Analysis on the Similarities and Differences of Director’s Duty of Care, Skills and

Diligence in Banks and Non-Bank Corporations in Malaysia: A Need to Hold Directors

from Banks to a Higher Standard, if Not Broader Duty of Care.

Low Kin Fai

Fakulti Undang-Undang

Universiti Malaya

2014/2015
 Analysis on the Similarities and Differences of Director’s Duty of Care, Skills and

Diligence in Banks and Non-Bank Corporations in Malaysia: A Need to Hold Directors

from Banks to a Higher Standard, if Not Broader Duty of Care.

Low Kin Fai

An Academic Project Submitted in partial fulfillment for the Degree of Master of Laws

2014
 Abstract

Directors’ duties are founded on the law of fiduciaries and common law duty of

care, skills and diligence. Directors’ duties was once based on case laws in the

United Kingdom, which had already been codified in the United Kingdom’s

Companies Act 2006 (“CA 2006”). Such a position is adopted in Malaysia

following the amendments of the Companies Act 1965 (“CA 1965”) in the year of

2007, vide the Companies (Amendment) Act 2007 (Act A1299), which came into

force on the 15th of August 2007. This paper seeks to examine the similarities in

terms of directors’ duties of care, skills and diligence between a director from a

bank and a director from a non-bank corporation, in light of the additional criteria

and requirements to be met by directors from banks in the form of both Prudential

Regulation and Conduct of Business Regulation, and whether there is any

difference in terms of application of ‘business judgment rule’ for directors from

banks and directors from non-banks.

Keywords – Director’s duty of care, skills and diligence, director from banks, director

from non-banks, prudential regulation, conduct of business regulation, business

judgement rule

ii
 Acknowledgement

I am using this opportunity to express my gratitude to everyone who supported me throughout

the course of this LLM research project. I am indebted to Dr. Sujata Balan, my supervisor of

this research project for her aspiring guidance and undying patience, as well as her invaluably

constructive criticism during the project work. I cannot find words to express my gratitude to

her and I feel honoured to have the opportunity to work with her. I am sincerely grateful to her

for sharing her truthful and illuminating views on a number of issues related to this research

project.

I would like to seize this opportunity express my immense gratitude to Professor Dr. Tie Fatt

Hee and Professor Dr. Rizal Salim for their teachings and support.

I also express my warm thanks the lawyers and staffs from Messrs. Chooi and Company and

my friends and families who provided me with the necessary facilities being required and

conductive conditions for my LLM research project.

iii
List of Cases

1. Australian Securities and Investment Commission v Flugge [2008] VSC 473

2. Australian Securities and Investments Commission v Hellicar [2012] HCA 17
3. AWA Ltd v Daniels (1992) 7 ACSC 395
4. Balda Solutions Malaysia Sdn Bhd v Foo Wan Seng [2013] 1 LNS 247
5. Bristol and West Building Society v Mothew [1998] EWCA Civ 533

6. Cepatwawasan Group Bhd v Tengku Dato’ Kamal Ibni Sultan Sir Abu Bakar [2008]
2 MLJ 915
7. Charitable Corporation v Sutton (1742) 2 Atk 400; 9 Modern 349
8. Daniels and Ors v Anderson and Ors (1995)16 ACSR 607; (1995) 13 ACLC 614
(New South Wales Court of Appeal)
9. Devlin v Slough Estates Ltd [1983] BCLC 497
10. Eng Man Hin @ Ng Mun Heng v King’s Confectionery Sdn Bhd [2006] 4 MLJ 421
11. Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286

12. Howard Smith Ltd vAmpol Ltd [1974] AC 821

13. Hutton v West Cork Rly Co (1883) 23 Ch D 654
14. Kinsela v Russell Kinsela Pty Ltd (1986) 4 ACLC 215
15. Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187
16. Laguna Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392
17. Mega Education Systems Sdn Bhd & Anor v Ozone Glass Design Sdn Bhd & Ors
[2011] 6 MLJ 644.
18. Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical
Services Ltd [1983] Ch 258
19. Norman v Theodore Goddard [1991] BCLC 1028; [1991] BCC 14
20. Omega Holdings Bhd v Dato’ Tiah Thee Kian [2002] 6 MLJ 20.
21. Parke v Daily News [1962] Ch 927
22. Percival v Wright [1902] 2 Ch 421

23. Re Barings plc (No. 5) [1999] 1 BCLC 433

24. Re Brazilian Rubber Plantations and Estates Ltd [1911] 1 Ch 425
25. Re Brian D Pierson (Contractors) Ltd [2001] 1 BCLC 275
26. Re Bulawayo Market and Offices Co Ltd [1907] 2 Ch 58
27. Re Cardiff Savings Bank; Marquis of Bute’s Case [1892] 2 Ch 100

iv
28. Re City Equitable Fire Insurance Co Ltd [1925] Ch 407
29. Re D’Jan of England Ltd [1994]1 BCLC 561
30. Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180
31. Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227
32. Re Landhurst Leasing plc [1999] 1 BCLC 286
33. Re Smith & Fawcett [1942] Ch 304
34. Re Southern Counties [2008] EWHC. 2810 (Ch)
35. Shafron v Australian Securities and Investments Commission [2012] HCA 18
36. Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17
37. Ultrafram (UK) Ltd v Fielding [2005] EWHC 1638
38. Vrisakis v Australian Securities Commission (1993) 9 WAR 390
39. West Mercia Safetywear Ltd v Dodd [1988] BCLC 250

v
Table of Contents

Chapter 1:

1.1 Research Topic

1.2 Statement of Problem
1.3 Purpose of Study
1.4 Research Questions
1.5 Limitations and Delimitations
1.6 Type of Research Design
1.7 Analysis Procedures

Chapter 2:

2.1 Introduction of director’s duties

2.2 Who is a director and to whom directors’ duties are owed?
2.3 Minimum Requirements to be a director in a bank and in a non-bank corporation

Chapter 3:

3.1 Director’s duties of care, skills and diligence: history and development
3.2 Additional regulations on financial institution or bank
3.3 Liabilities of directors
3.4 Business Judgment Rule

Chapter 4:

4.1 Duty of Care, Skills and Diligence in the context of Bank Governance Structure
4.2 Additional Regulations for Directors of Financial Institutions and Bank
4.3 Governance, regulatory and supervisory framework for financial institutions or bank in
the United Kingdom
4.4 Governance, regulatory and supervisory framework for financial institutions or bank in
Malaysia
4.5 Should there be a higher standard of care, skills and diligence for directors from bank?

Chapter 5:

5.1 Conclusion

vi
Chapter 1:

1.1 Research Topic

Analysis on the Similarities and Differences of Director’s Duty of Care, Skills and

Diligence in Banks and Non-Bank Corporations in Malaysia: A Need to Hold Directors from

Banks to a Higher Standard, if Not Broader Duty of Care.

1.2 Statement of Problem

Directors’ duties are founded on the law of fiduciaries and common law duty of care,

skills and diligence. Directors’ duties was once based on case laws in the United Kingdom,

which had already been codified in the United Kingdom’s Companies Act 2006 (“CA 2006”).

Such a position is also followed in Malaysia, through the amendments of the Companies Act

1965 (“CA 1965”) in the year of 2007, vide the Companies (Amendment) Act 2007 (Act

A1299), which came into force on the 15th of August 2007. In a nutshell, amendments and new

provisions in relations to directors’ duties were introduced to the CA 1965.

However, it shall be noted that the origin of the Companies Law is based on partnership

law, which was subsequently enacted to regulate public companies. This raises the question as

to the extent of applicability of the Companies act on directors from financial institutions,

particularly banks which their failures are closely associated with the governance which will

have generally have a greater impact on the economy and on consumer confidence, as

compared to other types of business failures. Hence, accountability of bank directors is

questioned and there are voices to hold them to a higher standard of care. Moreover, banks are

strictly and tightly regulated in comparisons with other corporations. Hence, for these reasons

directors from bank should be held to a higher standard of care.

 Basically, financial institutions are governed by two types of regulations, namely, the

Prudential Regulations which focuses on the solvency, safety and soundness of financial

institutions; and Conduct of Business Regulation that focuses on the methods used by financial

firms to conduct business with their customers. 1 The question is on the impact of these

regulations on the directors from a financial institution, i.e. how these regulations would affect

the directors from the banks. For example: these regulations lay down the fundamental

requirement of adequacy of resources in a bank. Another important requirement as contained

in these regulations is that of the suitability of persons for managerial positions, as compared

to non-banks corporations where such requirements are set out in the Companies Act, which

application is also extended to directors from both financial institution and non-financial

institution. Furthermore, there is deficiency of gap in terms of studies based on this issue, as

most literatures discussed about the link between directors’ duty and bank failures and some

other literatures also critically analyses the extent of directors’ duty generally . There is no

literature that compares bank directors and non-bank directors in terms of the extent of the duty

of care, skill and diligence.

1.3 Purpose of Study

The purposes of study are namely; firstly, it is to examine both the similarities and

differences in terms of directors’ duty of care, skills and diligence in both banks and non-bank

companies. The second purpose is to determine as to whether the directors from a bank owe a

higher standard of care, skills and diligence as compared to the directors from a non-bank

corporation.

1
Both the Prudential Regulations and the Conduct of Business Regulation will be discussed in details below.

2
1.4 Research Questions

The research study is intended to answer the following questions which are specific but

exploratory in nature, namely whether there is a difference in relation to the directors’ duty of

care, skills and diligence between bank directors and non-bank company director. Besides, this

research study also examines the Bank Regulations to determine whether the Bank Regulations

impose a higher duty of care, skills and diligence on Bank’s directors as compared to non-bank

corporations. For this purpose, a critical analysis will be carried out to determine the Prudential

Regulation and Bank Conduct of Business Regulation in light of Director’s duty of care, skills

and diligence.

1.5 Limitations and Delimitations

One of the major limitations in this research project is time constraint. The researcher

is a working adult who is doing part-time studies. The researcher finds it hard to balance

between working and studies. Due to the time constraint, the researcher has changed its

research design and excluded qualitative interviews which was initially in the research design.

There are several delimitations in this research project, one of the delimitations is that

only the jurisdiction of three countries will be studied in this research project because of time

constraint. The researcher believes that a study shall be placed on the position in Hong Kong

and also in the United States of America due to the rapid development in the law of director’s

duties in these two countries. Another delimitation is that only financial institutions or banks

is compared to normal companies. The researcher believes that insurance companies and those

public listed companies which are also government-linked companies shall also be compared

because these are big players that are ‘too big to fail’.

3
1.6 Type of Research Design

The research design is mixed method research comprised of purely doctrinal research

wherein the study entails a comparative study on the laws and principles that governs the

director’s duty of care, skills and diligence. This duty will be examined closely and critically

in relation to two indicators, directors from banks and directors from non-banks corporations.

