CHAPTER 10

DUTIES OF DIRECTORS AND OTHER OFFICERS

Chapter Objectives
After the completion of this chapter you should be able to understand amongst other things: 1.1 the role of directors, company secretaries and other officers the statutory duties of directors, company secretaries and other officers the common law duties of directors, company secretaries and other officers the transparency of financial benefits of directors, company secretaries and other officers the remedies for breach of duties the exoneration and relief for breach of duties Fiduciary duties are imposed on persons who are involved in the management of a company. This and includes directors. It also includes persons other than directors, to whom the board of directors has delegated managerial duties and other persons who act as directors even though they have not been validly appointed. A company secretary is also subject to similar duties even though not usually involved in management. The Act also imposes various duties on "officers". "Officer" is defined in s 4(1) as a director, secretary, or employee of the company. Receiver/managers and liquidators are also included as officers because they take part in the management and control of companies.

1.2

FIDUCIARY DUTIES AND SECTION 132

Fiduciary duties 2.1 A fiduciary relationship is the relationship between a person in a position of trust, the fiduciary, and the person for whose benefit the fiduciary acts.

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The best-known fiduciary relationships are those between trustee and beneficiary and between agent and principal. Promoters, directors and company secretaries of a company are also regarded as fiduciaries with respect to their company. Because of the trust placed in a fiduciary, the courts have formulated strict equitable principles governing their duties. Fiduciaries owe duties of loyalty, good faith and the avoidance of conflict of interests. The precise extent of these duties is dependent on the particular relationship and circumstances. The duties of directors and company secretaries have often been compared with the duties owed by trustees. In both cases they must act in the interests of others who are dependent on the proper exercise of their powers. Indeed, courts of equity impose similar strict obligations on both directors and trustees to avoid conflicts between their personal interests and those they are required to protect. In The Board of Trustees of the Sabah Foundation & Ors v Datuk Syed Kechik bin Syed Mohamed & Ors, Chin J had this to say about those occupying fiduciary positions - a fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. It is possible to categorise the fiduciary duties of directors, company secretaries and other officers in the following way. They owe a duty: to act bona fide in the interests of the company; to exercise powers for their proper purpose; to retain their discretionary powers; and to avoid conflicts of interests;

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Directors and company secretaries also owe a duty to exercise reasonable care and diligence. The fiduciary duties of directors of a company require them to act bona fide in the best interests of the company as a whole. Whilst the powers of management are conferred on the board of directors collectively, the fiduciary obligations are owed by the directors and company secretaries individually. Whether a director or company secretaries is in breach of these fiduciary obligations depends on the particular circumstances of each case.

STATUTORY DUTIES
Section 132 duties 3.1 Section 132 imposes several statutory duties on "officers", directors and company secretaries. These statutory duties largely restate the fiduciary duties under the

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general law. Section 132 expressly states that it operates in addition to any general law duties: s132 (5). Honesty and reasonable diligence 3.2 Section 132(1) imposes a broad duty on directors at all times to act honestly and exercise reasonable diligence in the exercise of their powers and the discharge of the duties of their office. It is a question of fact, based on the circumstances of the particular case, as to what honestly and reasonably means: Yeng Hing Enterprises Sdn Bhd v Datuk Dr Ong Poh Kah. It appears that any breach of the fiduciary duties is also a breach of s 132(1). For example, an officer who issues shares in a company for the purposes of blocking a takeover may have failed to act in the interests of the company. If this is the case the officer is also subject to criminal penalties: s 132(3). In Industrial Concrete Products Bhd v Concrete Engineering Products Bhd , James Foong J of the High Court (Kuala Lumpur) said: Regarding the extent of the meaning of 'honesty', the case of Multi-Pak Singapore Pte Ltd (in receivership) v Intraco Ltd & Ors explains that this does not mean that the director had acted fraudulently; it means that he must act bona fide in the interests of the company and that in exercising his discretion, the director should act only to promote and advance the interest of the company.

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Misuse of information 3.5 Section 132(2) supplements the fiduciary duty regarding use of confidential information, which was outlined in the case of Electro Cad Australia Pty Ltd & Ors v Metaji RJS Sdn Bhd & Ors. Section 132(2) makes it an offence for officers or agents of a corporation to make improper use of information acquired by virtue of their position as officers or agents to make a gain for themselves or any other person or to cause detriment to the corporation. In the Singapore case of Public Prosecutor v Choudhury [1981] 1 MLJ 76, the court held that knowledge that the company was facing a financial crisis was specific confidential information within the meaning of the old corresponding section of the Singapore Companies Act.

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Definition of officer 3.8 Section 132(6) defines "officer" for the purposes of the section to include a person who has been an officer at any time. Section 4(1) defines "officer" more comprehensively to include the following: (a) any director, secretary or employee; (b) a receiver and manager appointed under an instrument; and (c) a liquidator appointed in a voluntary winding up. Consequences of breaching s 132 duties 3.9 The significance of s 132 is that it imposes criminal liability as well where the general law duties are breached. The penalties for breach of the duties imposed by s 132 are severe. Under s 132(3) an officer who commits a breach of s 132 is liable to the company for any profit made; in addition he or she will also incurs criminal liability. Under s 132 (3) the court may order a person be imprisoned for up to five years or to pay a fine of up to RM 30,000.

