COMPANY LAW II

LAW 3211

a) The 1st issue in this case is, whether Kamla breached

his duty to disclose as a director by not declaring the
commission he received from the Canadian company
contrary to s.132(2)(c) and s131(1) of the Companies
Act 1965.

The duty of a director to disclose his interests in a

contract usually arises where there is a conflict of
interests. This basically means that his duty to act in
the best interests of the company are in conflict with
his interests as a director. The simple solution is to
disclose these interests to the shareholders. Part of
this fiduciary duty owed to a company is the duty of a
director 'not to benefit for himself or any other
person' from his position as a director (s.132(2)(c)).

In Regal (Hastings) ltd v. Gulliver [1942] 1 All

ER 378, the directors, acting in good faith for the
best interests of the company, bought shares in the
subsidiary, to increase it's paid up capital to £5000 so
as to enable the company to obtain a lease for the
two cinemas. The lease negotiations fell through and
the directors (defendants) sold their shares at a
profit. New directors were appointed by the
purchasers of the shares and an action was taken
against the former directors to recover the profits
they made from the sale of the shares. The House of
Lords in this case held that the four defendants were
liable to repay the profits they made despite acting in
good faith.

The equitable rule against profiting from the

company above by the House of Lords has been
accepted in Malaysia in Tengku Abdullah ibni

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Sultan Abu Bakar & Ors v. Mohd Latiff bin Shah
Mohd & Ors [1996] 2 MLJ 265.

In our case, Kamla, one of the directors of Pickle Bhd,

was promised a commission by the Canadian
company in return for contracting with them instead
of their rivals. Receiving this commission on the part
of Kamla is 'benefitting' per se from her position as a
director. It can be seen, however, that Kamla did act
in the best interests of the company when he secured
a deal with this Canadian company that would give
them a better price than had she contracted with
other companies.

The only problem, therefore, that remains is her non-

disclosure of the commission. As the provisions and
cases above have shown us, any profit obtained by a
director by virtue of his position must be disclosed to
the shareholders, even if no detriment is caused to
the company (Regal (Hastings) ltd v. Gulliver
[1942] 1 All ER 378). Pickle Bhd, in our case, has
actually benefitted from this contract secured by
Kamla as it is supplying now at a lesser price. Having
said this, Kamla will be liable to the company to
repay the commission she received.

A minor issue remaining is, whether Arif, a non-

executive director and the chairman of the board,
was under a fiduciary duty to disclose Kamla's
commission she received from the Canadian
company to the shareholders of Pickle Bhd.

S.131(1) talks about the duty of a director 'to

declare…. his interests', and s.132(2)(c) mentions
that a director cannot use his position to gain an

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 interest 'without the consent or ratification of a
general meeting'.

Both provisions provide for a director to declare

his/her own interests, but no where in these two
provisions does it mention the duty of a director to
disclose the interests of another director, be it even
the chairman (Arif, in our case). The duty to whistle-
blow is merely a moral duty which the law does not
deem binding.

b) The 1st problem that arises in the case is, whether

Kamala breached her duty to disclose her brother's
interest in the contract between Pickle Bhd and Aces
Sdn Bhd for the sale of property contrary to s131(1)
of the Companies Act 1965.

s.131 (1) talks about a director's direct or in direct

interest in a contract. Applying this rule strictly and
looking at the sibling-relationship per se, Kamla is an
interested director as a close relative of hers would
benefit from this sale to Aces Sdn Bhd. This, however,
is not the whole story. The facts tell us that Kamla
and her brother are not on speaking terms, and when
two members of a family have fallen out it is unlikely
that they would attempt to do acts to benefit one
another. We may safely conclude, therefore, that this
first element is not satisfied.

s.131(1) also requires the director to make a

declaration of his interest 'after the relevant facts
have come to his knowledge'. The facts of our
problem tell us that 'Kamla was unaware that her
brother wanted to acquire the land'. This ignorance of
this particular fact on Kamla's part also negates the
satisfaction of the 2nd element under s.131(1).

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The House of Lords in Regal (Hastings) Ltd v.
Gulliver [1942] 1 All ER 378 held that the directors
could have protected themselves by making full
disclosure in the general meeting.

The above case can be distinguished from our

problem on many levels. To begin with, the directors
in Regal (Hastings) were the ones directly benefitting
from their position, so it was obviously their duty to
disclose. Kamla, on the other hand, does not benefit
herself from the conclusion of the contract nor does
she benefit anyone close to her. An estranged
brother can hardly be said to be a reason for her to
want the contract to go through. Add to this the fact
of her ignorance of her brother's interest in the land.

Kamla will not be found liable under s.131(1) of the

Companies Act 1965.

The second issue presented in the question is,

whether the board of Pickle Bhd exercised reasonable
care, skill and diligence in accordance with s.132 (1A)
of the Companies Act 1965 by relying solely on the
independent report on the market value of the
property when it was later discovered that the sale of
property was made at a loss.

Supposing, as the directors did, that their decision to

conclude the sale of land quickly between their
company and Aces Sdn Bhd (which led to the
property being sold at a loss) is covered by the
business judgment rule under s.132 (1B) of the
Companies Act 1965, I will examine, independently,
the four pillars of wisdom to see whether or not the
board can escape liability for breaching their duty of
care.

The American business judgment rule is basically

where the courts do not review the merits of a

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business decision because directors are humans and
not all business matters are predictable.

The 1st element of this rule is, that the directors made
their decision in good faith for a proper purpose. The
facts of our problem tell us that the directors of Pickle
Bhd wanted to conclude the sale of land quickly. In
line with this decision, they didn't carry out their own
investigation as the market value of the land but
relied on an independent report. The question is, was
this a decision made in good faith for a proper
purpose?

