REFORM OF THE LAW RELATING TO DIRECTORS DUTIES IN MALAYSIA

Sujata Balan
Faculty of La
Un!"#$%!ty of Malaya
&'(') *uala Lu+,u$
Malay%!a
T#l no- (') . /0(/(&11 2off!c#3
('45 )/5'/0/ 2+o6!l#3
Fa7 no- (') . /0&/)5)0
E+a!l- %ujata6alan8u+9#:u9+y
ABSTRACT
The Malaysian legislature recently passed the Companies (Amendment) Act 2007 which
introduced significant and far-reaching changes for Malaysian companies. n particular!
important changes were made to the law relating to directors" statutory and common law duties.
Among the changes are the codification of certain common law principles relating to directors"
duties and the introduction of new concepts such as the #usiness $udgement %ule. There is also
an attempt to pro&ide statutory clarification as to the role and function of the 'oard of directors
in a company.
The central theme of these amendments appears to 'e the implementation of a strong and
effecti&e corporate go&ernance regime in Malaysia. (eedless to say! these reforms are consistent
with the o')ecti&e of the Malaysian corporate law reform programme to modernise the present
legislati&e framewor* and to facilitate an effecti&e and competiti&e 'usiness en&ironment in
Malaysia. This paper e+amines some of the pro&isions in the Companies (Amendment) Act 2007
which relate to directors" statutory and common law duties and considers their implications on
the corporate law regime in Malaysia.
I INTRODUCTION
Malaysian legislation relating to companies has always been vibrant and progressive. Since 1965
the Companies Act 1965 (hereafter referred to as the principal Act has been amended no less
than seventeen times.
1
!he year "##$ witnessed the enactment of another Amendment Act% the
Companies (Amendment Act "##$ (Act A1"99 (hereafter referred to as &Act A1"99'. Act
1
A1"99% which came into effect on 15 A(g(st "##$% is a ma)or milestone in the history of
company law legislation in Malaysia. *t creates amendments% s(bstit(tions and new provisions
which will have a significant and wide reaching effect% principally on directors. !he central
theme of Act A1"99 appears to be the implementation of a strong and effective corporate
governance regime. *ts contents mirror to a great e+tent the recommendations of the ,igh -evel
.inance Committee /eport on Corporate 0overnance which was p(blished in 1999% soon after
the calamito(s financial storm that swept across Asia in the period 199$11992.
*n this paper% the writer aims to e+amine some of the changes bro(ght abo(t to directors3
stat(tory and common law d(ties in Malaysia by Act A1"99. *t m(st be mentioned that Act
A1"99 also deals with matters other than directors3 d(ties and that those matters are not dealt
with in this paper.
!he relevant provisions affecting directors3 d(ties are disc(ssed% in parts **1 45*** below.
II9 SECTION 4)5 OF THE COM;ANIES ACT 40(& < DIRECTORS FIDUCIARY
DUTIES AND DUTIES OF CARE AND S*ILL
6efore Act A1"99% section 17"(1 of the principal Act contained a feeble and inade8(ate attempt
to state in stat(tory form% directors3 fid(ciary d(ties and their d(ties of care and s9ill. !he said
provision reads:
(1 A director shall at all times act honestly and (se reasonable diligence in the discharge
of the d(ties of his office.
!he words &honestly' and &diligence' were never ade8(ately determined by case law in
Malaysia. *n practice Malaysian co(rts have shown little enth(siasm to (tilise this provision
"
as a
g(ide to decide on matters relating to directors fid(ciary d(ties and d(ties relating to care and
s9ill. *nstead most cases
7
have shown their readiness to see9 the aid of the rich ;nglish case law
on the s(b)ect. *n this conte+t% it may be noted that the co(rts were entitled to (se s(ch cases by
virt(e of s 17"(5. !his is beca(se s 17"(5 reads% &!his section is in addition to and not in
derogation of any other written law or rule of law
<
relating to the d(ty or liability of the directors
or officers of the company'.
!he ,igh -evel .inance Committee /eport on Corporate 0overnance recognised the area of
directors3 fid(ciary d(ties as one which was &cr(cially important'.
5
=ne of its recommendations
was that legislation sho(ld be enacted to &set o(t clearly the obligations of directors in their
dealings with the company in conflict sit(ations% and the ways in which s(ch conflicts may be
"
managed witho(t detriment to the company'. *ts principal recommendation in this area was that
the common law fid(ciary d(ty to avoid conflicts of interest sho(ld be codified into stat(tory
form.
!he recommendations of the Committee have% to some e+tent% been implemented with the
enactment of new provisions s(bstit(ting the e+isting provisions in ss 17"(1 and 17"(".
A. Contents of the S(bstit(ted Section 17"(1
!he contents of s 17"(1 have been s(bstit(ted to read as follows:
(1 A director of a company shall at all times e+ercise his powers for a proper p(rpose
and in good faith in the best interest of the company.
*t is well established at common law and e8(ity that directors m(st act in good faith in what they
consider is in the best interest of the company. Added to this is the closely associated r(le that
directors m(st e+ercise their powers for a proper p(rpose. *t is s(bmitted that the new contents of
s 17"(1 will add nothing new to the e+isting common law and e8(ity on the s(b)ect as it is well
established by case law% that directors are fid(ciaries and that the powers conferred on them m(st
be e+ercised bona fide in the interest of the company and not for &some private advantage or for
any p(rpose foreign to the power'.
6
*t may also be noted that the new s 17"(1 is restricted to the
e+ercise of powers and ma9es no specific reference to acts of directors. *t is s(bmitted that a
more comprehensive effect co(ld have been achieved by the legislat(re if the words &act% and'
had been inserted between the word &times' and the word &e+ercise' in the new s 17"(1.
A point to be noted is that neither the new s 17"(1 nor any other amendment made by Act
A1"99 deals with another closely lin9ed d(ty to the e+ercise of the powers of directors% namely
that directors m(st always e+ercise independent )(dgment and that they m(st not fetter their
discretion. !h(s% where it is alleged in Malaysia that directors have in fact fettered their
discretion% resort m(st be made to e8(ity and common law. At common law the r(le regarding
this d(ty of directors to e+ercise independent )(dgment has been somewhat modified by ,ulham
,oot'all Clu' -td v Ca'ra .states plc%
$
which% following the A(stralian case of Thor'y v
/old'erg%
2
held that directors may enter into an agreement which in fact provides that they will
act in a partic(lar way in f(t(re% if at the time of the agreement% they bona fide consider that it is
in the interest of the company to so fetter their discretion. >hether a similar approach will be
adopted by the Malaysian co(rts remains to be seen.
7
6. Section 17"(" ? @rohibitions Against Ase =f Company3s @roperty% ;tc.
6efore Act A1"99% the original s 17"(" provided that an officer (which by the definition in s <
of the principal Act incl(des a director or an agent of a company or an officer of the Stoc9
;+change shall not ma9e an improper (se of any information ac8(ired by virt(e of his position to
gain directly or indirectly an advantage for himself or for any other person or ca(se detriment to
the company. !he provision made no reference to an improper (se of a company3s property by a
director or officer of the company. Also there was no specific reference to the e+propriation of
any opport(nity of the company which a director or officer became aware of. 6(t% it is s(bmitted
that this omission did not e+cl(de the e+propriation or diversion of corporate opport(nity from
its ambit as s(ch misdeeds almost invariably arose from the mis(se of information ac8(ired by
virt(e of a director3s or officer3s position. Also% before Act A1"99% the principal Act did not deal
with the thorny iss(e of whether any breach of fid(ciary d(ty co(ld be ratified by the members in
a general meeting% or with the 8(estion whether directors co(ld engage in b(siness which is in
competition with the company.
Act A1"99 amends s 17"(" by replacing the e+isting s(bsection with the following:
@rohibition against improper (se of the company3s property% position% corporate
opport(nity or competing with the company
(" A director or officer of a company shall not% without the consent or
ratification of a general meeting
9
1
a (se the property of the companyB
b (se any information ac8(ired by virt(e of his position as a director or officer of
the companyB
c (se his position as s(ch director or officerB
d (se any opport(nity of the company which he became aware of% in the
performance of his f(nctions as the director or officer of the companyB or
e engage in b(siness which is in competition with the company%
to gain directly or indirectly% a benefit for himself or any other person% or ca(se detriment
to the company.
