CHAPTER 5:

Officers of Company
(Directors)
LAW485 CORPORATE LAW
 CONTENTS:
Directors of Companies:
• Appointment
• Qualification & Disqualification
• Validation & Vacation of office
 Removal
 Powers
 Duties
 Prohibited dealings

Corporate Law
 INTRODUCTION
❑ Since a company is an artificial person created by law, it
may only act or make decisions through natural persons
who are their agents.

❑ The Constitution or MOA & AOA of a company normally

entrusts the business of a company to be managed by a
body of persons called ‘directors’ (agents of the company.)

❑ Whether the act done by the director/s will bind the

company or otherwise depend on the nature and extent
of authority of the director/s.

Corporate Law
Powers of Management of Co.
 Directors and the company are separate entities (Salomon v A. Salomon
Ltd).
 Shareholders establish the company and appoint the board of director
(BOD) to manage the company.
 The power of the BOD is reflected in S. 211 CA 2016 which states that
“the business and affairs of the company shall be managed by, or under
the direction of the Board.”

Corporate Law
 INTRODUCTION
Corporate decisions which binds a co. :
Members in a
General Meeting
(GM)

Board of
Directors (BOD)

Corporate
decisions
Corporate Law
 • S.2 CA 2016 defines a director as: any person
occupying the position of director of a corporation

*
by whatever name called and includes a person in
accordance with those directions or instructions the
majority of directors of a corporation are
accustomed to act and an alternate or substitute
director.
* the meaning of director has been widened to
include, CEO, CFO, COO or any other persons
whatever named who is responsible for the
management of the company.
Corporate Law
 • S.196.(1) The minimum number of directors
(a) in the case of a private company, one director;
or
(b) in the case of a public company, two directors.
(2) A director shall be a natural person who is at
least eighteen years of age, who;
shall ordinarily reside in Malaysia by having a
principal place of residence AND shall not include
an alternate of substitute director.

• S.201: A person appointed as a director must

consent in writing to be a director and declare
that he is not disqualified.
Corporate Law
 Appointment of a Director

 A director may be appointed to hold office

during the incorporation or, appointed
subsequently after the incorporation by
way of ordinary resolution (S.202)

 The board also may at any time appoint

additional director, and he shall hold office
until the next AGM (for public company)
or in accordance to the terms of
appointment (for private company).

Corporate Law
 Disqualification

 S.198 A person shall not hold office as a

director if he
 is an undischarged bankrupt,
 has been convicted of an offence relating
to the promotion, formation or
management of a corporation
 has been convicted of an offence
involving bribery, fraud or dishonesty;
 has been convicted of an offence under Ss.
213, 217, 218, 228 & 539 , even if it
occurred outside Malaysia.
 has been disqualified by the Court under
S.199 – Court’s power to remove a director.
Corporate Law
Disqualification

 S.199 – Court has power to remove a director.–

on an application by the Registrar of Companies (ROC),
the Court will make an order to disqualify any person
from acting or holding office as a director if-
 Within the last five years, the person has been a
director of two or more companies which went into
liquidation resulting from the company being
insolvent due to his conduct as a director which
contributed wholly or partly to the liquidation.
 Due to his contravention of the duties of a director
or
 Due to his habitual contravention of this Act.

Corporate Law
Validation of Acts of Director

 S.204 provides that the acts of directors shall be valid

notwithstanding any defect that may afterwards be
discovered in his appointment or qualification.
This is to protect innocent third parties who have
entered into corporate transactions dealt through a
director whose appointment is defective.

 In Dawson v African Consolidated Land & Trading

Company [1898]. The court held that the contract was
enforceable despite the fact that the director lost his share
qualification. The company was liable to honour the
contract.
However, outsider having notice that there is irregularity
in the appointment of a director cannot invoke S.204 to
his advantage.
Corporate Law
 Vacation of Office
S.208(1) The office of a director of a company shall be vacated if the
person holding that office-
(a) resigns in accordance with subsection (2);
(b) has retired in accordance with this Act or the constitution of the
company but is not re-elected;
(c) is removed from office in accordance with this Act or the constitution
of the company;
(d) becomes disqualified from being a director under section 198 or 199;
(e) becomes of unsound mind
(f) dies; or
(g) otherwise vacates his office in accordance with the constitution of the
company.
S.209(1) where a company has only one director or the last remaining
director, that director shall not resign office until that director has called a
meeting of members to receive the notice of the resignation and to appoint
one or more new directors.

Corporate Law
Removal of Director – PRIVATE co.

