Is a Company Allowed to Suspend Its Directors?

A. Introduction

I previously wrote on recent issues relating to removal of directors of a private company. Unlike removal of directors which is expressly provided for under the Companies Act 2016 (“CA“), the CA is silent on suspension of directors. Is a company then allowed in law, to suspend its directors? Can a company argue that it has an implied power under the CA to suspend its directors?

In this article, I will cover two recent High Court decisions which held that a company is not allowed to suspend its directors and there is no implied power to do so.

B. Kwan Teck Hian v Insulflex Corporation Sdn Bhd [2018] 2 CLJ 335

B.1 Background Facts

In this case, the director was suspended due to alleged wrongdoings and the director was denied the company’s financial records. The director commenced the suit to sought for an inspection of the financial records of the company.

Although the issue of suspension was not fully argued by both parties, the High Court elaborated on this issue of suspension as it relates to whether or not the director is entitled to inspect the books of the company.

B.2 Why Should Suspension Be Avoided?

The High Court held that the suspension is not provided for under the CA and should be avoided for two reasons.

First, there are other mechanisms to restrict access to companies record against directors whom are accused of wrongdoings. For instance, removal of directors. Alternatively, the company can apply for interim measures against the director to restrict his access to the company’s records.

Second, even if a director is suspended, the company search would still show that the person suspended is a director of the company. This brings risk to the company as third parties are entitled to rely on the indoor management rule in their dealings with the suspended director, who is in fact, still a representative of the company.

B.3 Suspension of Administrative Role Is Nevertheless Allowed

Despite ruling that suspension of a director is not allowed in law, the High Court made an interesting distinction between suspension of an executive director and a director in his normal capacity. The High Court held that any administrative suspension of the additional role of the director is allowed. For example, the executive role or managing role of the director can be suspended as such a suspension is akin to any normal disciplinary action taken against other employees.

C. Dato’ Shun Leong Kwong & Anor v Menang Corporation (M) Bhd [2021] 7 CLJ 23

C.1 Background Facts

The Plaintiffs brought an action to challenge their suspension as directors of the Defendant companies. The 1st Defendant agreed that there is no express power to suspend a director under the CA and the constitution of the company. However, the 1st Defendant argued that the power to suspend is an implied one.

First, the Defendants relied on section 47 of the Interpretation Acts 1948 and 1967 which provides:

"Where a power to make an appointment is conferred by any written law, the appointing authority shall also have power (subject to any limitations or qualifications which affect the power of appointment) to remove, suspend, reappoint or re-instate any person appointed in the exercise of the power."

Second, the Defendants referred to section 211(2) of the CA which provides:

"The Board has all the powers necessary for managing and for directing and supervising the management of the business and affairs of the company subject to any modification, exception or limitation contained in this Act or in the constitution of the company."

The High Court rejected the Defendants’ arguments.

First, the High Court held that section 47 of the Interpretation Acts only govern appointments conferred by any written law. Here, the Court held that the Defendants’ constitution cannot be construed as written law.

Second, the High Court held that while the term “business and affairs of the company” under section 211(2) of the CA is wide, it does not extend to suspension fo a director. This is because the CA is a comprehensive act. The fact that it does not provide for suspension of a director means that there is no implied power to do so.

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