COMMON LAW DUTIES DUTY TO ACT BONA FIDE IN THE INTERESTS OF THE COMPANY 4.1 4.2 The general principle regarding the exercise of powers conferred on directors, was stated by Lord Greene MR in Re Smith and Fawcett. They must exercise their discretion bona fide in what they consider - not what the court may consider - to be in the interests of the company, and not for any collateral purposes. This is also expressed as a duty to act bona fide for the benefit of the company as a whole. The Act also imposes a similar duty on directors. Under s 132(1) directors must at all times act honestly in the exercise and discharge of the duties of their office. Breach of the duty to act honestly under s 132(1) renders directors guilty of an offence and also liable to the company for any profit made or any damage suffered by the company: s 132(3). They may be guilty of an offence under s 132(1) where they are in breach of any of their fiduciary duties to act bona fide in the interests of the company. They need not necessarily be "dishonest" according to its everyday meaning.

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The fiduciary duty to act bona fide in the interests of the company is a subjective duty. There is no breach where the directors act in what they honestly believe to be in the interests of the company. The courts are generally reluctant to override the business judgment of directors. Directors are presumed to have acted bona fide for the benefit of their company and those persons alleging a breach of duty bear the onus of proving that they have not acted bona fide: Intrico Pte Ltd v Multi-Pak Singapore Ltd.

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Interests of the company 4.8 A difficult question arises as to what is meant by the phrases "the company as a whole" and "the interests of the company". Acting for the benefit of the company means that the directors must act in the interests of the shareholders as a collective group. Greenhalgh v Arderne Cinemas Ltd. As long as the company is solvent, the interests of the company are the interests of its shareholders. However, where the company is in financial difficulties, the company's creditors' interests become increasingly important.

4.9

Access to information 4.10 A particular aspect of the duties owed by nominee directors concerns the extent to which nominee directors are entitled to acquire information about the company and then divulge this information to the appointor. It may indicate a lack of good faith and loyalty for the nominee to pass on information about the company back to the appointor: Raffles Hotel Ltd v Rayner (High Court, Singapore).

The interests of a group of companies 4.11 In Walker v Wimborne, the High Court of Australia rejected the argument that the directors of a company which was one of several companies with common directors and which were administered as a group, could consider the interests of the "group" ahead of the interests of their own company. This is an application of the principle in Salomon's case. As each company in a group is considered as a separate and independent legal entity, directors of a particular company must act in its best interests and not in the interests of the group as a whole. In New Kok Ann Realty v Development & Commercial Bank , Ginn Chit Tuan J of the Supreme Court referred to Walker v Wimborne. He stated that: the Australian case shows that even where companies, such as the plaintiff and the defendant, are members of a so-called group each company was a separate and independent legal entity and the directors, in discharging their duty to the company must take account of the interests of its shareholders and its creditors who may be prejudiced by the movement of funds between

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companies in the event that the companies become insolvent or are wound up as in this case. The interests of employees 4.13 4.14 It has been held that directors should not consider the interests of employees ahead of the interests of the company as a whole Parke v Daily News The fiduciary duty of directors to act bona fide in the interests of the company assumes that they will exercise their powers for proper purposes. However, the duty to act for proper purposes is wider than this. Directors may breach this duty even if they honestly believe their actions are in the best interests of the company as a whole. In cases where it is alleged that the directors have exercised their powers for improper purposes, the courts consider two matters; the objective purpose for which the power was granted and the purpose which actually motivated the exercise of the power. The onus of establishing that the directors acted improperly rests with those alleging the breach of duty. The courts are generally reluctant to interfere in the internal management of a company unless improper purposes are clearly demonstrated.

Issue of shares 4.15 While the duty to act for proper purposes may arise in a large variety of situations most of the cases involving allegations of breach of directors' duties to act for proper purposes have concerned the issue of shares by directors. The power to issue shares is ordinarily conferred for the purpose of raising capital for the company

Approval of company under s 132D 4.16 The power to issue share is one usually vested in the board of directors. However, s 132D of the Act provides that notwithstanding anything in the companys articles or memorandum, the directors shall not exercise any power to issue shares without the prior approval of the company in general meeting. Referring to the equivalent Singapore section, in Jimbat bin Awang v Lai Wee Ngen , Lai Kew Chai J of the Singapore Court of Appeal observed that : the statutory regime is put into place primarily to protect the interests of shareholders so that directors cannot act to their detriment without their knowledge and prior consent. Any issue of shares made by a company in contravention of s 132D is void and any consideration given for the shares is recoverable: s132D(6). As a matter of convenience the approval of the company need not be sought for every issue of shares, but may apply to the exercise of the power generally, by

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means of a resolution passed at the annual general meeting: s 132D (2). This approval remains in force until the conclusion of the next general meeting. Approval of the general meeting is not required where shares are issued as consideration or part consideration for the acquisition of shares or assets by the company: s 132D(6A). 4.20 The court has the power, under s 63 of the Act, to validate any improper issue or allotment of shares where it is satisfied that in the circumstances it is just and equitable to do so.

Shares issued to maintain control 4.21 Notwithstanding that they have obtained the approval of the general meeting, directors are still subject to the fiduciary duty to exercise their powers for proper purposes. If directors issue shares for the purpose of maintaining their position of control of the company, they will breach their fiduciary duty and the share issue may, subject to s 63, be invalidated. Judicial authority on the proper purposes duty in the context of share issues is largely derived from other jurisdictions. The power to issue shares must be used bona fide for the purpose for which it was conferred. Usually this is to raise sufficient capital for the benefit of the company as a whole. It must not be used under the cloak of such a purpose for the real purpose of benefiting some shareholders or their friends at the expense of other shareholders or so that some shareholders or their friends will wrest control of the company from the other shareholders.

