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Law 580 Assignment 2 - Grade: 7.5
Law of Association II (LAW 580)
Universiti Teknologi MARA
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Question a) Rudi has been the managing director of Bizsmart Bhd since 2010. Bizsmart Bhd was involved in marketing business. The company was in need of a delivery service provider and Rudi suggested Fastdelivery Sdn Bhd to Bizsmart Bhd. Rudi has some shares in Fastdelivery Sdn Bhd and this was disclosed to the board of Bizsmart Bhd. During the board meeting, a few companies were shortlisted and the board decided to appoint FastDelivery Sdn Bhd as a delivery service provider.
Advise the company whether there is any breach of directors’ duties by Rudi.
(10 marks) Answer : Issue Whether Rudi has breached his duty as a managing director of Bizsmart Bhd?
Law Essentially, a director is a person who controls, regulates and supervises the affairs of the company within his conferred powers and duties to manage the company’s administration in meeting its object and purpose. 1
Therefore, the law governing the company in Malaysia, the Companies Act 2016 (CA 2016) specifically sets out the directors’ duties and responsibilities under it Subdivision 3. Section 213(1) of the Act stipulated that every director of a company is under a fiduciary duty in exercising power to act in good faith and a proper purpose for the best interest of the company, at all times.
These duties which directors owe towards the company also covers the duty of avoiding conflict of interest. In brief, the directors are prohibited from entering into any agreement where the company’s interests collide with their own interests. As portrayed in the case of Aberdeen
1 director. (n.) West's Encyclopedia of American Law, edition 2. (2008). Retrieved December 17 2020 from legal-dictionary.thefreedictionary/director
Railway Co. v Blaikie Brothers , 2 the House of Lord strictly decided that no one may be permitted to enter into an agreement for his own benefit, even though the conditions were fair.
A conflict of interest occurs when a director becomes unreliable due to a clash between personal interests and directors’ duties or responsibilities towards the company. Section 218(1) CA 2016 affirms the prohibition against improper use of property, position or etc whereby in the absence of consent of a general meeting, a director is prohibited from gaining any benefit for himself , or other parties or causing detriment to the company. Failure to comply with these regulations is considered a serious breach of the director’s duties and could lead to criminal proceeding. Upon conviction, the director shall be liable for a maximum 5 years imprisonment, or a fine not exceeding RM three million ringgit, or both as per Section 218(2) of the Companies Act 2016. Furthermore, the director also can be charged under any other relevant laws such as the Capital Market Services Act 2007 , the Malaysian Anti-Corruption Commission Act 2009 and Penal Code. 3
Nevertheless, there are always exceptions to the general rule. This can be seen from the word ‘ consent ’ in Section 218(1) of the Act. The word highlights that the director can actually insert their personal interest in the company and protect themselves from liability by seeking authorisation.
This is where Section 221 of the Companies Act comes into picture. It emphasises on the duty of directors to make disclosure of interest provided that “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, declare the nature of his interest at a meeting of the board of directors as soon as is practicable after the relevant facts have come to the director’s knowledge.”
This section, in line with the latest case of Delta-Pelita Sebakong Sdn Bhd v. Wong Hou Lianq & Ors And Other Appeals 4 notes that, when a potential conflict is foreseeable, the directors need
2 (1854) 1 Macq 46. 3 Melinda, M. D. (2019, 29 November). Malaysia - The Right To Sue Directors For Causing Wrongful Loss Towards the Company. Retrieved from <conventuslaw/report/malaysia-the-right-to-sue-directors- for-causing/> accessed 17 December 2020. 4 [2020] MLRAU 41.
In regards to the effects of the disclosure, Richard Malanjum J in the case of Magnifine Sdn Bhd v. Yap Mun Him 7 ruled that the director is not exempted from his fiduciary duty to act in good faith for a proper purpose in the best interest of the company although such disclosure has been made in a full and frank manner. In short, the effect of the disclosure is that the directors are said to have only been avoided from facing the consequences of a conflict of interest.
