[ NUR ARFAH BT ABDUL SABIAN 2009810436 CORPORATE

GOVERNANCE ] TAKE HOME TEST OCT 2010

Question:

"Malaysian Corporate Law should follow UK where it takes the position that it's more
important for companies directors to be honest than competent.

Offer your critical view on the above statement and provide justification for your view."

Answer

In discussing the statement given, there is an important provision in our Companies Act 1965
that need a critical analysis as to suggest whether our law need to follow UK law as regard to
position and the requirement of directors. The intended provisions are, section 132(1) and
132(1A) were amended and become into force in Malaysia on 15 August 2007 all together with
other affected provisions.

The new amendment repeals the current statutory provision on directors’ duties that requires a
director to act honestly and use reasonable diligence in the discharge of his duties in section
132(1) of the Companies Act 1965. This is replaced by a new section 132(1) which requires a
director to act for proper purposes and in good faith. Further the new section 132 (1A) had
show the seriousness of our law to the standard of care, skill and diligence which should be
possessed by them.

First and foremost, let’s take a reference to common law position, where an important case, Re
Smith & Fawcett Ltd [1942] did point out that main duty of Directors, where they must exercise
their discretion bona fide in what they consider, not what a court may consider as it is in the
interest of the company. As such, Directors must not exercise their powers for any collateral
purpose. Fiduciary duty of loyalty in common law did comprise of duties to act bona fide for the
interest of the company and exercise powers for proper purpose. The powers given by the
articles to the directors are held in trust for the company and must not be exercise for improper
purpose.

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 [ NUR ARFAH BT ABDUL SABIAN 2009810436 CORPORATE
GOVERNANCE ] TAKE HOME TEST OCT 2010

In our Companies Act 1965, before section 132(1) amended, the old section did state that
fiduciary duty of loyalty of Directors will subject to firstly, act honestly and secondly, use
reasonable diligence. However, it was asserted that there are several mischiefs have occurred
from the old section as regard to the good corporate governance practice. The address mischief
outline by the Lee Swee Sing are concern with the undefined word ‘honest’ and the possibility
that criminal liability only arises if it can be proven that the director is aware that the conduct
is not in the company’s best interest.

According to her, section 132(1) is contrary to the common law position in the sense that at
common law, a director must comply with both, firstly the best interest of the company
requirement and secondly the with the proper purpose test. There is no requirement that the
director had acted fraudulently or with deliberate intent to obtain personal advantage. This can
be illustrated in the case of Kea Holdings Pte Ltd v Gan Boon Hock [2000]. In this case, a
director suggested for orders to be cancelled even though he knew that there were buyers. It
was held by the court that the director had breached his duty to act honestly when he
cancelled the orders. The word honest as defined in the case of Multi-Pak Singapore Pte Ltd v
Intraco Ltd [1994] did stated by the court that the word 'honestly' does not mean that a
director would only be in breach of duty if he had acted fraudulently. It means to act bona fide
in the interests of the company. Therefore, in exercising their discretion, the directors should
only act to promote or advance the interest of the company.

Later after the amendment, the new section 132(1) state that, a director of a company shall at
all times exercise his powers in good faith in the company’s best interest and for proper
purpose. By reading the provisions, it understand that, this new provision suggest that, if the
director exercise his power in good faith for companies’ best interest but if he did it for
collateral purposes, he will still liable under this new law. This new amended law did similar
with common law position where the emphasize point is on the duty of a director to act in bona
fide for the companies interest and in proper purpose. Both laws suggest that there is no need
to prove dishonest intent because the word ‘honestly’ is replaced with the statement ‘exercise

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 [ NUR ARFAH BT ABDUL SABIAN 2009810436 CORPORATE
GOVERNANCE ] TAKE HOME TEST OCT 2010

his powers for a proper purpose’ and in the ‘best interest of the company’. The new section
132(1) requires the Directors to maintain their honesty to the companies in which the test that
will apply would be the good faith test and the proper purpose test as in the common law
practice.

However, our companies act did add new provision as regard to the duty of care, skill and
diligence that must observe by the Directors. In this section Section 132(1A) Companies Act
1965 provides that a director of a 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 section requires that when a director has additional knowledge, skill and experience, that
director will be assessed against a reasonable person who has that additional knowledge, skill
and experience. The actual knowledge and experience of a director is to be considered in
addition to the minimum standard. The old section 132(1) is silent as to the standard of care,
and skill required of a director. It merely prescribes that a director has a duty to act honestly
and use reasonable diligence. Before the assertion of this new section, the duty to act with care
and skill is derived from common law. For example, the leading decision at common law
position that become reference is the case of Re City Equitable Fire Insurance Co Ltd (1925)
where in this case the subjective test on the standard of care of directors are applied. However,
the problem raise with the test is that there is no minimum objective standard required of a
director. Since the subjective standard of care varies according to the skill a director has, a
director with no specific skill or expertise need not be accountable.

Therefore, as regard the issue whether Malaysian Corporate Law should follow UK where it
takes the position that it's more important for companies directors to be honest than
competent, in my opinion, we should stick with our law where we did stipulated that both
requirements of the provisions concerning of honesty and competent elements are at same

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 [ NUR ARFAH BT ABDUL SABIAN 2009810436 CORPORATE
GOVERNANCE ] TAKE HOME TEST OCT 2010

level that need to be observed equally. Both requirements are very important to be practice in
order to maintain our Malaysian corporate governance with the globalization need in the
national and international market. The era of digital and information society did requires
Directors to observe not only their loyalty and honesty in acting for the best interest of the
companies, but also requires them to have certain standards of care, skill and diligence in
ensuring that their duty in steering the companies maintain in the right path in making profits
and benefit to all their companies stakeholders.

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