4.22

Creating or destroying a majority of voting power 4.23 In Howard Smith Ltd v Ampol Petroleum Ltd , the Privy Council held that directors may act for improper purposes even where a share issue is not motivated by self-interest. Directors breach their duty to act for proper purposes if they use their power to issue shares for the purpose of creating a new majority shareholder. This is even where the directors may honestly believe their actions are in the best overall interests of the shareholders.

Purposes of issue of shares other than raising capital 4.24 In some cases, shares may be properly issued for purposes other than raising capital for the company. For example, the company often issues shares as consideration for the purchase of property. Share issues are also a means of remunerating employees of a company.

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Mixed Purposes The but for test 4.25 When directors exercise their powers to issue shares, they may be motivated by a number of purposes. This is particularly the case when the directors are themselves shareholders in the company. They must exercise their power in the interests of their company, but in doing so they may also promote their own interests as shareholders to the detriment of other shareholders. In Whitehouse v Carlton Hotel Pty Ltd , the High Court of Australia explained that where there was more than one purpose it was inappropriate to look for the substantial or dominant purpose. Applying the but for test an allotment will be invalidated if the impermissible purpose is causative in the sense that but for its presence no allotment would have been made.

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Directors' refusal to register a transfer 4.28 Section 15 requires the memorandum or articles of private companies to restrict the transfer of its shares. This is usually achieved by giving directors the discretionary power to refuse to register transfers of all classes of shares. Directors must also exercise their discretion to refuse to register transfers of shares bona fide in the interests of the company and not for improper purposes. When directors give reasons for refusal to register the court may investigate the sufficiency of the reasons: Lim Ow Goik v Sungei Merah Bus Co Ltd . In David Hey v New Kok Ann Realty Sdn Bhd. Hey had obtained certain shares by transfer. The directors refused to register the transfer as the Foreign Investment Committee had not approved it. The Federal Court of Malaysia held that the court should not interfere with the directors' discretion in refusing to register, as non-compliance with the Committee's guidelines would adversely affect the company, which was a private company. A member may also obtain a remedy under s 181 by showing that a refusal to register a transfer of shares is part of conduct, which is oppressive, unfairly discriminatory, or otherwise prejudicial.

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4.31

Other situations of improper exercise of powers 4.32 Directors may exercise their powers for an improper purpose where they use company funds to promote their re-election against other candidates.

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4.33

In Bishopsgate Investment Management Ltd v Maxwell, a director was held to have used his powers as a director for an improper purpose where he gave away the company's assets to a family company for no consideration.

DUTY TO RETAIN DISCRETION 5.1 Directors cannot limit the exercise of their future discretions. An example of such a limitation is an agreement entered into by directors providing that they will vote in a certain way at future board meetings. Such a contract is ineffective, even if the directors are not otherwise in breach of their duties such as acting for an improper purpose. However, directors may enter into contracts on behalf of the company, whereby they agree to vote in favour of a particular course of action if they properly consider this to be in the interests of the company at the time the agreement is entered into: Thorby v Goldberg.

5.2

DUTY TO AVOID CONFLICT OF INTERESTS 6.1 Directors are under a duty to avoid conflict of interest situations. This means that they must not allow a situation to develop where their duties to the person for whose benefit they act and their personal interests are in, or may be in conflict: This is another aspect of the fiduciary duties owed by directors to their company. The obligation to avoid conflict of interests aims to prevent directors improperly making a profit from their office. However, it goes further than this, to prevent directors from putting themselves in a position where it appears that they may act in their own interests. In such a case, directors cannot avoid liability by claiming they did not make a profit, their company did not suffer any loss or that the contract was a fair one. Aberdeen Railway Co v Blaikie Bros In Chua Boon Chin v JM McCormack, the court held that there was due cause to remove a liquidator of the company who was also a director, in circumstances which involved an inherent conflict of interest. The common feature in all cases in which a breach of the duty has been established is that the directors placed themselves in a position where they put or may have put their own interests ahead of the interests of the company. Section 132 (1) may be applicable where a director fails to act honestly. More specifically, a director may breach s 132 (2) where he or she makes improper use of information belonging to the company.

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Interested director transactions with the company 6.6 Directors breach their fiduciary duty if they enter into contracts with their company because they are then in a position where their personal interests conflict or may conflict with the company's interests. The duty imposed on directors not to contract with their company is strictly applied, because directors should obtain the best deal for the company and not be seen to put themselves in a position where they may further their own interests. A breach of duty arises whether the director's interest in the contract is direct or indirect. A director who contracts personally with the company has a direct interest. An indirect interest in a contract exists when the director is a director or shareholder of another company which contracts with the company in Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co A director owes separate fiduciary duties to each company and not to the group as a whole: Walker v Wimborne. In order for directors to be in breach of their duty, they must have a material interest in the contract with the company. This is recognised in s 131(2). For example, a director of a company who owns a relatively small parcel of shares in a large public company does not have a material interest in any contract between the companies only because of that shareholding. In addition, the interest of the director must be certain and enforceable rather than merely a prospect of deriving a benefit: Baker v Palm Bay Island Resort Pty Ltd . Directors avoid being in breach of duty if they make full and frank disclosure of their interest in any contract with the company. Disclosure is also required by s 135(1).

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Financial benefits to directors of listed public companies: MSEB LR 6.12 The MSEB Listing Rules contain detailed requirements providing for the transparency of financial benefits to directors and other related parties of listed public companies and their subsidiaries. Listed companies must make an immediate announcement to the MSEB of such transactions and comply with detailed rules for disclosure and shareholder approval set out in Paragraph 10, part E of the Rules. Any related party transaction which exceeds five percent of the companys net assets must comply with Rule 10.08. This Rule requires shareholder approval in general meeting for transactions between a listed company and related parties, such as directors and their associates.

