Imputed Knowledge of Sleeping Directors: Can They Really Sleep and Say That They Don’t know?

1. Definition of sleeping director(s)

Sleeping directors are commonly non-executive directors who attend periodic Board meetings, read management reports on the business and finances of the business and pass resolutions or authorize management to act with Board authority.

A non-executive director is not an employee of the company. His relationship with the company is qua director only. In law, his work is gratuitous unless there is a provision in the constitution that allows him to be remunerated for his services. Rule 7.23 of the Bursa Malaysia Listing Rules, fees payable to non-executive directors shall be by a fixed sum and not by the commission on or percentage of profits or turnover. There are no specific rules governing non-executive directors’ remuneration in private companies, and if any, it will be in its constitution.

Usually, the payment of remuneration to non-executive directors takes place at financial year-end and is subject to the approval of shareholders in general meeting. It is not conceivable that a general meeting be called periodically to approve periodic payments. The practice of making periodic payments without the approval of the general meeting is unlawful and has been severely criticized: Wong See Yaw & Anor v. Bright Packaging Industry BHD [2016] 6 CLJ 465

With that being said, does a sleeping director (the non-executive director) owes any fiduciary duty to the company? Can the knowledge of the affairs of a company be imputed upon a non-executive director?

2. The position of sleeping director according to Companies Act 2016

First, it is to be noted that the Companies Act 2016 makes no distinction between an executive and non-executive director.

Section 2 of the Companies Act 2016 provides for the definition of director as follows:

"director"  includes any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the majority of directors of a corporation are accustomed to act and an alternate or substitute director;

3. The position of sleeping director according to case laws: Sleeping directors do owe fiduciary duties to the company.

Second, all directors of a company, be it executive or non-executive, owe fiduciary duties to the company.

In Ravichanthiran A/L Ganesan v Percetakan Wawasan Maju Sdn Bhd & Ors [2008] 8 MLJ 450 (“Ravichanthiran”), Ramli Ali J (as his Lordship was then) in the Kuala Lumpur High Court cited the Singapore Court of Appeal decision in Planassure Pac formerly known as Patrick Lee Pac v Gaelic Inns Pte Ltd [2007] SGCA 41; [2007] 4 SLR 513 and state that:

… The nub of the issue is whether they remained under a duty to take positive steps to ensure that the accounts were in order (at least on their face), despite their designation as nonexecutive directors. This question ought to be answered in the affirmative. As pointed out by the court in Vita Health Laboratories Pte Ltd v Pang Seng Meng [2004] 4 SLR 162, every director of a company, regardless of whether he has an executive or non-executive designation, has fiduciary duties and legal responsibilities to his company.

Thus, the mere fact that Crowhurst, Lew and Shaw were non-executive directors of the material time and took a backseat in the management of the company did not exempt them from the need to exercise a modest level of scrutiny as to the goings-on in the respondent.

Further on the Appeals Court held:

A director cannot now be viewed as the mere sentinel who may occasionally dose off at his post. Directors are officers who must remain alert and watchful at the helm. Directors ought to have an inquiring, though not necessarily suspicious, mind in discharging their supervisory function.

In Ravichanthiran, the plaintiff, being the non-executive director sued, among others, the second defendant and alleged that it was the second defendant being the “de-facto” director of the first defendant who failed to pay the EPF contribution of the employees of the first defendant.

In Ravichanthiran Ramli Ali J further held that

[10]  Even, assuming that the plaintiff is a non-executive director, nevertheless he is still a director in the eyes of the law and his roles and duties are governed by the CA (Companies Act) in particular, s 132. Furthermore a non-executive director is entrusted to look after the affairs of the company and to keep a close watch on the company's managers and other directors in order to safeguard the investment of shareholders. Even if the plaintiff is a nominee of the second defendant, then the plaintiff is in fact a trustee for his principal interest and the plaintiff by failing to ensure that the EPF contributions had been diligently paid had breached his fiduciary duties towards his principal, being the second defendant. This, the plaintiff had failed to do as clearly evident from his affidavit in support that he had neither been involved nor had any knowledge of the company's affairs.

In Lembaga Kumpulan Wang Simpanan Pekerja v. Adorna RMIT Sdn Bhd & 9 Ors  [2003] 4 MLJ 729, Kamalanathan Ratnam J had this to say:-

“Directors are alter ego of a company. It is therefore not appropriate for a director to attempt to escape culpability by pleading that he is a sleeping partner or director or a silent director or a non executive director.”

