Directors' Duties and Breach of Fiduciary Duty Claims in Malaysia

What Are Directors' Duties?

Every director of a Malaysian company owes duties to the company. These duties exist to protect the company and, indirectly, its shareholders and creditors from directors who act improperly or put their own interests ahead of the company's.

Before the Companies Act 2016 came into force, directors' duties in Malaysia were found mainly in case law developed over decades by the courts. The Companies Act 2016 codified these duties into statute, making them clearer and more accessible.

It is important to understand that directors owe their duties to the company as a separate legal entity, not directly to individual shareholders. This distinction matters when considering who can bring a claim for breach.

Statutory Duties Under the Companies Act 2016

Duty to Act Honestly

Section 213 of the Companies Act 2016 requires a director to act honestly at all times. This means directors must not deceive the company, other directors, shareholders or third parties in the conduct of the company's affairs.

Duty to Exercise Reasonable Care, Skill and Diligence

Under Section 214, directors must exercise reasonable care, skill and diligence. The standard expected is that of a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of someone carrying out the same functions as the director. If a particular director has greater skill or experience, they are held to that higher standard.

Duty to Exercise Powers for Proper Purpose

Section 215 states that directors must exercise their powers for a proper purpose and in good faith in the best interests of the company. A director who uses their powers for a collateral purpose—such as issuing new shares primarily to dilute a particular shareholder's voting power rather than to raise capital—may be in breach.

Duty of Loyalty and Good Faith

Section 216 reinforces that a director must act in good faith in what the director considers to be the best interests of the company. Directors must put the company's interests above their own personal interests or the interests of third parties.

Duty to Disclose Interests

Section 217 requires directors to disclose any interest they have in a contract or proposed contract with the company. This disclosure must be made to the board of directors. Failure to disclose a conflict of interest is a breach of duty and may also be a criminal offence.

Duty Not to Improperly Use Position or Information

Sections 218 and 219 prohibit directors from improperly using their position or information obtained by virtue of their position to gain an advantage for themselves or someone else, or to cause detriment to the company. These provisions target self-dealing, insider trading and misuse of confidential company information.

Fiduciary Duties

In addition to the statutory duties set out in the Companies Act 2016, directors continue to owe fiduciary duties at common law. Fiduciary duties arise from the position of trust and confidence that a director holds in relation to the company.

The core fiduciary duties include the duty to act bona fide in the interests of the company, the duty to avoid conflicts of interest, and the duty not to make secret profits from the directorship. The statutory duties largely overlap with and reinforce these common law fiduciary duties.

Who Can Bring a Claim for Breach?

Claims by the Company

Because directors' duties are owed to the company, the company itself is the proper plaintiff in any action for breach. In practice, this means the board of directors (excluding the director accused of breach) would resolve to commence legal proceedings on behalf of the company.

This can create a practical difficulty where the wrongdoing director controls the board or where the board is unwilling to sue one of its own members.

Derivative Actions by Shareholders

Where the company itself will not or cannot bring a claim, shareholders may apply to the court for leave to commence a derivative action on behalf of the company under Sections 347 to 350 of the Companies Act 2016.

A derivative action allows a shareholder to step into the company's shoes and pursue a claim that belongs to the company. Any damages recovered go to the company, not to the shareholder personally.

To obtain leave, the shareholder must show that they are acting in good faith and that it appears to be prima facie in the best interests of the company that the action be brought. The court will also consider whether the company has decided not to bring the action and the reasons for that decision.

Personal Actions by Shareholders

In limited circumstances, a shareholder may have a personal claim against a director. This typically arises where the director owed a duty directly to the shareholder (which is uncommon) or where the shareholder has suffered a loss that is separate and distinct from any loss suffered by the company.

Remedies for Breach

Where a breach of duty is established, the court may order a range of remedies. These include:

• Damages (a money judgment) for the loss suffered by the company
• An account of profits, requiring the director to hand over any profit made from the breach
• Rescission of contracts entered into in breach of duty
• Injunctions to prevent continuing or threatened breaches
• Removal of the director from office

The court has broad discretion to fashion an appropriate remedy depending on the nature and seriousness of the breach.

Defences Available to Directors

The Business Judgment Rule

Section 214(2) of the Companies Act 2016 provides a statutory business judgment rule. A director is deemed to have met the duty of care, skill and diligence if the director made a business judgment in good faith for a proper purpose, did not have a material personal interest in the subject matter, informed themselves about the matter to the extent they reasonably believed appropriate, and rationally believed the judgment was in the best interests of the company.

This defence recognises that directors must make commercial decisions that involve risk, and that courts should not second-guess reasonable business judgments with the benefit of hindsight.

Ratification

In some cases, the company's shareholders may ratify a director's breach of duty. Ratification means the shareholders approve or confirm the director's conduct after the fact, effectively releasing the director from liability. However, not all breaches can be ratified. Conduct that is illegal or amounts to fraud on the minority shareholders cannot be ratified by a simple majority.

Reliance on Professional Advice

A director may be able to defend a claim by showing that they reasonably relied on information, opinions, reports or statements prepared by employees, professional advisers, other directors or board committees. This defence is not absolute; the director must have acted in good faith and made an independent assessment of the information.

Limitation Periods

Claims for breach of directors' duties are subject to limitation periods under the Limitation Act 1953. Generally, claims must be brought within six years from the date on which the cause of action accrued, though the position can be more complex where the breach was concealed or not immediately discoverable.

Practical Considerations

Directors should ensure they understand their duties and maintain clear records of their decision-making processes. Keeping proper minutes, disclosing potential conflicts promptly, and seeking appropriate advice before major decisions can all help demonstrate that a director acted in good faith and with due care.

Shareholders who believe a director has breached their duties should consider whether the company is willing to take action, and if not, whether a derivative action is appropriate. These claims can be complex and fact-sensitive, and the procedural requirements for derivative actions must be carefully followed.

Common questions

Can I sue a director personally if the company loses money?

Generally, only the company can sue its directors for breach of duty. Shareholders may bring a derivative action on the company's behalf with court permission, but damages go to the company, not individual shareholders.

What is a derivative action?

A derivative action is a court proceeding where a shareholder sues on behalf of the company to enforce a right that belongs to the company. The shareholder must obtain leave from the court before proceeding.

Can shareholders forgive a director's breach of duty?

Shareholders can ratify some breaches by resolution, releasing the director from liability. However, shareholders cannot ratify conduct that is illegal or constitutes fraud on minority shareholders.

What is the business judgment rule?

The business judgment rule protects directors from liability for honest business decisions made in good faith, for a proper purpose, without personal interest, and based on reasonable inquiry, even if those decisions turn out badly.

How long do I have to bring a claim against a director?

Under the Limitation Act 1953, claims for breach of directors' duties generally must be brought within six years from when the cause of action arose. The time may be extended if the breach was concealed.