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6.14

Shareholders must give their informed consent, based on detailed information circularised to all shareholders. An independent adviser must be appointed and has the responsibility for providing an opinion as to whether the transaction is fair and reasonable and whether it is to the detriment of minority shareholders. Even more rigorous requirements are imposed by the Listing Rules where the transaction exceeds twenty-five percent of the companys net tangible assets.

Interested director transactions under the Companies Act and articles 6.15 There are many and varied ways in which a director may obtain a financial benefit from entering a contract with his or her company. Some of the specific ways include obtaining a loan or guarantee from the company or entering into an agreement to transfer an asset to or from the company.

Articles 6.16 Table A articles do not permit directors to have direct or indirect interests in contracts with the company. For example, Table A, art 72 (h) specifically provides that the office of a director becomes vacant if a director is directly or indirectly interested in any contract with the company and fails to declare the nature of that interest.

Entitlement of interested director to vote 6.17 There is nothing in the Act that expressly prohibits an interested director from voting at a board meeting that is considering a contract with the directors. In the case of companies which have adopted Table A articles, Article 81 prohibits directors from voting in respect of any contract with the company in which they have an interest. Further, if they do vote, their vote is not counted for purposes of determining whether the boards resolution has been passed.

Substantial property arrangements between directors and their companies 6.18 The Companies Act also specifically targets substantial asset transfers between a company and its directors and connected persons. Section 132E prohibits any arrangement or transaction involving the transfer of non-cash assets without the prior approval of the company in general meeting. The term "any arrangement or transaction" includes a number of transactions which have a common purpose. Thus, in MUI Plaza Sdn Bhd v Hong Leong Bank , entering into six tenancies constituted an "arrangement or transaction".

Prohibited share or asset acquisitions 6.19 The acquisition of shares or assets in a company in which a director or related party has a direct or indirect material interest is another instance of prohibited self-dealing. In Malaysia, s 132G of the Act is relevant where a director, a

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substantial shareholder or a person connected to such a shareholder or director of an acquiring company has a substantial interest of more than 2 per cent in a target company. Section 132G prohibits, subject to exceptions, that specific type of selfdealing. It is a both a civil and penal provision. The arrangement or transaction made in contravention of s 132G is void and the directors and the acquiring company are subject to criminal penalties: s 123G(5). 6.20 An arrangement or transaction entered into three years after the related party first held the shares in the target company is exempt: s 132G(1). In Actacorp Holdings v Anor [1993]

Personal profits arising from acting as director 6.21 The duty of directors to avoid placing themselves in a position where their duties to the company and their personal interests or other duties conflict extends well beyond them entering into contracts with the company. Directors are also under a duty not to make personal profits while acting in their position. This attempts to ensure that when acting for the company, directors are not tempted by the prospect of deriving benefits for themselves. This equitable principle applies even where the company has not suffered any loss, indeed it may even have benefited. Further, there is a breach of duty even if the transaction was fair from the company's point of view. Good faith must not only be done but must manifestly be seen to be done". Directors, then, cannot place themselves in a position where it may appear that they are motivated by considerations other than what is in the best interests of the company. In Regal (Hastings) Ltd v Gulliver

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6.23

Three Tests 6.24 In The Board of Trustees of the Sabah Foundation & Ors v Datuk Syed Kechik bin Syed Mohamed & Ors , the High Court applied three tests to determine whether a director could be held liable for breach of fiduciary duty by obtaining personal profits which in equity belonged to the company Chin J referred to Regal Hastings and stated that the three tests are: (i) 'the no profit rule'; (ii) 'the no conflict rule'; and (iii) 'the misuse of trust knowledge rule'. Bribes and other undisclosed benefits 6.24 An obvious example of a breach of the fiduciary duty to avoid conflicts of interest occurs when a director is paid a bribe or secret commission in order to procure a particular course of action by the company or to influence the director

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in a particular way: Mahesan v Malaysian Government Officers Cooperative Housing Society 6.26 In Simmah Timber Industries Sdn Bhd v David Low See Keat & Ors , the High Court held that the first defendant had clearly breached his statutory and fiduciary duties as a director of the plaintiff company by obtaining secret profits for himself.

Misuse of company funds 6.27 Directors are under a duty to act in their company's interests with respect to the use of the company's funds. Directors are also under a duty not to mix the company's funds with their own. In some instances this may also amount to theft or embezzlement. A conflict of interests arises whether the company's funds are mixed with the director's personal funds or with the funds of another company in which the director has an interest Where directors misappropriate company funds it is no defence for them to assert that there was no misappropriation because there was no intention by them to cause wrongful loss to the company or that they did not consider the company to be another person. Directors must separate the companys interests from their own and act as trustees for all moneys of the company which come into their hands: Lai Ah Kau v Public Prosecutor . Misusing company funds for a directors own benefit constitutes a criminal breach of trust: Tan Sri Tan Hian Tsin v Public Prosecutor (Federal Court) and Chang Lee Swee v Public Prosecutor. If directors obtain funds from the company for their personal use it is no defence for them to assert that the funds obtained were lent to them. This is illustrated in the Australian case of Paul A Davies (Aust) Pty Ltd v Davies.

