# The Resident Director Requirement and the Nominee Director Trap

> What section 196(4) of the Companies Act 2016 actually requires, why it is not a citizenship test, and what a nominee director arrangement really exposes both sides to.

- Category: business
- Language: en
- Status: published
- Updated: 2026-07-20
- Canonical: https://negaraku.md/en/business/resident-director-malaysia

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Search for how to incorporate a Malaysian company as a foreigner and you will be sold
a nominee director inside three clicks. The pitch is always the same shape: the law
requires a local director, we provide one, it is a formality, here is the annual fee.

Two things are wrong with that pitch. The law does not require a *local* director, and
it is not a formality for anybody involved.

## What section 196(4) actually says

The Companies Act 2016 sets the minimum board at one director for a private company
and two for a public company (s.196(1)). A director must be a natural person aged at
least eighteen (s.196(2)).

Then s.196(4):

> For the purposes of this section, the minimum number of directors — (a) shall
> ordinarily reside in Malaysia by having a principal place of residence in Malaysia;
> and (b) shall not include an alternate or substitute director.

Read what is not there. There is no reference to citizenship, to permanent residence,
to a National Registration Identity Card, or to any immigration status. The test is
factual residence: is Malaysia this person's principal place of residence.

Three consequences follow, and each of them cuts against how the requirement is
usually sold.

**A foreign national living in Malaysia qualifies.** If you have relocated and your
home is here, you can be the sole director of your own company. Nothing in s.196
prevents it.

**A Malaysian citizen living abroad may not qualify.** A founder who holds a Malaysian
passport but whose principal home has been Singapore for six years does not obviously
satisfy s.196(4)(a). Citizenship does not cure a residence test.

**Only the minimum number has to be resident.** A private company needs one. If your
board has three directors, one resident director satisfies s.196(4) and the other two
may live anywhere. Companies routinely appoint a resident nominee *and* keep the
foreign founders on the board, which is correct — but it also means the nominee slot
is a single seat, not a majority.

The requirement people are actually remembering is the **company secretary**, who
under s.235(1)(c) must be a citizen or permanent resident of Malaysia. That is a
genuine nationality test, on a different office. Conflating the two is the origin of
most of the confusion in this space.

## Where the requirement actually bites for a foreign founder

The problem is rarely eligibility. It is sequencing.

A founder who has not yet moved to Malaysia cannot honestly claim a principal place of
residence here at the moment of incorporation. And the immigration route out of that —
an Employment Pass — runs the other way round: the pass is applied for by a company
that already exists and has already been registered with the Expatriate Services
Division. You need the company before you can get the pass, and you may need residence
before you can be the company's only director.

That gap is real, and it is the honest commercial case for a nominee arrangement. It
is also a *temporary* case. Once the founder relocates and Malaysia becomes their
principal place of residence, the s.196(4) problem dissolves and the nominee is a
recurring fee protecting against a risk that no longer exists.

Ask any provider quoting an annual nominee fee what their exit process looks like.

## A nominee director is a director

There is no such thing in Malaysian law as a partial director, a passive director, a
compliance director or a director in name only. The Act recognises one office and
attaches one set of duties to it.

Section 213(1) requires a director to exercise their powers in accordance with the
Act, for a proper purpose, and in good faith in the best interest of the company.
Section 213(2) requires reasonable care, skill and diligence. Breach carries
imprisonment for up to five years or a fine up to RM3 million, or both.

Section 217 then deals with the nominee case head on. A director appointed by or as
the representative of a member, employer or debenture holder shall act in the best
interest of the company, and where that duty conflicts with the duty to their
nominator, **shall not subordinate** the duty owed to the company. Contravention
carries the same five-year and RM3 million exposure.

So the arrangement being sold — you sign, we decide — is precisely the arrangement
s.217 exists to prohibit.

Section 210 widens the net further. For the purposes of ss.213 to 218, 223 and 228,
"director" also includes the chief executive officer, chief financial officer, chief
operating officer and any other person primarily responsible for the management of the
company. And the s.2 definition of director already includes **a person in accordance
with whose directions or instructions the majority of directors are accustomed to
act**.

Read those two together. The beneficial owner who instructs the nominee is not
standing outside the liability regime. They are inside the definition of director,
without ever appearing on the register.

## What the protection instruments actually achieve

Nominee arrangements are papered. The usual bundle is an indemnity from the beneficial
owner, a deed of appointment restricting the nominee's authority, a directors and
officers insurance policy, and an undated signed resignation letter held in escrow.

Here is what each one does under the Act.

**The company-side indemnity is void.** Section 288 makes any provision — in the
constitution, in a contract with the company, or otherwise — exempting an officer
from, or indemnifying them against, any liability that would otherwise attach for
negligence, default, breach of duty or breach of trust in relation to the company
**void**. Not unenforceable in part. Void.