!he wording of s 17"(" in the form enacted raises a n(mber of significant 8(estions and these
are dealt with below. At the o(tset% it may be noted that the five transgressions listed in s 17"("
(a to (e are only prohibited witho(t the consent or ratification of a general meeting and if they
are made to gain directly or indirectly a benefit for the director or any other person or ca(se
detriment to the company.
<
C. Significance of the >ords &Shall Cot >itho(t the Consent or /atification of a 0eneral
Meeting'
!he words &shall not witho(t the consent or ratification of a general meeting' s(ggest that the
prohibitions listed in s 17"(" may not be wrongdoings if they are consented to or ratified by the
general meeting. At common law% a valid consent or ratification of the general meeting regarding
a wrongf(l cond(ct of a director% may amo(nt to a decision not to s(e him in respect of that
wrongf(l cond(ct. !h(s an effective consent or ratification of a wrongdoing may adversely affect
a f(t(re s(it against a director by the company% or a derivative action by members% regarding that
wrongdoing. A cr(cial 8(estion% therefore% is whether there are any limitations placed on the
general meeting when it p(rports to ratify or give its consent to the prohibitions in the new s
17"(". Anfort(nately% the section is silent on this point.
At common law% the general meeting may to some e+tent release directors from their fid(ciary
obligations
1#
b(t there are limits to the e+ercise of the power.
11
*t is diffic(lt to state the
limitations placed on the general meeting at common law when the general meeting p(rports to
consent to or ratify a wrongdoing by directors.
1"
6(t the legal position regarding a consent or
ratification obtained by the (se of the votes of wrongdoers or those (nder their infl(ence is fairly
clear in cases which can be classified as &fra(d on the company' or a &fra(d on the minority'.
17
S(ch ratification will not release the wrongdoers from liability. Altho(gh the real meaning of the
aforesaid e+pressions has never been settled% it is clear that they incl(de a wrongf(l act which
amo(nts to an e+propriation of the company3s property
1<
or the company3s opport(nity
15
or
where the e+propriation involves members3 property.
16

/everting to items (a% (b% (c and (d of s 17"("% the (se by a director for gain of the property
of the company% or information ac8(ired by virt(e of his position or a corporate opport(nity
which the company co(ld have (tilised for its profit may amo(nt to a fra(d on the minority or a
fra(d on the company and may give gro(nds for a s(it by the company or a derivative s(it by
members. !he reason for allowing the general meeting to consent to or ratify the transgressions
mentioned above is not clear. *n providing for ratification or consent% it is possible that the
legislat(re intended that s(ch ratification or consent is to be given by independent shareholders
not involved directly or indirectly in the wrongdoing b(t there is no cl(e as to whether s(ch or
other restraints are placed on the general meeting.
1$
*t is s(bmitted that% as a meas(re of
protection for the company and its minority members% the legislat(re sho(ld have made it clear
that a consent or ratification referred to in s 17"(" wo(ld be ineffective (nless it was achieved
witho(t the votes of wrongdoers or of those who were (nder their infl(ence or who had a
personal interest in condoning the wrong.
12
*t may also be mentioned that as s 17" (" does not
specify the type of resol(tion re8(ired for a consent or ratification% an ordinary resol(tion (which
may not be diffic(lt to obtain may be s(fficient.
5
D. -in9 between S 17"(" and the Cew Stat(tory Derivative Action Created by Act A1"99
At this point% reference m(st be made to the new ss 121A to 121; inserted into the principal Act
by Act A1"99 and which create a stat(tory derivative action for the benefit of the members and
the other complainants listed in s 121A(<. Ander s 121A (1% this stat(tory action is only
possible with the leave of the co(rt. Section 1216(< provides that the co(rt in deciding whether
or not leave shall be granted shall ta9e into acco(nt whether the complainant is acting in good
faith and whether it appears prima facie to be in the best interest of the company that the
application be granted. More importantly% where there is a ratification of a director3s wrongdoing
its effect is dealt with in s 121D which reads:
*f members of a company% ratify or approve the cond(ct% the s(b)ect matter of the action1
a the ratification or approval does not prevent any person from bringing% intervening in or
defending proceedings with the leave of co(rtB
b the application for leave or action bro(ght or intervened in shall not be stayed or
dismissed by reason only of the ratification or approvalB and
c the Co(rt may ta9e into acco(nt the ratification or approval in determining what order to
ma9e.
/everting once more to s 17"("% the ratification referred to in it will not prevent a mem'er from
bringing a stat(tory derivative action with the leave of the co(rt (nder the new provisions.
,owever% (nder s 121D(c% the co(rt may ta9e into acco(nt the ratification in determining what
order it wo(ld ma9e. !he factors that the co(rt will ta9e into acco(nt are not clear. A possibility
is that the co(rt may not recognise a ratification of an act which at common law amo(nts to a
fra(d on the minority or a fra(d on the company. Another possibility is that the co(rt may not
give effect to ratification (nless it was achieved by the votes of independent members with no
direct or indirect lin9 to the alleged wrongdoers.
19

*t m(st also be noted that the common law derivative action appears to be preserved by
the new s 121A (7 which states:
!he right of any person to bring% intervene in% defend or discontin(e any proceedings on
behalf of a company at common law is not abrogated.
!he diffic(lties of the common law derivative action have made it an (nattractive remedy
"#
for
members. *t is hoped that the co(rts will interpret the new provisions liberally free of the h(rdles
enco(ntered by plaintiffs at common law. *t m(st also be mentioned that the introd(ction of the
new stat(tory derivative action will not affect a member3s right to present a petition (nder s
121(1 where he alleges that a ratification of the prohibitions in s 17"(" amo(nt to one of the
6
gro(nds mentioned in s 121(1% namely that they amo(nt to oppression% disregard of interests%
(nfair discrimination or pre)(dice.
;. Director ;ngaging *n Competing 6(siness
/eference m(st once more be made to s 17"("(e which provides that a director shall not%
&engage in b(siness which is in competition with the company'. At common law it was never
entirely clear whether a director co(ld compete with his company. !he cases (s(ally relied on to
state that he co(ld% act(ally involved competing directorships.
"1
!he effect of these cases was
that directors of a company were% s(b)ect to the articles of association% allowed to be members of
a rival board provided they did not disclose confidential information of the first company to the
second.
After the enactment of s 17"("(e% a director may not% witho(t the consent or ratification of a
general meeting% engage in a b(siness enterprise which is in competition with the b(siness of his
company. !he degree and scope of his engagement for the p(rpose of this prohibition is (nclear.
Secondly% Act A1"99 offers no cl(e in relation to the 8(estion whether directors do &engage in
b(siness which is in competition with the company' when they accept directorships in a rival
company. *t is (nli9ely that the prohibition in s 17"("(e incl(des competing directorships% b(t
the possibility of it being constr(ed otherwise by the co(rt cannot be r(led o(t.
!he effect of the new provision is that a general meeting may consent to or ratify a b(siness
activity of the directors which is in competition with the company. >here directors do engage in
a competing b(siness activity there is a possibility that they can ca(se serio(s harm to the
company and its members. As in the case of a consent or ratification of the prohibitions stated in
s 17"("(a to (d there is no indication in the section whether there are limits which are
applicable where a general meeting gives its consent or ma9es a ratification of a breach of the
said prohibitions. !he comments and observations made earlier regarding ratification of the
prohibition in s 17"(" (a to (d in part ** s(b1part C of this paper are also relevant in this case.
.. 5oting 6y an *nterested Director
Another associated 8(estion not dealt by with by Act A1"99 is whether the affected director may
vote when a proposed resol(tion to ratify any of the prohibitions listed in s(b1sections (a ? (e of
s 17"(" is tabled before the general meeting. !he traditional r(le is that votes of shareholders are
proprietary rights and the member is free to vote as he li9es% even tho(gh he has an interest in the
matter voted on.