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Taking up corporate opportunity 6.31 Another aspect of the fiduciary principle that a director should avoid a conflict of interests is where the director makes a profit from taking up an opportunity, which should have been taken up by the company. In such cases, the director is liable to account to the company for any profit. The case of The Board of Trustees of the Sabah Foundation & Ors v Datuk Syed Kechik bin Syed Mohamed & Ors The Singapore case of Personal Automation Mart Pte Ltd Tan Swe Sang, illustrates the various facets of the conflict of interest rule as it applies in the context of a director taking up a corporate opportunity that in equity belongs to the company. The decision indicates that circumstances in such cases may

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involve simultaneous claims of misuse of confidential information, competition with the company and dishonesty. Diversion of Contract 6.34 In Cook v Deeks , Three directors formed a new company to divert a contract. The Privy Council held that the three directors' personal interests in the newly formed company conflicted with their duties. This also amounts to fraud on the minority.

Company refrains from taking up opportunity 6.35 Where directors take up an opportunity, which the company would not or could not take up, the position is less clear. In Regal (Hastings) Ltd v Gulliver The directors were in breach of duty despite appearing to act honestly and the company not having suffered any loss. In PJTV Denson (M) Sdn Bhd & Ors v Roxy (Malaysia) Sdn Bhd However, in Queensland Mines Ltd v Hudson , the managing director of the company, Hudson, took up mining exploration licences in circumstances where the company was financially unable to do so. Hudson made full disclosure of his intention to take up the licences personally and then resigned as managing director. He met all expenses and ran all risks until he proved the existence of valuable deposits. The rights were then sold to an American company with Hudson being entitled to royalties. When control of Queensland Mines changed, the company took proceedings against Hudson alleging breach of duty. The Privy Council held that the opportunity to earn the royalties arose from the use Hudson made of his position as managing director. But he fully informed Queensland Mines shareholders as to his interest in the licence, and the company renounced its interest and assented to Hudson proceeding with the venture alone. Queensland Mines failed in its action for an account of the past and future profits from the royalties payable to Hudson. Therefore Hudson was not in breach of his duty.

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6.37

Company need not suffer loss 6.38 A company need not suffer any loss to establish a breach of duty. Green v Bestobell Industries Pty Ltd.

Misuse of confidential information 6.39 Directors are also not permitted to use for their own benefit property or information entrusted to them for use on behalf of the company Electro Cad Australia Pty Ltd & Ors v Metaji RJS Sdn Bhd & Ors. This principle Includes misuse of trade secrets, lists of customers for the use of competitors and other confidential information

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6.40

Confidential information is generally information which is the object of an obligation of confidence and is used to cover all information of a confidential nature. This includes (i) Trade secrets. (ii) Literary and artistic secrets (iii) Personal secrets. (iv) Public and Government secrets.

Improper use of information s 132(2) 6.41 Section 132 (2) supplements the fiduciary duty regarding use of confidential information and secret profits. It is wider than the fiduciary duty in that it also applies to agents of the company and to officers of the Stock Exchange. The provisions prohibits an officer or agent of the company or officer of the Stock Exchange from making improper use of any information acquired by virtue of their position to gain directly or indirectly and advantage for themselves or any other person or to cause detriment to the company. Section 132 (2) does not, in its terms, specifically require the information to be secret or confidential. Controversy exists over whether such a requirement should be read into the equivalent Australian provision. Whether the use of particular information is improper may determined by its importance to the company and the possible detriment caused by the divulging of that information.

Competing with the company 6.42 As a general rule, fiduciaries are not permitted to enter into competition with the persons for whom they act. Trustees cannot compete with their beneficiaries and partners cannot compete with their partnerships. Despite the similarities of the duties of directors to the duties arising in these other relationships, it is not entirely settled that a director who undertakes an activity that is in competition with the company's business is in breach of duty. There is no absolute rule holding that a director of one company can be prevented from acting as a director of a competing company: Bell v Lever Bros Ltd . In Shanghai Hall Ltd v Chong Mun Foo , the plaintiff operated a restaurant and bar. The defendants, who were also directors of the plaintiff company, carried on a similar business on the floor of the building immediately below the plaintiffs business. The plaintiff alleged breach of directors duty of disclosure of interests in a rival company. The High Court held that in the absence of a provision in the companys articles a director is at liberty to become a director of a rival company. This principle is subject to the duty, discussed above, that they cannot divulge confidential information obtained by them as director of one company, to the other company or use for their own purposes information

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entrusted to them while acting as a director: Electro Cad Australia Pty Ltd & Ors v Metaji RJS Sdn Bhd & Ors. 6.45 While directors may sit on the boards of rival companies, the law does not permit them to use or disclose the confidential information of one company to the rival company: Likewise, directors will not be able to compete with their company where this involves them closing down the company's business and operating it for themselves: Mordecai v Mordecai. In Avel Consultants Sdn Bld v Mohammed Zain Yusof, , the respondents, who were directors of a group of cornpanies, started a firm to carry on the same business as the group of companies and the firm canvassed the regular clients of the group for work and also replaced the companies in certain projects. The Federal Court upheld the trial judge's finding that the respondents as directors had breached their fiduciary duties to their companies. In Personal Automation Mart Pte Ltd v Tan Swe Sang, the defendant claim that she was merely using the knowledge and skills obtained during her former employment, and was thereby merely engaging in the legitimate pursuit of her skills was not accepted.

6.46

DISCLOSURE OF INTERESTS At common law 7.1 We noted earlier that it is quite common for companies to insert provisions in their articles allowing a director to have an interest in contracts with the company. If this is the case and the director has a conflicting interest, he or she is not in breach of a duty to the company. Whilst such provisions are relatively common, companies recognise the possibility that a conflict of interest situation may arise and often provide in their articles that directors must disclose their interests in contracts and refrain from voting on the matter. For example, Table A, art 72(h) provides that the office of director is vacated if the director is directly or indirectly interested in any contract with the company and fails to declare the nature of that interest in the manner required by the Act. Further, Table A, art 81 provides that a director shall not vote on a matter in which he or she is interested and if he or she does, the vote is not counted. This provision, however, only deals with proceedings at board meetings. A director who is also a shareholder is not disqualified from voting at a general meeting of members on matters affecting his personal interests as a shareholder: North-West Transportation Co v Beatty . In some cases though, the vote of the majority shareholders at a general meeting may constitute a fraud on the minority: Cook v Deeks .

