LECTURE 8: COMPANY DIRECTORS

Company Law
LW 4024
 Who is a director?

 A director of a company is an “officer” within the meaning of

Section 2(1) CA 2016.
 Section 2(1) CA 2016 also defines the word “director” as
including:
“any person occupying the position of director of a corporation by
whatever name called and includes a person in accordance with
whose directions or instructions the majority of directors of a
corporation are accustomed to act and an alternate or substitute
director” 2
 Who is a director?
 The definition is very wide and so includes:
• a director properly so called and duly appointed to such office
• one who acts in the position of director with or without lawful
authority
• a de facto director who had acted after his appointment as a director
had been terminated
• a “shadow director”
• an alternate director

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 Who is a director?
Re Unisoft Group Ltd (No.3) (1994)


The meaning of a shadow director was thus explained:

“ ..that the shadow director must be, in effect, the puppet master controlling the actions of the
board. The directors must be the “cat’s paw” (tool) of the shadow director. They must be people who
act on the directions or instructions of the shadow director as a matter of regular practice…”

Secretary of State for Trade and Industry v Deverell & Anor (2000)
D and H had been key participants in the senior management of a travel company. They were not
directors but purported to be ostensible consultants to the company. The reality however, was that
they exercised such control so as to be puppet masters over the management.
The Court of Appeal held that all that was needed was sufficient evidence showing that the board
was accustomed to act in accordance with their instructions and it was not always necessary to show
that appointed directors had surrendered their discretion in the face of instructions from the alleged
shadow director. 4
 Requirements of Directors

Under Section 196(1) CA 2016:
- a public company must have at least two directors
- who must be resident in Malaysia, ie “shall ordinarily reside in Malaysia by having a principal
place of residence in Malaysia” and - shall not include an alternate or substitute director.
- such director(s) cannot resign or vacate office if this will cause the number of the company’s
directors to fall below two.
- a private company, there must be at least one director who “shall ordinarily reside in Malaysia
by having a principal place of residence in Malaysia”

Fong Poh Yoke v The Central Construction Company (M) Sdn Bhd (1998)
The court held that the word “residence” means that the person must be residing in the place with
some degree of continuity. Thus he may have two places of residence so long as his main place of
residence is in Malaysia. Citizenship is not important.
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 Qualification of Directors

 Although in law, a corporate body is a person and can stand in a fiduciary

relationship with another body corporate, nevertheless, Section 196(2) CA 2016
provides:
“A director shall be a natural person who is at least eighteen years of age.”

 A director:
• Does not have to be a member of a company
• Need not possess any academic qualification
• Does not have to hold any shares in a company
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 Qualification of Directors

 A company in its constitution may require its directors to hold a minimum

number of shares in the company. CA 2016 does not provide a grace period
within which the director should obtain the shares. Therefore the terms in the
constitution shall apply without exception.

 Re East Norford Tramways Co (Barber’s Case) (1877)

It was stated that where the holding of shares is a condition precedent, the
appointment as a director may be held “absolutely null and void” if the
person does not have the relevant share qualifications.
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 Qualification of Directors

 Some companies might have adopted the Fourth Schedule to CA 1965 (“Table A”) as
its constitution and have not passed any resolution to modify it. In these cases,
reference must be made to Table A. Article 72 stated that the office of a director will
become vacant if the director:
(a) ceases to be a director by virtue of the Act;
(b) becomes bankrupt or makes any arrangement or composition with his creditors
generally;
(c) becomes prohibited from being a director by reason of any order made under the Act;
(d) becomes of unsound mind or a person whose person or estate is liable to be dealt
with in any way under the law relating to mental disorder;
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 Qualification of Directors

(e) resigns his office by notice in writing to the company;

(f) for more than six months is absent without permission of the directors
from meetings of the directors held during that period;
g) without the consent of the company in general meeting holds any other
office of profit under the company except that of managing director or
manager; or
(h) is directly or indirectly interested in any contract or proposed contract
with the company and fails to declare the nature of his interest in manner
required by the Act. 9
DISQUALIFICATION OF DIRECTORS
Based on s198(1), the following categories are disqualified:
a) An undischarged bankrupt
b) Convicted of an offence in connection with promotion,formation or
management of a corporation;
c) has been convicted of an offence involving bribery, fraud or dishonesty; or
involving breach of duties of directors
d) Has been convicted of an offence under section 213,217,218,228
and 539.
e) Disqualified by Court due to breach of S 199 :
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DISQUALIFICATION OF DIRECTORS S 199

