1.0 Introduction
A company’s account is the hardcore evidence that reveals the entire business or investment activities transacted in a financial year of a company and this is reflected in its financial statements. The rewards of the directors’ fees, salaries and remuneration to the board of directors (BOD) by the shareholders, as well as any allegation of breach of fiduciary duties by these directors will be disclosed from reviews, examinations and deliberation of the company’s accounts.
Since it is mandatory for the BOD to prepare these accounts to be reflected in the financial statement in compliance with Companies Act 2016 (CA 2016), they equally have every right to inspect the accounts. However, restriction and prohibition remain, which is an exception to this general trite principle.
The refusal to inspect these accounts arises when there are irregularities in the accounts, and conflicts and disagreement among directors and between directors and shareholders.
2.0 Accounting records – what they are
Accounting records is defined in s 2 of CA 2016 as follows:
A financial statement as provided in the Malaysian Financial Reporting Standard (MFRS) 101 includes:
3.0 Directors’ duties
It is mandatory for companies to systematically record the business transactions or investment affairs conducted during the financial year to maintain book-keeping accounts sufficiently so as to be able to explain the financial position should any enquiries be made.
Directors acting collectively as BOD have to take steps to ensure that business and investment activities are recorded within 60 days from the occurrence of the activity, facilitating the completion of the financial statements which comprise of profit and loss accounts, and the balance sheets of the company.
Section 245(1) provides:
In addition to that, the financial statements must be ready and complete and to be audited by an approved company auditor within 6 months from the end of the financial year of the company. [ss 248(1)(b), (2)] Upon having been audited, the financial statements together with the directors’ report (FSR) would be circulated to their shareholders. These FSR would be deliberated, discussed and finalized in:
The object of the FSR is to allow shareholders to assess, review, examine and make enquiry related to the performance of the BOD in managing the company during the financial year of 12 months. In short, FSR is the ‘report card’ of the company in any financial year.
4.0 Directors’ right of inspection
Company accounts are documents belonging to the company and therefore, every existing director has equal rights to these documents.
The directors’ right to inspect the company account is unqualified or absolute. Section 245(1) imposes mandatory duties to cause the accounts to be prepared, to be audited [s 248(2)], and equally couched in mandatory terms which allow free access to these accounting records by any of the directors. The object of the inspection is to assist the director in discharging the duties.
Section 245(4) expresses mandatory and clear terms as follows:
The exercise of directors’ right to inspect accounting records is absolute. There is no requirement or necessity to provide reasons, explanation or justification for the exercise of such unqualified right.
In Dato Dr Lim Boon Ping v Sun Pharmaceutical Sdn Bhd [2020] 8 AMR 763, Ahmad Fairuz Zainol Abidin J succinctly concluded on the directors’ right to inspect and access company’s records to be absolute in the following terms on p 767:
The right of inspection is not restricted to the preparation of ‘true and fair profit and loss account’ as envisaged by s 245(1) but it is also extended to the fiduciary duties of good faith, care, skill and diligence which the director owes to the company pursuant to ss 213, 214 of CA 2016. The Court of Appeal in Singapore, Wuu Khek Chiang George v ECRC Land Pte Ltd [1999] 2 SLR 352 where LP Thean JA explained the importance of such inspection on p 361:
In the leading authority of the Court of Appeal in UK, Oxford Legal Group Ltd v Sibbasbridge Service Plc [2008] EWCA Civ 387, the Court of Appeal held that a director can exercise the right to inspect for the purpose of carrying out his duties as a director generally. Sir John Chadwick held on pp 398-399:
In summary, the right of inspection is to enable a director to discharge all the statutory duties, including but not limited to those related to accounts.
5.0 Sleeping director
A Director is appointed by the shareholders to be entrusted with the management and operation of the company. At times, an individual may be obligated to accept the appointment due to business requirement, financial obligations or loan conditions incurred by the bank. The individual may not be involved in the management or the operation of the company at all times.
