CHAPTER 5:

DIRECTORS
 • At the end of this topic, student should be able to
understand:
1. Types of directors
LEARNING 2. Qualifications and disqualification
3. Appointment, reappointment, retirement
OUTCOMES: 4. Vacation of office and removal
5. Directors’ duties & responsibilities
6. Director’s Code of Ethics
 VACATION OF OFFICE

SECTION 208 COMPANIES ACT 2016

(1) The office of a director of a company shall be vacated if the person
holding that office—
i. resigns in accordance with subsection (2); - by giving written notice to company
ii. has retired in accordance with this Act or the constitution of the company but is not re
-elected;
iii. is removed from office in accordance with this Act or the constitution of the company;
iv. becomes disqualified from being a director under section 198 or 199;
v. becomes of unsound mind or a person whose person or estate is liable to be dealt
with in any way under the Mental Health Act 2001 [Act 615];
vi. dies; or
vii. otherwise vacates his office in accordance with the constitution of the company.
Cont..
• If a vacancy is created resulting from circumstances referred to in subsection
(1), the Board shall have the power, at any time, to appoint any person to be a
director to fill such casual vacancy and the director so appointed shall hold
office:

• in the case of a public company, until the next annual general meeting; or
• in the case of a private company, in accordance with the terms of
appointment.
Resignation of Director
• A director may resign from the director position by handing in a
written notice to the board of directors. Once the board has received
the notice, the board must inform the company secretary in order to
prepare a board resolution.
• If the board approves of the resignation, the company secretary will
submit the following documents to the SSM:
• Date of ending director term
• Full name
• Identification card number
• Sometimes, the board of directors may reject the resignation of a
director and may also refuse to submit the resignation document to
the SSM.
• The reasons why the board may reject the resignation is because the
resigning director is:
• A contract employee
• A party to the shareholder’s agreement
• Involved in a likely serious breach of trust case
 REMOVAL OF DIRECTOR

• A director may be removed before the expiration of the director’s

period of office in the following–sec 206(1)(a)(b):

• Subject to the constitution, a director may be removed by ordinary resolution

(a private company).

• a director may be removed by passing ordinary resolution at a meeting and

special notice is required for the resolution (public company).

• The special notice also be required for the resolution to appoint another
person instead of the director at the same meeting-sec 206(2) and (3).
 DIRECTORS’ DUTIES

• Basically the duties of directors can be divided into three which are:
1. Fiduciary duty
i. The duty to act for proper purpose and in good faith in the best interest of the
company
ii. The duty to retain discretion
iii. The duty to avoid conflicts of interest

2. Duty of care, skill and diligence

3. Statutory duty-specified under Companies Act 2016

The sources of the Directors’ duties are derived from the following:

(a) Common Law and Equity – it is settled that directors have the duty
of care and skill as well as the fiduciary duties and loyalty.
(b) The Companies Act 2016 – sets out the statutory duties of directors
which carry certain penalties for non-compliance.
(c) Company’s Constitution / Agreements – crafted specially to cater
the duties of directors which are not spelled out in the Companies Act
2016.
(d) Any other relevant statutes – e.g. Malaysian Anti-Corruption
Commission Act 2009, AMLA, etc.
• Directors need to know what their duties are because they play a
critical role in the effective management and operation of a company.
They are responsible for making important decisions that affect the
company and its shareholders, and they must ensure that their
actions are legal, ethical, and in the best interest of the company.

• Understanding their duties and responsibilities helps directors to fulfil

their obligations and avoid any potential civil or criminal liabilities.

• It also helps shareholders to hold directors accountable and ensure

that the company is operating responsibly and sustainably.
 A. Fiduciary duty – legal obligations
1. The duty to act, for a proper purpose and in good faith in the best interest of the
company.

• As an officer of the company, directors are responsible to act on the best interest of the
company.

• Directors are prohibited from exercising its powers for any collateral purpose or any act
done for an impermissible purpose. Collateral purpose means he cannot be influenced by
any personal or outside interest. His sole purpose must be to act in the best interests of
the company.

• It is very important to ensure that all members will get benefit from directors’ action.
Other than that, of course the main priority is to obtain profit to ensure sustainability, put
aside their own personal interest and ensure maximization of shareholder wealth.
• This stated under Section 213(1) of Companies Act 2016:

• “A director of the company shall at all times exercise his power in accordance
with this Act, for a proper purpose and in good faith in the best interest of the
company.”

