Persons who are qualified to be a company director
No academic qualification is required for a person to qualify as a director of a company.
A person may qualify to be a director of a company as long as he satisfies the following requirements:
1. Must be at least 18 years old.
2. Must not be an undischarged bankrupt.
3. Must not have been convicted of a criminal offence involving fraud or dishonesty.
4. Must not have been imprisoned for an offence under Section132, Section 132A or under Section 303 of the Act.
5. Must consent to act as Director.
Exercise of powers
1. The BoD exercise its powers in board meetings. The meetings are usually conducted with sufficient notice given to all directors of these meetings. The chairman of the meetings must ensure that the required quorum is present before any business may be conducted.
2. If a meeting is held without notice having been given, it may still be valid if all of the directors attend.
3. However, it has to be noted that in common law, the court has held that a failure to give notice may negate resolutions passed at a meeting because the persuasive oratory of a minority of directors might have persuaded the majority to change their minds and vote differently.
4. The powers of the board are vested in the board as a whole. The powers are not vested in the individual director. However, there could be instances where an individual director may still bind the company by his acts that were carried out bona fide and by virtue of his ostensible authority. (Read “Rule in the Turquand’s Case” as can be found in Malaysian Company Law Principles and Practice, second edition by Ben Chan, Philip Koh and Peter Ling, Thomson Sweet & Maxwell Asia, p. 517, or Concise Principles of Company Law in Malaysia, second edition by Shanty Rachagan, Janine Pascoe, Anil Jashi, LexisNexis, p.122. )
5. The board owes a duty to the company to exercise its powers for proper purposes. It shall not use its power to dilute shareholders’ voting power or indulge in an oblique motive in raising capital or demonstrate refusal to register transfer of shares.
| Activity 2.13
|Question to activity 2.13||Suggested answers to activity 2.13|
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  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  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.
Director’s statutory duties
1. A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office as mentioned in Section 132(1).
The Act further states that an officer or agent of a company or officer of the Stock Exchange shall not make improper use of any information acquired by virtue of his position as an officer or agent of the company or officer of the Stock Exchange to gain directly or indirectly an advantage for himself or for any other person or to cause detriment to the company as mentioned in Section 132(2).
Section 132 (3) of the Act states that an officer or agent or officer of the Stock Exchange who commits a breach of this section shall be –
(a) liable to the company for any profit made by him or for any damage suffered by the company as a result of the breach; and
(b) guilty of an offence against this Act.
The penalty for an offence against this section is imprisonment for five years or thirty thousand ringgit.
2. Dividends are payable from profits
Directors must ensure that dividends are paid out from profits only.
No dividends shall be payable to the shareholders of any company except out of profits or pursuant to Section 60 as mentioned in Section 365(1).
Section 365(2) of the Act states that every director or manager of a company who willfully pays or permits to be paid any dividend out of what he knows is not profits except pursuant to Section 60 –
(a) shall without prejudice to any other liability be guilty of an offence against this Act; and
(b) shall also be liable to the creditors of the company for the amount of the debts due by the company to them respectively to the extent by which the dividends so paid have exceeded the profits and that amount may be recovered by the creditors or the liquidator suing on behalf of the creditors.
The penalty for an offence against this section is imprisonment for ten years or two hundred and fifty thousand ringgit or both.
Section 365(3) of the Act states that if the whole amount is recovered from one director or from the manager he may recover contribution against any other person liable who has directed or consented to the payment.
No liability by this section imposed on any person shall on the death of the person extend or pass to his executors or administrators nor shall the estate of any such person after his decease be made liable under this section as mentioned in Section 365(4).
The Act states that “dividend” includes bonus and payment by way of bonus as mentioned in Section 365(5).
Section 135 General duty of directors to make disclosure
A director has a general duty to make disclosure.
