1

COMPANY LAWCOMPANY LAW

DIRECTORSDIRECTORS

LECTURE 13LECTURE 13

Charles NicholsonCharles Nicholson

2

LEARNING OUTCOMESLEARNING OUTCOMES

Students should Students should be ablebe able::• to explain the meaning of ‘directors’ (D), their to explain the meaning of ‘directors’ (D), their

appointment , qualifications and removal.appointment , qualifications and removal.• to describe the role of different types of D.to describe the role of different types of D.• to show an understanding of the rules that govern the to show an understanding of the rules that govern the

office of D.office of D.• to identify those aspects of power distributed between the to identify those aspects of power distributed between the

BOD and the general meeting of shareholders.BOD and the general meeting of shareholders.• to demonstrate knowledge of the statutory and common to demonstrate knowledge of the statutory and common

law duties of a D.law duties of a D.• explain the remedies available for a breach to the co. and explain the remedies available for a breach to the co. and

the penalties under the Co. Act.the penalties under the Co. Act.

3

DEFINITION DEFINITION ● ‘‘DirectorDirector’’ includes any person occupying the position of a includes any person occupying the position of a

director of a corporation by whatever name called and director of a corporation by whatever name called and includes a person in accordance with whose directions or includes a person in accordance with whose directions or instructions the directors of a corporation are accustomed instructions the directors of a corporation are accustomed to act and an alternate or substitute director – to act and an alternate or substitute director – s. 4(1)s. 4(1). .

• It includes a shadow director (D) and a It includes a shadow director (D) and a de facto de facto D.D.

● De facto De facto DD – – is a person who assumes to act as a D. He is is a person who assumes to act as a D. He is held out as a D by the co., and he claims and purports to be held out as a D by the co., and he claims and purports to be a D, although not actually appointed as such. a D, although not actually appointed as such.

• To establish that a person was a de facto D, it is necessary To establish that a person was a de facto D, it is necessary to prove that he undertook functions in relation to a co. to prove that he undertook functions in relation to a co. which could properly be discharged only by a D. which could properly be discharged only by a D.

• A A de factode facto D will be subject to the usual duties of a D such D will be subject to the usual duties of a D such as to act in the best interests of the co. and act with as to act in the best interests of the co. and act with reasonable care and diligence.reasonable care and diligence.

4

● Shadow DShadow D – – is a person who is not formally appointed as is a person who is not formally appointed as a D; he does not claim or purport to act as a D. He is not a D; he does not claim or purport to act as a D. He is not held out as a D by the co. He is a person in accordance held out as a D by the co. He is a person in accordance with whose directions or instructions the Ds of a co. are with whose directions or instructions the Ds of a co. are accustomed to act. accustomed to act.

• To establish that a person is a shadow D, it is necessary to To establish that a person is a shadow D, it is necessary to show that:- show that:- (a) he directed the BOD how to act in relation to the co. (a) he directed the BOD how to act in relation to the co. (b) the Ds acted in accordance with such directions; and (b) the Ds acted in accordance with such directions; and (c) the Ds were accustomed so to act.(c) the Ds were accustomed so to act.

SeeSee: Millet J in : Millet J in Re Hydrodam (Corby) LtdRe Hydrodam (Corby) Ltd [1994] 2 [1994] 2 BCLC 180 which was referred to in the case of BCLC 180 which was referred to in the case of Ravichanthiran a/l Ganesan v. Percetakan Wawasan Ravichanthiran a/l Ganesan v. Percetakan Wawasan Maju Sdn Bhd & Ors.Maju Sdn Bhd & Ors. [2008] 8 MLJ 450 [2008] 8 MLJ 450

5

● Governing D or Managing DGoverning D or Managing D – – is a full-time D who is is a full-time D who is actively involved in the management of the co.actively involved in the management of the co.

He is appointed by the BOD and is given very He is appointed by the BOD and is given very extensive/wide powers over the management of the co. -extensive/wide powers over the management of the co. -subject to the BOD’s authority -subject to the BOD’s authority - Arts. 91 – 93 Table AArts. 91 – 93 Table A

● ChairmanChairman – – the person whom the Directors elect to chair the person whom the Directors elect to chair their meetings. He signs the minutes of the meetings and their meetings. He signs the minutes of the meetings and presides as chairman of every general meeting of the co.presides as chairman of every general meeting of the co.

● Nominee DNominee D – – he is appointed to represent the interests of he is appointed to represent the interests of certain persons, viz. shareholders, employees or creditors. certain persons, viz. shareholders, employees or creditors. In the event there is any conflict between his duty to act In the event there is any conflict between his duty to act in the best interest of the co. and his duty to his in the best interest of the co. and his duty to his nominator, he is required to act in the best interest of the nominator, he is required to act in the best interest of the co. -co. - s. 132(1E)s. 132(1E)

6

● Executive DExecutive D – – is both a full-time D and an employee of is both a full-time D and an employee of the co.the co.

● Non executive (or independent) DNon executive (or independent) D – – they are not they are not involved in the full-time management of the co. and are involved in the full-time management of the co. and are not employees of the co. They attend BOD meetings and not employees of the co. They attend BOD meetings and are considered officers of the co. Independent Ds are considered officers of the co. Independent Ds represent the interest of S/H and are free from represent the interest of S/H and are free from management or other relationships which could interfere management or other relationships which could interfere with the exercise of their independent judgement. They with the exercise of their independent judgement. They are custodian of the corporate governance process.are custodian of the corporate governance process.

● Alternate DAlternate D – – is a temporary substitute for one who may is a temporary substitute for one who may be absent from board meetings due to illness or other be absent from board meetings due to illness or other commitments. He has the same powers, rights, duties and commitments. He has the same powers, rights, duties and responsibilities of a D.responsibilities of a D.

7

APPOINTMENT AND QUALIFICATIONAPPOINTMENT AND QUALIFICATION

• A co. is required to have at least 2 directors, each should A co. is required to have at least 2 directors, each should have his principal or only place of residence in Malaysia – have his principal or only place of residence in Malaysia – s.122(1) s.122(1)

• They must be natural persons (be an individual and not a They must be natural persons (be an individual and not a co.) & be of full age (18 years) -co.) & be of full age (18 years) - s. 122(2)s. 122(2); ; The first Ds The first Ds shall be named in the MA or AA of the co. shall be named in the MA or AA of the co. - - s. 122(3)s. 122(3)

• They must consent to act as D of the co.-They must consent to act as D of the co.- s. 123(4)s. 123(4) • No requirement that D must own or buy shares (a No requirement that D must own or buy shares (a

specified share qualification requirement) unless AA specified share qualification requirement) unless AA requiresrequires ( (Art. 71). Art. 71). If so, D must buy shares within 2 If so, D must buy shares within 2 months after his appointment or such shorter period as is months after his appointment or such shorter period as is fixed by the AA–fixed by the AA– s. 124s. 124

• Public co.: separate resolution at general meeting to Public co.: separate resolution at general meeting to appoint every director unless members unanimously agree appoint every director unless members unanimously agree against such a rule – against such a rule – s. 126(1)s. 126(1)..

8

DISQUALIFICATIONDISQUALIFICATION

• An undischarged bankrupt cannot act as a D except with An undischarged bankrupt cannot act as a D except with the leave of the court. Otherwise he commits an offence the leave of the court. Otherwise he commits an offence – – s.s. 125(1)125(1). . Penalty: 5 years imprisonment and/or RM Penalty: 5 years imprisonment and/or RM 100,000.100,000.

• A person convicted of an offence in connection with the A person convicted of an offence in connection with the promotion, formation or management of a co. or for an promotion, formation or management of a co. or for an offence involving fraud or dishonesty is disqualified offence involving fraud or dishonesty is disqualified from being a D for a period of 5 years after conviction.from being a D for a period of 5 years after conviction.