S199.(1)
The Court may, on an application by the Registrar, make an order to disqualify any person
from acting or holding office as a director or promoter of a company, or be concerned
with or taking part in the management of a company whether directly or indirectly, if—
(a) 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;
(b) due to his contravention of the duties of a director; or
(c) due to his habitual contravention of this Act.
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 Appointment of a director
By Section 202(1) CA 2016:
“A person shall not be appointed as a director of a company unless he has consented in writing to be a
director and make a declaration that he is not disqualified from being appointed or holding office as a
director of a company under this Act.”
Section 202 (1) CA 2016 states that “a person named as a director in an application for incorporation of a
company shall hold office as a director from the date of incorporation until that person ceases to hold office
as a director in accordance with this Act.”
By Section 202(2) CA 2016: “All subsequent directors of a company may be appointed by ordinary
resolution.”
Where the company is a public company, the appointment is by way of a separate resolution. Section 203
CA 2016 requires the appointment of directors to be voted individually. Two or more directors cannot be
appointed in the same resolution, unless the members have first agreed by resolution to the appointment of
the said directors in a single resolution. If any member at that meeting voted against the appointment of more
than one director in a single resolution the appointment is not valid.
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 Removal of Directors
 Private Company – s.206(1)
 Subject to the Constitution, an ordinary resolution may be passed to
remove a director

 Public Company – s. 206(2)

 by ordinary resolution with special notice of 28 days s.322(1)
 director has right to be heard at the meeting
S.207 states that on receiving special notice for a resolution to remove a
director, the company shall send it to the director who shall be given the right
to make oral or written representation.
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 5. Removal of Directors
Tuan Haji Ishak bin Ismail v Leong Hup Holdings Bhd (1996)
A boardroom tussle occurred in a listed company, KFC Holdings (M) Bhd (“KFC”) which
controlled several well-known “Kentucky Fried Chicken” outlets in Malaysia.
One of the groups was led by the Lau Brothers from Leong Hup Holdings Bhd (“LH”) and
the other group by Ishak and George Ting from the KFC camp.
There was a management agreement between LH and KFC and LH was to manage the
upstream operations of KFC. At the same time LH appointed KFC to assist it in the
management of the “Ayam A1” retail outlets of LH. The agreement provided that the Lau
Brothers were to be appointed to the Board of KFC though there was no provision that the
Lau Brothers were entitled to permanent representation on the board of KFC, confrontations
then occurred between the two groups and an EGM was called to remove the Lau Brothers as
directors of KFC. 14
 5. Removal of Directors
cont….
It was argued on behalf of KFC that a public company could not contract out of
its right to remove a director by ordinary resolution notwithstanding anything in
its articles and notwithstanding in its agreement between the company and the
director that he should not be removed.
The court held that if the company is a public company, it has an unfettered
right to remove a Director regardless of what the articles may say (according to
Section (128(1) CA 1965).

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 Duties of Directors

 For the purpose of company law, it is proper to say that directors stand in a fiduciary
relation to the company and all the powers entrusted to them are only exercisable in this
fiduciary capacity.
 Hospital Products Ltd v United States Surgical Corpn (1984)

“…….the fiduciary’s duty may be more accurately expressed by saying that he is under
an obligation not to promote his personal interest by making or pursuing a gain in
circumstances in which there is a conflict or a real or substantial possibility of conflict
between his personal interests and those of the persons whom he is bound to protect”
 Scope of a directors’ fiduciary duties
• proper purpose and good faith
• duty of skill, care and reasonable diligence
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 Duties of Directors
 Proper purpose and good faith
Section 213 (1) CA 2016 provides that: “A director of a company shall at all times
exercise his powers in accordance with this Act, for a proper purpose and in good faith in
the best interest of the company.”
When exercising his duties, the director must consider the interests of the company and
no one else’s; not even his personal interests.

