Directors' Duties Under the Companies Act 2016 and Your Personal Liability

The fine is three million ringgit and the sentence is five years. Not against the company — against you. Section 213(3) of the Companies Act 2016 makes a breach of directors’ duties a criminal offence committed by the individual, and the same ceiling reappears in s.217, s.218, s.221, s.222, s.223, s.224, s.225 and s.228.

That is the single fact most Malaysian summaries of directors’ duties omit. They describe fiduciary duty in the abstract, borrow a paragraph of English case law, and stop. The Act does something much blunter: it converts the duties into offences, extends them past the people whose names appear on the register, and voids the indemnity clause your constitution probably contains.

This page is the map of that exposure — who is caught, what the four duty provisions actually say, which two defences the Act gives you, and how the duties are enforced.

Who counts as a director under the Companies Act 2016?

Three definitions widen the net, and they operate at the same time.

Provision	Who it catches
s.2	Any person occupying the position of director by whatever name called; any person in accordance with whose directions or instructions the majority of directors are accustomed to act; an alternate or substitute director
s.57(7)	For the register — includes an alternate, substitute or local director
s.210	For ss.213–218, 223 and 228 only — includes the chief executive officer, chief financial officer, chief operating officer or any other person primarily responsible for the management of the company

Section 210 is the provision practitioners underuse. It means a CFO who never sat on a board, was never appointed under s.201 and appears nowhere in SSM’s records is nonetheless bound by s.213 good faith, s.213(2) care and diligence, s.217 nominee loyalty, s.218 improper use of position, s.223 substantial disposals and s.228 related-party transactions — and is exposed to the same RM3 million ceiling.

The s.2 limb catches the other end: the founder who resigned from the board to manage optics but whose instructions the remaining directors still follow. If the majority of the board is accustomed to act on those instructions, that person is a director for every purpose of the Act.

What does s.213 actually require?

Section 213 splits into two duties that are commonly run together and should not be.

s.213(1) — proper purpose and good faith. A director shall at all times exercise his powers in accordance with the Act, for a proper purpose and in good faith in the best interest of the company. Three separate requirements sit in that sentence. A power can be exercised in complete good faith and still be exercised for an improper purpose — the classic case being an allotment of shares made honestly, but to dilute a rival shareholder rather than to raise capital.

“Best interest of the company” means the company, not the shareholder who appointed you and not the group. Section 217 spells this out for nominee directors and is dealt with below.

s.213(2) — reasonable care, skill and diligence. The standard is deliberately two-limbed:

• s.213(2)(a) — the knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities. This is objective. It is not “what you knew”; it is what someone in your seat, with your portfolio, should have known.
• s.213(2)(b) — any additional knowledge, skill and experience which the director in fact has. This is subjective and it only ever ratchets the standard upward. A director who is a chartered accountant is held to an accountant’s standard when the board reviews the accounts. There is no corresponding relief for a director who knows less than the objective minimum.

Section 213(3) then makes contravention of the section an offence carrying up to five years, up to RM3 million, or both.

Which related duties carry the same penalty?

Sections 214 to 219 sit under the same subdivision and are best read as one scheme. Note the section numbering carefully — it is routinely misreported.

Section	Duty	Individual exposure
s.214	Business judgment rule — a defence, not a duty	—
s.215	Reliance on information provided by others — a defence	—
s.216	Responsibility for the acts of a delegatee	—
s.217	Nominee director must not subordinate the company’s interest to the nominator’s	5 years / RM3m / both
s.218	No improper use of company property, information, position or opportunity, and no competing business	5 years / RM3m / both
s.219	Notify the company of your shareholdings and related particulars	5 years / RM3m under s.219(1); RM25,000 plus RM1,000 a day under s.219(2)
s.220	Preserves other written law — not a duty in itself	—

Two frequent misattributions are worth correcting outright. Reliance on others is s.215, not s.214 — s.214 is the business judgment rule. And the preservation provision is s.220, not s.217. Section 220 provides that ss.214 to 219 shall be in addition to and not in derogation of any other written law relating to the duty or liability of directors or officers.

