5 minutes

Malaysia Directors Duties and Responsibility Under Companies Act

In today’s corporate landscape, directors play a crucial role in the management and decision-making processes of companies. They are responsible for the overall governance and success of the organization. The Companies Act, 2016, outlines the duties and responsibilities that directors must adhere to fulfill their roles effectively. 

A director is an individual appointed or elected by the shareholders of a company to oversee its operations, make strategic decisions, and act in the best interest of the company and its stakeholders. Directors are entrusted with the responsibility of ensuring the long-term sustainability and growth of the organization. 

Directors should be aware of their duties and responsibilities as it is important for them to form the foundation of corporate governance and ensure accountability within a company. These duties are designed to protect the interests of various stakeholders, including shareholders, employees, creditors, and the wider community. By fulfilling their duties, directors contribute to the overall stability and success of the company, enhancing the trust level and confidence among investors and stakeholders. 

Duty of the Directors 

The Companies Act, 2016, sets out specific duties that directors must uphold during their tenure. These duties are aimed at ensuring directors act with integrity, exercise due diligence, and make informed decisions in the best interest of the company. 

Directors are required to exercise reasonable care, skill, and diligence in carrying out their responsibilities. This means that they should possess the necessary knowledge and expertise to make informed decisions and should act in a manner that an ordinary person with their skills and experience would reasonably do in the same situation. 

Directors have a duty to act in good faith, honestly, and in the best interest of the company. They should exercise their powers for the proper purpose and with the aim of promoting the success of the company for the benefit of its shareholders. This duty also considers the long-term consequences of their decisions, considering the interests of employees, customers, suppliers, and the community. 

Directors are expected to exercise independent judgment and not be unduly influenced by any external factors or personal interests. They should avoid conflicts of interest and make decisions solely based on what is in the best interest of the company. This duty ensures that directors act impartially and free from any undue influence or pressure. 

Directors have a duty to avoid situations where their personal interests conflict or may potentially conflict with the interests of the company. If a director has a direct or indirect interest in a proposed transaction or arrangement with the company, they must declare the nature and extent of their interest to the other directors and abstain from participating in the decision-making process. By declaring their interest, directors maintain transparency and integrity in their dealings, preventing any potential conflicts of interest. 

Directors must not accept any benefits, financial or otherwise, from third parties that are conferred because of their position as a director or that may reasonably be expected to influence their judgment or conduct. This duty helps ensure that directors make decisions independently and in the best interest of the company rather than being influenced by external factors. 

Directors’ Responsibilities  

Apart from the specific duties outlined in the Companies Act, 2016, directors also have various responsibilities that they must fulfill to ensure the smooth functioning and compliance of the company. 

  1. Directors are responsible for ensuring that the company complies with all statutory requirements and legal obligations. This includes filing necessary documents, maintaining registers, and adhering to applicable laws and regulations related to the company’s operations. 
  2. Directors must ensure that the company’s books and records are accurate, up-to-date, and properly maintained. This includes financial records, minutes of meetings, registers of members, and any other documents required by law. Proper record-keeping is crucial for transparency, accountability, and effective decision-making. 
  3. Directors have a responsibility to prepare accurate and timely financial statements that provide a true and fair view of the company’s financial position and performance. These financial statements must comply with relevant accounting standards and be filed with the appropriate regulatory authorities. 
  4. Directors are responsible for convening and conducting board meetings and general meetings as required by the Companies Act, 2016. These meetings provide a platform for discussion, decision-making, and communication among the directors and shareholders, ensuring transparency and accountability in the company’s affairs. 
  5. Directors are involved in the process of appointing and removing directors within the company. They must ensure that suitable individuals are selected for directorial positions based on their qualifications, skills, and experience. Similarly, if a director’s performance is unsatisfactory or if they breach their duties, the board may have the power to remove them from their position. 
  6. Directors have a crucial role in maintaining and enhancing the corporate governance practices of the company. This involves establishing appropriate internal controls, risk management systems, and ethical standards. Directors should also encourage transparency, accountability, and responsible decision-making throughout the organization. 

Consequences of Breach of Directors’ Duties and Responsibilities 

Failure to fulfill directors’ duties and responsibilities can have serious consequences, both for the directors personally and for the company. 

Directors who breach their duties may be held personally liable for any losses or damages incurred by the company or its stakeholders because of their actions or omissions. This can lead to legal proceedings where directors may be required to compensate the company or other affected parties for the losses suffered. 

In certain cases, directors may face criminal charges if their actions involve fraudulent activities, deliberate misconduct, or violation of specific laws and regulations. Criminal penalties can include fines, imprisonment, or both, depending on the offense. 

Directors who repeatedly fail to fulfill their duties or engage in serious misconduct may face disqualification from acting as directors in the future. Disqualification orders can be imposed by the court, regulatory authorities, or government agencies, prohibiting individuals from holding directorial positions for a specified period. 

Conclusion 

Directors’ duties and responsibilities under the Companies Act, 2016, are essential for ensuring effective corporate governance and protecting the interests of stakeholders. By upholding these duties and fulfilling their responsibilities, directors contribute to the sustainable growth and success of the company. It is crucial for directors to remain aware of their obligations, exercise due diligence, and act in the best interest of the company to foster trust, transparency, and accountability within the corporate landscape.