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7.4

At common law, where a potential conflict of interests arises, directors may avoid a breach of their fiduciary duties if they make full disclosure to the company of their interest in a proposed transaction with the company. In the absence of authorisation in the company's memorandum or articles, directors must make full disclosure to the company and have the contract ratified by the general meeting. As a general rule, the appropriate organ of the company to whom disclosure must be made is the general meeting of members. Furs Ltd v Tomkies . The House of Lords in Regal (Hastings) Ltd v Gulliver, took a similar view when it held that the directors could have protected themselves by making full disclosure to, and having their actions ratified by, the general meeting. This would have been a mere formality because the directors controlled the voting of the general meeting.

7.5

7.6 7.7

Under the Act 7.8 The common law position regarding disclosure by directors who contract with their companies or who place themselves in a conflict of interest situation is supplemented by the Act. Section 131(1) requires a director who is directly or indirectly interested in a contract with his company, to declare promptly the nature of that interest at a meeting of directors. Breach of this provision is a criminal offence: s 131(8). The High Court held that in the case of a small closely held family where all the directors are aware of the interests which one or more directors may have in a contract entered into with the company the failure to formally disclose the interests did not constitute a breach of s 131 of the Act: Tneu Beh v Tanjong Kelapa Sawit Sdn Bhd & Ors . A director must be proved to have knowledge, actual or inferred, of any contract in which he or she is interested: In Lim Foo Yong v Public Prosecutor , the appellant was convicted of a charge of failing to declare his interest in a contract. The evidence before the court was circumstantial and the court was not satisfied that the appellant was aware of the interest. The High Court, Kuala Lumpur, set aside his conviction for breach of s 131. Under s 134, the company is required to keep a register with respect to each director, containing particulars of the aforesaid interests. These particulars are required to be disclosed by s 135. These registers must be open for inspection by the members or any other person: s 134(8). In addition, the company is required to produce the register at the annual general meeting: s 134(11).

7.9

7.10

7.11

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THE DUTIES OF CARE, SKILL AND DILIGENCE

8.1 8.2 Directors are to act with due care, skill and diligence Re City Equitable Fire Insurance Co. The standard of care to be exercised by a director has been said as being to exhibit the degree of skill reasonably to be expected from a person of his knowledge and experience One of the most important recent decisions reflecting changed community attitudes and expectations is the case of Daniels v Anderson, here the auditors were sued for negligence. The auditors claimed contributory negligence on the part of AWA and instituted a cross-claim against the directors seeking contribution. In the cross-claim the auditors alleged that AWA's directors had been negligent. The New South Wales Court of Appeal held that the auditors were negligent but that AWAs contributory negligence arose because both its senior executives and chief executive officer were held to have e been negligent and this was attributed to AWA. The majority judgment considered the directors duties of care and stated several propositions: Directors owe a common law duty of care to their company which overlaps with their equitable duty of care. Directors are under a duty to familiarise themselves with the companys business and how it is run. The court approved the following principle from the United States case Francis v United Jersey Bank 432 A 2d 814 (1981) A director is not an ornament, but an essential component of corporate governance. Consequently, a director cannot protect himself behind a paper shield bearing the motto dummy director. Even though directors may have a variety of different skills and experience, they must do more than merely represent their particular field of experience. They must ensure that the board has the means to monitor management so as to satisfy themselves that the company is being properly run. While directors need not have equal knowledge and experience of every aspect of the companys activities, they are required to make inquiries and keep themselves informed about all aspects of the companys business operations. Directors must be allowed to make business judgments and take commercial risks. However, they cannot safely proceed on the basis that ignorance and a failure to inquire are protection against liability for negligence. Directors cannot shut their eyes to corporate misconduct and then claim that they did not see the misconduct and did not have a duty to look.
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8.3

8.4

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The court held that AWAs non-executive directors did not breach their duty of care because on the facts of the case they had made inquiries and requested information about the foreign exchange dealings from senior management and the auditor, but the full details were concealed from them. However, chairman and chief executive officer, was in a different position. He breached his duty to act with reasonable care because he failed to make inquiries of senior management which would have led to a better appreciation of the risks and dangers of the foreign exchange dealings. As the companys chief executive officer, he was under a continuing obligation to supervise management and seek satisfactory explanations regarding the deficiencies of the foreign exchange trading system and procedures. A director must exercise reasonable diligence in performing the duties of his or her office: s 132(1). The early cases took a fairly lenient view of the requirement of diligence. Romer J in Re City Equitable Fire Insurance Co Ltd stated:

8.9

CREDITORS' RIGHTS
Interests of creditors Duty to creditors 9.1 We noted above that directors are under a fiduciary obligation to exercise their powers bona fide in the interests of the company as a whole. When the company is solvent, the company's interests correspond with the interests of its shareholders. Different considerations apply when the company is in financial difficulties. There have been a number of cases where the courts have decided that directors must also act in the interests of the company's creditors as well as its shareholders- Walker v Wimborne. In Walker v Wimborne, the liquidator of an insolvent company, which was one of a group of associated companies, brought an action against its directors under the Australian equivalent of s 305 to recover money disposed of by the company prior to its winding up. The directors caused the company to make loans to other companies in the group in circumstances where there was no prospect of repayment. They used the company's funds to pay wages of the employees of associated companies and to pay the associated companies for work, which they had not in fact carried out. The High Court of Australia held that the directors were liable. In Federal Express Pacific Inc & Anor v Meglis Airfreight Pte Ltd & Ors , the Singapore High Court acknowledged the duty of directors to take into account creditors interests at a time of financial instability.

