Asklegal
Home banner asklegal s first agm

Corporate

If a company in Malaysia fails, can I sue the directors?

7 days ago Denise C.

56

Shares


Have you ever wondered what directors in a company do? As kids, we would watch movies featuring old, white men sitting around an oblong table, shooting off their approval for decisions numbering in the millions and then they would waltz away to flirt with their secretaries and be chauffeured off in a nice gleaming Bentley. This is all good and fine if the company is doing well but what if the company is struggling to stay afloat and the director gets a new Rolls Royce?

So, if you are an investor or a shareholder with a company that goes belly up or if you realised that your company suffered incredible losses in the past year and you think that this is caused by the directors of the company mucking about, you might actually wonder if these directors can be sued.

Image from giphy.com

Malaysia recently overhauled the laws that governs companies in Malaysia with the new Companies Act 2016 and you would be very pleased to learn that you can actually sue directors for breaching their director duties. By the way, this article is not aimed at investment schemes which is a wholeeee other ball park.

[READ MORE: If you lost money in a Malaysian pyramid scheme, can you get your money back?]

Before we move into the how you can sue part, let us give you a brief overview of what duties directors have (by the way, it doesn’t matter if they are the directors of a two dollar company or a multinational company, they still have director duties to fulfil).  

 

Directors actually have a whole list of duties under Malaysian law

These are the director duties under common law. Image from slideshare.net

The Companies Act 2016 (“CA 2016”) actually sets out a list of duties that directors of companies in Malaysia would have to adhere to. However, in order to keep this article succinct, we shall focus on three (more) common duties. 

1. The director must act for the company

The first duty can be found in section 213(1) which sets out the duty for directors to act within the powers that have been given to him. To put it in context, there are two ways a director can gain his powers from in Malaysia. The first would be through the Companies Act 2016 and the other way would be through the company’s constitution (we will explain what this is later on in the article). 

Section 213(1) Companies Act 2016:

“A director of a company shall at all times exercise his powers in accordance with this Act, for a proper purpose and in good faith in the best interest of the company.”

 

For example, if the CA 2016 states that directors are allowed to allot company shares subject to them gaining approval through a company resolution first. This means that if a director were to allot shares without a resolution authorising it, they would be acting beyond their powers and could be guilty of a breach of director duties. 

If you are clear on what the Act says and are scratching your head over the constitution part, because you thought that only countries have constitutions, don’t fret because an explanation is rightttt here. 

The first thing you need to know is that a company’s constitution works, more or less, in the same way as a country’s constitution. It sets out the basic rules that the company has and as explained in section 33 of the CA 2016, the constitution also binds every member in the company. This means that not only is the constitution enforceable by the members against the directors, it is also enforceable between members of the company. Section 31(2) CA 2016 also explains to us how a constitution works hand in hand with the relevant Malaysian laws. In essence, if the CA 2016 allows some discretion for the companies to set their own rules, they can do so. It is important to note that under the new CA 2016, it is not mandatory for every company to have a constitution – it is optional.

Section 31(2) CA 2016:

“If a company has a constitution, the company, each director and each member shall have the rights, powers, duties and obligations set out in this Act, except to the extent that such rights, powers, duties and obligations are permitted to be modified in accordance with this Act, and are so modified by the constitution of the company.”

 

Aside from not exceeding the limits of their powers, directors are also supposed to exercise their powers in a way that they were intended to be exercised. For example, if a director has the power to allot shares, he can allot them in a way that would benefit the company as opposed to allotting them in a way that would make themselves richer. 

2. The director cannot do crazy things

The second duty is found in section 213(2) and it states that:

“A director of the company shall exercise reasonable care, skill and diligence with – 
 
(a) the knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities; and
 
(b) any additional knowledge, skill and experience which the director in fact has.

 

This duty to exercise reasonable care, skill and diligence may sound rather vague but the courts would judge this using the objective and subjective tests.

The objective test is found in part (a) of section 213(2) wherein the judge would look at whether the director had acted in a way that other directors with the same skills and responsibilities would have acted. This means that the judge would look at how the general population of directors would have acted.  For example, if you are a director and you made the decision to sell your company for RM10,000 while every other director out there would have sold it for a minimum  of RM50,000, you would probably be guilty of failing to exercise reasonable care and skill.

You definitely don’t want your directors to tell you your money is gone. Image from giphy.com 

However, section 213(2) also involves a subjective test. A subjective test is where instead of the judge looking at the knowledge and skill that the general population of directors would have, the judge would look specifically at any additional knowledge and skill that you have. This means that if you had any special knowledge that would give you greater skills than a “normal” director would, you would be judged with those standards in mind as well. For example, if you were a director of a company and you had a degree in accounting, the courts would look at that degree and would more likely than not find you guilty of failure to exercise reasonable care and skill when you decided to sell off your company for RM10,000. 

The objective and subjective tests found in section 213(2) means that the judge is required to consider the objective knowledge of directors as well as the knowledge of the director in question. 

3. The director cannot have sneaky under-table dealings

This duty is meant to ensure that directors do not abuse their positions as directors in order to gain personal benefits. An example of a situation like this would be if the director of Company A influences his company to enter into a contract with Company B because he owns shares in Company B and would stand to gain a lotttt of money if the deal goes through. 

The CA 2016 aims to prevent situations like these by requiring directors to declare any interests they may have in a proposed transaction. Section 221(1) says:

“Subject to this section, every director of a company who is in any way, whether directly or indirectly, interested in a contract or a proposed contract with the company, shall as soon as practicable after the relevant facts have come to the director’s knowledge, declare the nature of his interests at a meeting of the board of directors.”

