Short answer. Under section 221 of the Companies Act 2016, a director with a direct or indirect interest in a contract or proposed contract with the company must declare its nature at a board meeting as soon as practicable, and the secretary must minute it. Failure is an offence (up to five years or RM3 million) and the contract is voidable by the company. Sections 222 to 230 add rules on voting, loans and approvals.
Axecta provides company secretarial service for companies across Malaysia. Talk to our team.
In this article
- Why conflicts matter in small companies
- The disclosure rule: section 221
- Who counts as “connected” with a director
- Interested directors and voting: section 222
- Related rules for specific transactions
- A step-by-step conflicts process
- An illustrative scenario
- Common mistakes
- What this means for different companies
- How Axecta helps
- Next steps
- Frequently asked questions
Why conflicts matter in small companies
In an owner-managed Sdn Bhd the director, shareholder and landlord, supplier or lender are often the same people. That is legal, but the Companies Act 2016.pdf) requires the interest to be visible and, in some cases, approved. This guide covers disclosure (section 221), voting (section 222), the related approvals for loans, fees and asset transfers, and a simple process.
The disclosure rule: section 221
Section 221(1).pdf) requires every director who is in any way, directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of the interest at a meeting of the board of directors, as soon as practicable after the relevant facts come to the director’s knowledge.
Key features
- Standing notice. A general notice that the director is an officer or member of a specified corporation, or a member of a specified firm, and is to be regarded as interested in any later contract with it, is a sufficient declaration if it specifies the nature and extent of the interest and the interest does not change in nature or extent (section 221(4)). It is of no effect unless given at a directors’ meeting or the director takes reasonable steps to have it read at the next meeting (section 221(5)).
- Conflicting offices or property. A director holding any office or property that may create duties or interests in conflict with their duties as director must declare the fact and the nature, character and extent of the conflict (section 221(6)), at the first meeting after becoming a director or after starting to hold the office or property (section 221(7)).
- Family interests. An interest in the company’s shares or debentures held by the director’s spouse or child (including adopted and stepchildren) who is not a director is treated as an interest in the contract (section 221(9)).
- Recording. The secretary must record every declaration in the minutes of the meeting (section 221(8)).
- Exceptions. Interests as a member or creditor of another corporation need not be declared if not material (section 221(2)). A director is not deemed interested merely by guaranteeing a loan to the company, or by being a director of a related corporation (section 221(3)).
- Consequences. A contract made in contravention is voidable at the instance of the company, except for outsiders who gave valuable consideration without notice (section 221(10)). Officers and others who contravene commit an offence, with imprisonment up to five years, or a fine up to RM3 million, or both (section 221(12)).
- The constitution. Section 221(11) says the section adds to, and does not replace, any constitutional restriction on directors’ interests.
Who counts as “connected” with a director
Need this done for you? Axecta’s company secretarial service team can handle this for your company. See the company secretarial service service.
Section 197.pdf) deems a person connected with a director if the person is a family member (spouse, parent, child including adopted child and stepchild, brother, sister and the spouse of the director’s child, brother or sister), an associated body corporate, a trustee of a trust benefiting the director or family, or a partner of the director or of a connected person. A company is associated with a director if it is accustomed to act on their directions, if the director has a controlling interest, or if the director and connected persons can control at least 20% of the votes attached to voting shares. This matters for the loan and asset-transaction rules below.
Interested directors and voting: section 222
Section 222(1).pdf) says a director interested in a contract (unless the interest need not be disclosed under section 221) counts only toward the quorum, must not participate in the discussion while the contract is considered, and must not vote on it. But section 222(2)(a) says this does not apply to a private company unless it is a subsidiary of a public company. So:
| Company type | Interested director may vote? | Source |
|---|---|---|
| Ordinary private company | The statutory bar does not apply; check the constitution | s222(2)(a) |
| Private company that is a subsidiary of a public company | Barred from discussion and voting, with exceptions for wholly-owned group contracts | s222(1), (2)(b) |
| Public company | Barred from discussion and voting | s222(1) |
Even where the statute does not bar a vote, many boards ask the interested director to step out. A contract made in breach of section 222(1) is voidable, and the director commits an offence (section 222(3), (4)).