**Third-party indemnity and insurance stop at s.213.** Section 289(4) does permit a
company to indemnify an officer for liability owed to persons other than the company,
and s.289(5) permits the company, with prior Board approval, to effect insurance for
civil liability and defence costs. Both look like the answer. Then s.289(6):

> In the case of a director, subsection (4) and paragraphs (5)(a) and (b) shall not
> apply to any civil or criminal liability in respect of a breach of the duty as
> specified in section 213.

The single largest risk a nominee director carries is the one the statute expressly
carves out of both the indemnity and the insurance. Section 289(3) still allows
recovery of costs where judgment is given in the director's favour, they are
acquitted, or they are granted relief under the Act — but that is reimbursement after
winning, not cover for losing.

A private indemnity from the beneficial owner personally sits outside s.288, since it
is not a provision of the company. It is also worth exactly what the indemnifier is
worth, in whatever jurisdiction they can be sued in, and it cannot touch a criminal
fine.

**The undated resignation letter is the weakest instrument in the bundle.** Section
208(2) permits a director to resign by giving written notice to the company at its
registered office, and s.208(3) makes the notice effective when it is delivered at the
registered office address or at a later date specified in it. A signed letter held by
someone else has not been delivered, and the nominee usually does not control the
registered office. Section 196(3) then deems any resignation ineffective if it would
drop the board below the minimum, and s.209(1) prohibits a sole or last remaining
director from resigning at all until a members meeting has been called to receive the
notice and appoint a replacement.

For a nominee who is the *only* resident director of a company controlled by someone
overseas, those two sections combine into something uncomfortable: the exit depends on
the cooperation of the person you would be exiting from.

## If you are being offered a resident directorship

Treat it as taking on unlimited personal exposure to a business you do not run, and
price it accordingly — or decline.

The minimum you should insist on before signing:

- Direct, independent access to the accounting records. Section 245 requires them, and
  s.539 makes every officer criminally liable where proper books were not kept.
- Sight of the bank mandates and knowledge of who the authorised signatories are.
- Written confirmation of the beneficial owners, which the company must in any event
  identify and record under the beneficial ownership regime in ss.60A to 60E.
- A standing arrangement for board papers before decisions, not after. Section 214's
  business judgment rule protects informed decisions; it protects absence not at all.
- Your own copy of the constitution and the register of members.

If a provider resists any of these, the arrangement they are selling is one where you
carry s.213 liability and cannot discharge s.213 duties.

## Common mistakes

- **Buying a nominee because you read that a "local" director is required.** Section
  196(4) is a residence test. Check whether you satisfy it yourself before paying
  anyone.
- **Assuming the nominee must be the majority of the board.** Only the minimum number
  has to be resident — one seat on a private company board.
- **Using an alternate director to fill the resident slot.** Section 196(4)(b)
  expressly excludes alternates and substitutes.
- **Relying on a D and O policy for the core risk.** Section 289(6) disapplies both
  insurance and third-party indemnity for s.213 liability.
- **Relying on a company indemnity at all.** Section 288 voids it.
- **Believing the beneficial owner is outside the regime.** The s.2 definition of
  director captures whoever the board is accustomed to obey.
- **Keeping the nominee after relocating.** Once Malaysia is your principal place of
  residence, the requirement that justified the fee no longer applies to you.
- **Treating an undated resignation letter as an exit.** It is not delivered, and
  ss.196(3) and 209(1) may make it ineffective anyway.

## What's next

If you are a foreign founder, answer one question before you buy anything: on the day
you incorporate, where is your principal place of residence? If the answer is
Malaysia, you do not need a nominee. If the answer is not yet Malaysia, you need one
temporarily, and the arrangement should be written with a defined end date tied to
your relocation.

If you are considering accepting a resident directorship for a fee, read s.213,
s.217, s.288 and s.289(6) in that order, then decide whether the fee compensates you
for a RM3 million ceiling that no insurance policy in Malaysia may lawfully cover.

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**Verification status.** AI-assisted draft, not yet reviewed by a subject-matter
expert. Statutory references are to the Companies Act 2016 (Act 777) as reprinted by
SSM as at 1 August 2022. Nothing here is legal advice on a particular appointment, and
the penalties cited are the statutory maxima stated in the Act.

## Sources

- Companies Act 2016 (Act 777), reprint as at 1 August 2022 — https://www.ssm.com.my/Pages/Legal_Framework/Document/Companies%20Act%202016_Akta%20777_BI%20(1.8.2022).pdf (SSM)
- Guidelines for the Incorporation of Local Companies — https://www.ssm.com.my/Pages/Legal_Framework/GUIDELINES/4.-Guidelines-For-Incorporation-Of-A-Local-Company.pdf (SSM)
- Company Directors' Responsibilities — https://www.ssm.com.my/Pages/Publication/Booklet/document/Booklet%20-%20CDR%20(FINAL).pdf (SSM)
- Companies Act 2016 — legal framework — https://www.ssm.com.my/Pages/Legal_Framework/Companies-Act-2016.aspx (SSM)

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