent corruption and bribery to ensure the success and sustainability of the company they are responsible for.

Author: Maryam Amilah Zaini

Published Date: 15 May 2023

References:

[1] [1980] 1 MLJ 109.

[2] Section 218(1) of CA 2016.

[3] [1999] 6 MLJ 497.

[4] Section 213(3) of CA 2016.

[5] [2012] MLJU 167.