Related rules for specific transactions
| Transaction | Section | What the Act says | Penalty or consequence |
|---|---|---|---|
| Using company property, information, position or opportunity for personal gain; competing | 218 | Not allowed without consent or ratification of a general meeting | Up to 5 years or RM3 million, or both |
| Buying or selling substantial assets | 223 | Needs company approval by resolution; “substantial” for an unlisted company means more than 25% of total assets, 25% of net profits attributed, or 25% of issued share capital, whichever is highest | Void except for outsiders without notice; offence |
| Loans to a director | 224 | Prohibited, with exceptions including an exempt private company, funds for company expenditure with prior approval, and employee schemes | Offence; directors who authorise are jointly and severally liable to indemnify the company |
| Loans to persons connected with directors | 225 | Prohibited for companies other than exempt private companies, with exceptions | Offence for directors who authorise |
| Tax-free pay to directors | 226 | Not allowed; treated as a gross sum subject to tax | Offence |
| Compensation for loss of office | 227 | Needs disclosure and member approval | See the section |
| Non-cash assets with directors or substantial shareholders | 228 | Shareholder approval if value exceeds RM250,000, or exceeds 10% of net asset value (and at least RM50,000) | Void if no prior approval; account for gains; offence |
| Director’s fees and benefits | 230 | Private company Board may approve subject to the constitution; notify shareholders within 14 days | Debt due to the company if unapproved |
| Contract with a sole member who is also a director | 234 | If not in writing, record terms in directors’ minutes | Fine up to RM1 million |
Loans to directors in more detail
Where a loan is made to enable a director to meet company expenditure or buy a home (when full-time employed), section 224(3) requires the prior approval of the company on a resolution that discloses the purpose and amount. If prior approval was not obtained, a private company may authorise it within six months, and if not authorised the loan must be repaid after twelve months from the making of the loan (section 224(4), (5)). Directors who authorise a loan without the required approval are jointly and severally liable to indemnify the company against loss (section 224(6)). See separating personal and business finances.
See directors’ duties and director personal liability for the wider picture, and written resolutions for how members can approve a transaction without a meeting where the Act allows it.
A step-by-step conflicts process
- Identify. Ask every director at the start of the year, and before any significant deal, what offices, shareholdings or property could conflict with the company.
- Declare in time. Declare at the board meeting at which the matter is first raised, or by standing notice under section 221(4) and (5).
- Minute it. The secretary records the declaration (section 221(8).pdf)); the register of directors itself is kept under section 57, and changes in board composition go to SSM through the section 58 notification. See how to hold a board meeting.
- Decide who participates. Check section 222 and the constitution. Where the company is private, consider having the interested director leave the room anyway.
- Test the terms. Compare with at least one external quote or market benchmark and record the comparison.
- Get the right approval. Board approval, or a members’ resolution where the Act requires it (sections 218, 223, 224, 227, 228). See directors’ vs shareholders’ resolutions.
- Document the contract in writing with commercial terms.
An illustrative scenario
A Sdn Bhd with two director-shareholders wants to rent its warehouse from a company owned by one of them. The interested director tells the board at the first meeting where the lease is discussed, and the secretary minutes the nature and extent of the interest under section 221. The company obtains two comparable rental quotes, and the other director approves the lease at a rate in line with them. The company is private and not a subsidiary of a public company, so section 222 does not bar the interested director from voting, but the minute records that he left the room. If the same company had instead bought a non-cash asset valued at more than RM250,000 from that director, section 228 would also require approval by shareholders at a general meeting. All figures other than the statutory thresholds are invented for illustration.
Common mistakes
- Assuming a family-owned landlord or supplier is not an “interest”.
- Treating director current accounts as informal loans, without the section 224 approvals.
- Missing the 14-day shareholder notice for approved fees under section 230(3).
What this means for different companies
- Sole director and sole shareholder: disclosure is still required. The practical value is a clean minute that shows the transaction was authorised and on proper terms; section 234 adds a minuting rule for contracts with a sole member who is a director.
