DUTY AND LIABILITY OF THE DIRECTOR BEFORE AND AFTER THE AMENDMENT OF MALAYSIAN COMPANY ACT 1965.

They are a few of changes we can see now when the company act was amended in 2007. Lots of amendment is relating to the duty and liability of the director which we can see starting in the section 131 of the company Act 1965. There are a few of amendments. I will touch some part of the amendment which especially that is relating to the duty and liability of the director which I think it is important to discuss in this topic. Firstly, before the amendment, the old section of 132 (1) Company Act 1965 provide that in the discharge of duties, director shall at all times acting honestly and use reasonable diligence when managing the company. We can see that the old section is not perfectly defined, the still some mischief in the section which are the word ‘honestly’ was not clearly defined and secondly in the aspect criminal liability, it only arises if it can be proven that the director is aware that the conduct is not in the company’s best interest. Besides that, the old section of 132 (1) of the Company Act 1965 was contrary to the common law position because at Common Law, the director must comply with both the interest of the company requirement and also with the proper purpose test and at Common Law, there is no requirement that the director had acted fraudulently or with deliberate intent to obtain personal advantage. The unclearly of the old section of 132 (1) brings lot of the cases relating to the duty and liability scope. In the case of Multi-Pak Singapore Pte Ltd v Intaraco Ltd, the court held that the word ‘honestly’ does not mean that a director would only be in breach of duty if he had acted fraudulently. It means to act bona fide in the interest of the company. In exercising their discretion, the director should only act to promote or advance the interest of the company. After the amendment in 2007, the new section of 132 (1) Company Act 1965 provided that a director of a company shall at all times exercises his powers in good faith in the company’s best interest for the purpose of the company. Therefore, if a director exercise his power in good faith in the company’s best interest but if it only for collateral purpose, the director will still be liable under the new section 132 (1) of the Company Act 1965.

Moreover, section 132 (1A) of the Company Act 1965 is also a new section after the amendment. This section provided the duties of care, skill and diligence imposed to the director. We can see that the duty of care and skill is derived from Common Law. The old section of 132 (1) is silent as to the standard of care and skill required of a director. It merely prescribes that a director has a duty to act honestly and use reasonable diligence. This new section is related to the Common Law case which is the leading decision in Re City Equitable Fire Insurance Co Ltd, it was held that, “ In discharging the duties of his position…a Director must…act honestly; but he must also exercise some degree of both skill and diligence…so long as a Director acts honestly he cannot be made responsible in damages unless guilty of gross or culpable negligence in a business sense”. Also to add, in the commonwealth jurisdiction like in New Zealand, Section 137 of the New Zealand Company Act 1993 provided that a company director must carry out his directorial functions with such care, skill and diligence that would be exercise by a reasonable director in the circumstances of the former. Despite these developments, the position in Malaysia remained to be Re City Equitable Fire Insurance, as the court in Abdul Mohd Khalid v Datuk Haji Mustapha Kamal had cited obiter Re City Equitable Fire as the’ applicable authority for directors’ duty of care and skill. Furthermore, Section 132 (1A) Company Act 1965 provided 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 same liabilities and ;
(b) any additional knowledge, skill and experience which the director in fact has.
Another amendment of the Company Act is included the section 132 (1B) which provided the business judgment rule imposed to the director. S. 132 (1B) of the Company Act 1965 provided that :
(1B) A director who makes a business judgment is deemed to meet the requirements of the duty under subsection (1A) and the equivalent duties under the common law and in equity if the director–

(a) makes the business judgment in good faith for a proper purpose;
(b) does not have a material personal interest in the subject matter of the business judgment;
(c) is informed about the subject matter of the business judgment to the extent the director reasonably believes to be appropriate under the
circumstances; and
(d) reasonably believes that the business judgment is in the best interest of the company.

So, based on this section 132 (1B), we can see that the overriding requirement is that the director must make a conscious decision or exercise a conscious judgment and if the director failed to make a conscious decision or exercise a conscious judgment, the Business Judgment Rule will not extend its protection. Meanwhile, the amendment also include section 132 (6) of the Company Act 1965 defines the business judgment which mean ‘ any decision on whether or not to take action in respect of matter relevant to the business of the company’. Also, the amendment includes S. 132 (1C) of the Company Act 1965 which permits permit the director to rely on expert advice but that reliance would only be considered reasonable if the director has made an independent assessment of the reports, advice, opinions and data receive from the experts and consultants employed to provide them. The business judgment rule was originated from the American cases Otis & Co. v Pennsylvania R. Co. and this rule was affirmed in Aronson v Lewis. In Otis, a shareholder’s derivative action alleged that corporate directors failed to obtain the best price available in the sale of securities, resulting in the loss of nearly half a million dollars. In this case, the court held that the director had acted in good faith and were not liable to the shareholders. The court also held that the mistakes or errors in the exercise of hones business judgment do not subject the officer and directors to liability for negligence in the discharge of their appointed duties. In Aronson v Lewis the court affirmed that the Business Judgment Rule is "a presumption that in making a business decision.. Directors.. acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company..”

To be continue..