Sleeping Directorship, Free Shares & Guaranteed Dividends. Too Good To Be True? Part 1 & 2

Author: Tony Quah

Many entrepreneurs lack knowledge in essential business finance and structuring. In this six part series delivered over 3 instalments, we will be sharing a few 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 I

I met Ms Ong (not her real name) at a local University in 2017 while doing my Postgraduate Studies. Ms Ong is an entrepreneur and a well-known figure in the local fashion accessories industry.  One day, over lunch and in between lectures, she told me that one of her competitors have offered her a business alliance so that together, they can monopolise the market. 

The essence of the deal was:-

  1. Sleeping Directorship for her, and she does not need to get involved in the business.
  2. 20% new shares (worth RM200,000) to be issued to her, no money needs to be paid. In 3 years, the Company guarantee to buy back the shares from her at x3, = RM600,000 and she will cash out with RM400,000 profit or can stay on.
  3. In the past, the Company declare dividends annually of RM100,000; so the minimum she will receive is RM20,000 per year.
  4. The company have been in business since 2015 and loss-making so no Accounts Audited / Tax Return submitted as no taxes to pay.
  5. Bank Facilities of MYR500,000 which she will have to sign a Director Guarantee but when she resigned as a Director, she will not be liable anymore. The company have only 2 directors, so she will replace the outgoing director.

I told her that there is no such thing as a Free Lunch but she was adamant that there was no risk at all, so we ended the discussion there and then.

In March of 2020, she wanted to meet me personally for advice on what to do about the signed deal but we could not meet up due to MCO.

As entrepreneurs, most of us have heard of the above golden opportunity. Some of us might have even walked in Ms Ong’s shoes. What are the possible reasons Ms Ong want to meet me for advice in March 2020?

Over the next few weeks, I will give a short but vital analysis for each of the items.

Part II

The essence of the deal was that:-

Item 1 – Sleeping Directorship for her, and she does not need to get involved in the business.

Being a director of a Company and not being involved in the business is very dangerous, as Ms Ong is liable to various statutory actions.  The Malaysian Companies Act 2016 has various definitions for Directors and their responsibilities & liabilities, but no definition for Sleeping, Independent, Non-Executive Directors so Ms Ong is equally liable as 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 a corporation are accustomed to act and an alternate or substitute director – in certain countries, this is known as Shadow Director.

As such, it is foolhardy for Ms Ong to think she can claim as Defence that she is a Sleeping Director.

The liability of a Director is not limited to only Companies Act, but also the following Acts which are commonly infringed upon and the Directors have a personal liability which means the Company cannot even indemnify them : –

  • Employment Act 1955
  • Unclaimed Monies Act 1965
  • Income Tax Act 1967
  • Employee Provident Fund Act 1991
  • MACC 1957, Amend 2009, 2018
 

Second Instalment: Parts 3 & 4

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