Director’s Legal Duties and Obligations

Companies’ directors are persons who are vested with the responsibility of the management of the company’s affairs. A company is usually composed of two main organs which are the board of directors and the members in general meetings. Every company provides the director extensive powers to supervise manage and control the company.

Likewise every director owes certain duties and responsibilities towards the company. Directors stand in a relationship of trust and confidence with the company that is fiduciary relationship. [1]A fiduciary duty is an obligation to act in the best interest of another party. If a director said to be breach his fiduciary duties such as making secret profits, the company may sue him for damages or recover such secret profits from him. In other words, directors cannot and should not use his/her position to reap personal gains.

Directors own to the company a duty to act in good faith for the benefit of the company. As seen above, directors stand in fiduciary relationship with the company, which is the relationship that is based on trust and confidence this means that the director should always act in the greatest curiosity of the company.

Directors must always act in good faith in all matters that relate to the company. The directors must exercise their powers bona fide not for any collateral purpose but in what they consider is in the interest of the company. [2]This argument can be held by seeing at Section 132(1) of the Company Act 1965 which states that directors must exercise their discretion bona fide in what they consider – not what a court may consider – is in the interest of the company and directors must not exercise their powers for any ‘collateral purpose’. However, there is an issue whether directors also owed fiduciary duties to other people apart from their fiduciary obligations to the company.

The Court fixed in the case of Percival v Wright that directors do not have any fiduciary obligation to disclose negotiations made when they just to buy shares in relation to the shareholders. However, this case also did not put any rule that directors of the company may not be in the fiduciary relationship with the shareholders. For example, the Court believed that the directors in the case of Allen v Hyatt have put her in a fiduciary relationship with some shareholders in the agency’s capacity to. This case shows that even in Percival v Wright directors do not owe any fiduciary duty to shareholders, it is likely that there is a fiduciary relationship between the directors and shareholders of the company which cannot be denied. The directors may also have a fiduciary obligation to employees in addition to the shareholders.

[3]However, in Malaysia on the fiduciary duty of directors to staff is still unclear because according to Chan and Koh on Malaysian company law, the companies Act 1965 ‘ does not expressly provide that the directors of the company is to take attention to the interests of company employees in carrying out their functions ‘. In carrying out their fiduciary duties to the company, there is the scope that the directors must act in accordance with. The scope of fiduciary duties required has not yet been codified by the lawmakers but the principles established in cases based on the common law can be used in accordance with section 132 (5) of the companies act. Section 132 (5) of the Act read, ‘ this section is in addition to and not in derogation from any law or laws relating to the duties or liabilities of a director or officer of any other company ‘ and the word ‘ rule of law ‘ shall be construed as including the rules of public law.

Firstly the directors are in the duty to act bona fide in the interests of the company. Subjective test of “honesty or good faith” is a test carried out to find out whether this duty has been fulfilled. The directors are said to be in breach of duty when they failed subjectively (i.e., in the mind of their own) to give proper consideration to the company interest. For example, this happens when a director contends that the interests of the company as a personal interest and do not deliberate its interests as a separate linked entities. [4]The case of Re W & M Roith Ltd can be brought up to explain this point.

In this case, Roith, the company director, entered into a service contract with the company with the purpose of providing some financial provision which is his pension for his wife upon his death and without considering whether the contract benefit the company. The court held that the service contract was for benefit of the wife and not bona fide in the interest of the company.

In this case, it can be seen that Roith had breached his fiduciary duty which is to act in the best interest of the company as he acted for the interest of his wife and not for the company. That is why this contact was challenged and bought to court upon his death. From this case, it’s clear that directors could breach his/her fiduciary duty if he/she doesn’t act in the best interest of the company. As a director, it is important for him/her to bring profit to the company and not for him/her.

[5]Another case that can be looked into is John Crowther Group Plc. V Carpets International Plc. and others. In this particular case, the directors entered into an agreement to recommend a particular bid for the company shares. By negotiating such break fee provisions that limit consideration of any other offers, it can be argued that the directors did not act in the best interests of the company, particularly if the other company’s approach to higher prices.

But this must be weighed against the interests of the company in a bid to get early. If, for example, the offeror will not make an offer without a break, including the conditions, the directors may legitimately believe that the terms of the offer (including a break fee) is in the best interests of the company. This case shows that the director must provide a best and higher bid for company shares to earn profit. Thus when the director recommend a lower bid than other companies, he/she said to be breached his/her fiduciary duty.

Next is the duty to exercise powers for their proper purpose. This task can be broken relatively easily, as the director may violate this obligation every time they carry out activities that they are not empowered to do even if they honestly think that whatever they do is for the benefit of the company. For example, the main reason for the issuing shares is to raise capital. If shares were issued for other purposes, it may not be appropriate and the directors have breached this duty of care. [6]In Hogg v Cramphorn Ltd & Ors, Articles of Association of the company the defendant to authorize the directors to issue or sell shares to people on some of the terms and conditions and at times as the directors think it is fit.

When there is an attempt to take over the company, the directors work a scheme in which the new preference shares have been allotted to 5707 new trust established for employees of the company. The Board of Directors made a loan of A£ 5705 from funds of the company independent of the trustees to enable the trustees to subscribe and pay for the shares.

Votes attached to shares along with those of the directors and their friends were enough to form a majority at a general meeting and as a result, the acquisition was defeated. One of the company’s shareholders challenged the validity of the distribution. The court is of the opinion that the directors have acted for improper purpose and added that the authority to issue shares is a fiduciary duty of directors. So, when the issue was done for improper purposes, the shares issued may be waived.

