Directors’ Duties under the Malaysia Companies Act, 2016 (“CA 2016”) in the context of Climate Change

Malaysia has been a signatory to the United Nations Framework Convention on Climate Change since 1993. It was only in the late 2000s that Malaysia had taken a more serious approach in addressing climate change at the federal level, especially with newly launch National Energy Policy. In 2021, Malaysia announced its Nationally Determined Contributions (NDCs) with the aim to an unconditional reduction in the economy-wide carbon intensity of GDP by 45% by 2030[1].

According to a legal opinion commissioned by The Commonwealth Climate and Law Initiative (CCLI) (“Legal Opinion”), directors of Malaysian companies are duty bound to proactively incorporate climate change considerations into their corporate strategies and decision-making processes [2]. Directors need to apprise themselves of all aspects concerning climate change that can impact their companies and undertake action to manage, plan and implement appropriate strategies to address climate related risks and ensure proper disclosure of such risks. A director who failed to do so may be in breach of his / her legal duties and could be subject to litigation from shareholders or enforcement action from the regulatory authorities [2]. Also, directors cannot deny their obligations to take into account of climate change risks in discharging their fiduciary duties [2]. The directors’ duties under the law of Malaysia comprise of (i) statutory duties which are set out in the Companies Act, 2016 (CA 2016) and (ii) the common law principles as pronounced in cases decided by the Courts of Malaysia.

Under Section 213 of the CA 2016, the duties that directors owe to their companies are in two broad categories i.e., fiduciary duty to act for a proper purpose and in good faith in the best interest of the company and a duty of care skill and diligence [2].

 

Fiduciary Duty

Section 213(1) of the CA 2016 provides for the first category of directors’ duties, whereby a director is under a fiduciary duty to, at all times (i) exercise his powers for a proper purpose and (ii) such powers must be exercised in good faith in the best interest of the company. The statutory duties and fiduciary duties of directors under the CA 2016 can be explained by references to the following case laws [2]:

(1) Case law: Dato’ Abul Hasan bin Mohamed Rashid v Multi-Code Electronics Industries & Anor [2012] 5 MLJ 176 (Court of Appeal of Malaysia) A director of a company is precluded from bringing his personal interest into conflict with that of the company. In the case of Dato’ Abul Hasan bin Mohamed Rashid v Multi-Code Electronics Industries & Anor [2012] 5 MLJ 176 (Court of Appeal of Malaysia), it was held that directors could be regarded as trustees and were subject to strict fiduciary principles that ensured certain minimum standards of behaviour with potentially severe penalties in the event of breach.

(2) Case law: The Board of Trustees of the Sabah Foundation & Ors v Datuk Syed Kechik bin Syed Mohamed & Anor [2008] 5 MLJ 469 The company is entitled to the single-minded loyalty of its directors. In The Board of Trustees of the Sabah Foundation & Ors v Datuk Syed Kechik bin Syed Mohamed & Anor [2008] 5 MLJ 469, the court defined the characteristic of a fiduciary as that the director must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.

(3) Dato’ Abul Hasan bin Mohamed Rashid v Multi-Code Electronics Industries & Anor [2012] 5 MLJ 176 A director must act bona fide in the interests of the company and not exercises his or her powers for any collateral purpose. In Dato’ Abul Hasan bin Mohamed Rashid v Multi-Code Electronics Industries & Anor [2012] 5 MLJ 176 (Court of Appeal of Malaysia), the court held that a director who, by using the position, makes a profitable gain and must account for that profit. Where a director finds himself or herself in a position where the duty to the company and the director’s personal interest conflict, any contract entered is voidable at the instance of the company.

(4) Zaharen bin Hj Zakaria v Redmax Sdn Bhd and other appeals [2016] 5 MLJ 91 A director must never act in any manner that would put the company in harm’s way. This principle was affirmed in Zaharen bin Hj Zakaria v Redmax Sdn Bhd and other appeals [2016] 5 MLJ 91 (Court of Appeal of Malaysia).

