Many business owners and founders automatically become directors when they incorporate a company. In the early stages, the focus is naturally growing the business and securing customers. Legal compliance and corporate governance often receive less attention because they seem administrative or something that can be dealt with later.
However, becoming a director comes with legal responsibilities under the Companies Act 2016 (“CA 2016”). These duties apply regardless of whether your company is a startup, small and medium enterprises, or large corporation.
In practice, many directors only fully appreciate these responsibilities when issues arise, such as investor due diligence or shareholder disputes. At that stage, fixing governance issues can be expensive and time-consuming.
This is why understanding director duties early and putting the right structure in place from the beginning is not just a legal requirement, but a commercial safeguard.
What Every Director Should Know
1. Always Act in the Best Interests of the Company- section 213(1) of the CA 2016
A company is a separate legal entity from its shareholders and directors. Accordingly, even where a director is the majority or sole shareholder, a director’s powers must be exercised, and decisions made, in the best interests of the company, rather than in the director’s personal interests.
Acting in the company’s best interests requires directors to make decisions that promote the interests of the company as a whole, rather than the director’s own interests or those of any related party. This includes avoiding the use of company assets for personal purposes, appropriately managing conflicts of interest, and ensuring that any related-party transactions are entered into on proper commercial terms and are appropriately disclosed, approved, and documented.
As a practical guide, before making any significant decision, a director should consider whether he or she honestly believes the decision to be in the best interests of the company and whether that belief is one that a reasonable director could hold in the same circumstances. Adopting this practice will help demonstrate compliance with a director’s duties and is consistent with the subjective-objective test for breach of directors’ duties affirmed by the Federal Court in Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra v Petra Perdana Bhd & Another Appeal [2018] 2 MLJ 177.
2. Make Informed Decisions – section 213(2) of the CA 2016
Under the CA 2016, directors are required to exercise care, skill, and diligence when making decisions. This means they should understand the documents they sign, review important contracts carefully, and seek professional advice where necessary. Relying solely on verbal explanations or approving significant transactions without proper review may expose both the company and its directors to unnecessary risk.
This principle was illustrated in Pioneer Haven Sdn Bhd v Ho Hup Construction Co Bhd [2012] 5 CLJ 169. The Court of Appeal found in favour of directors who had made a major business decision under time pressure, noting that they had obtained written legal advice and actively considered the decision at the board meeting, rather than simply approving it without proper deliberation.
The practical takeaway is simple: before approving a significant transaction, directors should understand the matter, obtain written professional advice where appropriate, and keep proper records of the decision-making process. These steps help demonstrate that the required standard of care, skill and diligence has been exercised.
3. Manage Conflicts of Interest Properly- sections 219, 221 and 222 of the CA 2016
Conflicts of interest are common in practice, especially in founder-led and closely held companies. A director might have an interest in another business dealing with the company or be involved in a transaction with a related party. This is not necessarily a problem. A conflict only becomes an issue when it is not handled properly. The key is to disclose it formally and manage it in line with the law and the company’s own governance process.
In practice, this means following two simple steps. First, where a director has a direct or indirect interest in a transaction with the company, that interest should be formally declared to the board as soon as practicable and recorded in the board minutes. Second, once the interest has been disclosed, the interested director should abstain from participating in both the discussion and the vote on that matter. Following this documented and transparent process helps protect both the company and the director if the transaction is later challenged.
4. Keep Corporate Records Up to Date- sections 47,51,58,68,78 and 245 of the CA 2016
Directors are ultimately responsible for ensuring that the company maintains proper statutory records, resolutions, filings and accounting records. While the company secretary plays an important role in maintaining these records, directors should ensure that statutory registers, annual filings and accounting records are kept up to date and lodged with the Companies Commission of Malaysia where required.
Failure to comply with these requirements may expose the company and its directors to regulatory action and financial penalties, and in serious cases, may result in the company being struck off the register. Directors cannot rely solely on the company secretary to fulfil these obligations. As those responsible for the management of the company, directors should maintain appropriate oversight to ensure the company’s statutory compliance.
Why These Duties Matter in Practice (and Why Many Businesses Seek Ongoing Legal Support)
In reality, director duties are not just legal requirements, they directly affect how a business operates, grows, and raises capital. Where governance is weak, businesses often face issues such as unclear decision-making authority, shareholder disputes or delays in transactions due to documentation gaps.
This is why many businesses seek ongoing legal and corporate advisory support, not only to draft documents when needed, but to ensure that decisions are properly documented, compliance is maintained, and risks are identified before they become costly problems.
Key Takeaways
Business owners and founders should keep the following in mind:
- act in the best interests of the company;
- make informed and well-documented decisions;
- identify and properly manage conflicts of interest; and
- maintain proper corporate records and compliance.
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This article was written by Jocelyn Lier (Associate) from Donovan & Ho’s corporate practice.
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.
