“Hey, I have a quick question: my boss just offered to appoint me as a nominee director. They need a Bumiputera director so that the company can undertake some projects. I will be indemnified for any claims brought against the company. Is it safe for me to accept the appointment?” my friend asked over the phone.
The arrangement that was described is that of a nominee director appointment. A “nominee director” is simply a person appointed as the company’s director to satisfy a legal or commercial requirement, but who in reality carries out the instructions of the appointing party rather than exercising independent management powers.
Section 217(1) of the Companies Act 2016 (“Act”) defines a nominee director as “a director who was appointed by virtue of his position as an employee of a company, or who was appointed by or as a representative of a member, employer or debenture holder”.
Section 217(1) of the Act also provides that a nominee director:
(a) shall act in the best interest of the company; and
(b) in the event of any conflict between his duty to act in the best interest of the company and his duty to his nominator, he shall not subordinate his duty to act in the best interest of the company to his nominator.
Thus, even though one may act as a “nominee”, he/she remains fully subject to all statutory and common law duties of a director. The nominee director may be exposed to certain legal claims in his/her personal capacity and be made personally liable. Below are some non-exhaustive examples of situations where a director may be personally liable:
Personal liability under the Act
- Failure to keep proper accounting and other records of the company [1].
- Failure to lodge the company’s financial statements and reports for each financial year [2].
- In the course of the winding up of a company or in any proceedings against a company, if the company’s business has been carried on with intent to defraud creditors or for any fraudulent purpose, the court may declare that a director is personally liable for the company’s debt [3].
Personal liability under other Malaysian statutes
- Where the company fails to pay tax to the Inland Revenue Board of Malaysia, a director (during the period in which that tax was liable to be paid by the company) is jointly and severally liable for such debt [4].
- When there are unpaid contributions by the company under the Employees Provident Fund Act 1991, a director (during the period in which that contribution was liable to be paid by the company) is jointly and severally liable for such debt [5].
Further, once a creditor has obtained a judgment against the company, a director can be summoned to court to answer questions regarding the company’s financial status and its ability to repay the debt [6].
“Serving as a nominee director should not be taken lightly,” I told my friend. Even if the role seems like a formality, before accepting, one should ensure the indemnity truly offers protection against such liabilities.
[1] Sections 245(1) and 245(9) of the Act
[2] Sections 259(1) and 259(3) of the Act
[3] Section 540(1) of the Act
[4] Section 75A(1)(a) of the Income Tax Act 1967
[5] Section 46 of the Employees Provident Fund Act 1991
[6] Section 4(1) of the Debtors Act 1957
About the Author
Poon Wei Ying is a Senior Associate of XK Law who graduated with First Class Honours from the Cardiff University, United Kingdom. She believes in giving back to the society and that education can change a person’s life.
Disclaimer: This post is not intended as a solicitation, is not legal advice, and is not a substitute for obtaining legal advice. You should not act upon any such information without first seeking qualified professional counsel on your specific matter.