 

Duty of Care

Section 213(2) of the CA 2016 requires a director to exercise reasonable care, skill and diligence. A director’s exercise of this duty of care will be assessed based on [2]: (a)    Firstly, the knowledge, skill and experience which may be reasonably expected of a director having the same responsibilities. This is assessed using an objective test; and (b)    Secondly, the additional knowledge, skill and experience which the director in fact has. Therefore, where a director professes to have qualifications or experience in a specialised area of knowledge, he shall be expected to use such specialised knowledge where it is pertinent to the company’s activities. In such circumstances, while the second limb under Section 213(2) CA 2016 is described as a subjective test, the director is adjudged against the standard of skill commensurate with the director’s professed level of qualification or experience in the area of knowledge [2].

Case law: Singapore landmark case of Abdul Ghani bin Tahir v Public Prosecutor [2017] SGHC 125 In a Singapore landmark case of Abdul Ghani bin Tahir v Public Prosecutor [2017] SGHC 125, the company director was imprisoned for failure to exercise reasonable diligence under section 157(1) of the Singapore Companies Act [2]. In this case, The Singapore High Court found the director to have neglected his duty of care and diligence which contributed to the company committing money laundering offences because of the skills and experience that the director possessed, which was, as a chartered accountant providing corporate secretarial services and his experience as a Singaporean resident director.

 

In today’s scenario where wide and global discussions on issues regarding climate-related provisions, regulations and guidelines are now easily available to directors of Malaysian companies, it will be difficult for any director to claim they were not aware of the material risks arising from the climate crisis. Therefore, directors may risk acting in breach of their duties, if they do not keep themselves informed of the climate risks and must undertake the appropriate action to incorporate a broader sustainability agenda in their companies’ operating and decision-making processes and address these issues. Board can and rely on the support of external ESG experts and advisors but it is important for directors having regard to their knowledge of the company’s activities, structure and operations, to make an independent assessment of the sustainability and climate-related advice, opinions, reports and statements and should refrain from taking a simplistic approach of just placing wholesale reliance on the opinions of ESG experts.  

Companies are pressured to take responsibility for the impact of its business on the environment, the economy and the community as stakeholders have become increasingly aware of the impact of climate change.

In March 2022, the directors of Shell were sued for failing to properly prepare the multinational oil and gas company for net zero. The lawsuit brought by activist shareholders was thought to be a first-of-its-kind action at holding a company’s board of directors personally liable “for failing to properly prepare for the net zero transition.”[3] The activist shareholders argued that the board’s failure to implement a climate strategy that truly aligns with the landmark Paris Agreement was a breach of their duties under English law. It claimed that the Shell board’s mismanagement of climate risk had put its directors in breach of their duties under the U.K. Companies Act. This law stipulates directors are legally required to promote the firm’s success and to exercise reasonable care, skill and diligence.

It is not the first time that Shell has been brought to court over climate-related issues. In May 2021, a Dutch court ordered Shell to reduce its global carbon emissions by 45% by the end of 2030, when compared with 2019 levels. The court also held that Shell was responsible for its own carbon emissions and those of its suppliers, known as Scope 3 emissions [3].

It is rather clear and evident from the above legal actions that companies today must ensure that strategic plans are in place to incorporate sustainability considerations into business strategies and operations as failure to do so will have a greater impact on the company’s risk profile, reputation, potential liabilities and its overall value.  As climate crisis and issues becoming more prevalent, directors’ duty and standard of care have now evolved to an even higher benchmark i.e., to consider climate related risks in their decision-making process.

Directors today must own up to their roles and responsibilities in addressing climate change and step up in discharging their duties.

 

If you have any questions or require any additional information, please contact us.

 

The above have been extracted from [1] The Star : On climate change, Malaysia has three stories to tell, [2] the Legal Opinion commissioned and published by The Commonwealth Climate and Law Initiative (CCLI) and [3] The Guardian : Shell directors sued for ‘failing to prepare company for net zero’ and is for general information only. It is not a substitute for professional advice.

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