117 Duties of directors

Duties of directors

Directors have two types of duties, which are fiduciary duties which are civil in nature, and statutory duties which are criminal in nature.

In carrying out their fiduciary duties, a director must do so by:

1. Acting bona fide (in good faith) in the best interests of the company.

2. Exercising his powers for proper purposes.

3. Retaining and exercising discretion in making a decision on behalf of the company.

4. Avoiding conflict of interests.

5. Using care, skill and diligence in discharging of his duties.

 

 

 

 

 

 

 

 

 

 

 

Figure 2.4 The fiduciary duty of a director

 

The meaning of “Acting bona fide”

Directors must act honestly and bona fide (in good faith). The test for acting in good faith is a subjective one. In showing good faith, directors must act in what they consider is in the best interests of the company and not what a court might consider to be those interests.

The directors may still be held to have failed in this duty if they fail to direct their minds to the question of whether a transaction they have entered into on behalf of the company was in the best interests of the company.

 

The meaning of “Proper Purpose”

Directors must exercise their powers for a proper purpose, i.e., for the interest of the company as a whole. The acts or omissions of not exercising powers for a proper purpose can be seen in circumstances where a director would look after his own interest or divert an investment opportunity to a relative. In such breaches, the directors would also have failed to act in good faith.

 

The meaning of “Discretion”

Directors cannot, without the consent of the company, restrain their discretion in relation to the exercise of their powers. They cannot bind themselves to vote in a particular way at future board meetings. This is so even if there is no improper motive or purpose and no personal advantage to the director.

However, this does not mean that the board cannot agree to the company entering into a contract which binds the company to a certain course, even if certain actions in that course will require further board approval. The company remains bound, but
the directors retain the discretion to vote against taking future actions (although that may involve a breach by the company of the contract which the board previously approved).

 

The meaning of “Conflict of Duty and Interest”

While carrying out their fiduciary duties, directors must not put themselves in a position where their interests and duties conflict with the duties that they owe to the company. The law takes the view that good faith must not only be done, but
must be seen to be done. Directors cannot escape liability by asserting that their decision was in fact well founded in situations where it can clearly be seen to be a circumstance of a conflict of interest.

Conflicts of duty and interest can be seen in three sub-categories.

1. Transactions with the company

By definition, where a director enters into a transaction with a company, there is a conflict between the director’s interest (to do well for himself out of the transaction) and his duty to the company (to ensure that the company gets as much as it can out of the transaction). This rule is so strictly enforced that, even where the conflict of interest or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it.

2. Use of corporate property, opportunity, or information

Directors must not, without the informed consent of the company, use for their own profit the company’s assets, opportunities or information.

3. Competing with the company

Directors cannot compete directly with the company without a conflict of interest arising. They should also not act as directors of competing companies, as their duties to each company would then conflict with each other.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 2.5 Director’s conflict of duty and interest

 

Common law duties of care and skill

In common law2, the level of care and skill which has to be demonstrated by a director has been largely understood with reference to the case of Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, where the level of care and skill required was
expressed in purely subjective terms.

For the general principles in Re Equitable Fire Insurance Co Ltd, the court held that:

“a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.”

However, in a more modern approach, the court held that the rule in Re Equitable Fire related only to skill, and not to diligence. With respect to diligence, what was required was:

“such care as an ordinary man might be expected to take on his own behalf.”( in Dorchester Finance Co v Stebbing [1989] BCLC 498)

In determining the level of care and skill which should be demonstrated by a director, the decision of Dorchester Finance is the degree required. This was a dual subjective and objective test.

 

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2 Common law refers to English common law. Principles of Malaysian company law are derived from English common law principles by virtue of the Civil Law Act 1956 (Act 67), provided that these principles are not in conflict with express provisions of the Act or any other written law (Rachagan, Pascoe & Joshi, 2010).

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