The issue is whether such a ‘sleeping director’ or an ‘inactive director’ has the statutory right to inspect the records, accounts or documents was considered in Ho Yee Chin v Ho Min Hao & Ors [2016] 6 CLJ 728. The High Court answered in affirmative.
The High Court held that the director, irrespective of whether he is active or ‘sleeping’, has the unfettered right to inspect the records of the company. A director who does not take part in the management continues to remain liable as a director with fiduciary and statutory duties. It is of these reasons that the director holds the right to inspect. SM Komathy JC held on pp 735-736:
In conclusion, the right of inspection by a director is an inalienable right and not restricted in any way by the fact that the director does not take part in the management of the company.
6.0 Exception to the general rule
6.1 Current director
Section 245(4) confers the right of inspection on a company’s accounts to only an existing director. The right of a director to inspect the company’s accounts flows from the office as a director and nothing more. The right could not be invoked once an individual cease to be director due to retirement, removal or resignation of the director.
In Dato Tan Kim Hor & 3 Ors v Tan Chong Consolidated Sdn Bhd [2009] 2 MLJ 527, the Court of Appeal held that a director is entitled to inspection without the need to provide any particular reason for his request for inspection. The obligation of the company to allow inspection by its director is mandatory.
The Court of Appeal held that a director has absolute right to inspect the accounting books and other records of a company. The rights flow from his office as a director and enable him to perform his duties as a director. An ex-director has no proprietary, managerial or any other similar interest in the accounting and other records of a company.
The right of inspection remains absolute and cannot be curtailed by the facts that the company has ceased business, is in an inactive nature or is dormant for several years. As long as an individual remains as a director, such right to inspect past years’ accounts remains.
6.2 Bona fide application
A director seeking the assistance of the court to grant the application compelling the opening up of the accounting records for inspection must adduce evidence to show that the application is urgent and bona fide with its truthfulness.
In the absence of proof to the contrary, the court would take judicial notice that the right is exercised for the benefit of the company.
The right to inspect will be lost or disappears in the event that evidence revealed sufficiently that the right is exercised to injure the company, to achieve private objectives of the director, for illegitimate purpose or is motivated by some ulterior motives.
In Wuu Khek Chiang George v ECRC Land Pte Ltd [1999] 2 SLR 352, LP Thean JA in delivering the Court of Appeal’s decision succinctly held on pp 366-367:
In Dato’ Seri Timor Shah Rafiq v Nautilus Tug & Towage Sdn Bhd [2018] 2 CLJ 103, the High Court lays down the circumstances of ‘clear proof’ that is needed to demonstrate that the inspection is for improper purpose.
Crucially, it is for the company resisting the inspection of the director to demonstrate that he is exercising his right of inspection for some ulterior or improper purposes or to injure the company. And in order to achieve this, the company must show clear proof that this is undoubtedly the case. Thus, Low Hop Bing JCA in the Court of Appeal of Tan Kim Hor & Ors v Tan Chong Consolidated Sdn Bhd [2009] 2 MLJ 527 firmly stated on pp 531-532:
The Court would decide whether the right to be exercised by the director is genuine and bona fide; or for ulterior motives to injure the company.
7.0 Court intervention
The director who has secured the right to inspect and access the accounting records but is being denied or refused access has the liberty to seek court intervention. Section 245(8) provides:
In Dato Seri Timor Shah Rafiq v Nautilus Tug & Towage Sdn Bhd [2018] 2 CLJ 103, Mohd Nazlan Ghazali J succinctly explained on p 127:
The court needs to be satisfied that:
In Dato Dr Lim Boon Ping v Sun Pharmaceutical Sdn Bhd [2020] 8 AMR 763, the directors are husband and wife. Without the knowledge of the plaintiff (husband), the business of the company was transferred to a competitor company, couple with the two employees are also consented being directors and shareholders of the competitor company.
