Lecture 7- DIRECTORS-

APPOINTMENT,
QUALIFICATION &
DISQUALIFICATION
by
Darmar Pathmanathan
LLB(hons) London, LLM(London)(with
merit), Grad ICSA, Dip Arb., CLP
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 Types of Directors
➢ By section 2, the term ‘director’ includes any person occupying the position of
director, by whatever name called. Someone who is effectively in charge of a
company, wholly or substantially, can be treated as a director. A director is also
referred to as an officer of the company under section 2 CA 2016.

➢ Definition of ‘director’ under CA provided by section 210 states ‘director’

includes chief executive officer, chief financial officer, chief operating
officer or any other person primarily responsible for the management of
the company only for the purposes of sections 213 to 218, 223 and 228.

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 Types of directors
• A DEFACTO DIRECTOR - is a person who is treated as a D without ever having formally been
appointed as D, as long as he occupies the position of a D, it is immaterial what name he is called
by.

• A SHADOW DIRECTOR is a person in accordance with whose directions or instructions the directors
of the company (co) are accustomed to act. Not a shadow director if advice is given in a
professional capacity for example accountants or lawyers.

• An EXECUTIVE DIRECTOR is a person who holds two positions i.e. as D and as employee with
executive functions.

• A NON-EXECUTIVE DIRECTOR is a person who is solely a D i.e. he holds no executive functions and
only holds non-executive functions i.e. to attend board meetings.

• A MANAGING DIRECTOR is an extended example of the executive D, has a dual function i.e. that of
a D and that of an employee with special authority to exercise any/all of the management powers.

• A NOMINEE DIRECTOR is a person appointed to represent the interest of a particular

shareholder/creditor for example it is common for institutional shareholders to nominate a
nominee D to represent its interests on the board.

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• A managing director
It is sometimes quite common to refer to such a person
as the Chief Executive Officer (CEO). The managing
director will be appointed from the board and thus has a
dual function i.e.

✓ That of a director and thus an officer of the company

and

✓ An employee with special authority to exercise any or

all of the management powers

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 Appointment of directors
Section 202 provides that the first directors are those named as such
in the application for incorporation. They may also be named in the
constitution.

• Subsequent directors are normally appointed by the members

through ordinary resolution.

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 Directors
➢ Section 196 provides for a minimum of 1 resident director for
private company and a minimum of 2 resident directors for public
company.
➢ Section 196(2) provides a director shall be a natural person with a
minimum age of 18 years and no maximum age. This applies to all
companies, private and public.
➢ Resident director means one who ordinarily resides in Malaysia by
having a principal place of residence in Malaysia.
➢ The minimum number of directors shall not include an alternate or
substitute director. 6
 Disqualification of directors
This is provided for in section 198. The following categories are
disqualified:
S198(1)
a) An undischarged bankrupt
b) Convicted of an offence in connection with promotion, formation or
management of a corporation;
c) has been convicted of an offence involving bribery, fraud or
dishonesty; or involving breach of duties of directors

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d) Has been convicted of an offence under
section 213,217,218,228 and 539.

e) Disqualified by Court due to breach of S 199 :

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 S 199
S199.(1)
The Court may, on an application by the Registrar, make an order to
disqualify any person from acting or holding office as a director or
promoter of a company, or be concerned with or taking part in the
management of a company whether directly or indirectly, if—

(a) within the last five years, the person has been a director
of two or more companies which went into liquidation resulting from
the company being insolvent due to his conduct as a director which
contributed wholly or partly to the liquidation;

(b) due to his contravention of the duties of a director; or

(c) due to his habitual contravention of this Act.

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 Removal of directors
• In the case of public companies, notwithstanding the constitution
or agreement, a director may be removed under section 206(2) by
ordinary resolution.
• Special notice of 28 days under section 322(1) is required. The
director to be removed must be given the right to be heard under
section 207 which states on receiving special notice for a
resolution to remove a director, the company shall send it to the
director who shall be given the right to make oral or written
representation.
• In the case of private companies, subject to the constitution, an
ordinary resolution may be passed to remove a director- S206(1)

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 Payment & remuneration of
directors
• Any tax-free payments to directors is prohibited. This is provided
for in section 226 which states a company shall not pay a director
any remuneration free of income tax, or otherwise calculated by
reference to or varying with the amount of his income tax, or the
rate of income tax.