• He will be guilty of an offence if he acts as a D or He will be guilty of an offence if he acts as a D or promoter or is in any way directly or indirectly involved promoter or is in any way directly or indirectly involved with the management of a co. Penalty: 5 years with the management of a co. Penalty: 5 years imprisonment or RM 100,000 or both - imprisonment or RM 100,000 or both - S. 130S. 130

9

• Where a D who has been a D of a co. that has gone into Where a D who has been a D of a co. that has gone into liquidation within 5 years of the date on which the first liquidation within 5 years of the date on which the first co. in which he was a D had gone into liquidation.co. in which he was a D had gone into liquidation.Penalty: 3 years imprisonment and/or RM 10,000 - Penalty: 3 years imprisonment and/or RM 10,000 - s. 130As. 130A

• Art. 72 Table AArt. 72 Table A provides situations whereby the D provides situations whereby the D automatically vacates his post.automatically vacates his post.

10

TERMINATIONTERMINATION• D can retire by rotation – D can retire by rotation – Art. 63Art. 63 • If D appointed for fixed term, D retire when time expires. If D appointed for fixed term, D retire when time expires. • D can resign by notice in writing – D can resign by notice in writing – Art. 72(e)Art. 72(e)..• RemovalRemoval::

a. If private co. – removal of a D is governed by the co’s a. If private co. – removal of a D is governed by the co’s A/A - A/A - Art. 69Art. 69 – pass ordinary resolution. – pass ordinary resolution.b. If public co. – members can pass ordinary resolution to b. If public co. – members can pass ordinary resolution to remove D before the expiration of his period of office remove D before the expiration of his period of office notwithstanding anything in A/A or any contract between notwithstanding anything in A/A or any contract between the co. and him – the co. and him – s. 128s. 128 c. Special notice (28 days notice – c. Special notice (28 days notice – s. 153s. 153) is required to be ) is required to be given to D of the intended resolution to remove him and to given to D of the intended resolution to remove him and to appoint some person in his place at the meeting.appoint some person in his place at the meeting.d. D has a right to defend himself and be heard on the d. D has a right to defend himself and be heard on the resolution at the meeting. He can send copy of the resolution at the meeting. He can send copy of the representation to SH or require it to be read out at GM. representation to SH or require it to be read out at GM.

11

COMPENSATION TO DIRECTOR FOR LOSS OF COMPENSATION TO DIRECTOR FOR LOSS OF OFFICEOFFICE

• Co. is not allowed to pay compensation to a D for loss of Co. is not allowed to pay compensation to a D for loss of office or as consideration for his retirement –office or as consideration for his retirement – S. 137(1)S. 137(1)

• UnlessUnless::a. particulars of the amount is disclosed to SH; anda. particulars of the amount is disclosed to SH; andb. approval has been obtained for the proposed payment b. approval has been obtained for the proposed payment

by the co. in general meeting.by the co. in general meeting.

• Following are the Following are the exceptions exceptions as to payments: - as to payments: - S. 137(5)S. 137(5)a. a. Payment made under an agreement entered into Payment made under an agreement entered into before the law took effect;before the law took effect;

b. b. Payment made under an agreement, particulars of Payment made under an agreement, particulars of which have been disclosed and approved by way of which have been disclosed and approved by way of special resolution;special resolution;

12

c. c. It is a bIt is a bona fide ona fide payment by way of damages for payment by way of damages for breach of contract;breach of contract;

d. d. It is a bIt is a bona fide ona fide payment by way of pension or payment by way of pension or lump lump sum payment in respect of past services which sum payment in respect of past services which does not exceed total emoluments of D in the 3 years does not exceed total emoluments of D in the 3 years immediately preceding his retirement or death;immediately preceding his retirement or death;

Ngan & Ngan Holdings & Anor v. Central Mercantile Ngan & Ngan Holdings & Anor v. Central Mercantile Corp (M) Sdn BhdCorp (M) Sdn Bhd [2010] 1 MLJ 822 CA [2010] 1 MLJ 822 CA

e. e. Payment pursuant to an agreement made between Payment pursuant to an agreement made between D D and the co. before D became a director of the co. as and the co. before D became a director of the co. as

consideration to serve the co. as a director. consideration to serve the co. as a director.

RHB Capital Bhd v. Tan Sri Dato’ Abdul Rashid bin RHB Capital Bhd v. Tan Sri Dato’ Abdul Rashid bin Haji Mohamed HussainHaji Mohamed Hussain [2006] 4 MLJ 80[2006] 4 MLJ 80

13

BOD AND GENERAL MEETING – POWERS BOD AND GENERAL MEETING – POWERS

• Every co. has 2 organs – BOD and GM.Every co. has 2 organs – BOD and GM.• In practice BOD is conferred wide powers of management.In practice BOD is conferred wide powers of management.

S. 131B(1) & (2) S. 131B(1) & (2) andand Art.73Art.73 – – the business and affairs of a the business and affairs of a co. must be managed by, or under the direction of, the co. must be managed by, or under the direction of, the BOD except those specifically given to GM.BOD except those specifically given to GM.

• GM has specific powers and BOD has residual powers.GM has specific powers and BOD has residual powers.• GM cannot override decisions made by BOD or be GM cannot override decisions made by BOD or be

involved in management –involved in management – Automatic Self-CleansingAutomatic Self-Cleansing Filter Syndicate Co. v.Filter Syndicate Co. v. CuninghameCuninghame [1906] 2 Ch 34[1906] 2 Ch 34 John Shaw & Sons (Salford) Ltd v. ShawJohn Shaw & Sons (Salford) Ltd v. Shaw [1935] 2 KB [1935] 2 KB

113 – the decision to commence legal proceedings was 113 – the decision to commence legal proceedings was within the general powers of management provided in the within the general powers of management provided in the co’s A/A and the members could not override the board’s co’s A/A and the members could not override the board’s decision. decision.

14

STATUTORY DUTIES OF DIRECTORSSTATUTORY DUTIES OF DIRECTORS

1. 1. A D of a co. shall at all times exercise his powers for a A D of a co. shall at all times exercise his powers for a proper purpose and in good faith in the best interest of proper purpose and in good faith in the best interest of the co -the co - s. 132(1)s. 132(1)

2.2. A D shall exercise reasonable care, skill and diligence A D shall exercise reasonable care, skill and diligence with -with -

(a)(a) the knowledge, skill and experience which may the knowledge, skill and experience which may reasonably be expected of a D having the same reasonably be expected of a D having the same responsibilities; (objective standard)responsibilities; (objective standard) - -132(1A)(a)132(1A)(a), , andand

(b)(b) aany additional knowledge, skill and experience which ny additional knowledge, skill and experience which

the D in fact has. (subjective standard) –the D in fact has. (subjective standard) – s. 132(1A)(b)s. 132(1A)(b)

15

Business judgment rule – s.132(1B)Business judgment rule – s.132(1B)

Business judgment is defined in Business judgment is defined in s.132(6)s.132(6) to mean – to mean – ‘‘any decision on whether or not to take action in respect any decision on whether or not to take action in respect of a matter relevant to the business of the company’.of a matter relevant to the business of the company’.

