Company directors and their duties (Part 2)

Having previously dispensed with the enumeration as to the definition of director duties and to whom they are owed to, we will therefore proceed to enumerate the principles involved. Before we ensue however it is worth mentioning that in Malaysia these largely common law and equity based rules regarding directors duties have been supplimented by statutory provisions introduced by the Companies (Amendment) Act 2007.

1. Duty to act bona fide in the best interests of the company

This duty is the most basic of all duties. What is meant by bona fide and in the best interests of the company is that a director must at all times ensure that his actions are consistent with the well being of the company’s. An example would be found in the case of Re W & M Roith Ltd [1967] 1 WLR 432 a director, Mr Roith, entered into a service contract with his company providing for pension to be given to his wife in the event of his death without taking into consideration as to whether the contract was for the benefit of the company. The object of the contract was considered not to be binding on the company as it did not benefit the company but Mrs Roith.  The statutory expression for this principle obtains in Section 132(1) of the Companies Act  1965.

2. Duty to disclose all material information

This duty is to avoid potential conflict of interest. In Aberdeen Railway Co v Blaikie Bros (1843-1860) All ER Rep 249 for example, the director involved was sitting on the boards of both Aberdeen Railway and Blaikie Bros and failed to disclose this when the two companies contracted with each other. This was found to be a failure to disclose material information. Similarly in Guinness plc v Saunders [1990] 2 AC 663, the company had as its consultant one of its directors, and this was only later realised by the rest of the board, and so was held to be non-disclosure. The duty to disclose finds expression in Section 131 of the Companies Act 1965. Section 132(2) of the Act as amended by the Companies (Amendment) Act 2007 also prohibits generally competing with the company.

3. Duty to avoid conflict of interest

Conflict of interest can be described as one situation whereby one profits by one’s position as a director at the company’s expense. In Cook v Deeks [1916] 1 AC 554 three out of four directors in a railway company diverted  contract in which the company was interested to another company formed by them. The contract was held belonging to the company and the directors were not entitled to expropriate it to make a present to themselves. This duty is so strict it applies even when the company by some reason is incapable of performing the contract, for example, where the offeror dislikes most of the board, but likes one of the directors and offers the contract personally to him, as in the case of Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443. The statutory expression for this rule can be found in Section 131(7B) of the Companies Act 1965 which was added by the Companies (Amendment) Act 2007, which makes voidable all contracts done in conflict of interest at the option of the company involved. The newly added Section 131A also makes it impossible for the interested director to vote on the issue.

4. Duty to retain discretion

As company director, what powers invested within one to do cannot generally be subdelegated. This is not a rule followed too strictly, however, as then the directors would not be capable of taking more important, abstract decisions at the board level as held in Dovey v Cory [1901] AC 477.  In Re Brazilian Rubber Plantations & Estates Ltd [1911] 1 Ch 425 it was held that a director is justified in trusting officers of the company to perform all duties that, having regard to the exigencies of business, may properly be left to such officers. The board of directors is also not prevented from relying on information provided by others in the dispensation of their duties, as stated in Section 132(1C) of the Companies Act 1965.

5. Duty to exercise reasonable care and skill

Lastly in this part of the series we consider the common law contribution to the realm of directors duties, the duty to exercise reasonable care and skill in the performance of one as a company director. This was first laid down by Romer J in the case of Re City Equitable Fire Insurance Co Ltd [1925] Ch 407. Romer J only laid down generally lax standards back then, for example, the standard that a directors skills need not be greater then his skill that may reasonably be epected from a person of his knowledge. I.e. if the director were trained as a lawyer, then the standard of care that would be expected from him would be that of a lawyer. If the director were just a sweeper, it would be a different matter. Romer J also held that there was no need for a director to attend ALL board meetings, provided he makes an effort. However these standards were held too lax. In subsequent cases such as AWA Ltd v Daniels (1992) 7 ACSR 759 and Dorchester Finance Co Ltd & Anor v Stebbing & Ors [1989] BCLC 498 standards were raised much higher.

Having elaborated to some extent what the scope of the principles are involved when company directors dispense their duties, what are the remedies provided in the event of their breach? Stay tuned for this in the next and final part of this essay!