Understanding Director Responsibilities and Liabilities Under Common Law and the Companies Act 2016

‍Introduction

Serving as a director of a company is not merely a title—it is a role burdened with responsibilities and legal obligations. Directors are entrusted with steering the company towards success while maintaining ethical standards, diligence, and accountability. Failure to uphold these duties may result in significant legal consequences, including civil liabilities, fines, and even criminal prosecution.

In Malaysia, directors' responsibilities are governed by both common law and the Companies Act 2016. This article provides a comprehensive overview of these duties, and the potential liabilities directors may face for non-compliance.

Fiduciary Duties Under Common Law

At common law, directors owe fiduciary duties to the company, which means they must act in the company's best interests. These key obligations include:

• Acting in good faith – Directors must make decisions that benefit the company rather than themselves.
• Exercising care, skill, and diligence – Directors must apply reasonable judgment in their business decisions.
• Using powers for their intended purpose – Directors should not misuse their authority for personal gain.
• Avoiding conflicts of interest – Directors must not engage in any business or transaction that conflicts with the company’s interests.
• Maintaining confidentiality – Directors should safeguard sensitive company information and not disclose it for personal benefit.
• Treating shareholders fairly – Directors must ensure that all shareholders are treated equitably without bias.
• Refraining from profiting from their position – A director must not secretly profit from their role or exploit corporate opportunities for personal gain.

These fiduciary duties require directors to act with integrity and place the interests of the company above their own. Any breach of these obligations may result in legal action or financial penalties.

Statutory Duties Under the Companies Act 2016

In addition to common law duties, the Companies Act 2016 codifies several legal obligations that directors must comply with. These statutory duties include:

• Acting for a proper purpose and in good faith (section 213(1)) – Directors must exercise their powers in a way that benefits the company.
• Exercising reasonable care, skill, and diligence (section 213(2)) – Directors must take proactive steps to ensure responsible decision-making.
• Making business judgments with integrity (section 214(1)(a)) – Directors must act in the best interests of the company when making key decisions.
• Avoiding conflicts of interest (section 214(1)(b)) – Directors must not allow personal interests to interfere with company matters.
• Disclosing conflicts of interest (section 221) – Directors must be transparent about any personal stake in a transaction and abstain from voting on such matters (section 222).
• Maintaining proper accounting records (section 245) – Directors must ensure the company keeps accurate financial records.
• Preparing and submitting financial reports (section 258) – Directors are responsible for ensuring that financial statements are properly prepared and submitted in accordance with legal requirements.

Failure to comply with these statutory obligations may result in severe consequences, including personal liability and potential legal action.

Potential Liabilities for Breach of Duties

Directors who fail to adhere to their responsibilities under common law and the Companies Act 2016 face significant legal and financial risks. Some key liabilities include:

1. Improper Use of Powers – If a director does not act in good faith or in the best interests of the company, they may face imprisonment for up to 5 years, a fine of up to RM3 million, or both (Section 213(3)).
2. Misuse of Company Property or Information – Directors who misuse company assets or confidential information without proper authorization may also face up to 5 years of imprisonment, a fine of RM3 million, or both.
3. Fraudulent Trading and Insolvency – If a director knowingly allows a company to continue trading while insolvent, they may be personally liable for the company’s debts. Under Section 540(1), directors may be held responsible for fraudulent trading. A conviction under Section 539(3) could result in imprisonment of up to 5 years, a fine of RM500,000, or both.

These penalties emphasize the importance of compliance and the need for directors to act with integrity and diligence at all times.

How Directors Can Protect Themselves

To mitigate the risks associated with non-compliance, directors should adopt best practices such as:

• Staying Informed – Keeping up to date with changes in company law and regulatory requirements.
• Seeking Legal Advice – Consulting legal professionals when faced with complex corporate and commercial decisions.
• Being Aware – Avoiding rubber-stamping decisions and instead take an interest of what goes on in the company.
• Ensuring Proper Documentation – Maintaining accurate records of board meetings, financial reports, and company transactions.
• Implementing Strong Governance Measures – Establishing clear policies to prevent conflicts of interest and ensure transparent decision-making.

By adhering to these practices, directors can minimise risks and ensure they fulfil their responsibilities effectively.

Conclusion

Serving as a company director comes with both privileges and significant obligations. Directors must act in good faith, exercise proper judgment, and comply with both common law fiduciary duties and the statutory provisions under the Companies Act 2016.

Failure to meet these obligations can result in severe consequences, including fines, civil liabilities, and even criminal prosecution. To safeguard their interests and those of their companies, directors should remain informed, seek legal counsel when necessary, and implement strong governance practices.

This article is written by Raja Nadhil Aqran (Partner). It only contains general information. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such.

For more information, contact us at info@aqranvijandran.com.