 

This means that it would potentially be a breach of a director’s duties if he were to sneakily try to steer the company into being part of a deal that benefits him and not the company. To our more observant readers, you might realise that this duty would potentially overlap with the first duty where the Act states that directors have to act “in the best interest of the company”.  

Such an observation is accurate as the sections that govern directors’ duties can overlap and it essentially means that all those old-timey images we have of directors enjoying life and expensive lunches do not stand anymore. Directors are not allowed to take a hands-off approach in running the company. This is illustrated in the UK case of Lexi Holdings v Luqman where the court stated that directors must keep themselves informed of what is going on in the company and participate in management. 

Now that you are aware that directors do have duties to fulfil to the company, the next question you have would be, how in the world do you sue directors?

 

There are specific rules and procedures to follow when sueing directors

Image from pinterest.com

As a general rule that was established in the very, very old English case of Foss v Harbottle (this was decided in 1843, when even our grandparents weren’t born yet), a company is the proper plaintiff. This means that the company is the only one who can bring a legal action. 

But herein lies a catch with the rule in Foss v Harbottle, if the companies are the proper plaintiffs and if directors control the companies, how could you ever sue a director that has been messing up? The rule in Foss does allow for several exceptions but they were very hard to use. 

This is where section 346 and section 347 of the Companies Act 2016 steps in and provides you with ways to sue your directors. There are actually several other ways you can sue a director (through a shareholders’ agreement, company’s constitution and a winding up petition) but this article will focus on what is contained in the Companies Act in order to avoid confusion. 

Remedy in case of oppression

This remedy is found in section 346 and it reads as follows:

“Any member or debenture holder of a company may apply to the Court for an order under this section on the ground – 
 
(a) that the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the members or the debenture holders including himself or in disregard or his or their interests as members, shareholders or debenture holders of the company; or
 
(b) that some act of the company has been done or is threatened or some resolution of the members, debenture holders or any class of them has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the members or debenture holders, including himself.”
 
If you are at a loss over what the section means, take deep breathes because it essentially means that you are allowed to bring the directors to court if you realised that directors have been acting unfairly towards you and this has affected your interests as members. This means that the are two things you need to prove when bringing this action to court. The first is that you need to prove that there has been an element of unfairness and the second is that you need to show that it affected your interest as a shareholder or member of the company. 
 
This is a remedy that has been designed to allow you to bring an action when you, as a shareholder/member, has suffered a personal wrong. Typically, the courts will first look at any agreements between you and the other directors to see if there has been any understandings or legitimate expectations between you and the company/other directors. If there are any understandings or legitimate expectations to be found, then you would have a stronger case for proving oppression. 
 
An example of how an action can be considered as unfair and affecting your interest as a shareholder/member is where you were promised that you could participate in the management of the company but the directors then excluded you from management despite promising you otherwise. This was the scenario that was present in the English case of Ebrahimi v Westbourne Galleries
 
Another way you could bring an action through the oppression remedy is where the directors have acted in a way that has breached the company’s constitution. Among countless ways that directors can breach their company’s constitution is by failing to hold the annual general meeting (AGM) or by depriving you, a shareholder, of knowing what is going on with the company’s affairs (section 195 of the CA 2016 now provides that members can make recommendations of the management of the company if they manage to pass a resolution with a 75% vote). 
 
Don’t let this be you. Image from imgur.com

 

2. Derivative action
 
A derivative action is found in section 347 of the Companies Act and it reads as follows:
 
“(1) A complainant may, with the leave of the Court initiate, intervene in or defend a proceeding on behalf of the company.
 
(2) Proceedings brought under this section shall be brought in the company’s name.”
 
There is a crucial difference that can be found in a derivative action – it is an action you bring for the company and any damages you manage to win goes to the company. This means that unlike the oppression remedy where you sue because your interests as a shareholder has been affected, the derivative action is an action you bring when you realised that the company has been affected by the wrongdoing of directors and any remedy that is awarded by the court goes back to the company
 
In essence, should you choose to bring a derivative action, you are doing so out of the good of your heart and the immense love you (may) have for the company. If you recall the case of Foss v Harbottle rule that was discussed above (which is known as the proper plaintiff rule for you curious birds out there), a derivative action is basically to circumvent scenarios where a company refuses to sue itself for wrongdoings. 
 
This provides you, as a shareholder, with the remedy to right a wrong that has been to the company. The Companies Act sets out all the procedures that you have to follow in bringing a derivative action claim but in a nutshell, they are as follows:
 
1. You have to apply for leave (permission) from the court to bring a derivative action
2. You need to give the directors a notice in writing of your intention to apply for leave from the court at least 30 days before you do so
3. If the court grants you leave, you have to initiate the action within 30 days
 
The court will grant you leave to continue a derivative action if they think that you are acting in good faith and if on the face of it, the derivative action appears to be for the best interests of the company. 
 
However, at the end of the day, nothing protects your rights better than one simple thing...
 

You need to know what is going on in the company

Image from memegenerator.net 

At the end of the day, the law can provide directors with various duties and you, the shareholder, with various remedies. But if you just take a hands off approach in caring for the companies that you invest in, then no amount of law can help promote good accountability. Shareholder activism is an important part in keeping directors accountable and preventing them from acting beyond their powers. 

So, on this note, invest wisely and remember to consult your lawyer if things go awry. 

 

 
 
 
 
 
This article is for informational purposes only and should not be taken as legal advice. Every situation is unique and dependent on the facts (ie, the circumstances surrounding your individual case) so we recommend that you consult a lawyer before considering any further action. All articles have been scrutinized by a practicing lawyer to ensure accuracy.
Tags:
companies act 2016
shareholder remedies
derivative action
oppression remedy
director duties
Propsocial banner

56

Shares