Major Changes to the Companies Act 1695

Accounts and audit

Of all the amendments, only certain amendments involved the roles and responsibilities of company directors, which are section 131 and section 132.

Section 131: Disclosure of interests in contracts property, offices, etc

Section 131(1)

Subject to section 131, 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.

Example of case law

Lim Foo Yong V PP

Facts:

The defendant was the managing director of United Malaysian Steel Mills Bhd and also an advisor to Ban Guan Ltd. The defendant was charged under Section 131(1) Companies Act 1965 for failing to declare the nature of his interest at the Directors Meeting of United Malaysian Steel Mills Bhd, that he is interested in a contract between the two companies.

Sessions court convicted the defendant based on following circumstantial evidence:

In the companies concerned, the defendant was shown to have direct or indirect influence through his family members.

At or about the time of execution of the contract, the defendant and his family agreed to sell their shares in United Malaysian Steel Mills Bhd and agreed to acquire shares in Ban Guan Ltd.

The defendant resigned from the board of United Malaysian Steel Mills Bhd just before the demand for specific performance of the contract was received by Ban Guan Ltd.

The specific profits that would accrue to Ban Guan Ltd on the execution of the contract.

High court quashed the conviction as the circumstantial evidence dit not point irresistibly to guilt of accused:

The Sessions Court President failed to consider the personal guarantee given by the defendant to United Malaysian Steel Mills Bhd.

The Sessions Court President failed to consider that the sale price in the contract was fixed by the government.

Section 131(2)

This section provides that a director does not have to declare his interest in a company contract if the interest is of him being a shareholder or creditor of a corporation, which is interested in a contract or proposed contract with the company and where such interest may be regarded as not material.

Section 131(7A)

For the purpose of this section, an interest of the spouse of the director of a company and an interest of a child, including adopted child or stepchild, of a director of the company in the shares or debenture of the company, shall be treated as an interest in the contract and proposed contract.

Example of case law

Tan Bok Seong V Sin Be Seng & Co (Port Weld) Sdn Bhd

If the director proves that the other directors are aware of his interest, then that director need not formally declare his interest.

Section 132: Fiduciary duties

Section 132(1)

Section 132 Companies Act 1965 imposes several statutory duties on directors and officers. These duties largely restate the fiduciary duties under the general law. This section relates to the fiduciary duty of loyalty of the directors and other officers include the following:

To act bona fide in the interests of the company.

To exercise powers for their proper purposes.

To retain their discretionary powers.

To avoid conflicts of interests.

Example of case law

Kea Holdings Pte Ltd V Gan Boon Hock

Facts:

The director suggested for orders to be cancelled even though he knew that there were buyers.

Held:

The director had breached his duty to act honestly.

Howard Smith Ltd V Ampol Petroleum Ltd

Facts:

The directors allotted shares to a company which had made a takeover bid. The directors argued that the allotment was made to obtain capital for the company.

Held:

The power to issue shares may be exercised for reasons other than raising capital provided those reasons relate to a purpose benefiting the company as a whole. However, on the facts, the directors had improperly exercised their powers, as the share issue was to reduce the majority holding of two other shareholders who made a rival bid. The power to issue shares was used for a purpose of maintaining control of the company in the company in the hands of the directors themselves.

Section 132(1A) Duties of care, skill, and diligence

This section of Companies Act 1965 provides that a director of a company shall exercise reasonable care, skill and diligence with:

The knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities;

Any additional knowledge, skill and experience which the director in fact has.

Section 132(2) Duties to avoid conflict of interest

Example of case law

Avel Consultants Sdn Bhd V Mohd Zain Yusoft

Facts:

The director had set up another firm to compete for contracts with the company.

Held:

Conflict arose where the director uses or exploits an asset treated as the company’s property, for his own purpose or the purpose of any one else.

Section 132(2)

A director or the officer of a company shall not, without the consent or ratification of a general meeting to:

Use the property of the company;

Use any information acquired by virtue of his position as a director or officer of the company;

Use his position as such director or officer;

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;

Engage in business which is in competition with the company.

Section 132E: Substantial property transactions involving directors

Section S132E(2)

This section provides that an arrangement or transaction which is carried into effect in contravention of subsection (1) shall be void, unless there is prior approval of the arrangement or transaction:

By a resolution of the company at a general meeting.

By a resolution of the holding company at general meeting, if the arrangement or transaction is in favor of a director or substantial shareholder of its holding.

