Director's duty

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Three categories of duty (1) Statutory duties (2) Fiduciary duties (3) Duties of skill, care and diligence

Transcript of Director's duty

Page 1: Director's duty

Three categories of duty

(1) Statutory duties

(2) Fiduciary duties

(3) Duties of skill, care and diligence

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Duties of Directors

Sec 132 (1)-(amdt 2007)A director shall at all times exercise his powers for a proper purpose and in good faith in the best interest of the company.

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Percival WrightF:A director was approached by a

shareholder wishing to sell his shares. The director agreed without disclosing pending takeover bid. The shareholder claimed that the director had breach the fiduciary duty.

H: The directors only owe fiduciary duties to the company as a whole and not to individual shareholders.

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Exceptions

Where there is agency relationship between the directors and the members

Allen v HyattF: Directors approached the shareholders

and induced them to give the option to purchase their shares for the purpose of amalgamation and the directors made profit

H: Directors became agents of the shareholders & owe such duty to them

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In other special circumstances i.e.nature of the company & transaction, dependence of the shareholders on the directors etc

Coleman v MyersH: The directors owe fiduciary duties to the

shareholders because of the family character of the company, the position of father and son in the family and in the company and their high degree of inside knowledge

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Statutory Duty

Imposed by the Companies Act

Duties of DisclosureSecs. 131,133, 135

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Fiduciary Duty

Duty to act bona fide in the interest of the company

Duty to act for proper purpose

Conflict of interest

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Duty to act bona fide in the interest of the company

‘ to act honestly’Gowans J in Marchesi v Barnes & Keogh‘ acting bona fide in the interests of the company in the performance of the function attaching to the office of director’

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Who is to decide what is in the interest of the company

May be decided by the company at general meeting

When powers left to the BOD, it would be the directors who decide.

Directors should act bona fide in what they consider in the interest of the company

Court will only interfere if no reasonable man would consider it as bona fide in the interest of the company

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Case: Re Smith & Fawcett Ltd

Lord Greene MRThey must exercise their discretion bona fide in what they consider- not what the court may consider-to be in the interests of the company, and not for any collateral purposes

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Re W.& M. Roith Ltd

F: R owned a majority shares in a company and was also a director. R wanted to make a provision for his wife after his death and had entered into a contract with the company. Later R died and his executor claimed his wife pension. Liquidator rejected the claim.

H: The directors had entered into a contract which was not in the interest of the company

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John Crowther Group Plc v Carpets International Plc

Vinelott J:…directors owe a fiduciary duty to act in

the interest of their company and to make full and honest disclosure to shareholders before they vote on such a resolution

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Dawson International Plc v Coats Patons Plc & Ors

H: When the directors decided to advise the shareholders concerning a particular bid they have a duty to advise them in good faith and not to mislead either deliberately or carelessly

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Whose interest is the company’s interest

Interest of the shareholders

Interest of the creditors

Interest of the employees

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Interest of the Shareholders

Greenhalgh v Arderne Cinemas Ltd‘the company as a whole’ does not mean

the company as a commercial entity distinct from its corporators, it means the corporators as a general body

i.e.interest of the shareholders of the company (as a whole)

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Interest of the Creditors

Dillon LJ in Multinational Gas & Petrochemical Co (1983) 2 AER 563

‘ they (the directors) owe fiduciary duties to the company though not to the creditors, present or future, or to individual shareholder’

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Judicial recognition in UK, Australia, NZ ; creditors interest should be taken into consideration where the company is insolvent

Lornho v Shell Petroleum, Lord Diplock‘ it is the duty of the Board to consider…the

best interest of the company. These are not exclusively those of its shareholders but may include those of its creditors’

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Other Cases

Walker v WimborneMason J: It should be emphasized that the

directors of a company in discharging their duty to the company must take account of the interest of its shareholders and creditors…His interests (creditors) may be prejudiced by the movement of funds between companies in the event that the companies become insolvent

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Winkworth v Edward Baron Development Co

LtdLord Templeton: A duty is owed by the

directors to the company and to the creditors of the company to ensure that the affairs of the company are properly administered and its property is not dissipated or exploited for the benefit of the directors themselves to the prejudice of the creditors

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Interest of the Employees

Sec 309(1) of UK CA 1985Directors need to regard the interest of the employees of the company in the performance of the functions and duties

Similar provision in S’pore CA but not in our CA

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Duty to exercise power for proper purpose

Power vested to the directors by the AOA is held in trust for the company and must not be exercised for improper purpose

Similarly with the company’s property Liable for breach of fiduciary duty Improper purpose in the exercise of

power or misapplication of company’s property overrides the bona fide of the directors

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Re Duomatic LtdF: Directors made a payment

(compensation) to ex-director and not disclosed to the shareholders as required by the Act

H: The honest belief of directors due to their ignorance of the law does not justify the breach of duty of the directors.

