Company Law Case

Question 1

According to Lee Mei Pheng & Ivan Jeron Detta (2014), directors stand in fiduciary relationship with the company which is a relationship that is based on confidence and trust.  So the director should always act for the best interest of the company.  

Fiduciary duties of a director as specified by Section 132(1) of Companies 1965 are:

1. Duty to act in bona fide for the interest of the company
2. Duty to exercise powers for their proper purpose
3. Duty to retain their discretionary powers
4. Duty to avoid conflict interests [‘no conflict’ rule and ‘no-profit’ rule]
5. Duty to exercise care, skill and diligence

Duty to act in bona fide for the interest of the company

Directors must always act in good faith or honestly in all the matters that related to the company.  That means directors also must exercise their powers bona fide in what they consider is for the benefit of the company and not for their own interests or any collateral purpose.  Any decision made by the directors must not be tainted with self-interest.

Case for illustrating this principle are: RE W & M ROITH LTD [1967] 1 ALL ER 427

A director was about to retire and he wanted to make some financial guarantee for his wife.  So he entered into a service contract with the company that his wife will receive pension from the company upon his death.  Upon his death, that contract was challenged that the director whose approved the contract has not acted bona fide in the interest of the company.

Court held that the agreement is void because the director had breach his duty to act bona fide and for the best interest for the company.

Duty to exercise powers for their proper purpose

The common law requires directors exercise the power assign on them for a proper purpose.  Under Section 132(1) of Companies Act 1965, directors required to be act honestly and must act for a proper purpose.  This duty can be breached rather easily because directors could breach this duty each time when they carry out activities that they are not authorised to do even they think they have act honestly for the interest of the company.

Example: Directors are usually given power to issue shares.  Normally the primary reason for issuing shares is to raise capital.  So if shares were issued for other purpose, it may be improper and the directors have thus breached this duty of care.  Courts have also considered situations where they have held that shares have been issued for improper purpose such as:

• Diluting the shareholding of a member
• Entrenching control of the entity in certain shareholders by issuing them more shares
• Attempting to reduce to a minority position, a member or members who hold a majority of the voting power
• Directors maintaining control of the entity

Case for illustrating this duty is: Mills v Mills (1938) 60 CLR 150

The directors of company are fiduciary agents and a power conferred upon them cannot be exercised in order to obtain some their self advantages or for any purpose foreign to the power.

Duty to retain their discretionary powers

Under this duty, directors of the company should not restrict the exercise of their discretionary powers in the future.  So if a director has entered into an agreement or contract with others directors that they will only vote in a particular way, that agreement may considered as invalid.  However, it very much based on each case condition.