28 February, 2018
An issue for consideration was whether the Appellants, who are directors of the Respondent, had acted in breach of their directors’ duties pursuant to section 132 of the Companies Act 1965 (“the Act”) in managing the Respondent. The allegation was that in so managing the Respondent, the Appellants caused the Respondent to lose its controlling block of shares in Petra Energy Berhad (“PEB”), which was a wholly owned subsidiary of the Respondent. The Federal Court clarified the law on governance and management of a company as between directors and shareholders in general meetings.
It was held the powers of management conferred on directors by the Act and the articles of association of a company governed by Table A of the Act cannot be overridden by an ordinary resolution passed by a simple majority of shareholders at a general meeting. The shareholders, therefore, cannot interfere with or control the directors exercising their powers of management vested in them by virtue of the articles of association unless a special resolution is passed and the articles of association are altered to that effect.
The test for breach of duty of a director and acting in the best interest of the company is both an objective and subjective one, that is, whether the director considers that the exercise of discretion is in the best interest of the company (subjective test); this is subjected to an objective review or examination by the Court (objective test).
By virtue of section 132(1B) of the Act which laid down the statutory business judgment rule, the Court will not assess the merits of a commercial or business judgment made by directors and interfere with business decisions unless it can be shown that the directors have not acted bona fide. The appeal was allowed.
Kang Hai Holdings Sdn Bhd and Kang Hai Realty Sdn Bhd v Lee Lai Ban (Civil Appeal No 02(f)-65-09/2016(J) [Federal Court] (Decision delivered on 19 December 2017)
In this case, the Appellants alleged that the Respondent had obtained unlawful and unauthorised entry into the first Appellant’s lands to extract and purchase earth pursuant to a Tenancy Agreement entered into with Siva, a former director of the Appellants.
Siva, having ceased to be a director of the first Appellant, did not have authority to enter into the Tenancy Agreement on behalf of the Appellants. Siva had fraudulently held himself out as a director and manager of the first Appellant. The Respondent did not verify Siva’s position in the Appellant companies either through a company search or otherwise and did not check the status of the land by conducting land searches. The Respondent when sued attempted to raise the Rule in Turquand to suggest that he was entitled to assume Siva had authority when he entered into the Tenancy Agreement.
In this regard, the Court explained that in view of “the rapid development of modern technology, and the access to information available in the database of the Companies Commission of Malaysia”, the Rule of Turquand which was enunciated in Royal British Bank v Turquand [1843-60] ALL ER Rep 435 and adopted by the Malaysian courts in Pekan Nenas Industries Sdn Bhd v Chang Ching Chuen & Ors [1998] 1 MLJ 465, now imposes a minimum duty on the “outsider” (such as the Respondent in this case) to, at the very least, make minimum checks to afford the outsider himself the protection of the Rule in Turquand.
The Court also held that Form 49 is a public document to which the common law doctrine of constructive notice applies. Form 49 would impute knowledge on the Respondent as to the fact that Siva was not a director of the company and therefore his absence of authority to enter into the Tenancy Agreement on behalf of the Appellants. It mattered not whether the Respondent did the available company searches.
Further, it was held that the Rule in Turquand is only applicable where the representation that the agent had authority to enter into the type of contract in question was made by a person who possesses actual authority either generally or in respect of the matters to which the contract relates. Given the representation was made by Siva himself, the Rule in Turquand did not apply. The appeal was allowed.
For further information, please contact:
K Shanti Mogan, Partner, Shearn Delamore & Co
shanti@shearndelamore.com
