Resigning as a Company Director – as simple as ABC?

Due to the fiduciary duties imposed by the Companies Act 2016 and the gravity of the responsibilities held by directors in a company, the act of resigning from the office of a director is not always straightforward; it operates differently than other resignations from a typical employment role, and would require some further considerations which are discussed in this article.

There are statutory restrictions from resigning

There are some situations where a director is statutorily prohibited from resigning from their post as director, as follows:

Restrictions under the Companies Act 2016 (“Act”)

s196

This section prohibits a director from resigning if the result of the resignation is that the number of directors of the company would fall below the minimum number required. Any purported resignation or vacation of office in contravention of this section is be deemed to be ineffective unless a person is appointed in that director’s place.

The act requires a minimum of ONE director for private companies, and such director:

(a) must ordinarily reside in Malaysia by having a principal place of residence in Malaysia; and

(b) shall not include an alternate or substitute director.

For example, in a situation where there are 2 directors, with one resident director and the other a non-resident director (who may be residing overseas and has become uncontactable), the resident director cannot resign as doing so will leave the company with only one non-resident director, which contravenes the statutory minimum requirement.

Also, we have come across situations where the Constitution of the company still expressly requires 2 directors at minimum, even though the Act now allows for only 1 director. In such instance, the resignation of 1 director (out of the 2) would result in a contravention of the company’s Constitution.

s209

This section provides that where a person is the last remaining director, he shall not resign from his/her office until a meeting is called to appoint one or more new directors. This restriction applies to companies that only have 1 director left.

Right to under other circumstances  

With the exception of the above restrictions, the Act does not appear to prevent a director from resigning under other circumstances. This means that a director is not prevented from resigning when, for example, the company is in financial trouble. However, this does not mean that a director is absolved from all liabilities arising from the director’s failure to perform his/her duties which caused the company’s financial trouble in the first place.

The manner of effecting resignation matters

Under s208 of the Act, a director may resign his office by giving a written notice to the company at its registered office. Notably, such notice is only effective when it is delivered to the address of the registered office or at a later date specified in the notice. Not depositing such written notice with the company’s registered office (i.e. typically the company secretary’s address) could therefore result in the resignation not being effected, as the company secretary has no knowledge of nor any obligation to update the register of directors with such a resignation.

Does the board need to approve the resignation?

While it is common practice for companies to require a board resolution to record and resolve a director’s resignation, the law does not require such consent as held in the case of Tan Kei Vin & 2 Ors v Feed Me Love Sdn Bhd & 2 Ors [2019] MLRHU 1034.

In this case the court held that there is no requirement that the resignation must be accepted by the board of directors; a director has a right to relinquish his/her office by giving notice of his/her resignation in accordance with the Act.

Similarly, in Wong Kok Meng v Preserver Bina Sdn Bhd [2019] MLRHU 1292, the court said that the director’s resignation is effective from the date of his/her notice of resignation pursuant to s 208, and that the company is under a statutory obligation to lodge the relevant forms with the authorities within 14 days from the director’s resignation to reflect the same.

The effect of resignation

As mentioned, a director is not absolved from all liabilities by virtue of his/her resignation, if such liabilities were incurred as a result of his/her breach of director’s duties to the company, prior to the date of resignation.

For example, in CTI Leather Sdn Bhd v Hoe Joo @ Khoo Hock Tat & Ors [2011] 8 MLJ 521, the court scrutinized the date of the directors’ resignation and found that their breach of fiduciary duties had occurred before their resignation and were therefore liable for the losses suffered by the company.

In addition, the court also went further and considered whether the conduct of the defendant fell within the definition of “director” under the Act notwithstanding his resignation in determining whether he is still liable as a director post resignation.

Among the factors considered which led the court to reach the finding that the defendant remained in control of the company and was therefore still a director notwithstanding his resignation were:

  • the defendant remained as a cheque signatory of the company, thereby having control of the finances of the company
  • the defendant’s continued role in the company
  • the defendant continued to receive benefits from the company.

Commentary

The decision to resign is in most cases a simple matter of serving the requisite notice in accordance with the Act. However, given that the law imposes onerous duties on directors which cannot be avoided simply by resigning, directors need to be aware of the potential liability that they may face by virtue of their role as a director, and take steps to ensure that the company under their control as well as the performance of their duties are in full compliance with the requirements of the law.

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This article was written by Shawn Ho (Partner) and Adryenne Lim (Senior Legal Executive). Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021.  We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.

Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysian 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.

 

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