Section 135 (1) of the Act states that a director of a company shall give notice in writing to the company –
(a) of such particulars relating to shares, debentures, participatory interests, rights, options and contracts as are necessary for the purposes of compliance by the first-mentioned company with the provisions of Section 134;
(b) of particulars of any change in respect of the particulars referred to in paragraph (a) of which notice has been given to the company including the consideration, if any, received as a result of the event giving rise to the change;
(c) of such events and matters affecting or relating to himself as are necessary for the purposes of compliance by the company with the requirements of this Act; and
(d) if he is a director of a public company or of a subsidiary of a public company on the date he attains or will attain the age of seventy.
The penalty for an offence against this section is imprisonment for three years or fifteen thousand ringgit.
Section 135(2) of the Act provides that a person required to give notice under subsection (1) shall give the notice –
(a) in the case of a notice under paragraph (1)(a) of that subsection, within fourteen days after –
(i) the coming into operation of this section;
(ii) the date on which the director became a director; or
(iii) the date on which the director acquired an interest in the shares, debentures, participatory interests, rights, options or contracts;
(b) in the case of a notice under paragraph (1)(b), within fourteen days after the occurrence of the event giving rise to the change referred to in that paragraph; and
(c) in the case of a notice under paragraph (1)(d) of that subsection, within fourteen days after –
(i) the coming into operation of this section; or
(ii) the date on which the director became a director.
A person required to give notice under subsection (1) of any matters relating to shares or debentures which are listed on the official list of a Stock Exchange as defined in the Securities Industry Act 1983 shall, on the day on which he gives that notice, serve a copy of the notice on the Stock Exchange and the Stock Exchange may publish, in any manner as it may determine, any information contained in that notice as mentioned in Section (2A).
The penalty for an offence against this section is ten thousand ringgit. The default penalty is five hundred ringgit.
Section 135(3) of the Act further states that a company shall within seven days of receiving a notice given under subsection (1) send a copy of the notice to each of the other directors of the company.
The penalty for an offence against this section is ten thousand ringgit. The default penalty is five hundred ringgit.
Section 135(4) in the Act refers to a participatory interest as a reference to an interest within the meaning of Section 84.
In determining, for the purposes of Section 135, whether a person has an interest in a debenture or participatory interest the provisions of Section 6A, save for subsections (1) and (3) of that section, have effect and in applying those provisions a reference to a share shall be read as a reference to a debenture or participatory interest as mentioned in Section 135(5).
Director’s other statutory duties
1. Directors must obtain the approval of shareholders for acquisition or disposal of property of substantial value as in Section 132C.
2. Directors must ensure that proper accounting records are kept and to lay accounts and reports before the company as in Section 167.
3. Directors have a duty to prevent insolvent trading as in Section 303(3).
4. Directors must bear the responsibility if fraudulent trading is proven as in Section 304(1).
5. Directors bear personal responsibility for fraud.
Remedies for breach of duty
The law provides for a range of remedies in the event of a breach by the directors of their duties
The remedies may be as follows:
(a) Injunction. An injunction is an equitable remedy in the form of a court order. The order requires a party to do, or to refrain from doing certain acts. A party that fails to comply with an injunction faces criminal or civil penalties. The offender may have to pay damages or face a merit arrest and possible prison sentences.
(b) Declaration. A declaration ordinarily refers to a judgment of the court or an award of an arbitration tribunal which is a binding adjudication of the rights or other legal relations of the parties which does not provide for or order enforcement.
Where the declaration is made by a court, it is usually referred to as a “declaratory judgement”.
(d) Damages or compensation in law. Damages is an award of money to be paid to a person as compensation for loss or injury or restoration of the company’s property.
(e) Rescission. Rescission is the unwinding of a transaction. This is done to bring the parties, as far as possible, back to the position in which they were in before they entered into a contract (the status quo ante).
(f ) Account of profits. Account of profits is an equitable remedy. It is used in cases of breach of fiduciary duty. It is an action taken against a defendant to recover the profits taken as a result of the breach of duty so as to prevent unjust enrichment.
(g) Summary dismissal. Termination of employment is the end of an employee’s duration with an employer. The decision may be made by the employee, the employer, or mutually agreed upon by both.
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).