Introduction
A company incorporated under the Companies Act 2016 or the then Companies Act 1965 would have its affairs and business managed by a board of directors (BOD) who are, in turn, appointed by the company’s shareholders who may themselves also become directors. The BOD owes a fiduciary duty to the company to always act and carry out its affairs and operations in good faith and in its best interest.
The Companies Act 2016 sets out, in sections 210 to 234 of the Act, the various duties and responsibilities of the directors with the corresponding penalties and fines for any non-compliance and violation of the Act. In cases of serious violations, the directors may face imprisonment of up to 5 years.
This article explores the extent, coverage and scope of what it means for a director “to act in good faith and in the best interest of the company,” especially in the light of the recent Court of Appeal’s decision in Tan Sri Dato’ Tajudin bin Ramli v Rego Multi-Trades Sdn Bhd [2018] 2 AMR 912 and the High Court’s decision in Rego Multi-Trades Sdn Bhd v Tan Sri Dato’ Tajudin bin Ramli & Ors [2017] 1 LNS 800.
Good faith and best interest
Section 213(1) of the Companies Act 2016 (the Act) specifically provides that a director is required to discharge his obligations at all times in good faith and in the best interest of company. It states:
“A director of a company shall at all times exercise his powers in accordance with this Act, for a proper purpose and in good faith in the best interest of the company.”
Although the company is managed by a board of directors who generally make decisions on a collective basis, nonetheless the Act continues to hold individual director fully responsible for any non-compliance or violation of the Act. The Companies Commission of Malaysia (SSM) is the regulator acting also as the prosecutor on director for any non-compliance. Likewise, the company may also institute legal proceedings against the defaulted director as it is a legal entity which can sue or be sued.
To act “in good faith in the best interest of the company” encompasses the element of honesty. The director must at all times avoid any conflict of interest, i.e., he should not place himself in a position where his duty and interest may conflict. Thus, he has a duty to make a disclosure to other members on the board of directors if he has an interest relating to any business decisions to be taken by the company. Thus, he should never take advantage of and profit from his position as a director. He has generally a duty to exercise reasonable care, skill and diligence when making business decisions in the board meeting.
In Petra Perdana Berhad v Tengku Dato’ Ibrahim Petra Bin Tengku Indra Petra & Ors [2015] 8 CLJ 856, the Court of Appeal held that it is settled law that in determining the duty to act honestly under section 132(1) of the Companies Act 1965 (pari material with section 213(1) of the Act)(see Appendix 1), the test which the Court has applied is an objective one, in that in the absence of separate consideration:
“Whether an honest and intelligent man in the position of a director of a company concern could, in the whole of material circumstances, have reasonably believed that the transaction were for the benefit of the company”.
In Alcatel-Lucent (M) Sdn Bhd v Solid Investment Ltd [2012] 4 MLJ 72, the Court of Appeal explained the element of fiduciary intertwined with good faith which encompasses the obligation of loyalty. The director must devote single-minded loyalty to the company. Ramli Ali JCA held on p 82:
“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. The distinguishing obligation of fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary.”
Section 213(2) of the Act further provides that a director must exercise reasonable care, skill and diligence expected of a director besides any additional knowledge, skills and experience which he possesses. The section states as follows:
“A director of a company shall exercise reasonable care, skill and diligence with –
Business dealings are dynamic in nature which require all times the prompt attention and action of a company’s board of directors. It is the circumstances and justification for a decision and action that demonstrate whether the duty to act in good faith and in the best interest of the company has been fulfilled by a director, taking part in the BOD decision.
A case in point is that of Tan Sri Dato’ Tajudin bin Ramli v Rego Multi-Trades Sdn Bhd [2018] 2 AMR 912 in the Court of Appeal. In this case the director Tan Sri Dato’ Tajudin bin Ramli (Tan Sri TR) was held personally liable and responsible for the company’s loss of RM265 million. He was found to have not acted “in good faith in the best interest of the company.”
The saga begins
Rego Multi-Trades Sdn Bhd (Rego) is a wholly owned subsidiary of Technology Resources Industries Bhd (TRI). Tan Sri TR was a former director of Rego and also a substantial shareholder, the former Chairman and Chief Executive Officer of TRI at all material times.
TRI’s principal activities are that of investment holding and provision of management services. Pursuant to a board decision in Rego on 10.1.1997, Tan Sri TR was authorised by the BOD to negotiate and finalise the terms with Aras Capital Sdn Bhd (Aras Capital) for the execution of an Investment Management Agreement (IMA) involving an investment of up to RM200 million, which was further increased to up to RM300 million on 21.4.1997.
Between 14.1.1997 and 28.4.1997, Rego had deposited with Aras Capital an aggregate sum of RM277.3 million. Aras Capital, however, in same year of 1997 on 12.12.1997 lost its fund manager license with the Securities Commission which resulted to it being no longer able to manage Rego’s investment under the Investment Management Agreement (IMA).
In order to pacify the auditor not to classify the investment in Aras Capital amounting to RM277.3 million as a bad and doubtful debt for the financial year ended 31.12.1997 on TRI’s group, Tan Sri TR executed a letter of indemnity (LOI) on 1.4.1998 to Rego stating that he himself would make good any losses that Rego might suffer should Aras Capital defaulted the payment due to Rego by 31.3.1999 under the IMA.
Aras Capital indeed defaulted the repayment of the investment sum to Rego. In the TRI’s 80th BOD meeting held on 23.2.2000, the BOD resolved that TRI accepted Tan Sri TR proposed payment of RM100 million as full and final settlement on the personal guarantee given by Tan Sri TR under the LOI issued on 1.4.1998 to Rego. Rego subsequently received payment from Tan Sri TR on account of Aras Capital’s obligations under the IMA in the sum of RM110 million.