If we presume that the reason Pickle Bhd's directors

wanted the land sold fastly was to pay off debts that
were due or to even to raise finance that the
company is in urgent need of, that would mean that
relying on an independent report to save time is an
act done in good faith (in all honesty) for a purpose
necessary to the company.

The 2nd element under s.132(1B)(b) is that the

directors do not have 'material personal interest in
the subject matter of the business judgment'. We
may safely say that this element is satisfied too, for
none of the directors (including Kamla – a matter
discussed under the first part of this answer) have a
personal interest in selling part of the company's
assets off. In fact, as we have presumed, it was done
for the own good of the company.

The 3rd pillar to be proven under clause (c) of the

aforementioned section is that the director must be
'informed about the subject matter of the business
judgment' to a reasonable extent that is considered
appropriate. The facts infer that the decision to sell
quickly was a collective decision on behalf of the
whole board which means that they were equally
informed. Add to this the fact that it is common-

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 practice to rely on independent reports in assessing
the market value of any given piece of land.

The fourth and last requirement is that the director

'reasonably believes that the business judgment is in
the best interests of the company. Presuming, as we
did earlier, that the company was in urgent need of
cash at the time they were seeking to sell the land,
and assuming that selling assets was the only option
available to the company to raise finance, I find it
hard not to find that the directors reasonably
believed that selling the land at the market price
quoted by the independent report was in the best
interests of the company

Since the directors have successfully fulfilled the four

elements available to escape liability for breaching
the duty of care, they will not be liable based on the
business judgment rule provided for under s.132(1B)
of the Companies Act 1965.

c) The 1st issue to be considered here is, whether Devi,

by resigning from Pickle Bhd and taking up the
contract offered by Sharp Ltd is in breach of both her
Common Law duty as well as her statutory duty
against taking up any corporate opportunity under
s.132(2)(d).

Taking up a company's corporate opportunity is

considered an instance of conflict of interests. A
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situation of conflict of interests arises when a director
places himself in a position where his duty to act in
the best interests of the company conflicts with his
interests as a director.

In Cooks v. Deeks (1916) 1 AC 554, 3/4 of the

directors of Toronto Construction Co. set up a new
company for the purpose of taking up the contract
initially offered to Toronto Construction Co. and to
exclude the fourth director with whom they had
differences. The court held that the three directors
had breached their duty by placing their personal
interests to secure the contract above their duty to
Toronto Construction Co. to make sure that they get
the contract.

The question before us in our case is, whether Devi's

subsequent acceptance to Sharp Ltd's offer amounts
to taking up corporate opportunity, bearing in mind
that Devi's acceptance was made after the initial
offer to Pickle Bhd was withdrawn.

The rule against conflict of interests which includes

the prohibition against taking up corporate
opportunity is a very strict one. In Regal (Hastings)
Ltd v. Gulliver [1942] 1 All ER 378, the underlying
principle of the court's decision was that directors are
prohibited from taking up corporate opportunity even
where the company in question does not have the
financial resources to take up that particular
opportunity.

The facts in our case are, to an extent, different.

Sharp Ltd's withdrawal of offer to Pickle Bhd was not
based on any agreement between the former
company and Devi. The way I see it is thus; Pickle
Bhd were not very keen on the contract from the
very start, or else they would not have postponed the
decision on whether or not to go ahead with the

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contract, add to this Sharp Ltd's subsequent
withdrawal of offer. During the waiting period, no
conflict of interest arised with regards to Devi, as no
offer of contract had been made to her yet. When the
offer was eventually made to her, it had already been
withdrawn from Pickle Bhd. They are two different
instances with no chain of events connecting them,
save the fact of their subsequence.

So, in answer to the issue posed by this question, I

would say that no instance of conflict of interest
arouse under clause (d) of s.132(2) of the Companies
Act 1965, for it prohibits the 'use of any opportunity
of the company' per se, and not where this
opportunity has ceased to exist.

In continuance of the issue I just finished discussing,

there remains a minor problem to be resolved, that
is, whether Devi has discharged her duty as a
director to disclose her interest in a contract under
s.131(1) as well as her duty to obtain consent for
taking up a corporate opportunity of the company
under s.132(2)(d) of the Companies Act 1965.

Supposing that Devi had indeed placed herself in a

position of conflict of interest, where to promote her
interests as a director will be in conflict with her duty
towards the company, the reasonable solution to this
kind of situation would be to disclose under s.131(1)
or to obtain the consent of the shareholders in a
general meeting (s.132(2)). As she both disclosed all
material facts to the board and as the shareholders
ratified the agreement to waive any interest in the
contract upon payment of a commission, It can be
said that Devi has discharged her duties under the
Companies Act 1965.

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The next issue is, whether Devi is in breach of any
fiduciary duty as a former director for soliciting
employees of Pickle Bhd.

The position in the law is clear, a director competing

with the company he is managing is prohibited as it
would amount to a situation of conflict of interests,
but where the director has already resigned, there is
nothing to forbid him/her from competing with the
company. If that was the case, it would mean unfair
restraint of trade (Poon Huat Seng v. Goh Cheng
Chua (1994) CSLR VI 885).

This same case quoted also provided that a former

director must 'not exploit any opportunity or
confidential information he had learned during his
relationship or association with his principal'. The
question, therefore, is, whether Devi, a former
director, is exploiting information she had access to
whilst holding office in making offers to existing
officers at Pickle Bhd?

Names of directors are public. It is not knowledge

that only directors possess. If Devi, however, made
offers selectively based on her knowledge of them as
directors whilst in office, it would amount to an
exploit of information. Having said this, it would still
be highly unethical to solicit officers of a former
principal even if offers were made on public
information.

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