In Malaysia, the payment of directors’ fees and benefits and directors’ service contracts are subject to certain legal requirements, which will be explored in this article. Failure to comply with these legal requirements may result in legal sanctions, as seen in the case set out at the end of this article.

No Directors’ Remuneration unless Provided in Constitution or Approved by Shareholders

The High Court in Wong See Yaw & Anor v. Bright Packaging Industry Bhd [1] (“Wong See Yaw Case”) held that it is a well-established common law rule that directors of a company are not allowed to expend on the funds of the company to pay any directors unless the company’s constitution confers the authority on the directors for such purpose or the payment is authorised by the members of the company.

This rule on directors’ remuneration arises from the principle that a director has fiduciary duties to the company he serves, which include the duty to act in good faith in the best interest of the company and the prohibition against improper use of the company’s property, position, corporate opportunity, or competing with the company. Directors would be infringing their role as fiduciaries and violating statutory requirements if they remunerate themselves in the absence of provisions in the constitution or authorisation by shareholders, thus risking penalties. Neither is the fact that a person is a director of a company in itself make that person an employee, which would otherwise entitle him to remuneration as an employee.

Approval Required for Directors’ Fees and Benefits for Private Companies

In the case of a private company, its board of directors (“Board”) may, subject to the constitution, approve the fees of the directors and any benefits payable to the directors, as provided under Section 230(2) of the Companies Act 2016 (“CA 2016”).

Any such Board’s approval must be recorded in the minutes of the directors’ meeting, and the Board must notify the shareholders of the approval of the fees within 14 days from the date of the approval, as required under Section 230(3) of the CA 2016. Contravention of Section 230(3) is an offence for which, upon conviction, the company and its officers will be liable to a fine not exceeding RM250,000.

Members who hold at least 10% of the total voting rights and who consider the payment of fees and benefits payable to the directors was not fair to the company may require the company to pass a resolution to approve the payment, either by way of a written resolution or at a general meeting, within 30 days after they have knowledge of such payments. [2]

The payment constitutes a debt due by the director to the company unless an approval has been obtained through a resolution passed under Section 230(4) of the CA 2016. [3]

The court in the case of Tan Tung Kwok Ors v Lau Kah Hing [4] held that although Section 230(2) of the CA 2016 allows for the board of directors of a private company to approve the directors’ fees and benefits, such approval is still subject to the company’s constitution.

Approval Required for Directors’ Fees and Benefits for Listed and Unlisted Public Company

In respect of a public company (whether listed or not) and the subsidiaries of a listed company, the fees of directors and benefits payable to their directors must be approved at a general meeting, as required under Section 230(1) of the CA 2016. Contravention of Section 230(1) is an offence, and a company shall, on conviction, be liable to a fine not exceeding RM3 million, and any payment in contravention of the provision constitutes a debt due by the director to the company.

In respect of a corporation listed on the Main Market or ACE Market of Bursa Malaysia, its constitution must provide that:

• The fees payable to non-executive directors must be a fixed sum and not a commission on or percentage of profits or turnover. In respect of executive directors, their salaries must not include a commission or percentage of turnover, as stated in Paragraph 7.23 of the Main Market Listing Requirements and Rule 7.23 of the ACE Market Listing Requirements (“Listing Requirements”).
• Directors’ fees and benefits payable to directors are subject to annual shareholder approval at a general meeting, as provided under Paragraph 7.24 of the Main Market Listing Requirements and Rule 7.24 of the ACE Market Listing Requirements.

Director’s Service Contract for a Public Company or its Subsidiaries

Generally, there is no legal requirement for a company to enter into director’s service contracts with its directors.

A director’s service contract in relation to a public company means a contract under which (a) a director of the public company undertakes personally to perform services, as a director or otherwise, for the public company or for a subsidiary of the public company; or (b) services that a director of the public company undertakes personally to perform as a director or otherwise are made available by a third party to the public company or to a subsidiary of the public company. [5]

However, if a public company or its subsidiaries enter director’s service contracts with their directors, Section 232(1) of the CA 2016 requires a public company to keep and maintain a copy of every director’s service contract available for inspection.

All the copies of contracts shall be kept available for inspection at the registered office of the company[6] and shall be made available for inspection for at least one year from the date of termination or expiry of the contract.[7] Failure to do so is an offence, and the company and every of its officers who is in contravention will, on conviction, be liable to a fine not exceeding RM1,000,000 upon conviction.[8]

The company shall give notice to the Registrar of Companies (a) of the place at which the copies of the contracts are kept available for inspection; and (b) of any change in that place, unless the copies of the contracts have at all times been kept at the registered office of the company [9]. The same is also applicable to a variation of a director’s service contract [10].

Case under the CA 2016

The Companies Commission of Malaysia had charged NWP Holdings Berhad (“NWP”) for infringing Section 230(1)(b) of the CA 2016 by failing to obtain its shareholders’ approval at the annual general meeting for the directors’ fees paid for the fiscal year ended 31 August 2017 and 31 August 2018. Notwithstanding the shareholders subsequently ratified the payment of directors’ fees for the years 2017 and 2018 during the extraordinary general meeting held on 17 December 2020.

On 22 April 2022, NWP announced in a filing with Bursa Malaysia that the charges against NWP had been compounded and the compounds had been fully paid by NWP. The Sessions Court Judge had subsequently ordered that NWP be acquitted and discharged.

Key Takeaways

1. Payment of remuneration to directors must be provided in the constitution of the company or authorised by shareholders.
2. In respect of a private company (which is not a subsidiary of a listed company), directors’ approval is required for the fees of the directors and any benefits payable to the directors. The Board’s approval must be recorded in the minutes of the directors’ meeting, and the Board must notify the shareholders of the approval of the fees within 14 days of the date of the approval.
3. In respect of a public company (whether listed or not) and the subsidiaries of a listed company, shareholders’ approval at a general meeting is required for the fees of directors and benefits payable to their directors.
4. If a public company or its subsidiaries enter into director’s service contracts with their directors, the company must keep and maintain a copy of every director’s service contract available for inspection.

This article is authored by Ms Wong Mei Ying (Partner) and Ms Lim Jia Wen (Trisha) (Associate ) of Tay & Partners. The information in this article is intended only to provide general information and does not constitute any legal opinion or professional advice.

The article was first published by Tay & Partners here.

Photo by Jp Valery on Unsplash.