If you think being a sleeping director is a walk in the park, think again! In today’s article, we will briefly share what is a sleeping director and what the law has to say in regards to this topic.
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What is a sleeping director?
Sleeping directors, also commonly known as non-executive directors are directors:
- Who periodically attend Board meetings but do not play an active role in the management of the company;
- Who are usually usually appointed to prerequisite numbers of directors as required by the law. In this regard, they are usually the parents, family members or friends of the active directors (also known as executive directors) of the company; and
- Who usually do not receive any remuneration from the company unless the constitution of the company states otherwise.
The law in regards to this topic
Question No. 1: Does the law distinguish between an active director and sleeping director?
No. The Companies Act do not make a distinction between a sleeping director or an active director. Infact, the Act lays down a blanket definition in defining a director:
“Director” includes any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the majority of directors of a corporation are accustomed to act and an alternate or substitute director.
Question No. 2: So what does a sleeping director do?
As pointed out earlier, little to none. They are basically there to fill the prerequisite numbers of directors required by law (in the case of public company, a minimum of two directors). This is especially true for small corporate businesses (and sometimes even big companies) and family run companies.
Question No. 3: Does that mean that they can wash their hands and walk away if things go south?
No. Infact, the court has been very blunt when it comes to this issue. In Beucar Accessories (M) Sdn Bhd v Gordon Toh Chun Toh & Ors, the court pointed out the fact that:
- They are not concerned with the label attached to a director- they merely look into the fact that once a person has accepted his appointment as a director of a company, under the law he is deemed to understand his duties and agreed to discharge those duties carefully, skillfully, diligently and honestly.
- If a director chooses to adopt an attitude of not to know the affairs of the company, in the eyes of the law, he could not be relieved from his responsibility because he should not have accepted the directorship if he had no intention to carry out the duties imposed on him.
For example, in Hardie Billie & Ors v Lembaga Kumpulan Wang Simpanan Pekerja, a director of a company was charge under the Employees Provident Fund (EPF) Act for failing to make monthly contributions to the EPF for its employees.
The court held that the other sleeping directors of the company (alongsides the director who were found guilty) we to be personally liable for the unpaid contributions as well, and had this to say:
“In the circumstances, as much as I sympathize with the predicament of these Defendants, who are very much in the position of non-active directors, the position in law is clear. Hence, pursuant to Section 46 of EPF Act, these Defendants are liable for EPF contributions.. for the relevant period when they were directors.”
Therefore, think carefully before you decide to become a sleeping director. It might sound like an easy job to pull off, but in reality, it is not- you will still have to do all that is necessary to ensure that the company does not break any laws. Failure to do so will probably land you in hot soup.
Make an appointment with Company Secretary and Business Lawyer for advice and consultation
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