In Beucar Accessories (M) Sdn Bhd v. Gordon Toh Chun Toh & Ors [2012] 1 LNS 164, Hadhariah Bt Syed Ismail JC (as her Ladyship was then) referred to the two cases above and aptly held as follows:

I shared the same view as expressed in both the two cases cited above. The court is not concerned with the label attached to a director. The court merely look into the fact that once a person has accepted his appointment as a director of a company, under the law he is deemed to have understand his duties and agreed to discharge those duties carefully, skillfully, diligently and honestly. If he chose to adopt an attitude of not to know the affairs of the company, in the eyes of the law, he could not be relieved from his responsibility because he should not have accepted the directorship if he had no intention to carry out the duties imposed on him…”

In the case of Lembaga Kemajuan Wang Simpanan Pekerja v Rubfil Sdn Bhd & Ors [2005] 7 MLJ 175 (which was also referred to in Ravichanthiran) the late Abdul Wahab Said Ahmad J held(at p 178):

The directors be they as nominees, sleeping directors or non-active directors owe a duty to see the company's employees EPF be protected. As directors of the company whether as active, nominee, sleeping or non-active director all of them are jointly and severally liable.

Such is also a case in Hardie Billie & Ors v Lembaga Kumpulan Wang Simpanan Pekerja (WA-11ANCVC-38-03/2018, 26 June 2018) whereby, in this case, management of EPF payments was delegated to one of the directors. This director was said to have been negligent in the discharge of his duties which resulted in EPF contributions not being paid.

However, the Court held that the other directors were to be personally liable for the unpaid contributions, even though those other directors may have been “sleeping” or “non-active” directors:

“In the circumstances, as much as I sympathize with the predicament of these Defendants, who are very much in the position of non-active directors, the position in law is clear.

Also in Pendakwa Raya v Mok Chin Fan & Ors [2015] MLJU 531 (though being a criminal case under the Securities Industries Act 1983), the Court of Appeal held as follows:

[35]  We further note the respective roles played by the respondents in the perpetration of this crime. The 4th respondent was an executive director and Chief Executive Officer of Inix, the 2nd respondent was an Executive Director and Chief Technical Officer, and the 1st respondent was a non-executive director. They were responsible under the law to ensure correct and accurate information are contained in the prospectus and that the reports to Bursa are accurate.

4. Executive director vis-a-vis non-executive directors

In Kuala Lumpur High Court case of Tanjung Offshore Bhd v Harzani bin Azmi & Ors [2018] MLJU 1751, Darryl Goon JC held that

…directors of companies also owe a common law duty of care to the company on whose board they sit (see The State of South Australia & Anor v Timothy Marcus Clark [1996] SASC 6137 and also AWA Ltd v Daniels (1992) 7 ACSR 759) though the exact nature and extent of the duty may vary depending on the circumstances including whether the director concerned was an executive director or a non-executive director.

The position of an executive director drawing a salary vis-a-vis that of non-executive directors was considered in the case of Sime Darby Berhad & Ors v Dato Seri Ahmad Zubair & Ors; Tun Musa Hitam & Ors (Third Party) [2012] 2 MLRH 466 (“Sime Darby”) as follows:

One cannot deny that the duties of non-executive directors are different from that of executive directors. What is expected of and exacted from them as non-executive directors are different from that of executive directors. Whilst they all owe a common duty to the company to act in good faith in the best interest of the company at all times (s 132(1) of the Companies Act 1965), yet with respect to the execution of the matters that the board and committee members have discussed, deliberated and decided, it is the executive directors that would execute the decisions made. In other words, the executive directors will have to descend to the base and execute the decisions, solve problems, manage resources, monitor progress, measure performance and be answerable to the board and committee for the performance of the company as a whole. The executive directors being full-time employees of the company as most of them generally are, would be the hands-on people involved in the daily grind of negotiation, supervision and operations. The executive directors would be answerable to the board and committee as a whole for the quarterly performance of the company as the non-executive directors meet with the executive directors in the full board meetings to review quarterly results before these are released to investors through Bursa Malaysia. Little wonder what the full board is required to meet at least four times in a year. The duties of the non-executive director vis-avis the company are performed or an intermittent basis as he meets with the other non-executive directors and executive directors at the quarterly meeting of the board or more often as may be necessary. Whilst they receive director s fees for being non-executive directors, they do not draw a salary unlike executive directors who are expected to work in a normal nine to five job.

As for the standard of duty between an executive director and a non-executive director, as aptly pointed out by S.M Komathy Suppiah, J in the recent Shah Alam High Court case of Luster Industries Berhad v Citi-Champ International Limited & Ors (Lim See Chea & Anor, third party) [2020] MLJU 22, an executive director owes a higher duty than a non-executive director.

Also, in the Kuala Lumpur case of Petra Perdana Bhd v Tengku Dato' Ibrahim Petra bin Tengku Indra Petra & Ors [2014] 11 MLJ 1, Nallini Pathmanathan J (as her Ladyship was then) in her judgment held that non-executive directors had even less direct knowledge of the day to day affairs of a company than an executive director.