""
!he r(le sho(ld not apply to a shareholder1director in respect of the
prohibitions mentioned above as it is possible for some of them to be cases of fra(d on the
$
company or fra(d on the minority. !his is clearly ill(strated in Coo* v 0ee*s.
"7
A f(rther
pertinent iss(e which Act A1"99 does not address% is whether a director may vote if there is no
fra(d on the minority or fra(d on the company. !he writer is of the opinion that Act A1"99
sho(ld have made it clear that an interested person (which will incl(de the affected director
sho(ld not (nder any circ(mstances% whether or not there is a fra(d on the company or a fra(d on
the minority% be allowed to vote on a resol(tion to ratify a breach of s 17"(" (a1(e. *t is
important that a resol(tion to ratify a wrongdoing sho(ld be passed by disinterested members
free of any infl(ence% direct or indirect% of the wrongdoers.
.inally it m(st be mentioned that the e+pression Edirector3 has% for the p(rpose of s 17"% been
e+tended by the new s 17" (6 to incl(de &the chief e+ec(tive officer% the chief operating officer%
the chief financial controller or any other person primarily responsible for the operations or
financial management of a company% by whatever name called'. !h(s the net has been spread
m(ch wider in order to catch other f(nctionaries involved in senior management of a company.
III9 SECTION 4)524A3 OF THE COM;ANIES ACT 40(&. DIRECTORS DUTIES OF
CARE= S*ILL AND DILIGENCE
!he common law too9 an ind(lgent attit(de to this s(b)ect and the law was never developed with
clarity or precision% or to deal with the increasing professionalism of directors. !he traditional
starting point of any disc(ssion of the common law has always been /omer F3s historic% b(t
m(ch criticiGed% three propositions in %e City .1uita'le ,ire nsurance Company.
"<
!he first of
these relates to the degree of s9ill which a director m(st display in the discharge of his d(ties. =n
this /omer F said%
A director need not e+hibit in the performance of his d(ties a greater degree of
s9ill than may reasonably be e+pected from a person of his 9nowledge and
e+perience.
"5
!his slac9 s(b)ective standard has been disparaged by commentators
"6
and )(dges
"$
as to be of
little val(e. Ander the test% a director with little or no s9ill or little or no e+perience stood a better
chance of escaping liability.
"2
*t did not enco(rage directors to ac8(ire s9ills or e+perience.
*n recent years% there has been a visible depart(re in ;nglish case law from the lenient standard
of /omer F3s first proposition.
"9
%e 0"$an of -ondon -td
7#
indicated a new approach to a
director3s standard of care. *n that case% ,offman F accepted the standard stated in s "1<(< of the
*nsolvency Act 1926 of ;ngland. ,is -ordship was of the view that the standard re8(ired by this
section correctly stated the common law d(ty owed by a director to his company. !his was
2
(n(s(al in that a stat(tory standard which was enacted for wrongf(l trading was applied in a
common law case of director3s alleged negligence.
71
*n ,offman F3s words%
7"
*n my view% the d(ty of care owed by a director at common law is acc(rately
stated in s "1< (< of the *nsolvency Act 1926. *t is the cond(ct of?
Ea reasonably diligent person having both ? (a the general 9nowledge% s9ill and
e+perience that may reasonably be e+pected of a person carrying o(t the same
f(nctions as are carried o(t by that director in relation to the company% and (b the
general 9nowledge% s9ill and e+perience that director has.3
77
!his new development has been praised by the -aw Commission in ;ngland as &a remar9able
e+ample of the modernisation of the law by the )(dges'.
7<
!he Companies Act "##6 of ;ngland
now provides a new section 1$< modelled on this d(al or twofold ob)ectiveHs(b)ective standard.
*n Malaysia% there was a limited stat(tory recognition of directors3 d(ty to show diligence in the
original s 17"(1% which provided that a director shall &(se reasonable diligence in the discharge
of the d(ties of his office'. !his stat(tory provision was never developed by the Malaysian
co(rts. =n the other hand% it appears to be generally ass(med that the propositions of /omer F
applied.
75
*n 1999% the ,igh -evel .inance Committee /eport on Corporate 0overnance
recognised the importance of the s(b)ect and recommended that s 17"(1 sho(ld be amended to
incorporate the d(ties of s9ill and care of directors b(t that the section &sho(ld C=!
76
be
amended to clarify that the standard of care imposed is with reference to the partic(lar
circ(mstances of the director'.
7$
Act A1"99 now amends the principal Act by inserting immediately after s 17"(1% the
following:
(1A A director of a company shall e+ercise reasonable care% s9ill and diligence with1
(a the 9nowledge% s9ill and e+perience which may reasonably be e+pected of a
director having the same responsibilitiesB and
(b any additional 9nowledge% s9ill and e+perience which the director in fact has.
!he statement in s 17"(1A reflects the d(al or twofold standard which has been advocated in
;ngland. !he first part of the standard is an ob)ective standard which today becomes the
minim(m benchmar9 for directors. *f the director does not meet this standard% the second
s(b)ective test need not be considered. >here a director does meet the first ob)ective standard% he
may still be liable if he fails to meet the s(b)ective standard in the second part% which is based on
any additional 9nowledge% s9ill and e+perience which the director in fact has.
9
!his new stat(tory statement of the standard of care of directors is most welcome. Altho(gh the
co(rts in Malaysia may (ltimately by )(dicial law1ma9ing arrive at a somewhat similar position%
the evol(tion process may be slow
72
and may ta9e many years.
I>9 SECTION 4)524E3 OF THE COM;ANIES ACT 40(& < NOMINEE DIRECTORS
Common e+amples of nominee directors are directors who are nominated by a ma)ority
shareholder or a debent(re holder. A nominee director may be p(t in an e+tremely diffic(lt
position when his d(ty to his company and his obligations to his nominator are in conflict.
;nglish common law has ta9en a strict stand over this matter and this is reflected in the ,o(se of
-ords3 case of 2cottish Cooperati&e 3holesale 2ociety -td & Meyer
45
and decision of the @rivy
Co(ncil in 6uwait Asia #an* .C & (ational Mutual -ife (ominees -td.
70
Ander ;nglish common
law the d(ties of a nominee director are no different from that of an ordinary director. A nominee
director3s first d(ty is to his company and he m(st not allow this d(ty to be compromised by
ta9ing into acco(nt the interests of his nominator.
!he diffic(lty involved in as9ing nominee directors to p(t aside the interests of their nominator
was recognised in other common law )(risdictions. .or instance% Facobs F in the A(stralian case
of %e #roadcasting 2tation 2 /# 8ty -td%
<1
was of the opinion that a nominee director may ta9e
into acco(nt his nominators3 interest if he honestly believed that the nominator3s interest
corresponded with the interest of the company.
<"
*n the Cew Iealand case of #erlei 9estia ((.:)
-td & ,erny'ough
<7
Mahon F said%
<<

!he stage has already been reached according to some commentators where
nominee directors will be absolved from s(ggested breach of d(ty to the company
merely beca(se they act in f(rtherance of the interests of their appointers%
provided their cond(ct accords with a bona fide belief that the interests of the
corporate entity are li9ewise being advanced.
*n ;&ersea Chinese #an*ing Corp -td and another v $ustlogin 8te -td
7<
Chao ,ic9 !in FA in
the Co(rt of Appeal of Singapore after referring to the strict r(le that the d(ty of the nominee
director is no different from that of an ordinary director said%
6(t that is not to say that a nominee director m(st act against the interest of his
appointor. A nominee director may ta9e into acco(nt the interest of his appointor
if s(ch interest does not conflict with the interest of the companyB see 6umagai
/umi Co -td v :enecon 8te -td J1995K " S-/ "9$ at 715 J52K. !he co(rt will
1#
only interfere if it is of the view that no reasonable director wo(ld consider the
action ta9en to be in the interest of the company.
Another A(stralian case% -e&in & Clar*!
<6
ill(strates that the terms or special circ(mstances (nder
which a company accepted a nominee director may be constr(ed as a waiver by the company of
the strict re8(irements imposed by the common law (pon a nominee director. .ew wo(ld
hesitate to commend the practical% sensible and realistic approach in these cases.
