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Duties and liabilities under common

law
Statutory duties
Remedies for breach of duties

Law of Assoc II/ Z.Elias

Board of directors powers almost unlimited - given by


AOA of a co.

To prevent abuse of powers. - need corporate governance

Company directors must be free to drive their companies


forward, but they have to exercise that freedom within a
framework of effective accountability need for balance
between the freedom of the directors to manage the
co and to ensure that they do not exercise their
powers with unsupervised, unfettered and absolute
discretion.

As such certain duties are imposed on directors. They are:


Fiduciary duties of loyalty and good faith;
Common law duties of care and skill; and
Statutory duties.

A.
B.
C.

Law of Assoc II/ Z.Elias

Law of Assoc II/ Z.Elias

In relation to the co - powers exercised by


directors are on behalf of the co. Therefore, must
act bona fide in the interest of the co.
As fiduciaries - position of trust to act with good
faith - duties of loyalty, good faith and avoid conflict
of interest owed to co .
Fiduciary duty is owed to the co and not to any
individual member of the co. : Percival v
Wright [1902] 2 Ch. 421;
Duty to ensure that any act dir. undertakes is with a
view to enhance the interest of the co. either by
enhancing profits, reducing costs or even positive
publicity of the co.
Law of Assoc II/ Z.Elias

Under the Common Law, a directors fiduciary,


duties are:

I.

To act bona fide in the companys interest and


not some other persons interest;

II. To

exercise his powers for a proper purpose;


and

III.To

avoid any conflict of interest between the


company and his personal interests.
Law of Assoc II/ Z.Elias

Law of Assoc II/ Z.Elias

The common law position


Where a director is required to act bona fide in the interest
of a company, he must act according to what he considers,
not what a court may consider, is in the interest of the
company : Re Smith and Fawcett Ltd (1942) Ch 304
As Fiduciaries, directors have a DUTY OF DISCLOSURE.
The directors are the ones to determine what is best for the
company.

Act bona
fide in the
interest of
the
Company

and

Exercise
powers for
proper
purpose

New S132(1):A director of a company shall at all times exercise his


powers:
AND

The director will be liable under S132(1) if a director


exercises his power: BUT

Law of Assoc II/ Z.Elias

I.

ACTING BONA FIDE IN THE COMPANYS INTEREST


Directors should only consider the interest of the co when
making a decision : Re Smith & Fawcett Ltd. [1942] Ch. 304,
Lord Greene MR stated; They must exercise their discretion
bona fide in what they consider not what the court may
consider to be in the interest of the co, and not for any collateral
purpose.

In Intraco Ltd v Multi-Pak Singapore Pte Ltd [1995] 1 SLR 313,


the Court held that the proper test in determining whether the
directors have acted bona fide was whether an honest and
intelligent man in the position of a director in the whole of
the existing circumstances, have reasonably believed that
the transactions were for the benefit of the co.

Directors priority - advance the cos interest. If anyone elses


interest is given consideration before that of the company, the
directors are in breach of their duty. Re W & M Roith Ltd. [1967] 1
All E R:
Law of Assoc II/ Z.Elias

The interest of the co. that the directors have to consider has
traditionally meant:

i.

The interest of the Members of the co as a collective grp, not


the interest of an individual member as in Percival v Wright
(supra). Directors have to treat all shareholders equally.

ii.

The interest of the Employees.


(Old law). Parke v Daily News Ltd. [1962] Ch 927
Msian Co Act has no general provision, but refer to Para. 7 of the 3rd
Schedule - powers may be applied under s. 19(1)(c). The interest
of the members and the employees are considered as the interest of
the company while the company is solvent and a going concern.

iii.

When the co threatened or goes into a state of insolvency,


Creditors interest will be cos interest.
Law of Assoc II/ Z.Elias

Winkworth v Edward Baron Development Co. Ltd. [1987] 1 A11ER


114; Lord Templeman , A duty is owed by the directors to the co and
to the creditors of the co to ensure that the affairs of the co are
properly administered and that its property is not dissipated or
exploited for the benefit of the directors themselves to the prejudice
of the creditors.
Walker v Wimborne [1976] 50 ALJR 446;
Cos directors in breach of their duties to the co and its creditors in
guaranteeing loans of another co in the group at a time when the co
was itself in serious financial difficulties.

