Introduction

Malaysias economy depends on the drive and efficiency of the companies. Therefore, the effectiveness of the board of directors in discharging their duties and responsibilities determines Malaysias competitive position. In other words, Company directors must be free to drive their companies forward, but they have to exercise that freedom within a framework of effective accountability. According to Section 4 (1) director has been defined as, any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose direction or instructions the directors of a corporation are accustomed to act and an alternate or substitute director. In other word, director is the person who is responsible in the business operation, by making the best decision for the company. The appointment of a director is a must in incorporating a business. Therefore, when signing Form 48A, they have to be witnessed by a Commissioner of Oaths, Sessions Court Judge, Magistrate or any other officer authorized by the Statutory Declarations Act 1960.

It is immensely important that directors must be aware of their responsibilities towards the business, shareholders or investors, government and public. Those who failed to fulfil the requirements according to Companies Act 1965 may have to pay heavily. In Great Eastern Ry v Turner (1872), Lord Selbourne aptly said this about directors:1 Directors are the mere trustees or agents of the company, trustees of the companys money and property; agents in the transactions which they enter into on behalf of the company. The minimum number of directors in a company has been dictated in the Companies Act 1965. Section 122 (1) and (1A) provides that, every company shall have at least two directors, who each has his principal or only place of residence within Malaysia; and that the alternate or substitute director should not be included in the calculation of this statutory minimum number of directors. Therefore, a company must have minimum two directors, whose only place of residence or principal place of residence is in Malaysia.

Company Law In Malaysia by Chan Wai Meng

Who can be appointed as a director? An individual can be a director as long as he is : i. ii. iii. iv. 18 years old; must not be an undercharged bankrupt must not have been convicted of criminal offence involving fraud or dishonesty must not have been imprisoned for an offence under S132, S132A or under S303 of Companies Act v. must consent to act as director

All these conditions have been set in order to ensure that the director understand their responsibilities to the company after the appointment. A director is under a duty to ensure that any act he undertakes is with a view to enhancing the interest of the company either by enhancing profits, reducing costs or even positive publicity of the company, Bursa Securities Listing Requirement, Securities Commission Act 1993 and Securities Industry Act 1983. Mainly, there are three types of director duties. i. ii. iii. Statutory duty Fiduciary duty Duty of reasonable care, skill and diligence.

Therefore, we will discuss in details regarding the duties of director.

Statutory duty
S131 CA provides that: every director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company shall, as soon as practicable after the relevant facts have come to his knowledge, declare the nature of his interest at a meeting of the directors of the company. These provisions are designed to achieve a modification of the no conflict rule by allowing a company to enter into transactions with directors provided their interest is disclosed to the board. Section 132 (2) provides that the duty not to misuse information or position. Under S132 (2), an officer or agent of a company or officer of the Stock Exchange shall not make improper use of any information acquired by virtue of his position as an officer or agent of the company or officer of the Stock Exchange to gain directly or indirectly an advantage for himself or for any other person or to cause detriment to the company. Hence, it is applicable to directors The statutory duties of the directors include: 1. Act honestly at all times and use reasonable diligence in the discharge of duties. 2. Not to make improper use of information obtained by virtue of office to gain advantage personally or to cause detriment to company. 3. Not to make improper use of unpublished price-sensitive information to gain personal benefit. 4. Seek approval of the company in general meeting before dispose of or execute any transaction for the disposal of a substantial portion of the company's undertaking or property. 5. Disclose/give notice to the company disclosing his shareholdings and any changes thereof. 6. Disclose interest in any contract or proposed contract made by the company. 7. Make sure registers and statutory books are kept updated.

Fiduciary Duty
At the time of a company is incorporated, the first two directors of the company has been appointed as it is one of the conditions. Thus, in company law, a director owes his company a fiduciary duty when exercising his powers. However, the question is what is fiduciary duty?

What is fiduciary duty? A fiduciary is a person who is expected to act in the interest of another person. The fiduciary cannot use their knowledge or position to benefit themselves rather than the person on whose behalf the fiduciary is required to act. A director is a fiduciary and must act in the interest of the directors company. 2Therefore, fiduciary duty is responsibility or duty of the person who is expected to act in the interest of another person.

