Qualification and appointment of directors

CORPORATE LAW 485 Chapter 5 DIRECTOR

At the end of this topic, students should be able to: Explain and examine the duties and responsibilities of directors in a company and the legal effects whenever there is non compliance to legal requirements

Appointment of Director

Qualification & Disqualification of Director

Removal of Directors

• Compensation for loss of office

Appointment Of Director

S201

S196

Every public company must has at least 2 directors .

In the case of private company, one director

A person cannot be appointed unless he has consented in writing & made a declaration that he is not disqualified under this Act

S202

A director maybe appointed by being named as a director in an application for incorporation of a company

All subsequent director maybe appointed by ordinary resolution

Qualification Of Directors

Sec 196(2)

S318 (3) CMSA 2007

Sec 196(4) Qualification of Directors

Sec 199

Sec 198(1)

Sec 196(4) • Is ordinarily resident in Malaysia • Has a principal place of residence in Malaysia Sec 196(2) • Natural person • Corporation cannot be a director for another corporation Sec 198(1) • Must be solvent Sec 198(1) – clean person.

• A person shall not hold office as a director of a company if the person: • is an undischarged bankrupt • convicted of an offence in connection with the promotion, formation or management of a corporation • Has been convicted of an offence involving bribery, fraud or dishonesty • Any offence under sec 213,217, 218, 228 & 539.

Sec 196(2)-Age

• Minimum age of 18 years

Sec 199(1) – Disqualification by the court order

• Within the last 5 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 • Due to his contravention of the duties of a director • Due to his habitual contravention of this Act.

Sec 318 (3)-Disqualification under the Capital Market and Services Act 2007 • Having been convicted of an offence under a securities laws • Having had an action taken against him under sec 199,200, 210, 211, 354, 355.356 ,373 CMSA 2007

Removal Of Director

Sec 206 (3) • By ordinary resolution

Sec 206

• Required special notice of 28days given to resolution • Director has right to make his defense • Tun Haji Ishak bin Ismail v Leong Hup Holding Bhd. • This requirement is not mandatory (Soliappan v Lim Yoke Fan)

• Minimum period notice 14days

Sec 316(1)

Compensation for loss of office (s227) Sec 206

Director of public company may be terminated at any time with special notice by ordinary resolution of company general meeting

Sec 227

Prohibits a company from making any payment to any director by way of compensation for loss of office or as consideration for or in connection with his retirement from such office

Duties Of Directors

Duties of skill, care & diligence Fiduciary duties Duties Of Directors

Duty to disclose interest in contract

Fiduciary Duties Duty to exercise power in good faith in the best interest of the company

Duty to avoid conflict of interest

Duty to exercise power for the proper purpose

Duty to exercise power in good faith & in the interest of the company • Sec 213(1) - “A directors of a company shall at all times exercise his power in accordance with the Act, for the proper purpose & in good faith in the best interest of the company.”

• Directors must exercise his power in good faith & interest of the company as a whole.

Case: Re W & M Roith Ltd Was the controller of a ‘one man company’ Roith

The claim was rejected by the liquidator of the company

When Roith duly died, the wife claim for pension

Enter into a contract with the company That the company would pay pension to his wife when he died Court Held: The liquidator was right to reject the claim. The contract was not for the interest of the company

Wife

Duty to exercise power for the proper purpose • Sec 213(1) – A director of a company shall all time exercise his power in accordance of this Act, for a proper purpose

Case: Howard Smith Ltd v Ampol Petroleum Both H & A were in a battle trying to take over Miller

Ampol Petroleum

A brought an action to challenge Miller the validity of the They issued more share to share issue Howard Smith Ltd.

Howard Smith Ltd

The director of Miller was in favour of Howard Smith to take over Miller

Court Held: they has breach the duty because misused the power

As a result H had more share & would win the bid

Duty to of avoid conflict interest • Director should not enter into any engagement in which there is possibility that their PERSONAL INTEREST could conflict with those of the company they were bound to protect.