That wording matters. Section 220 speaks of other written law. The preservation of the general law duties themselves appears elsewhere, in s.214(1), which deems a qualifying business judgment to satisfy s.213(2) and the equivalent duties under the common law and in equity — language that only makes sense because those equitable duties continue to exist alongside the statute. The practical consequence is identical either way: codification did not replace the fiduciary duties, it stacked a criminal layer on top of them.

Section 217 deserves separate attention because of how many Malaysian boards are constructed. A director appointed by virtue of employment, or as the representative of a member, employer or debenture holder, must act in the best interest of the company, and where his duty to the company conflicts with his duty to his nominator, he shall not subordinate the company’s interest. A private-equity nominee who votes the way the fund instructed, against the company’s interest, commits an offence carrying five years.

What are the two statutory defences, and what do they not cover?

The business judgment rule (s.214)

A director who makes a business judgment is deemed to meet s.213(2) and the equivalent common law and equitable duties if all four conditions are met:

1. the judgment is made for a proper purpose and in good faith;
2. the director has no material personal interest in the subject matter;
3. the director is informed about the subject matter to the extent he reasonably believes appropriate in the circumstances; and
4. the director reasonably believes the judgment is in the best interest of the company.

“Business judgment” is defined in s.214(2) as any decision on whether or not to take action in respect of a matter relevant to the business of the company — which expressly includes a decision not to act.

The limit is exact: s.214 deems compliance with s.213(2) only. It says nothing about s.213(1). A director who acted for an improper purpose cannot reach the business judgment rule at all, because condition 1 fails on its own terms. The rule protects commercially wrong decisions. It does not protect disloyal ones.

Condition 2 is the one that fails in practice. Where a director has any material personal interest in the subject matter, the defence evaporates — and that is precisely the situation in which a related-party transaction, a director’s loan or a service contract renewal comes before a small board.

Reliance on others (s.215)

Section 215(1) allows a director, in exercising his duties, to rely on information, professional or expert advice, opinions, reports or statements — including financial statements and other financial data — prepared by:

• any officer of the company whom the director believes on reasonable grounds to be reliable and competent on the matter;
• any other person retained by the company on matters the director reasonably believes to be within that person’s professional or expert competence;
• another director in relation to matters within that director’s authority;
• any committee of the board on which the director did not serve, in relation to matters within the committee’s authority.

Then comes the condition that ends the defence for most boards. Section 215(2) deems reliance to be on reasonable grounds only if it was made in good faith and after making an independent assessment of the information, having regard to the director’s knowledge of the company and the complexity of its structure and operations.

An independent assessment is not the same as receiving a report. A director who accepts a set of management accounts without interrogating them has not made an independent assessment, and s.215 does not assist.

Delegation (s.216)

Section 216(1) permits the board to delegate any of its powers to a committee, a director, an officer, an employee, an expert or any other person. Section 216(2) then makes the directors responsible for the delegatee’s exercise of the power as if they had exercised it themselves.

The escape in s.216(3) has two limbs, both of which must hold: the directors believed on reasonable grounds at all times that the delegatee would exercise the power in conformity with the directors’ own duties, and believed on reasonable grounds, in good faith and after proper inquiry where the circumstances indicated a need for inquiry, that the delegatee was reliable and competent.

“Proper inquiry, if the circumstances indicated the need for the inquiry” is the operative phrase. Red flags — a resignation, a qualified audit opinion, an unexplained variance — convert a passive delegation into a duty to ask.

Can the company protect me by contract or insurance?

Mostly not, and the constitution you inherited at incorporation may contain a clause that is void.

Section 288 makes void any provision, whether in the constitution or in any contract with the company or otherwise, that exempts an officer or auditor from, or indemnifies him against, any liability which by law would otherwise attach for negligence, default, breach of duty or breach of trust in relation to the company. A blanket indemnity clause is not merely unenforceable in part — the section voids it.

Section 289 then carves out what a company may do:

• s.289(3) — indemnify an officer for costs in proceedings where judgment is given in his favour, he is acquitted, he is granted relief under the Act, or the proceedings are discontinued or not pursued;
• s.289(4) — indemnify against liability to a person other than the company, and the costs of defending or settling such a claim, but excluding any fine imposed in criminal proceedings and any sum payable to a regulatory authority by way of penalty for non-compliance of a regulatory nature.

