Duty to retain discretion

The duty to retain discretion means that a director must retain the freedom to make decisions
on behalf of the company and not place themselves in a position where they are unable to act
in the best interests of the company by limiting the exercise of their future discretion. For
example, entering into transactions where they would have to put the interests of a third party
ahead of the companys interests or entering into a contract which provides that the director
shall vote a certain way at future board meetings.
A few principles regarding this duty has been established in common law. For instance, in the
case of Kregor v. Hollins1, the Court adopted a strict view stating that directors cannot fetter
their discretion by entering a contract with an outsider. However, this does not mean that a
director may not delegate his vested powers in accordance to proper authority and meanwhile
retain his discretionary power within his capacity such as the case in Re Brazilian Rubber
Plantations & Estates Ltds2 case where the court held that a director was justified in
trusting officers of the company to perform all duties that, having regard to the exigencies of
business, may properly be left to such officers. This was also held in the case of Re City
Equitable Fire Insurance Co3 where it was held that a director may be justified in trusting
an official to perform certain duties. However, in the case of Raffles Hotel Ltd v. Rayner4, it
was submitted that a director who is the nominee of someone else should be left free to
exercise the best judgment in the interest of the company.
This duty was subsequently codified in the Malaysian Companies Act 19655, specifically,
into s. 132 of the act. Upon the introduction of the new Companies Act 20166, this duty was
carried over to S. 215, S. 216 and S. 217 of the new act.

1 [1913] 109 LT 225

2 [1911] 1 Ch 425
3 [1925] Ch 407
4 [1965] 1 MLJ 60
5 Act 125
6 Act 777

Exercise of a directors discretion

S. 214 of the Companies Act 2016 states that a director who makes a business judgment has
to make the business judgment in good faith for a proper purpose, should not have a material
personal interest in the subject matter, should be informed about the subject matter of the
business judgment to a reasonably appropriate extent and lastly, the director should
reasonably believe that the decision is in the best interest of the company.
This is in pari materia with S.132(1B) of the previous act, which also provided for the
business judgment rule.
The breach of this provision can be seen in the case of Beucar Accessories (M) Sdn Bhd v.
Gordon Toh Chun Toh7 where the court found that the directors were proxies to an
undischarged bankrupt who was not an employee, a shareholder or a director of the plaintiff
or its parent's company. They admitted that they were appointed as the plaintiff's directors by
the bankrupt and took instructions from the bankrupt. As such, the court found that the
defendants cannot be said to have acted in the best interest of the company as although they
are custodian of plaintiffs funds, they chose to serve the needs of another. They were found to
have abandoned consideration of relevant facts and has breach duty to exercise discretion
under S. 132(1B) of the Companies Act 1965.
Reliance of information provided by others
S. 215 of the new act states in the exercise of their discretion, directors are not prevented
from relying on information provided by others as long as the information was provided by
persons listed under the act, such as any officer of the company whom the director reasonably
believes to be reliable and competent, any other person retained by the company with
professional skills or expertise in relation to matters, another director or any committee to the
board of directors in relation to matters within the committee's authority.
However, this reliance must be made in good faith and the director has to make an
independent assessment of the information relied on, by utilizing the director's knowledge of
the company and the complexity of the structure and operation of the company.

7 [2012] 1 LNS 164

S. 215 in the new act combined S.132(1C) and S.132(1D) from the old act, which
respectively provided for the list of individuals from whom information can be sourced from
and the criteria to access whether the reliance was made under reasonable grounds. Asides
from that, this duty also remains largely unchanged from the old act.
This duty was discussed in the Malaysian case of Petra Perdana Berhad v. Tengku Dato
Ibrahim Petra Tengku Indra Petra8 where the court held that it is not unusual, particularly in
a large public listed company where financial data is frequently complex and requires the
expert attention of specially trained personnel, to rely on the companys Finance Manager in
relation to financial matters. The court held that under S. 132(1C), it was not unreasonable for
the director to rely on the finance manager primarily responsible for finance in the Plaintiff as
the managers competence and role in this regard is irrefutable. Furthermore, the court found
that the defendant had also satisfied S. 132(1D) which required him to have done so in good
faith and after having made an independent assessment of such advice as the Board did
deliberate on the advice given before choosing to act on it.
Nominee Directors
S. 217(1) states that even in regards to a nominee director, who was appointed by virtue of his
position as an employee of a company, or who was appointed by or as a representative of a
shareholder, employer or debenture holder, shall act in the best interest of the company and in
the event of any conflict between his duty to act in the best interest of the company and his
duty to his nominator, he shall not subordinate his duty to act in the best interest of the
company to his duty to his nominator.
Furthermore, S. 217(2) states that upon failure to do so, the director shall be liable to a
maximum 5 years imprisonment or a fine of not exceeding 3 million or both
This provision is similar to S. 132(1E) in the old act, although the punishment provided for
this offence, S. 217(2) was not provided in the old act.
This duty was discussed in the English case of Scottish Co-operative Wholesale Society Ltd
v Meyer9 where a co-operative society had formed a subsidiary company and held the
majority shares in the company where they had three nominees out of five directors sitting on
8 [2014] 1 LNS 236
9 [1959] AC 324

the board of directors. Later on, the co-operative society decided, through their nominee
directors, to take actions detrimental to the company to its benefit and the three nominee
directors complied. In an application by the two remaining directors to the board under the
oppression provision in the UK Companies Act 1948, the court held that where the interests
of the appointors of the nominee directors and the company do not coincide, a nominee
director is bound to put the interests of the company ahead of the sectional interests which he
represents.
Delegation of discretion to other parties
Lastly, a director may delegate his discretion to another party. However, he has to be
responsible for the actions of his delegate unless in exceptional circumstances. This is
provided by S.216 (1) which states that unless specifically restricted, the directors may
delegate any power of the board of directors to any committee to the board of directors,
director, officer, employee, expert or any other person.
S.216 (2) also provides that where the directors have delegated any power, the directors are
responsible for the exercise of such power by the delegatee as if such power had been
exercised by the directors themselves. Despite this, there are exceptions to when directors are
liable for the actions of a delegate, which is provided for in S.216 (3) where it is stated that
the directors are not responsible for the acts of a delegate if they believed on reasonable
grounds at all times that the delegatee would exercise the power in conformity with the duties
imposed on the directors and the directors believed on reasonable grounds, in good faith and
after making a proper inquiry that the delegatee was reliable and competent in relation to the
power delegated.
The provisions in S. 216 is similar to S.132(1F) and S. 132 (1G) of the old act, where similar
to S. 132(1F), a director may still delegate his discretionary powers to other individuals listed
under the act and have to be responsible for the exercise of the power by the delegate subject
to exceptional circumstances that is provided under S.216 (3), where the circumstances
remains largely unchanged from S. 132(1G) of the old act.
This duty was discussed in the UK case of Re Barings plc (No 5) 10 where a dishonest futures
trader for the former Barings Bank fraudulently doctored the bank's accounts, and reported
large profits, while trading at losses. After the stock market went into a downward spiral, and
10 [2000] 1 BCLC 523

the truth of his losses were uncovered. The Secretary of State sought director disqualification
orders against three directors of Barings for their failure to supervise his activities. They were
alleged to be incompetent, and therefore "unfit to be concerned in the management of a
company" The High Court held that the three directors should be disqualified as directors
must inform themselves of company affairs and join in with other directors to supervise those
affairs. Directors may delegate functions, but they nevertheless remain responsible for those
functions being carried.