● S. 132(1B)S. 132(1B) - A director who makes a business judgment is - A director who makes a business judgment is deemed to meet the requirements of the duty under deemed to meet the requirements of the duty under S.132(1A)S.132(1A) and the equivalent duties under the common and the equivalent duties under the common law and in equity if the director -law and in equity if the director -

(a)(a) makes the business judgment in makes the business judgment in good faithgood faith for a for a proper purposeproper purpose;;

(b) does not have a material (b) does not have a material personal interestpersonal interest in the in the subject matter of the business judgment;subject matter of the business judgment;

16

(c) (c) is is informedinformed about the subject matter of the about the subject matter of the business judgment to the extent the director business judgment to the extent the director reasonably believes to be appropriate under the reasonably believes to be appropriate under the circumstances; andcircumstances; and

(d)(d) reasonably believes that the business judgment reasonably believes that the business judgment is in the is in the best interestbest interest of the co. of the co.

3.3. A D is under a duty against the improper use of co.'s A D is under a duty against the improper use of co.'s property, position, corporate opportunity or to compete property, position, corporate opportunity or to compete with the co. to gain directly or indirectly, a benefit for with the co. to gain directly or indirectly, a benefit for himself or any other person, or cause detriment to the himself or any other person, or cause detriment to the co. co. -- S. 132(2) S. 132(2)

● A D or officer of a co. shall not, without the consent or A D or officer of a co. shall not, without the consent or ratification of a general meeting – ratification of a general meeting –

(a)(a) use the use the propertyproperty of the co.; of the co.;(b)(b) use any use any informationinformation acquired by virtue of his position as acquired by virtue of his position as

a D or officer of the co.;a D or officer of the co.;(c)(c) use his use his positionposition as such D or officer; as such D or officer;(d)(d) use any use any opportunityopportunity of the co. which he became aware of the co. which he became aware

of, in the performance of his functions as the D or of, in the performance of his functions as the D or officer of the co.; orofficer of the co.; or

(e)(e) engage in business which is in engage in business which is in competitioncompetition with with the co.,the co.,to gain directly or indirectly, a benefit for himself or to gain directly or indirectly, a benefit for himself or any other person, or cause detriment to the co.any other person, or cause detriment to the co.- - S. 132(2)(a)-(e)S. 132(2)(a)-(e)

● ‘‘Improper use’ is to gain directly or indirectly, a Improper use’ is to gain directly or indirectly, a benefit for himself or any other person, or cause benefit for himself or any other person, or cause detriment to the co.detriment to the co.

● There will be no breach of duty if the director obtains There will be no breach of duty if the director obtains consent or ratification of the general meeting.consent or ratification of the general meeting.

19

4. Duty to disclose interests in contracts, property, offices 4. Duty to disclose interests in contracts, property, offices etc. – etc. –

● S. 131(1)S. 131(1) – a director who is in any way, whether directly – a director who is in any way, whether directly or indirectly, interested in a contract with the co. shall or indirectly, interested in a contract with the co. shall declare his interest at a declare his interest at a meeting of the directorsmeeting of the directors of the of the co.co.

● S. 131(7A)S. 131(7A) - an interest of the spouse of a director of a co. - an interest of the spouse of a director of a co. (not being herself or himself a director of the co.) and an (not being herself or himself a director of the co.) and an interest of a child, including adopted child or stepchild, of interest of a child, including adopted child or stepchild, of a director of the co. (not being himself or herself a a director of the co. (not being himself or herself a director of the co.) in the shares or debenture of the co., director of the co.) in the shares or debenture of the co., shall be treated as an interest in the contract.shall be treated as an interest in the contract.

● S. 131(7B)S. 131(7B) Where a contract is entered into in Where a contract is entered into in contravention of this section, the contract shall be contravention of this section, the contract shall be voidablevoidable at the instance of the co. at the instance of the co. exceptexcept if it is in if it is in favour of any person dealing with the co. for any favour of any person dealing with the co. for any valuable consideration and without any actual notice valuable consideration and without any actual notice of the contravention.of the contravention.

● Art. 81Art. 81 further provides that a D cannot vote at the further provides that a D cannot vote at the BOD meeting as regards the contract – BOD meeting as regards the contract – s. 131As. 131A - - he he cannot participate in the discussion & shall not vote cannot participate in the discussion & shall not vote but can be counted to make up the quorum (but can be counted to make up the quorum (Art. 83Art. 83 – – quorum may be fixed by Ds and unless so fixed shall quorum may be fixed by Ds and unless so fixed shall be 2).be 2).

● Art. 72 (f)Art. 72 (f) – D can be removed for breach of such – D can be removed for breach of such duty.duty.

21

Substantial property transactions – Substantial property transactions –

under s. 132Cunder s. 132C• Any transaction by Ds to acquire property of substantial Any transaction by Ds to acquire property of substantial

value or to dispose of a substantial portion of the co’s value or to dispose of a substantial portion of the co’s property requires the approval by the co. in a general property requires the approval by the co. in a general meeting - meeting - S. 132C(1)S. 132C(1)

• Otherwise the contract is Otherwise the contract is voidvoid unless it is in favour of the unless it is in favour of the other party for valuable consideration and without actual other party for valuable consideration and without actual notice of contravention - notice of contravention - S. 132C(3)S. 132C(3) – – it protects a bona it protects a bona fide purchaser for value who has no notice of the D’s fide purchaser for value who has no notice of the D’s breach. breach.

• The D involved shall be guilty of an offence under the The D involved shall be guilty of an offence under the Act –Act – S. 132(C)(5)S. 132(C)(5)

• The meaning of the term substantial value/substantial The meaning of the term substantial value/substantial portion depends on:portion depends on:

a. For listed cos. – refer to the Listing Requirements;a. For listed cos. – refer to the Listing Requirements;

b. Other cos – if the value exceeds 25% of the total assets b. Other cos – if the value exceeds 25% of the total assets of the co; if the net profits from the transaction exceeds of the co; if the net profits from the transaction exceeds 25% of the total net profit of the co; or its value exceeds 25% of the total net profit of the co; or its value exceeds 25% of the issued share capital of the co., whichever is 25% of the issued share capital of the co., whichever is the highest. the highest.

• A D under this section includes the chief executive A D under this section includes the chief executive officer, the chief operations officer, the chief financial officer, the chief operations officer, the chief financial officer or any other person primarily responsible for the officer or any other person primarily responsible for the operation or financial management of the co.- operation or financial management of the co.- s.132(C)(6)s.132(C)(6)

23

Issue of shares by Co. – S. 132DIssue of shares by Co. – S. 132D

● BOD decides initially on the issue shares – the number, BOD decides initially on the issue shares – the number, terms of issue and subscription price but it must then get terms of issue and subscription price but it must then get the prior approval of the co. in general meeting before the the prior approval of the co. in general meeting before the shares are issued – shares are issued – s. 132D(1)s. 132D(1); Art. 73; Art. 73

● This is to protect SH so that BOD do not act without SH This is to protect SH so that BOD do not act without SH knowledge and consent –knowledge and consent – Jimat bin Awang Jimat bin Awang v v Lai Wee Lai Wee Ngen Ngen [1995] 3 SLR 769. [1995] 3 SLR 769.

● Even if prior approval is obtained, the power to issue Even if prior approval is obtained, the power to issue shares must be exercised for a proper and bona fide shares must be exercised for a proper and bona fide purpose and must not be used for a collateral purpose.purpose and must not be used for a collateral purpose.

Howard Smith Ltd Howard Smith Ltd v. v. Ampol Petroleum Ltd Ampol Petroleum Ltd [1974] AC [1974] AC 821, Privy Council; 821, Privy Council;

Cheah Ngun Ying v. Low Cheong & Sons Sdn Bhd & Cheah Ngun Ying v. Low Cheong & Sons Sdn Bhd & Ors Ors [2010] 9 MLJ 385 HC[2010] 9 MLJ 385 HC

Substantial property transactions by D, connected Substantial property transactions by D, connected persons or substantial s/h - S. 132Epersons or substantial s/h - S. 132E

● A co. cannot transfer substantial assets (non-cash assets) A co. cannot transfer substantial assets (non-cash assets) to a D, connected persons or substantial SH unless prior to a D, connected persons or substantial SH unless prior approval obtained from GM. Otherwise, the transaction is approval obtained from GM. Otherwise, the transaction is voidvoid – – ss. 132E (1) & (2). 132E (1) & (2)..

