Case Background & Strategy

Not everyone is permitted to be a company director in Malaysia. The Companies Act 2016 disqualifies certain people automatically and gives the court power to disqualify others. A disqualified person who continues to act as a director commits a criminal offence, and the company that allows it exposes itself to invalid decisions and regulatory sanction. This article explains the grounds, the procedure and the consequences.

Automatic disqualification under section 198

Section 198(1) of the Companies Act 2016 provides that a person shall not hold office as a director or, directly or indirectly, take part in the management of a company if that person is an undischarged bankrupt, or has been convicted, whether in Malaysia or elsewhere, of an offence in connection with the promotion, formation or management of a corporation, or an offence involving bribery, fraud or dishonesty, or an offence under specified sections of the Act including breach of directors’ duties, or has been disqualified by a court order. For convictions, the disqualification runs for five years from the conviction or, where a custodial sentence is imposed, from release from prison.

The disqualification is automatic. No court order is required. The moment a director is adjudged bankrupt or convicted of a qualifying offence, the office is vacated by operation of law. The Act allows a disqualified person to apply for leave of the court to act, and an undischarged bankrupt may act with the leave of the Official Receiver or the court, but until leave is granted the person must step down.

Disqualification by court order under section 199

Section 199 allows the court, on the application of the Registrar, the Official Receiver or the liquidator, to disqualify a person from being a director for a period of up to five years. The grounds include that the person has, within the last five years, been a director of two or more companies which went into insolvent liquidation, and the person’s conduct as a director contributed wholly or partly to the insolvency, or that the person has habitually failed to comply with the Companies Act, or has been found guilty of persistent breaches.

The court considers the person’s conduct as a director, the extent of responsibility for the failure of the companies, and whether the conduct shows unfitness to manage. Serial directors of collapsed companies, and directors who repeatedly ignore filing obligations, are the primary targets of this provision.

Additional requirements for listed companies

Directors of companies listed on Bursa Malaysia face a further layer of scrutiny. The Listing Requirements require every director to be fit and proper, and a director may be required to step down where the exchange or the Securities Commission considers that a conviction, regulatory finding or personal conduct renders the director unfit, even if section 198 is not engaged. Listed companies must also publicly announce any change of director and the reasons.

Acting while disqualified

A person who acts as a director or takes part in management while disqualified commits an offence under section 198 punishable by imprisonment of up to five years, a fine of up to RM1 million, or both. The prohibition extends to indirect participation, so a disqualified person cannot simply resign as director and continue to run the company from behind a nominee. That person becomes a shadow director in breach of the disqualification.

For the company, the consequences are practical. Decisions taken by a board that includes a disqualified director are open to challenge, banks and regulators may refuse to deal with the company, and the other directors may themselves be in breach of duty for allowing the situation to continue.

Effect on existing appointments

Disqualification vacates the office of director in every company in which the person holds office, not only the company connected to the conviction or bankruptcy. Each of those companies must lodge the vacancy with SSM within 14 days. Where the disqualified person was the sole director of a private company, the company must appoint a replacement promptly or risk being struck off.

What to do if you may be disqualified

Directors facing bankruptcy proceedings or criminal charges should take advice before the event occurs. Options include contesting the bankruptcy petition, applying for leave of the court to continue to act, restructuring the board so that the company is not left without a director, and negotiating an orderly handover of banking and regulatory responsibilities. Waiting until the bankruptcy order or conviction is made removes most of those options.

Frequently asked questions

Can a bankrupt be a director in Malaysia?

No. Under section 198 of the Companies Act 2016 an undischarged bankrupt is automatically disqualified from being a director or taking part in the management of any company unless the court or the Official Receiver grants leave.

How long does director disqualification last in Malaysia?

Automatic disqualification following a conviction lasts five years from the conviction or release from custody. A court disqualification order under section 199 may be for up to five years.

What is the penalty for acting as a director while disqualified?

Imprisonment of up to five years, a fine of up to RM1 million, or both. The prohibition also covers indirectly taking part in management.

Does a disqualified director lose all directorships?

Yes. Disqualification vacates the office of director in every company in which the person holds office, and each company must notify SSM within 14 days.

How NZSK Legal can help

NZSK Legal advises directors facing bankruptcy or criminal proceedings on the effect on their directorships, applies for leave of the court where appropriate, and advises companies on managing a board vacancy created by disqualification. We also act for liquidators and creditors seeking disqualification orders against directors of failed companies.