Indemnity and Insurance for Officers and Auditors of Malaysian Companies
Unless otherwise indicated, the company stated in this article refers to the private company incorporated in Malaysia in accordance with the Malaysian Companies Act 2016 (CA 2016).
In Malaysia, corporate governance places significant emphasis on the protection and accountability of company officers and auditors. These individuals often face personal risks, including potential liabilities arising from legal proceedings or claims brought against them in the course of their duties. To mitigate this risk, companies can offer indemnity and insurance, ensuring that officers and auditors are not left personally liable for honest mistakes. However, the scope of these protections is carefully regulated to balance the need for accountability with the necessity of protecting individuals who perform key functions within a company.
Before delving into indemnity and insurance, it is important to define who qualifies as an officer under the CA 2016. Section 289(9) of the CA 2016 defines an officer to include any individual who is or was a director, manager, secretary, or employee of the company. This also extends to a receiver or manager in charge of part of the company’s business, and a liquidator appointed for the company’s voluntary dissolution. These officers play critical roles in the governance and operations of a company and thus their actions carry significant legal and financial implications.
Section 288 of the CA 2016 states that a company is prohibited to include any provisions in the company’s constitution or contract to protect its officers and auditors from being personally accountable for things like negligence, breach of trust, or any failure in their duties. If an officer or auditor is at fault, they are personally liable for their action.
Section 289 imposes strict limits on the extent to which a company can indemnify its officers and auditors. This section specifically prevents a company from relief or excuse an officer or auditor for liabilities resulting from negligence, breach of duty, default, or breach of trust. This guarantees that the officer or auditor will not be exempt from personal liability if their actions are considered improper or damaging to the company. However, Section 289(4) allows indemnity in specific circumstances, such as covering legal costs when the officer or auditor successfully defends themselves as cleared of any wrongdoing in legal proceedings.
Section 289(5) of the CA 2016 allows companies to purchase insurance for their officers and auditors to protect them against potential civil liabilities and covering legal costs and settlement costs when the officer or auditor successfully defends themselves in legal proceedings related to their actions or omissions in their role. However, the Board of Directors’ approval must be obtained in advance before proceeding with the purchase of the insurance. Insurance is an important safeguard that enables officers and auditors to perform their roles without undue fear of personal financial loss. However, this protection excludes coverage for any liability arising from a wilful breach of duty, ensuring that insurance cannot be used to shield individuals from intentional misconduct.
Information regarding the indemnity and/or insurance given to the officer or auditor must be disclosed in the Directors' Report and Board meeting minutes, as mandated by Section 289(7) of the CA 2016.
A real-life example that highlights the application of indemnity can be found in the case of Perdana Petroleum Bhd v Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra & Ors [2021] 6 MLJ 663. In this case, the appellant, Perdana Petroleum Bhd, appealed the High Court's decision that ordered the company to indemnify its former directors for the legal expenses and costs they incurred while defending previous legal actions brought against them for breaching their fiduciary duties. The former directors invoked Section 289 of the CA 2016, which allows a company to indemnify an officer for costs incurred in defending or settling claims or proceedings arising from actions taken in their official capacity.
The Court of Appeal observed that Section 289 of the CA 2016 is merely permissive and does not automatically grant a statutory right to indemnity for officers or auditors of companies. In addition, the court highlighted that indemnity clauses in a company's Constitution primarily serve as a contract between the members and the company. In order for the directors to benefit from the protection provided by the company’s Constitution, the indemnity clauses must be included in a separate, binding contract between the directors and the company.
Alternatively, directors may opt for directors' and officers' insurance to secure additional protection against potential liabilities that may arise during the course of their duties. Taking the necessary steps outlined above is essential to provide directors with the peace of mind they need while fulfilling their challenging and demanding responsibilities.
Conclusion
In conclusion, companies must carefully assess the need to purchase insurance to provide appropriate protection for their officers and auditors. While insurance offers a safeguard against personal financial loss, it is essential to ensure that it is used within the boundaries set by the CA 2016. Officers and auditors must remain accountable for their actions, particularly in cases of negligence, breach of duty, or misconduct. Therefore, companies should consult legal experts to draft indemnity clauses and insurance policies that comply with the statutory limitations under Sections 288 and 289 of the CA 2016. This approach ensures that officers and auditors can perform their roles effectively, without undue fear of personal liability, while maintaining a high standard of corporate governance and accountability.
Kaizen, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professionals in Kaizen for further clarification.
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