The plaintiff applied to the court for assistance pursuant to s 245(8) to be given access to the records. Ahmad Fairuz Zainol Abidin J held on p 769:
On the other hand, the opposing parties bear the responsibility to adduce ‘clear proof’ to satisfy the court ‘affirmatively’ that the grant of the right to such a director would be:
The burden of the proof lies on the opposing party and the standard of proof is ‘clear proof that a misuse of power is involved’. There is no burden on a director to show or justify any particular reason for his request for inspection. In this regard, the Singapore Court of Appeal in Wuu Khek Chiang George v ECRC Land Pte Ltd [1999] 2 SLR 352, LP Thean JA delivered the landmark decision succinctly held on p 367:
Likewise, the High Court in Dato Seri Timor Shah Rafiq v Nautilus Tug & Towage Sdn Bhd [2018] 2 CLJ 103 echo similar observation in clear terms. Mohd Nazlan Ghazali J held on p 127:
The presumption that the director will exercise the right for the benefit of the company applies unless it is displaced otherwise. In upshot, a director is entitled as of right to have access to the company’s account until it can be demonstrated vividly that an exception applies.
In James Theophilus Fredericks v Pelopor Dinamik Sdn Bhd [2020] 4 AMR 227, the plaintiff being a director of the defendant company has in numerous attempts between 2016 and 2019 demanded and inquired for the inspection of accounting books but was being refused for such an inspection.
The High Court, upon having evaluated the contentions of the defendant, drew a conclusion that the defendant had failed to show clear proof or adduce any clear evidence to satisfy the court affirmatively that the grant of the right of inspection would be:
The High Court affirmed the trite principles as follows:
In this case, the defendant advanced an argument that the director he himself who has approved the audited financial statement for the disputed years is now barred from inspecting the accounts as to its correctness. He himself has been stated in those financial statements as to its ‘true and fair’ basis. This argument was totally
rejected by the court.
Wong Chee Lin J held on p 237:
8.0 Procedure compliance
The Act recognized that the director may not able to comprehend let alone interpret the information embedded within the large and volumeness of accounting records, s 245(8) permits the appointment of an approved company auditor to act on behalf of the director to facilitate the inspection and examination of company’s records.
The appointed auditor however required to furnish an undertaking not to divulge or disclose the findings other than to the directors. It is to maintain confidentiality of the business information and the report the auditor ultimately produces. In Dato Tan Kim Hor & Ors v Tan Chong Consolidated Sdn Bhd, the High Court reject the directors’ application on accounts inspection in view the content of the undertaking extends the disclosure to many parties but not exclusively to the director.
The procedure compliance stated in s 245(8) is as follows:
Section 48(3) further provides that the ‘authorised person’ is allowed to make copies or take extracts from the documents or records.
In James Theophilus Fredericks v Pelopor Dinamik Sdn Bhd [2020] 4 AMR 227, the High Court allowed the director’s application to access and inspect the accounting books through the appointment of an approved company auditor. Wong Chee Lin J held on p 239:
9.0 Conclusion
It is a settled law that directors of the company who perform the onerous duties and hold responsibilities to act in the best interest of the companies are accorded absolute and unqualified rights to access the company’s accounting records. This is to enable such directors to discharge the responsibilities fairly and equitably for the benefits of company and its shareholders.
As the right comes with the office, the Court would only deny the right in very exceptional circumstances in which clear proof points that such inspection would cause injury or detriment to the company. The threshold is a high one.
References:
- Dr Choong on Companies Act 2016, Peng You Solutions Plt, 2020, 3rd ed.
- Dr Choong on Interpretation of Companies Act 2016 (2020, 1st ed.), Peng You Solutions Plt, 2020, 1st ed.
- Hallmark Legal Principles on Companies Act 2016, Choong Consultants Plt, 2019, 1st ed.
- Real Property Gains Tax: Law and Practice, Peng You Solutions Plt, 2021, 1st ed.
- To order the books, please email to pengyou.solutions@ gmail.com
*Dr. Choong Kwai Fatt is a practicing advocate & solicitor of the High Court of Malaya.
Note: The deliberation on “Directors’ Right and Restriction on Inspection of a Company’s Account ” is the writer’s own opinion and conclusion.