9.2

9.3

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General meeting of insolvent company cannot ratify 9.4 The case of Kinsela v Russell Kinsela Pty Ltd , accepted that a company's financial instability raised the directors' duty to act in the interests of the creditors. However, the court declined to formulate a general test of the degree of financial instability, which would have to be established.

Improper use of information 9.5 Section 132(2) also imposes this duty on officers and agents of a company. Most cases where this duty has been considered concerned the improper use of confidential information in circumstances, which were contrary to the interests of the company. However, in Grove v Flavel , the court applied the duty to a director of a financially troubled company in order to protect the interests of the creditors of the company. Directors must take into account the interests of not only existing creditors but also future creditors when managing the affairs of insolvent companies: Jeffree v NCSC . Similarly, in ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd , the court held that for a commercial or trading company confronting insolvency to make a gift of its assets in derogation of the interests of creditors was to use the powers for a non-corporate purpose. The duty of care has been extended to the interests of creditors. In the New Zealand case of Hilton International Ltd v Hilton , the court held that the declaration of a dividend from capital profits was not only contrary to law but that the directors who had acted carelessly in recommending the dividend were held liable to make good the loss. The court said that directors will breach their duty of care if, when recommending a dividend, they fail to have before them a proper set of accounts.

9.6

9.7

REMEDIES FOR BREACH OF DUTY Company's remedies 10.1 If an officer is in breach of his or her fiduciary duty to act bona fide in the interests of the company as a whole or fails to exercise a reasonable degree of care, the company has a variety of remedies available. The appropriate remedy depends on the circumstances. In some cases, a company may have more than one remedy available and it may choose the remedy which achieves the best result from its point of view. In Simmah Timber Industries v Sdn Bhd v David Low See Keat & Ors , a director who breached his fiduciary duties was ordered to account for an overpayment received by him as a result of a fraudulent scheme for the sale and lease-back of the companys assets. A company also has similar remedies against outsiders

10.2

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who knowingly participate in an officer's breach of duty. For example, in Simmah Timber Industries the court held that the advancement of payment by the first defendant on behalf of the plaintiff was in breach of trust, and the receipt of the payments by the second defendant was with either actual or constructive knowledge of the breach, thus satisfying the requirements to prove constructive trust. Damages or compensation 10.3 If a director breaches the fiduciary duties owed to the company and it suffers loss as a result, the company may apply for the equitable remedy of compensation: Newcare Sdn Bhd v Sri Alam Sdn Bhd. This is similar to the common law remedy of damages. If the officer is fraudulent, the company has a common law action for the tort of deceit and may recover damages. If the breach of duty arises from a failure to exercise reasonable care, the company has an action for negligence and can recover damages for any loss which results. The object of compensation or damages is to place the company, as near as possible, in the position it would have occupied had the breach of duty not occurred. All directors who participate in the breach of duty are jointly and severally liable. This means that the company can sue any one of several directors in breach of duty for the full amount of the damages or compensation. That director then has a right to seek contribution from the others who participated in the breach of duty. In Personal Automation Mart Pte Ltd Tan Swe Sang the court ordered a director who had diverted a business opportunity to another company which she had set up, to pay damages to the company for her breach of fiduciary duty. The facts of Personal Automation are discussed above. Where a director receives a bribe to influence decisions of the company, the company has the option of recovering the amount of the bribe or suing for damages. This is illustrated in Mahesan v Malaysian Government Officers Cooperative Society . Officers are also subject to the various statutory duties contained in s 132. An officer who breaches these duties is guilty of an offence. Where an officer is convicted of an offence the court may, in addition to imposing a penalty, order that the officer pay compensation to the company, if it has suffered loss or damage as a result of the breach: s 132(3). The recovery of compensation by the company is presumably not conditional upon the officer being convicted of an offence under s 132.

10.4

10.5

10.6

10.7

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Account of profits 10.8 An officer's fiduciary duty to the company is breached when the officer makes undisclosed profits arising from a conflict of interest situation. In such circumstances, compensation may not be a satisfactory remedy for the company, since the breach can arise even if the company suffers no loss. For example, in Regal (Hastings) Ltd v Gulliver , the directors breached their duty when they profited from the sale of shares in the company's subsidiary. They were in breach even though their company suffered no loss because it could not afford to acquire the subsidiary's shares itself. The directors were still ordered to disgorge the profits they had made. In The Board of Trustees of the Sabah Foundation & Ors v Datuk Syed Kechik bin Syed Mohamed & Ors , discussed above, Chin J held that in the absence of proved dishonesty the appropriate remedy was for the director to disgorge the profit, which constituted the value of the improvement of the land. This required the court to determine the value of both improvements to the land itself and access to those improvements as a result of the building of the coastal highway.

