Company directors and their duties (Part 3)

What happens when a company director, or directors of a company together, conspire to breach their duties? The answer depends on the course of action you, as a shareholder, especially as a minority shareholder, intend to persue.

If you want a personal remedy, then the answer lies in Section 181 of the Companies Act 1965. Section 181(1)(a) allows the court to provide a remedy to a member where the court finds that the affairs of the company are being conducted or the powers of the directors are being exercised either in an oppressive manner to one of the members including yourself or in disregard of your or another shareholder’s interest. Section 181(1)(b) concerns the actual or proposed act by or on behalf of the company or a resolution, or a proposed resolution, of shareholders, debenture holders or a class of shareholders of the company and allows the courr to provide a remedy to you where the court finds that the proposed act or resolution is either unfairly discriminatory to a shareholder or to debenture holders including yourself or is prejudicial to a shareholder or a class of shareholders or debenture holders, including yourself as well.

As long as you are a shareholder of the company intending to do the aggrieved act and it affects you in your capacity as a shareholder (or even otherwise) you can apply for this remedy, as was held in Re Tong Eng Sdn Bhd [1994] 1 MLJ 451 and Re Chi Liung & Son Ltd [1968] 1 MLJ 97.

Usually when personal remedy is applied for the courts would look for a conduct that is a visible departure from standards of fair dealing or whether the conduct was “burdensome, harsh and wrongful” as said in the case of Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324. In that case a co-operative society diverted the profits of the company to a new department of theirs, after failing to purchase the shares of the petitioners in the company. This was held to be wrongful conduct.

When a court finds that there is merit to your application, the court would have the power to either direct or prohibit the act or omission complained of, and if it involved the increase of shares, the company may be directed to reduce its capital accordingly.

Alternatively, you could petition to wind up the company under the just and equitable ground provided for under Section 218(1)(i) of the Companies Act 1965. However in Ng Eng Hiam and Ng Ke Wei & Ors [1965] 1 MLJ 238 it was said that courts are reluctant to wind up companies that are solvant and have a future merely because some shareholder complains of an oppressive conduct. In such circumstances, using the oppression action is preferable. 

What about when you want to claim on behalf of the company and not yourself? Usually, as per the rule in Foss v Harbottle (1843) 2 Hare 461 only the company itself may sue for any damages claimed, and usually by the articles of association, the power to institute legal proceedings lie with the board of directors. This is known as the “proper plaintiff” rule. However in this kind of circumstance the directors themselves would be the wrongdoers. Thus in Wallersteiner v Moir (No. 2) [1975] 1 QB 373 it was held that this rule would be excepted in such a circumstance, a circumstance where there is fraud on the minority as said in the case of Edwards v Halliwell [1950] 2 All ER 1064. In such a circumstance any damage awarded would be given to the company and not the shareholder, for it is an action by the company against its directors for the breach of their duties. In the past, in accordance with Order 15 rule 12 of the Rules of the High Court 1980, the company would be added as a nominal defendant so that enforcement could be made against the directors, but this has change for the recent Companies (Amendment) Act 2007 has added sections 181A to 181E to the Companies Act 1965. The effect of these sections is that now a minority shareholder may, with leave of the court, bring an action in the name of the company against any wrongful conduct by the company’s board of directors. The court is also now vested with the power to allow the shareholder in question control the conduct of any proceedings for this purpose as well as cancel any ratification of the act or ommission complained of by the company.

This concludes our 3 part series on company directors and their duties. Thanks for reading!

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!

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!

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