● D/connected persons/substantial SH cannot vote on the D/connected persons/substantial SH cannot vote on the resolution to approve the transaction - resolution to approve the transaction - s. 132E (3)s. 132E (3)

● A person connected with a D – A person connected with a D – s. 122As. 122A a member of D’s family; a member of D’s family; a a body corporatebody corporate associated with D - associated with D - s. 122A(3)s. 122A(3);; a trustee of a trust under which D or a family member is a a trustee of a trust under which D or a family member is a

beneficiary; beneficiary; a partner of D or a partner of a person connected with D. a partner of D or a partner of a person connected with D.

substantial SH – substantial SH –

25

A substantial SH – one who has 5% or more of the voting A substantial SH – one who has 5% or more of the voting shares in the co. - shares in the co. - s. 69Ds. 69D

● Value of the asset:Value of the asset:

a. Listed co. – refer to Listing Requirements;a. Listed co. – refer to Listing Requirements;

b. Other cos. – exceeds RM250,000; or if the value does b. Other cos. – exceeds RM250,000; or if the value does not exceed RM250,000 but exceeds 10% of the co’s not exceed RM250,000 but exceeds 10% of the co’s asset value provided it is not less than RM10,000. asset value provided it is not less than RM10,000.

The fiduciary duties of a D The fiduciary duties of a D

• Every D is under a fiduciary duty to act in the best Every D is under a fiduciary duty to act in the best interest of the co. (common law duties and statutory interest of the co. (common law duties and statutory duties under the Co. Act). Trust and confidence is duties under the Co. Act). Trust and confidence is reposed on Ds.reposed on Ds.

1. duty of care, skill, and diligence1. duty of care, skill, and diligence2. duty to act in good faith in the best interest of the co.2. duty to act in good faith in the best interest of the co.3. duty to act for a proper purpose3. duty to act for a proper purpose4. duty to avoid conflict of interest4. duty to avoid conflict of interest5. duty to retain discretion5. duty to retain discretion6. duty to disclose at GM.6. duty to disclose at GM.

27

The duty to exercise care, skill and diligence – The duty to exercise care, skill and diligence – s. 132(1A)s. 132(1A)

Laid down inLaid down in Re City Equitable Fire Insurance Co LtdRe City Equitable Fire Insurance Co Ltd [1925] Ch 407. The case summarises the common law [1925] Ch 407. The case summarises the common law duties of a director in relation to care and skill. duties of a director in relation to care and skill. Romer JRomer J in his judgement states the general proposition on duties in his judgement states the general proposition on duties of skill and care:-of skill and care:-

1.1. A D is required to exhibit in the performance of his A D is required to exhibit in the performance of his duties, the degree of skill that may reasonably be expected duties, the degree of skill that may reasonably be expected from a person of his knowledge and experience. A D of a from a person of his knowledge and experience. A D of a life insurance co., for instance, does not guarantee that he life insurance co., for instance, does not guarantee that he has the skill of an actuary or of a physician. But if a D has the skill of an actuary or of a physician. But if a D possesses special qualifications, e.g. a lawyer or possesses special qualifications, e.g. a lawyer or accountant, he is expected to use that skill for the co. accountant, he is expected to use that skill for the co.

• A D subjectively sets his own standard of skill and care. A D subjectively sets his own standard of skill and care. The more knowledge he has, the more is expected from The more knowledge he has, the more is expected from him and higher is the standard of skill and care expected him and higher is the standard of skill and care expected from him and vice versa. from him and vice versa.

See: See: Dorchester Finance Co Ltd v. StebbingDorchester Finance Co Ltd v. Stebbing [1989] [1989] BCLC 498BCLC 498

2.2. A D is not bound to give continuous attention to the A D is not bound to give continuous attention to the affairs of the co. His duties are of an intermittent nature affairs of the co. His duties are of an intermittent nature to be performed at periodical board meetings and at to be performed at periodical board meetings and at meetings of any committee of the board upon which he meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to whenever, in the circumstances, he is reasonably able to do so. do so.

See:See: Re Cardiff Bank: Marquis of Bute’s CaseRe Cardiff Bank: Marquis of Bute’s Case [1892] [1892] 2 Ch. 2 Ch. See: See: Art. 72Art. 72 – – cannot be absent for more than 6 cannot be absent for more than 6 months for meetings without permission of BOD. months for meetings without permission of BOD.

Daniels v. AWA LtdDaniels v. AWA Ltd (1995) 13 ACLC 614(1995) 13 ACLC 614

3.3. Duties with regard to the exigencies of the business and Duties with regard to the exigencies of the business and the A/A, may properly be left to some other official. A the A/A, may properly be left to some other official. A D is, in the absence of grounds for suspicion, justified in D is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. trusting that official to perform such duties honestly.

Dovey v. CoryDovey v. Cory [1902] AC 477 – See: [1902] AC 477 – See: s. 132(1F)s. 132(1F)..

Jurong Readymix Concrete v. Kaki Bukit Industrial Jurong Readymix Concrete v. Kaki Bukit Industrial ParkPark [2000] 4 SLR 723 – A D executed a guarantee on [2000] 4 SLR 723 – A D executed a guarantee on behalf of the co. without obtaining any legal advice. He behalf of the co. without obtaining any legal advice. He did not peruse the guarantee document or consult other did not peruse the guarantee document or consult other directors of the co.directors of the co.It was It was heldheld that the D was in breach of his duty of care that the D was in breach of his duty of care to the co.to the co.

30

Daniels v. AWA LtdDaniels v. AWA Ltd (1995) 13 ACLC 614, the NSW CA (1995) 13 ACLC 614, the NSW CA proposed the following as the minimum standard of care, proposed the following as the minimum standard of care, skill and diligence expected of all Ds:-skill and diligence expected of all Ds:-

A D must acquire a basic understanding of the business of A D must acquire a basic understanding of the business of the co. and must be familiar with the fundamentals of the the co. and must be familiar with the fundamentals of the co’s business;co’s business;

A D is under a continuing obligation to keep informed A D is under a continuing obligation to keep informed about the activities of the co;about the activities of the co;

Detailed inspection of day-to-day activities is not required Detailed inspection of day-to-day activities is not required but what is required is a general monitoring of the co’s but what is required is a general monitoring of the co’s business affairs. Accordingly, a D should attend board business affairs. Accordingly, a D should attend board meetings regularly;meetings regularly;

While they are not required to audit the co’s books, they While they are not required to audit the co’s books, they should be familiar with the financial status of the co. by a should be familiar with the financial status of the co. by a regular review of it’s financial statements. regular review of it’s financial statements.

● Standard depends on circumstances and Standard depends on circumstances and responsibilities of D –responsibilities of D –

National Mutual Life Nominees Ltd National Mutual Life Nominees Ltd v v WornWorn (1990) (1990) 5 NZCLC 665 NZCLC 66

● Higher standard expected of executive D than non-Higher standard expected of executive D than non-executive D –executive D –

AWA Ltd AWA Ltd v v DanielsDaniels (1992) 10 ACLC 933.(1992) 10 ACLC 933.