 S.206(1) subject to the Co.’s Constitution, a

director MAY BE REMOVED by ordinary resolution.
 S.297 (2)(a) :The passing of such resolution must be
done at physical general meeting and cannot be
passed by way of written resolution.
 To pass an ordinary resolution, a special notice is
required before a director can be removed UNDER
THIS SECTION.

Corporate Law
Removal of Director – PUBLIC co.

• A director may be removed as according to S.206, by an

ordinary resolution passed by the members with
special notice at a General Meeting to remove the
director before the expiration of his tenure.

 After the special notice has been served to the members,

the director who is being removed has the right to have
written representations to be sent to all members together
with the notice of meeting failing which, the director has
the right to require the representation to be read out at
the meeting (to remove him) – S.207 (3)

Corporate Law
Directors Powers to Act for Company

• A principal usually bound by the acts of his agents if the agents

act within their actual authority/powers.

• Since co cannot act on its own, a company is bound by an act

done on its behalf by its agent (DIRECTOR/S), where the act is
within the actual authority of the agent, or apparent or
ostensible authority.

• Agent’s actual authority may be conferred expressly by the

principal for the agent to do particular acts. This authority is
called express actual authority; e.g. power of attorney -
actual authority set out in document creating the power. Co not
bound if agent acts outside its authority.

Corporate Law
 …Directors Authority to
act for Co.

• Implied actual authority is not expressly

stated: it is implied from the circumstances. It
comes with the actual authority given:
Hely-Hutchinson v Brayhead Ltd [1968]1 QB
549
• To do things incidental to fulfill tasks agent
expressly authorised to do.
• To do things that a person in such a position
usually does (usual authority).
• Corporate agent given implied authority by
acquiescence of his authorities.

Corporate Law
 …Directors Authority
to act for Co.

 Apparent or ostensible authority – appearance of

authority conferred on agent.
 Extent of apparent authority may be the same or
exceed agent’s actual authority.
 If agent’s apparent authority can be established it
creates an agency by estoppel. Third parties who do
not know of any limitation on the power can assume
agent has necessary power. Freeman & Lockyer v
Buckhurst Park Properties (Mangal) Ltd [1964]1
AllER 630

Corporate Law
 …Directors Authority
to act for Co.

 Third party entitled to raise apparent authority to

enforce contract entered into on behalf of co. by
agent who has no actual authority to do so:
ESTOPPEL
 When co. represents to outsiders that agent
has requisite authority to do certain acts on
principal’s behalf in the contract of the kind
sought to be enforced; &
 Representation made by person who had
‘actual’ authority
 Third party induced by representation to enter
into contract with co thro agent.

Corporate Law
 DUTIES OF DIRECTORS

 S.211 – the business and affairs of a company shall be

managed by the Board of Directors (BOD).

 BOD’s powers shall be governed by the Third Schedule

of the CA2016 to allow for balance between the
freedom of the directors to manage the co and to
ensure that they do not abuse their powers.

To balance the Board’s power – there is Management

Review under S.195. where members are given a
reasonable opportunity to question, discuss, comment or
make recommendations on the management of the co.

Corporate Law
 DUTIES OF DIRECTORS
DIRECTORS’
DUTIES

FIDUCIARY DUTY OF CARE,

SKILL & STATUTORY
DUTIES DILIGENCE

To act in COMPANIES
To
good faith in exercise ACT 2016
the best To avoid
powers Conflict
interest of for a of
the proper Interest
Company. purpose

Corporate Law
 DUTIES OF DIRECTORS

FIDUCIARY
DUTIES

Corporate Law
 WHAT FIDUCIARY MEANS?
▪ A fiduciary is one who has powers which are
exercised on behalf of those who are dependent
upon him.
▪ He has to act in their interest, and in the case of
a director, he has to act in the interest of the
company.
▪ Fiduciary have a position of trust.
▪ As fiduciaries, directors owe duties of loyalty,
good faith and avoidance of conflict of
interest.
▪ The duty is owed to the company and not to any
individual member of the company.
Corporate Law
 …WHAT FIDUCIARY MEANS?
▪ The duty is owed to the company and not to any individual
member of the company.
Percival v Wright [1902] 2 Ch. 421;
The plaintiff was a shareholder of the co. He wanted to sell
his shares, and in the end his shares were sold to the chairman
and two other directors at an agreed price. He later discovered
that at the time he wanted to sell his shares, the co was
negotiating for a sale of the co’s shares at a higher price.
However, the sale never took place. The plaintiff said that the
directors had a duty to inform him of the negotiations.