Where a director is director of a co within a group of co.s, he is not


allowed to consider the interest of the group ahead of the interest of
the co of which he is director.
Each co within the group is an independent and separate legal entity.
Any movement of funds between the cos within the group may
prejudice the interest of the creditors should the co become
insolvent.
Law of Assoc II/ Z.Elias

II. TO EXERCISE POWER FOR A PROPER


PURPOSE
Directors are required to exercise powers given to
them for the proper purpose of the company for
the benefit of the co.
The purposes may be set out in the articles of
association of the company.
Therefore, directors are prohibited from
exercising powers for any collateral purposes or
any act done for an impermissible purpose or for
the benefit of a person other than the co, nor for
directors own benefit.
Law of Assoc II/ Z.Elias

Law of Assoc II/ Z.Elias

Breach of directors duty if they exercise their power for a


purpose other than the purpose for which the power was
conferred on them, even where he acts honestly in what he
considers to be the cos interest. Re Duomatic Ltd. [1969]
2 Ch. 365.
Two factors that court will consider whether the directors
powers have been exercised for a proper purpose or not:
The objective for which the power was granted; and
The main purpose for which the power was exercised.

New S132(1):The word honestly is replaced with the statement exercise


his powers for a proper purpose and in the best
interest of the company,
Where the Directors had acted in the best interest of the
company BUT the transaction was motivated by some
improper purpose, he is in breach of fiduciary duty:
Re Duomatic Ltd. [1969] 2 Ch. 365;
Although the directors had acted honestly due to their
ignorance of the law, the directors were liable for
misapplication of the cos fund when they made payment to
a former director as compensation for loss of office without
notifying the shareholders.
Law of Assoc II/ Z.Elias

The power to issue shares may be exercised for


reasons other than raising capital provided those
reasons relate to a purpose benefiting the
company as a whole.

This principle has been subject to argument in


Howard Smith Ltd v Ampol Petroleum Ltd
[1974] AC 821
However, the directors had improperly exercised
their powers, as the effect of the share issue was
to reduce the majority holding of two other
shareholders who made a rival bid.
Law of Assoc II/ Z.Elias

Even where there is an absence of self-interest the


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

III. TO AVOID CONFLICT OF INTEREST

Director should not put himself in a position where his personal


interests conflict with those of the co.
They have a duty to act for the benefit of the co.

They are not allowed to improperly obtain profit out of their position as
directors. Aberdeen Railway Co. v Blaikie Bros. [1854] 1 Macq
461; House of Lords held that the co could avoid the contract where
one of the partners of the firm the co had contracted with, was a
director of the co at the time of the contract even if it was made on fair
terms.

Guinness plc v Saunders [1990] 2 AC 663; where a committee of


the co, without authority, awarded a director of the co remuneration of
5.2m in return for his services in a successful takeover bid, the court
rejected the claim by the director that he had a right to the money. A
fiduciary must not place himself in a position of conflict, and may not
profit from his position except to the extent allowed by the articles.

Law of Assoc II/ Z.Elias

Common Law Conflict of interests


could arise in the following situations
where the directors :

a) compete

with the company;

b) contract

with the company; and

c) use

corporate property, information


or opportunity.
Law of Assoc II/ Z.Elias

Law of Assoc II/ Z.Elias

a) Compete with the company


A director would be in breach of his duty if he obtains for
himself any property or benefit that properly belongs to the co,
or for which the co has been negotiating for.
Where a director makes any profit as a result of opportunities
that arose out of his position, he cannot keep them unless
the profits have been disclosed to and approved by the
co.
Regal (Hastings) Ltd. v Gulliver [1942] 1 A11ER 378;
The court held that although the transactions where the
directors obtained a profit over the sale of the shares which
they had bought at par were made in good faith, the directors
were however liable to account to the co for the profits. The
reason for this decision was that: (1) there was an acquisition
of property by reason of the office held; and (2) the acquisition
was in the course of the execution of that office.