Section 132E(7)

This section provides the purpose of subsection (1), which a person connected with substantial shareholder shall have the same meaning as that assigned to a person connected with a director in Section 122A save that all therein to a director shall be read as a reference to a substantial shareholder. For the purposes of this section, a person shall be deemed to be connected with a director if he is a member of that director’s family or a body corporate that associated with that director. This includes the director’s:

Spouse

Parents

Brother

Sister

Brother-in-law

Sister-in-law

Child including adopted child and step child

Son-in-law

Daughter-in-law

Section 132G: Prohibited transaction involving shareholders and directors

Section 132G(2)

This section provides that notwithstanding the provision of Section 132C and Section 132E, a company shall not enter into any arrangement or transaction to acquire the shares or assets of another company in which a shareholder or director of the acquiring company, or a person connected to such shareholder, or director, has a substantial shareholding. Unless the arrangement or transaction was entered into three years after such shareholder, director or connected person as the case may be, first held the shares in that other company or after the assets were first acquired by the said company, as the case may be.

Section 132G(2)

This section provides that an arrangement or transaction entered into in contravention of subsection (1) shall be void and any consideration given for the shares or assets shall be recoverable accordingly.

The new law Section132(a) stated that a company director shall at all times exercise his power in good faith in the company best interest and for proper purpose (companies amendment act,2007). However there is a flaw in this act where the word best interest is not specifically defined in order to maintain flexibility. This will allow arguable action of the director, director may argue that their action is for the company best interest when it takes into consideration of the stakeholder even though there is no prove that their action will bring benefit to the stakeholder. It’s arguable when the director of a company refused to lay off the current employee during financial crisis moment with the reason to act in the best interest of the company as in corporate responsibility which causes a major loss to the company. A director may also act in the best interest of the company but the transaction is motivated by improper purpose this is supported by the case Howard smith ltd v Ampol petroleum ltd . Ampol petroleum ltd wishes to take over RW Millers eventhough RW Millers’s director is not agree on the takeover and by that time Ampol petroleum ltd already held 55 shares of RW Millers. RW Millers director announce to issues a new share in order to finance the contruction of new tanker but all the new share issue is given to the competitor of Ampol petroleum who is also interested to takeover RW Millers. As a result of the new share issuance the Ampol petroleum ltd loss in the bid to takeover RW Millers. The court held that the director purpose of issuance of share to finance the development of new tanker is not genuine and unconvincing also it is for an improper purpose. The purpose of issuance of new shares is to maintain the control of the company in the hand of the director themselves but RW Millers director issues new shares for the purpose to allow Howard smith ltd has the chance to take over the company rather than being take over by Ampol petroleum. So the director is held liable for the action although he is said to act in the best interest of the company but the act is motivated by improper purpose.

Section 132(1A) stated that a director of a company shall exercise reasonable care, skill and diligence with (a) the knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities; and (b) any additional knowledge, skill and experience which the director in fact has (companies amendment act,2007). The new paragraph (b) will bring rise to a problem. This is because if the current director was once an auditor the director is expected to perform his skill as an auditor during his post as a director. The past knowledge is immeasurable there is no standardized knowledge among the auditor. Things that are well aware by one could not be a yardstick to conclude that it will be well aware by the others. Hence the paragraph (b) will not be effective to held a director liable if the director is found guilty based on the past experience knowledge. This will be more debatable when the current director had leave his previous profession for sometime which may lead to not update himself with the latest amendment and neglect unintentionally on the particular knowledge.

S132 (2)(a) says that a director of a company shall not, without the consent or ratification of a general meeting to use the property of the company to gain directly or indirect, a benefits for himself or any other person or cause detriment to the company (companies amendment act,2007). This will be arguable because it will not be an common for a director of a company to get the permission from the shareholder on the purchase of company vehicle. Next, it will be impossible for a director to held a general meeting every time the director need to use company vehicle to seek approval and permission from the shareholder. The word ‘to gain indirect benefit’ of this section 132(2)(a) is debatable in the event where the director wish to drop by a shop for some personal purchases which is on the way to the place where a company meeting is held . Under this section 132(2)(a) the director will be held liable for using the company vehicle to gain indirect benefits as in drop by for personal purchases. This will be absolutely awkward because dropping by at a place in conjunction to the journey is common and bring no harm on using the company vehicle for this purposes.

Section 131 of the principal Act is amended by inserting after subsection (7) the following subsections: For the purpose of this section, an interest of the spouse of a director of a company (not being herself or himself a director of the company) and an interest of a child, including adopted child or stepchild, of a director of the company (not being himself or herself a director of the company) in the shares or debenture of the company, shall be treated as an interest in the contract and proposed contract.

This section still has the arguable point. The section doesn’t clearly state that how many interest do the director’s spouse and child can get. Whether is follow the proportion which stated in the memorandum or must have another agreement about the proportion of division interest for the director’s spouse and child. If the director suddenly dies, the interest which should get by the director’s spouse and child will be appropriated by the other shareholders.

The reason for keeping amendment Company Act is to fulfill the changing of the economic restructure and business environment. The amendment is still no enough to fulfill the faster changes of economic growth and business structure so the amendment still process. To protect the interests of the investors and other shareholders is the main purpose for amending the Companies Act.