The duty to act in good faith in the best interest of the The duty to act in good faith in the best interest of the co. - s. 132(1)co. - s. 132(1)

• D must act bona fide in the interest of the co.D must act bona fide in the interest of the co. Re Smith and Fawcett Ltd Re Smith and Fawcett Ltd [1942] 1 All ER 542[1942] 1 All ER 542 – –

““Directors must exercise their discretion bona fide in Directors must exercise their discretion bona fide in what they consider, not what the court may consider, is in what they consider, not what the court may consider, is in the interests of the company and not for a collateral the interests of the company and not for a collateral purpose”purpose” – – Lord GreeneLord Greene..

● What this rule amounts to is this: everything that a What this rule amounts to is this: everything that a director does as adirector does as a director director must be done to promote or must be done to promote or advance the interests of his co.advance the interests of his co.

33

● Whether or not a director has acted for the benefit of the Whether or not a director has acted for the benefit of the co. depends on the co. depends on the objective testobjective test. The standard required for . The standard required for a bona fide act was provided bya bona fide act was provided by Pennycuick J in Pennycuick J in Charterbridge Corporation Ltd. v. Lloyds Bank LtdCharterbridge Corporation Ltd. v. Lloyds Bank Ltd [1970] Ch 62, 74.[1970] Ch 62, 74.

“ …“ …whether an intelligent and honest man in the position whether an intelligent and honest man in the position of the director of the co. concerned, could, in the whole of of the director of the co. concerned, could, in the whole of the existing circumstances have reasonably believed that the existing circumstances have reasonably believed that the transaction was for the benefit of the co.the transaction was for the benefit of the co.”.”.

● This test was adopted byThis test was adopted by Thean J. in Thean J. in Intraco Ltd. v. Multi-Intraco Ltd. v. Multi-Pak Singapore Ltd.Pak Singapore Ltd. [1995] 1 SLR 313 CA and applied [1995] 1 SLR 313 CA and applied also in also in Kawin Industrial Sdn Bhd (in liquidation) v. Tay Kawin Industrial Sdn Bhd (in liquidation) v. Tay Tiong SoongTiong Soong [2009] 1 MLJ 723 (High Court). [2009] 1 MLJ 723 (High Court).

34

The duty to act for a proper purpose - s. 132(1)The duty to act for a proper purpose - s. 132(1)

An element of fiduciary duty placed upon directors is to An element of fiduciary duty placed upon directors is to exercise their powers for the proper purposes for which exercise their powers for the proper purposes for which they were conferred i.e. bona fide in the interest of the they were conferred i.e. bona fide in the interest of the co. and for no other or collateral purpose.co. and for no other or collateral purpose.

● A director uses his powers for a A director uses his powers for a collateral purposecollateral purpose if he if he exercises his powers conferred by the articles for exercises his powers conferred by the articles for purposes other than those for which they were intended purposes other than those for which they were intended and to do so would be an abuse or improper use of his and to do so would be an abuse or improper use of his powers and a breach of duty – the exercise of the power powers and a breach of duty – the exercise of the power will be held to be invalid. will be held to be invalid.

a.a. Power to issue shares is to raise capital – Power to issue shares is to raise capital – Punt v. Symons & Co. LtdPunt v. Symons & Co. Ltd [1903] 2 Ch 506; [1903] 2 Ch 506;

In order to secure the passing of a special resolution, the In order to secure the passing of a special resolution, the directors had issued new shares to 5 additional members. directors had issued new shares to 5 additional members. The shares were not issued The shares were not issued bona fidebona fide but with the sole but with the sole object and intention of creating voting power necessary to object and intention of creating voting power necessary to carry out the proposed alteration in the articles. This was carry out the proposed alteration in the articles. This was held to be an abuse of their powers. Byrne J. said: held to be an abuse of their powers. Byrne J. said: “A “A power of this kind exercised by the Directors in this case, power of this kind exercised by the Directors in this case, is one which must be exercised for the benefit of the co: is one which must be exercised for the benefit of the co: primarily it is given to them for the purpose of enabling primarily it is given to them for the purpose of enabling them to raise capital when required for the purposes of them to raise capital when required for the purposes of the co.” the co.”

36

See alsoSee also:: Howard Smith Ltd Howard Smith Ltd v. v. Ampol Petroleum Ltd Ampol Petroleum Ltd [1974] AC [1974] AC

821, Privy Council -821, Privy Council - where where the shares were allotted the shares were allotted solely to avoid a takeover by one group of SH by solely to avoid a takeover by one group of SH by diluting their majority shareholding..diluting their majority shareholding..

Cheah Ngun Ying v. Low Cheong & Sons Sdn Bhd & Cheah Ngun Ying v. Low Cheong & Sons Sdn Bhd & Ors Ors [2010] 9 MLJ 385 High Court [2010] 9 MLJ 385 High Court

bb. . Power to refuse to register a transfer of shares must be Power to refuse to register a transfer of shares must be for co.’s interestsfor co.’s interests – – Australian Metropolitan Life Australian Metropolitan Life Assurance Co Ltd Assurance Co Ltd v. v. UreUre (1923) 33 CLR 199.(1923) 33 CLR 199.

Cheah Ngun Ying v. Low Cheong & Sons Sdn Bhd & Cheah Ngun Ying v. Low Cheong & Sons Sdn Bhd & Ors Ors [2010] 9 MLJ 385 HC [2010] 9 MLJ 385 HC Mohd Hishamudin J Mohd Hishamudin J

When the BOD of the defendant co. decided to allot and When the BOD of the defendant co. decided to allot and issue shares to the other shareholders, the Board knew issue shares to the other shareholders, the Board knew that by so doing Low Lai Kui’s (plaintiff’s husband) that by so doing Low Lai Kui’s (plaintiff’s husband) shareholding in the co. would be reduced or diluted. It shareholding in the co. would be reduced or diluted. It would render his majority control of 52% to about 42%.would render his majority control of 52% to about 42%.

The law with regard to the exercise of the powers of the The law with regard to the exercise of the powers of the directors to issue shares is that such power is a directors to issue shares is that such power is a fiduciary fiduciary powerpower and must be exercised bona fide for the interest of and must be exercised bona fide for the interest of the co.the co. ( (Howard Smith Ltd v Ampol Petroleum Ltd & Howard Smith Ltd v Ampol Petroleum Ltd & OrsOrs [1974] AC 821).[1974] AC 821).

38

The power to allot and issue shares under Article 5 of The power to allot and issue shares under Article 5 of the co’s articles must be used for a proper and bona the co’s articles must be used for a proper and bona fide purpose. Here, that power was used for a fide purpose. Here, that power was used for a collateral purpose. The power was not applied equally collateral purpose. The power was not applied equally but selectively where shares were allotted and issued but selectively where shares were allotted and issued to all the other shareholders in proportion to their to all the other shareholders in proportion to their respective shareholding, but no shares were allotted respective shareholding, but no shares were allotted or issued to P’s husband, Low Lai Kui, or his estate. or issued to P’s husband, Low Lai Kui, or his estate. The direct effect of such an exercise of power by the The direct effect of such an exercise of power by the directors was that Low Lai Kui’s family lost their directors was that Low Lai Kui’s family lost their majority in, and control of, the co..majority in, and control of, the co..

39

The duty to avoid conflict of interest - s. 131The duty to avoid conflict of interest - s. 131

● The general rule is that a D must not place himself in a The general rule is that a D must not place himself in a position where his duty owed to the co. and his personal position where his duty owed to the co. and his personal or financial interest conflict. or financial interest conflict. SeeSee: Lord Herschell in : Lord Herschell in Bray v. FordBray v. Ford [1896] AC 44, [1896] AC 44, House of Lords.House of Lords.

● If a D obtains a benefit in circumstances where there If a D obtains a benefit in circumstances where there could have been a conflict of interest, he is accountable could have been a conflict of interest, he is accountable to the co. for that benefit unless he has disclosed itto the co. for that benefit unless he has disclosed it and and obtained the approval of the co.obtained the approval of the co.