Re W & M Roith Ltd (1967)

A director, Roith, entered into a service contract with his company for the purpose of
providing a pension for his wife in the event of his death and without taking into
consideration whether the contract was for the benefit of the company.
It was held that the whole object of the contract was not to be binding on the company for
it was to benefit not the company but Mrs Roith. 17
 Duties of Directors - Proper purpose and good faith
Illustrations are given in Section 218(1) CA 2016 as to what is meant by a director exercising his
power for a proper purpose:
“A director or officer of a company shall not, without the consent or ratification of a general
meeting—
(a) use the property of the company;
(b) use any information acquired by virtue of his position as a director or officer of the company;
(c) use his position as such director or officer;
(d) use any opportunity of the company which he became aware of, in the performance of his functions
as the director or officer of the company; or
(e) engage in business which is in competition with the company, to gain directly or indirectly, a benefit
for himself or any other person, or cause detriment to the company.
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Duties of Directors -Proper purpose and good faith

Note that the statutory duty above applies to a director as well as an officer of the
company. It thus applies also to the company’s CEO, CFO, COO, secretary, employee,
receiver and manager, and a liquidator appointed in a voluntary winding up. This is
because of the definition given to the term “officer” in Section 2(1) CA 2016 and the
definition of director in Section 210 CA 2016 i.e.:

“in addition to the definition of “director” in section 2, “director” includes chief

executive officer, chief financial officer, chief operating officer or any other person
primarily responsible for the management of the company.”

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 Duties of Directors -Proper purpose and good faith
Regal (Hastings) Ltd V Gulliver [1967]
Regal owned a cinema. Its directors wished to acquire 2 more local cinemas and then sell all as a
going concern. They formed a subsidiary in order to take lease of other 2 cinemas but the landlord was
not prepared to grant a subsidiary lease on the 2 cinemas unless subsidiary’s paid-up capital was
₤5,000. Co. was unable to inject more than ₤2,000 in cash for 2000 shares and so original
arrangement was changed. It was decided that Regal would subscribe for the outstanding 3000 shares.
The whole business was sold by way of takeover and directors made a profit. Purchasers of Regal
installed new BOD and co. brought an action against former directors claiming that they should
account for profit made on sale of their shares in subsidiary.
Held: the House of Lords found that as the opportunity to purchase the cinemas had arisen as a result
of his directorship of Regal, Gulliver had a duty to account for the profit he had made, regardless of
the fact that Regal had declined this opportunity.
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 Duties of Directors -Proper purpose and good faith
 IDC v Cooley (1972)

 Mr Cooley was an architect employed as managing director of Industrial Development Consultants

Ltd., part of IDC Group Ltd. The Eastern Gas Board had a lucrative project pending, to design a
depot in Letchworth. Mr. Cooley was told that the gas board did not want to contract with a firm, but
directly with him. Mr. Cooley then told the board of IDC Group that he was unwell and requested he
be allowed to resign from his job on early notice. They acquiesced and accepted his resignation. He
then undertook the Letchworth design work for the gas board on his own account. Industrial
Development Consultants found out and sued him for breach of his duty of loyalty. 
 It was held that even though there was no chance of IDC getting the contract, if they had been told,
they would not have released him. So he was held accountable for the benefits he received. He had
‘one capacity and one capacity only in which he was carrying on business at that time. That capacity
was as managing director of the plaintiffs.’ All information which came to him should have been
passed on. 21

 Duties of Directors -Proper purpose and good faith
 By virtue of Section 218(2) CA 2016, if the officer fails to obtain the
approval, there is criminal liability.
“Any person who contravenes this section commits an offence and shall, on
conviction, be liable to imprisonment for a term not exceeding five years or a fine
not exceeding three million ringgit or to both.”