A director is in breach of his duty even though


there is no bad faith.
A director may not enter into transactions in which he
has or can have a personal interest conflicting
with the interest of the co that he is suppose to
look after. Any profits made by competing for an
opportunity which was his duty to acquire for the co,
he has to surrender the profits to the co.
Cook v Deeks [1916] 1 AC 554
Dir. liable to account to the co where he made profit
by using information which has come to him whilst he
is a director or which he has acquired in the course of
his duties.
Law of Assoc II/ Z.Elias

Law of Assoc II/ Z.Elias

Even after he has resigned a director is still liable for


breach, especially if the resignation is due to the fact that he
wants to take the opportunity for himself. Canadian Aero
Service Ltd. v OMalley [1973] 40 DLR (3d) 371; the court
held the president and the vice-president of the company
liable where, after having negotiated a contract on behalf of
the company, they resigned, formed a new company, and
acquired it for the new company.

Even where the director secures a contract that his


company has no chance of obtaining, he is liable for
breach because the opportunity came to him by virtue of their
position in the company.
Industrial Development Consultants Ltd. v Cooley [1972]
2 A11ER 162;
The court held that although IDC would have not obtained the
contract, the defendant was in breach of his duty to IDC
because he did not fully disclose to IDC all information he
obtained in the course of his dealings with EGB. As such he
was liable to account all profits he had made to IDC.

Law of Assoc II/ Z.Elias

Directors are not liable if they use any information that


they obtain through their position as a director for their
own benefit where co has bona fide rejected the
opportunity.
Peso Silver Mines Ltd. v Cropper [1966] 58 DLR
The court held, although the directors were in fiduciary
relationship, they were not liable as the reason to reject the
opportunity offered to the co had been taken bona fide. The
opportunity of the directors to acquire the contract was
considered not acquired by reason, or in the course of the
execution of the directors office.

This decision has been subjected to criticism as it will be


difficult to know whether the boards decision to reject was
made bona fide or not. The directors may be tempted to
reject the opportunity so that they may benefit personally

Law of Assoc II/ Z.Elias

A directors duty continues to bind him even after he


no longer holds office. This will be so where the
director has during his term of office committed acts
amounting to breach of duty and either;
(i) resigns or secure his release in order to reap the
benefit of his breach of duty (as in Industrial
Development Consultants case), or
(ii) after his resignation or release, commits similar
acts which, if he were still a director, would amount
to a breach of duty on his part.

Law of Assoc II/ Z.Elias

Although a director is not allowed to compete with


his co, he is not prevented from acting as a director
of competing companies:
Bell v Lever Bros. Ltd. [1932] AC 161. He may
not, however, use the confidential information he
gains on one co to its detriment, for the benefit of
himself or another company.
In Riteway Express Pty. Ltd. v Clayton [1987] 10
NWSLR 238; it was held that although directors may
sit on boards of rival cos, they cannot use or disclose
the confidential information of co where this involves
them closing down the cos business and operating it
for themselves.

Law of Assoc II/ Z.Elias

b) Contract with the company


As a directors personal interest may conflict with
the cos interest, a director cannot enter into a
contract with the co. A director should try to get
the best deal possible for the co, and if he were to
contract with the co, he may try to obtain the best
deal for himself.
S. 131(1) requires a director to disclose the fact
that he has an interest in a contract, whether it is
direct or indirect. Direct interest is where the
director contracts personally, and an indirect
interest arises when the contract includes family
interest, or where the director is a director or
shareholder of another company which contracts
with the company.

Law of Assoc II/ Z.Elias

Transvaal Lands Co. v New Belgium (Transvaal) Land


& Development Co. [1914] 2 Ch. 288;
Two directors of Transvaal Lands Co. (TLC) were also
shareholders of New Belgium (NB) and one of them,
Samuel was also a director of NB. At Samuels
recommendation, TLCs board agreed to purchase certain
shares of NB. After the purchase TLC discovered the two
directors interest in NB and sought to have the contract
rescinded.
The court held that there was conflict of interest in Samuels
case as both director and shareholder of NB has the duty to
act in TLCs best interest.