A director is required to act bonafide and in the interest of the company. The first element of this duty is, it requires directors to exercise the powers not only in the manner which has been set by the law, but also it must be beneficial to the company as a whole. This duty is also known as good faith. The duty of good faith can be distinguished from other general duties imposed upon directors.

First, the duty applies to directors when they make decision to exercise powers were Corporation, or perform some function as individuals which has been designated to them by the board. In other word, they have to exercise corporate powers and acting in a corporate rule.

Secondly, the duty of good faith permits a challenge to be made to a particular decision will have taken or transaction entered into by directors; remedies for breach of a duty include orders setting aside the decision or transaction in appropriate cases. In Re Smith & Fawcett Ltd [1942] Ch 304, [1942] 1 All ER 542, CA, the directors refused to transfer a deceased mans shares to his son, exercising their 'absolute and uncontrolled discretion without assigning reasons and offered a lesser amount instead.

Lord Greene MR stated that: 'A wide and comprehensive power to directors by their passing a particular transfer the transferee would obtain too great a weight in the councils of the
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Commercial Applications of Company Law in Malaysia, 3rd Edition

company or might even perhaps obtain control.' Thus the directors had acted in the best interests of the company. The court stated that directors must act 'bona fide in what they consider - not what the court may consider - is in the interests of the company. However many cases have held that directors may breach their duty to act in the interests of the company, even if they are acting in what they genuinely consider to be an honest manner.3

Furthermore, a director is needed to use powers for their proper purposes. A director must not use his powers for a purpose other than he has been assigned. By doing against his duty, there will be a breach of duty for abusing the directors power. As Hoffman LJ has stated, ...He must exercise the power solely for the purpose for which it was conferred. Therefore, it is important to ask what are the things that a director must do or must not do and what are the consequences?

In Section 132(2) of the Companies Act 1965, some illustrations were given. A director or officer of a company shall not, without the consent or ratification of a general meeting a) Use the property of the company; b) Use any information acquired by virtue of his position as a director or officer of the company; c) Use his position as such director or officer; d) Use any opportunity of the company which he became aware of, in the performance of his functions as the director or officer of the company; or e) Engage in business which is in competition with the company, to gain directly or indirectly, a benefit for himself or any other person, or cause detriment to the company.4 As in the case of Re W & M Roith Ltd, a company director had entered into a service contract with his company f or the purpose of providing a pension for his wife in the event of his death and without taking into consideration whether the contract was for the benefit of the company. The court held that the whole object of the contract was not to be binding on the company as it was to benefit Mrs Roith and not the company. By analyzing this case, it can be seen that as Roith did not act for the best interest of the company as he acted for the interest of his wife, he had breached his fiduciary

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duty that is duty to act in the best interest of the company. That is why in this case, the court held that the contract was not binding to the company. A director is also responsible to avoid conflict of interests. Section 131 requires a director to notify or declare to other directors any material interest he may have in a contract or proposed contract with the company. He must not allow his duty to the company to come into his personal interests. It is not a breach of duty per se for a director to allow such a conflict to occur but he is under disability from entering into any transactions where such a conflict exists. Therefore, a transaction which a director makes on behalf of the company from which he obtains a personal benefit may be treated as a void transaction and can be set aside at the option of the company. Conflict of interest can be described as in the situation where the director makes a secret profit. In Cook vs Deeks [1916] 1 AC 554, the directors diverted business of the company to themselves, and attempted to ratify their dealings by voting their shares at a general meeting in their own favour. The Privy Council held that ratification was not possible because the directors were using their votes to expropriate the minority shareholders. In Regal Hastings v Gulliver, where Regal was a business that operated cinemas. The directors of Regal formed a subsidiary, HAC. HAC acquired two new cinemas and two weeks later the company was sold producing profits per share. Regal took proceedings, under its new management, against the ex-directors, seeking an account on the profits they had made on the sale of their shares in the HAC. House of Lords held that the ex-directors were liable to Regal for these profits on the ground that they had obtained their shares by reason of their position as directors of Regal and in the course of office as directors. The court further held that without their position as directors they will never have the opportunity to gain such profits. Similarly in the case of Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443. Mr. Cooley was an architect and the managing director of IDC. He was asked to negotiate with The Eastern Gas Board for a contract. During the negotiation, Mr Cooley found out that The Eastern Gas Board was not prepared to give the contract to IDC. However, they were ready to give Mr Cooley the contract instead. He came back to IDC and told them that the negotiation was failed. Soon after the negotiation, he resigned from IDC on the ground of ill-health. He successfully obtained the contract from The Eastern Gas, and made substantial amount of profit. On the same time, IDC was informed about the contract, and they sued Mr Cooley for the profit he made to himself from The Eastern Gas contract.

