Duties of Director

CORPORATE LAW DIRECTOR PART 2 : Duty of Skill Care & Diligence

Duty to be skillful

 Under Common Law the rule that a person is not required to possess any skill to be appointed as a director.  The fact that unskillful director is not a breach of his duty to the company.  Nevertheless, the director is under duty to exercise the power using the level of skill that he has.  If he uses less than the level of skill that he has, then he is in breach of his duty.

Re City equitable fiRe insuRanCe Co. ltD.  Romer J said:

“A director need not exhibit in the performance of his duties a greater degree of skill that may reasonably be expected from a person of his knowledge and experience”.

Duty of skill, CaRe anD DiliGenCe unDeR Ca 2016

• The duty of skill, care and diligence have been codified in section 213(2) of CA 2016 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.

• This section has abrogated and raised the standard of skill and care under common law as establish in Re City Equitable and the case of Re Brazilian there is no minimum objective standard required of a director.

Duty of skill, CaRe anD DiliGenCe unDeR Ca 2016 •

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• In this case, the standard is subjective to be assessed in relation to the director’s knowledge and experience. Since the subjective standard of care varies according to the skill a director has, a director with no specific skill no expertise need not be accountable.

• The effect of this provision it raises the standard requirement of a director to exercise reasonable skill, care and diligence from a subjective standard to a minimum objective standard.

• This comes under the phrase “with the knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities” in the above section.

Section 213(3)  A director who contravenes the duties under section 213 commits and offence and shall on conviction be liable to imprisonment for a term not exceeding 5 years or to a fine not exceeding RM 3 million or to both.

tHe business JuDGeMent Rule (s132(1b))  The term “business judgment” is defined in the recent amendment under section 214 (2) as any decision on whether or not to take action in respect of a matter relevant to the business of the company.  The purpose of the business judgment rule perhaps is to protect honest directors and officers from being liable for their unsuccessful decisions and give some sort of confidence and bravery on director to involve in innovation venturesome business activity.  Under section 214(1), a director who makes a business judgment is deemed to meet the requirement of the duty of skill care and diligence under subsection 213 (2) 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 d. reasonably believes that the business judgment is in the best interest of the company.  A director is not liable for the negligence for breach of duty of skill, care and diligence in any error of business judgment if complies with the above 4 rules set out in section 214(1).  Under the section the overriding requirement that director must make a conscious decision or exercise a conscious judgment to get the protection.

RelianCe on infoRMation PRoViDeD by otHeRs (s215(1))  Section 251 (1) provides that a director, in exercising his duties as a director may rely on information, professional or expert advice, opinions, reports or statements including financial statements and other financial data, prepared, presented or made by :a. any officer of the company whom the director believes on reasonable grounds to be reliable and competent in relation to matters concerned. b. any other person retained by the company as to matters involving skills or expertise in relation to matters that the director believes on reasonable grounds to be within the person’s professional or expert competence. c. another director in relation to matters within the director’s authority. d. any committee to the board of directors on which the director did not serve in relation to matters within the committee’s authority.

Thus 4 categories of people whose information is allowed to be relied on are : a) A reliable competent officer b) A professional or expert retained by the company c) Another director d) A committee to the board of directors, on which the director is not a member

 Section 215 (2) states that the director’s reliance made under subsection (1) is deemed to be made on reasonable grounds if it was made :a. in good faith and b. after making independent assessment of the information or advice, opinions, reports or statements, including financial statements and other financial data, having regard to the director’s of the company and the complexity of the structure and operation of the company.  On section 215(1) the director is permitted to rely on expert advice but that reliance would only be considered reasonable if the director has made independent assessment reports and data received from the experts and consultants who are employed to provide them.  A director is not liable for any loss suffered by company due to his reliance of the information provided by others under section 215 (1).

DeleGation anD ResPonsibility foR aCtion of DeleGatee – s216 (1)  S216(1)– according to this section the directors may delegate any power of the board of directors to any committee to the board of directors, the director, officer, employee or expert unless such delegation is prohibited by the CA 2016, the company’s constitution, the board’s resolution or the members’ resolution  S216(2) – where the directors have delegated any power, the directors are responsible for the exercise of the power by the delegatee as if the power had been exercised by the directors themselves.

 S216(3) provides– the directors are not responsible under (2) if :  The directors believed on reasonable grounds at all times that the delegatee would exercise the power in conformity with the duties imposed on the directors under this Act and the constitution of the company and  The directors believed on reasonable grounds, in good faith and after making a proper inquiry if the circumstances needed for inquiry, the delegatee was reliable and competent to the power delegated.

aPPRoVal of tHe CoMPany RequiReD foR DisPosal by DiReCtoRs of CoMPany’s unDeRtakinG oR PRoPeRty  S 223 – a director must seek approval of the company in general meeting before they can carry into effect any transaction to acquired property or to dispose of substantial portion of the company’s property.  Any arrangement contrary to this provision shall be void.  Any director who is contravention of this section commits an offence and shall be liable to imprisonment for a term not exceeding 5 years or to a fine not exceeding RM3 million or to both.

otHeR Duties  S 224 – Loan to directors  S 226 – Prohibition of tax free payment to directors  S228 – Transaction with the directors, substantial shareholder or connected person  S 217 – Responsibility of a nominee director