Law of Assoc II/ Z.Elias

a.

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


material interest in a contract with the co. - S.131(2).
Director will not be liable:
S.131(1) where he makes a full and frank disclosure of his
interest to the board of directors meeting.

b.

S.132E where director who enters into substantial property


transaction with his co, & have such transaction approved by
the members in a general meeting.

c.

S.131(4), disclosure made by giving general notice to the


BODs meeting specifying the nature and interest of the
directors interest. Ensure that the notice is given at the
directors meeting, or that makes sure that it is brought up and
read at the next directors meeting.

d.

S.131(7) - Failure to declare interest - liable for not more than 7


years imprisonment or RM150,000 fine, or both.

At common law, a contract made by a co with one


of their directors, or with co or firm in which he has
interests is voidable at the instance of the company:
Aberdeen Railway Co. v Blaikie Bros. (supra).
A contract is voidable because a directors interest
may be ratified by the company in a GM. Although a
director may not vote in his own interest at a board
of directors meeting, he may do so as a
shareholder of the company at the general meeting
as in North-West Transportation Co. Ltd. v
Beatty [1887] 12 App Cas 589; the court allowed
Beatty to vote for a resolution in which he had
interest in the transaction, as he was acting within
his right.
Law of Assoc II/ Z.Elias

Duties to avoid
Conflict of Interests
under
S.132(2)
Law of Assoc II/ Z.Elias

Law of Assoc II/ Z.Elias

The old S132(1) CA 1965 provides that:


A director shall at all times act honestly and use reasonable
diligence in the discharge of his duties of his office
Comment:
The old law does not expressly refer to the common law
situations of conflict.

Law of Assoc II/ Z.Elias

The New S132(2) provides that:


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.

Law of Assoc II/ Z.Elias

Comment:
This new provision amounts to a restatement of the
common law conflict of interest situation.

It assists directors in appreciating situations of conflict which


may cause them to act in breach of their duty to the company.

Law of Assoc II/ Z.Elias

Common Law
Duties of Care, Skill and
Diligence
and
2007 amendment
Section 132(1A)

Law of Assoc II/ Z.Elias

Old law

The duty to act with care and skill is derived from common law.

The old S.132(1) is silent as to the standard of care, and skill


required of a director. It merely prescribes that a director has a
duty to act honestly and use reasonable diligence.
The Common Law Position
The leading decision is Re City Equitable Fire Insurance Co
Ltd (1925) CH407, where it was held that
In discharging the duties of his position...a Director must act
honestly; but he must also exercise some degree of both skill and
diligence.. so long as a Director acts honestly he cannot be made
responsible in damages unless guilty of gross or inculpable
negligence in a business sense.
Overend & Gurney v Gibb (1872) LR 56 HL480: standard
breached only if dir entered into agreement where the
circumstances was obvious to deter a reasonable person from
entering into the agreement.

Law of Assoc II/ Z.Elias

Very minimal standard of duty of care and


skill on directors in their management of co.s.
Reason? Historical! -----directors were not chosen
for their knowledge and experience but more
because of their position in society. Thus,
unreasonable to impose high standards of care and
skill.

As a result of Re City Equitable Fire Insurance


Co. Ltd. [1925] Ch. 407;, Romer J. came to a
conclusion that a director must act honestly
and exercise care and diligence. Romer J.
made three propositions which is still applied
today and form the core of the law on duties of
care and skill:

Law of Assoc II/ Z.Elias

1.

A director need not exhibit in the


performance of his duties a greater degree of
skill than may reasonably be expected from a
person of his knowledge and experience.
- No minimum standard of skill set for a
director. A director has to act with care as can be
expected from them basing on their knowledge
and experience. Re Brazilian Rubber
Plantations and Estate Ltd. [1911] 1 Ch.425

A director should take as much care in the affairs


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

Law of Assoc II/ Z.Elias

Law of Assoc II/ Z.Elias

As a reasonable person, a director would make


reasonable inquiries when asked to enter into
certain transactions on behalf of the company, such
as the signing of cheques. In Re Railway &
General Light Improvement Co.; Marzettis
Case [1880] 42 LT 206;
Re Kie Hock Shipping Pte Ltd. [1985]1 MLJ 411
Director found grossly negligent when he failed to
collect cos debts, & allowed his uncle to dispose of
debtors assets, & then gave further credit to
debtor who in the end owed the co S$11m.