Read together: the RM3 million fine under s.213(3) can never be paid by the company on your behalf, and neither can a regulatory penalty. Directors’ and officers’ insurance operates inside the same boundary.

How are these duties actually enforced?

Four independent routes, and they are not alternatives — the same conduct can run down more than one.

1. Criminal prosecution by SSM. The s.213(3) offence is prosecuted against the individual. A conviction under ss.213, 217, 218, 228 or 539 then triggers automatic disqualification under s.198(1)(d).

There is no gazetted compound schedule or practice directive fixing a compound amount for a directors’-duty offence — the Companies Act 2016 contains no compounding provision of its own. SSM’s only compounding power is the general one in s.38A(1) of the Companies Commission of Malaysia Act 2001 (Act 614), under which the Registrar may, with the written consent of the Public Prosecutor, compound an offence for an amount not exceeding 50% of the maximum fine — so up to RM1.5 million against the RM3 million ceiling. That is a case-by-case discretion, not a tariff. SSM’s only published compound instrument, Practice Directive 1/2017, covers late-lodgement defaults, not directors’-duty offences.

2. Statutory derivative action (ss.347–348). A complainant may, with the leave of the Court, bring proceedings in the company’s name. The clocks are tight and symmetrical: thirty days’ written notice to the directors of the intention to apply for leave under s.348(2), and once leave is granted, proceedings must be initiated within thirty days under s.348(3). The Court considers whether the complainant is acting in good faith and whether it appears prima facie to be in the best interest of the company. Proceedings once brought cannot be discontinued, compromised or settled except with the leave of the Court under s.348(5).

3. Oppression relief (s.346). A member or debenture holder may apply where the company’s affairs are conducted in a manner oppressive or in disregard of their interests. This is the route that most Malaysian shareholder disputes actually take.

4. Personal liability in insolvency. Section 540(1) allows the Court, on the application of a liquidator, creditor or contributory, to declare any person who was knowingly a party to carrying on business with intent to defraud creditors or for any fraudulent purpose personally responsible, without any limitation of liability, for the debts of the company. Section 539 attaches liability where proper accounting records were not kept. Limited liability is a shield with a hole in it, and s.540 is that hole.

Common mistakes

Treating s.213(1) and s.213(2) as one duty. They have different content and different defences. The business judgment rule reaches only s.213(2). Advisers who describe s.214 as “the defence to a breach of directors’ duties” overstate it materially.

Citing s.214 as the reliance provision. It is s.215. The error appears in a striking number of published Malaysian summaries, and it matters because the two provisions have entirely different conditions — s.214 requires an absence of material personal interest, s.215 requires an independent assessment.

Assuming the C-suite is outside the duty regime. Section 210 puts the CEO, CFO and COO squarely inside ss.213–218, 223 and 228. An unlisted Sdn Bhd whose finance director is not on the board should be briefing that person on s.218 opportunity and s.228 related-party rules exactly as if they were.

Relying on an indemnity clause in the constitution. If it indemnifies against liability for breach of duty, s.288 makes it void. Many constitutions adopted at incorporation from generic templates still carry one.

Believing a resignation ends the exposure. It does not end exposure for acts done while in office, and if the board remains accustomed to act on your instructions, the s.2 definition keeps you a director regardless of what the register says. Section 227(7) separately extends the loss-of-office rules to any person who has at any time been a director.

Assuming a sole director and sole shareholder can do as he likes. The duty runs to the company as a separate legal person. Section 218(1) requires the consent or ratification of a general meeting before a director uses company property, information, position or opportunity for personal benefit — and in a one-person company that means actually holding and minuting the meeting, not assuming it.

What’s next

Work through the specific duties in the order a company secretary meets them. Interest in contracts is the duty that fails most often in practice, and the failure is usually a missing minute — see disclosure of interest. The personal notification duty on shareholdings runs on a 14-day clock most directors have never heard of, covered in director shareholding notification.

For board changes, appointing and resigning directors sets out the consent, minimum-number and vacation rules, and removing a director covers the written-resolution prohibition that catches most private companies. On money flowing to directors, see loans to directors and directors’ fees approval.