Touching on this TRI BOD’s resolution, the Court of Appeal held that it was invalid as TRI and Rego were two entirely separate legal entities even though they were within the same group of company. It was Rego that invested with Aras Capital and what’s more the LOI was given by Tan Sri TR to Rego. The resolution by the holding company of TRI to accept Tan Sri TR’s settlement proposal on the LOI given to Rego was totally unfounded and has no legal effect on Rego.
The outstanding sum of RM265 million remained due and payable by Tan Sri TR pursuant to the LOI given to Rego. In conclusion, TRI BOD’s resolution would not able to discharge Tan Sri TR’s LOI’s obligation which he made as an individual director of Rego. A resolution of a holding company (TRI) has no binding effect on its subsidiary (Rego).
Rego instituted legal proceedings against Tan Sri TR in 2013 claiming that the director has breached his fiduciary, statutory and common law duties in procuring the company entry into an IMA with Aras Capital. The director has not acted in the best interest of the company and failed in his duties to verify, supervise and monitor the said substantial investment amounting to RM277.3 million. Applying the objective test enunciated in Petra Perdana’s case, Rego contended that no honest and intelligent man would have believed that the IMA was of benefit to Rego.
The High Court affirmed Rego’s contention and held that Tan Sri TR has misled Rego’s BOD from making an informed decision in relation to the investment with Aras Capital. In addition Tan Sri TR has:
There was –
In conclusion, Tan Sri TR, in causing Rego to enter into the IMA with Aras Capital, was not acting in good faith. The fatal blow was when Aras Capital’s license was revoked by the Securities Commission on 12.12.1997 in the very same year that Rego invested RM277.3 million with it. There was no immediate legal action commenced by Rego to recover the investment from Aras Capital.
The High Court went on to conclude that Tan Sri TR has indeed failed in his fiduciary duty as a director to ensure effective internal control within Rego and to supervise and monitor the fund placement with Aras Capital. He has breached his fiduciary, statutory and common law duties as a director of Rego. Tan Sri TR was ordered to pay Rego the sum of RM265 million as the LOI was considered a legally binding and enforceable document.
Court of Appeal’s decision
Being dissatisfied, Tan Sri TR took his case to the Court of Appeal. He contended that the decision to invest in Aras Capital was made by the Board and not by himself alone. He signed the agreement pursuant to the Rego’s BOD’s resolution authorising him to do so. He further argued that he could not be expected to micro manage matters. Once the decision to invest had been made by the Board, he, as the director, left it to the managers to follow up. This, he contended, was the normal practice for a CEO and Chairman of a large corporation. Therefore, he claimed, there was no breach of fiduciary duty on his part, especially as he was extremely busy with the huge corporate and financial restructuring of the TRI Celcom Group at that material time. These explanations, justifications and contentions were totally rejected and dismissed by the Court of Appeal.
Yeoh Wee Siam, JCA in delivering the judgement of the Court of Appeal, opined on page 919:
“We do not think that the appellant can avoid liability by contending that he is a busy CEO and cannot be expected to micro manage everything. The High Court made a finding that the appellant was in breach of his duty of loyalty to the respondent when he committed substantial funds owned by the respondent to third parties. There is no evidence that the appellant made any attempt to verify the financial viability of Aras Capital, or to monitor the placements in Aras Capital.”
In arriving at the Court of Appeal’s decision, cogent evidences are relied on the failure of the director to evaluate the background and capability of Aras Capital as a fund management company, the lack of due diligence in appraising the company and its performance prior to signing the IMA and committing over a large sum in investment, there being subsequently no monthly statements being provided by Aras Capital and no personnel from Rego to monitor the fund placement with Aras Capital – all these pointed to Tan Sri TR having acted in breach of his duties as a director of Rego.
Tan Sri TR was found to have been negligent in his duty in being unaware that Aras Capital’s license as a fund manager was revoked on 12.12.1997.
The Court of Appeal concurred with the High Court findings and accepted in totality its decision. Tan Sri TR was held liable to account to Rego a sum of RM265 million.
Afterword
Apart from the LOI supplied by Tan Sri TR and the breach of his fiduciary duty, it would seem that the BOD of Rego should also be held accountable as it authorised the investment with Aras Capital via a Directors’ Circular Resolution No. 02-97 on 10.1.1997.
The BOD failed in its duty collectively to act in the best interest of the company when it committed a substantial sum without first ensuring that due diligence was carried out to ascertain the viability of Aras Capital. It also failed to supervise or monitor the said investment besides not taking prompt action to recover the sum when Aras Capital lost its license to act as a fund manager.
The BOD seemed to have shed its responsibility and role in the whole affair, leaving an individual director to take the rap. Considering that the decision to invest in Aras Capital was a collective decision of the BOD, it would appear that the BOD, too, should be held liable.
Conclusion
Malaysia has transformed its business landscape with the legislation of the Companies Act, 2016 which took effect from 31.1.2017. Directors sitting on a board of company should be fully cognizant of their duties and responsibilities, giving their undivided loyalty to the company and acting in its best interest. Failure to do so would lead to dire consequences as borne out in the Court of Appeal’s judgment in Tan Sri Dato’ Tajudin bin Ramli v Rego Multi-Trades Sdn Bhd [2018] 2 AMR 912.
References
- Members’ Resolutions and Meeting under the Companies Act 2016, InfoWorld, 2017 ed.
- 148 Practical Applications on the Companies Act 2016, InfoWorld, 2018 ed.
- Dr Choong on Companies Act 2016, Peng You Solutions Plt, 2018, 2nd ed.
- www.kwaifatt.com
Appendix 1
– Comparison of sections of Companies Act
