What does the Companies Act 2016 provide regarding the removal of a director?
For companies in Malaysia, the removal of a director is governed by the Companies Act 2016. In particular, Section 206(1) reads:
“A director may be removed before the expiration of the director’s period of office as follows:
(a) subject to the constitution, in the case of a private company, by ordinary resolution; or
(b) in the case of a public company, in accordance with this section.”
In addition, Section 206(3) requires the provision of special notice for the ordinary resolution to remove a director under Section 206.
The Company’s Constitution vs Companies Act 2016, which prevails?
Section 206(1)(a) of the Companies Act 2016 provides that the removal process is “subject to the constitution”. Therefore, before the removal of directors in private companies is effected, the company’s constitution must first be considered to determine if it has any specific provisions regarding the removal of directors. The case Low Thiam Hoe & Anor v Sri Serdang Sdn Bhd & Ors supports the position that section 206(1)(a) gives primacy to the constitution of the private company¹. In other words, if the company’s constitution provides for a specific method of removal, that method must be followed, and the default statutory process for removal under Section 206 is overridden. The situation is different for a public company where the statutory removal of director under Section 206 must be followed, notwithstanding anything in the company’s constitution.
Is Cause or Reason Required for Removal?
There are no reasons or causes required for the removal of directors provided for under the Companies Act 2016. The majority of shareholders have the unqualified and unfettered power² to vote and decide on the director removal, as long as it is in line with the company’s constitution and statutory provisions. This means that shareholders can by a simple majority vote (>50%) remove any director, in absence of his/her resignation or prior to the expiration of his/her full term without providing any reasons, so long as proper procedures are followed. There is also no permanent right to hold onto the position of directorship, unless it is entrenched specifically in the constitution of the company³.
That said, case laws have shown that actions of removal which have been done mala fide (in bad faith) may nevertheless be contested in court. Should the director removal be carried out improperly without following the correct procedure, or if done with bad faith by sidelining a director in order to take over the board, then the aggrieved director may turn to the courts for redress.
To illustrate, in the case of Dato’ Raja Azwane bin Ariff v Dato’ Man bin Mat & Ors⁴, the first resolution sent to the plaintiff director with a letter on 5 January 2010, used the term “resign” and asked the plaintiff to sign it, purportedly to make the decision unanimous. When the plaintiff objected, the second resolution dated 4 January 2010, replaced the word “resign” with “removed” and was sent to the plaintiff on 25 January 2010, claiming to correct an administrative error. Such removal was found by courts to be tainted with bad faith due to backdated circular resolution which appeared to be a deliberate attempt to force the director to voluntarily “resign”.
Can a written resolution be used to remove a director?
As per Section 297(2)(a) of the Companies Act 2016, the resolution under Section 206 to remove a director before the expiration of his term of office cannot just be passed merely via a written resolution. Hence, unless the constitution specifically provides for a different procedure, a director can only be removed before the expiration of their term by an ordinary resolution passed in a physically convened members’ general meeting, as members’ written resolutions are not sufficient nor allowed for this purpose.
What happens if the removal of the director does not comply with the correct procedure?
Strict compliance with procedural and statutory requirements is necessary to avoid the invalidity of the removal. For instance, the company must issue special notice of the resolution for removal at least 28 days in advance of the members’ meeting, as per Section 206(3) and Section 322(1). One of the common mistakes is failing to give adequate notice to the director, or not correctly computing or adhering to the statutory notice period. Failure to comply with these requirements can render the removal invalid as seen in cases like Dato’ Low Tuck Choy and Anor v Chong Kok Weng and Others⁵.
What are some common mistakes or pitfalls encountered in removing a director?
Each situation and circumstance will need to be carefully considered and planned out, in order to anticipate any roadblocks and to avoid missteps, which can result in challenge by the director being removed. Examples of challenges encountered in practice when undertaking such an exercise could include:
- not having sufficient quorum or votes to pass a board resolution to convene the members’ meeting;
- not having a replacement director to substitute the removed director;
- not convening a physical members’ meeting or having a chairperson present in Malaysia in such meeting;
- issues pertaining to quorum and the appointment of proxy; and
- not being sufficiently prepared to handle heated conflict and objections by the removed director attending the members’ meeting.
Can the removal of a director who is also a shareholder amount to oppression?
In addition to the practical challenges described above, a removal of a director who is also a shareholder, particularly a minority shareholder, could certainly present risks of oppression allegations.
The removed director may potentially file an oppression lawsuit under Section 346 of the Companies Act if the removal was done in a way that disregarded its interest as a shareholder. If the removal was carried out in a way that is discriminatory, unfair, or oppressive, the court may step in to defend the rights of the minority shareholder.
Conclusion
Removing a director without his/her resignation can be fraught with missteps, if not meticulously planned and executed. Failure to comply with the correct procedure could result in invalidation of the removal, a potential lawsuit, and irreparable harm to the company’s reputation. Hence, it is advisable for companies to seek professional legal advice before initiating the removal process to ensure compliance with statutory requirements and mitigate litigation risks.
¹ [2020] 10 MLJ 137
² Low Thiam Hoe & Anor v Sri Serdang Sdn Bhd & Ors [2020] 10 MLJ 137
³ Chan Tai Ping v Ning Yang Properties Sdn Bhd & Ors [2022] 11 MLJ 394
⁴ [2011] 9 MLJ 467
⁵ [2009] MLJU 826
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This article was written by Shawn Ho (Partner) & co-authored by Xiu Hui (Intern) from the corporate practice group of Donovan & Ho.
Donovan & Ho is a law firm in Malaysia, and our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