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Case: Howard Smith Ltd v Ampol Petroleum Ltd

F: App (HS) & Resp (AP) wanted to take over Millers. Directors of Millers considered that it would be in the best interests of the company to be taken over by App. Accordingly Millers issued new shares to App in order to block the takeover by Resp

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Privy Council:Nullified the issue of shares, the directors had misused their power

Lord Wilberforce:This was an abuse of the power even though the directors had not acted to further their self-interest

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Conflict of Interest

i) No profit rule

ii) No conflict rule - transaction with the company - competition with the company

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No profit rule

Director/s cannot use his position as director to obtain profit for himself:

- By misappropriating the assets of the company

- Misuse the information of the company- Usurping the opportunities that are

available to the company

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Regal Hastings Ltd v Gulliver

F: Regal wanted to acquire the lease of two cinemas. For that purpose they incorporated Amalgamated(subsidiary). Directors of Regal subscribed certain amount of shares from Amalgamated. The deal to acquire the cinemas failed. Later all the shares in Regal and Amalgamated were sold to a new owner. Directors who bought shares in Amalgamated make a profit. New owner of Regal claimed that they had breached their duty.

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H: The directors were held liable to account the profit made. The opportunity had come to them in their capacity as fiduciaries of the company. They have to disclose that to the shareholders.

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Regal Hastings Ltd v Gulliver:

“…they(the directors) may be liable to account for the profits which they have made, if, while standing in a fiduciary relationship to (the company), they have by reason and in course of that fiduciary duty made a profit.”

Lord Russell of Killowen

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IDC Ltd v CooleyF: C was the managing director of IDC Ltd.

The company tried to obtain a contract from Eastern Gas Board but failed. However the EGB approached C to become their project manager of the said contract. C resigned from IDC and accept the post.

H: C liable to account the profit made to IDC. He is guilty of putting himself in a position in which his duty to the company and his self interest in conflict

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Canadian Aero Service Ltd v O’MalleyF: Defendants negotiated on behalf of

Canadian Aero certain contracts for a project in Guyana. While the negotiation was still in progress, the defendant formed a company, “Terra” and later resigned from Canadian Aero. Terra then bid the said project and successfully obtained it.

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SC of Canada:Defendants liable to pay damages to

Canadian Aero as they had breached their fiduciary duty by allowing a conflict of interest.Their resignation had been prompted by the wish to take the contract for themselves.

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Furs Ltd v TomkiesH: The director who took a bribe or

commission in relation to a transaction that he was negotiating on behalf of the company was in breach of his fiduciary duty.

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Exceptions

When the company has considered the proposal and has decided against it.

Peso Silver Mines Ltd v CropperF: Plf company was offered by a prospector to buy

some mining claims. BOD of Plf rejected the offer. At that time the def was a member of the board. The def was later approached by the prospector to buy the claims. He formed a syndicate for that purpose. Later he was dismissed from the board.

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H: The defendant was not in breach of his duty. Plf had for good reasons rejected the offer

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When the company has known at all times that the director’s interest to take up the opportunity rejected by the company

Refer: Queensland Mines Ltd v Hudson

A company by agreement release the directors from the fiduciary duty

Refer : New Zealand Netherlands Society ‘Oranje’ Inc v Kuys

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No conflict rule

Directors have a duty not to place themselves in a position where their duties and their personal interests conflict

i) Transaction with the company- A director of a company cannot enter into a

transaction with the company without disclosing the fact that he has interest in the transaction directly or indirectly

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Failure to disclose, the transaction becomes voidable at the instance of the company

He will be in breach of fiduciary duty and accountable for any profit made.

Disclosure of interest has been imposed by Secs 132A and 131 – criminal penalty for non-compliance

Compliance to the statutory duty has no effect on the validity of the contract

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Aberdeen Railway Co v Blaikie Bros

F: ARC entered into a contract to purchase equipment from a firm of partnership (BB). A director of ARC did not disclose to other directors that he is a partner in BB.