Law of Assoc II/ Z.Elias

As business people today are normally sufficiently


qualified, Romer J.s proposition have been
qualified in the light of todays circumstances.
Several cases have suggested that the proposition
would be applicable to non-executive directors. As
for executive director, minimum objective
standards must apply. Dorchester Finance Co.
Ltd. v Stebbings [1989] BCLC 498;
The court held it was unacceptable for directors not
to attend board meetings or to take any active
interest in the companys affairs & so were made
liable for losses incurred when unsecured loans
made turned out to be irrecoverable.

Law of Assoc II/ Z.Elias

The standard of care depend on the nature of


their duties : Norman v Theodore Goddard
(1992)10 ACLC 3016, a director was not made liable
as it may be that in considering what a director
ought reasonably to have known or inferred, one
should also take into account the knowledge, skill
and experience which he actually had in
addition to that which a person carrying out
his functions should be expected to have.

2. A director is not bound to give continuous attention to the


affairs of the company. His duties are of an intermittent
nature to be performed at periodic board meetings.

An extreme example is Re Cardiff Savings Bank: the Marquis


of Butes case[1892]2 Ch 100; The Marquis was only 6 months
old when he was appointed President of the bank. The Marquis
attended only one meeting in 38 years, but was held not liable for
losses resulting in irregularities in the banks operation.

However, in Re Denham & Co. [1883] 25 Ch. D 752; although a


director who had not attended a board meeting for 5 years
escaped liability for the fraud of his co-directors who issued to the
shareholders false reports and balance sheets, the judge found
him guilty of negligence in not attending the meetings, and so
refused to pay him his costs.

Law of Assoc II/ Z.Elias

Law of Assoc II/ Z.Elias

This proposition that a director is not bound to give continuous


attention to the affairs of the company is not of general
application to all directors.

Issue of liability are differently decided according to whether


the director was executive or non-executive.

Executive directors are usually appointed under service


agreements which require them to give their exclusive attention
to the affairs of the company. Daniels v Anderson (1995) 16
ACSR 607
Where the court found the CEO liable for negligence for not
having made the proper inquiries based on the auditors report.
The non-executive directors, however, had been found not
negligent. In the absence of information to the contrary, they
were entitled to assume that the auditors had detected any
irregularities.

3. In respect of all duties which having regard to the


exigencies of business and the articles of association,
may properly be left to some other official, a director is
in the absence of grounds for suspicion, justified in
trusting that official to perform such duties honestly.

A director is allowed to delegate his powers for practical


commercial reasons. Non-executive directors may safely
delegate their power to the executive directors. In the
absence of any reasonable grounds for suspicion, directors
may trust the officials of the co. to carry out their duties as
entrusted by the directors.
Huckerby v Elliott [1970]1 A11ER 189; a director of a
gaming club was held not negligent in failing to check
whether the club had the appropriate license when the task
of obtaining it had been delegated to someone else.
Law of Assoc II/ Z.Elias

Similarly in Dovey v Cory [1901] AC 477; the


director of a banking co. was held not negligent in
relying on the assertions of the chairman and GM of
the co, whose integrity, skill and competence he had
no reason to doubt. They had in fact improperly paid
dividends out of capital and gave advances on
improper security.
Directors, however, cannot blindly accept all that is
placed before them. In Dorchester Finance Co.
Ltd. v Stebbings [1989] (supra) the court would
not allow the non-executive directors with
accounting experience to rely on the auditors report
without doing anything themselves.
Law of Assoc II/ Z.Elias

The task of managing a co may sometimes need the


directors to delegate their power to experts in
particular areas, such as obtaining the legal opinion
of a lawyer pertaining to some documents. Where
the directors need to delegate but they do not do so,
they may be held negligent.
AWA Ltd. v Daniels (supra), the judge said that in
complex situations which need specialist knowledge,
a director may be required to seek and rely on
expert or professional advice.
Law of Assoc II/ Z.Elias

The Common Law Position

In the UK, the law has moved towards an objective assessment of


the standard of care required of directors, as reflected in s.174 of
the UK Companies Act 2006.