• The act also clearly mentioned that a director failed to carry out duties and
responsibilities commits an offence and shall, on conviction, be liable to
imprisonment for a term not exceeding five years or to a fine not exceeding three
million ringgit or to both.
Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra v Petra Perdana Bhd
and Another Appeal [2018] 2 MLJ 177

• Decided cases also provide guidance on what it means to act in good faith and in the best
interest of the company.

• The Federal Court in the recent case of Tengku Dato’ Ibrahim Petra bin Tengku Indra
Petra v Petra Perdana Bhd and Another Appeal [2018] 2 MLJ 177 applied both subjective
and objective tests simultaneously to assess the director’s duties and responsibilities
depending on the different company cultures and company policies.

• The Federal Court emphasised that the subjective test depends on what a director
considers to be an act done in good faith and in the interest of the company, and not
what a court may consider as being in the best interest of a company. The court’s
assessment would come in the form of an objective test whereby the court would
examine the director’s subjective assessment of what the director considers as being an
act done in the best interest of the company.
 Greenhalgh v Ardene Cinema Ltd
• Re Smith v Fawcett Ltd (1942)
• The court held that directors must
exercise their discretion bona fide in what
they consider -not what a court may
consider - to be in the interest of the
company and not for any collateral purpose.

Acting for the best interest of the

company means directors must act
in the interest of the shareholders
as a collective group.
 2. The duty to retain discretion

• It is under the component of the duty to act in the best interest of the
company.
• This giving an idea that directors must retain freedom to make decisions on
behalf of the company.
• An example is the discretionary given to director is voting at the board
meeting. The director has discretionary to vote decision that he think is the
best for the interest of the company.
• However, where the directors have decided to enter into a contract on
behalf of the company and it is the best interest of the company, directors
must take necessary action to enable the company to comply with the
contract.
 3.The duty to avoid conflicts of interest

• Directors being a fiduciary cannot use their powers or be seen to use their powers to
benefit themselves at the expense of the company. In other words, a company
director must avoid any situations, which will give rise to a conflict between his or her
duty to the company and his or her personal interest.
• This obligation to avoid conflict of interests aims to prevent directors from improperly
making a profit by virtue of his or her position in the company.
• A director can however make profit by virtue of his or her position in the company but
provided that the director has disclosed his or her profit to the company and the
company has allowed the director to keep that profit.
• Conflict of interest occurs when a director:
• has an interest in a contract that is entered into with the company;
• takes a corporate opportunity that belongs to the company;
• takes a bribe;
• uses confidential information belonging to the company; or
• uses company property to benefit himself or herself
 B. Duty of care, skill and diligence
• Section 213 (2) state that 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.
• The act also clearly mentioned that a director failed to carry out duties and responsibilities
commits an offence and shall, on conviction, be liable to imprisonment for a term not
exceeding five years or to a fine not exceeding three million ringgit or to both.
• Director must take care in his affairs of the company as he would reasonably take in his own
affairs. That means, the director must take care of the company like how he must take care of
himself.
• As to the standard of care the common law has held that a common director need only
exhibit reasonable care and what constitutes ‘reasonable’ will be measured by the care an
ordinary man might be expected to take in the same circumstances
Re City Equitable Fire Insurance Co. Ltd(1925)

A director is bound to take reasonable care and diligence

that is to be measured by the care an ordinary man might
be expected to take in circumstances on his behalf
Statutory
duty
 Business judgement rule

• Section 214 Companies Act 2016 also mention responsibility and duty of
director regarding business judgment rule.
• “business judgment” means any decision on whether or not to take
action in respect of a matter relevant to the business of the company.
A director who makes a business judgment is deemed to meet the
requirements of the duty under subsection 213(2) and the equivalent duties
under the common law and in equity if the director:

• makes the business judgment for a proper purpose and in good faith;
• does not have a material personal interest in the subject matter of the
business judgment;
• is informed about the subject matter of the business judgment to the
extent the director reasonably believes to be appropriate under the
circumstances; and
• reasonably believes that the business judgment is in the best interest of
the company.
Reliance on information provided by others