*n addition% some common law )(risdictions have created special stat(tory e+ceptions
<$
to the
strict common law r(le. .or e+ample% stat(te may% s(b)ect to certain conditions being met% permit
a director of a wholly owned s(bsidiary to act in the interests of its holding company.

!here is a dearth of Malaysian case law
<2
on this s(b)ect b(t the legal position may now be
considered to be reasonably clear following the enactment of Act A1"99 which adds a new
s(bsection (1; to s 17". !he new provision reads:
(1; A director% who was appointed by virt(e of his position as an employee of a
company% or who was appointed by or as a representative of a shareholder% employer or
debent(re holder% shall act in the best interest of the company and in the event of any
conflict between his d(ty to act in the best interest of the company and his d(ty to his
nominator% he shall not s(bordinate his d(ty to act in the best interest of the company to
his d(ty to his nominator.
*t is noted that s 17"(1; lists the categories of nominee directors who come (nder the section3s
ambit. !he list is wide eno(gh to cover the (s(al 9ind of nominee director. !he d(ty imposed by
the new provision is similar to the d(ty (nder the common law. >hether the section will be
interpreted liberally or strictly by the co(rts remains to be seen. A point to note is that the new
provision ma9es no e+ception. !he strict r(le seemingly applies even in the case of the director
of a wholly owned s(bsidiary. ,owever% a possible% b(t limited% escape ro(te is the wording of
the section% which is that a nominee director &shall not su'ordinate
<9
his d(ty to act in the best
interest of the company to his d(ty to his nominator'. !h(s it is arg(able that he may% as was
stated in the A(stralian and Cew Iealand case law mentioned above% act in the interest of his
nominator provided that his act also advances the interest of the company or does not conflict
with his d(ty to the company.
11
>9 SECTIONS 4)524C3 AND 4)524D3 OF THE COM;ANIES ACT 40(& .
RELIANCE ON INFORMATION ;RO>IDED BY OTHERS

*t is (navoidable that in e+ercising their powers% or in carrying o(t their f(nctions% directors have
to rely on information provided by others. 6oth the ,igh -evel .inance Committee /eport on
Corporate 0overnance
5#
and the Corporate -aw /eform Committee
51
recogniGed the importance
of allowing directors to rely on others in order to obtain information. !he ,igh -evel .inance
Committee /eport pointed o(t that if directors are (nable to rely on others to obtain information%
they wo(ld be forced to ma9e detailed and e+ha(stive in8(iries into every matter and as a res(lt
delay the decision1ma9ing process.
5"
Act A1"99 inserts a new s(bsection (1C that provides that a director may rely on information%
professional or e+pert advice% opinions% reports or statements incl(ding financial statements or
other financial data prepared% presented or made by the person mentioned in the s(bsection. !he
persons are% (i an officer of the company whom the director believes on reasonable gro(nds to
be reliable and competent in respect of the matters concerned% (ii any other person retained by
the company in connection with matters involving s9ills or e+pertise% where the directors believe
on reasonable gro(nds that the matters concerned are within the persons3 professional or e+pert
competence% (iii another director concerning matters within that directors3 a(thority or (iv any
committee of the board (on which the delegating director did not serve concerning matters
within that committee3s a(thority.
*t is clear from an ens(ing new s(bsection (1D that blind reliance% reliance witho(t in8(iry or
reliance witho(t independently weighing the relevant information will not protect the director.
!his new provision creates two re8(irements that m(st be f(lfilled if reliance is deemed to have
been made on reasonable gro(nds. .irst% the reliance m(st be made in good faith. Secondly% the
reliance m(st have been made after ma9ing an independent assessment of the information%
advice% opinion% report% statement or financial data having regard to the directors3 9nowledge of
the company and the comple+ity of its str(ct(re and operation.
!hese new developments are fairly reliable indicators on when directors can rely on information
provided by others.

1"
>I9 SECTIONS 4)524F3 AND 4)524G3 OF THE COM;ANIES ACT 40(& .
DIRECTORS RIGHTS AND RES;ONSIBILITIES IN RES;ECT OF
DELEGATION OF THEIR ;OWERS
;+cept in the case of small companies% delegation by the board of some of its management
f(nctions is inevitable. !he third proposition of /omer F in %e City .1uita'le ,ire nsurance
<4
dealt with directors3 powers of delegation. ,is -ordship said%
*n respect of all d(ties that% having regard to the e+igencies of b(siness and the
articles of association% may properly be left to some other official% a director is% in
the absence of gro(nds for s(spicion% )(stified in tr(sting that official to perform
s(ch d(ties honestly.
*n ;ngland% it is now accepted that /omer F3s statement does not protect the directors when they
had placed (n8(alified or blind reliance on the person to whom they had delegated their tas9.
Also% delegation% even tho(gh made in good faith% does not release them from s(pervising the
discharge of the f(nction they had delegated. A director cannot delegate and abdicate all
responsibility for the delegatee3s acts and omissions
5<
. *n Malaysia% the ,igh -evel .inance
Committee /eport on Corporate 0overnance
55
recommended that the directors3 power to
delegate and the r(le that they may rely on the information provided by others be p(t in stat(tory
form. !hese recommendations are now implemented in Act A1"99. Act A1"99 amends the
parent Act by inserting a new s(bsection (1. to s 17" which reads:
(1. ;+cept as is otherwise provided by this Act% the memorand(m or articles of
association of the company or any resol(tion of the board of directors or shareholders of
the company% the directors may delegate any power of the board of directors to any
committee to the board of directors% director% officer% employee% e+pert or any other
person and where the directors have delegated any power% the directors are responsible
for the e+ercise of s(ch power by the delegatee as if s(ch power had been e+ercised by
the directors themselves.
At first sight% that part of s 17"(1. which provides that &the directors are responsible for the
e+ercise of s(ch power by the delegatee as if s(ch power had been e+ercised by the directors
themselves%' may appear to be overly rigoro(s in that it may appear to ma9e directors liable even
tho(gh they had ta9en the necessary preca(tions to prevent a wrongdoing by the delegatee. 6(t
this is not so% for an ens(ing new s(bsection (10 provides that directors are not responsible
(nder s(bsection (1. if they believed% on reasonable gro(nds% at all the times that the delegatee
wo(ld (se the power delegated in conformity with the d(ties of the director (nder the principal
Act and the company3s constit(tion. An additional re8(irement is that the directors believed on
17
reasonable gro(nds and in good faith (and after ma9ing proper en8(iries if the circ(mstances
warranted the need for one that the delegatee was reliable and competent to e+ercise the power
delegated.
Ceither s 17"(1. nor the ens(ing s(bsection (10 (disc(ssed below e+pressly say that the
power to delegate is s(b)ect to reasonable s(pervision or monitoring by the directors. *t is
s(bmitted that despite this omission% directors cannot escape liability for the proper e+ercise of
any of their f(nctions by merely delegating their power in good faith to a committee or one of the
persons mentioned in the section. Malaysian co(rts are li9ely to hold that directors are bo(nd to
monitor or s(pervise the e+ercise of the f(nctions delegated (nless the circ(mstances indicate
that s(pervision may be reasonably e+c(sed.
Considered overall% the new s(bsections% (1. and (10 are (sef(l additions to the stat(tory law
dealing with directors3 d(ties. >hilst recognising in stat(tory form that the directors can delegate
their powers the new s(bsections impose re8(irements which attempt to ens(re that the e+ercise
of the power of delegation is responsible% honest and informed. !hese new provisions will serve
to promote effective corporate governance.
>II9 SECTION 4)524B3 < BUSINESS ?UDGMENT RULE
!he board of a company involved in a commercial enterprise cannot totally avoid ma9ing
b(siness )(dgments that involve ris9 ta9ing. Most b(siness opport(nities available to a company%
come inevitably with the attendant ris9 that the opport(nity% if e+ploited% may go wrong and
ca(se loss to the company. Co one will deny that it is proper to protect the directors over a
b(siness )(dgment that has gone wrong if they had e+ercised their )(dgment with responsibility%
honesty and in the best interest of the company.
!he ,igh -evel .inance Committee /eport on Corporate 0overnance
56
noted the e+istence of a
b(siness )(dgment r(le to protect directors in the Anited States
5$
and A(stralia
52
and
recommended the enactment of a stat(tory provision on the s(b)ect.
