What are the Directors' roles, rights and responsibilities?
This post sets out the role of a director, the responsibilities & liabilities attached to the office of a director and what it takes to be one. Know your rights and responsibilities.
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The definition of a director according to Section 2 of the Companies Act, 2016
Section 2 of the Companies Act, 2016 defines “director” as 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.
How are directors appointed?
A private company is now allowed to have minimum of one (1) director (Section 196(1) Companies Act, 2016). In the case of a public company, it shall have a minimum of two ( 2) directors. Under the now repealed Companies Act, 1965, a minimum of 2 directors were required.
Pursuant to Section 196(4) of the Companies Act, 2016, to qualify as a director, one shall ordinarily reside in Malaysia by having a principal place of residence in Malaysia. This has director must show proof that he is ordinarily resident in Malaysia and he has a principal place of residence in Malaysia. A person who wishes to be appointed a director, must first make a declaration and give his consent to act under Section 201 of the Companies Act, 2016.
The Board of Directors may, at any time, appoint a director in addition to the existing directors and the director so appointed shall hold office, in the case of a public company, until the next annual general meeting and in the case of a private company, in accordance with the terms of appointment as per Section 202 of the Companies Act, 2016.
Qualification and Disqualification of Directors
Age Qualification - under the Companies Act, 2016, a director must be at least 18 years of age. The Companies Act, 2016 also removes the age limit for directors of public companies. Hence a director over 70 years of age is qualified to be a director and no additional administrative procedure is required.
A person shall not hold office as a director of a company, or whether directly or indirectly be concerned with or takes part in the management of a company, if the person:-
(a) is an undischarged bankrupt;
(b) has been convicted of an offence relating to the promotion, formation or management of a corporation;
(c) has been convicted of an offence involving bribery, fraud or dishonesty;
(d) has been convicted of an offence under section 213,217,218,228 and 539; or
(e) has been disqualified by the Court under Section 199 (Section 198 of the Companies Act, 2016).
On contravention of Section 198 of the Companies Act, 2016, a person is liable for a penalty of fine not exceeding RM 1 million.
Section 199 grants power to the Court, on application by the Registrar to disqualify persons from acting as director or promoter, or be concerned with or taking part in the management of a company if:-
(a) within the last five years, the person has been a director of 2 or more companies which went into liquidation resulting from the company being insolvent due to his conduct as a director which contributed wholly or partly to the liquidation;
(b) due to his contravention of the duties of a director; or
(c) due to his habitual contravention of the Companies Act, 2016.
Under the Companies Act, 2016, the Registrar of Companies has to prove only one of the conditions.
Resignation, Vacation or Death of a Director
Section 208(1) of the Companies Act, 2016 states that the office of a director of a company shall be vacated if the person holding that office:-
(a) resigns in accordance with subsection (2);
(b) has retired in accordance with the Companies Act, 2016 or the constitution of the company;
(c) is removed from office in accordance with the Companies Act, 2016 or the constitution of the company;
(d) becomes disqualified from being a director under section 198 or section 199 of the Companies Act, 2016;
(e) becomes of unsound mind;
(f) dies; or
(g) otherwise vacates his office in accordance with the company’s constitution.
A Sole Director shall not resign - Since a company may have only one (1) director as allowed under the Companies Act 2016, Section 209 of the Companies Act, 2016 provides that such director shall not resign office until that director has called a meeting of members to receive the notice of the resignation and to appoint one or more new directors.
If the office is vacated due to grounds of disqualification from being a director, unsound mind, death or in accordance with the constitution of the company (Section 289(1)(d),(e),(f),(g), Companies Act, 2016), the secretary shall, as soon as practicable, call a meeting of the next of kin, other personal representatives or a meeting of members.
How can a director be removed?
Private Company - A director may be removed before the expiration of the director’s period of office, subject to the constitution, by ordinary resolution (Section 206, Companies Act, 2016). Such resolution must be passed at a physical meeting of members as a resolution under Companies Act 2016. A resolution to remove a director cannot be passed as a written resolution even if it is proposed by the Board or of any members of a private company.