• Section 215 of the Companies Act 2016 allows directors to rely on

information provided by others when making decisions, including
advice, opinions, reports or statements. Directors may rely on
information provided by company officers, professionals or experts,
other directors or committees. This reliance is considered reasonable
if it is made in good faith and after the director has made an
independent assessment of the information, taking into account the
complexity of the company’s structure and operations. This provision
protects directors who make decisions based on information provided
by others, as long as they act in good faith and exercise their own
judgement.
Prohibition against improper use of property and
position
• Section 218 of the Companies Act 2016 prohibits a director or officer
of a company from using the property of the company, information
acquired by virtue of their position, their position as a director or
officer, any opportunity of the company, or engaging in business in
competition with the company, to benefit themselves or harm the
company, without the consent or ratification of a general meeting.
This provision aims to prevent directors and officers from using their
positions for personal gain at the expense of the company.
General duty to make disclosure

• Section 219 of the Malaysian Companies Act 2016 requires directors

to give written notice to their company when they acquire or dispose
of shares, debentures, or contracts in the company, or if there is any
change in the information previously provided.

• The purpose of this requirement is to ensure transparency and

accountability in the management of the company and to protect the
interests of shareholders
Duty to avoid a conflict of interest

Section 221 of the Companies Act 2016 requires directors to disclose any
interest they have in a contract or proposed contract with the company,
either directly or indirectly. They must declare the nature of their interest at
a board meeting as soon as possible after becoming aware of the facts.

Section 222 of the Companies Act 2016 sets out the rules regarding a
director’s participation in contracts where they have an interest, whether
directly or indirectly. If a director is interested in a contract, they must
disclose their interest and cannot participate in any discussion or vote on the
contract. However, there are exceptions for private companies and contracts
involving indemnity or a director’s interest in another company.
Duty for accounts to be kept

• Section 245 of the Companies Act 2016 requires companies and their
directors and managers to maintain proper accounting and other
records that explain the financial position and transactions of the
company. The records must be kept in a way that allows for easy
auditing and must be retained for at least seven years after the
transactions or operations have been completed. These records must
be kept at the company’s registered office or a place chosen by the
directors but must be available for inspection by the directors.
Breach of director’s duties and penalties
• A director who breaches his or her duties to the company can be held
liable for damages. The company or its shareholders may bring a civil
lawsuit against the director seeking monetary compensation for any
losses suffered as a result of the director’s breach.

• In addition, the director may also be required to compensate any

third parties who have suffered loss as a result of the breach. The sum
of damages awarded will depend on the nature and extent of the
breach and the losses suffered
• Section 347 of the Companies Act 2016 provides an avenue for shareholders to
initiate a derivative action against a director who has breached his or her duties.

• This action is brought on behalf of the company rather than the shareholders
themselves, as the company is the entity that has been harmed by the director’s
breach.

• The purpose of Section 347 is to provide a means for shareholders to hold

directors accountable for breaches of their duties, even if the company’s
management is unwilling or unable to do so.

• A director can also be arrested, charged and convicted for breaching his or her
duties as set out in the Companies Act 2016. For example, a director who
contravenes Sections 213, 219(1), 221 or 222 commits an offence and upon
conviction may be liable to a fine of RM3 million or 5 years imprisonment.
• Other responsibilities:

• The holding of AGM for public companies

• Recording the minutes of all meetings
• Circulation of financial statements and directors reports
• Making of annual return and lodgement with the RO
• Maintaining a registered office
• Publication of company name and company number
• Appointment of qualified persons as secretaries
• Making a declaration of solvency in the case of voluntary winding up by
member
• Ensuring that payment of dividend is from profits only; and
• Registration of charges
Code of Ethics for Directors and Company Secretary (2023) -
SSM
• This document is intended to provide general guidelines on the
ethical expectations of the company director and company secretary
when carrying out their duties.

• It is written as a general guidance for all types of companies in

developing their own code of conduct for company director or
company secretary with more specific principles and guidelines that
they should follow based on their role or the ethical standards of
their industry.
• This code of ethics is intended to be applied in complementary to the
existing laws and guidelines.

• It is a benchmark for the company director and company secretary to

act professionally in the best interest of the company by promoting
good governance and upholding high standards of integrity and
accountability.
• It is imperative for the company director and company secretary to
familiarize themselves with any other applicable ethical codes or
guidelines and to seek advice or guidance when in doubt about the
ethical implications of their actions.

