Directors' Personal Liability
How a director may be made personally liable
Under the laws of Malaysia, a company is required to have a minimum of 1 director.
Many directors assume that a company (i.e., a private registered company and NOT a sole proprietorship) is a shield against civil suits; that the company alone will be made liable in the event something goes wrong.
This could not be further from the truth. There are numerous circumstances in which a director may attract personal liability. Personal liability is a terrifying prospect; it could lead to one becoming a bankrupt, causing one's assets to vest with the Director General of Insolvency.
Consider a simple scenario. Builders Sdn Bhd is incorporated in 2004. It has 3 directors (Tom, Richard and Harry).
Builders is in the construction industry and develops houses. In 2008, due to the increase in the price of concrete, Builders is unable to develop houses in a cost-efficient manner.
Builders fails to pay one of its suppliers, Shylock Sdn Bhd. Shylock has supplied Builder with RM1,500,000.00 worth of steel but not received any payment for the same.
Shylock obtains Judgment in the Malaysian High Court against Builder. Shylock proceeds to wind-up Builder and a liquidator is appointed.
The liquidator of Builder subsequently discovers that there have been irregularities in Builder's accounts.
In addition, there are a number of discrepancies that are of serious concern.
In such circumstances, Tom, Richard and Harry may be made liable for the indiscretions committed in Builder's name.
A common myth about companies
A misconception that many hold is that the “private limited” or “limited” tag of a company (“Sendirian Berhad” and “Berhad”respectively in Malaysia) is a shield that automatically protects a director from liability.
This is false.
There are actions (or omissions) that will make a director personally liable.
In this article, we look at 5 common oversights that will encumber personal liability.
1. Failing to satisfy contributions to the Employers' Provident Fund (EPF)
The Courts of Malaysia have consistently held that a failure to make contributions to the EPF will cause a director to be made personally liable (for all outstanding amounts).
The justification for this is plain to see: a company wields more power than an employee.
Directors, who are the brains behind a company's actions, must ensure that the exercise of this power is fair.
This is so notwithstanding a director's standing in the company (sleeping partner, nominee and/or non-active director).
As such, a director must be vigilant in ensuring that the company makes timely EPF contributions. Even if a company has 3 employees, unpaid EPF contributions can and will run into the hundreds of thousands of Ringgit.
Fortune favours the circumspect and it is always best for a director to personally ensure that timely EPF contributions are being made for all employees.
2. Failure to pay tax
[Image Credits: http://assets.huluim.com/shows/key_art_the_taxman_cometh.jpg]
When a company fails to pay any tax, a director may be made personally liable.
As such, if Builders has failed to pay any tax that is due and owing to the Inland Revenue Board, Tom, Richard and Harry may be made personally liable for the sums outstanding.
This is so even if Tom, Richard and Harry were unaware of the tax. The law presumes that every director is aware of the necessary taxes that need to be paid.
3. Assisting the transportation of unlicensed foreign workers
In the example outlined above, Builders' employees may consist of a number of unlicensed foreign workers.
If Builders was to assist these unlicensed employees to travel in between countries (e.g., if Builders was to book flights in and out of Malaysia), then Tom, Richard and Harry may be found guilty of a criminal offence.
4. Breach of statutory duties
Under the Malaysian Companies Act 2016, there are statutory duties that a director must adhere to.
In general, a director must:-
Avoid any conflict of interest;
Declare his interest in any company undertaking;
Not make a loan to any other director of the company;
Not misuse and/or disseminate insider information;
Not make any false statement or report;
Not misrepresent the nature of any contract or make false promises.
The above list is non-exhaustive. There are additional statutory duties placed upon directors by the Companies Act 2016.
Any failure by a director to adhere to these duties may result in the director being made personally liable for any fine meted out.
A more serious consequence is the criminal liability that may follow a breach of a statutory duty.
Failing to lodge statutory documents with the Companies Commission of Malaysia (CCM)
A company is required to lodge statutory documents with the CCM. Amongst others, these are:-
Company's annual returns;
Notice of change of directors;
Notice of change of registered office.
The Board of Directors is obligated to ensure that these documents are lodged with the CCM on time.
Failing to do so will cause the directors to be personally liable for any fine meted out by the CCM.
To ensure that a director does not attract any personal liability, it is important to ensure that all directors have a working understanding of the Companies Act 2016.
There have been many circumstances in which a director has discovered that certain seemingly-innocuous actions have very serious consequences.
When in doubt, the Board of Directors of any company should seek legal advice from a qualified legal professional.
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