40

● Whenever a director has personal interests that possibly Whenever a director has personal interests that possibly may conflict with those of the co., disclosure must be may conflict with those of the co., disclosure must be made to the shareholders and their ratification obtained. made to the shareholders and their ratification obtained. The director's interests and those of the co. ‘possibly may The director's interests and those of the co. ‘possibly may conflict’ when a conflict’ when a reasonable manreasonable man looking at the relevant looking at the relevant facts and circumstances of the particular case would think facts and circumstances of the particular case would think that there was a real sensible possibility of conflict. that there was a real sensible possibility of conflict.

● The test is thus The test is thus objectiveobjective i.e. would a reasonable man i.e. would a reasonable man think that a conflict is possible? think that a conflict is possible?

● See:See: S. 131(1) S. 131(1) – a director who is in any way, whether – a director who is in any way, whether directly or indirectly, interested in a contract or proposed directly or indirectly, interested in a contract or proposed contract with the co. shall declare his interest at a contract with the co. shall declare his interest at a meeting meeting of the directorsof the directors of the co. of the co.

41

● It is irrelevant that the co. did not incur any losses due to It is irrelevant that the co. did not incur any losses due to the breach of duty.the breach of duty.

Industrial Development Consultants Ltd. v. CooleyIndustrial Development Consultants Ltd. v. Cooley [1972] 2 All ER 162, PC. [1972] 2 All ER 162, PC. C, an architect, was MD of the plaintiff co.. They were C, an architect, was MD of the plaintiff co.. They were building and development consultants. He took part in building and development consultants. He took part in negotiations with the Eastern Gas Board in trying to negotiations with the Eastern Gas Board in trying to secure for the co. contracts to build 4 large depots but secure for the co. contracts to build 4 large depots but EGB was not satisfied with the plaintiff’s set-up and EGB was not satisfied with the plaintiff’s set-up and refused to award the contracts to it. EGB then refused to award the contracts to it. EGB then approached C and invited him to be the Project Manager approached C and invited him to be the Project Manager for the projects in his private capacity. C did not disclose for the projects in his private capacity. C did not disclose this to IDC. He resigned from IDC by falsely this to IDC. He resigned from IDC by falsely representing that he was of ill health, and was later given representing that he was of ill health, and was later given the contracts by EGB.the contracts by EGB.

42

The court The court heldheld that C had to account for the profits he that C had to account for the profits he had made in breach of his fiduciary duty to IDC. had made in breach of his fiduciary duty to IDC.

C was guilty of putting himself in a position in which his C was guilty of putting himself in a position in which his duty to the co. and his self-interest grievously conflicted. duty to the co. and his self-interest grievously conflicted. Although, the plaintiff was getting a benefit which it Although, the plaintiff was getting a benefit which it would not have otherwise got, the alternative would be would not have otherwise got, the alternative would be to allow C to retain a profit made by him in breach of his to allow C to retain a profit made by him in breach of his duty to the co. which the court was not prepared to do.duty to the co. which the court was not prepared to do.

See alsoSee also: : Magnifine Sdn Bhd v. Yap Mun HimMagnifine Sdn Bhd v. Yap Mun Him [2005] 6 [2005] 6 CLJ 413CLJ 413

● Directors having interest in the party dealing with the co.Directors having interest in the party dealing with the co.

Aberdeen Railway Co v. Blaikie BrosAberdeen Railway Co v. Blaikie Bros (1854) 1 Macq 461 (1854) 1 Macq 461 (House of Lords). A railway co. made a contract for the (House of Lords). A railway co. made a contract for the purchase of a large quantity of iron chairs from a firm in purchase of a large quantity of iron chairs from a firm in which the chairman of the co., Mr. Blaikie, was also its which the chairman of the co., Mr. Blaikie, was also its managing partner.  The co. refused to accept the chairs managing partner.  The co. refused to accept the chairs arguing that the contract was arguing that the contract was voidablevoidable owing to the owing to the chairman’s interest in the supplier firm. The court ruled chairman’s interest in the supplier firm. The court ruled that a director must not have that a director must not have ““a personal interest a personal interest conflicting, or which possibly may conflict, with the conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect…”interests of those whom he is bound to protect…” . . The co. was not bound by the contract. Blaikie was bound The co. was not bound by the contract. Blaikie was bound by his duties to the co. to obtain the chairs at the lowest by his duties to the co. to obtain the chairs at the lowest possible price for the co. However, as a partner of the possible price for the co. However, as a partner of the firm he was personally interested in obtaining the highest firm he was personally interested in obtaining the highest price possible from the co. This is the very evil against price possible from the co. This is the very evil against which the rule in question is directed. which the rule in question is directed.

44

The duty against the use of co’s property, opportunity The duty against the use of co’s property, opportunity etc. – s. 132(2)etc. – s. 132(2)

● Duty against the improper use of co.'s property, position, Duty against the improper use of co.'s property, position, corporate opportunity or competing with the co. corporate opportunity or competing with the co. s. 132(2). s. 132(2). A director cannot make use of a co.’s property, or A director cannot make use of a co.’s property, or opportunity or information for himself or make secret opportunity or information for himself or make secret profitsprofits

Cooks v. DeeksCooks v. Deeks [1916] 1 AC 554, Privy Council [1916] 1 AC 554, Privy Council (Supreme Court of Ontario, Canada). The defendants, 3 of (Supreme Court of Ontario, Canada). The defendants, 3 of the 4 directors (TR Hinds, GS Deeks & TM Deeks) of the the 4 directors (TR Hinds, GS Deeks & TM Deeks) of the Toronto Construction Co., resolved to break their Toronto Construction Co., resolved to break their business relations with Cook, the fourth director. The co. business relations with Cook, the fourth director. The co. had satisfactorily performed a series of construction had satisfactorily performed a series of construction contracts with the Canadian Pacific Railway Co. The last contracts with the Canadian Pacific Railway Co. The last of these contracts, the Shore Line contract, was negotiated of these contracts, the Shore Line contract, was negotiated in the same by two of the Ds. in the same by two of the Ds.

When the arrangement was completed, the 3 Ds formed When the arrangement was completed, the 3 Ds formed the Dominion Construction Co. and took the contract for the Dominion Construction Co. and took the contract for themselves. They also passed a resolution to confirm that themselves. They also passed a resolution to confirm that the co. had no interest in the contract.  the co. had no interest in the contract. 

Cook, the minority shareholder, successfully sued the Cook, the minority shareholder, successfully sued the directors for a breach of duty and the Court allowed the directors for a breach of duty and the Court allowed the Toronto Construction Co. to recover the profit from the Toronto Construction Co. to recover the profit from the contract. The directors are not at liberty to sacrifice the contract. The directors are not at liberty to sacrifice the interest of the co. they are bound to protect, and while interest of the co. they are bound to protect, and while ostensibly acting for the co., divert in their own favour ostensibly acting for the co., divert in their own favour business which should properly belong to the co. they business which should properly belong to the co. they represent.  represent. 

