DBA 103 Company Law
Exercise 2 (Statutory Duties of Director)
NAME : OOI CHUAN YEE
MATRIX NO : 14 2013 080
LECTURE’S NAME : MDM RAJA NUR ALAINI RAJA OMAR
Infrastructure University Kuala Lumpur
Faculty of Business and Accounting
June 2016
In the Companies Act 1965, Section 132 describes about statutory duties of a director, which has more details in Section 132 (1), Section 132 (2) and Section 132 (3). Section 132 is all about the duties of a director to act honestly and exercise reasonable diligence. It is also an obligation of a firm's directors or officers imposed by corporate legislation, such as disclosure of personal-interest contracts, filing of required information with the appropriate authorities, keeping of statutory books, exercise of due care and skill.
First, according to Section 132 (1), a director must always exercise his power for a proper purpose and in good faith for the best interest of the company. It also stated that a director should always act beyond the standard of care, skill and diligence required for a director.
As an example, in the case of Hogg v Cramphorn Ltd (1967) Ch 254, the director decided to make a takeover offer for the company by issued 5707 shares with ten votes each to the trustees of the employee’s welfare scheme to outvote Baxter's bid for majority control, claiming that they feared that Mr Baxter would sack the workers. The directors including Colonel Cramphorn who was managing director and chairman, believed that the takeover would be good for the company.
Colonel Cramphorn, the director said that he exercise his power for a proper purpose and in good faith for the best interest of the company. However, the directors were actually violated their duties as directors by issuing shares for the purpose of preventing the takeover. The power to issue shares creates a fiduciary duty and must only be exercised in order to raise capital and not for any other purposes such as to prevent a takeover. The act could not be justified on the basis that the directors honestly believed that it would be in the best interest of the company. Thus, Buckley J, writing for the Court, held that the new shares issued by the directors are invalid.
Second, according to Section 132 (2), shareholders’ ratification is needed for a director to use the company’s property, information, director’s position. It is to ensure that all of the company’s asset and power are use within its capacity and for the purpose corporation is formed. Besides, shareholders need to ratify the use of any opportunity of company that might directly or indirectly benefits the director himself or third party, or cause harm to the company.
An example of Yeng Hing Enterprise Sdn Bhd v Datuk Dr Ong Poh Kah (1988) 2 MLJ 60, the plaintiff owned and operated a restaurant and bar. The defendant who was also directors of the plaintiff’s company carried on a similar business below the plaintiff’s business place. The plaintiff sued the defendant for breach of directors’ duty in that the directors failed to disclose their interest in the rival company.
As mentioned in the section above, High Court stated in absence of a provision in the company articles, a director is at liberty to be a director of a rival company. While the law allows director of one company to sit on the boards of a rival company, they cannot however, use or disclose the confidential information of one company to a rival company as stated in Section 132 (2). Thus, Fruity is illegal because she gave information to FH without FA’s acceptance. Besides, Section 132 (1) also imposes a broad duty on directors at all times to act honestly and exercise reasonable diligence in the exercise of their power and the discharge of the duties of their office.
Third, according to Section 132 (3), a director cannot make improper use of their positions that directly or indirectly benefits the director himself or third party, or cause harm to the company. In other words, the director should present all profit earned by the company with no secret or hidden information. He must act fairly and be trusted by the others.
As an example, in the case Foss v Harbottle (1843) 67 ER 189, Richard Foss and Edward Starkie Turton were two minority shareholders in the "Victoria Park Company". They claimed that the major shareholders’ behaviors, who were also the company’s directors, had caused damage to the company. The directors controlled the company to purchase properties from the directors themselves, which the purchase value was higher than market value. Thus, they request the court to declare invalid acts of directors and the profit gain to the company. However, the court dismissed the claim and held that when a company is wronged by its directors it is only the company that has standpoint to sue. Second, the "majority rule principle" states that if the alleged wrong can be confirmed or ratified by a simple majority of members in a general meeting, then the court will not interfere. Thus, the directors as major shareholders were not liable for the charge.
In the case above, the directors made improper use of their position as a director by helping themselves to gain benefits from the company. They as directors used the name of the company to purchase the properties from themselves, and agree to pay more money than the market value for the properties. Then they as the major shareholders controlled the company too, so that the minority shareholders does not has standpoint to sue them.
Lastly, to conclude Section 132 stated in the Companies Act 1965, the codification of Section 132 helps to removes ambiguity for duties of directors. It also provides a centralized reference point for directors in considering their duties and responsibilities in respect of their position.