• However, non-compliance with the laws and regulations in particular

the Companies Act 2016 should be reported to the Registrar.
Principles
• The core principles on which this Code rely on are those that relate to
transparency, integrity, accountability, corporate liability and
sustainability.
Objectives
This Code of Ethics is formulated to enhance the standard of corporate
governance and corporate behaviour with a view to achieving the following
intended objectives:

(a) To establish standards of ethical conduct for company directors based on

acceptable belief and values one upholds;

(b) To uphold the spirit of accountability and transparency in line with the
legislations, regulations and guidelines governing a company; and

(c) To promote the sustainability of a company by pursuing “Environmental,

Social, and Governance” (ESG) strategies in its business.
a) Corporate Governance
A director –
• (i) should have a clear understanding of the aims and objectives,
capabilities and capacity of the company;
• (ii) should devote time and effort to attend and participate at meetings and
to know what is required of the board and each of its directors, and to
discharge those functions;
• (iii) should ensure at all times that the company is properly managed and
effectively controlled;
• (iv) should stay abreast of the affairs of the company and be kept informed
of the company's compliance with relevant legislations and contractual
requirements;
• (v) should insist on being kept informed on all matters of importance to the
company in order to be effective in corporate management; (refer code for
details)
(b) Relationship with Shareholders, Employees, Creditors, Customers
and Other Stakeholders

A director –
(i) should be conscious of the interest of shareholders and other stakeholders,
among others, employees, creditors, suppliers and customers of the company;
(ii) should ensure employees fully understand and appreciate the value of good
corporate governance practices and procedures through ongoing training,
awareness programmes and robust communication;
(iii) should ensure adequate safety measures and provide proper protection to
workers and employees at workplaces;
(iv) should at all times promote professionalism and raise the competency of
management and employees; and
(v) should adopt an objective and positive attitude and give the utmost cooperation
for the common good when dealing with governmental authorities or regulatory
bodies.
(c) Sustainability Practices
• A director must take accountability for the “Environmental, Social, and
Governance” (ESG) in the company by –
• (i) integrating sustainability considerations into all aspects of decision-
making, including strategic planning, risk management and investment
decisions;
• (ii) ensuring that the company sets its sustainability strategies, goals and
targets which are aligned with the company's overall strategy and vision;
• (iii) being more proactive to the needs of the community and to adopt
appropriate policies and initiatives towards achieving sustainability in the
social, economic and environmental conditions in furtherance of the
pursuit of profitability;
• (iv) striving to treat employees fairly and promote quality of life by
adopting sustainable corporate social responsibilities;
• (v) ensuring that the company’s policies are in line with international
trends to promote human rights in the corporate environment;
(d) Corporate Liability
The development of adequate procedures1 to be implemented to
prevent the occurrence of corrupt practices in relation to the business
activities of a company is vital.
In this regard, a director must ensure that the company have
established an adequate procedure which can be used to reasonably
protect both the company and top management from the liabilities
arising from the section 17A of the Malaysian Anti-Corruption
Commission Act (MACCA) 2009.

• A director must ensure that the company – (i) practices the highest
level of integrity and ethics
• (ii) complies fully with the applicable laws and regulatory
requirements on anti-corruption;
• (iii) effectively manages the key corruption risks of the organisation;
• (iv) puts in place the appropriate controls and contingency measures
that are reasonable and proportionate to the nature and size of the
organisation, in order to address any corruption risks arising from
weaknesses in the organisation’s governance framework, processes
and procedures;
• (v) conducts corruption risk assessments periodically to identify,
analyse, assess and prioritise the internal and external corruption
risks of the organisation;
(e) Anti-Money Laundering and Counter Financing of Terrorism
(AML/CFT)
• To prevent the company from risk of being exposed to AML/CFT activities, a director
must ensure that the company –

• (i) adopts policies and procedures which are consistent with the principles set out under
the Anti-Money Laundering, AntiTerrorism Financing and Proceeds of Unlawful Activities
Act 2001 (AMLA) and the Guidelines, and keeps the shareholders and employees abreast
on matters under AMLA and Guidelines;

• (ii) conducts its business in conformity with high ethical standards to ensure that laws
and regulations are adhered to; and

• (iii) remains vigilant against undertaking any business transaction that is or may be
connected with or may facilitate money laundering/terrorism financing (ML/TF) and
ensure that approval is not given for transactions where there are good reasons to
suppose that transactions are associated with Money Laundering/Financing of Terrorism
(ML/TF) activities.