Firstly, the history, law and principles relating to the director’s duty of care, skills and diligence

will be set out in details, reference will also be made to several key case laws. Thereafter, the

researcher will set out the Malaysian laws in relation to directors’ duty of care, skills and

diligence. Furthermore, a discussion on the business judgment rule and the directors will also

be included. The researches will then discuss the laws on directors’ duty of care, skills and

diligence in the context of both banks and non-bank corporations by studying various statutes,

regulations and case laws. This part of study will be a comparative study whereby the

researcher will compare the directors’ duty of care, skills and diligence in the United Kingdom,

Australia and Malaysia. Then, the researcher will follow with an analysis on the similarities

and differences of the directors’ duty of care, skills and diligence on both directors from bank

and from non-bank corporations.

1.7 Analysis Procedures

Primary and secondary data in the documents form will be analyzed using CCM

technique i.e. Constant Comparative Methods in order to identify the similarities and

differences between the director’s duty of care, skills and diligence of directors from both banks

and non-bank corporations. All the similarities and differences identified will be highlighted

and extracted into writing for the ease of reference. A critical analysis will be deployed on the

results obtained from the study.

4
1.8 Literature Review

In general, there is no specific article that compares the director’s duties of care, skills

and diligence between a bank and a non-bank corporation. However, there are some literatures

that are closely related to the director’s care, skills and diligence. Basically it can be divided

into two types: one type which discusses specifically on director’s duties and the other type

which is a comparative study.

For the first type, generally it discusses about the law and principles of directors’ duties

of care, skills and diligence as well as its development. For example, there is one article by

Havercroft and Reisberg2 which discussed on how traditionally soft issues have become hard

after the codification of director duties particularly the inclusion of the term ‘environment’ in

the CA 2006 in the UK and how directors’ duty of care, skills and diligence has changed. On

the other hand, Ian Ramsay also analyses the role of director in corporate governance such as

duty of care of company directors and also the role of shadow directors as well as nominee

directors.3 In addition, Loughrey talks about how the normal application of duty of care to bank

directors will lead to obstacles in a claim against them.4 He Wei Ping also examines how Bank

regulations have inhibited the growth of non-bank corporations. 5 The researcher takes the

stance that these literatures fail to highlight the similarities and differences of director’s duty

of care, skills and diligence between directors from banks and directors from non-banks.

Although the researcher agree with some of the literatures that the current director’s duty of

2
Havercroft, Ian and Reisberg, Arad, Directors' Duties Under the UK Companies Act 2006 and the Impact of the
Company's Operations on the Environment (December 15, 2010). Available at SSRN:
http://ssrn.com/abstract=1274567.
3
Ramsay, Ian, Corporate Governance and the Duties of Company Directors. Available at SSRN:
http://ssrn.com/abstract=924312
4
Loughrey, Joan, Assessing the Director’s Duty of Care and Skill in the UK in the Light of the Financial Crisis
(April 30, 2011). Available at SSRN: http://ssrn.com/abstract=1914633
5
He Wei Ping, “Paternalistic Regulation in China’s Banking Sector, The Chinese Journal of Comparative Law
(2013) pp. 1-14. Doi:10.1093/cjcl/cxt008”.

5
care fail to make directors from banks liable for bank failures, these literatures did not explain

such a position.

On the other hand, a comparative study of directors’ duty of care, skills and diligence

can be found. As an example, Zwinge Tamo compares the director’s duty of care, skills and

diligence between United Kingdom and Germany and examines the dual test in relation to the

director’s duty of care, skills and diligence. 6 Interestingly, Misawa Mitsuru conducted a

comparative study by comparing the standard of cares of bank directors between US and Japan

by analyzing the court decisions and existing literatures.7 In addition to that, the researcher also

used and referred to several other literatures which have been included in the footnote and

bibliography.

Chapter 2:

2.1 Introduction of director’s duties

The duties of a director are traditionally founded upon two principles or categories,

which are firstly, the law of fiduciaries and secondly, the duties to exercise care, diligence and

skills in discharging their duties as a director. 8 Directors as the fiduciaries to the company owes

6
Zwinge Tamo, “Have Directors' Duties of Care and Skill Become More Stringent? What has Driven this
Development? Is this Development Beneficial? An Analysis of the Duty of Care in the UK in Comparison to the
German Duty of Care (October 20, 2009) http://dx.doi.org/10.2139/ssrn.1591590”
7
Mitsawa Misuru, “Bank Directors' Decisions on Bad Loans: A Comparative Study of U.S. and Japanese
Standards of Required Care. The Banking Law Journal, Vol. 122, No. 5, pp. 429-466, May 2005.
http://ssrn.com/abstract=952813.
8
Rashidah Abdul Rahman and Mohammad Rizal Salim, Corporate Governance in Malaysia, Student edition,
2010, Sweet and Maxwell Asia, Selangor, Malaysia; and Jim F. Cockery, Directors’ Powers and Duties, 1987,
Law Book Gallery, Book 2, <http://epublications.bond.au/law_books/2>; see also Jane Burke-Robertson,
Industry Canada Official Website: Corporate, Insolvency and Competition Policy, Primer for directors of not-
for-profit corporations (Rights, Duties and Practices), <http://www.ic.gc.ca/eic/site/cilp-
pdci.nsf/eng/cl00692.html>.

6
several duties to the companies. The position of a fiduciary has been explained in details by

Millet LJ in the case of Bristol and West Building Society v Mothew9:

“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. The distinguishing obligation of a fiduciary is the obligation of loyalty.

The principal is entitled to the singled-minded loyalty of his fiduciary. This core

liability has several facets. A fiduciary must act in good faith; he must not make a

profit out of his trust; he must not place himself in a position where his duty and

his interest may conflict; he may not act for his own benefit or benefit of a third

person without the informed consent of his principal. This is not intended to be an

exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations.”

In this paper, the focus will be placed on the directors’ duties of care, skills and

diligence, which will be discussed in details in another section below. The general rule is that

breach of director’s duties will attract liability both in civil and criminal in the context of

Malaysia. For example, if a director is in breach of the duty of care, skills and diligence, then

there will be two causes of action, first the derivative action whereby the remedy will directly

go to the corporation or the company itself. On the other hand, a direct action may be initiated

whereby the remedy will go to the shareholders. Although directors’ duties have been codified

in the United Kingdom’s CA 2006, which is subsequently followed in Malaysia after its

inclusion in the CA 1965 vide Act A1299, the origin of this Act is based on the development

of partnership law, and subsequently it was enacted to regulate public companies. 10 The

question is the extent of applicability of the Act in respect of bank governance, especially in

terms of regulating directors from a bank. Previously, prior to the codification of director duties

9
[1998] EWCA Civ 533.
10
Paddy Ireland, Company Law and the Myth of Shareholder Ownership, 62 Mod. L. Rev. 32 1999;

7
in the United Kingdom, such duties were based solely on the common law. After the

codification of director duties in the United Kingdom’s CA 2006, case laws or common law

still remain relevant pursuant to Section 170 of the CA 2006 which expressly states that the

case laws on director duties are a part of the CA 2006 regime for the purpose of interpretations.

For the ease of reference, Section 170 of the CA 2006 is reproduced below:

Companies Act 2006, s170 Scope and nature of general duties

(1) The general duties specified in sections 171 to 177 are owed by a

director of a company to the company.

(2) A person who ceases to be a director continues to be subject—

(a) to the duty in section 175 (duty to avoid conflicts of interest) as

regards the exploitation of any property, information or opportunity

of which he became aware at a time when he was a director, and

(b) to the duty in section 176 (duty not to accept benefits from third

parties) as regards things done or omitted by him before he ceased to

be a director.

To that extent those duties apply to a former director as to a director,

subject to any necessary adaptations.

(3) The general duties are based on certain common law rules and

equitable principles as they apply in relation to directors and have effect

in place of those rules and principles as regards the duties owed to a

company by a director.

(4) The general duties shall be interpreted and applied in the same way

as common law rules or equitable principles, and regard shall be had to

8
 the corresponding common law rules and equitable principles in

interpreting and applying the general duties.

(5) The general duties apply to shadow directors where, and to the extent

that, the corresponding common law rules or equitable principles so apply.

As seen, in the United Kingdom, it is clear that common law cases are still relevant

even after codification of director’s duties, for the purpose of interpretations as expressly set

out in both Sections 170(3) and 170(4) of the CA 2006. However, whether common law is still

applicable in Malaysia after the codification of director duties into the Malaysia’s CA 1965 is

not clear, because the CA 1965 does not contain any equivalent provisions in this context.

However, it is submitted that common law is important and remain relevant for the purpose of

interpretation.

2.2 Who is a director and to whom directors’ duties are owed?

A director is defined in s.4 of the CA 1965 as “any person occupying the position of

director of a corporation by whatever name called and includes a person in accordance with

whose directions or instructions the directors of a corporation are accustomed to act and an

alternate or substitute director”. Apparently, this definition of this section also covers a person

who is not formally appointed as a director but in fact carries out works as a director i.e. a de

facto director.11 Furthermore, a shadow director is also covered by this section if it can be

proved that the majority on the board of directors are acting on instructions or directions of

such person.12

11
Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180.
12
Ultrafram (UK) Ltd v Fielding [2005] EWHC 1638; Kuwait Asia Bank EC v National Mutual Life Nominees Ltd
[1991] 1 AC 187; Cepatwawasan Group Bhd v Tengku Dato’ Kamal Ibni Sultan Sir Abu Bakar [2008] 2 MLJ 915;
Omega Holdings Bhd v Dato’ Tiah Thee Kian [2002] 6 MLJ 20.

9
 Thereafter, it is important to note that to whom the directors’ duties are owed. In the

United Kingdom, prior to the codification of directors’ duties in the CA 2006 (hereinafter

referred to as “CA 2006”), there was a lot of uncertainties. Now, the orthodox question is

answered by s.170 CA 2006 which states that “directors’ duties are owed to the company and

not to individual shareholders, which also resembles the landmark decision Percival v Wright.13

In this case, the directors were offered to buy the shares held by the company’s members

without disclosing that at the time of the purchase they were negotiating with an outsider for

the sale of the company at a higher price. The shareholders claimed that the directors were in

breach of their fiduciary duty to them and that the sale ought to be set aside for non-disclosure.

The court rejected their claim. The duty was owed to the company and, in any case, there was

no unfair dealing by the directors. The shareholders had initially approached the directors

asking them to purchase their shares. Therefore, a breach of directors’ duty is a wrong done to

the company but not to the shareholder and as such the proper claimant in proceedings in

respect of the breach should be the company.

The decision in Percival v Wright leaves behind some doubts; namely, who is the

company? Some assistance in solving this issue can be taken from the Report of the Second

Savoy Hotel Investigation which concluded that directors cannot just focus on short-term

interests of the company but that regard must be taken of the long-term interests of the

company14. In other words, the duty is not confined to members of the company only i.e.

shareholders, but extends to future shareholders. For this purpose, the UK parliament has laid

down some assistance and guidelines in s172 of the CA 2006, which is the duty to promote the

success of the company. There are several factors in which the directors must take into

13
[1902] 2 Ch 421.
14
The Savoy Hotel Ltd, and the Berkeley Hotel Co Ltd, Report of an Investigation under s.165 (6) of the
Companies Act 1948, (H M Stationery Office, 1954); see Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286, on
the meaning of ‘the company as a whole’

10
consideration before making a business judgment, but clearly the wording of this section is that

of a subjective test. My opinion is that for s172, it is and extension to the common law,

especially the exhaustive list laid down in s172 (1) (a)-(f) in which directors have to have regard.