Public Company - Notwithstanding anything in the constitution or any agreement between a public company and a director, the company may by ordinary resolution at a meeting remove the director before the expiration of the director’s tenure of office. If a director was appointed to represent the interests of any particular class of shareholders or debenture holders, the resolution to remove the director shall not take effect until the director’s successor has been appointed.
For both private and public company, a special notice (of within 28 days) is required of a resolution to remove or replace a director at the same meeting (Section 206(3), CA 2016). The Secretary must call for a meeting within 28 days of receipt of the request to remove a director has been deposited at the Registered Office. The meeting shall be called by giving at least a 14 days notice to move the ordinary resolution for removal. However, no such special notice is required if the power to remove the director is exercised under the constitution.
Director's right to make an oral / written representation (for Public Company only)
Upon receipt of special notice for a resolution to remove a director of public company, the director shall be given the right to make oral representation or written representation not exceeding a reasonable length on the resolution to remove him pursuant to Section 207, Companies Act 2016.
If the director makes a written representation and requests the written representation to be notified to the members, the company shall state the fact of the representation having been made in the notice of the resolution given to members of the company; and send a copy of the representation to every member of the company to whom the notice of the meeting is sent, failing which the director may require that the representations be read out at the meeting.
The right of the director being removed to have his representation notified to the members is guaranteed as the applicant must otherwise prove the director is abusing its rights to seek needless publicity. (Section 207 of the Companies Act, 2016)
What are some of the Directors’ Duties and Responsibilities
Section 2 of the Companies Act 2016, also defines a director to include chief executive officer, chief financial officer, chief operating officer or any other person primarily responsible for the management of the company.
To Act in the Best Interest of the Company
Section 213(1) provides that a director shall at all times exercise his powers in accordance with the Companies Act 2016, for a proper purpose and in good faith in the best interest of the company.
To Exercise Reasonable Care, Skill and Diligence
A director of a company shall exercise reasonable care, skill and diligence with:
(i) the knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities; and
(ii) any additional knowledge, skill and experience which the director in fact has (Section 213(2), Companies Act 2016).
The case of Re City Equitable Fire Insurance Co Ltd has laid down some general principles regulating the duties of a director to the company. These principles are:-
(a) A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.
(b) A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings and at meetings of any committee of the board upon which he happens to be placed.
(c) In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.
A Duty to Avoid Conflict in Interest
A director has a duty to make full disclosure on particulars relating to shares, debentures, participatory interests, rights, options and contracts (Section 219, Companies Act 2016). Moreover, every director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company shall, as soon as practicable after the relevant facts have come to the director’s knowledge, declare the nature of his interest at a meeting of the board of directors.
What / Who is a Nominee Director ?
A nominee director shall act in the best interest of the company and in the event of any conflict between his duty to act in the best interest of the company and his duty to his nominator; he shall not subordinate his duty to act in the best interest of the company to his nominator (Section 217, Companies Act 2016).
Loans, Payments and Related Transactions Involving Directors
A company shall not:
(a) make a loan to a director of the company or of a company which related to that company; or
(b) enter into any guarantee or provide any security in connection with a loan made to such a director by any other person, with the exceptions, as follows:-
(i) to an exempt private company;
(ii) to provide directors with fund to meet the expenditure incurred in performing his duties as officer in the company;
(iii) to provide directors who is engaged full time with the company or holding company with funds to meet expenditure incurred by him in purchasing a home; or
(iv) to any loan made to such a director who is engaged in the full time employment of the company or its holding company, as the case may be, where the company has passed a resolution to approve a scheme for the making of loans to employees of the company and the loan is accordance with that scheme.
Paragraph (a) and (b) shall not authorize the making of any loan, or entering into any guarantee or the provision of any security except with the prior approval of the company on the resolution in which the prior approval of the company on the resolution in which the purpose of the expenditure and the amount of the loan or of the guarantee or security are disclosed.