59
Act A1"99 now incorporates a b(siness )(dgment r(le modelled on s 12#(" of the A(stralian
Corporations Act "##1 by inserting a new s(bsection (16 in s 17". !he new provision reads as
follows:
(16 A director who ma9es a b(siness )(dgment is deemed to meet the re8(irements of
the d(ty (nder s(bsection (1A
6#
and the e8(ivalent d(ties (nder the common law and in
e8(ity if the director1
1<
(a ma9es the b(siness )(dgment in good faith for a proper p(rposeB
(b does not have a material personal interest in the s(b)ect matter of the b(siness
)(dgmentB
(c is informed abo(t the s(b)ect matter of the b(siness )(dgment to the e+tent the
director reasonably believes to be appropriate (nder the circ(mstancesB and
(d reasonably believes that the b(siness )(dgment is in the best interest of the company.
At the o(tset% reference m(st be made to the definition of &b(siness )(dgment' in a new
provision in s 17"(6. !his provides that b(siness )(dgment means &any decision on whether or
not to ta9e action in respect of a matter relevant to the b(siness of the company'. !his was
probably enacted to cover both acts and omissions in relation to a b(siness decision. !he writer
wo(ld s(bmit that the wording of the definition is not comprehensive. !he wording creates some
do(bt as to whether the definition covers all decisions in relation to the b(siness activity of the
company or only covers decisions as to whether to ta9e or not to ta9e action in respect of a
matter. *t is s(ggested that a better alternative wo(ld be one with the word &incl(des' before the
words 'any decision' or a definition witho(t the words &whether or not to ta9e action' so that it
wo(ld cover every decision in relation to the b(siness of the company.
*t may be noted that a director only en)oys the protection of the b(siness )(dgment r(le if he does
not have a &material' personal interest in the s(b)ect1matter of the b(siness )(dgment b(t there is
ambig(ity as to when an interest will be &material'.
!he enactment of the b(siness )(dgment r(le as part of the principal Act is a welcome
development. Co(rts have traditionally demonstrated a rel(ctance to assess or )(dge the wisdom
of b(siness and management decisions by directors.
61
!he new provision will enable both the
board and the co(rt to determine when a b(siness )(dgment will protect directors from a s(it if
their b(siness )(dgment has gone wrong and ca(sed loss to the company.
As indicated above% the common law co(rts have shown disinclination to 8(estion directors3
b(siness )(dgments and management decisions and this is reflected in the new stat(tory
provisions. At this stage it is not clear how far the co(rts will go in (sing the r(le to protect
directors. A pertinent 8(estion which may confront the co(rt in the f(t(re is whether% despite the
b(siness )(dgment r(le% co(rts may still e+amine directors3 b(siness )(dgments where they have
made a grave error in their decision ma9ing process th(s raising do(bts as to their good faith.
6"
*t
is to be noted that if the director satisfies the re8(irements of s(bsection 16% he is deemed &to
meet the re8(irements of the d(ty (nder s(bsection 1A and the e8(ivalent d(ties (nder the
common law and in e8(ity'. !he d(ty (nder s 17"(1A was disc(ssed earlier in part ** of this
paper.
15
>III9 SECTION 4)4 OF THE COM;ANIES ACT 40(& . DISCLOSURE OF
DIRECTORS INTERESTS IN CONTRACTS
Section 171(1 of the principal Act imposes a d(ty on every director who is in any way% whether
directly or indirectly% interested in a contract or proposed contract with the company to disclose
his interest at a meeting of the directors of the company. !he disclos(re m(st be made as soon as
practicable after the relevant facts have come to his 9nowledge. .ail(re to comply with s 171(1
is a criminal offence with a penalty of imprisonment for seven years or a fine of one h(ndred and
fifty tho(sand ringgit or both.
A. Addition =f A Cew S(bsection !o Deal >ith !he *nterest =f A Spo(se =r Child
=f A Director
Section 171 is amended by the addition of a new s(bsection ($A which reads:
.or the p(rpose of this section% an interest of the spo(se of a director of a company (not
being herself or himself a director of the company and an interest of a child% incl(ding
adopted child or stepchild% of a director of the company (not being himself or herself a
director of the company in the shares or debent(re of the company% shall be treated as an
interest in the contract and proposed contract.
!he categories of family members specified in the new provision appear to be e+ha(stive and
one may 8(estion the need for restricting the list to these limited persons.
.(rther% the interpretation of this section is bo(nd to ca(se diffic(lties. *t is to be noted that the
interest of the family members referred to in the new s(b1section is the interest in the shares or
debent(res of &the company'% and the phrase% &the company' appears to refer to the company of
the director concerned% and not to the other contracting party where the other party is a
company. !he need for s(ch disclos(re is not clear as one wo(ld have tho(ght that the interest of
the spo(se or child in the other contracting party is the relevant interest for the p(rpose of s
171(1. !he ;+planatory Statement of the 6ill for Act A1"99 states that the intention of the
amendment is &to provide that the interest of a spo(se and a child incl(ding adopted child and
step1child is incl(ded in the interests that a director must disclose
67
(nder section 171'. *t is
respectf(lly s(bmitted that the wording of the amendment does not reflect this e+planation. !his
is beca(se the interest which a director must disclose to prevent contravention of s 171(1 is not
his interest in his own company b(t his interest in respect of the other contracting party. Again%
the degree or level of interest in the shares or debent(res is not specified. =n a strict
interpretation of the new provision% disclos(re may be necessary even if the interest is minimal.
!his diffic(lty of determining the level or e+tent of interest for the p(rpose of disclos(re has
been a feat(re of s 171 from the date of its inception. *t is s(bmitted that even the addition of the
word &material' before the word &interest' wo(ld not have totally removed the diffic(lty for this
16
wo(ld simply raise the en8(iry as to what level or degree of holding wo(ld be deemed to be
material. !his% it is s(bmitted% is the problem faced with the constr(ction of another component
of s 171% namely% s 171(". !his section e+empts a director from disclos(re where his interest
consists only of being a member or creditor of the other contracting party% where the other party
is a corporation% &if the interest of the director may properly be regarded as not being a material
interest'. !he word &material' is not defined in s 171 or in s <% the definition section of the
principal Act.
6<

!he writer wo(ld have preferred greater clarity in the drafting of s 171 for a breach of the section
is a criminal offence carrying severe penalties.
6. Addition of a Cew S(bsection to @rovide for a Civil /emedy
6efore s 171 was amended by Act A1"99 the said section did not contain any provision which
dealt directly
65
with the civil conse8(ences which followed its breach. Act A1"99 now adds a
new s(bsection ($6 to s 171. !his s(bsection ma9es a contract entered into in contravention of s
171 voidable at the instance of the company. !he new s(bsection creates a happy sit(ation for
the company which may elect to adopt a favo(rable contract even tho(gh it is tainted by a
transgression of s 171. !he same new section p(ts a restraint on the company3s right to rescind
the contract by creating an e+ception which applies where the tainted contract is &in favo(r of
any person dealing with the company for val(able consideration and witho(t any act(al notice of
the contravention'. !h(s it appears that an o(tsider who satisfies the re8(irements mentioned in
the e+ception may enforce a contract which infringes s 171 even if the terms do not favo(r the
company.
*t is noted that s(bsection ($6 (ses the e+pression &act(al notice'. !his% it is s(bmitted% is
beneficial to an o(tsider involved in a contract to which s 171 applies beca(se it appears to sh(t
o(t constr(ctive notice of the fact that s 171 is being breached. =ne may arg(e that the words%
Eact(al notice3 may even protect an o(tsider who is p(t on in8(iry that s 171 is being
contravened% and that this is not desirable. !he writer wo(ld have preferred the (se of the
e+pression &in good faith and witho(t notice'% so as to ma9e good faith an essential element of
s(bsection ($6.