Similarly in CTI Leather Sdn Bhd v Hoe Joo @ Khoo Hock Tat & Ors [2011] 8 MLJ 521, in dismissing the Plaintiff’s claim of breach of fiduciary duty against the Fourth Defendant, Nallini Pathmanathan J (as her Ladyship was then) held that

[100]  With regards to D4, I also accept that he was a non-executive director who had no knowledge of the details of this transaction. Again in view of my acceptance of D1’s evidence on this issue, it follows that the allegation of a breach of fiduciary duty against him must also fail.

…

[102]  I do not find D4 liable for these breaches because I accept his evidence that he was a not a director at the material time and in any event was a non-executive director who had no real knowledge of the operations of the plaintiff on a day to day basis.

In LNE Network Systems (Asia) Sdn Bhd v Loi Chew Ping & Ors [2015] MLJU 1884, the gist of the plaintiff’s case is that D1 had, through fictitious invoices, caused the plaintiff to issue cheques to D2 and D3, totalling RM817,372.72. The plaintiff commenced this action against the D1, D2 and D3 for, inter alia, the recovery of such sums. The court made the finding as follows:

[7]  At the material time, there were three directors in the plaintiff company: Mr. Rampling, his wife, and a non-executive director, Mr. Stephen Koh. The authorised signatories for cheques issued by the companies were any two directors. The plaintiff had an adopted a practice of getting Mrs. Rampling to pre-sign all the cheques in a chequebook. When it became necessary to issue a cheque, all the paperwork was put in order by D1, who then obtained Mr. Rampling’s countersignature on the cheque. When Mr. Rampling was away, Mr. Koh would sign in his stead. Being a non-executive director, Mr. Koh was not entirely familiar with the day-to-day affairs of the plaintiff and would unquestioningly sign the cheques prepared by D1.

However, in Dato' Dr Muhammad Ridzuan bin Mohd Salleh & Anor v Syarikat Air Terengganu Sdn Bhd [2012] 3 MLJ 737 the case revolved around the setting aside of the consent award due to the fact that the arbitrator failed to disclose that he was appointed as the non-executive director of Maybank, a party related to the arbitration. In the judgement of Lee Swee Seng JC (as his Lordship was then), it was held that

[36]  The defendant contended that his appointment is merely as a non-independent non-executive director and as a member of the Credit Review Committee. Since he does not hold an executive position, his influence over decision-making in the bank would be minimal. But that is not the point. The Companies Act 1965 does not differentiate between executive and non-executive directors but only the nomenclature of 'director' who under s 132(1) of the Companies Act the same duty is exacted of them in that they shall at all times exercise their powers for a proper purpose and in good faith in the best interest of the company. It is not for anyone to second guess what his role in the Credit Review Committee would be and as to whether an application for further facilities from the plaintiffs would come within his portfolio of duties where review is concerned.

Further, it is not a defence for a director notified of an injunction against the company to claim that he is a sleeping director, and thus not liable for breach of the injunction by the company Dato' Haji Abu Mansor Bin Ali J in the Kuala Lumpur High Court case of William Jacks & Co. (M) Sdn. Bhd. v. Chemquip (M) Sdn. Bhd. & Anor. [1994] 3 CLJ 125 by referring to the case of Biba Ltd. v. Stratford Investments Ltd. [1973] 1 Ch. 281 held as follows:

Leong's, Lee's and Lim's defence was they played only a passive role in the 1st defendant leaving the day to day running of the company to the 2nd defendant. They alleged they cannot be committed for contempt. I find merit in the applicant's Counsel's argument that directors of a company who have been notified of an injunction are liable for the breach of the injunction by the company and it is no defence if they claim they were only "sleeping directors

See also: Bayu Gamitan Sdn Bhd v. Mah Siew Seng & Ors [2000] 1 LNS 266 which was decided by PS Gill J in the Ipoh High Court.

5. CONCLUSION

To conclude:

1. The Companies Act 2016 does not differentiate the types of directors.
2. All directors of a company be it executive or non-executive, owe fiduciary duties to the company.
3. Executive directors owe a higher duty than a non-executive director.
4. There are cases whereby the Malaysian Courts held that non-executive directors had even less direct knowledge or even in some cases; no real knowledge of the day-to-day affairs of a company than an executive director did.
5. Also, though being non-executive director, a non-executive director has a duty to disclosure as an interested party
6. Lastly, it is not a defence for a non-executive director who knew about a Court’s order and breached the same to escape liability under the name of “non-executive director”

Thus, it is best that being a non-executive director, one must fulfil its fiduciary duties and obligations, among others, as illustrated in Sime Darby, the duties of the non-executive director vis-a-vis the company are performed or an intermittent basis as he meets with the other non-executive directors and executive directors at the quarterly meeting of the board or more often as may be necessary. Even in Ravichanthiran, a non-executive director ought to exercise a modest level of scrutiny as to the goings-on in the Company. Also in Ravichanthiran, a non-executive director is entrusted to look after the affairs of the company and to keep a close watch on the company's managers and other directors in order to safeguard the investment of shareholders