 Unfortunately, Section 218 does not provide for civil liability. Reference
has to be made to Section 541which provides that the court may order any
past or present officer of the company who had committed breach of duty
in relation to the company to compensate the company. 22
 Duties of Directors -
 Duty of skill, care and reasonable diligence
Section 213(2) CA 2016 provides:
“A director of a company shall exercise reasonable care, skill and diligence with—
(a) the knowledge, skill and experience which may reasonably be expected of a director
having the same responsibilities…”
(b) “any additional knowledge, skill and experience which the director in fact has.”
Example for (a), if you are a director and you made the decision to sell your company for RM10,000
while every other director out there would have sold it for a minimum of RM50,000, you would
probably be guilty of failing to exercise reasonable care and skill.
Example for (b), if you were a director of a company and you had a degree in accounting, the courts
would look at that degree and would more likely than not find you guilty of failure to exercise
reasonable care and skill when you decided to sell off our company for RM10,000 23
 Duties of Directors -
 Norman v Theodore Goddard (1991)

 The court was asked to consider the standard by which Mr Quirk, a company director,
should be judged in respect of his decision to place company money in the hands of Mr
Bingham, a fraudster. Bingham was a partner in the defendant solicitors’ firm who
specialised in tax law, and he had persuaded Quirk to invest the company’s money in a
company based on the Isle of Man. Bingham led him to believe that this company was
controlled by Theodore Goddard; however, it was in reality controlled by Bingham, who
stole the money. The company subsequently sued Theodore Goddard, who argued that
Quirk was in breach of the duty to his company as a director,  and that he should therefore
be required to contribute under the Civil Liability (Contributions) Act 1978 to any damages
payable by Theodore Goddard.
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 Duties of Directors -

 Norman v Theodore Goddard (1991)

It was held that the standard by which a company director should be judged was that
set out in s214(4) of the Insolvency Act 1986, this being the degree of care and skill
both as in fact possessed by the particular director, and that expected of a
reasonable person in that position. It was held that this standard should be applied
to company directors generally, and not just in cases involving wrongful trading in
insolvent companies. On the facts, however, it was found that Quirk had not fallen
below this standard; he had been entitled to trust Bingham in the absence of grounds for
suspicion – particularly given that all the other partners in Theodore Goddard had
placed in him the same degree of trust.
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 Duties of Directors -
 Common law duties of the director linked to this statutory duty were clearly stated
in:
Re City Equitable Fire Insurance Co (1925)
The court held that a non-executive director:
 did not have to exhibit in the performance of his duties a greater degree of skill
than might reasonably be expected from a person of his knowledge and experience;
 did not have to give continuous attention to the affairs of the company; and
 did not have to attend all meetings but he must attend in the circumstances he was
reasonably able to do so.

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 Disclosure by Directors
 Section 221 CA 2016 provides:
“Subject to this section, every director of a company who is in any way, whether directly or
indirectly, interested in a contract or proposed contract with the company shall, as soon as
practicable after the relevant facts have come to the director’s knowledge, declare the nature
of his interest at a meeting of the board of directors.”
 The wording of the above subsection is wide enough to cover the director’s direct as well as
indirect interest. If the company contracts with his spouse, he should be deemed to have an
interest in the contract.
 This section means that it would potentially be a breach of a director’s duties if he were to
try to steer the company into being part of a deal that benefits him and not the company. And
this duty would potentially overlap with the first duty where the Act states that directors have
to act “in the best interest of the company”. 27
 Other sources of liability of directors

 S 540 of the Companies Act 2016 - fraudulent trading.

 the Court can make an order against any person who was knowingly a party to such
a business. That person can then be made personally liable for all or any of the debts
of the company.
 It is not necessary to show outright fraud. The intent to defraud can be shown when the
directors knew that there was no reasonable prospect of those debts ever being paid.
 the burden of proof is on a balance of probabilities. This is a civil claim that can be
brought by the liquidator or shareholder of a company (if the company is wound up)
or by any creditor. It does not matter whether the company has been wound up yet or
not.
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 Other sources of liability of directors

 S539(3) of the Companies Act 2016 insolvent trading

 It contains similar wording targeting an officer of the company who knowingly was a
party to the taking on of a debt. If there was no reasonable ground for the company to
pay back the debt, then that officer can be liable of an offence.
 This offence would involve criminal prosecution and would have to be established
beyond a reasonable doubt.
 If there is a conviction, the penalty under the Companies Act 2016 is a maximum jail term
of 5 years or a maximum fine of RM500,000 or both.
 However, this conviction can also lead to the company officer bearing personal
liability for that debt of the company. A liquidator, creditor or shareholder can apply
to the Court to declare that the person is personally responsible for this debt.
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