H: The director had breached his duty by placing himself in a position where his personal interest conflicted with his duty to the company

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ii) Competition with the company Being a director to two or more

competing companies Where a director himself set up a

company competing with his present company for the purpose of obtaining the opportunities of the latter.

Case: Cook v Deeks

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Cooks v Deeks

F: A company had four directors (Defendant & Plaintiff) who were also the only shareholders. There were negotiations by the defendants for a lucrative contract with Canadian Pacific Railway. When the contract was awarded to the company, the defendants formed Dominion Construction Company to carry the work. Plaintiff on behalf of the company sued the Defendants.

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H: The Defendants were in breach of their fiduciary duty as directors and the company may recover the profit.

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Duty of Skill, Care & Diligence

i) Duty of skillRe City Equitable Fire Insurance Co Ltd‘ 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’

- If a director has no qualification, as long as he acts honestly within his power, not liable for mere errors of judgment

- Note: Refer to the amendment in 2007

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Recent Development (sec 132(1A)

Daniels v AWA Ltd A director must acquire a basic

understanding of the business Directors are under a continuing

obligation to keep informed about the activities of the company

General monitoring of the company’s business affairs; should attend board meetings regularly

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ii) Duty of careNeville J in Re Brazilian Rubber Plantations

and Estates Ltd:A director must use reasonable care in

discharging his duty and such reasonable care is to be measured by the care an ordinary man might be expected to take in the same circumstances on his own behalf

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Re City EquitableA director is required to display that degree

of care that would be reasonable for a person of his experiences and qualifications

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iii) Duty to be diligentRe City EquitableA director is not bound to give continuous

attention to the affairs of the company, his duty arises intermittently

- Exercise reasonable diligence in the performance of his duties

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Statutory Duties

The are four main agenda in the statutory regulation:

Disclosure of interests by directors Improper use of information Prohibited transaction between company and its

directors/persons connected to directors Shareholders’ approval for substantial property

transaction.

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Disclosure of interest- Section 131 and 135 (refer to CA 1965)and sec 99B of SIA 1983 (public listed company)

- (task; what interest must be disclose and what are the exemptions and

- What are the differences between sec 131 and 135 )

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Improper use of position and information-section 132

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Substantial property transaction

Section 132C-acquisition/disposal of substantial value/portion of property must be with approval in co. general meeting

Section 132E- arrangement or transaction to acquire/dispose shares or non cash assets of the requisite value

Non cash assets requisite value: sec 132E(7)

Person connected : section 132E (7)(1)-similar to section 122A.

Scope of Directors: sec 132C(6) and 132E(8)(c)

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Sec 132(7E)- includes gift from company to directors-Omega Securities Sdn Bhd v Yeo Lee Hoe

Exemption to sec 132C is sec 132F

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Prohibited transactions

Section 133

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General duty of disclosure

Sec 135

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Remedies

Common Law Duties- Enforced by the companyFew remedies available:1. Contracts which the director has an

interest; the contract is voidable at the option of the company

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2. Director exercised his power in breach of his duty; the exercised may be declared invalid or restrained by an injunction

3. Director obtained some profit or benefit; accountable to the company. Company may sue for the profit or sue for damages

4. Directors obtained property of the company; should return to the company

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Exemption / Release

A company cannot pass an article or entered into a contract exempting a director from indemnifying any liability in negligence, breach of duty or trust ( Sec 140 )

However a director may be relieved by:i) General meeting – where members ratify

the breach of duty of a director

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ii) Court – Sec 354The director will be excused if: he has acted honestly & reasonably, and considering circumstances of the case

Court may exercised such power; in a proceeding against the director OR in an application by the director

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Statutory duties

Disclosure of interest: section 131:disclosure will exonerate directors

from liability Section 1317A and 131A(3) : the contract

become voidable Section 131(8): imprisonment for 7 years or fine

RM150 000 or both Section131A(4): imprisonment for 7 years or fine

RM150 000 or both Sec 99B of SIA 1983:fine not exceeding RM1

million or imprisonment or both

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Remedies

Section 132- depend on breach of respective subsection

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Remedies

Sec 135-section 135(1): imprisonment 3 years or fine RM15 000