However, the lists itself might possess a problem in which the weight of it is a subjective

judgment of the director. The law is vague because it is not a matter of interpretation for the

court but the directors. Moreover, even if the directors did not take into account these, he would

not be in breach if in his opinion, in good faith, this will promote the success of company as a

whole. By virtue of s170 CA 2006, common law still remain relevant, and there are two

conflicting cases whereby a subjective test was applied in Re Smith & Fawcett15 and in Re

Southern Counties16, the court stated that objective considerations are hard to avoid.17

Therefore, the concluding remark can be made here is that director’s duties are owed to

the company but not to individual shareholders.18 However, in certain circumstances, a director

may owe a duty to creditor where the company is insolvent; see the cases of Multinational Gas

and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd 19, Kinsela v Russell

Kinsela Pty Ltd20 and West Mercia Safetywear Ltd v Dodd.21 Furthermore, traditionally a

director does not owe a duty towards the employees of the company as illustrated in the case

of Parke v Daily News 22 and also Hutton v West Cork Rly Co 23 . However, this has been

overturned in light of s247 of CA 2006 and also s187 of the United Kingdom Insolvency Act

which allows directors to make provisions for the benefit of the employees or former

15
[1942] Ch 304
16
[2008] EWHC. 2810 (Ch)
17
See also Simon Graham, Directors' duties: Current interpretation and future reforms, 2009, available from
<http://www.wragge.com/published_articles_4961.asp>.
18
Supra at 10 and 11; see also Chan Chong Choon Ben, Koh Tong Ngee Philip and SW Ling Peter, Chan and Koh
on Malaysian Company Law: Principles and Practice, 2nd edition, 2006.
19
[1983] Ch 258.
20
(1986) 4 ACLC 215.
21
[1988] BCLC 250.
22
[1962] Ch 927.
23
(1883) 23 Ch D 654

11
employees on the cessation or transfer of business of the company, or on the winding up of the

company.

2.3 Minimum Requirements to be a director in a bank and in a non-bank corporation

in Malaysia

In Malaysia, the basic minimum requirements as to who can be a director has been set

out in the CA 1965. Generally, the relevant provisions in are Sections 122, 124 and 129 of the

CA 1965. There is a requirement of two natural person of full age as directors in each

company, 24 who must hold a specified share qualification within two months after his

appointment or such shorter period as fixed in the Article of Association in the company. 25 For

definition of the term ‘full age’, reference can be made to the Age of Majority Act 1971, which

means a person who has reached the age of 18 years old. As seen in the wordings of Section

124 of CA 1965, a company cannot be a director because it is an artificial person. However, it

is argued that so long as there are two natural persons as directors of a company, there is nothing

to stop a company to be the third director, as seen in the case of Re Bulawayo Market and

Offices Co Ltd26 In terms of maximum age limit of a director, there is no maximum age limit

in relation to private limited companies. However, Section 129 of the CA 1965 provides that

persons of and over 70 years old may not be a director in a public companies unless approved

by members in a special resolution i.e. not less than three quarter of majority (see Section 129

(1) and (6) of the CA 1965).

24
Section 122 of the Companies Act 1965.
25
Section 124 of the ompanies Act 1965.
26
[1907] 2 Ch 58.

12
 However, there are additional requirements and conditions in order to be a director in a

financial institution such as a bank, these requirements will be addressed at another section

below.

Chapter 3:

3.1 Director’s duties of care, skills and diligence: history and development in the

United Kingdom

A close look to the director’s duties of care, skills and diligence has seen a fast-growing

development in the early 20th century until now. It appears that in the 19th century that the law

of fiduciaries provide adequate regulation to the behavior of directors. Even though the duty of

care, skills and diligence existed before, the standard of care is very low, which is measured by

the care of an ordinary man that he may take in the circumstances upon his own behalf, as seen

in the case of Re Brazilian Rubber Plantations and Estates Ltd.27Similarly, another example

can be seen in the case of Re Cardiff Savings Bank; Marquis of Bute’s Case28, whereby the

Court held that there was no breach of director’s duties for failing to attend bank meetings

which subsequently led to bank’s failure. In this case, a subjective test is deployed to determine

the duty of care, which makes it an easy way for the directors to escape liabilities. If the

standard of care is measured by a subjective test, then it will be very easy way for a director to

escape liability for breach of his duties as long as he is honest and acted in bona fide while

discharging his duties, this is also confirmed by Rashidah and Rizal in their research paper.29

Thereafter, it marks a significant development in the law of director’s duty of care

whereby the emphasis on the subjective test has shifted to a more reasonable objective test in

27
[1911] 1 Ch 425.
28
[1892] 2 Ch 100.
29
Op Cit.

13
the landmark decision of Re City Equitable Fire Insurance Co Ltd30. The Court in this case

held that the degree of diligence required was what may be was what may reasonably be

expected of the director in the circumstances, which clearly emphasized on an objective test.

The facts of this case concerns an insurance company which was defrauded by its managing

director who was convicted and sentenced. Action was brought by the liquidator against the

other directors for their negligence leading to the losses of the company. The Court found that

the directors were negligent but the directors cannot be made responsible for the losses of

companies because the provisions in the articles relieved them for liability as this is not ‘willful

neglect or default’. Nonetheless, Romer J has extensively dealt with the position of the common

law duties of care and skills in his judgment.

As Per Romer J at p. 427:

“In discharging the duties of his position thus ascertained a director must, of course,

act honestly; but he must also exercise some degree of both skill and diligence. To

the question of what is the particular degree of skill and diligence required of him,

the authorities do not, I think, give any very clear answer. It has been laid down

that so long as a director acts honestly he cannot be made responsible in damages

unless guilty of gross or culpable negligence in a business sense. But as pointed out

by Neville J. in In re Brazilian Rubber Plantations and Estates, Ld. ([1911] 1 Ch

425, 437), one cannot say whether a man has been guilty of negligence, gross or

otherwise, unless one can determine what is the extent of the duty which he is

alleged to have neglected.

30
[1925] Ch 407.

14
 In a nutshell, there are altogether three (3) propositions31 that can be taken from the

Romer J’s judgment from the case of Re City Equitable Fire Insurance Co Ltd32.

The first proposition can be found in His Lordship’s judgment at p 428, which states

that “a director need not exhibit a greater degree of skills in the performance of his duties

than may reasonably be expected from a person of his knowledge and experience”. In other

words, it is a subjective test that can easily relieve directors from their liabilities for mere

errors in their judgment for business decision. If a director act within the powers given to

them or so allowed by the existing laws, and if such exercise of power is acted with such

care as is reasonably expected from them as directors, by taking into account their

knowledge and experience, then by making a mistake would not make them liable for the

resulting loss from their mistakes. Lindley MR also commented on this and states that “if

directors act within their powers, if they act with such care as is reasonably expected from

them, having regard to their knowledge and experience, and if they act honestly for the

benefit of the company they represent, they discharge both their equitable as well as their

legal duty to the company.”33

This proposition has been heavily criticized by academicians 34 because of the

subjective test. Such a proposition, in the writer’s opinion is very unfair and unjustifiable

because notwithstanding that the position of a director, a director of higher education level

and come with more experience may be subjected to a higher standard of care whereas a

director with inferior educational background or a junior director are subjected to a lower

standard of care. The writer condemns that the same standard of care shall be applicable

merely because they hold the office of a director, this is because the public would assume

31
Nicholas Bourne, Essential Company Law, 2000, Taylor & Francis Group, pages 62 to 65.
32
Op Cit.
33
See the Judgment of Lindley MR in Laguna Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 at 435.
34
For example, see Hicks, ‘Directors’ Liability for Management Errors’, 1994, 110 Law Quarterly Review, at p
390.

15
that a director being the highest authority making person in a company would hold

necessary sets of skills and knowledge to fulfill their duties as a director. Personal

knowledge and experience shall not be taken into consideration for the purpose of

determining the standard of care of a director. Nevertheless, this has been put to an end by

the comprehensive statutory duties of a director in the CA 2006. More specifically, Section

174 of the CA 2006 which codifies the director’s duties of care, skills and diligence has

marks an end to the subjective test in Re City Equitable Fire Insurance Co Ltd by

implementing a dual-test comprises of both the objective test and the subjective test. As

such, it may be argued that the subjective element for the purpose of determining the

standard of care is retained in the CA 2006 vide Section 174(2)(b). This will be discussed

below.

The second proposition can be found in the judgment of Romer J at p 429 whereby

His Lordship states that “a director is not bound to give continuous attention to the affairs

of his company. His duties are of an intermittent nature to be performed at periodical board

meetings, and at meetings of any committee of the board upon which he happens to be

placed. He is not, however, bound to attend all such meetings, though he ought to attend

whenever in the circumstances he is reasonably able to do so”. It would appear that this

proposition is not relevant at all for full-time executive directors whom duties are to carry

day to day management of the companies and to make business decisions. Failure to give

continuous attention to the affairs of his company may result to serious consequences and

even lead to insolvency of the company.

The writer’s opine that Romer J’s second proposition shall not be read in isolation

of the third proposition because in the writer’s opinion, His Lordship was trying to deliver

the message that a director may delegate his duties and power and hence he needs not give

continuous attention to the affairs of his company. However, it shall be done in good faith

16
and must have regard to the interests of the company and any likely consequences of any

decision in the long term.35

The third proposition laid down by Romer J whereby a director is allowed to

delegate his duties and powers. As per Romer J at p 429: “a director is not bound to give

continuous attention to the affairs of his company. His duties are of an intermittent nature

to be performed at periodical board meetings, and at meetings of any committee of the

board upon which he happens to be placed. He is not, however, bound to attend all such

meetings, though he ought to attend whenever in the circumstances he is reasonably able

to do so”. As mentioned, in the writer’s opinion, this should be read conjunctively with

second proposition. Nevertheless, although a director is entitled to delegate particular

functions (subject to the articles of association of a company) to a trusted person who is

competent and with integrity, the director is required to exercise a supervisory duty upon

his delegatees (see the judgment of Jonathon Parker J in the case of Re Barings plc (No.

