Directors can land in prison for failing to carry out basic duties

Did you know that as directors you can land yourselves in prison for failing to carry out your basic duties?

Under Section 132 of the Companies Act 2016, dividends are only paid out of profits if the company satisfies the solvency tests, which generally relate to its cash flow solvency and balance sheet solvency.

Under the solvency test, a director must ensure that the company would be solvent immediately after the dividends are paid. This is done through a solvency statement that must be signed by the directors.

For example, a company must be able to pay its debts as and when they are due within 12 months after the distribution of the dividend is made.

The solvency statement is a statement made by each director that they have formed an opinion that the company satisfied the solvency test in relation to the transaction (Section 113 of the Companies Act 2016). The directors’ opinion must be:

1. based on the directors’ inquiry into the company’s state of affairs and prospects; and
2. must take into account all of the company’s liabilities including contingent liabilities.

“It is important for directors to reasonably believe in what they are going to confirm in the solvency statement, bearing in mind that failure to do attracts personal liability on the directors”

Making a solvency statement without reasonable grounds for the opinion is a criminal offence and if convicted, he/she could be liable to imprisonment up to 5 years or to a fine up to RM500,000 or both. Knowingly making a false statement attracts a heavier penalty – imprisonment up to 10 years or a fine up to RM3,000,000 or both.

So directors, study carefully the requirements and consult a lawyer if necessary to ensure you do not land in prison unnecessarily for carrying out your duties.