Sleeping Directorship, Free Shares & Guaranteed Dividends. Too Good To Be True? Part 5 & 6 (Final)

Author: Tony Quah

Many entrepreneurs lack knowledge in essential business finance and structuring. This is the final instalment of a 3 part series covering parts V & VI, presented in a short stories from our past portfolios in the hope that you could avoid potential pitfalls that could cost you huge sums of money and sanity.

Part V

The essence of the deal was that:-

Item 4 – The Company have been in business since 2015 and loss-making so no Accounts Audited / Tax Return submitted as no taxes to pay.

Accounts are required to be prepared irrespective of whether the Company is making a profit or loss or even if the Company is dormant.  There is certain provision that allows a Company accounts not to be audited by a Professional Firm, however, I would also advice to get it audited unless you are very well versed with the MASB, Companies Act, etc.

There are numerous sections of Companies Act that governs the preparation of Accounts and Income Tax Act that governs the submission of Tax Returns, too many to be elaborated here.

An important liability which most is not aware is that Income Act states that Directors have a personal liability for Income Tax which becomes Due and Payable during the Directorship Term, etc.  In Ms Ong case, since the Tax Returns were not submitted for the past 5 years, the Inland Revenue may at any time issue a Sect 90(3) and Ms Ong will be personally liable as she holds not less than 20% of the Shares.  This liability will not go away even after resignation.

Entrepreneurs should have the mind-set of using Accounts to manage the Business (easier to manage what you can measure), not just for Government purposes alone.

Part VI

The essence of the deal was that:-

Item 5 – Bank Facilities of MYR500,000 which she will have to sign Director Guarantee but when she resign as a Director, she will not be liable anymore.  Company have only 2 directors, so she will replace the outgoing director.

This is a very common misconception that it is a Director Guarantee.  It is actually a Personal Guarantee by the Director and as it is a personal guarantee, it does not discharge when the individual stops being a Director.

Furthermore, as this company was incorporated prior to 2016, most probably the M&A will state that the minimum number of [residential] directors is 2 and as such, Ms Ong will not be able to resign unless a new director is found (or they change the M&A).  Also, if the Company have any Sect 68-1 Compound from SSM or the outgoing director have Sect 143-1, 169-1 or 259-1 Compound from SSM, the resignation of the outgoing director cannot be effected.

CLOSING REMARKS

I hope from the above, you will realise that awareness of Corporate / Personal liabilities is not a stand-alone matter from one Act alone but is interlinked to various other Acts.  There are many other matters that every CEO (being a CEO is also deemed by Companies Act to be a Director so one cannot escape liability by not wanting to be a named Director) should know and most professionals in one field are not able to inform correctly. 

Interested to Learn More / Protect yourself better?

Do join our “Essential Corporate Knowledge for SME Chief Executive Officers” 2-Day Course or have a 1-1 discussion with one CFO in the Team. 

What happened to Ms Ong?  she informed that she has found someone else to advise her … I wish her GOOD LUCK ….

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