The court held that the action could not succeed, as the
directors did not owe any fiduciary duty to individual
shareholders.
Corporate Law
 …FIDUCIARY DUTIES
 S.213 CA 2016 provides that directors must:
at all times exercise their powers
for a proper purpose and
in good faith in the best interest of the company;
and exercise reasonable care, skill and diligence.

× Under the Common Law, a director’s fiduciary, duties

are:
I. To act bona fide in the company’s interest
and not some other person’s interest;
II. To exercise his powers for a proper purpose;
and
III. To avoid any conflict of interest between the
Corporate Law
company and his personal interests.
 FIDUCIARY DUTIES to act bona fide in
the interest of the co.
▪ In relation to the co - powers exercised by directors
are on behalf of the co. Therefore, must act in
good faith in the interest of the co.

▪ As fiduciaries - position of trust to act with good

faith - duties of loyalty, good faith and avoid conflict
of interest is owed to the co and not to any
individual member of the co. : Percival v Wright
[1902] 2 Ch. 421;
▪ Duty to ensure that any act dir. undertakes is with a
view to enhance the interest of the co. either by
enhancing profits, reducing costs or even positive
publicity of the co.

Corporate Law
Fiduciary Duty to act bona fide in the interest of
the co.

• Where a director is required to act bona fide in the

interest of a company, the director must act
according to what he considers, not what a court
may consider, is in the interest of the company : Re
Smith and Fawcett Ltd (1942) Lord Greene MR
stated; “They must exercise their discretion bona
fide in what they consider – not what the court
may consider – to be in the interest of the co, and
not for any collateral purpose.”
• Directors’ priority - advance the co’s interest. If
anyone else’s interest is given consideration before
that of the company, the directors are in breach of
their duty. Re W & M Roith Ltd. [1967]

Corporate Law
 FIDUCIARY DUTIES act bona fide in the
interest of the co

: Re W & M Roith Ltd

Roith ran a 'one-man company'. He was the
majority shareholder and ran the co.'s business as
one of the 3 directors.
Roith wanted to make provision for his wife after his
death. He made a contract with the co., under which
his wife would be paid a pension if he died. There
was no problem in having this agreement adopted by
the co., as he controlled it. After Roith died, his
executors put in a claim for the widow's pension. The
liquidator of the co. rejected the claim.
The court held, When the directors of the co. agreed
to the contract they were not considering the interest
of the co.

Corporate Law
 FIDUCIARY DUTIES act bona fide in the interest of the
co

 The interest of the co. that the directors have to consider

has traditionally meant:
i. The interest of the Members of the co as a collective
grp, not the interest of an individual member as in
Percival v Wright (supra). Directors have to treat all
shareholders equally.
ii. The interest of the Employees.
Parke v Daily News Ltd. [1962] The interest of the
members and the employees are considered as the interest
of the co. while the co. is solvent and a going concern.
iii. When the co threatened or goes into a state of
insolvency, Creditor’s interest will be co’s interest.

Corporate Law
 FIDUCIARY DUTIES EXERCISE POWER FOR A
PROPER PURPOSE

II. TO EXERCISE POWER FOR A PROPER PURPOSE

At Common Law:
• Directors are required to exercise powers given to
them for the proper purpose of the company for the
benefit of the co.

• The purposes may be set out in the Constitution or

the articles of association of the company.

• Therefore, directors are prohibited from exercising

powers for any collateral purposes or for the benefit
of a person other than the co, nor for director’s own
benefit.

Corporate Law
FIDUCIARY DUTIES EXERCISE POWER FOR A PROPER
PURPOSE

Breach of director’s duty if they exercise their power for

a purpose other than the purpose for which the power
was conferred on them, even where he acts honestly in
what he considers to be the co’s interest. Re Duomatic
Ltd. [1969] 2 Ch. 365.
Position today
S.213 CA 2016 provides that directors must:
at all times exercise their powers for a proper
purpose and in good faith in the best interest of the
company; and exercise reasonable care, skill and
diligence.
Where the Directors had acted in the best interest of the
company BUT the transaction was motivated by some
improper purpose, he is in breach of fiduciary duty:
Corporate Law
 FIDUCIARY DUTIES EXERCISE POWER FOR A
PROPER PURPOSE

The power to issue shares may be exercised

for reasons other than raising capital
provided those reasons relate to a purpose
benefiting the company as a whole.
In Howard Smith Ltd v Ampol Petroleum
Ltd [1974] However, the directors had
improperly exercised their powers, as the
effect of the share issue was to reduce the
majority holding of two other shareholders
who made a rival bid.