5)36). The exact statement which was approved by the Court of Appeal in Re Barings plc

(No. 5)37 is as such: “whilst directors are entitled (subject to the articles of association of

the company) to delegate particular functions to those below them in the management

chain, and to trust their competence and integrity to a reasonable extent, the exercise of

the power of delegation does not absolve a director from the duty to supervise the discharge

of the delegated function. No rule of universal application can be formulated as to the

[foregoing]. The extent of the duty, and the question whether it has been discharged, must

35
For example, see Section 172 of the CA 2006 which set put the duty to promote the success of the company.
A director of a company must act in the way he considers in good faith would be most likely to promote the
success of the company for the benefit of its members as a whole by taking into consideration, inter alia, the
interests of the company’s employees; the need to foster the company’s business relationships with suppliers,
customers and others; the impact of the company’s operations on the community and the environment and
the need to act fairly as between members of the company.
36
Re Barings plc (No. 5) [1999] 1 BCLC 433, which was subsequently upheld by the Court of Appeal; see also
the comments in Gower and Davies, Principles of Modern Company Law, 8th ed, 2008, London: Sweet and
Maxwell.
37
[2000] 1 BCLC 523.

17
depend on the facts of each particular case, including the director’s role in the

management of the company.”

This proposition is still highly relevant today because it is impossible for a director

to discharge their duties solely on their own without delegating some of their functions,

subject to the articles and association of the company, to his employees who can be trusted,

with integrity, holds the necessary qualifications and with the necessary skills and

experience. However, having delegated their duties does not mean that is the end of the

matter, the director who delegates his powers still has a duty to supervise such powers

delegated, he would still be held liable for any breaches or wrongdoings by his delegatees. 38

As mentioned, the case of Re City Equitable Fire Insurance Co Ltd is no longer

good law as it has been replaced by a statutory regime under Section 174 of the CA 2006.

There is a shift from a subjective test to a dual-test in the form of both objective and

subjective test for the purpose of determining the standard of care. Such a test was firstly

approved by Hoffman J in the case of Norman v Theodore Goddard39 whereby whether a

director has satisfied the standard of care ‘was accurately stated in section 214(4) of the

Insolvency Act 1986’.40 The position was once again approved by His Lordship albeit in

another case of Re D’Jan of England Ltd.41 Hoffman J applying s.214(4) of the Insolvency

Act 1986, held the director negligent and prima facie liable to the company for losses

caused as a result of its insurers repudiating a fire policy for non-disclosure because the

director had signed the inaccurate proposal form without first reading it. Furthermore, the

application of objective test is also seen widely in cases under the Company Directors

Disqualification Act 1986, particularly in relation to where directors delegate their powers.

38
See Mayson, French and Ryan, Company Law (22nded, Oxford: OUP, 2005) at pp 519-520.
39
[1991] BCLC 1028.
40
[1991] BCLC 1028 at pp 1030-1031.
41
[1994]1 BCLC 561.

18
Now, under the CA 2006 regime, particularly the dual-test in s174 and also s173, inactivity

on the part of directors is no longer acceptable and honestly and good faith can no longer

act as a shield for directors if the directors honestly play a passive role and were unaware

of a state of affairs because he had trusted others to manage the company, as clearly

resembled in the case of Re Landhurst Leasing plc42.

Now, after the codification of director duties in the CA 2006, specifically s174 for

director’s duty of care, skills and diligence which is as follows:

Section 174 of the Companies Act 2006

(1) A director of a company must exercise reasonable care, skill and diligence.

(2) This means the care, skill and diligence that would be exercised by a

reasonably diligent person with—

(a) the general knowledge, skill and experience that may reasonably be expected

of a person carrying out the functions carried out by the director in relation to the

company, and

(b) the general knowledge, skill and experience that the director has.”

The word ‘must’ as contained in Section 174 of the CA 2006 means that is a mandatory

obligation on the directors to exercise reasonable care, skills and diligence. The wordings of

Section 174 takes into consideration, firstly, the objective knowledge, skills and experience of

a director and secondly, the knowledge, skills and experience possessed by that individual

director to decide whether that particular individual director has breached the duty of care. As

seen, the effect of Section 174 is as such that a director’s actions will be measured against the

conduct expected of a reasonably diligent person and this is clearly an objective test. Subjective

42
[1999] 1 BCLC 286.

19
considerations will also apply according to the level of any special skills the particular director

may possess. In a summary, directors must carry out their duties and functions with the required

standard of care and competence, whereby the dual-test (combination of objective test and

subjective test) contained in s174, which was derived from Norman v Theodore Goddard43

which lays down the standard of care expected from directors44:

1. A de minimis, objective test - what is required of the reasonable director carrying out the

particular functions that they’re responsible for; and

2. A subjective test – whether, judged by the experience, skill and knowledge that the

individual director has, they’ve fallen below a certain standard in their conduct

Therefore, if the director has a higher standard of knowledge, experience and skill

because of his education, knowledge and years of experience in that industry, he is expected to

exercise his ‘qualifications and knowledge’ that may be reasonably expected from him. For

example, if a director who has a long period of service coupled with high education background

will be expected to perform to a higher standard of care than a junior director which has less

experience. 45 However, the writer opines that in respect of this, company regulators shall

publish a guidelines on the conduct of directors or guidance for directors for purpose of

ensuring the competence of directors.

As a result of this, a director can no longer take a passive role in the management of the

company. An example can be seen in the case of Re Brian D Pierson (Contractors) Ltd46 the

Court held that: “The office of director has certain minimum responsibilities and functions,

43
[1991] BCC 14).
44
Chris Hadrill, The duty of reasonable care, skill and diligence for directors, 2012, available at
<http://www.redmans.co.uk/blog/commercial-law/the-duty-of-reasonable-care-skill-and-diligence-for-
directors>.
45
Ibid.
46
[2001] 1 BCLC 275.

20
which are not simply discharged by leaving all management functions, and consideration of

the company’s affairs to another director without question, even in the case of a family

company… One cannot be a ‘sleeping’ director; the function of ‘directing’ on its own requires

some consideration of the company’s affairs to be exercised.”

3.2 Australia’s legal position on director’s duties of care, skills and diligence

The breach of director’s duty of care and skills has been very controversial and a

common litigation for more than 250 years47, it is perhaps the most commonly litigated breach

of director’s duty. One of the oldest case can be traced back to the year of 1742 in Charitable

Corporation v Sutton.48

A director owe a duty of care and skills and such duty is based on a statutory framework,

however, it is not confined to statutory duties. The relevant provision is contained in Section

180(1) of the Australian’s Corporations Act 2001, which read as follows:

Care and diligence--directors and other officers49.

(1) A director or other officer of a corporation must exercise their powers and

discharge their duties with the degree of care and diligence that a reasonable person

would exercise if they:

(a) were a director or officer of a corporation in the corporation's circumstances; and

47
James Edelman, Directors and fiduciary duties: the story of of Nocton v Lord Ashburton, 2012, Corporate
Counsel Day (23 May 2012): Conference held by the Australian Corporate Lawyers Association’s Western
Australia, available at
<http://www.supremecourt.wa.gov.au/_files/Directors_and_Fiduciary_Duties_20120523.pdf>.
48
(1742) 2 Atk 400; 9 Modern 349.
49
Section 180 (1) is a civil penalty provision (see section 1317E and Australian Securities and Investment
Commissionv Flugge [2008] VSC 473, at 556-8).

21
 (b) occupied the office held by, and had the same responsibilities within the

corporation as, the director or officer.

As see, such duty of care and skills owed by a director, including both executive

directors and non-executive directors. However, the nature of the duty will not necessarily be

the same. There is a distinction in terms of treatment of executive directors and non-executive

directors, because non-executive directors are not bound to give their continuous attention to

the affairs of the corporation.50 To begin with, the traditional approach to directors’ duties of

skill, care and diligence was seriously challenged in the AWA litigation in the early 1990s,51

which demonstrated a remarkable and unconventional new approach in this area of the law. 52

The majority in the Court of Appeal of New South Wales (Clarke and Sheller JJA) were of the

opinion that the subjective standard used in the older cases were out-dated and, more

significantly, that directors’ liability for breach of the duty of care could be founded in the

common law tort of negligence.53 In the view of the majority54:

“We are of the opinion that a director owes to the company a duty to take

reasonable care in the performance of the office. As the law of negligence has

developed, no satisfactory policy ground survives for excluding directors from the

general requirement that they exercise reasonable care in the performance of their

office. A director’s fiduciary obligations do not preclude the common law duty of

care.”

50
See AWA Ltd v Daniels (1992) 7 ACSC 395 (Rogers CJ Comm Div). Approved in Vrisakis v Australian Securities
Commission (1993) 9 WAR 390, 452 (Ipp J); Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA
17, [451] (Murphy JA).
51
AWA Ltd v Daniels and Ors (1992) 10 ACLC 933 (Rogers CJ (Comm D)) and Daniels and Ors v Anderson and
Ors(1995)16 ACSR 607; (1995) 13 ACLC 614 (New South Wales Court of Appeal).
52
See Professor Farrar’s illuminating analysis of the AWA case in Farrar, Directors’ Duties of Care, (2011) SAcLJ
745 at pp 752-753.
53
Daniels and Ors v Anderson and O[1995] 16 ACSR 607 at p 656.
54
Ibid at p 668.

22
 The director’s duties of care and skills could vary depending on the nature of the

company and also the nature of the business activity. The duties have been described as being

'of an intermittent nature to be performed at periodic board meetings, and at meetings of any

committee of the board upon which the director happens to be placed.55

It can be seen that Section 180(1) Australian’s Corporations Act 2001 lays down a

standard of care and diligence which is not based on subjective elements, unlike the legal

position in the earlier days in England. The Australian’s approach is measured against what a

“reasonable person” would exercise if he or she occupied the actual position held by the

director and had the same responsibilities associated with that position in “the corporation’s

circumstances”.56 There was a chance to revisit to the AWA Litigation in the year of 2012, a

case which considered the liability of non-executive directors for breach of their duties of care

and skill, it was the case of Australian Securities and Investments Commission v Hellicar.57 In

this case, James Hardie Industries, and its subsidiaries was conducting the business of

manufacturing and seeling asbestos products. James Hardie Industries then sent an

announcement to the Australian Stock Exchange, informing that a Medical Research and

Compensation Foundation established by James Hardie Industries was fully funded. In fact, it

was not true. Therefore, claims were brought by the Australian Securities and Investments.

Commission against both the executive directors and non-executive directors of James Hardie

Industries Ltd. On the part of the non-executive directors, the claims were based on the fact

that they granted approval to the scheme proposed by the executive directors. The New South

Wales Court of Appeal held that the Australian Securities and Investment Commission failed

55
AWA Ltd v Daniels and Ors (1992) 7 ACSC 759, 867.
56
Austin and Ramsey, Ford’s Principles of Corporation Law (13thed, Australia: Butterworths, 2007) pp 389-395
contains useful case law examples and illustrations where s 180(1) and the corresponding provisions that it
replaced were applied
57
[2012] HCA 17.

23
to prove that such a scheme was tabled and approved at the board meeting58 However, on

appeal to the High Court, the conclusion found by the Court of Appeal was overturned and the

directors were held liable. In connection to this case, there was a separate appeal brought by

one Mr. Shafron, who was the general counsel and company secretary of James Hardie. He

failed, the High Court upheld the New South Wales Court of Appeal’s decision that Mr.