S(bsection ($6 does not state that restitutio in integrum is a re8(irement before the company
may avoid the contract. *t was not necessary for it to say so beca(se when a party opts to rescind
a voidable contract% s 65 of the Contracts Act of Malaysia 195# will apply. Ander s 65 the party
rescinding a voidable contract% shall% if he has received any benefit there(nder from the other
party% restore the benefit to the party from whom it was received
1$
.inally% it is s(bmitted that the word &debent(re' in the e+pression &shares and debent(re' in the
new provision appears to be an inadvertent error. *t sho(ld be &debent(res' as the persons
mentioned in the section may have an interest in more than one debent(re.
I@9 SECTION 4)4A OF THE COM;ANIES ACT 40(& . >OTING AND
;ARTICI;ATION AT A BOARD MEETING OF A DIRECTOR WHO IS
INTERESTED IN A CONTRACT OR A ;RO;OSED CONTRACT
Act A1"99 addresses two important 8(estions which were not dealt with in the principal Act.
!he first was whether a director interested in a contract within the meaning of s 171 co(ld
participate in the relevant disc(ssion at a board meeting. !he second was whether s(ch director
may vote on a board resol(tion pertaining to the contract. @robably it was tho(ght that these
matters co(ld be properly left to the articles of association. *n this conte+t% article 21 of !able A
of the .o(rth Sched(le to the principal Act 1965 does provide that s(ch a director shall not vote
at the relevant board meeting and if he does vote% his vote shall not be co(nted. Article 21 does
not say that a director may not participate in the disc(ssion at the board meeting. ,owever% !able
A is not (and never was of (niversal application and companies are (and were free to e+cl(de
or modify article 21.
A. Addition of a Cew Section to 6ar an *nterested Director from 5oting and @articipating at
6oard Meetings
Act A1"99 now alters the legal position by creating a new section 171A which provides that in
the sit(ation mentioned above% the director concerned &shall be co(nted only to ma9e the 8(or(m
at the board meeting b(t shall not participate in any disc(ssion while the contract or proposed
contract is being considered at the board meeting and shall not vote on the contract or proposed
contract'. !he new section allows the interested director to be present at the board meeting
altho(gh he cannot participate in the disc(ssion or vote on a resol(tion adopting the contract. *n
the opinion of the writer% the preferred position wo(ld have been to e+cl(de his presence at the
time of the relevant debate and voting on the proposed resol(tion% as a director may be able to
infl(ence the board by his mere presence.
Section 171A (" provides for fo(r e+ceptions where the prohibitions in s 171A (1 do not apply.
!hey are: (i in the case of a private company which is not a s(bsidiary to a p(blic companyB (ii
in the case of a private company which is a wholly owned s(bsidiary of a p(blic company in
respect of its contract or proposed contract with the said holding company or with another
wholly1owned s(bsidiary of the same holding company.B (iii in respect of any contract or
proposed contract of indemnity against any loss which any director may s(ffer by reason of
12
becoming or being a s(rety for a companyB and (iv in the case of a contract or proposed contract
by a p(blic company or a private company which is a s(bsidiary of a p(blic company with
another company in which the interest of the director concerned consists solely of :
(a in him being a director of that company and the holder of shares not more than that
re8(ired as his share 8(alification% or
(b in him having an interest in not more than five per cent(m of that company3s paid (p
capital.
!he writer wishes to point o(t that even where the e+ceptions en(merated in s 171A(" apply% a
company sho(ld not ass(me that it may allow a director to participate or vote at a board meeting
in relation to a contract in which he is interested. !his is beca(se the relevant company will still
be s(b)ect to restrictions% if any% in its memorand(m and articles of association. !h(s% for
e+ample% where a private company which is not a s(bsidiary of a p(blic company has adopted
article 21 of !able A% a director shall not vote tho(gh he may participate% at a board meeting in
respect of a contract or proposed contract in which he is interested.
*t is also to be noted that Act A1"99 ma9es no amendment to article 21 of !able A. !herefore a
company to which the e+ceptions stated above do not apply m(st be wary of the fact that if it
adopts article 21 of !able A% part of the article will conflict with section 171A beca(se while the
said article forbids voting% it does not e+pressly forbid participation in the disc(ssion.
6. Civil and Criminal Sanctions for a 6reach of Section 171A
Section 171A (7 provides civil conse8(ences for a breach of s 171A (1. !hese civil
conse8(ences are s(bstantially similar to the position in the new s 171($6 for a breach of s
171(1 disc(ssed above. *t provides the same protection for a person dealing with the company
for a val(able consideration and witho(t any &act(al notice' of the contravention of s 171A (1.
!he comments made earlier regarding act(al notice in relation to section 171($6 in part 5**
above% regarding s 171($6 also apply to section s 171A (7.
.inally% it may be mentioned that (nder s 171A (<% a director who 9nowingly contravenes s
171A shall be g(ilty of a criminal offence the penalty for is imprisonment for five years or a fine
of one h(ndred and fifty tho(sand ringgit or both.
19
@9 SECTION 4)4B OF THE COM;ANIES ACT 40(& < FUNCTIONS AND ;OWERS
OF THE BOARD
Section 1716 is another new provision inserted into the principal Act by Act A1"99. S(bsection
(1 of the section provides that &the b(siness and affairs of a company m(st be managed by% or
(nder the direction of% the board of directors'. !he p(rpose of this provision appears to give
stat(tory recognition and stat(tory force to the commonly accepted r(le that the board3s primary
f(nction is to manage or oversee the cond(ct of the company3s (nderta9ing. Similar legislation
to codify this primary f(nction of the board to manage% s(pervise% direct and ass(me
responsibility for the operation of the company3s affairs and b(siness has been enacted in some
common law )(risdictions.
66
!he new provision implements the recommendation in the ,igh
-evel .inance Committee /eport on Corporate 0overnance that the board3s d(ty to oversee the
cond(ct of the company3s b(siness and its &power' to manage the company sho(ld be given
stat(tory force.
6$
!he writer wo(ld readily agree with the Committee3s view that a stat(tory
reiteration in the form enacted in s 1716 (1 wo(ld bring advantages in thatB it is a clear
statement to the board as to its responsibilities and a clear direction to the co(rts of the collective
f(nctions and d(ties of the board.
*n large companies the board will inevitably have to delegate some of its management f(nctions
to others. *n s(ch cases it cannot abdicate its d(ty to s(pervise the discharge of the f(nctions
delegated. !hat the board need not fact(ally manage the company% and if it does not do so% that it
has a d(ty to direct and s(pervise% is reflected in the words &be managed by or
62
(nder the
direction of the board of directors'. !he board m(st% at the least% ens(re that the company3s
b(siness and affairs are cond(cted (nder its direction and s(pervision.
A. (ew 2tatutory 8ro&ision %ecogni=ing The #oard"s 8owers ;f Management And
2uper&ision
!he ,igh -evel .inance Committee3s recommendation that the board3s power to manage the
company be given stat(tory force is implemented in a new section 1716 (" which provide as
follows:1

!he board of directors has all the powers necessary for managing and for directing and
s(pervising the management of the b(siness and affairs of the company s(b)ect to any
modification% e+ception or limitation contained in this Act or in the memorand(m or
articles of association of the company.
"#
!he articles of association of a company will almost always give powers of s(pervision and
management to the board and the (sef(lness of this section may be 8(estioned. ,owever it may
serve as a reminder to directors and o(tsiders that the powers of management are still s(b)ect to
any modification% e+ception or limitation contained in the Act or in the memorand(m or articles
of association of the company.
6. /elationship of the Cew S 1716 (" !o !able A Article $7 on Management @owers of the
6oard
!he s(b)ect of the board3s power of management (nder the new s 1716 has a lin9 to article $7 of
!able A and some remar9s on the said article may be pertinent. !his article% which is commonly
adopted by many companies% provides that &the b(siness of the company shall be managed by
the directors whoLmay e+ercise all s(ch powers of the company as are not% by the Act or by
these reg(lations% re8(ired to be e+ercised by the company in general meeting% s(b)ect%
nevertheless% to any of these reg(lations% to the provisions of the Act% and to s(ch reg(lations%
being not inconsistent with the aforesaid reg(lations or provisions% as may be prescribed by the
company in general meetingL'.