Corporate Law
 FIDUCIARY DUTIES EXERCISE POWER FOR A
PROPER PURPOSE

Even where there is an absence of self-interest the

issue will not be valid…still breach of duty.
Punt v Symons [1903] 2 Ch. 506. where directors
issue shares to themselves to maintain control over a
co, the court set aside such issue even though full
value has been paid on the shares.
In other words, although the directors may act
honestly for the benefit of the co., the directors may
still be held liable if they have exercise their power for
collateral purpose.

Corporate Law
 FIDUCIARY DUTIES TO AVOID CONFLICT OF
INTEREST

 Conflict of interests could arise in the following situations

where which there is a possibility that the directors’ personal
interest could conflict with those of the company which they were
bound to protect.

 The purpose of the duty is to prevent directors from improperly

making profit from their position.

 Broadly, duty to avoid conflict of interest may be divided into:

a. Directors contracting with the company;
b. Directors competing with the company;
c. Directors making secret profits using corporate property /
information / opportunities or use of position as directors

Corporate Law
… Conflict of Interests

a) Contract with the company

 A director of a co. cannot enter into a contract with the co.,
as his personal interest may conflict with the co.’s interest.
In a business transaction a person would try to get the
best deal possible for himself, so if a director were to
contract with the co, he may try to obtain the best deal
for himself and not the co.
 S. 221(1) requires a director to disclose the fact that he
has an interest in a contract, whether it is direct or
indirect. Direct interest is where the director contracts
personally, and an indirect interest arises when the contract
includes family interest, or where the director is a director
or shareholder of another company which contracts with
the company.
Corporate Law
 FIDUCIARY DUTIES TO AVOID CONFLICT OF
INTEREST

 Directors are not allowed to improperly obtain profit out of their

position as directors. Aberdeen Railway Co. v Blaikie Bros.
[1854]; House of Lords held that the co could avoid the
contract where one of the partners of the firm the co had
contracted with, was a director of the co at the time of the
contract even if it was made on fair terms.

 A contract made by a co with one of their directors, or with co

or firm in which he has interests is voidable at the instance of
the company. The contract is voidable because a director’s
interest may be ratified by the co. in a GM. Although a director
may not vote in his own interest at a board of directors’
meeting, he may do so as a shareholder of the co. at the
general meeting as in North-West Transportation Co. Ltd. v
Beatty [1887]; the court allowed Beatty to vote for a resolution
in which he had interest in the transaction, as he was acting
within his right.
Corporate Law
… Conflict of Interests

 In order for a director to be in breach of his duty, he must

have material interest in a contract with the co. -
S.221(2).
 Director will not be liable:
a. S.221(1) where he makes a full and frank disclosure
of his interest to the BODs’ meeting.
b. S.221(4), disclosure made by giving general notice to
the BOD’s meeting specifying the nature and
interest of the director’s interest. Ensure that the
notice is given at the director’s meeting, or that
makes sure that it is brought up and read at the next
director’s meeting.
c. S.221(7) - Failure to declare interest - liable for not
more than 5 years imprisonment or RM3 million fine, or
both.
Corporate Law
… Conflict of Interests

b) Compete with the company

A director would be in breach of his duty if he obtains for
himself any property or benefit that properly belongs to the co,
or for which the co has been negotiating for.
 Where a director makes any profit as a result of opportunities
that arose out of his position, he cannot keep them unless
the profits have been disclosed to and approved by the
co.
Regal (Hastings) Ltd. v Gulliver [1942] The court held
that although the transactions where the directors obtained a
profit over the sale of the shares which they had bought at par
were made in good faith, the directors were however liable to
account to the co for the profits. The reason for this decision
was that: (1) there was an acquisition of property by reason of
the office held; and (2) the acquisition was in the course of the
execution of that office.
Corporate Law
 … Conflict of Interests

 A director is in breach of his duty even though there is no

bad faith.

A director may not enter into transactions in which he has or

can have a personal interest conflicting with the interest
of the co that he is supposed to look after. Any profits made
by competing for an opportunity which was his duty to acquire
for the co, he has to surrender the profits to the co.
Cook v Deeks [1916] 1 AC 554
Dir. liable to account to the co where he made profit by using
information which has come to him whilst he is a director or
which he has acquired in the course of his duties.

Corporate Law
… Conflict of Interests

 Although a director is not allowed to compete with his

co, he is not prevented from acting as a director of
competing companies:

In Riteway Express Pty. Ltd. v Clayton [1987] 10

NWSLR 238; it was held that although directors may sit
on boards of rival cos, they cannot use or disclose the
confidential information of co where this involves them
closing down the co’s business and operating it for
themselves.