The court held that, he must return the profit to IDC because when he negotiated with The Eastern Gas, his position was the managing director of IDC, where he has abuse the power as a director by entering into the contract for his personal interest. Nevertheless, in Peso Silver Mines Ltd v Cropper, the owner of mineral claims offered to sell their claim to Peso Silver Mines Ltd. The board of directors of Peso rejected the offer. Mr. Cropper, a member of the board, purchased the claim for himself. Learning of this, Peso sued Cropper for breach of his fiduciary duty towards the company for "seizing the corporate opportunity". The Court found that Cropper was not in breach of his fiduciary duty to Peso. The directors had acted in good faith and in the best interests of the company in rejecting the offer. The information that Cropper received as a board member was in no way confidential that was unavailable to any prospective purchaser. The company received offers to sell on a regular basis and the offer at issue was not different from any other. The offer was made to Cropper as a private individual and was entirely separate from his role as a director. Consequently, for all these reasons there was no breach found. However, making a secret profit is not the only interest that should be avoided by directors. In Thomas Marshall v Guinle (1979) 1 Ch 227, the managing director had resigned before the end of the contractual term. There was an express covenant in his contract against using or disclosing the companys confidential information during or after his employment. Megarry VC suggested that four elements were necessary when considering the 'quality of confidence'. First, the release of the information would be injurious to the owner of it or of advantage to rivals; secondly, that the owner must believe that the information is confidential, for example not in the public domain; thirdly, the owner's belief in the above is reasonable; and, fourthly, the information must be judged in the light of the usage and practices of the industry concerned.5 The above fiduciary duties are based on the concept that a director is in a special position of responsibility in relation to the company. He is therefore held to a higher standard of responsibility than most, which can lead to liability even where he has acted honestly. Fundamentally, a director must act in good faith in the best interests of the company, irrespective of the fact he may have a substantial shareholding in that company. In essence, just because he is the boss, he may not take unauthorised advantage of his position. A director has a duty not to profit from his position, for example by taking a business opportunity that came to him through the company, even if the company does not want to
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take it itself. If a director wishes to benefit personally outside what has already been accorded to him in the Articles of Association he must declare such benefit and have it approved by the members. In short, if a director gains any form of unauthorised benefit, he must offer it to the company or alternatively indemnify the company for its loss.

Duty of care, skill and diligence

Section 132(1A) of the companies Act 1965 provides that A director of a company shall exercise reasonable care, skill and diligence with a) The knowledge, skill and experience which may reasonably expected of a director having the same responsibilities and b) Any additional knowledge, skill and experience which the director in fact has. Directors owe the company duty of care, skill and diligence. The applicable case in Malaysia is Re City Equitable Fire Insurance Co. Ltd (1925) CH407. In this case, the chairman of the company committed frauds by purporting to buy Treasury Bonds just before the end of the accounting period and selling them just after the audit. By this method a debt due to the company from a firm in which the chairman had an interest was reduced on the balance sheet by increasing the assets. The liquidator of the company attempted to make the other directors liable for failing to discover the fraud. (They had left the management of the company entirely in the hands of the chairman). The liquidator failed. Romer J held that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from someone of his knowledge and experience. There are no specific standards for a director. It is a subjective issue to define. However, one thing is clear that, a director do not presently have to meet a high standard. The duty of care arises under the general law and may also arise under a contract of service that exists between a director and the company. Daniels v AWA Ltd (1995) 13 ACLC 614 (CA) removed any lingering doubts on this point. In at least some of these recent cases especially Rogers CJs judgment in AWA the courts have also set out realistic and useful guidelines for directors to follow to ensure that when exercising their powers and carrying out their duties they are not breaching their legal or statutory obligations. In this case, AWA, a large listed company in Australia, employed a young foreign exchange manager, Andrew Koval, for its foreign exchange dealings. Andrew concealed losses from management as there were neither adequate internal controls in place nor proper records in place. The company suffered loss of A$ 50 million. They dismissed Koval and sued auditors in contract, alleging negligence in audit. Auditors counter-claimed against the company for contributory negligence on ground. The court held that, the auditors are negligent but also held that the company to be twentypercent contributory negligent. None of the directors were found liable on ground that they

