Directors in Malaysia: Key Legal Duties, Disqualification, and Removal Under the Companies Act 2016

‍Introduction

Understanding the role and responsibilities of company directors in Malaysia is essential for sound corporate governance. Whether you are appointing a new director or planning to remove one, the Companies Act 2016 (“CA 2016”) provides the legal backbone for these processes. For an overview of director responsibilities and liabilities under common law and the CA 2016, click here.[1]

This article explains the key requirements, disqualifications, and authorities of directors – with practical insights for companies and stakeholders.

Who Can Be Appointed as a Director in Malaysia?

Under Section 196 of the CA 2016, an individual qualifies as a director only if he or she:

1. is a natural person (a body corporate cannot act as a director);
2. is at least 18 years old;
3. has consented in writing to the appointment; and
4. ordinarily resides in Malaysia – at least one such resident director is required in a private company, and at least one of the minimum two directors in a public company must reside locally.

For private companies, at least one director must ordinarily reside in Malaysia. Public companies must have at least two directors, one of whom must also reside in Malaysia.

These requirements ensure that directors are legally accountable and accessible to regulators and shareholders.

Disqualification of Director

Despite meeting the baseline criteria, certain individuals may be disqualified from serving as directors. Section 198 of the CA 2016 outlines several grounds for disqualification. A person is disqualified if he or she:

1. is an undischarged bankrupt;
2. has been convicted of an offence related to corporate fraud, bribery, or dishonest; or
3. has been found guilty under specific provisions of the Companies Act, such as those relating to breaches of directors' duties, or is subject to a court‑imposed disqualification order.

Disqualification applies not only to offences committed in Malaysia but also to those committed abroad. If a disqualified person continues to act as a director, they commit an offence punishable by imprisonment of up to five years or a fine of up to RM1 million, or both. However, in cases where a person has been disqualified due to bankruptcy, they may apply for leave from the Official Receiver or the Court to be reappointed as a director.

How Can a Director Be Removed?

The removal of directors is a critical aspect of corporate governance and is generally subject to the company’s constitution. A well-drafted constitution provides clarity on the procedures for removal, the rights of shareholders, and any additional safeguards for directors. Where the constitution prescribes a removal mechanism, that process prevails. If the company has no constitution or the constitution is silent, the default provisions of section 206 apply.

Private Companies

For private companies, a director can be removed through the following process:

1. Ordinary resolution – Under section 206(1)(a), shareholders may remove a director by ordinary resolution (simple majority) at a general meeting.
2. Special notice – Section 206(3) requires at least 28 days’ special notice of the intention to move the resolution. The notice must be served on both the company and the director. There is no requirement for the notice of the resolution to set out the grounds on which the director’s removal is being sought – it is sufficient that the director is aware of the proposal to remove him or her.[2] Upon receipt of the special notice, the director has a right to be heard and make oral or written representation on the resolution to remove him[3];
3. Physical meeting only – Removal cannot be effected by written resolution (section 297(2)(a)).
4. Constitutional override – Where the constitution prescribes its own mechanism, that bespoke process must be followed. The Federal Court confirmed this hierarchy in Low Thiam Hoe & Anor v Sri Serdang Sdn Bhd & Ors[4]  (CA 2016 gives primacy to a valid constitution).

Public Companies

Whereas, for public companies:

1. Section 206(2) allows shareholders to remove a director by ordinary resolution notwithstanding anything in the constitution or any contract.
2. The same 28‑day special notice requirement applies (section 206(3)).
3. Where the outgoing director represents a class of shareholders or debenture‑holders, removal is ineffective until a replacement is appointed.

Significance of a Company Constitution

The importance of having a company constitution in place cannot be overstated. If a company lacks a constitution, shareholders must rely solely on the provisions of the Companies Act, which may not address the specific needs of the company. A well-drafted constitution allows shareholders and directors to establish clearer guidelines on governance matters, including director removal, thereby reducing potential disputes. Without a constitution, companies must adhere strictly to statutory procedures, which may not always be the most efficient method for resolving internal governance issues.

Case Law on Removal of Directors

Case law has reinforced the principles surrounding the removal of directors.

In Chan Eng Leong & Anor v Goh Choon Kim & Ors[5], the court ruled that a company cannot exclude a shareholder's statutory right to remove a director through its constitution. This underscores the importance of ensuring that constitutional provisions do not conflict with statutory rights. Similarly, in Tan Ken Meng v HSL Plastics Sdn Bhd & Ors[6], the court reaffirmed that directors in private companies may be removed via an ordinary resolution, even if it results in a change in company control. These cases highlight the importance of understanding both statutory and constitutional provisions when addressing director removal.

Authority of Directors

Beyond their appointment and removal, directors must also understand their authority in representing the company. A director’s authority can be classified as either actual or ostensible.

Actual authority refers to the powers explicitly granted to a director by the board or the company’s constitution. In contrast, ostensible or apparent authority arises when a company, through its conduct, represents that a director has the power to act on its behalf. If a third party relies on a director’s ostensible authority, the company may be bound by the director’s actions, even if the director lacked actual authority. However, a company can deny liability if the third party was aware of the director’s lack of authority or had reason to doubt it.

The rule in Turquand’s case, also known as the indoor management rule, provides further protection to third parties dealing with a company. This rule states that third parties are entitled to assume that a company’s internal procedures have been properly followed unless they have reason to suspect otherwise. This principle protects third parties who act in good faith when engaging in transactions with a company.

Suspension of Directors

Unlike removal, the suspension of directors is not explicitly provided for under the Companies Act 2016. In Jerry Ngiam Swee Beng v Abdul Rahman Bin Mohd Rashid[7], the court held that there is no legal basis for suspending a director under the law as a suspension would give ‘holidays’ to directors with respect to their statutory functions and duties under the Act.

Further, in Dato’ Shun Leong Kwong & Anor v Menang Corporation (M) Bhd & Ors[8], the High Court held that the board’s powers to manage the “business and affairs” of the company under section 211 of the CA 2016 do not include the power to suspend a director unless such power is expressly granted under the company’s constitution.

This highlights the importance of having a clear and comprehensive constitution that addresses various scenarios, including the suspension or temporary removal of directors.

Conclusion

Directors play a crucial role in ensuring that a company operates effectively and in compliance with legal requirements. Their appointment, disqualification, removal, and authority are governed by a combination of statutory provisions and company-specific constitutional arrangements. A well-drafted constitution provides clarity on critical matters, particularly in relation to the removal of directors, and ensures that companies operate smoothly without unnecessary disputes. Understanding these legal principles allows companies and shareholders to make informed decisions and uphold sound corporate governance practices.

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This article is written by Raja Nadhil Aqran (Partner) and is intended to provide a general guide to the subject matter. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such.

To find out more, contact our lawyers at info@aqranvijandran.com.

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[1] See also our article entitled “Good Faith and Corporate Governance: Lessons from Malaysian Case Law”, which can be accessed here.

[2] Indian Corridor Sdn Bhd & Anor v Golden Plus Holdings Sdn Bhd [2008] 3 MLJ 653.

[3] Section 207(1) and (2) of the CA 2016.

[4] [2020] 10 MLJ 137.

[5] [2021] MLJ 1466.

[6] [2019] MLJU 966.

[7] [2003] 6 MLJ 448.

[8] [2021] MLJU 870.

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