/everting once more to the stat(tory power e+pressed in s 1716 ("% it was noted that the powers
conferred on the board are s(b)ect to modification% e+ception and limitation in the memorand(m
and articles. !h(s% the said doc(ments may reserve some management powers for the general
meeting to e+ercise% even tho(gh they are management powers that the board may e+ercise.
More importantly% it is clear that the new provision does not prohibit a specific power in the
memorand(m or articles which p(rports to allow the general meeting to interfere in the
management of a company by the passing of a resol(tion% whether ordinary or special. !his
matter is partic(larly relevant where there is a conflict between the board and the company in
general meeting over the division of powers between these two organs. *n this conte+t% there is
strong a(thority that where the articles give powers of management to the board% the general
meeting cannot interfere with the e+ercise of those powers.
69
!herefore% in the event of a conflict
between the board and the general meeting% the relevant article dealing with the e+ercise of
management powers% for e+ample% !able A article $7% has to be caref(lly constr(ed to determine
the division of management powers between the two organs. Articles materially similar to article
$7 were constr(ed in a n(mber of ;nglish and Malaysian cases as not permitting interference by
the general meeting in matters of management.
$#
6(t a debate as to whether articles in the form
of article $7 can be constr(ed in this way began a h(ndred years ago and still contin(es.
$1
!his is
beca(se the wording of article $7 and its ancestors is both ambig(o(s and inelegant.
$"
=ne aspect
of the debate which has arisen is whether the words towards the end of article $7% which read
&and to s(ch reg(lationsL as may be prescribed by the company in general meetingL'% can be
constr(ed as empowering the general meeting to interfere in management by an ordinary
resol(tion. 6(t the weight of a(thority against s(ch a constr(ction appears overwhelming.
$7
*n
;ngland% the e8(ivalent to article $7% namely% article $# of the 1925 version of !able A ma9es
"1
the management powers given to the board s(b)ect &to any directions given by special
resol(tion'. !he ;nglish article $# may have removed the alleged ambig(ity
$<
in its predecessor
and is a precedent which Malaysia may adopt. ,owever article $# may be criticised as
strengthening the grip of the board on management as the ma)ority re8(ired to pass a special
resol(tion may often be a diffic(lt tas9 for members to achieve.
*t is regrettable that Act A1"99 ma9es no amendment to !able A article $7 to free it from its
controversies. *f the article is adopted by a company% its board co(ld% on the basis of c(rrent
a(thority% ignore the directions of the company in general meeting over management matters
which are not specifically reserved for the benefit of the general meeting by the Act or by the
company3s constit(tion. >hether the present position sho(ld contin(e or whether !able A sho(ld
be amended to give greater powers to the general meeting is also a debatable 8(estion in
Malaysia.
!his s(b)ect can be concl(ded by a final comment. Altho(gh the board may appear to en)oy near
absol(te powers where a company adopts a reg(lation similar to article $7% recalcitrant directors
may be warned that they r(n the ris9 of a possible removal from their office by an e+asperated
general meeting% and this co(ld be achieved in the case of a p(blic company by an ordinary
resol(tion.
$5
@I9 CONCLUSION
Malaysia has always shown eagerness towards raising the standard and efficiency of the
co(ntry3s corporate laws and corporate governance. !he vario(s amendments to the principal
Act% the establishment of the ,igh -evel .inance Committee in 1999% the Companies
Commission in "##1% and the Corporate -aw /eform Committee in "##7 indicate Malaysia3s
enth(siasm to achieve these noble and desirable p(rposes.
Act A1"99 is yet another evidence of Malaysia3s commitment to strengthen its corporate laws
and corporate governance. !his paper has attempted to e+amine some of the ma)or effects of Act
A1"99 on directors3 d(ties in Malaysia. =verall% the writer is of the view that the new legislation
is a commendable attempt to strengthen the corporate laws of Malaysia. !he changes made by
Act A1"99 will help to invigorate the e+isting legislation and enhance responsible management
and good governance.
""
1
M !his paper forms part of an article co1a(thored by this writer and S! -ingam% entitled &!he ;ffects
of the Companies (Amendment Act "##$ =n Directors3 D(ties: Some =bservations'.
6y Act "7H1966% Act A"1% Act A5#% Act A616% Act A65$% Act A$"#% Act A$91% Act A216% Act A276%
Act A2<5% Act A9<9% Act A1##$% Act A1#""% Act A1#<7% Act A1#21% Act A11#2% Act A1112.
"
Some of the cases where s 17" (1 was referred to are> ?eng 9ing .nterprise 2dn #hd v 0atu* 0r
;ng 8oh 6ah J1922K " M-F 6#B 2immah Tim'er ndustries 2dn #hd v 0a&id -ow 2ee 6eat J1999K 5
M-F <"1 and ndustrial Concrete 8roducts v Concrete .ngineering 8roducts#hd J"##1K " M-F 77".
7
See for instance% 8$T@ 0enson (M) 2dn #hd A ;rs v %o+y (Malaysia) 2dn #hd J192#K " M-F 176 and
(g 8a* Cheong v /lo'al nsurance Co 2dn #hd J1995K 1 M-F 6<.
<
My emphasis.
5
See Ch 6 paras "."."51".".71 of the /eport. See also Cons(ltative Doc(ment 5% C-/C at para <."2.
6
Di+on F in Mills v Mills (1972 6# C-/ 15#.
$
J199<K 1 6C-C 767.
2
J196<K 11" C-/ 59$.
9
My emphasis.
1#
See %egal (9astings) -td v /ulli&er J196$K " AC 17<.
11
See Coo* v 0ee*s J1916K 1 AC 55<.
1"
!his arises beca(se of the diffic(lty in reconciling some of the common law decisions and )(dicial
dicta on the s(b)ect. *t is diffic(lt to s(mmarise these decisions. Some appreciation of the diffic(lties
will be evident from the decisions in %egal (9astings) -td v /ulli&er (see n 1#% supra at p 15# of the
)(dgment% Coo* v 0ee*s% (i'id at p 56< of the )(dgment% 2mith A ;thers v Croft (Co 7 J192$K
6C-C 755 at p <#< and 8rudential Assurance Co -td v (ewman ndustries -td (Co " J1921K Ch "5$
at p 7#$. See in partic(lar the statement of 5inelott F in 8rudential that &there is no obvio(s limit to the
power of the ma)ority to a(thoriGe or ratify an act or transaction whatever its character provided that
the ma)ority does not have an interest which conflicts with the company'.
17
Some of the cases where the doctrine of fra(d on the minority was applied were instances where the
victim was the company itself. !his paper (ses the e+pressions &fra(d on the company' and &fra(d on
the minority' to disting(ish the position of the company from that of its minority shareholders. .
1<
Menier v 9oopers Telegraph 3or*s J12$<K -/ 9 Ch App 75#.
15
!he classic case is Coo* v 0ee*s! supra n "5.
16
#rown v #ritish A'rasi&e 3heel -td J1919K 1 Ch "9#.
1$
*n this conte+t see the recommendations of the Company -aw /eview Steering 0ro(p in ;ngland
entitled% Modern Company -aw .or a Competitive ;conomyB Completing the Str(ct(re (A/C##H1775
(-ondon: D!* "### para 5.25.
12
*n this conte+t see s 1$5 of the Companies Act "##6 of ;ngland which% inter alia% deals with (a the
d(ty of a director to avoid a conflict of interest% (b when a breach of s(ch d(ty may arise% and (c the
machinery for obtaining &a(thoriGation' of a breach of s(ch d(ty. See also ss 1$6% 12#% 121 of the
;nglish Act which are relevant to the present disc(ssion.
19
See s(b1part C above.
"#
!he derivative action in Malaysia is dealt with in detail in -oh Siew Cheang% Corporate 8owers
Accounta'ility (N(ala -(mp(r: -e+is Ce+is 6(tterworths% "
nd
ed.% "##"% Ch 75.
"1
-ondon A Mashonaland .+ploration Co -td & (ew Mashonaland .+ploration Co -td J1291K >C
165B #ell & -e&er #rothers -td J1971K All ;/ /ep 1B 2hanghai 9all -td & Chong Mun ,oo J196$K 1
M-F "5<.
