Company directors and their duties (Part 1)

When you think of a company, more often then not wouldn’t you like to be heading such a company, particularly if its a big Malaysian conglomerate, such as Sime Darby? Better yet, what about those American ones, such as Microsoft, Google or Coca-Cola? Yeah, being thee company C.E.O would be an achievement few would dream of refusing if they had the change… or would they?

The truth is, being a C.E.O. or a M.D. (Managing Director as they call it) isn’t as easy as its cut out to be. Its a full time job, like any other, and the money, while rolling in by the millions if its big enough, rarely offsets the amount of work pun in. A company employee has some responsibilities towards his employer, the company, and so does the M.D. being part of which is called the Board of Directors (BoD). Why do they have these responsibilities (which we shall from this point on call “duties”) do you ask? Well, a company is what one calls a legal persona, a legal fiction, if you will. It is an artificial person, created by the law to facilitate the growth of business. Such a point could not be put any clearer than it already is in the landmark case of Salomon v A Salomon & Co Ltd [1897] AC 22. In Malaysia a company is set up persuant to section 14(1) of the Companies Act 1965 when “any two or more persons associate for the purpose of forming a company” or summat like that. Section 14(2) further provides that a company can either be limited by guarentee or by shares, and it is the latter that is most predominant. Companies are “limited” in the sense that creditors who wind-up (dissolve) the company by reason of its inability to pay cannot claim anything beyond what has been paid in capital for the company either via shares or guarantee. This is why many of them exist today, because it makes good business sense to limit liabilities, particularly if one intends to venture into projects with huge undertaking. However, the law doesn’t afford this priveilege free. By virtue of Part V of the Companies Act, directors, being managers of the company, are invested with certain duties of a fiduciary nature, and are liable to account for their breach. Little wonder than Lord Selbourne in Great Eastern Railway v Turner (1872) LR 8 Ch App 149 at p. 152 said that “The directors are the mere trustees or agents of the company, trustees of the company’s money and property, agents in the transactions which they enter into on behalf of the company”.

Really? To whom are these so called “duties” owed to?   

Well, truth be told, duties are primarily owed to shareholders. Basic common sense tells us that this is because shareholders, having contributed their money to the company’s capital, are entitled certain expectations in the way those are kept and spent. However the case of Percival v Wright [1902] 1 Ch 421 tells us that no duty is owed to any single shareholder but rather the company as a whole. When the company is of doubtful insolvency, the interests of the creditors override that of the shareholders, as held in Kinsela v Russell Kinsela Pty Ltd (In Liquidation) (1986) 4 NSWLR 722. 

And what are these duties?

Duties may generally be divided by their origins. Ones laid down by equity include;

1. The duty to act honestly or bona fide in the best interests of the company.

2. The duty to disclose all material information that might affect the company at all material times.

3. The duty to avoid conflict of interest, and,

4. The duty to retain discretion.

A common law contribution to the realm of directors duties is the general duty of directors to exercise reasonable care and skill in the performance of their functions. 

A further elaboration of the principles above will follow in the next Part, so say tuned!