Pursuant to Section 197(2)(b) of the Companies Act, 2016, a body corporate is associated with a director if the director or a person connected to the director or that director and persons connected with him are entitled to exercise or control the exercise of not less than 20% of the voting shares in that body corporate.
Subject to prior approval being obtained from the members, a company shall not enter or carry into effect any arrangement or transaction for shares or non-cash assets with a director or substantial shareholder.
For public company, a director or substantial shareholder who is interested in the arrangement or transaction shall abstain from voting on the resolution but there is no such rule for a private company under the current Companies Act, 2016.
Fees paid to directors of a public company or a listed company shall be approved at a general meeting. However, in the case of a private company and subjects to its constitution, the board of directors shall have the right to approve the fees. If shareholders holding at least 10% of the total voting rights consider the fee or benefits payable to the director or the former director is not fair, they may require the company within 30 days after having knowledge of such payment, to pass a resolution to approve such payment.
A Director’s Service Contract
Section 231 of the Companies Act, 2016 defines a director’s “service contract” in relation to a public company as a contract under which:
(a) a director undertakes personally or perform services as a director or otherwise for the public company or for a subsidiary of the public company; or
(b) services that a director undertakes personally to perform as director or otherwise are made available by a third party to the public company, or to a subsidiary of the public company.
Such contract shall be available for inspection by members holding at least 5% of total paid up capital in the case of a public company having share capital. In the case where the public company does not have share capital, at least 10% of the members.
Proceedings of the Board of Directors are governed by the Third Schedule of the Companies Act, 2016
Subject to constitution, the proceedings of a board of directors in a company shall be governed by the Third Schedule of the Companies Act, 2016.
It should be noted that Clause 4 of the Third Schedule states that, a notice of a meeting of the Board is required to be sent to all directors who are in Malaysia.
Clause 7 states that a quorum for a meeting of the Board of Directors shall be fixed by the Board and if not so fixed shall be a majority of the directors.
In the meeting of the Board of Directors , every director has one vote and the chairperson shall have a casting vote, as provided under Clauses 9 and 10 respectively.
Whereas, Clause 12 of the Third Schedule states that if a director is present at a meeting of the Board, he is presumed to have agreed and voted in favour of the resolution unless he expressly dissents from or votes to object the resolution. This provision is to make sure that every director exercises his voting right in passing a resolution.
A resolution in writing, signed, or assented to by all directors so entitled to receive notice of meeting of the Board, is as valid and effective as if it had been passed at a meeting of the Board duly convened.
Can directors be indemnified by the Company ?
As the responsibilities of officers and directors in particular increase, so do the liabilities and risks that attached thereto. A director may want to get an insurance scheme that will keep him indemnified in the discharge of his duties in office.
Section 289(3) of the Companies Act 2016 enables a company to indemnify an officer of the company (includes a director) for any cost incurred by him or the company in respect of any proceedings that relates to any liability or omission in his capacity as an officer or where judgment is given in his favour or he being acquitted or being granted relief under the provisions of the Act, or where proceedings were discontinued.
A company may also indemnify a third party in respect of any act or omission of the director in his capacity as an officer of the company and indemnify cost incurred by that director or officer in defending or settling any claims relating to such liability except for (a) fines or penalties which the director or officer has to pay as a result of non-compliance with any regulatory requirements by relevant authority; (b) cost incurred by the director or officer in defending proceedings whereby he was convicted or judgment given against him or (c) in connection with his application for relief under the provision of the Companies Act, 2016.
With Section 289(5) of the Companies Act, 2016, a company may effect insurance for the director or officer of the company in respect of civil liability for any act or omission in his capacity as such and cost incurred by the director or officer in defending or settling any claim relating to any such liability in which the director or officer was acquitted or relief was granted under the provisions of the Companies Act, 2016 or (c) where proceedings were discontinued. Nevertheless, the protection under sub(4) and (5) is not available to a director with respect to any civil or criminal liability in respect of a breach of duty of a director (Section 289(6), Companies Act, 2016).