Despite these developments, the position in Malaysia remained


bound by Re City Equitable Fire Insurance, as the applicable
authority for directors duty of care and skill as in
Abdul Mohammad Khalid v Dato Haji Mustapha Kamal [2003]5
CLJ 85

Problems with the subjective test:


There is no minimum objective standard required of a director.
Since the subjective standard of care varies according to the skill a
director has, a director with no specific skill or expertise need not
be accountable.
Law of Assoc II/ Z.Elias

The position today:

S.132(1A)provides that 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; and
(b) any additional knowledge, skill and experience which
the director in fact has.

Law of Assoc II/ Z.Elias

Law of Assoc II/ Z.Elias

Comments:

Where a director has additional knowledge,


skill and experience, that director will be
assessed against a reasonable person
who has that additional knowledge, skill
and experience.

The actual knowledge and experience of a


director is to be considered in addition to the
minimum standard.

The main statutory duties of a director are provided under the


OLD s.132. This provision gives the common law duties that
have been discussed above statutory authority. Where a director
breaches his duty at common law, these statutory provisions
impose criminal liabilities.
The following provisions are affected by the 2007 amendment to
the CA that has put into effect the BUSINESS JUDGEMENT
RULE.
1.

S.132(2). It is an offence under this provision if the directors


make improper use of information gained by virtue of their
position as officers to use for their own or anothers gain or to
cause detriment to the co.
In P.P v Choudhry [1981]1 MLJ 76; the knowledge that the co
was facing financial crisis was considered as specific confidential
knowledge which the director had used to his own advantage.
Law of Assoc II/ Z.Elias

2.

S.132(3) imposed liability on any officer who


commits breach of his fiduciary duty by making
improper use of his position to directly or indirectly
gain a benefit for themselves or for any other
person, or to cause detriment to the co. He is not
only liable to the co, but if found guilty can be
imprisoned for 5 years or fined RM30,000.

3. S.131, discussed earlier, also imposes a duty upon


directors to disclose their interest (whether
directly or indirectly) in contracts with the co.

Law of Assoc II/ Z.Elias

4. S.135 impose duty on directors to disclose particulars of


interest in shares, debentures, participatory rights,
options and contracts. They also have to disclose changes in
those interest mentioned; and particulars necessary for
maintaining the register of directors, secretaries, managers and
auditors.
5. S.133 except for exempt private co, a co is prohibited from
giving loans to their directors. Exceptions :
i. where it is given to pay for expenses in carrying out the
directors duty,
ii. to purchase a home for a full-time director, and
iii. where the co has a scheme of loan for its employees, and the
director is a full-time director.
S.133A prevents a co from making a loan to any person
connected with a director of a co.(see S.122A) Where directors
allow such loans to be made without the cos approval they are
jointly and severally liable to the co to indemnify the co against
any loss arising from the loan.
Law of Assoc II/ Z.Elias

Law of Assoc II/ Z.Elias

6.

S.132C, directors are prohibited from the acquisition of an


undertaking or property of substantial value, or dispose of a
substantial portion of the cos undertaking or property
without the approval of the co in GM. The acquisition is
prohibited where it materially and adversely affected the
performance or financial position of the co. Any director who
contravenes s.132C shall be guilty of an offence and liable
to imprisonment for 5 yrs or a fine of RM30,000 or both.

7. S.132E, prohibits a co to enter into any arrangement or


transaction with a director/director of cos holding
co/persons connected with such director(s.122A) to acquire
from or dispose to such persons any non-cash assets of
requisite value, unless it has been approved in a GM.

Law of Assoc II/ Z.Elias

S.132(1B)
Business Judgment
Rule

Law of Assoc II/ Z.Elias

Old law
i) Sections 131, 132C, 132D, 132E, 133, 133A, provide
for sanctions that follow if a director breaches his duties.
ii)

Where a Director has made a genuine business


judgment in good faith, he will be protected from
liability for negligence even if these judgments
turned out badly.