Shafron was liable for breach of his statutory duty of care, skills and diligence imposed on him

by Section 180 of the Corporations Act 2001, it was further held that the duty of care and

diligence that it includes whatever responsibilities the officer concerned had within the

corporation, regardless of how or why those responsibilities came to be imposed on that

officer.59 As seen in the widely worded Section 180 of the Corporations Act 2001, it did not

actually mention the standard of care and skills owed by a director,60and it may be argued that

the legal position is unclear.61

Moreover, there are several arguments in Australia that the director’s duties of care,

skills and diligence are actually a form of fiduciary duties, 62 another academic also discussed

such a proposition in his paper. However, as far as the writer is concerned, the director’s duties

of care still remains separate from fiduciary duties because the writer believes that it is

unjustifiable to impose a stricter duties to directors in the form of fiduciary duties, but in the

name of duty of care.

58
[2010] NSWCA 331.
59
Shafron v Australian Securities and Investments Commission [2012] HCA 18 [18].
60
It will be seen that in 2006, the United Kingdom adopted a dual objective-subjective standard for directors’
duty of care, skill and diligence in s 174 of the Companies Act 2006. Malaysia followed suit in 2007 by inserting
into its Companies Act 1965 a similar provision (s 132(1A)) on this subject. Both provisions deal expressly with
a director’s duty of care, skill and diligence.
61
See Austin and Ramsey, Ford’s Principles of Corporation Law, 13th edition, 2007, Australia: Butterworths, at p
389.
62
A J D Heydon, ‘Are the Duties of Company Directors to Exercise Care and Skill Fiduciary?’ in
S Degeling and J Edelman (eds), 2005, Equity in Commercial Law at 235; see also James Edelman (2012).

24
3.3 Malaysian law on director’s duties of care, skills and diligence

Previously under the CA 1965, director duties was founded on common law cases. Even

though after the codification in the CA 1965, which an overview can be seen in the following

Sections 132(1), 132(1A), 132(1B) and 132(1C). Nevertheless, the Malaysian provision is very

similar to the position to the English’s CA 2006, similar wordings in contained in Section

132(1A) of the CA 1965 as compared to Section 174 of the CA 2006. For the ease of reference,

Section 132 (1A) is reproduced below:

Companies Act, 1965, Section 132 (1A)

A director of a company shall exercise reasonable care, skill and diligence with—

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

director having the same responsibilities; and

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

However, one clear distinction between the two statutes is that the Malaysian CA 2006,

unlike the English’s CA 2006, did not provide the applicability and relevancy of common law

cases. Due to Section 170 of the CA 2006, the English courts have an obligation to look into

common law cases and take into consideration for the purpose of interpretation. In light of

Section 132(1A) CA 1965, now the dual test as in s174 of the UK CA 2006 apply in Malaysia

as well. This has been confirmed in the case of Balda Solutions Malaysia Sdn Bhd v Foo Wan

Seng63, whereby the Court held that this section imposes a more stringent objective standard

and as a result, it is no longer possible for directors to rely on honestly or good faith to escape

liability from breach of directors’ duty of care, skills and diligence.

63
[2013] 1 LNS 247. In this case, the CEO approved quotations which were below actual costs of production
and caused the company to suffer losses. The court took into consideration that the director has 17 years of
experience and knowledge and held that the directors had breached the duty of care, skills and diligences.

25
 When there is breach of duty of care, skills and diligence by a directors, two actions

may be brought namely, a derivative action which is action by a director or shareholder on

behalf of a corporation against a director or board for breach of duty and Corporation is named

as a defendant, but the remedy goes to the corporation, not an individual; and secondly, a direct

action which is an Action brought by a shareholder against the corporation or a purchaser or

seller and remedy will go to the individual. 64 Seemingly, as a result of the codification of the

dual objective test and subjective test in Section 132 of the CA 1965, it eradicates the

ambiguities and uncertainties left behind by the case of Re City Fire Equitable Co Ltd. On the

other hand, it also imposes a higher standard of care and skills on the directors in Malaysia, as

opposed to the subjective test. Being honest alone or the mere reason of inexperience may not

suffice for relief of liability, the directors require to exercise due diligence and shall take

adequate steps to ensure that they do not breach their duty of care, skills and diligence owed

by them to their companies.

3.4 Business Judgment Rule

As discussed, a director owes a duty of care, skills and diligence to his company and he

is required to discharge his duties and functions in accordance to the standard reasonably

expected from him for holding as a director, if he possess better and higher qualifications, then

he may be judged based on such knowledge and experience that he possesses in enhancing the

business of the company. However, mistakes are unavoidable especially in those business that

involves high risks, for every business opportunities come with certain risks attached to it. As

discussed before, in the past, if a director made a mistakes or error in his judgment but so long

64
Chan Chong Choon Ben, Koh Tong Ngee Philip and SW Ling Peter, Chan and Koh on Malaysian Company Law:
Principles and Practice, 2nd edition, 2006; see also Paul I. Davies and Sarah Worthington, Gower and Davies –
Principles of Modern Company Law, 9th edition, 2012, Sweet and Maxwell.

26
as he is honest and acted in bona fide, then he is relieved of his liability. 65 As the law develops,

an honest error in business judgment would not suffice in the modern context, it must be shown

that certain criteria is met for the relief of liability. In Malaysia, the ‘business judgment rule’

is contained under Section 132(1B) of the CA 1965, which was inserted after the recent

amendments vide A1299. In a nutshell, to escape liability, however, honestly may not be

sufficient, unless the ‘business judgment rule’ applies. As such, it is important to examine

Section 132 (1B) of the CA 1965, which provides that:

Section 132 (1B) of the CA 1965:

“(1B) A director who makes a business judgment is deemed to meet the

requirements of the duty under subsection (1A) and the equivalent duties under

the common law and in equity if director-

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

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

judgment;

(c) is informed about the subject matter of the business judgment to the extent the

director reasonably believes to be appropriate under the

circumstances; and

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

company.”

Generally it can be used to insulate directors from liability for their business decisions.

However, this section does not apply to interested or self-dealing transactions unless the

decision is made by directors who are disinterested after full and complete disclosure. If all

directors are interested, then board can appoint a committee or go to shareholders. Furthermore,

65
See the case of Re City Equitable Fire Insurance Co Ltd.

27
based on this, the directors must make a conscious judgment or decision or else the ‘business

judgment rule’ would not apply.66 In order to offer certain protection to directors, one of the

most important rule is that of the ‘business judgment rule’. The rule would offer a protection to

directors which made a genuine business decision of which prior informed consent has been

obtained and he has diligently and honestly carried out his duties for the best interest of his

company. Perhaps it is well explained by Laguodo Giraldo, 67 whereby he articulates two

reasons for the need to have a ‘business judgment rule’. Firstly, he argues that the judicial

system is unable to review whether a business decision is correct or not in the business context.

Secondly, he argues that there is a lack of an objective standard to determine the correctness of

a corporate decision. Perhaps he was right, as shown in the recent Malaysian case of Mega

Education Systems Sdn Bhd & Anor v Ozone Glass Design Sdn Bhd & Ors 68, whereby the High

Court refused to interfere with the director’s decision making because the Court adopted the

approach that ‘they should know best’. As Dr. Sujata Balan69 has pointed out, the court cannot

be expected to provide an exit mechanism for them when an investment turns sour because the

court do not want to substitute their views on the director’s day-to-day decision making.

In Australia, the ‘business judgment rule’ has been adopted in the statutory framework

much earlier than in Malaysia. The relevant provision is contained in Section 180(2) of the

Corporations Act 2001, which reads as:

Section 180(2) of the Corporations Act 2001:

66
See also Rashidah and Muhammad Rizal.
67
Laguado Giraldo,, Factors Governing the Application of the Business Judgment Rule: An Empirical Study of
the US, UK, Australia and the EU, 2006, Vniversitas. Bogotá (Colombia).
68
[2011] 6 MLJ 644.
69
Sujata Balan, Reform of the Law Relating to Directors’ Duties in Malaysia, 2008, AFBE Conference 2008, 3-4
December 2008, Kuala Lumpur, available at
<http://www.segi.edu.my/onlinereview/chapters/vol14_srl_art1.pdf>.

28
 A director or other officer of a corporation who makes a business judgment

is taken to meet the requirements of subsection (1), and their equivalent

duties at common law and in equity, in respect of the judgment if they:

(a) make the judgment in good faith for a proper purpose; and

(b) do not have a material personal interest in the subject matter of the

judgment; and

(c) inform themselves about the subject matter of the judgment to the extent

they reasonably believe to be appropriate; and

(d) rationally believe that the judgment is in the best interests of the

corporation.

The director’s or officer’s belief that the judgment is in the best interests of the

corporation is a rational one unless the belief is one that no reasonable person

in their position would hold.

As seen, the Malaysia’s statutory form of the ‘business judgment rule’ is very similar

in nature to the Australian’s ‘business judgment rule’. However, it shall be noted that there is

a clear difference as pointed out by the writer before, that the ‘business judgment rule’ in

Australia applies to both the officers and also directors of a company, whereas the Malaysian’s

provision only applies to the directors.70

Focus is shifted to the position in the United Kingdom, to begin with, there is no

‘business judgment rule’ under the statutory regime in the United Kingdom. However, it has

once been considered by the United Kingdom’s Company Law Reform Steering Group in its

consultative document, Director and Auditor Liability: A Consultative Document (2003),

70
See Ruzita Azmi and Adilah Abdul Razak, Business Judgment Rule: A new defence for business and
management decisions by company directors? 2012, 2nd International Conference on Management, Langkawi
Kedah, available at
<http://www.internationalconference.com.my/proceeding/icm2012_proceeding/061_115_2ndICM2012_Proc
eeding_PG0816_0825.pdf> .

29
which subsequently decided not to adopt the ‘business judgment rule’ because there is no

necessity to do so and there is fear that it may give rise to several other complex issues.

However, the Company Law Reform Steering Group opined that it is up to the courts to develop

a defence based on ‘business judgment rule’ through case laws. 71 However, a change of view

is seen in this Consultative Paper as compared to the earlier Consultative Paper issued by the

Law Commissions of England and Wales and Scottish Law Commission.72 In the Consultative

Paper (1999), the UK and the Scottish Law Commission at paragraph 5.24 states that there is

no need for a statutory ‘business judgment rule’ because the courts do not review the

commercial decisions made by directors in good faith. One example can be seen in the case of

Devlin v Slough Estates Ltd,73 where by Dillon J held that ‘the court does not interfere with the

business judgment of directors in the absence of allegations of mala fides’.74 Although there is

a similar position in Malaysia, whereby the courts also do not review the commercial decisions

made by a director as seen in the case of Eng Man Hin @ Ng Mun Heng v King’s Confectionery

Sdn Bhd75 and the case of Re Kong Thai Sawmill (Miri) Sdn Bhd,76 the codification of ‘business

judgment rule’ into the CA 1965 would be a good move in the writer’s opinion because it can

strike a balance between justifiable risk-taking in business decision and mere negligence.