46

Regal (Hastings) Ltd v. GulliverRegal (Hastings) Ltd v. Gulliver [1942] 1 All ER 37 HL[1942] 1 All ER 37 HLRegal was in the business of running cinemas. They Regal was in the business of running cinemas. They owned a cinema in Hastings. They wanted to acquire the owned a cinema in Hastings. They wanted to acquire the leases of 2 other cinemas. So they incorporated a leases of 2 other cinemas. So they incorporated a subsidiary co. called ‘Hastings Amalgamated Cinemas subsidiary co. called ‘Hastings Amalgamated Cinemas Ltd’ (HAC) for this purpose. The landlord of the cinemas Ltd’ (HAC) for this purpose. The landlord of the cinemas insisted on either a personal guarantee of the rent from insisted on either a personal guarantee of the rent from the directors, or that HAC should have a paid-up capital the directors, or that HAC should have a paid-up capital of of £5,000. Regal could only pay for 2,000 £1 shares in £5,000. Regal could only pay for 2,000 £1 shares in HAC. The directors of Regal did not wish to give HAC. The directors of Regal did not wish to give personal guarantees. They agreed to take up the personal guarantees. They agreed to take up the remaining 3000 shares between themselves. The 4 remaining 3000 shares between themselves. The 4 directors each subscribed for 500 shares. The Chairman, directors each subscribed for 500 shares. The Chairman, Gulliver, got outsiders to take up 500 shares and the Gulliver, got outsiders to take up 500 shares and the remaining 500 shares were offered by the Board to remaining 500 shares were offered by the Board to Garton, the co’s solicitor.Garton, the co’s solicitor.

The deal to acquire the cinemas did not go through. The The deal to acquire the cinemas did not go through. The defendants then sold all the shares in the 2 companies to defendants then sold all the shares in the 2 companies to purchasers. They sold HAC’s shares for £3.80 per share purchasers. They sold HAC’s shares for £3.80 per share making a profit of £2.80 per share. Regal now under the making a profit of £2.80 per share. Regal now under the control of the purchasers filed an action for breach of control of the purchasers filed an action for breach of fiduciary duty claiming reimbursement of this profit from fiduciary duty claiming reimbursement of this profit from the 4 directors and Gulliver and Garton. the 4 directors and Gulliver and Garton.

The defendants had acted honestly in what they did. They The defendants had acted honestly in what they did. They contended that it was impossible for Regal to take up all contended that it was impossible for Regal to take up all the shares in HAC. But the House of Lords refused to the shares in HAC. But the House of Lords refused to accept this argument. The 4 directors were held severally accept this argument. The 4 directors were held severally liable to account for the profits they made. The liable to account for the profits they made. The opportunityopportunity to obtain these shares had come to them by to obtain these shares had come to them by reason and only by reason of the fact that they were reason and only by reason of the fact that they were directors of Regal and in the course of the execution of directors of Regal and in the course of the execution of their fiduciary duties. their fiduciary duties.

48

Further Duties Further Duties

• The duty to retain discretion. They have to be The duty to retain discretion. They have to be independent in making decisions. There should be no independent in making decisions. There should be no limitations or restrictions placed by the previous directors limitations or restrictions placed by the previous directors on the discretion of the present directors. The restrictions on the discretion of the present directors. The restrictions would apply only if found in the Co. Act, MA or AA.would apply only if found in the Co. Act, MA or AA.

Thorby Thorby v. v. GoldbergGoldberg (1964) 112 CLR 597. (1964) 112 CLR 597. • Cannot accept bribe or secret profits – Cannot accept bribe or secret profits – Boston Deep Sea Boston Deep Sea

Fishing & Ice Co v.Fishing & Ice Co v. AnsellAnsell (1888) 39 Ch, D 339.(1888) 39 Ch, D 339.• Cannot misuse company’s fundsCannot misuse company’s funds• Cannot misuse confidential information - Cannot misuse confidential information - s. 132(2)s. 132(2)• Cannot compete with the co. Cannot compete with the co. – – s. 132(2)s. 132(2)

49

Remedies for a breach of dutyRemedies for a breach of duty

● Remedies for a breach of duty – bring action for Remedies for a breach of duty – bring action for damages/compensation, account of profits, rescission of damages/compensation, account of profits, rescission of contract and return of property.contract and return of property.

● Exoneration for breach of duty by:Exoneration for breach of duty by:1. members: allowed –1. members: allowed – Furs Ltd v. TomkiesFurs Ltd v. Tomkies (1936) (1936) 54 CLR 58354 CLR 5832. a clause in the A/A to exempt the D for breach of 2. a clause in the A/A to exempt the D for breach of duty for negligence is void –duty for negligence is void – ss. 140(1). 140(1). . ‘‘ToTo exempt the Ds from liability for losses caused by exempt the Ds from liability for losses caused by ‘their own wilful neglect or default’. ‘their own wilful neglect or default’. 3. court may relieve the D if he had acted honestly and 3. court may relieve the D if he had acted honestly and reasonably –reasonably – ss. 354 -. 354 -Yeng Hing Enterprise Sdn. Bhd. v. Yeng Hing Enterprise Sdn. Bhd. v. Dr. Ong Poh Kah Dr. Ong Poh Kah [1988] 2 MLJ 60 Supreme Court[1988] 2 MLJ 60 Supreme Court

Re City Equitable Fire Insurance Co. LtdRe City Equitable Fire Insurance Co. Ltd [1925] Ch 407[1925] Ch 407The case summarises the common law duties of a director in The case summarises the common law duties of a director in relation to care and skill. relation to care and skill. Here the litigation arose because in the winding-up of the co., Here the litigation arose because in the winding-up of the co., £1,2000,000 was found to have been lost by the co. owing partly to £1,2000,000 was found to have been lost by the co. owing partly to the failure of certain investments but mainly to the frauds of the the failure of certain investments but mainly to the frauds of the chairman of directors, Bevan, a ‘daring and unprincipled chairman of directors, Bevan, a ‘daring and unprincipled scoundrel’ who was then duly convicted. In this action, the scoundrel’ who was then duly convicted. In this action, the liquidator also sought to make the other Ds liable for the losses on liquidator also sought to make the other Ds liable for the losses on the ground of negligence for allowing the co’s money to be the ground of negligence for allowing the co’s money to be dissipated in various ways such as declaring unwise dividends and dissipated in various ways such as declaring unwise dividends and allowing poor investments to be made and failing to prevent the allowing poor investments to be made and failing to prevent the chairman from acting fraudulently. chairman from acting fraudulently. In fact, In fact, the Ds were held to the Ds were held to have been negligent but they escaped liability because the A/A have been negligent but they escaped liability because the A/A contained a provision which exempted the Ds from liability apart contained a provision which exempted the Ds from liability apart from losses caused by ‘their own wilful neglect or default’. from losses caused by ‘their own wilful neglect or default’. ((s.140(1) CA 1965s.140(1) CA 1965 makes such provisions makes such provisions voidvoid).).

51

Dorchester Finance Co. Ltd. v. StebbingDorchester Finance Co. Ltd. v. StebbingA moneylending co. had 3 Ds, Stebbing, Parsons & A moneylending co. had 3 Ds, Stebbing, Parsons & Hamilton. S worked full time for the co. The other 2 paid Hamilton. S worked full time for the co. The other 2 paid very little attention to it and visited its premises only very little attention to it and visited its premises only rarely. The 2 Ds signed blank cheques at S’s request, rarely. The 2 Ds signed blank cheques at S’s request, with which S made loans that were illegal and with which S made loans that were illegal and accordingly irrecoverable. No board meetings were held. accordingly irrecoverable. No board meetings were held. All 3 Ds were All 3 Ds were heldheld liable in negligence and had to make liable in negligence and had to make good the loss to the co. The judge took into account the good the loss to the co. The judge took into account the fact that the 2 non-executive Ds had considerable fact that the 2 non-executive Ds had considerable accountancy experience, and stated,accountancy experience, and stated, ““For a chartered For a chartered accountant and an experienced accountant to put accountant and an experienced accountant to put forward the proposition that a non-executive D has no forward the proposition that a non-executive D has no duties to perform, I find quite alarming…they not only duties to perform, I find quite alarming…they not only failed to exhibit the necessary skill and care in the failed to exhibit the necessary skill and care in the performance of their duties as Ds but also failed to performance of their duties as Ds but also failed to perform any duty at all as Ds of Dorchester… .”perform any duty at all as Ds of Dorchester… .”