• Section 230 provides for approvals for fees of directors. It states

fees (and any benefits) paid to directors in a public or listed
company or its subsidiaries must be approved at a general
meeting. Thus shareholders’ approval is now required.

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• For a private company, the Board may (subject to the
constitution) approve directors’ fees (and any benefits) but
the shareholders must be notified accordingly.
Shareholders may object to the fees on the basis that the
payment is not fair to the company. Specifically,
shareholders holding at least 10% voting rights may object
and require the company to pass a resolution to approve
the payment.

• Section 232 states public companies must keep copies of

every director’s service contract at the registered office
available for inspection. The copies of contracts must be
made available for inspection for at least one year from the
date of termination or expiry of the contract
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 Loan to directors
• Section 224(1) – Loans to directors
A company (other than an exempt private company) shall not
• Make a loan
• Enter into any guarantee or
• Provide any security
to its director or a director of a company which is a related company
i.e. holding company. A contravention of section 224 will result in the
following circumstances:

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• The directors who authorized the loan will be
liable to indemnify the company against any
loss arising from the contravention;
• Such directors will also be guilty of an offence
and will face a fine or imprisonment or both
• The company nevertheless can recover the
loan or the amount for which it becomes
liable under the guarantee as well as the
security given.

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 Exceptions to S 224(1)
• expenditure incurred by him for the purposes of the company or to
enable him to properly perform his duties. It is possible for the
company to provide funds to the directors to perform his duties as
an officer of the company;

• the director is a full-time employee and the loan is given to enable

him to purchase a home; or

• the loan is made pursuant to a scheme (approved by the general

meeting) for making loans to employees and the director who is
engaged in full time employment with the company.

• Company is an exempt private company

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 Loans to persons connected to
directors.
• s225 the co cannot give loan, guarantee or security for loan to any person
connected to a director. Exempt private companies are not affected and
they can give loans to their own directors/persons connected with
directors.
➢ S197 defines connected persons as
✓ Members of director’s family;
✓ A body corporate which the director is associated with;
✓ A trustee of a trust (other than a trustee for an employee share scheme
or pension scheme)in which the director or his family is a beneficiary;.

✓ A director’s partner, or a partner of a person connected with the

director.
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• The director’s family is further defined to include his spouse, parent, child
(including adopted and step child), brother, sister and the spouse of the
director’s child, brother or sister.

• A body corporate is associated with the director if

❖ A majority of its directors are accustomed or obliged to act in accordance

with the director’s instructions or wishes; or

❖ The director has a controlling interest in it; or

❖ The director or persons connected with him or the director and persons
connected with him has at least 20% voting shares in that body corporate.

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 Exceptions to s 225(1)
➢ The co who gives the loan is an exempt private co.

➢ Where there is a holding & subsidiary relationship.

➢ If the company’s business is to lend money or to give guarantee.

➢ The person connected is connected to a full time director
and it is for the purpose of meeting expenditure or to buy a home
➢ Loan is made in accordance with a scheme approved by company
to employees

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 Compensation for loss of office
S227
A company may not make any payment to a director as
compensation for loss of office. The loss of office can result from
• Retirement
• Resignation
• Take-overs
• Death

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 Exceptions to S 227(1)
There are exceptions under S 227(5) and they include the following:
• Any payment under an agreement entered into before the commencement of this
Act

• The payment is made under an agreement which has been disclosed and
approved by a special resolution of the company;

• The payment is a bona fide payment by way of damages for breach of contract;

• The payment is a bona fide payment by way of pension or lump sum payment
given in consideration of past services. However, such gratuities or ex-gratia
payments must not exceed the total emoluments (includes director’s fees, and
other payments made to director) given to the director in the 3 years preceding
his death or retirement;

• The payment is made pursuant to an agreement made before he became a

director as consideration for his agreeing to serve as director.
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