Oct 26, 2026 · @QZGOH

Does this happen?

A supplier company that sells products to a related company at cost, with no profit, is giving away value, and the director who approves it answers to the supplier alone.

The pattern is common where one person sets up Company A to make or source goods and Company B to sell them, and invoices between the two at cost because "it is all the same pocket". The Companies Act 2016 (CA 2016) makes this easy to set up: a private company requires only one director, who must ordinarily reside in Malaysia. Under the Companies Act 1965 a company needed at least two directors, which at least put a second pair of eyes on related-party dealings.

With a single director, there is often no one else in the room. The same individual decides the price on both sides of the deal. But each company remains a separate legal person with its own creditors, tax position and, sometimes, its own minority shareholders. That is where the arm's length principle and directors' liability come in.

The arm's length principle

A price is at arm's length if it is what two unrelated parties, each looking after its own interest, would agree in comparable circumstances. An independent supplier would not sell at cost indefinitely; it would expect a margin for its functions, assets and risks. A zero-margin price between related companies is therefore the classic sign of a non-arm's length deal.

In tax law the principle is statutory. Section 140A of the Income Tax Act 1967, the Income Tax (Transfer Pricing) Rules 2023 and the Malaysian Transfer Pricing Guidelines 2024 require controlled transactions between associated persons to be priced at arm's length, and this covers domestic deals, not only cross-border ones; whereas in company law there is no single "arm's length" section, but the concept runs through directors' duties. A court asking whether a director acted in the supplier's best interes may ask what an independent board would have accepted. Related party transactions must also be disclosed in the financial statements under the applicable accounting standards (MFRS 124 or the MPERS equivalent).

Directors' liability: the supplier's side

The supplier's director carries most of the risk, because the supplier is the company giving up its margin. The buyer's director is getting a good deal; the supplier's director must justify why his company agreed to earn nothing.

The starting point is that the supplier is a separate legal person. Its director cannot reason that the profit "ends up in the group anyway". He must ask what the supplier itself gains. There can be honest answers, such as keeping alive a buyer that is the supplier's main outlet, or absorbing spare capacity. But they need to be real, recorded and revisited. Note also that "cost" often means direct cost only, so the supplier may in fact be selling below full cost once overheads are counted.

Section 218 of the CA 2016 prohibits any use of position to benefit oneself or any other person, or to cause detriment to the company in question. 

In practice, who complains depends on who else has a stake in the supplier. If one person owns 100% of both companies and the supplier is comfortably solvent, a shareholder resolution can usually consent to the arrangement. The exposure, however, becomes real when the supplier has minority shareholders, lenders with covenants, or creditors it cannot pay, or when the IRB audits the pricing. Civil claims can then follow, for example by the company itself, a minority shareholder through a derivative action, or a liquidator.

When the supplier is in financial difficulty

The risk bloats in the event the supplier becomes insolvent or close to it, as a cost-price arrangement stops being a private matter for the owner. The interests of its creditors come to the fore, and a shareholder's consent cannot bless a transfer of value that leaves them unpaid. A liquidator may look closely at related-party pricing in the period before winding up. Margin forgone in favour of a sister company is a natural target for a breach-of-duty claim against the director.

Conclusion

Single directorship under CA 2016 made it simple to run several companies side by side, but it did not merge them. The Companies are still separate legal entity (especially when each of them are body corporate by nature). Each company keeps its own duties, creditors and tax position. A cost-price deal tests the supplier's director on all three fronts: the IRB can impose an arm's length margin plus a surcharge, whereas the director can face severe both civil and criminal liability under CA 2016, yet to mention that insolvency escalates the exposure of risk. Pricing at arm's length, documenting the decision and obtaining shareholder approval where necessary may cost little next to those risks.

This article is general commentary on Malaysian law as at October 2026 and is not legal or tax advice. Section numbers and thresholds should be checked against the current Act, and specific arrangements reviewed by an advocate and solicitor or tax adviser.