Cg Take Home Test

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[ NUR ARFAH BT ABDUL SABIAN 2009810436 CORPORATE GOVERNANCE ] TAKE HOME TEST OCT 2010

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Question:

"Malaysian Corporate Law should follow UK where it takes the position that it's more

important for companies directorsto behonestthan competent.

Offer your critical view on the above statement and provide justification for your view."

Answer

In discussing the statement given, there is an important provision in our Companies Act 1965

that need a critical analysis as to suggest whether our law need to follow UK law as regard to

position and the requirement of directors. The intended provisions are, section 132(1) and

132(1A) were amended and become into force in Malaysia on 15 August 2007 all together with

other affected provisions.

The new amendment repeals the current statutory provision on directors duties that requires a

director to act honestly and use reasonable diligence in the discharge of his duties in section

132(1) of the Companies Act 1965. This is replaced by a new section 132(1) which requires a

director to act for proper purposes and ingood faith. Further the new section 132 (1A) had

show the seriousness of our law to the standard of care, skill and diligence which should be

possessed by them.

First and foremost, lets take a reference to common law position, where an important case,Re

Smith & Fawcett Ltd [1942] did point out that main duty of Directors, where they must exercise

their discretion bona fide in what they consider,not what a court may consider as it is in the

interest of the company. As such, Directors must not exercise their powers for any collateral

purpose. Fiduciary duty of loyalty in common law did comprise of duties to act bona fide for the

interest of the company and exercise powers for proper purpose. The powers given by the

articles to the directors are held in trust for the company and must not be exercise for improper

purpose.


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In our Companies Act 1965, before section 132(1) amended, the old section did state that

fiduciary duty of loyalty of Directors will subject to firstly, act honestly and secondly, use

reasonable diligence. However, it was asserted that there are several mischiefs have occurred

from the old section as regard to the good corporate governance practice. The address mischief

outline by the Lee Swee Sing are concern with the undefined word honest and the possibility

that criminal liability only arises if it can be proven that the director is aware that the conduct

is not in the companys best interest.

According to her, section 132(1) is contrary to the common law position in the sense that atcommon law, a director must comply with both, firstly the best interest of the company

requirement and secondly the with the proper purpose test. There is no requirement that the

director had acted fraudulently or with deliberate intent to obtain personal advantage. This can

be illustrated in the case of Kea Holdings Pte Ltd v Gan Boon Hock [2000]. In this case, a

director suggested for orders to be cancelled even though he knew that there were buyers. It

was held by the court that the director had breached his duty to act honestly when he

cancelled the orders. The word honest as defined in the case ofMulti-Pak Singapore Pte Ltd v

Intraco Ltd [1994] did stated by the court that the word 'honestly' does not mean that a

director would only be in breach of duty if he had acted fraudulently. It means to act bona fide

in the interests of the company. Therefore, in exercising their discretion, the directors should

only act to promote or advance the interest of the company.

Later after the amendment, the new section 132(1) state that, a director of a company shall at

all times exercise his powers in good faith in the companys best interest and for proper

purpose. By reading the provisions, it understand that, this new provision suggest that, if the

director exercise his power in good faith for companies best interest but if he did it for

collateral purposes, he will still liable under this new law. This new amended law did similar

with common law position where the emphasize point is on the duty of a director to act in bona

fide for the companies interest and in proper purpose. Both laws suggest that there is no need

to prove dishonest intent because the word honestly is replaced with the statement exercise


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his powers for a proper purpose and in the best interest of the company. The new section

132(1) requires the Directors to maintain their honesty to the companies in which the test that

will apply would be the good faith test and the proper purpose test as in the common law

practice.

However, our companies act did add new provision as regard to the duty of care, skill and

diligence that must observe by the Directors. In this section Section 132(1A) Companies Act

1965 provides that a director of a company shall exercise reasonable care, skill and diligence

with;

(a) the knowledge, skill and experience which may reasonably be expected of a

director having the same responsibilities, and

(b) any additional knowledge, skill and experience which the director in fact has.

This section requires that when a director has additional knowledge, skill and experience, that

director will be assessed against a reasonable person who has that additional knowledge, skill

and experience. The actual knowledge and experience of a director is to be considered in

addition to the minimum standard. The old section 132(1) is silent as to the standardof care,and skill required of a director. It merely prescribes that a director has a duty to act honestly

and use reasonable diligence. Before the assertion of this new section, the duty to act with care

and skill is derived from common law. For example, the leading decision at common law

position that become reference is the case of Re City Equitable Fire Insurance Co Ltd (1925)

where in this case the subjective test on the standard of care of directors are applied. However,

the problem raise with the test is that there is no minimum objective standard required of a

director. Since the subjective standard of care varies according to the skill a director has, a

director with no specific skill or expertise need not be accountable.

Therefore, as regard the issue whether Malaysian Corporate Law should follow UK where it

takes the position that it's more important for companies directors to be honest than

competent, in my opinion, we should stick with our law where we did stipulated that both

requirements of the provisions concerning of honesty and competent elements are at same


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level that need to be observed equally. Both requirements are very important to be practice in

order to maintain our Malaysian corporate governance with the globalization need in the

national and international market. The era of digital and information society did requires

Directors to observe not only their loyalty and honesty in acting for the best interest of the

companies, but also requires them to have certain standards of care, skill and diligence in

ensuring that their duty in steering the companies maintain in the right path in making profits

and benefit to all their companies stakeholders.

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