- Foreign-owned subsidiary: intercompany contracts with the parent are common. Check whether section 222 applies (it can, if the Malaysian company is a subsidiary of a public company) and whether the exemption for wholly-owned group contracts fits.
How Axecta helps
Axecta’s company secretarial team can set up a declaration register, include standing declarations in board packs, minute disclosures correctly and flag transactions that need a members’ resolution.
Next steps
- Circulate a conflicts questionnaire to every director.
- Review current related-party arrangements (leases, loans, supply contracts).
- Check any amounts owing to or from directors against sections 224 and 225.
- Minute standing declarations at the next board meeting.
- Take legal advice on any large deal with a director or substantial shareholder.
Frequently asked questions
Which section of the Companies Act 2016 covers conflict of interest disclosure?
Section 221 requires a director interested in a contract or proposed contract to declare the nature of the interest at a board meeting as soon as practicable. Section 218 covers misuse of company property, position, information and opportunities, and section 222 covers voting.
Must a director disclose in writing?
Section 221 requires a declaration at a board meeting and requires the secretary to record it in the minutes. A standing notice under section 221(4) also works if given at a meeting or read at the next one. The Act does not require a separate form.
Can an interested director vote in a Sdn Bhd?
Section 222(1) bars an interested director from participating or voting, but section 222(2)(a) says this does not apply to a private company unless it is a subsidiary of a public company. Check the constitution too, and consider stepping out of the discussion anyway.
What happens if a director fails to disclose an interest?
The contract is voidable at the company’s instance, except as regards outsiders who gave valuable consideration without notice (section 221(10)). The director also commits an offence, with up to five years’ imprisonment or a fine up to RM3 million, or both.
Can a company lend money to a director in Malaysia?
Section 224 prohibits it, subject to exceptions such as exempt private companies and approved funds for company expenditure or housing for full-time employees. The approvals and timelines are in the section. Directors who authorise unlawful loans may be liable to indemnify the company.
Is a transaction with a director’s spouse a conflict?
Possibly. Section 197 treats family members as connected persons, and section 221(9) treats the spouse’s or child’s interest in the company’s shares or debentures as the director’s interest. Section 225 restricts loans to connected persons for companies that are not exempt private companies.
When do shareholders need to approve a deal with a director?
Section 228 requires shareholder approval for the acquisition or disposal of non-cash assets with a director, substantial shareholder or connected person above the thresholds, which for an unlisted company means over RM250,000, or over 10% of net asset value and at least RM50,000. Section 223 applies for substantial company assets.
Do I need to declare interests every year?
The Act requires declaration when the interest arises and when you start to hold a conflicting office or property. A standing notice can cover future contracts with a named entity. Many boards refresh declarations annually; that is good practice, not a statutory requirement.
Can a director be paid fees by a private company?
Yes. Under section 230(2) a private company’s Board may approve directors’ fees and benefits, subject to the constitution, must record it in the minutes and notify shareholders within 14 days. Members holding at least 10% can challenge within 30 days. Public company fees need a general meeting.
Need a conflicts process for your board?
Axecta Management Services is a full-suite accounting, company secretarial and consulting firm in Kuala Lumpur, serving companies from SMEs to MNCs.
Ask Axecta to set up your board procedures
Keep reading
- Directors’ Duties Under the Companies Act 2016: A Practical Guide
- How to Hold a Board Meeting for a Sdn Bhd in Malaysia
- Director Personal Liability in Malaysia: When a Director Can Be Held Personally Liable
- Directors’ Resolution vs Shareholders’ Resolution in Malaysia
- Separating Personal and Business Finances in a Sdn Bhd
- Written Resolutions for a Sdn Bhd Under the Companies Act 2016
- How to Appoint and Remove a Director of a Sdn Bhd in Malaysia
- Director Roles & Duties: the full guide
Official sources to check
- Companies Act 2016 (sections 197, 218, 221, 222, 223, 224, 225, 226, 227, 228, 229, 230, 234)
- SSM company pages
This article is general information and not legal, tax or accounting advice for your company. Rates, thresholds, deadlines and procedures change, so confirm current requirements with the sources above or with Axecta.