Unravelling the True Meaning of “the Interests of the Company” (Part 2)

In Part 1 of this article, I have discussed on the meaning of the “interests of the company” in light of the interests of the company itself and the interests of the members (current and future).

Now let’s look into the meaning of “interests of the company” in the context of the company’s employees and the company’s creditors. 

The interests of the company’s employees

Employees are considered to have an interest in the company as they contribute their work, skills and knowledge at present in receipt of benefits such as pension provided by the company in future.

Besides, human capital is often regarded as a kind of investment of the company, which is particularly applicable to some high technology industries as technological innovation requires significant contributions made by employees. 

As a result, directors should consider the interests of employees in the sense that they are a key group of stakeholders who can promote competence and enhance sustainability of the companies they worked for.

Surprisingly, under the common law, the interests of the company’s employees are excluded! Rewards given to them may only be justified if these are reasonable incidental to the carrying on of business of the company and tend to promote the prosperity of the company. 

In the case of Parke v Daily News Ltd [1962] 2 All ER 929, Justice Plowman held that the payment of large ex-gratia sum to employees upon sale of the company’s business in order to benefit those employees rather than the company itself is not justified. 

However, in Singapore, Section 159 of the Singapore Companies Act allows director to consider the interests of the employees. This provision is a recognition that benefiting the employees generally advances the interests of the company as a commercial entity. 

Unfortunately, such is not a case in Malaysia. 

The interests of the company’s creditors

Moving on, it must be noted that when a company insolvent or prospectively insolvent, the interests of the creditors are a proper and valid category of interest that directors must consider. 

In the Chancery Division decision of Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd; Eaton Bray Ltd v Palmer [2002] All ER (D) 226 (Dec), Leslie Kosmin QC (Sitting as a deputy judge of The High Court) held that

“Where a company was insolvent or of doubtful solvency or on the verge of insolvency and it was the creditors’ money which was at risk, the directors when carrying out their duty to the company must consider the interests of the creditors as paramount and take those into account when exercising their discretion.“

In the Singapore Court of Appeal case of Dynasty Line Ltd (in liquidation) v Sukamto Sia and another and another appeal [2014] SGCA 21, Sundaresh Menon CJ in delivering the judgment of the Court made several remarkable findings as follows:

1. That the relevance of the company’s solvency was to establish whether the directors were in breach of their duties. 

2. The court was not concerned with the question on whether the company was technically insolvent or whether it would be appropriate for the company to be wound up. 

3. The court held that the solvency tests, such as the ‘going concern” test and the ‘balance sheet’ test used in the context of winding up action are of limited use.

4. Instead the court held that a ‘broader assessment’ of the surrounding circumstances of the case including consideration of all claims, debts, liabilities and obligations of the company, was necessary. 

5. The purpose of this broader assessment is to reveal whether there are reasons to be concerned that the interests of the company’s creditors are or will be at risk. If so, directors would be obliged to take account of the creditors’ interests.

The underlying reason is that in cases of insolvency or prospective insolvency, the assets of the company must not be dissipated by some wrong exercise of powers so as to make sure that all available assets will be kept to meet the debts of the company against the creditors in the event of liquidation. 

This is in line with Section 541 of the Malaysian Companies Act 2016 that provides for the liquidator or creditor to make an application to examine the conduct of the directors to determine whether there had been breach of duty in the course of winding up. If yes, restitution or contribution to the assets of the company by way of compensation may be ordered. 

While the interests of the creditors are a dominant factor in insolvent or prospective insolvent companies, what is more important is that the duty of directors is nonetheless owed to the company in absence of statutory provisions that an independent duty is owed to the creditors. 

It is noteworthy that the imposition of the obligation on directors to take account of the creditors’ interests does not mean that the creditors may sue the directors. 

In the Court of Appeal case of Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd [2010] SGCA 31; [2010] 4 SLR 1089, VK Rajah JA said that

“If creditors were allowed to recover directly, it would contravene the collective procedure of insolvency and open a back door for some of them to work around the pari passu rule. Allowing creditors and the company to directly recover from directors might also lead to double recovery.”

Conclusion

Based on the above, I have discussed on whether the interest of the company’s employees as well as the interests of the company’s creditors are considered as the ‘interests of the company’. 

We can see that interests of the employees are unfortunately excluded from the ambit of ‘interests of the company’ under common law. Unlike Singapore, Malaysia have yet to take the initiative to change the common law position. 

On the interests of the company in corresponding to the interest of the creditors, where a company is unable to pay its debt as they fall due, the interests of the creditors of the company must be taken into account. 

Hence, if directors act in a manner that prejudices the creditors of the company when the company is insolvent, they might be held guilty of a misfeasance.