MEMBER FIRM OF BAKER & MCKENZIE INTERNATIONAL. Directors' Duties and Liabilities under Malaysian Law

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1 MEMBER FIRM OF BAKER & MCKENZIE INTERNATIONAL Directors' Duties and Liabilities under Malaysian Law December 2010

2 This memorandum has been prepared for clients and professional associates of Wong & Partners. It is intended to provide only a brief summary of the directors' duties in Malaysia. For this reason, the information contained in this memorandum should not form the basis of any decision as to a particular course of action; nor should it be relied on as legal advice or regarded as a substitute for detailed advice in individual cases. The services of a competent professional adviser should be obtained in each instance, so that the applicability of the relevant legislation or other legal development to the particular facts can be verified. This memorandum is protected by copyright. No part may be reproduced or transmitted by any process or means without prior written permission of Wong & Partners. The law is stated as at December 2010.

3 Table of Contents 1. Introduction Directors General Duties owed to the Company Common Law Duties of Directors Statutory Restrictions and Liabilities Ratifying Breaches Disqualification of Directors Statutory Liabilities of Directors on Winding-Up Civil and Criminal Liabilities of Directors... 4

4 1. Introduction Generally, the Malaysian Companies Act 1965 ( MCA ) provides for the statutory duties and liabilities of company directors. Further, the common law principles on directors duties supplement the provisions of the MCA. Directors are considered as officers or agents of a company and have the capacity to enter into contracts on behalf of the company, subject to limitations on their authority to do so as imposed either by law, the company s articles of association or other legal instruments. At present, the MCA does not make a distinction between an executive and nonexecutive director. Accordingly, the duties and liabilities of a director apply to both an executive and non-executive director. As with most jurisdictions, the business and affairs of a company are managed by a Board of Directors. The MCA prescribes a minimum of 2 directors, being natural persons of full age and both directors must reside primarily in Malaysia. 2. Directors General Duties owed to the Company Statutory Duties under the MCA The MCA essentially codifies the common law duties of directors and provides for technical details in respect of the discharge of such duties. The statutory duties of a director under the MCA include the following: Duty to Act in Good Faith and for Proper Purpose: Directors owe a duty to the company to act in its best interests in good faith, and to do so with reasonable skill and care. The degree of skill and care imposed is that which a reasonable person would exercise had he been in a similar position as the director, taking into account any special skill, knowledge or expertise that the director may possess. Discharge of the Duty to Exercise Reasonable Care and Skill: The MCA deems this duty discharged when a director is informed about the subject matter of a business judgment and considers it appropriate, he makes a business judgment in good faith, believing that such judgment is in the company s best interest and has no material personal interest in the subject matter of the business judgment. Reliance on Information and Advice: Directors may rely on information, professional or expert advice, opinions, etc. presented by individuals retained by the company to provide such advice. A director s reliance is made on reasonable grounds where it is made in good faith and was made after an independent assessment by him, having regard to his knowledge of the company and the complexity of the corporate structure or operation. Duty to ensure dividends declared from profit: Directors are to ensure that dividends are paid from profits and not capital. Wong & Partners Directors' duties in Malaysia 1

5 Duty to seek shareholders approval: Directors are to seek shareholders approval at the general meeting of the company prior to carrying into effect any arrangement or transaction of substantial value relating to the company. This includes the acquisition and/or disposition of property whose value, profit or shares value exceeds 25% of the total assets of the company, net profit or issued share capital of the company. Further, directors must also obtain shareholders approval prior to issuing new shares. Any transaction between the company and a director or a substantial shareholder, where the transaction is of substantial worth requires prior approval to be obtained from the shareholders at the company s general meeting. For the purposes of discharging this duty, substantial worth is defined as a value exceeding 25% of the total assets of the company, or the net profits, or the issued share capital of the company, whichever is the highest. Duty to keep proper accounts and registers Directors have a duty to maintain proper accounts and registers (i.e. of members or transfers of shares, etc.) and to make the same available for inspection when required. 3. Common Law Duties of Directors As with most common law jurisdictions, Malaysia share similar common law duties imposed on directors, including but not limited to the following: Non-fettering of director s discretion Prohibition from profiting secretly Duty of fidelity 4. Statutory Restrictions and Liabilities In addition to the statutory directors duties, there are various restrictions and liabilities imposed by the MCA on directors and these are as follows: Conflicts of Interests Directors must not place themselves in a position where their personal interests and duties to the company are likely to directly or indirectly conflict. Given that it is not uncommon for individuals to hold directorships in more than one company at any time, directors should be cautious when contracting with another company in which they hold directorships or are substantial shareholders. Such individuals are generally duty-bound to either declare their interests in a particular transaction to the other directors or show that there could be no possibility of conflict. Duty to declare interests A director, or persons related to him such as a spouse or child, having direct or indirect interests in a contract involving the company must declare such interests as soon as is reasonable to the board of directors. Wong & Partners Directors' duties in Malaysia 2