71
Department of Trade and Industry, Company Law: Director and Auditor Liability – A Consultative Document,
December 2003, available at <http://www.treasurers.org/node/3264> .
72
Corporate Law Reform Committee Consultative Document 5 entitled ‘Clarifying and Reformulating the
Directors’ Role and Duties’, 1999.
73
[1983] BCLC 497, 504.
74
See also the Privy Council’s decision in Howard Smith Ltd v Ampol Ltd [1974] AC 821.
75
[2006] 4 MLJ 421.
76
[1978] 2 MLJ 227.

30
Chapter 4:

4.6 Duty of Care, Skills and Diligence in the context of Bank Governance Structure

In relation to the directors’ duty of care, skills and diligence, bank directors may be

liable in several occasions. For example, in the case of United Kingdom, as noted by Professor

Anu Arora that in light of recent financial failings, directors are liable under s174 CA 2006

because of several reasons; that the senior management in Banks were posing ‘medium or high’

risks to maintain market confidence; directors being too short-termism and failed to take into

considerations advice and warnings and also failings on the part of non-executive directors who

failed to play their role effectively in terms of monitoring the performance of executive

directors to do a check and balance, especially in relation to the review of bonuses and

remuneration scheme; executive directors were also liable as they were responsible for

appointing non-executive directors as they did not properly choose the candidates. 77

4.7 Additional Regulations for Directors of Financial Institutions and Bank

Bank failures are ordinarily viewed as having a greater impact on the economy and

financial stability, specifically on consumer confidence than other types of business failure.

This is due to the fear that such lack of confidence may have a domino effect across the banking

sector and also across the wider economy generally, or a group of, possibly, key-players in the

economy. 78 It is because banks are closely interconnected amongst others; in the way they

undertake business that there is a real danger of systemic failure. The underlying nature of

77
Anu Arora, The corporate governance failings in financial institutions and directors’ legal liability, 2011,
Comp. Law. 2011, 32(1), 3-18; see also House of Commons Treasury Committee, the run on the Rock, January
2008, at <http://www.parliament.the-stationery-office.com/pa/cm200708/cmselect/56/56ipdf>.
78
Braithwaite T., Macintosh J., Simonn B., and Reed J., GM to file for Chapter 11 protection, May 31 2009,
Finacial Times, http://www.ft.com/cms/s/0/e75423ac-4df8-11de-a0a1-00144feabdc0.html#axzz1eiNTMkfu;

31
banking business necessitates that banks are interdependent; thus they regularly place deposits

with each other, lend and borrow from and to each other, and their need to settle accounts with

each other for third-party transfers makes them more susceptible to influences across the

sector.79 The failure of one bank can transmit fear amongst a chain of banks and the failure of,

even an, individual bank introduces the possibility of a system-wide failure. Further, the

cumulative effect of bank failure may have a ripple effect because customer deposits form a

large part of the money supply and a significant portion of bank assets. 80 Such uncertainty will

affect the level of customer spending as depositors either lose savings or fear banking or

economic instability. The collapse of Northern Rock and its subsequent nationalization,

together with the sale of Bradford and Bingley to the Spanish Santander Group and the merger

of HBOS Group with Lloyds were some of the measures the Brown government was forced

into to prevent a banking collapse, during 2007-08.81 However, events in the United Kingdom

were paralleled by events in the global markets with France, Germany, Switzerland and the

USA announcing banking bad debt exposure. 82 The attempts of any single government to

stabilize their domestic banking sector were hampered by events internationally 83 and the

United Kingdom Government was forced into announcing a massive rescue package of the

79
Kaufman, Bank Failure, Systemic Risk, and Bank Regulation, The Cato Journal, Vol. 16 No 1,
http://www.cato.org/pubs/journal/cj16n1-2.html
80
Assets held by UK banks totalled £7,616bn at the end of 2009, down 4% on the previous year. Foreign banks
held 51% of the total. As concerns about solvency eased, UK banks’ equity prices rose by 40% between March
2009 and the end of the year, recouping much of the losses of the previous nine months, International Banking
Services London, Banking 2010, February 2010,
http://www.thecityuk.com/media/2372/IFSL_Banking_2010.pdf
81
Belt-and-braces bid to banish N Rock nightmare, The Financial Times, 7 October 2008,
http://www.ft.com/cms/s/d77c7f54-47bb-11dd-93ca-000077b07658,dwp_uuid=74d73); Bradford & Bingley’s
final moments, 28 September 2008, http://business.timesonline.co.uk/to1/business/industry, and Santander
buys Bradford & Bingley’s branches, the Telegraph, 13 February 2009,
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3100146
82
BBC News, Timeline: Credit Crunch to Downturn, 29 January 2009,
http://news.bbc.co.uk/1/hi/business/7521250.stm
83
The Turner Review: A regulatory response to the global financial crisis, March 2009,
http://www.fsa.gov.uk/pubs/other/turner_review.pdf concluded that what made the 2007-09 crisis was the
global nature of the financial crisis

32
financial sector. 84 Successive governments, in the UK have intervened to safeguard the

financial sector through primary legislation, quasi-government bodies (e.g., the FSA) and soft

laws (voluntary codes of practice).

Whereas Malaysia was affected by financial crisis in the July 1997, a restructuring plan

of the financial system.85 Bank regulation refers to rules that banks are required to comply

with86 whilst supervision refers to the monitoring process undertaken by regulators. Apart

from the initial authorisation requirements that must be complied with, prudential supervision

requires continuing compliance with the statutory requirements. Accordingly 87 two types of

regulation and supervision can be identified namely:

i. Prudential Regulation which focuses on the solvency, safety and soundness of

financial institutions;

As mentioned, prudential regulation focuses on the solvency, safety and soundness of

financial institution, including banks. As Mishkin noted, 88 there are altogether nine (9)

features of prudential regulations which are, inter alia, restrictions on asset holdings and

activities; separation of the banking and other financial service industries; restrictions on

competition; capital requirements; risk-based deposit insurance premia; disclosure

requirements; bank chartering; bank examination; and a supervisory versus regulatory

84
Grice, £850bn: Official Cost of the Bank Bailout, The Independent, 4 December 2009,
http://www.independent.co.uk/news/uk/politics/163850bn-official-cost-of-the-bank-bailout-1833830.html. A
similar rescue package of the US banking sector was announced with the Obama government approving a
$700billion Troubled Asset Relief Programme, Somerville, US bank bailout estimate cut by $200 billion, Reuters,
7 December 2009, http://www.reuters.com/article/2009/12/07/us-economy-treasury-tarp-
idUSTRE5B60KF20091207
85
Zaherawati Zakaria, Zaliha Hj. Hussin, Nazni Noordin & Mohd Zoolhilmie Mohamed Sawal / Voice of
Academia Vol.5 No.1 2010
86
The financial Services and markets Act 2000 not only implemented a single unified regulator for the financial
services sector but also implemented minimum standards of prudential regulation across the sector
87
Llewellyn, The Economic Rationale for Financial Regulation, Financial Services Authority Occasional Paper, 1
April 1999, 10-11, http://www.fsa.gov.uk/pubs/occpapers/OP01.pdf
88
Mishkin, F.S., “Prudential Supervision. Why Is It Important and What Are the Issues?”, in Mishkin, F.S. (ed.),
Prudential Supervision. What Works and What Doesn't, 2001, NBER Conference Report, The University of
Chicago Press: Chicago.

33
 approach.89 For example, by imposing a high minimum capital requirements for banks would

help to soothe high-risk business activities. This is because, the writer opines that from the

economic perspective, once the owners of banks have more capitals at risk, they have the

incentives to ensure proper management of the bank. Another example is that by enhancing

the licensing requirement and entry requirement into the banking industry would ensure that

only fit and proper persons are allowed to own and manage banks. This shall be measured by

the background of the applicants, for example, their financial resources, experience, education

and etc.

ii. Conduct of business regulation that focuses on the methods used by financial firms

to conduct business with their customers.

The case for prudential regulation and supervision of financial firms is that consumers

are not well equipped to judge the safety and soundness of financial firms either because they

do not have access to market information or they do not have the skills or expertise to make an

informed judgment. On the other hand, conduct of business regulation helps to ensure the

establishment of rules and guidelines about the proper way of dealing with customers, but fails

to focus on institutional regulation. The need for banks to be regulated on the basis of

prudential supervision stems from the need to prevent systemic bank failure that may result

from the fact that banks work on small asset reserves which makes them susceptible to failure,

and the fact that the inter-bank lending market is made up of a network of unsecured creditor

and debtor relationships means that the collapse of a single bank can have a domino effect and

lead to the collapse of other banks.90

89
See also Claire Giordano, Prudential Regulation and Supervision Instruments and Aims: A General
Framework, available at
<http://www.bancaditalia.it/studiricerche/convegni/atti/Financial_Market_Regulation/background_paper/gio
rdano.pdf>.
90
The 2008-09 credit crisis was in large due to a loss of confidence within the banking sector and the
unwillingness of the banks to lend to each other, see also: Freixos, Curzio, Hoggarth and Soussa, Lender of Last

34
 As discussed before, the CA 1965 provides for the minimum requirement for the

position of a director, for example s124 which lays down the qualification of directors; s125

which restricts bankrupt to become a director; s129 which set the age limit of a director and

also s130 which restrain certain persons from managing companies. As seen, these are the

minimum requirements set out in the CA 1965 which is applicable to both banks and also non-

financial institutions. On top of these, banks are strongly and tightly regulated as compared to

other non-financial corporations, this will be discussed below.

4.8 Governance, regulatory and supervisory framework for financial institutions or

bank in the United Kingdom

In the United Kingdom, the major piece of legislation is the recently in force Financial

Services Act 2012 (hereinafter referred to as “FSA 2012”) which came into force since 1st

April 2013, and substantially amended the Financial Services and Markets Act 2000

(hereinafter referred to as “FSMA 2000”), the Bank of England Act 1998, the Banking Act

2009 and other legislations. This is a new financial regulation framework which will be

operative in the UK. Under the old regime, the Financial Services Authority (hereinafter

referred to as “FSA”) was one of the independent bodies which works together with the Bank

of England in regulating Bank governance, it is now being replaced by the Financial Conduct

Authority (FCA), which works together with the Prudential Regulation Authority (hereinafter

referred to as “PRA”) for macro-prudential regulation and to protect stability of the financial

system. Meanwhile, the Bank of England will have overall responsibility for financial stability;

Resort: A Review of the Literature, http://www.bankofengland.co.uk/publications/fsr/1999/fsr07art6.pdf;

Goodhart and Illing (eds), Contagion, and the Lender of Last Resort: A Reade, Financial Crisis, Oxford University
Press, 2002

35
and a new Financial Policy Committee (hereinafter referred to as “FPC”) of the Bank of

England is being created.