Case: Arberdeen Railway Co. v Blaikie Bros Entered into contract To supply a large quantity of iron seat

Railway Co.

with a partnership

One of the partner was a director of the company

The court held: The company could avoid the contract even though its terms were fair.

Duty to avoid conflict of interest ( Companies Art Sec132(2)) • Sec 218(1) - a director or officer of a company shall not, without the consent or ratification of a general meeting..

Misuse the property of the company Competition with the company

Misuse of company opportunity

Misuse of information

Misuse of position

Misuse the property of the company S218(1)(a)

To make profit for himself/ any other person that cause loss to company

Case: Paul A Davies Pty Ltd v Davies

The directors decided To enter a new venture due to down turn in the business Freehold Property Plaintiff was a company carrying on a business of a car dealer But finance partly from Co. ‘s funds & bank loan

They purchased a freehold property under their own name but was finance partly from company funds in the form of interest free loan – as a result the company faced financial problem – placed in voluntary winding up The court held: The directors were liable for breach of fiduciary duty as they had used the company funds for their own private purposes

Misuse of information S 218 (1)(b)

May include confidential information, customer lists or trade secrets

Avel Consultant Sdn, Bhd is a subsidiary of Elmex Consultants

Case : Avel Consultant Sdn. Bhd. V Mohd Zain Yusof & Ors.

A firm named Perunding AJZ was formed by the three respondent

The firm carried the same business nature & took the contract that belong to Alvel & Elmex

The 1st & 2nd defendant were the director of these two companies where as the 3rd respondent was a director of Elmex only

The court held: the directors had breach their fiduciary duties because they carefully planned to take Avel’s jobs

Misuse of position – S218(1)(c)

to make profit for themselves & at the same time may cause loss to the company

Case : Cook v Deeks

Same business- they passed a resolution of the company ratifying their conduct There were 4 directors in a company . A dispute arose between Cook & the other directors

3 other directors

Company

Negotiated a contract in their own name & not for the company

The form a new company to carry out the contract

The court held: The directors had breached of fiduciary duties & the benefit of contract belong to the company

Misuse of company opportunityS218(1)(d)

If he makes a profit from taking up an opportunity which should have taken up by company

The Board of Truestees of the Sabah Faondation & Ors v Datuk Syed Kechik b Syed Mohamed

The court held: The director had breached the duty. As a director he had a duty to make sure that whatever timer areas that were intended for Sabah Foundation or its group company were for the benefit of the company only.

Case : Cook v Deeks

Competition with the companys218(1)(e)

Prohibits a directors without consent of the company from engaging in business which is in competition with the company

Case: Personal Automation Mart Pte Ltd v Tan Swee Sang

Same business Company

She secretly took over the company’s premises, staff & telephone line with the intention of founding her new business

New company

Form new business Resigned from the company

The court held: defendant was in breach of her fiduciary duty to the company

Remedies for breach of duties under common law

Sec 218(2) – A director who commits an offence shall be liable to imprisonment for not exceeding 5 years or a fine not exceeding 3 million or both

It can claim compensationMahesan v Malaysian Government Officers

Remedies for breach

Claim any secret profit that director made- Furs Ltd v Tomkies

The exercise of a power which breach of director duties may be declared to be invalidHoward Smith Ltd V Ampol Petroluem

Disclosure of interest in contract - S221(1)

Sec 221(1) Sec 221(2)

Sec 219(1)

Requires every director of the company whether directly/indirectly, interested in a contract with the company to declare the nature of his interest at the meeting of directors as soon as practicable after relevant facts have come to his knowledge

In order for directors to be breach of their duty, they must have material interest in the contract To avoid being breach of duty, director must make full & frank disclosure of their interest- at the meeting of the board of directors

Breach of provision penalty of imprisonment for 5 years or fine not exceeding of RM3 million or both

Case: Tneu Beh v Tanjung kelapa Sawit Sdn. Bhd.

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