6 Restriction on Participation by Interested Director A director who is in any way interested, whether directly or indirectly, in a contract involving the company, shall not participate in any discussion pertaining to that contract. He shall only be counted to make up the quorum of the meeting. Misuse of Insider Information or Opportunities Directors dealing with sensitive information regarding transactions must not use such information for their own profit, even if the information is not ultimately utilized by the Company because such information is deemed to be Company property. Directors wishing to act on such information should firstly communicate the same to the Company and obtain the consent of the other directors. Restriction from Taking Loans Companies are generally prohibited from giving loans to its directors, subject to certain exceptions. Further Duties of Directors of Public Companies Directors of public companies are subject to further duties that are imposed by other legislation such as the Securities Commission Act 1993 or the Bursa Malaysia listing requirements. Statements in Company Prospectus A director is deemed guilty of an offence for any untrue statements or willful non-disclosure in prospectuses. False and Misleading Statements or Reports It is an offence for directors to knowingly authorize, direct or consent to the advertising, circulation or publication of misleading or false statements or reports. Fraud and Obtaining Payment of Money by False Promise Directors obtaining payment from a company through fraudulent, deceitful or dishonest means, or by making false promises are guilty of an offence. 5. Ratifying Breaches The company may elect to ratify breaches of duties by its directors at the general meeting, where shareholders may vote to condone the breach or allow the director to act in a manner which would otherwise result in a breach of his directorial duties. Further, the Court may grant relief to a director in breach of his duties if the court considers that the director acted honestly and reasonably and thus, ought to fairly be excused. Directors need not wait until proceedings have been commenced against him because they may apply for such relief as a pre-emptive measure. Wong & Partners Directors' duties in Malaysia 3

7 6. Disqualification of Directors The Companies Commission of Malaysia ( CCM ) may institute disqualification of directors proceedings on receipt of a complaint; this remedy may not be instituted by the companies themselves. Directors may be disqualified from their position or taking part in the management of the company for up to 5 years on the grounds of unfit conduct, bankruptcy, conviction of fraud, dishonesty or offences relating to the promotion, formation or management of the company. 7. Statutory Liabilities of Directors on Winding-Up The MCA imposes criminal liability on directors in connection with the winding-up of a company if the following should occur: Incomplete disclosure of information to liquidators, refusal to deliver property or documents, or concealment of debts due to or from the company by past or present officers of the company; Destruction, mutilation, alteration or falsification of documents by directors; Contracting on behalf of the company although the director had no reasonable ground of expectation that the company would be able to pay the debt; Fraudulent trading; and/or Misfeasance by past or present officers of the company, including liquidators, or any person who has taken part in the formation or promotion of the company. 8. Civil and Criminal Liabilities of Directors Breaches of statutory duties under the MCA may attract criminal liability where provided, which includes substantial fines or terms of imprisonment. In more serious cases, a director could face both fines of up to RM 250,000 and up to 10 years imprisonment upon conviction. The MCA also provides, in certain cases, for the director to be personally liable for the loss or damage suffered by the company. Companies and third parties affected by the directors breach of duties may also commence civil proceedings against them. The usual remedy sought is for the directors to account for any profit made unlawfully and/or for them to make good any loss or damage suffered as a result of the directors actions. **************** Please note that the above is merely a brief outline of the duties and liabilities of directors from a Malaysian legal perspective. It is not an exhaustive exposition of the law in Malaysia nor is it intended to be relied on as legal advice and should not be so construed. Wong & Partners Directors' duties in Malaysia 4

8 A Truly Global Leader Wong & Partners prides itself on being a progressive law firm in the 21 st century with global standards of quality and experience. As a member firm of Baker & McKenzie International, we have access to the most developed global platform in the legal profession with 3,900 lawyers in 43 countries and in Baker & McKenzie's scope of our practice. Our difference is in the way we think, work and behave we combine an instinctively global perspective with a genuinely multicultural approach, enabled by collaborative relationships and yielding practical, innovative advice. We also have a deep understanding of the culture of business the world over and are able to bring the talent and experience needed to navigate complexity across practices and borders with ease Contact: Adeline Wong Adeline.Wong@wongpartners.com Krystal Ng krystal.ng@wongpartners.com Wong & Partners is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm Wong & Parrners All rights reserved.