Directors’ Absolute Power to Inspect the Accounts and Records of a Company

Directors generally dictate the management of a company and are conferred with various powers in order to effect the same.

The perimeters for the exercise of such powers are delineated by the directors’ general duties to the company (e.g. duty to act in the best interest of the company), and may be curtailed by the shareholders of the company if:- 

• the constitution of the company is altered to take away the powers of the board of directors; or 
• if an opportunity arises under the articles, the directors of whose actions the shareholders disapprove are not re-elected.

[According to Decision of Azahar Mohamed FCJ (as His Lordship then was) in Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra v Petra Perdana Bhd and another appeal [2017] MLJU 1976 – note that this is a case on the general powers of a director in the management of a company, and not specifically with regard to the power of a director to inspect the accounts and records of the company]

To assist directors in effectively managing a company, one of such powers conferred onto the directors is the power to inspect the accounts and records of the company.

Power to Inspect Accounts & Records 

The power of a director to inspect the accounts and records of the company is expressly provided in Subsection 245(4) of the Companies Act, 2016, as follows:-

“The records referred to in subsection (1) shall be kept at the registered office of the company or at such other place as the directors think fit, and shall at all times be open for inspection by the directors.”

Such power is also said to be ‘absolute‘ as directors are not required to furnish any reason for exercising such power.

In Dato’ Tan Kim Hor & Ors v Tan Chong Consolidated Sdn Bhd [2009] 2 MLJ 527 (“Dato’ Tan Kim Hor case”), Low Hop Bing JCA (as His Lordship then was) held that:

“[11] There is no burden on the plaintiffs as directors to show any particular reason for their request for inspection. This will ordinarily be assumed: Molomby v Whitehead & Australian Broadcasting Corp (1985) 63 ALR 282; and Wuu Khek Chiang George.”

In any event, a director is under an obligation to undertake the inspection of the accounts and records of the company if he or she has any suspicion on the management of the finances of the company. Indeed, the failure to undertake the same exposes such director to charges of breaches of his duties, as a director, to the company.

In Dato’ Seri Timor Shah Rafiq v Nautilus Tug & Towage Sdn Bhd [2018] 8 MLJ 394, Justice Mohd Nazlan held that:  

“[73] The facts of this case clearly demonstrate that the relationship between the two groups of directors has deteriorated. They appear to be suspicious of one another. In encl 1, the plaintiff seeks to inspect various documents of the accounting records on financial transactions of the defendant company. He appears to suspect something is amiss with the financial records. As a director, I reiterate that the plaintiff does not have to justify why he needs to examine the records.

[74] But his suspicions on the financial records may even compel him under the law, in the discharge of his fiduciary and statutory duties, to undertake the requisite inspection. His failure to do so may open him to charges of breaches of director’s duties, apart from the failure of the company and the directors to keep proper records under s 167(1), as may be punished under s 167(7) of the CA as referred to earlier. I again emphasise that as a corollary, a failure on the part of company or any of its directors in permitting the exercise of inspection rights under s 167(3) is also an offence under s 167(7) of the CA.” [Emphasis added]

The Hong Kong Court of Appeal in Law Wai Duen & Anor v Boldwin Construction Co. Ltd. & Ors [2001] 4 HKC 403 held that:-

“Hence, in relation to many matters directors will no doubt rely upon what is done by company officials and their fellow directors in relation to the affairs of a company. But that is not to say that the ultimate responsibility does not lie upon the director. If a director has cause to be suspicious, or reasonably believes there is such cause, then the director may incur liability if he does not satisfy himself in relation to all matters relating to the company’s affairs. More importantly, even if a director does rely upon other directors or company officials in the conduct of the company’s affairs, he must, at all times, be at liberty to satisfy himself as to any matter in relation to the company’s business. 

It is in this context, therefore, that Street CJ’s statement at the foot of p 360 can be understood. He said: 

A director’s right to inspect and take copies of documents belonging to his company is, I think, clear. 

The judge went on to emphasise that the right of director to inspect and take copies of company documents was essential to the proper performance of the director’s duties.” [Emphasis added]

Exception

A director can be barred from exercising his or her power to inspect the accounts and records of the company if he or she has an ulterior purpose to procure the said accounts and records. One of such ulterior purposes is when the inspection is sought to procure information to injure the company.

In the Dato’ Tan Kim Hor case, Low Hop Bing JCA (as His Lordship then was) held:

“[9] It is settled law that the defendant, having resisted the plaintiffs’ right to inspect the accounting and other records of the defendant, bears the burden of proving that the plaintiffs’ right is being, or will be, exercised for an improper purpose: Australian Metropolitan Life Assurance Co Ltd v Ure & Ors (1923) 33 CLR 199, per Isaacs J; and Wuu Khek Chiang George v ECRC Land Pte Ltd [1999] 3 SLR 65 CA, per LP Thean JA.

[10] It is for the defendant to show ‘clear proof’ and to satisfy the court ‘affirmatively’ that the grant of the right of inspection would be for a purpose detrimental to the interests of the company. There must be a ‘real ground’ that the right would be abused and that substantial harm would be caused to the company thereby: Wuu Khek Chiang George.“

Conclusion

It is imperative that a director be given the absolute power to inspect the company’s accounts and records in view of his or her duties to the company. Such power should only be resisted where there is clear proof that the exercise of such power is intended to harm the company.

Otherwise, the status of the person as a director of the company is merely illusory, and he or she is vulnerable to the risks of breaching his or her own duties in ensuring, amongst others, the proper management of the company.