InIn Dovey v. Cory Dovey v. Cory [1902] AC 477, a D relied on the [1902] AC 477, a D relied on the judgement and advice of the chairman and general judgement and advice of the chairman and general manager of the co. when he assented to the payment of manager of the co. when he assented to the payment of dividends and to loans from the co’s funds. He had no dividends and to loans from the co’s funds. He had no reason to doubt the balance sheets that were presented to reason to doubt the balance sheets that were presented to Board meetings nor did he have any reason to doubt the Board meetings nor did he have any reason to doubt the competence of the general manager. In fact the dividends competence of the general manager. In fact the dividends were paid out of capital and the loans were made without were paid out of capital and the loans were made without proper security. proper security.

When the co. was wound up, the liquidator attempted to When the co. was wound up, the liquidator attempted to make D liable for the losses incurred. The House of make D liable for the losses incurred. The House of Lords held that D was not negligent. Business life could Lords held that D was not negligent. Business life could not go on if people could not trust those who are put in a not go on if people could not trust those who are put in a position of trust for the purpose of attending to details of position of trust for the purpose of attending to details of management. management.

53

Howard Smith v. Ampol PetroleumHoward Smith v. Ampol Petroleum [1974] AC 821, PC[1974] AC 821, PCThere were rival takeover bids for the shares of RW There were rival takeover bids for the shares of RW Miller (Holdings) Ltd., the target co. The rivals in this Miller (Holdings) Ltd., the target co. The rivals in this takeover bid was Howard Smith and Ampol Petroleum. takeover bid was Howard Smith and Ampol Petroleum. Ampol and an associated co. (‘Bulkships’) together Ampol and an associated co. (‘Bulkships’) together already held 55% of Miller’s shares. So as things stood, already held 55% of Miller’s shares. So as things stood, HS could not possibly make an effective takeover. The HS could not possibly make an effective takeover. The directors of Miller were of the opinion that it would be in directors of Miller were of the opinion that it would be in the best interest of the co. to be taken over by HS since the best interest of the co. to be taken over by HS since they were unsure what would happen to the co. if Ampol they were unsure what would happen to the co. if Ampol took further control. So they issued 10 million worth of took further control. So they issued 10 million worth of new shares to HS. This served 2 purposes:-new shares to HS. This served 2 purposes:-

1.1. it provided Miller with the much-needed capital to finance it provided Miller with the much-needed capital to finance the completion of 2 tankers, andthe completion of 2 tankers, and

2. it converted or diluted Ampol’s shareholdings from a 2. it converted or diluted Ampol’s shareholdings from a majority one to a minority one and therefore made the majority one to a minority one and therefore made the HS’ takeover bid likely to succeed.HS’ takeover bid likely to succeed.

Ampol brought this action to set aside the issue of Ampol brought this action to set aside the issue of shares. They challenged their validity. shares. They challenged their validity. There was a general power in Miller’s A/A which gave There was a general power in Miller’s A/A which gave power to the Ds to issue shares to such persons at such power to the Ds to issue shares to such persons at such time and under such conditions as they thought fit. time and under such conditions as they thought fit. Although the issue of shares were Although the issue of shares were intra viresintra vires, it , it nevertheless impose a nevertheless impose a fiduciary dutyfiduciary duty on the part of the on the part of the D. D. When the case came up for hearing at the first instance, 2 When the case came up for hearing at the first instance, 2 facts were found by the judge :-facts were found by the judge :-

1. that there was no element of self-interest on the part of 1. that there was no element of self-interest on the part of the directors; andthe directors; and

2. that the main reason for the allotment of the shares was 2. that the main reason for the allotment of the shares was not to increase the capital of the co. but to defeat the not to increase the capital of the co. but to defeat the takeover bid by Ampol by diluting their majority takeover bid by Ampol by diluting their majority shareholding. shareholding.

55

The judge set aside the allotment of the shares to HS. The judge set aside the allotment of the shares to HS.

On On appealappeal by HS, the Privy Council, upheld the decision. by HS, the Privy Council, upheld the decision.

It It heldheld that the shares were allotted solely to avoid the that the shares were allotted solely to avoid the takeover by Ampol. The absence of self-interest did not takeover by Ampol. The absence of self-interest did not necessarily mean that the defendant’s acts were in necessarily mean that the defendant’s acts were in accordance with the purposes for which the powers were accordance with the purposes for which the powers were conferred. Self-interest is only one example of improper conferred. Self-interest is only one example of improper motive.motive.

If a particular exercise of the power is challenged, it is If a particular exercise of the power is challenged, it is necessary for the court to examine the necessary for the court to examine the substantial purposesubstantial purpose for which it was exercised, and to reach a conclusion for which it was exercised, and to reach a conclusion whether that substantial purpose was proper or not. whether that substantial purpose was proper or not.

56

COMPANY SECRETARY COMPANY SECRETARY

Every co. must have at least one secretary who must be a Every co. must have at least one secretary who must be a natural person of full age and has his principal place of natural person of full age and has his principal place of residence in Malaysia - residence in Malaysia - S.139(1)S.139(1)..

He must be a member of a professional body prescribed He must be a member of a professional body prescribed by the Minister or licensed by the Registrar - by the Minister or licensed by the Registrar - S.139(A)S.139(A)..

The first secretary of the co. must be named in the MA or The first secretary of the co. must be named in the MA or AA. Later secretaries are appointed by the BOD – AA. Later secretaries are appointed by the BOD – S.139(1A) & (3)S.139(1A) & (3)

He is an officer of the co. – He is an officer of the co. – s. 4(1)s. 4(1)

57

Previously they were considered as clerical who had no Previously they were considered as clerical who had no power to bind the co. contractually – power to bind the co. contractually –

Newlands Newlands v v National Employers’ Accident AssocNational Employers’ Accident Assoc (1885) 54 LJ (QBD) 428; (1885) 54 LJ (QBD) 428; Ruben v. Great Fingall Ruben v. Great Fingall ConsolidatedConsolidated (1906) AC 439. (1906) AC 439.

Now they are considered as chief administrative officers Now they are considered as chief administrative officers with implied authority to enter into contracts relating to with implied authority to enter into contracts relating to administrative matters. Not management matter. administrative matters. Not management matter.

Panorama Developments (Guildford) Ltd Panorama Developments (Guildford) Ltd v v Fidelis Fidelis Furnishing Fabrics LtdFurnishing Fabrics Ltd [1971] 2 QB 711.[1971] 2 QB 711.

58

AUDITORSAUDITORS• Every co. must appoint an approved auditor to audit it’s Every co. must appoint an approved auditor to audit it’s

financial reports. To be done before the first AGM of the financial reports. To be done before the first AGM of the co. – co. – s. 172(1)s. 172(1)

• Appointment is until the conclusion of the next AGM. Appointment is until the conclusion of the next AGM. • Eligibility – registered as a public accountant with Eligibility – registered as a public accountant with

Malaysian Institute of Accountants and approved by Malaysian Institute of Accountants and approved by Minister of Finance – Minister of Finance – s. 8s. 8..

Function – carry out audit and present reliable, Function – carry out audit and present reliable, independent report on company’s accounts and financial independent report on company’s accounts and financial position whether it gives a true and fair view of the position whether it gives a true and fair view of the company’s financial affairs.company’s financial affairs.

Report attached to accounts and given to SH and lodged Report attached to accounts and given to SH and lodged with the Registrar. with the Registrar.

Provides a degree of protection to SH, creditors and Provides a degree of protection to SH, creditors and prospective SH. prospective SH.

59