DUTY OF DIRECTOR

Presented by:• AMELDA BINTI MOHD YUSOF•DAYANG ASMAH BINTI AWANG HAMBALI•HRRISON ANAK ARIS•ARTIKA NADIA BINTI YUSOF

Duty to Act bona fide in the interest of the compay

Director has fiduciary duty to act bona fide in the interest of the company

The issue here whose interest are to be considered the interest of the company?

a. Duty to the companyb. Duty to creditorsc. Duty to employeesd. Duty to shareholders

a) Duty to the Company

The directors are in a fiduciary relationship to the company therefore, the directors owe the duty to act in good faith for the benefit of the company.

The traditional view is that the directors owe the fiduciary duty to the company and the company alone, not to members of the company.

Consequences of the rule is that where the director has breached the duty, the company is the proper plaintiff to bring an action.

Rule in Foss v. Harbottle

Rule in Foss v. Harbottle is actually rule of majority supremacy.

It means that once a resolution is passed by majority, it is binding on all the members.

Also the courts will in such cases not interfere to protect the minority interest.

This is based on the rational that on becoming a member, each person impliedly consents to submit to the will of majority. Said in another way it is a corollary to the rule that only the company can sue, which again translates to the wish of the majority.

b) Duty to Creditors

Creditors had certain rights against a company and its members, but they had no greater rights against the directors than against any other members of the company.

The creditors had only those statutory rights against the members which were given to them in the winding-up.

General rule

As a general rule, if a company is in a solvent state, the courts do not readily impose a fiduciary duty upon the directors to creditors, present or future, of the company.

Multinational Gas and Petrochemical Co v. Multinational Gas and Petrochemical Services Ltd [1983] Ch 258

Dillon L.J stated: The directors indeed stand in a fiduciary relationship to the

company, as they are appointed to manage the affairs of the company and they owe fiduciary duties to the company though not to the creditors, present or future, or to individual shareholders.

Emergent Principle

In recent years, there is principle that the directors in discharging their duty in good faith for the benefit of the company as a whole, must have regard to the interests of creditors especially in a situation where the company is insolvent or nearing insolvency.

Where a company is insolvent or nearing insolvency, the creditors are to be seen as having a direct interest in the company and that interest cannot be overridden by the members of the company.

In such case, the duty of the directors to consider the best interest of the company concerns not exclusively those of the members but may also include those of its creditors.

Kuwait Asia Bank EC v. National Mutual Life Nominees Ltd [1991] 1 AC 187

Lord Lowry suggested that:The director might by agreement or representation assume a special duty to a creditor of the company.

West Mercia Safetywear Ltd v. Dodd & Dodd [1988] BCLC 250

West Mercia Safetywear Ltd was a wholly owned subsidiary of AJ Dodd

Dodd was a director of both WMSL & DD 1984- Both co. were in financial difficulties Dodd transferred £4000 from WMSL to DD In June, both went into liquidation.

Liquidator of WM take an action against Dodd

COA held that Dodd was guilty of breach of duty

What about the interest of creditor?

Do director owe any duty to company's creditor?

When the co is solvent, the directors are required to make a decision which are in the interest of the company’s members (shareholder)

However, when the co is insolvent or nearly insolvent the interest of the co became the interest of its creditor.

Nicholson v. Permakraft. (NZ) Ltd

When the co is insolvent or doubtful solvency, the interest of creditor will override the interest of the shareholder

Section 303(3) of CA 1965 Directors of the co are imposed with the

statutory duty to take into consideration the interest of its creditor when the co is insolvent otherwise the director may be guilty of an offence under this act.

High Court if it think proper to do so declare that the officer shall be personally responsible without any limitation.

Such application maybe made by the liquidator or any creditor of the company.

c) Duty to Employees

Malaysian Act does not expressly provide that the director of the company are to have regard to the interest of the company’s employees’ in the performance of their function.

English Companies Act 1985

Sec 309 states that : The duty of director includes the to

have regard the interest of the company’s employees in general as well as the interest of its members.

Duty imposed by this section on the director is owed by them to the company and an enforceable in the same way as any other fiduciary duty.

d) Duty to shareholders

• The relationships of directors and individual shareholders as such and without more may not be sufficient to establish or give rise to a fiduciary relationship where the directors are purchasing shares from the shareholders.

• The directors must exercise their power in the interests of the company and not act in a way contrary to the company’s interests even on the instructions of every shareholders and are not in the circumstances obliged to act on the instructions of all shareholders in general meeting.

• The duty of the directors, without doubt is primarily one to the company itself.

Percival v Wright

The pf had approached a company indicating their intention to dispose of their shares in the company. The chairman and was also the directors of the company agreed to purchase the shares from the p at the price of 12 5s per shares asked by the pf.