we ignorant of failure to adhere foreign exchange of the company. It is important not to overreact to these decisions. However, it is equally important for members of the governing bodies of non-profit associations to be aware of the fact that they have an obligation to ensure that the operations of the association are managed properly and that they may be personally liable for breaches of this obligation. Directors have both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding the companys activities to enable them to discharge their duties as a director. Detailed inspection of the day-to-day activities is not required but what is required is a general monitoring of the companys business affairs. A director should attend board meetings regularly. Although directors are not required to make an audit of the companys books directors should be familiar with the financial status of the company which includes conducting regular reviews of financial statements. In other words, a non executive director did not need to have any skill or qualification suitable for his office. This affirmed the decision of the court in Re Brazilian Rubber Plantation & Estate Ltd where the directors did not have knowledge of the rubber industry and made losses from rubber speculation. The court held that they were excused of liability. In the case Re Brazilian Rubber Plantations and Estates Ltd (1911), three individuals were appointed as directors of a multinational undertaking. They behaved with extreme incompetence and caused the company to suffer prodigious losses. However Neville J refused hold any of the directors liable to the company for the consequences of their gross ineptitude. The court found that the individuals were inexperienced, unqualified and poorly skilled. Paraphrasing the reasoning of the court it was held that if a company decides to appoint idiots to directorial posts, it should not later be permitted to complain if those individuals behave and perform like idiots in discharging their responsibilities. However, this benchmark of competence proved far too lax and excessively forgiving as it was applied in cases throughout the twentieth century. In plain English, the subjective test for care and skill featherbedded generations of negligent directors. Towards the end of the twentieth century Lord Hoffman became the standard-bearer for reform in this field and in decisions including Norman v Theodore Goddard [1991]. The court held that when performing his functions as an executive director, an executive director is to exercise his knowledge, skill and experience which he actually has and which a person carrying his function should be expected to have.

Conclusion
When discussing the duties of director, we will be questioning ourselves to whom do directors owe their duties? Directors owe a duty to the company and not its individual shareholders. In many instances, the distinction is not significant, since what is good for the corporation will also benefit its shareholders. Maximising the return to shareholders (or creating shareholder value), in many cases, does not conflict with the interests of the company. But there may be situations where the interests of the company and shareholders may conflict. The interests of shareholders may lie in realizing a short-term gain on their investment, something which the directors may decide is not the in the interest of the company in the long term. In a number of corporate and commercial transactions directors will be put in a special position of reliance. We have already noted the case where financial certificates have to be provided under a loan stock instrument, but a more common example is where directors are asked to warrant or give undertakings in relation to information about a company when it is being bought or sold. Where directors are made separate parties to a sale and purchase agreement, they will clearly have a separate liability, whether or not there is a right of recourse or indemnity against the company. But if the agreement is simply between buying and selling shareholders, and warranties are given to the best of the directors knowledge, information and belief or after due and careful inquiry, it seems likely that an independent duty arising into the person relying on an appropriate degree of care being applied, will exist. It appears that the task of clarifying and reformulating director duties to promote accountability is not an easy one but it has to be done so as to ensure that our corporate law framework remains effective and can facilitate business. The confidence of the investors should not be derogated by poor performance of the directors.