Case Background & Strategy

Directors in Malaysia are fond of saying that the company is a separate legal entity and that its debts are its own. That is true, until a director breaches the duties the Companies Act 2016 imposes. At that point the protection of the corporate veil falls away and the director’s personal assets are exposed. This article sets out the core duties, the defences available and the situations in which directors are most often sued personally.

The duty of good faith and proper purpose

Section 213(1) of the Companies Act 2016 requires a director at all times to exercise his powers in accordance with the Act, for a proper purpose and in good faith in the best interest of the company. This is the fiduciary heart of the director’s role. It is breached when a director uses a power for a purpose other than the one for which it was given, for example issuing shares to dilute a rival shareholder rather than to raise capital, or when a director prefers his own interest, a family member’s interest or a nominator’s interest over the company’s.

The duty of care, skill and diligence

Section 213(2) requires a director to exercise reasonable care, skill and diligence with the knowledge, skill and experience that may reasonably be expected of a director having the same responsibilities, and with any additional knowledge, skill and experience the director actually has. The test is therefore both objective and subjective. A minimum standard applies to everyone, and a director who is also a qualified accountant or engineer is held to that higher personal standard. Ignorance of the company’s affairs is not a defence. It is a breach.

The business judgment rule

Section 214 gives directors a safe harbour. A director who makes a business judgment is taken to have met the duty of care if the director made the judgment for a proper purpose and in good faith, did not have a material personal interest in the subject matter, was informed about the matter to the extent the director reasonably believed appropriate, and reasonably believed the judgment was in the best interest of the company. Courts will not second-guess a commercial decision that turns out badly if it was made honestly, without conflict and on adequate information. The rule protects judgment, not neglect. It does not protect a director who never asked the questions.

Reliance on others

Section 215 allows a director to rely on information, professional advice and reports from employees, professional advisers, other directors and board committees, provided the reliance is made in good faith and after an independent assessment. This is what allows a board to function. The qualification matters: a director must actually read the report and consider it, not simply sign because the auditor or the managing director said it was fine.

Conflicts, company property and insider information

Section 218 prohibits a director from using the company’s property, information acquired as a director, the director’s position, or a corporate opportunity to gain a benefit for himself or another person, or to cause detriment to the company, unless the shareholders consent or ratify the conduct at a general meeting. Section 221 requires a director who is in any way interested in a contract or proposed contract with the company to declare the nature of that interest at a board meeting as soon as practicable. Diverting a customer to a director’s own company, using company funds to pay personal expenses and taking a commission on a company purchase are all classic breaches.

Consequences of breach

A breach of directors’ duties has both civil and criminal consequences. On the civil side, the company, or a shareholder acting for the company under a derivative action, can recover the loss suffered or the profit made by the director. On the criminal side, a breach of section 213 or section 218 is an offence punishable by imprisonment of up to five years, a fine of up to RM3 million, or both. Directors can also be disqualified from holding office.

Insolvency raises the stakes further. Under section 540 of the Companies Act 2016, where a company’s business has been carried on with intent to defraud creditors or for any fraudulent purpose, the court may declare that any person who was knowingly a party to it is personally responsible, without any limitation of liability, for all or any of the company’s debts. Fraudulent trading is also a criminal offence. Directors who keep trading and taking credit when they know the company cannot pay are the most common target.

Liability beyond the Companies Act

Directors face personal exposure under other statutes as well. Directors can be personally liable for a company’s unpaid tax under the Income Tax Act 1967 where they hold a substantial shareholding, for unpaid EPF and SOCSO contributions, for environmental and safety offences committed by the company, and, since 2020, for corruption offences committed by the company under section 17A of the Malaysian Anti-Corruption Commission Act 2009 unless they can show that adequate procedures were in place.

Protecting yourself as a director

The best protection is a paper trail showing that you asked, you were told, you considered and you decided. Attend board meetings. Insist on management accounts. Record dissent in the minutes. Declare interests before, not after, the transaction. Take independent advice on unusual transactions and keep the advice on file. Consider directors’ and officers’ liability insurance, which the Act allows a company to buy. And when the company is in financial difficulty, take advice early, because the duties of a director shift towards creditors as insolvency approaches.

Frequently asked questions

What are the main duties of a director under the Companies Act 2016?

To act in good faith in the best interest of the company for a proper purpose (section 213(1)), to exercise reasonable care, skill and diligence (section 213(2)), to avoid misusing company property, information and position (section 218), and to disclose conflicts of interest (section 221).

Can a director be personally liable for company debts in Malaysia?

Generally no, but a director becomes personally liable where the court makes a declaration for fraudulent trading under section 540, where the director has breached fiduciary duties causing loss, or under specific statutes such as tax, EPF and anti-corruption laws.

What is the business judgment rule in Malaysia?

Section 214 of the Companies Act 2016 protects a director who makes a business decision in good faith, for a proper purpose, without a material personal interest, on reasonable information and with a reasonable belief that it is in the company’s best interest.

What is the penalty for breach of directors’ duties?

A breach of section 213 or section 218 is a criminal offence punishable by imprisonment of up to five years, a fine of up to RM3 million, or both, in addition to civil liability to the company.

How NZSK Legal can help

NZSK Legal acts for companies pursuing directors for breach of duty and for directors defending such claims, including derivative actions, injunctions to preserve assets and claims arising in insolvency. We also advise boards on governance structures that keep directors on the right side of sections 213 to 218.

This article is general information on Malaysian law as at September 2026 and is not legal advice. Every matter turns on its own facts and documents. Contact Messrs Ng, Zainurul, Seke & Khoo (NZSK Legal) for advice on your specific situation.Directors in Malaysia may be held personally liable for breaching their statutory and fiduciary duties, including duties of good faith, care, diligence and avoiding conflicts of interest. The Companies Act 2016 provides protections and defences, but directors may face civil claims, criminal penalties and personal liability for company debts in cases of fraudulent trading.