Application___________________________________________________________________ Rudi is the managing director of Bizsmart Bhd ( Bizmart ) and a member of shareholder in Fastdelivery Sdn Bhd ( Fast Delivery ) concurrently. In accordance with Section 213 CA 2016 , he is deemed to carry responsibilities of fiduciary duty in exercising power to act in good faith and a proper purpose for t he best interest of Bizmart, at all times.
Now, the conflict of interest happens when Rudi proposes Bizmart to enter into a contract with Fastdelivery. In line with the case of Aberdeen Railway Co. v Blaikie Brothers , Rudi ought to avoid any conflict of interest. Thus, he is restricted to enter into a contract of delivery service with Fastdelivery as Bizmart interests and Rudi’s personal interest in Fastdelivery are both collide.
Pursuant to Section 218(1) CA 2016 , Rudi is prohibited from gaining any benefit for himself, or other parties or causing detriment to Bizmart. If Rudi fails to comply with these regulations, he is considered to commit a serious breach of the director’s duties and shall be liable for a maximum 5 years imprisonment, or a fine not exceeding RM three million ringgit, or both as per Section 218(2) of the Companies Act 2016. Furthermore, Rudi also can be charged under any other relevant laws such as the Capital Market Services Act 2007 , the Malaysian Anti-Corruption Commission Act 2009 and Penal Code.
7 [2005] 2 MLRH 277.
Nonetheless, under Section 221 CA 2016 , Rudi may insert his personal interest of Fastdelivery into the proposed delivery services provider contract with Bizmart by disclosing the nature of interest to the boards of directors of both Bizmart and Fastdelivery. In compliance with the case of Delta-Pelita Sebakong Sdn Bhd v. Wong Hou Lianq & Ors And Other Appeals , Rudi need to make such disclosure when the potentially conflicting information in question is in doubt. In the process, Rudi cannot take part in the discussion in relation to the conflict of interest held in the general meeting.
Nonetheless, Section 221(2) of the Companies Act mentioned Rudi only need to disclose a material interest of the proposed delivery service provider agreement which is significant to Bizmart. To determine the material interest, the ' reasonable man ' test prescribed under the Common Law Position must be first applied. Rudi should take into account relevant facts and circumstances to reach the conclusion that there is a real sensible possibility of a conflict. In contrast with the case of Wilkinson v West Coast Capital , the transaction of the proposed contract between Bizmart and Fastdelivery contain real sensible possibility of conflict as Bizmart need of delivery service provided by Fastdelivery is interrelated yet establishing the material interest of the subject agreement.
Moreover, Rudi’s disclosure of the material interest must be made in full and frank disclosure as per FHR European Ventures LLP v Mankarious****. Rudi must make a proper disclosure, for instance, reveal the commission or profit worth from the proposed contract between Bizmart and Fast delivery. It was insufficient for the party to merely inform the board of the proposed contract considering that the profit was much more than what is customary. Or else, such commission is regarded as secret profit and Rudi may be liable for breach of duty under Section 218(2) of the Act.
By applying to this issue, Rudi may escape liability of breach of duty in relation to his conflict of interest between Bizmart and Fastdelivery. However, the post-disclosure does not exempted from his fiduciary duty to act in good faith for a proper purpose in the best interest of the company as pointed out by Richard Malanjum J in Magnifine Sdn Bhd v. Yap Mun Him.
b) Imran is one of the board members of FFC Bhd. Early this year he was entrusted to negotiate a contract with CBA Bhd. Later due to some reasons, the board of FFC Bhd advised Imran to withdraw from the negotiation. Recently, Imran was offered the contract by CBA Bhd. Imran resigned from FFC Bhd and incorporated his own company in order for him to accept the offer.
Advise Imran whether his resignation absolves him from any liability for breach of duty to avoid conflict of interest.
(10 marks) Issue.
The issue is whether Imran is absolved from his liability of breach of duty as a director after his resignation.
Law.
A company’s director is an agent of a company thus he is given power and has duties in terms of managing the company. This is also known as fiduciary duty between the directors that manages the company in trust and confidence for the company and any breached would give rise to action. In Foss v Harbottle , 8 the directors breached his duties by misappropriate the company’s property and the court decides that the company could take action against the loss that it has suffered.
