What Does The Companies Act 2016 Say About Nominee Directors?
We’re guessing you’re thinking of appointing a nominee director for your Sdn Bhd.
But before assuming the risk, you’d like to know how well their roles and responsibilities are covered by existing company law, including:
- scope of power
- liabilities, and
- constraints
It’s a valid question, so let’s see how a nominee director’s role is defined in the Companies Act 2016, which is meant to address all aspects of company governance.
Spoiler: It’s not as comprehensive as you might like!
The Companies Act on nominee directors
Out of the 620 sections in the Companies Act 2016, only one (Section 217) specifically addresses the responsibility of a nominee director, and here it is verbatim:
(1). 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, shall act in the best interest of the company and 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.
(2). A director who contravenes this section commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or a fine not exceeding three million ringgit or to both.
Practice due diligence and verify what we said – here’s a link to the Companies Act!
In simpler language, the bolded part means a nominee director’s first responsibility is to the company, not whomever appointed them.
For example, a nominee director you appoint cannot knowingly allow you to embezzle company funds.
And that’s pretty much all the Act says about nominee directors.
That’s great, but if you and your fellow directors don’t plan on embezzling anything, it’s not really a protection you need.
And if you do plan on embezzling funds, this article won’t help you!
Gaps in the Companies Act
The Companies Act 2016 makes no explicit mention of:
- formally limiting the powers of a nominee director
- recognising the superior authority of a traditional director
- compelling a nominee director to adhere to a nominator’s instructions
We’re sure you’ll agree that the protections offered are quite insufficient.
To be fair, federal legislation like the Companies Act is intended as a framework that can cover the entire country – that’s a lot of companies!
The details are often left to those running the show.
If you’re a business owner and see value in appointing a nominee director, it’s your job to fully define the parameters and constraints of that role.
That’s where a Proxy Agreement comes into play.
What’s a Proxy Agreement?
We describe Proxy Agreements in detail in our post on essential nominee director documents.
But here’s the summarised version:
A proxy agreement is a legal arrangement allowing one entity to carry out specific functions on behalf of another and comes with many strings attached.
In the context of a nominee directorship, it includes several key documents that fully define the scope of authority held by the nominee, including:
| Document | Description | Benefit to Owner |
|---|---|---|
| Nominee Director Agreement | Limits nominee director’s rights, requiring explicit permission for actions, with resignation provisions for appointment changes or breaches | You maintain all company decision-making (to the extent desired). |
| Power of Attorney | Filed with the High Court and grants you full authority over the company and company bank accounts. | You maintain full oversight and control over company finances. |
| Trust Deed | Binds the nominee director to hold shares on your behalf, acting solely on your instructions and accounting for all share benefits. | You receive any profits generated from all shares transferred. |
| Call Option Agreement | Forces nominee shareholder to sell trust shares at pre-determined ‘strike price’ on specified events, e.g., you’re a foreigner with a suitable local partner. | You can compel the nominee director to resign at any time and regain shares transferred at no cost. |
Taken together, we can see a more robust level of protection afforded to business owners.
Sounds pretty bulletproof if you ask us.
If you have other questions, check out our FAQ on appointing nominee directors where we go into logistics and requirements.
Otherwise, that’s it for this post – hope we helped!
Let MISHU handle your Nominee Directorship
MISHU’s team of professionals can help you source the perfect nominee director and manage all paperwork to ensure a smooth appointment that fully protects you and your company’s interests.