Although improper purpose is the main cause or just one of several reasons that contribute in decision making, the decision will not be valid if, but for the improper purposes, the decision would not have been made. When a director uses his / her power for improper purposes, the company may cancel the actions of companies. Another duty of directors is to retain discretion. Directors do not have to put themselves in a position where they are unable to make decisions for the best interest of the company. These include entering the commercial transactions that occur in a situation where they can’t take part in decision making to the company.

For example, the directors may not carry out a transaction where they should put the interests of other parties ahead of the interests of the company. [7]In Kregor v Hollins, The Court adopted the view that decisive that the directors may not fetter his discretion contract with outsiders. It is not proper for the directors to provide an undertaking to a third party that they will see the importance he will “find”. [8]While in Clark v Workman, it was held that the director has breached his duty when he gave undertaking to a third party that director would see to his interest.

Although the directors are free to decide, they cannot contract how to exercise their discretion or how to decide in future. Besides that, directors have the duty to avoid conflict of interests. The directors are deemed to have what is known as the “fiduciary duty” due to their company. This is a legal relationship which is important, and is one of the duties of the trust and utmost good faith. In this context, the directors must place the interests of the company in the presence of their own.

Directors cannot put themselves into a situation where they have (or may have in the future) a personal interest conflicting (or possible conflicts in the future) with the interests of the company, which they will be bound to protect. This will occur where there is a real possibility of conflict.

A conflict of interest may be direct or indirect. Directors have a duty not to have a personal interest in a transaction with the company. A director will breach this duty where he or she enters into a contract with the company either directly (by personally contracting with the company) or indirectly (such as where the director is both a director and shareholder of another company which contracts with the first company of which he/she is a director). In Malaysia, section 132(2) (e) provides that a director shall not engage in business which is in competition with the company except with the consent or ratification of a general meeting.

This means that the director may engage in business activities that compete with the agreement of the general meeting. In addition, the involvement of any competing company should be declared at the meeting of directors by virtue of section 131(5) of the Companies Act. There is qualification in respect of the above obligations. The company’s constitution clearly allows a director to have an interest in a contract with the company. If that happens, it will modify the fiduciary duty of a director.

The provisions must be strictly observed in order to prevent a breach of the duty. [9]A director who is interested in personally on transactions through the company’s constitution can still vote in the board of directors, but is still subject to an obligation to vote for the benefit of the company as a whole, unless relieved of that duty in some way. Particular constitution may require disclosure of interest in a contract to the members at a general meeting before the contract can be entered into. [10]Where this is the case, an exception occurs where the directors are fully aware of the facts and, in the circumstances, the director of benefits is clear.

For example, if the Board of Directors resolves to increase qualifications in their pension fund, it will not be necessary for each director is officially revealed to the Board that their individual qualifications will increase. [11]Other credentials to a duty to avoid conflict of interest is where a director make full disclosure of the nature of his interest in the transaction to the members of the company at a general meeting, and the transaction was approved by ordinary resolution. If a director is interested in a transaction with the company, and none of the above qualifications are met, the contract is voidable by the company. The Board will decide whether or not to initiate proceedings to make unauthorized transactions. Because of their role, the directors have a fiduciary duty not to misuse confidential information which they acquire as a result of their position.

The information is considered CONFIDENTIAL where the owners believe that: if the information disclosed will be in some way prejudicial to him or to others; the information is confidential, secret and not in the public domain; based on the use and practice of industrial or commercial, this information will be treated as a quick cover. These examples in breach of duty will reveal details of the company customers or suppliers in a situation where that information will be considered to be given the confidence or as involved in insider.

Directors must avoid situations where personal interests conflict, or may conflict, with those of the company. In common law, it seems that the director may engage in businesses that compete as long as there are no prohibitions express in the memorandum, articles or agreement of the company. This will occur where the companies act for the director is so related to the affairs of the company that it’s done in management and in the use of opportunities and special knowledge as directors. There needs to be a connection between the fiduciary duties of directors the cause and chance.

It is necessary to see the situation where the opportunity arises; type of opportunity; the nature and extent of the company’s operations and future operations of the company. If there is any connection between the duties of directors and opportunity, it is probable that the opportunity has been misused. It is irrelevant if the company does not have exploited the opportunity itself, except where it is really for the interest of the company that the directors pursue benefits. In conclusion, as directors of the company, there are certain fiduciary duty must comply with. This task can be found by following the principles of the common law and where relevant, of the companies Act 1965.

Fiduciary duties of directors as has been discussed above should be required by them and any without any will result in a breach of fiduciary duty of directors in office.

---

[1] https://definitions.uslegal.com/b/breach-of-fiduciary-duty/ [2] https://www.scribd.com/doc/45190152/Amendments-Toc-a-1965 [3] https://www.scribd.com/doc/45190152/Amendments-Toc-a-1965 [4] [1942] 1 All ER 542 [5] [1990] BCLC 460 [6] https://www.scribd.com/doc/22795963/Assignment-Company-Law-Directors-Fiduciary-Duties [7] (1913) 109 LT 225 [8] [1920] 1 IR 107 [9] Guinness plc v Saunders [1990] 2 AC 663 [10] Woolworths Ltd v Kelly [1991] 22 NSWLR 189 [11] Woolworths Ltd v Kelly [1991] 22 NSWLR 189

Cite this page