Corporate Law
… Conflict of Interests

 C.. Making secret profits using corporate

property / information / opportunities or use
of position as directors.
The common law rules are also reflected under:
 a. Director must not take corporate property – S.
218(1)(a)
 b. Director must not use corporate information – S. 218
(1)(b)
 c. Director must not use his position as directors –S. 218
(1)(c)
 d. Director must not take or use corporate opportunity –
S. 218 (1)(d)
Corporate Law
Duties of Care, Skill and Diligence

The Common Law Position

The leading decision is Re City Equitable Fire
Insurance Co Ltd (1925) CH407, where it was held
that
‘In discharging the duties of his position...a Director
must act honestly; but he must also exercise some
degree of both skill and diligence.. so long as a
Director acts honestly he cannot be made
responsible in damages unless guilty of gross or
inculpable negligence in a business sense.”

Corporate Law
Duties of Care, Skill and Diligence

 S.213 (2) – a director shall exercise reasonable

care, skill & diligence with the knowledge, skill
and experience which may be reasonably be
expected of a director having the same
responsibilities; and any additional knowledge,
skill & experience which the director in fact
has.

 S. 214 (1) retains the Business judgment rule to be

read together with S.215 (Directors’ reliance on
others).

Corporate Law
COMMON LAW DUTY OF CARE AND SKILL

 Very minimal standard of duty of care

and skill on directors in their management
of co.s.
 As a result of Re City Equitable Fire
Insurance Co. Ltd. [1925] Ch. 407;, Romer
J. came to a conclusion that a director must
act honestly and exercise care and
diligence. Romer J. made three
propositions which is still applied today and
form the core of the law on duties of care
and skill.

Corporate Law
 COMMON LAW DUTY OF CARE AND SKILL

1. “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.”

- No minimum standard of skill set for a director. A

director has to act with care as can be expected from
them basing on their knowledge and experience. Re
Brazilian Rubber Plantations and Estate Ltd.
[1911] 1 Ch.425

Corporate Law
 …COMMON LAW DUTY OF CARE AND SKILL

2. A director should take as much care in

the affairs of his co. as he would
reasonably take in his own affairs.
This means that if a director takes care of
the co.’s affairs the same way he takes care
of his own affairs, he will not be liable. Co.
can only take action against him where
he runs the co. in a way that a
reasonable man would not do in his
own affairs.

Corporate Law
…COMMON LAW DUTY OF CARE AND SKILL

3. As a reasonable person, a director would

make reasonable inquiries when asked
to enter into certain transactions on behalf
of the company, such as the signing of
cheques. In Re Railway & General Light
Improvement Co.; Marzetti’s Case
[1880] 42 LT 206;

Corporate Law
 STATUTORY DUTIES

1. S.221(12) imposes liability on any officer who commits

breach of his fiduciary duty by making improper use of
his position to directly or indirectly gain a benefit for
themselves or for any other person, or to cause
detriment to the co. He is not only liable to the co, but if
found guilty can be imprisoned for 5 years or fined RM3
million.

2. S.223, directors are prohibited from the acquisition of an

undertaking or property of substantial value, or dispose
of a substantial portion of the co’s undertaking or
property without the approval of the co in GM. The
acquisition is prohibited where it materially and
adversely affected the performance or financial position
of the co. Any director who contravenes s.223 shall be
guilty of an offence and liable to imprisonment for 5 yrs
Corporate Law
or a fine of RM3 million, or both.
 STATUTORY DUTIES
3. S.224 except for exempt private co, a co is
prohibited from giving loans to their directors.
Exceptions :
i. where it is given to pay for expenses in carrying
out the director’s duty,
ii. to purchase a home for a full-time director, and

iii. where the co has a scheme of loan for its

employees, and the director is a full-time director.

4. S.225 prevents a co from making a loan to any

person connected with a director of a co. Where
directors allow such loans to be made without the co’s
approval they are jointly and severally liable to the co
to indemnify the co against any loss arising from the
Corporate Law
loan.
 …STATUTORY DUTIES

5. S.219 imposes duty on directors to, particulars of

interest in shares, debentures, participatory
rights, options and contracts. They also have to
disclose changes in those interest mentioned; and
particulars necessary for maintaining the register of
directors, secretaries, managers and auditors.

6. S.228, prohibits a co to enter into any arrangement

or transaction with a director/director of co’s holding
co/persons connected with such director to acquire
from or dispose to such persons any “non-cash
assets” of requisite value, unless it has been
approved in a GM.

Corporate Law
 That’s the
law on how
Directors
should
manage
companies,
Folks!

Corporate Law