The shares were to be transferred to the chairman and two other directors of the company. During the negotiations for the sale of pf shares, the chairman and the board were approached by one Holden with a view to the purchase of the entire undertaking of the company at a price considerably over 12 5s per share.

The negotiations with Holden however ultimately proved abortive. The pf brought an action against the chairman ant the other directors, as df, asking for the sale to be set aside on the ground that the df as directors had failed to disclose the negotiations with Holden when treating for the purchase of the pf shares.

It was argued on behalf on the pf that the directors held fiduciary position as trustees for the individual shareholders when the negotiations for a sale of the undertaking were on foot.

Swifen Eady J. held that the purchasing directors were under no obligation to disclose to their vendor shareholders. Directors in a most invidious position, as they could not buy or sell shares without disclosing negotiations. A pre-mature disclosure of which might well be against the best interests of the company. There is no question on unfair dealing in this case. The directors did not approach the shareholders with the view of obtaining their shares.

In certain circumstances, the directors may by their conduct have placed themselves in a position of fiduciary agents for the shareholders.

For examples in the course of negotiating a takeover bid. The directors may owe a duty to the individual shareholders to disclose in good faith and not fraudulently.

Allen & Ors v Hyatt & Ors The appellants were the directors of the Lakeside

Canning Comp Ltd. The appellants were negotiating with one Grant, who was endeavouring to amalgamate the canning companies of Ontario. The appellants represented to the shareholders of Lakeside, including the respondents, that it was necessary for the appellants to secure the consent of the majority of the shareholders in order to effect the amalgamation and inducted the respondents to give the appellants the option to purchase their shares at par of $250 with interest at 7 per cent for the periods during which no dividend had been paid. Few month later, the appellants exercised their options and made profit

The respondents brought an action seeking a declaration that the appellants were trustees for the shareholders of Lakeside of the profits derived and for an account and consequential relief.

Viscount Haldane L.C held that the duty of the directors was primarily one to the comp itself. The directors have the duty to the individual shareholders as acting for them as they were acting for the company itself that was as agents.

Coleman v Myers

• The court held that a fiduciary relationship in the absence of an agency situation can be seen in the special facts which are:

• The family character of the comp• The dominant position of the directors • The high degree of inside knowledge• The methods they had used in implementing

their scheme• The other family members habitually looked to

the directors for business advice and information affecting the true value of the shares.

Glandon pty ltd &Ors v Strata Consolidated Pty Ltd &Ors

• The disputes between the pf and the df were settled by a deed of settlement which included a provision for some of the df to buy out the pf interests for $500000. The pf argued that fiduciary relationship existed btwn the pf and df due to the df should revealed to them certain information known to the df relating to the value of the assets of the comp.

Held:

The claim by the pf was rejected by Young J who found that even assuming a fiduciary duty of the kind alleged existed and even if the particular information had been disclosed to the pf, they would still have entered into the settlement on the terms which they did.

Duty to act bona fide and for a proper purpose

Directors are under a duty to act bona fide in the interests of the company as a whole and not for any collateral purpose.

Re W & M Roith LtdDirector (Roith)

contract of service with his company.

•providing pension for his wife in the event of his death.

•Without consideration whether contract was for the benefit of the company.

Contract not binding the company

The majority of the cases on requirement of a directors to act for a proper purpose, involved the directors’ issuing new additional shares in an attempt to defeat takeover bids.

Section 132D, notwithstanding the provisions in MOA or AOA, directors must not issue new shares without the prior approval of the members in general meeting.

Punt v Symons & Co Ltd

Directors issued new shares of the company. Purpose : with the object of creating sufficient

majority to pass a special resolution depriving other shareholders of special rights conferred on them by the AOA.

Held : shares were issued for immediate controlling the holders for greater number of shares in the company and of obtaining necessary statutory majority for passing a special resolution. Therefore, shares were not issued bona fide for the general advantage of the company.

Howard Smith Ltd v Ampol Petroleum Ltd

Ampol Petroleum and Bulkships Ltd together owned 55% of the issued share capital of R W Miller (Holdings)Ltd.

Ampol and Howard Smith Ltd were making competing takeover bids for Miller.

The directors of Miller favoured Howard Smith’s bid. But there was no prospect of this bid succeeding because Ampol and

Bulkships would not have accepted Howard Smith’s offer. The directors of Miller resolved to allot 4.5 million of new shares to Howard

Smith for two purposes: first, to raise the capital needed, and secondly to reduce the holdings of Ampol and Bulkships (the existing

majority position in the company) to enable Howard Smith’s bid to succeed.

Held : the allotment was not valid. It must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not exist previously.