New law (2007 amendment)


S132(1B) provides that:A director who makes a business judgment is deemed to meet
the requirements of the duty under subsection (1A) and the
equivalent duties under the common law and in equity if the
director(a) makes the business judgment in good faith for
proper
purpose;
(b) does not have a material personal interest in the subject
matter of the business judgment;
(c) is informed about the subject matter of the business
judgment to the extent the director reasonably believes to be
appropriate under the circumstances; and
(d) reasonably believes that the business judgment is in the best
interest of the company
Law of Assoc II/ Z.Elias

Section 132(1B)
Comments :

The overriding requirement is that the


Directors must make a conscious decision
or exercise a conscious judgment.

If the Directors failed to make a conscious


decision or exercise a conscious judgment, the
Business Judgment Rule will not extend its
protection.

Law of Assoc II/ Z.Elias

S.132(1B)
What is Business Judgment?

S.132(6) defines business


judgment to mean:
any decision on whether or not to
take action in respect of a matter
relevant to the business of the
company
Law of Assoc II/ Z.Elias

S132(1C): a director may rely on expert


advice but that reliance would only be
considered reasonable if the director has
made an independent assessment of
the reports, advice, opinions and data
received
from
the
experts
and
consultants employed to provide
them.

Law of Assoc II/ Z.Elias

Vita Health Laboratories Pte Ltd and Ors v Pang


Seng Meng [2004] 4 SLR 162; [2004]SGHC 158

The court should be slow to interfere with


commercial decisions taken by directors and should
not substitute its own decisions in place of those
made by honest directors.

..it is not the function of the court to punish and


censure director, who have, in good faith made
incorrect commercial decisions..

Law of Assoc II/ Z.Elias

Law of Assoc II/ Z.Elias

1.

Sue For Damages or Compensation


The co may sue for damages or for
compensation where it suffers a loss due
to a breach of fiduciary duty. The co can
take a common law action for tort of
deceit and may recover damages where
the director is fraudulent. Damages or
compensation is meant to put the co in a
position it would have enjoyed had the
director not breached his duty.

2. Return of Property
The co may seek a declaration that a director holds
property on trust for the co where the director acquires
property as a consequence a breach of duty. The property
concerned will be returned to the co. Where the director
has misapplied the cos assets or property, the co has a
right to sue for the return of the cos property. He is liable
to replace them. Normally the order for the return of
specific assets will be made if the assets are still under the
directors control.
Third parties who are involved in a directors breach of duty
may also be sued as constructive trustees. They are
considered to hold the cos assets as constructive trustees,
either because they received the cos property knowing of
the breach of duty, or have knowingly assisted the director
in some dishonest or fraudulent breach of his duty.
Law of Assoc II/ Z.Elias

Law of Assoc II/ Z.Elias

3.

Recover Secret Profit


The co may claim any secret profit made by the
director. According to S. 132(3)(a) where there
has been a breach of a directors duty to act
honestly, the director is liable to the co for any
profit he has made or for any damage suffered by
the co due to the breach. The co may choose
either to sue the director for damages or recover
the secret profit. If the cos loss is greater than
the directors profit, the co may choose to sue for
damages. Where the co did not suffer any loss, it
may claim the directors secret profit.

4.

Rescission of Contract
A contract entered into by a director in breach of his duty can
be rescinded at the cos option. Normally this would be done
where the contract is to the cos detriment. The co may declare
the power exercised by the director in breach of duty as null
and void. This will mean that the transaction entered into by
the director will have no effect. Any money paid will be
returned.
A cos right to rescind may be lost under certain circumstances.
Rescission is not allowed:
where it is no longer possible to restore the parties to their
original position;
where third parties have in good faith acquired rights in the
subject matter of the contract, and
if the company fails to rescind within a reasonable time.
Law of Assoc II/ Z.Elias

Thats all for


Directors at
this juncture,
Folks!

Law of Assoc II/ Z.Elias

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