10.9

Rescission of contract 10.10 Directors breach their duty if they have an undisclosed interest in a contract with the company. In such circumstances, the company may at its option, rescind the contract. This enables the company to get out of an unfavourable contract. The aim of rescission is to put both parties to the contract, in the position they would have been in had no contract been made. Thus any money paid or property transferred, is returned. 10.11 In Russell Kinsela Pty Ltd v Kinsela , a liquidator successfully sought a declaration that a lease was voidable at the company's option. This lease had been entered into between a company and two of its directors where the directors had exercised their powers for an improper purpose. 10.12 If the directors profited from the contract, they are liable to account for the profit, irrespective of whether the company exercises its right to rescind. 10.13 A company's right to rescind may be easily lost. The right is lost if it is no longer possible to restore the parties to their original positions, if outsiders have bona fide acquired rights in the subject matter of the contract or if the company fails to rescind within a reasonable time. Return of property 10.14 Where a director acquires property as a consequence of a breach of duty, the company may seek a declaration that the director holds the property on trust for

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the company. The effect of this is that the property is returned to the company. This remedy is most appropriate where the director misappropriates property or misapplies money belonging to the company, for his or her own purposes. For example, in O'Brien v Walker , Francis Nugan, one of the directors of the Nugan Hand group of companies, misapplied funds from one of the companies in the group, to purchase a house in his own name. After Nugan died and the companies went into liquidation, the liquidator sought an order that Nugan's estate held the house on a constructive or resulting trust for the company. The court upheld this claim. The company was then entitled to have the house registered in its own name. A similar remedy was obtained in Cook v Deeks. 10.15 In Attorney General for Hong Kong v Reid, the Privy Council held that the property acquired by directors in breach of duty was held on a constructive trust for the company. Thus where the director had accepted a bribe and had acquired property with the bribe, the company could, at its election, sue for the amount of the bribe or for the property. The latter option would enable the company to assert beneficial rights over property which had increased in value.

EXONERATION AND RELIEF FOR BREACH OF DUTY

By the general meeting of members General of power of ratification 11.1 Directors who have breached their duties to the company may be excused from liability if the general meeting of members ratifies their actions. Earlier, it was seen that directors who are in a conflict of interests situation with the company, may avoid liability for breach of duty by making full disclosure of their interest and gaining the approval of the general meeting: Regal (Hastings) Ltd v Gulliver . The general meeting may also ratify the actions of directors who exercise their powers for improper purposes. This is illustrated in the English case of Bamford v Bamford There are few Malaysian cases on the issue of ratification. In Abdul Rahim bin Aki v Krubong Industrial Park (Melaka) Sdn Bhd & Ors , accepted the proposition stated by Harman LJ in Bamford v Bamford. In Khoo Choon Yam v Gan Miew Chee @ Gan Khuan Poh & Ors , Abdul Hamid Mohamed J noted the Court of Appeal's acceptance of the ratification principle, but held that that as the case before him involved the appointment of additional directors behind the back of the plaintiff, without even the notice of the resolution given to him there could be no question of ratification.

11.2

11.3

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Ratification by board 11.4 In Winthrop Investments Ltd v Winns Ltd , it was held that the general meeting had power to affirm improper exercises of power by directors not yet carried out. The directors must however, make full disclosure of the purposes of the exercise of their powers. Even if the general meeting ratifies the acts of the directors, such ratification may nevertheless be a fraud on the minority and hence be invalid. The general meeting may also ratify breaches of directors' duty of care, both prospectively or retrospectively: Pavlides v Jensen . Their ratification may however, be invalid if the directors' breach enables them to gain a benefit: Daniels v Daniels .

11.5

No ratification where company insolvent 11.6 In the Australian case of Kinsela v Russell Kinsela Pty Ltd (in liq) , the general meeting purported to excuse directors from breach of duty. This was held to be invalid because the company was insolvent or near insolvency at the time. Shareholders are unable to ratify breaches of duty where directors fail to take into account the interests of creditors. Street CJ stated it is, to my mind, legally and logically acceptable to recognise that, where directors are involved in a breach of their duty to the company affecting the interests of shareholders, then shareholders can either authorise that breach in prospect or ratify it in retrospect. Where, however, the interests at risk are those of creditors I see no reason in law or in logic to recognise that the shareholders can authorise the breach. This approach was followed in the Singapore High Court case of Ow Chor Seng v Tjinta Pte Ltd , where Amerjeet JC interpreted Kinselas case as holding that where creditors interests are effected the shareholders cannot ratify a breach of directors fiduciary duty the company.

11.7

By the articles 11.8 At common law it was possible for a company to provide in its articles that Directors were exempt from liability for breach of duty except where loss was caused by wilful neglect or default. Such an exclusion clause was contained in the articles the company in Re City Equitable Fire Insurance Co Ltd , where the court held it was effective in allowing the directors to avoid liability. Section 140(1) now provides that any provision contained in the articles or in a contract with the company which exempts any officer or auditor of the company against liability arising in respect of negligence, default, breach of duty or breach of trust, in relation to the company, is void.

11.9

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11.10 A company may indemnify an officer or auditor against liability incurred in successfully defending any civil or criminal proceedings: s 140(2). Section 140(1) is therefore aimed at preventing exclusion clauses contained in the articles or outside contracts operating to the advantage of officers and auditors who breach their duties. By the court 11.11 Officers of a corporation and certain other persons specified in s 354(3) may seek to be relieved from liability, if in any proceedings against them for negligence, default, breach of trust or breach of duty, it appears to the court that they acted honestly and ought fairly to be excused: s 354(1). Where the court grants relief to an officer, or auditor, he or she may be indemnified under the articles, for the legal costs in relation to the proceedings: s 140(2). The court also has power to grant partial relief. 11.12 Generally, the court before which proceedings to enforce the liability have been taken, has the power to grant relief. Provision is also made for an application for relief where it is anticipated that an action may be brought for negligence, default, breach of trust or breach of duty: s 354(2).

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