""
(orth-3est Transportation v #eatty (122$ 1" App. Cas 529 (@.C. and #urland v .arle J19#"K AC
27 (@.C. are the leading cases.
"7
2upra n 11.
"<
J19"5K Ch <#$
"5
'id at p <"2. /omer F3s second proposition dealt with diligence. ,is -ordship said %
A director is not bo(nd to give contin(o(s attention to the affairs of his company. ,is d(ties are
of an intermittent nat(re to be performed at periodical board meetings and at meetings of any
committee of the board (pon which he happens to be placed. ,e is not% however bo(nd to
attend all s(ch meetings% tho(gh he o(ght to attend whenever in the circ(mstances he is
reasonably able to do so.
/omer F3s third proposition is dealt with in part 5*.
"6
See for instance the ,igh -evel .inance Committee /eport on Corporate 0overnance Ch. 6 paras
".".511".".65 and the Cooney Committee /eport in 1929 in A(stralia.
"$
See for instance 0aniels v Anderson J1995K 16 ACS/ 6#$
"2
%e #ra=ilian %u''er 8lantations A .states -td J1911K 1 Ch <"5 is a stri9ing e+ample of where
ignorance benefited the director.
"9
See (orman & Theodore /oddard J1991K 6C-C 1#"2% %e #arings 8lc (o. < J"###K 1 6C-C 5"7 and
%e 0"$an of -ondon -td J199<K 1 6C-C 561.
7#
'id.
71
See .arrar% F, O ,annigan% 6M% ,arrar"s Company -aw (-ondon: 6(tterworths% <
th
ed% 1992 at p
795.
7"
2upra n 7# at p 567.
77
See also his -ordship3s preference for the adoption of a similar standard in (orman & Theodore
/oddard J1991K 6C-C 1#"2.
7<
Company 0irectors> %egulating Conflicts of nterest and ,ormulating a 2tatement of 0uties% -aw
Commission Cons(ltation @aper Co. 157 (-ondon: Stationery =ffice% 1992% para 17.19% 8(oted in
Mayson% .rench O /yan% Company -aw (=+ford: =A@% ""
nd
ed.% "##51"##6 at p 512.
75
.or e+ample in A'dul Mohd 6halid & 0ato 9a)i Mustapha 6amal J"##7K 5 C-F 25% altho(gh the
reference in this case to %e City was obiter.
76
!he Committee3s emphasis.
7$
See Ch 6 para ".".65 of the /eport.
72
'id.
79
J1959K AC 7"<.
<#
J1991K1 AC 12$.
<1
J196<11965K CS>/ 16<2.
<"
'id at p 1667.
<7
J192#K CI-/ 15#.
<<
'id at p 1651166.
<5
J"##<K " S-/ 6$5.
<6
J196"K CS>/ 626.
<$
See Cons(ltative Doc(ment 5% C-/C paras <.771 <.76 and s 12$ of the Corporations Act "##1 of
A(stralia.
<2
See ndustrial Concrete 8roducts #hd v Concrete .ngineering 8roducts #hd J"##1K " AM/ "151B
J"##1K " M-F 77" where a director had acted in the interest of his nominator and against the interest of
the company.
<9
My emphasis.
5#
See Ch 6 para 7.1.7 of the /eport.
51
See Cons(ltative Doc(ment 5% C-/C% paras 7.1# ? 7.16.
5"
2upra n 51.
57
J19"5K Ch <#$ at p <"2 et se1.
5<
Mayson% .rench and /yan% Company -aw (=+ford: =A@% ""
nd
ed.% "##51"##6 at pp 51915"#
contains an ill(strative acco(nt of the leading cases on the s(b)ect.
55
See Ch 6 paras ".1.1" and 7.1.1 1 7.1.< of the /eport.
56
See Ch 6 para 7." of the /eport.
5$
*n the ASA the so1called Esafe harbo(r3 principle was developed by )(dicial doctrine.
52
*n A(stralia the b(siness )(dgment r(le was created by stat(te. See s 12#(" of the A(stralian
Corporations Act "##1
59
See also Cons(ltative Doc(ment 5 C-/C% para 7."1
6#
S(bsection (1A of s 17" deals with a director3s d(ty of care% s9ill and diligence.
61
See 0o&ey v Cory J19#1K AC <$$ at p <22. An emphatic statement is that of the @rivy Co(ncil in
9oward 2mith -td v Ampol -td J19$<K AC 2"1 at p 27" as follows: &!here is no appeal on merits from
management decisions to co(rts of lawB nor will co(rts of law ass(me to act as a 9ind of s(pervisory
board over decisions within the powers of management honestly arrived at.'
6"
.or a critical and analytical disc(ssion of the b(siness )(dgment r(le see /osenberg% David %
&0alactic St(pidity and the 6(siness F(dgment /(le ("##6 6epress -egal Series% @aper 1#6$
(http:HHlaw.bepress.comHe+pressoHepsH1#6$.
67
My emphasis.
6<
C(rio(sly% another new section% s 171A (which deals with voting and participation at a board meeting
in respect of a contract ca(ght (nder s 171 attempts indirectly to deal with the iss(e of a material
interest of a director. See part *4% s(b1part A.
65
!his was not act(ally a defect beca(se s 171(2 provides that s 171 &shall be in addition to and not in
derogation of the operation of any r(le of law' and th(s brings in the application of the common law.
At common law% contracts which violated the d(ty mentioned in s 171 were voidable at the option of
the company. See A'erdeen %ailway Company v #lai*ie #rothers 1 MACP <61% 9ely-9utchinson v
#rayhead -imited J1962K 1P6 5<9 and /uinness v 2aunders J199#K " AC 667.
66
An e+ample is s 1"2 of the Cew Iealand Companies Act 1997.
6$
See Ch 6 para ".1.17 of the /eport. See also Cons(ltative Doc(ment 5% &=n Clarifying and
/eform(lating the Directors3 /ole and D(ties' by the Corporate -aw /eform Committee for the
Companies Commission of Malaysia (hereafter referred to as &Cons(ltative Doc(ment 5% C-/C'% at
paras ".11".$.
62
My emphasis.
69
See n. $#.
$#
Automatic 2elf-Cleansing ,ilter 2yndicate Co -td v Cuninghame J19#6K " Ch 7< (C.AB Cuin A
A+tens -td v 2almon J19#9K AC <<" (,.-B $ohn 2haw A 2ons (2alford) -td v 2haw J1975K " N6 117
(C.AB #rec*land /roup 9oldings -td v -ondon A 2uffol* 8roperties -td J1929K 6C-C 1##B 0ato
Mah 6o* A ;rs & 2ee 6eng -eong A ;rs (199# 1 MSC-C 9#% 75$B 8ilot Cargo v Adinas Tours and
Tra&el 2dn. #hd. J"##"K " AM/ 1$7".
$1
See Ceville F in Marshall"s @al&e /ear Co -td v Manning 3ardle A Co -td J19#9K 1 Ch "6$% and
-im !eong Pwee FC in Credit 0e&elopment 8te -td v M; 8te -td J1997K " S-/ 7$#. See also Sealy%
- S% Cases and Materials in Company -aw (-ondon: 6(tterworths% $
th
ed% "##1 at p "#5B -oh Siew
Cheang% Corporate 8owers Accounta'ility (N(ala -(mp(r: -e+is Ce+is 6(tterworths% "
nd
ed.% "##" at
pp 1<6 ? 155B Mayson .rench and /yan% Company -aw (=+ford: =A@% ""
nd
ed.% "##51"##6% at pp
5#6? 5#9% for ill(minating s(mmaries.
$"
See /ower"s 8rinciples of Modern Company -aw (-ondon: Stevens O Sons% <
th
ed% 19$9 at p 1<5.
$7
See n $#% supra. *n this conte+t% @rofessor 0ower3s view of the possible meaning of the controversial
words were as follows: &@ossibly &reg(lations'% when it first appears% means the e+isting articles and%
when (sed in the final phrase% means any new articles adopted by special resol(tion.' 'id% p 1<5 in his
n <6.
$<
*n this conte+t% see Mayson .rench and /yan% supra n $#% pp 5#$15#2.
$5
See s 1"2 of the principal Act for the proced(re re8(ired.