As, mentioned, the functions of the FCA which replaced FSA as the new conduct of

business regulator is charged with the duty to oversee the market and to ensure that the markets

function and perform well, it also cover consumer protection, integrity of the financial system

and to promote effective competition.91 On the other hand, the PRA is a very important unit

whereby it is responsible for promoting safety and soundness of financial firms including

insurance firms, there are three characteristics in terms of its approach in regulation and

supervision, which are the judgment-based approach; the forward-looking approach and

focused approach. 92 FPC, on the other hand will be responsible for macro-prudential

regulations and to monitor the stability of the UK financial system.

The FSA 2012 implements significant changes to the UK financial regulation

framework by amending the relevant provisions of the FSMA 2000, inter alia, restructure and

broaden the law relating to market manipulation and misleading statements and impressions;

extend the scope of the special resolution regime under the Banking Act 2009 and create a new

category of regulated activity in relation to benchmarks (e.g. LIBOR) and credit ratings. 93

Basically, the PRA is a subsidiary of the Bank of England which will be responsible for the

prudential regulation of deposit takers, insurers and major investment firms. The FCA will

91
Gibson Dunn, Financial Services Act 2012: A New UK Financial Regulatory Framework – All Change? 4 March
2013, available at <http://www.gibsondunn.com/publications/Documents/FinancialServicesAct-2012-
NewUKFinancialRegulatoryFramework.pdf >; see also The Chartered Insurance Institute, the UK’s New
Financial Services Regulatory Landscape, April 2013, available at
<http://www.cii.co.uk/media/4372607/regulatory_landscape_update_april_2013_vfonline.pdf>.
92
For detailed discussion, please see Allen & Overy, The Prudential Regulation Authority – An Overview, 1 April
2013, available at
<http://www.allenovery.com/SiteCollectionDocuments/The%20Prudential%20Regulation%20Authority%20Ap
ril%202013.pdf >.
93
Clifford Chance briefing notes, A brief overview of the Financial Services Act 2012 and the new UK financial
regulatory framework, March 2013,
<http://www.cliffordchance.com/publicationviews/publications/2013/03/a_brief_overviewofthefinancialservi
cesac.html>.

36
conduct regulation and also for regulation of non-PRA firms (which replaces FSA as the

authority under the old regime). The FPC will be responsible in assisting the Bank of England

to achieve financial stability objective and to give recommendation and direction to FCA and

PRA to address systemic risk. The Bank of England will have overall responsibility for

financial stability and act as an ultimate supervisor. 94

*Source: Clifford Chance Briefing Note95

94
Morrison and Foerster, News Bulletin – the UK’s Financial Services Act 2012: Some Key Features, April 2013,
available from < http://www.mofo.com/files/Uploads/Images/130415-The-UKs-Financial-Services-Act-
2012.pdf>.
95
Ibid.
http://www.cliffordchance.com/publicationviews/publications/2013/03/a_brief_overviewofthefinancialservic
esac.html

37
 The Prudential Regulation of Banks in the United Kingdom

In the United Kingdom, since the Banking Act 1979 the regulation of banks has been

based on the assumption that Parliament will establish minimum acceptable standards of

conduct enforced and monitored through an authorization and permission regime. Collectively,

the supervision of the banking sector is conducted on the basis of prudential supervision under

the Financial Services and Market Act 2000 (FSMA 2000), as amended, and the Codifying EU

Banking Directive adds a definitional platform to ensure common terminology and implement

a minimum set of banking regulatory standards.

The Threshold Conditions:

Taking the United Kingdom’s position, the permission requirement under the FSMA

prior to undertaking authorized activities requires the applicant to satisfy certain ‘threshold

conditions’96 on a continuous basis.97 The FSA has broad powers that are intended to have

regard to its statutory objectives whilst ensuring that it uses its resources efficiently to mitigate

the risks, which ensue in the financial services sector.98

The FSMA 2000 99 provides for the minimum criteria in order for the grant of

permission and prior to carrying out the regulated activities. These minimum ‘threshold

conditions,’ are laid down in Schedule 6 of the FSMA 2000 and the FSA must ensure that those

seeking authorisation can satisfy them at both the initial authorisation stage and then

continuously. The threshold conditions are broad, the first two conditions are absolute the other

three conditions grant the FSA a wide discretion, although these discretionary requirements are

96
Part 4A and Schedule 6 of the Financial Services Act 2012;Financial Services Bill 2011, Part 2 clause 7 amends
sections 41 FSMA 2000.
97
FSA, FSA Handbook, Release 041, April 2005, AUTH 2: Authorization and regulated Section 3.8.3,
http://www.fsa.gov.uk/pubs/hb-releases/rel41/rel41auth.pdf
98
Supervision 1.3G available at http://fsahandbook.info/FSA/html/handbook/SUP
99
Section 41 (2) FSMA 2000, See also FSA, FSA Handbook, Release 041, April 2005, AUTH 2: Authorization and
regulated Section 3.8.1, http://www.fsa.gov.uk/pubs/hb-releases/rel41/rel41auth.pdf

38
further elaborated in the Principles for Businesses, 100 Statements of Principles for Approved

Persons101 and the Interim Prudential sourcebook for Banks (IPSB)). For the purpose of this

paper, three threshold conditions will be discussed, which are local of offices, close links and

suitability of persons.

(i) Local of Offices:

This requirement deals with a problem that became particularly apparent following the

collapse of BCCI, which avoided effective supervision because whilst incorporated in

Luxembourg, the bank’s management was based in London. The FSMA 2000 102 requires that

the head-office and registered office of an authorized entity are both located in the UK, or

where an entity not having a registered office, for example a partnership, has its head office in

the UK must carry on business in the UK. Neither the Post-BCCI Directive, nor the FSMA

define what is meant by ‘head-office,’ but the FSA has given guidance 103 and its key focus is

to determine where the ‘central management and control’ of the day-to-day activities is located.

This requirement complies with the Post-BCCI Directive.104

(ii) Close Links:

Again this threshold deals with another Post-BCCI Directive 105 and provides that

authorized persons must disclose links with other persons who may prevent the FSA from

effectively supervising the applicant once authorized. The FSA can insist on the disclosure of

any information about ‘close links’ even where that link is with an exempted person or entity. 106

100
FSA, Principles for Businesses, http://fsahandbook.info/FSA/html/handbook/PRIN/1
101
FSA, Statements of principles and Code of Practice for Approved Persons
102
Sch. 6 Para. 2 FSMA 2000, See FSA, FSA Handbook, Release 041, April 2005, AUTH 2: Authorization and
regulated Section 3.8.2, http://www.fsa.gov.uk/pubs/hb-releases/rel41/rel41auth.pdf
103
See FSA, FSA Handbook, Release 041, April 2005, AUTH 2: Authorization and regulated Section 3.8.2,
http://www.fsa.gov.uk/pubs/hb-releases/rel41/rel41auth.pdf
104
Consolidated Banking Directive 2000/12/EC
105
Consolidated Banking Directive 2000/12/EC
106
Sch. 6, Para 3

39
The term ‘close links’ refers to (i) links between parent and subsidiary undertaking, or (ii) an

equivalent degree of control in relation to unincorporated persons, or (iii) the holding or control

of 20 per cent or more of the voting rights or capital of a firm. The lead test for the requirement

of disclosure is whether the ‘close links’ are likely to prevent effective FSA supervision, and

if the person to whom the applicant is linked is an entity regulated outside the EEA, then the

foreign regulation should not impede effective FSA supervision of the applicant. The close

links requirement will be assessed in the context of links within the banking group 107 and the

FSA will consider whether the structure and geographical spread of the group might impede

adequate and reliable flow of information to the FSA, whether companies within the group

have different accounting dates and do not share common auditors.108

(iii) Suitability of Persons:

The final threshold imposes the ‘fit and proper’ purpose requirement must be satisfied,

inter alia, by a person’s ‘connection’ with any other person and hence introduces an overlap

with Threshold Conditions 3 and 4. However, a number of considerations under two main

headings will be focus on:

i. Conduct of business with integrity and in compliance with proper standards; and

ii. Competent and prudent management and exercise of due skill, care and diligence.

This provides that it will focus on key issues such as the installation of compliance

procedures for a firm’s ‘approved persons’ to be made aware of the regulatory requirements

applying to them; whether a firm demonstrates readiness to comply with the regulatory

requirements; whether there are arrangements for proper systems of internal control to comply

with regulatory standards and requirements to be put in place; whether reasonable care has

107
FSA, handbook, COND. 2.3, http://www.fsahandbook.info/FSA/html/handbook/COND/2/3
108
FSA Handbook, COND 2.3.3G, http://www.fsahandbook.info/FSA/html/handbook/COND/2/1

40
been taken to ensure that robust information and reporting systems have been developed, tested

and properly installed; and whether an approved entity has made reasonable enquires to ensure

that it will not pose an unreasonable risk to consumers or the financial system in the UK 109

including whether, or not, the approved entity has appointed auditors with sufficient experience

in the areas of business to be undertaken.

4.9 Governance, regulatory and supervisory framework for financial institutions or

bank in Malaysia

Similarly, in Malaysia, Bank Negara Malaysia (“BNM”) is the regulator in relation to

financial institutions; its major role is to provide prudent conduct of monetary policy, to

enhance stability in the financial system and to enhance consumer understanding as well as

market confidence. However, unlike the United Kingdom’s complex regulation framework

which consists of several other bodies such as FCA, FPC, PRA and also the Bank of England,

BNM is the only regulator for the financial industry in Malaysia.

In respect of corporate governance of banks in Malaysia, it was previously governed

under several pieces of legislations such as Banking and Financial Institutions Act 1989

(“BAFIA 1989”) and Insolvency Act 1996 (“IA 1996”). Now, with the introduction of

Financial Services Act 2013 which came into force on 30 th June 2013, BAFIA 1989 has been

repealed, and consolidated the BAFIA 1989, IA 1996, the Payment System Act 2003 (“PA

2003”) and the Exchange Control Act 1953 (“ECA 1953”). The main introductions under the

FSA are that it has shown that there has been increased regulation and also corporate

accountability. Furthermore, the power granted to the BNM under the FSA 2013 includes

power to decide what is appropriate for banks in terms of prudential requirements, such as

capital adequacy, liquidity, and corporate governance and risk management. BNM as the main

109
FSA Handbook, COND 2.5.6G and 2.5.7G http://fsahandbook.info/FSA/html/handbook/COND/2/5

41
regulator has the power to impose several threshold conditions and requirements on banks. For

example, under the FSA 2013, the BNM has final say in relation to the appointment of the

Chairman of the Board of Directors, the Board and Chief Executive Director of a bank, because

all these appointments are subject to the consent of BNM. Furthermore, s55 of the FSA 2013

laid down the requirements for Chief Risk Officer, Chief Financial Officer and Chief

Operations Officer to have the necessary qualifications and without criminal records. This is

seen as a big step to enhance market confidence and consumer protection, and this is crucial in

fighting money laundering. In addition, BNM also has the power to take action against the bank

who appointed individuals who are not fit and proper i.e. do not have the necessary

qualifications for these key roles. If necessary, BNM can exercise the power granted to it under

s162 FSA 2013 to remove the appointed persons if he or she is of inadequate qualifications.

