Claiming for Losses Caused to the Company By a Director in Breach of Their Duty

Directors hold a fiduciary position in the company and are expected to exercise the powers vested in them solely towards the best interests of their company. If they fail to do so, directors can be held accountable for their breach of duties. These can include situations where a director intentionally acted in conflict with the interests of their company or even where a director made unjustifiably poor decisions which caused losses to the company.

In such situations, companies can also consider recovering any losses caused to the company arising from such breaches. This article explores several examples in case law where Courts have found directors liable for losses caused to their company due to their actions and/or inaction.
 

The General Position of Directors’ Duties

Directors are the directing figures in a company’s structure and generally hold significant power in deciding how the business of a company is run. As such, significant and onerous duties are imposed on directors to ensure that they act in the interests of their companies. This also protects the shareholders of the company, who usually have little to no say in how a company’s business is conducted.

In Malaysia, the duties imposed on directors can be found in the Companies Act 2016 (“CA 2016”) which sets out the statutory duties and obligations of a director at Sections 210 to 234. A director who has contravened any of the duties set out in the CA 2016 can be sued by the company for breach of those duties and to recover any losses suffered by the company. For example, in a case where a company has suffered loss due to its director acquiring a secret profit in his capacity of a director, that said director would be in breach of his statutory duties, specifically the non-profit rule stipulated in Section 218 of CA 2016. Therefore, the director in question will be held liable and compelled to return the secret profit obtained unlawfully.

Other legislations such as the Capital Market Services Act 2007 (“CMSA”) also provide various other duties and obligations owed by a director to their company. In any event, criminal sanction can also be brought by the relevant authorities such as Malaysian Anti-Corruption Commission and the Attorney General Chambers as both authorities hold prosecutorial power as provided by the Malaysian Anti-Corruption Commission Act 2009 and the Penal Code respectively.

In determining whether the actions of a director was in breach of their duties to their companies, the Court will also consider “whether an honest and intelligent man in the position of a director of the company concerned, could in the whole of existing circumstances, have reasonably believed that the transaction made by such director were for the benefit of the company.” In other words, whether a reasonable person in the position of the director in question would have believed and/or acted in the same way should he or she be put in such circumstances.

Examples in Case Law

The cases below are examples where an aggrieved company sued an errant director for breach of their fiduciary duties which gave rise to loss and damages.

(i) Obtaining Secret Profits

In Simmah Timber Industries Sdn Bhd v David Low See Keat & Ors [1999] 5 MLJ 421, the Plaintiff who is the company itself, the first and second defendants entered into a lease-back agreement in 1986. Under the agreement, the second defendant would transfer, among others, all his shares in the plaintiff to the first defendant and settle in full all outstanding loans and liabilities of the plaintiff, in consideration of that the plaintiff would transfer its assets as enumerated in a schedule, a lease of land and the tenancy of its office to the second defendant. At the material time, the plaintiff was under the control of the first and third defendants.

The first defendant contended that he had injected funds into the plaintiff in 1986. However, he was only able to show that the debt owed by the plaintiff to the first defendant was capitalised into shares. Further, the first defendant denied even receiving the sub-rental and electricity charges which were specifically referred to in the statement of claim when he also self-admitted the receipt of the same and also stated that those amounts were never banked into the company’s account. The court rejected both contentions and is of the opinion that the first defendant has indeed caused all assets of the Plaintiff to be transferred to the second defendant without taking steps to show this in any of the audited account of the company and obtained unlawful profit arising from the sub-rental and electricity charges.

The Court held that the first defendant, the director of the plaintiff, has obtained secret profits for himself and received shares in the plaintiff by transferring the company’s assets to the second defendant and another party via a simple device of the lease-back agreement. The company not only lost its assets but was further burdened with the additional monthly payments to lease-back the same assets it once owned. The first defendant was in breached of his duties as a director and a fiduciary of the company and must, therefore, render a true and complete account of the profits received by him to the company and to pay the same to the company. The court held that this case is a clear case of fraud upon the company by its director.

The Court further held that a director who acted in his own interests has also breached his duty as a trustee of the company and that where monies or assets belonging to the company are transferred to a director, the said director would hold the same on resulting trust for the company.

(ii) Failure to Disclose Interest and/or information related to such interest:

In the Court of Appeal case, Taz Logistics Sdn Bhd v Taz metals Sdn Bhd & Ors [2019] 3 MLJ 510, the defendants therein were the directors of Taz Logistics who has the duty provide all information to Taz Logistics as was relevant for its progress and commercial needs. The learned Judge was of the opinion that the proposed setting up, actual setting up and acquisition of yard space of Taz Metals had been offered initially to Taz Logistics, the movement of key management personnel and the majority of the staff to Taz Metals and the taking over of office space, one of the Defendant’s role in Taz Metals, another defendant’s relationship with the primary shareholders and directors of Taz Metals clearly warranted disclosure in full to Taz Logistics.

In fact, had such disclosure been done reasonable by the defendants, the fact that the key directors of Taz Logistics were inextricably intertwined with the setting up and operation of its competitor which is Taz Metal would be exposed.

Hence, by failing to provide and seek consent or ratification at general meeting for the setting up of Taz Metal and proceeding with the foregoing acts, the defendants clearly in breach of their directors’ duties.

In Delta-Pelita Sebakong Sdn Bhd v Wong Hou LIanq & Ors and other appeals [2020] 3 MLJ 415, the directors in question were related by blood, close and familiar with each other (when they were also collectively in charge of the involved companies) which the learned judge held that the mandatories of the disclosure of potential conflicting information has been obliterated. Despite the peculiar fact therein, the Court emphasised the following rules:

• one need to disclose facts or information which form the basis of a director’s interest to those who are not aware of that information or facts. 
• any potentially conflicting information is to ensure transparency in the dealings by the management of the company and the moral integrity of those helming the administration of the company
• although the wronged party was given right to affirm such a contract, it does not mean that the duty to disclose is not mandatory for the effect of such non-disclosure is clearly stated. In other words, spelling out the consequences of the breach does not obliterate the mandatories of it.

In short, the wrongful loss caused to the company can be prevented to an extent if a director acts in a diligent and reasonable manner in performing his fiduciary duties for the best interest of the company. Aside from that, the company and its shareholders should also exercise their rights such as the right to inspect the company’s account to prevent wrongful loss caused to the company.