In Zaheran Zakaria v Redmax , 9 the directors had breached their fiduciary duties and made fraudulent transactions. The case emphasises that the directors must exercise reasonable care, skill and diligence in maintaining the status quo of the company as stated in section 213(2) of the Companies Act 2016 (the Act). Section 213(1) of the Act states that the company’s director shall exercise its powers for a proper purpose and in good faith in the best interest of the company and not for his own benefit. Any breach committed by the director shall be liable for criminal offences as provided under section 213(3).
8 (1843) 2 Hare 461 9 [2016] 5 MLJ 91
In section 218(1) of the Act stated that the director shall not use the company’s assets, information or opportunity for his own benefit or another person’s gain without the members’ approval which include competing with the company using his director position. Nonetheless, in section 215 , a director may rely on information and advice by a third party and make an independent assessment based on his knowledge.
In section 132(2)(d) of Companies Act 1965 , a directors’ duties are not to take or use corporate opportunity. Relating to section 213 of the Companies Act 2016 , a director must use corporate opportunity for the company’s benefit only. In Avel Consultant Sdn bhd v Mohd Zain, 10 the defendant was the director of the plaintiff but wants to take on the benefits of corporate opportunity thus terminating the contract of corporate opportunity for the plaintiff. The court decides that the defendant had breached his fiduciary duty and had a conflict of interest against the company.
Section 132(2)(d) also applies to situations whereby the directors shall not take up the corporate opportunity even if the company failed to take the corporate opportunity presented. In Industrial Development Consultants Ltd v Cooley , 11 the plaintiff i. the company failed to take the corporate opportunity i. the contract and the defendant was subsequently offered the contract thus he resigned and took upon the corporate opportunity. The court decides that the defendant knew about the contract offered to the company therefore he was still bound by his fiduciary duty to the company and liable for the benefit he received.
However, an exception to section 132(2)(d) is when in a situation that the company had rejected the corporate opportunity, the director is not prohibited to take the corporate opportunity for his own benefit. In Peso Silver Mines Ltd v Cropper , 12 the plaintiff i. the company was offered by a prospector to purchase certain land but was rejected by the company due to financial situation. Defendant was subsequently offered the same opportunity and was accepted through a newly incorporated company. Defendant had disclosed his interest in the newly incorporated company and refused to turn over the company to the plaintiff, thus was subsequently fired and
10 [1984] 1 CLJ 482 11 [1972] 1 WLR 443 12 [1966] S.C. 673
contract to Imran which is accepted by Imran using his own incorporated company. As FFC Bhd had rejected the contract, this brings to an exception of section 132(2)(d) of Companies Act 1965 and section 218(1) of the Companies Act 2016 (the Act) whereby the corporate opportunity and the company’s information and opportunity could be utilized by the director for his own benefit. As in Peso Silver Mines Ltd v Cropper , Imran was contacted personally by the CBA Bhd after FFC Bhd had withdrawn from taking any contract with the CBA Bhd. Imran as the director would have an obligation of fiduciary duty towards the FFC Bhd if the FFC Bhd wanted to take up the corporate opportunity from the CBA Bhd. Thus, Imran had done his duties and diligence as FFC Bhd’s director in accordance with section 213 of the Act when the FFC Bhd decided to withdraw the contract.
This gives Imran the right to use the corporate opportunity and information of the FFC Bhd for his own benefit when the CBA Bhd had personally contacted him for the contract. As found in Peso Silver Mines Ltd v Cropper , Imran could not be made liable for his contract with CBA Bhd when the contract had been first rejected by the FFC Bhd and it does not give rise to corporate opportunity doctrine. Therefore, even if Imran hadn’t resigned his post as a director of FFC Bhd, he is free to contact a contract with the CBA Bhd with his own incorporated company and absolved from any liabilities for breach of duty to the FFC Bhd provided that he disclosed his interest on his newly incorporated company to the members of FFC Bhd as stated under section 221 of the Act.
Conclusion.
In conclusion, Imran is not completely absolved from his liability of breach of duty as a director after his resignation under certain circumstances.
Law 580 Assignment 2 - Grade: 7.5
Course: Law of Association II (LAW 580)
University: Universiti Teknologi MARA
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