Basically, the regulatory framework for banks in Malaysia can be summarized as

follows: principles and best practices recommended by the Malaysian Code on Corporate

Governance (Revised 2007); BNM Guidelines on Corporate Governance for Licensed

Institutions; the Main Market Listing Requirements of Bursa Malaysia Securities Berhad as
110
well as international best practices. Besides all these, other BNM guidelines and

recommendations include, inter alia, Financial Sector Blueprint 2011-2020, Prudential Limits

and Standards set by BNM, Anti-money laundering and counter financial terrorism guidelines,

Capital Adequacy Guidelines, Insurance and Takaful Guidelines, Capital Adequacy Guidelines,

Business Conduct Guidelines.

110
Liew Chambers, Bursa Listing Requirement, available from
<http://www.liewchambers.com/0020Contents04a(ListingRequirements).htm>; MAICSA website,
<http://www.maicsa.org.my/download/technical/technical_announcements_131223_4.pdf>; Security
Commission, Malaysian Code of Corporate Governance (Revised 2007), available from <
http://www.ecgi.org/codes/documents/cg_code_malaysia_2007_en.pdf>.

42
 These guidelines and regulations are only applicable to banks but not to other non-

financial institutions or in other words, non-bank corporations would not be caught under these

regulatory framework. Non-bank corporations merely need to comply with what is laid down

in the CA 1965 and also other regulations whenever applicable which at the same time applies

to banks. The question is whether these extra and stringent regulations will impose a higher

duty of care, skills and diligence on bank directors as compared to non-bank directors. Another

question is that will these extra regulations just broaden the scope of the directors’ duty, but it

does not particularly pose them to a higher standard of care to be expected from them.

4.10 Should there be a higher standard of care, skills and diligence for directors from

bank?

Under the FSA’s Guidance particularly the requirement laid down under Section 56

FSA 2013, which sets out the functions and duties of board of directors in a financial institution.

For the ease of reference, Section 56 of the FSA 2013 is reproduced below:

Section 56 of the FSA 2013:

(1) The business and affairs of an institution shall be managed under the direction

and oversight of its board of directors, subject to this Act and any other written law

which may be applicable to the institution.

(2) Without limiting the generality of subsection (1), the board of directors shall—

(a) set and oversee the implementation of business and risk objectives and

strategies and in doing so shall have regard to the long term viability of the

institution and reasonable standards of fair dealing;

43
 (b) ensure and oversee the effective design and implementation of sound internal

controls, compliance and risk management systems commensurate with the nature,

scale and complexity of the business and structure of the institution;

(c) oversee the performance of the senior management in managing the business

and affairs of the institution;

(d) ensure that there is a reliable and transparent financial reporting process within

the institution; and

(e) promote timely and effective communications between the institution and the

Bank on matters affecting or that may affect the safety and soundness of the

institution.

(3) In carrying out its functions or duties under this Division, the board of directors

of an institution shall have regard to the interests of depositors or policy owners of

the institution and participants.

It appears that directors from non-banks companies are not bound by this, in which this

section requires the directors from banks to have regards and take into considerations in

discharging their duties and performing their functions, hence a director from a bank has to do

a lot more than what a director from a non-bank corporation is required to do. The writer has

two views in relation to this. One of the writer’s argument is that by having to do more works

or an increased amount of work, it is not equivalent to a higher standard of care, skills and

diligence, it just simply means that the new regulatory framework under the FSA 2013 has just

broaden the scope of duty of a bank director. Another view of the writer is that this section is

worded generally and in fact, is quite similar to Section 172 of the UK’s CA 2006, which is the

director’s duty to promote the success of the company. As seen, the wording under Section 56

44
of the FSA 2013 is intended to be a subjective test. Therefore, at the end, it would not impose

a higher standard of care to the director from banks.

Notwithstanding this, a more direct and relevant provision would be Section 57 of the

FSA 2013 which sets out the duties of directors, it is pertinent to read through Section 57,

which is reproduced below:

Section 57 of the FSA 2013:

(1) A director of an institution shall at all times—

(a) act in good faith in the best interests of the institution;

(b) exercise reasonable care, skill and diligence with—

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

director having the same responsibilities; and

(ii) any additional knowledge, skill and experience which the director has;

(c) only exercise powers conferred on him for the purposes for which such powers

are conferred; and

(d) exercise sound and independent judgment.

(2) Subsection (1) has effect in addition to, and not in derogation of, any written

law or rule of law relating to the duty or liability of a director.

(3) Any director who contravenes paragraph (1)(c) commits an offence and shall,

on conviction, be liable to imprisonment for a term not exceeding eight years or to

a fine not exceeding twenty-five million ringgit or to both.

45
Based on Section 57 of the FSA 2013, a director from a financial institution owes a duty of

care, skills and diligence to the company which is more strictly construed 111 based on Section

57(1)(c) and 57(1)(d) of the FSA 2013, which imposes a restriction in terms of his powers as a

director and also the he has to exercise sound and independent judgment. In the writer’s opinion,

this is stricter in the sense, as discussed, a director may delegates his powers in accordance to

the articles of association of the company to a delegatees and he has to exercise a supervisory

role, Section 57(1)(c) of the FSA 2013 seems to limit this delegation.

Moreover, Secton 57(1)(d) of the FSA 2013 seems to limit the reliance of directors on

their delegatees in discharging their functions as directors of a financial institution as a director

is required to exercise sound and independent judgment. The writer articulates that if a director

delegates his powers to a trusted person who has all the necessary skills, experience and

competence to carry out a certain job, the director can only rely on such information of which

he needs to understand comprehensively to exercise his decision-making power. As such, this

is more rigid than the delegation of powers by a director in a non-bank corporation. Therefore,

the writer believes that as such, there is a higher standard of care owed by a director from a

bank. Notwithstanding this, the writer opines that the ‘business judgment rule’ is not applicable

for directors from bank which fall is under the jurisdiction of FSA 2013. The writer has two

views in relation to this. Firstly, based on the maxim lex specialis derogate legi generali, which

means that a specific rule or a special rule should take precedence over a general rule, there is

no reason for the Parliament to have both similar worded provisions and both are also

applicable to directors from a financial institution. Therefore, FSA 2013 being the specific rule

shall govern directors from financial institution and CA 1965 only applies if ambiguities occur

in FSA 2013, such as the minimum age requirement of a director. Secondly, it will be harsh on

111
The wording of Section 57(1)(b) is similar to Section 132(1A) of the CA 1965.

46
directors if the ‘business judgment rule’ cannot be relied upon and it may hinder the growth of

the financial industry as there is possibilities of reluctance to hold managerial positions such

as director in a financial institution because of little of no protection to them. Nevertheless, it

is submitted therefore, the ‘business judgment rule’ is applicable as well to directors from bank.

However, the requirements for ‘fit and proper’ under Section 60 of the FSA 2013 is

person is high, because minimum criteria relating to probity, personal integrity, reputation,

competency, capability and financial integrity may be imposed. In addition to that, both

Sections 55 and 162 of the FSA 2013 also set out who can actually hold the position of

chairman, director, chief executive officer or senior officer. These additional requirements are

not contained in the CA 1965, and therefore it can be safely concluded that a director from a

bank has higher qualifications than a director from a non-bank corporation. It may be argued

that as such, a higher standard of care is owed by a director from a bank as opposed to a director

from a non-bank, because based on the dual test of Section 132(1A) CA 1965:

i. objective test - what is required of the reasonable director carrying out the particular

functions that they’re responsible for

ii. subjective test – whether, judged by the experience, skill and knowledge that the

individual director has, they’ve fallen below a certain standard in their conduct

Therefore, if a director has higher standard of experience, knowledge and skills; under the first

limb, although he may be relieved of his liability for error in business judgment, there is a

higher chance that he may not escape liabilities under the second limb of the dual test as he

holds higher qualifications.

In addition to that, directors in a bank are also governed by the prudential regulations

and also the BNM guidelines, as seen, such regulatory framework requires directors in a bank

47
to take into considerations of several factors before making a business decision; this is usually

not a concern for non-bank directors. These guidelines include certain requirements for

financial reporting, auditing and risk management which are usually not a concern for non-

bank directors. As a result, a bank director will be required to comply with the express and

implied duties contained within their contract of employment, and also the BNM guidelines

and other prudential requirements which will not only broaden their scope of duty as well as

posing them to a higher standard of skill and care. The question here is that whether by

imposing a higher standard of care, skills and diligence on the part of bank directors are right

and fair. My personal opinion is that banks are entrenched closely to the root of economy and

therefore stricter regulation is necessary to ensure good governance of bank in order to promote

financial stability and market confidence. There is one suggestion by David Travers, he

mentioned that bank directors should be regulated by a professional-model regulation similarly

to other profession such as lawyers and doctors112, because based on his research, he found out

that most directors especially those from public companies would regard themselves as

professional. This is perhaps not workable as the question arises will be who would be the main

regulatory body for regulating bank directors, if it is still the BNM, then the question is there

is no obligation on the part of a director to belong to the BNM, difference can be made to

doctors who have general obligation owed to Malaysian Medical Council.

Furthermore, stricter approach is adopted in the context of bank governance and by

imposing higher standard of care on bank directors will at least make them reluctance to

become short-termism and restrain them from taking risky business decisions. Renee Adams

and Hamid Mehran agreed that corporate governance for bank holding companies is different

from other type of companies due to the regulators are concerned with the effect of governance

112
David Travers, Towards professional-model regulation of directors’ conduct, 2013, Int. J.L.M. 123-140.

48
has on the performance of financial institutions because its performance will have a domino

effect on other industries and the overall economy as a whole, and they said that regulators

have placed additional expectations on banks.113

Chapter 5:

5.1 Conclusion

In conclusion, the director’s duty of care, skills and diligence has undergone several

major developments. However, the writer believes that it is still not enough to make a director

from a bank liable for their erroneous business decision that involves high risks. As such, the

writer articulates that directors from a bank has to exercise a standard of care, skills and

diligence as compared to directors from a non-bank corporation because of two reasons, that

they usually hold higher qualifications, better experience and more competent. Therefore, it is

idealistic that under the dual-test approach, a director would be subjected to a higher standard

of care under the second limb of subjective test. Secondly, BNM guidelines and prudential

regulations specify certain steps and methods to be strictly followed by directors from a

financial institution, including banks, in which a director from non-financial institutions does

not have to take into consideration generally. Nonetheless, being held to a higher standard of

care is justifiable because of the nature of the banking industry as explained above as it may

affect the economy in the nation or even of the world as well. Moreover, the ‘business judgment

rule’ is there to protect the authority of directors in the exercise of their duties made in bona

fide and with due care and diligence. This would also encourage good business governance.

113
Renee Adams and Hamid Mehran, Is Corporate Governance different for Bank Holding Companies,
Economic Policy Review, Vol. 9, No. 1, April 2003

49
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