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Directors Beware, Some Of Your Company’s Liabilities Can Be Yours!

Directors Beware, Some Of Your Company’s Liabilities Can Be Yours!

A friend of mine shared his unfortunate experience of being a an independent director of an insolvent public company. He was dragged to court when the company failed to remit the salary deductions of its employees and the employer’s contribution to the Employees Provident Fund (EPF). During the court proceedings he was asked by the judge whether he enquired on the status of the EPF contributions and whether he asked to cite the EPF statements during board meetings. Of course he didn’t. He was found to have failed to perform his duties as a director in ensuring EPF contributions are remitted on time and a portion of the unremitted EPF contributions was judged to be his personal liability!

Generally, in practice, there is this division of roles and responsibilities between boards and management with regards to the
administration of a limited company. Boards are expected to be responsible for governance and high-level strategic matters whereas management would be dealing with the implementation of strategies and the day-to-day operations of companies. Due to this, the level of reliance by boards on management for administrative matters such as EPF contributions is high.

However, the letter of a number of laws in Malaysia place the responsibilities of ensuring certain actions are performed directly on the board of directors. Apart from EPF, the Income Tax Act (ITA) also specifies that directors shall be jointly and severally liable for the income tax of a company during the period in which tax is liable to be paid. A similar provision is also available for the unremitted Goods and Services Act to be recovered from directors if the company they are directors of fails to do so.

There could be more laws which the onus on all directors to ensure proper conducts of companies with respect to the areas governed by those laws such as employment of foreign labour, quality of goods and matters pertaining to the safeguarding of the environment.

The company itself, has to comply with the requirements of the Companies Act. Under this law the responsibilities of directors to ensure compliance such as tabling of audited financial statements which comply with approved accounting standards would expose directors to penalties and fines if the company fails to do so. If this is carefully analysed, there are numerous steps that must be right for the expectations of the law to be met, and most of them are within the purview of management. They are:

  • Transactions must be properly recorded
  • Financial statements must be prepared
  • The financial statements must comply with approved accounting standards
  • The financial statements must be audited
  • An annual general meeting (AGM) is convened
  • The audited financial statements must be tabled and approved by shareholders at the AGM
  • The approved financial statements lodged with the Registrar of Companies

So, if one is an independent and non-executive director, how much control does one has even over this requirement to have audited financial statements lodged before the registrar? At the same time, our laws generally do not differentiate between executive and non-executive directors although our enforcement agencies could consider the differences in roles in mitigation, not in determining culpability. Independent directors have to pray hard for that distinction to be made!

How could these risks be mitigated? After all, the fees and remuneration of independent non-executive directors are not that
superb in the first place. The imbalances between risks and rewards are deterring qualified people from accepting offers for such roles. This phenomena is also not good in enhancing the level and quality of corporate governance in Malaysia.

Boards may consider few measures to ensure all directors are not necessarily exposed to liabilities when they have performed their job to the best of their abilities.

First is to have a register of all the possible non-compliances and misconducts which may cause directors to be put in trouble. This could be around laws and regulations with respect to the establishment of the company, laws with respect to the conduct and behaviours of the companies and specific laws and regulations of the industry in which the company is operating in.

Second is having regular updates from management with regards to the status compliance to those laws and regulations. This would requires management to establish processes where the line executives who are responsible to ensure compliance are accountable. It would be fair for the chief executive officer to ultimately signs off the updates  to provide additional comfort to the board.

The third step is to all the deliberations on these updates to be properly minuted to reflect the level of scrutiny and assessments. Such minutes would be the bases for regulators and enforcement agencies to assess whether the board have discharged their duties adequately.

Given the complexity of business operations and the numerous laws and regulations which companies are subjected to, board members, especially the independent non-executive directors, have to ensure their interests are protected. Compliance has become a norm in many industries and boards should not be apologetic to demand assurances from management. Otherwise, the liabilities of the companies could become theirs.