Directors, whether executive or non-executive, owe fiduciary duties to the company. Some of these fiduciary duties have been statutorised under the previous Companies Act 1965 ("CA 1965") as well as the Companies Act 2016 ("CA 2016") which is currently in force.
In Desacorp Sdn Bhd v Wong Hou Lianq & Ors and another appeal [2024] 3 MLJ 379, the issue was whether there was an automatic breach of a Director’s fiduciary duty to act in the best interests of the Company pursuant to Section 132 of the CA 1965 (presently Section 213(1) of the CA 2016) once breach of the fiduciary duty to disclose pursuant to Section 131 of the CA 1965 (presently Section 219 of the CA 2016) has been established.
Brief Background Facts
The dispute arose due to contracts between Desacorp Sdn Bhd ("Desacorp") and two other companies. One with Aspire Sdn Bhd ("Aspire") and the other with Demeter Sdn Bhd ("Demeter").
The contract between Desacorp and Aspire was signed by Neil for Desacorp and Kathryn for Aspire ("Aspire Agreement").
The contract between Desacorp and Demeter was signed by Mimi and Wong Kie Nie ("WKN") for Desacorp and Neil and Kathryn for Demeter ("Demeter Agreement").
Neil was a Director of Desacorp, Aspire and Demeter as well as a substantial shareholder of Aspire and Demeter at the material time whereas Kathryn was a Director and substantial shareholder of Aspire and Demeter.
Aspire and Demeter terminated the Aspire agreement and the Demeter Agreement respectively before filing a claim to seek a declaration that the agreements were terminated and to recover monies for work performed.
Desacorp disputed the claim and counterclaimed that the agreements were entered into in breach of Sections 131 and 132 of the CA 1965, rendering the agreements null and void. Desacorp also counterclaimed against Neil and Kathryn (as WKN’s representative) for breach of fiduciary duties.
High Court
The High Court found that Neil and WKN breached their statutory duty by failing to disclose their interests to Desacorp's Board before executing the Aspire Agreement and Demeter Agreement which is a strict and mandatory duty and that Neil and WKN was held to have a direct or indirect interest in the Aspire Agreement and Demeter Agreement due to their family relationship. However, the High Court decided that since Desacorp did not act to void the contracts upon discovering the breach, Desacorp is estopped from challenging the validity of the Aspire Agreement and Demeter Agreement. Ultimately, neither Neil nor WKN was found to be in breach of their fiduciary duties owed to Desacorp.
Court of Appeal
On appeal, the Court of Appeal held, inter alia, that:
No Automatic Breach of Section 132 of the CA 1965
A breach of Section 131 of the CA 1965 does not automatically amount to a breach of Section 132 of the CA 1965. Both sections are separate and distinct duties of a Director.
No Breach of Section 132 of the CA 1965
Further, no breach of Section 132 of the CA 1965 was found for the following reasons:
Ratification
Non-disclosure made the agreements voidable rather than void. This means that Desacorp had to act to void the agreements. Since Desacorp had knowledge of the Neil’s and WKN’s interest and by choosing not to void the agreements, the agreements were ratified.
Estoppel
Documents from previous dealings between the parties including drawdown letters and cheques indicated that Desacorp and its other directors knew that Aspire and Demeter were Desacorp’s contractors. Accordingly, the Court of Appeal held that Desacorp is estopped from challenging the validity of the Aspire Agreement and Demeter Agreement due to prior knowledge.
Higher Contract Rate. Marked up Management Fee and Additional Costs
Desacorp contended that respondents had not acted in the best interest of the company due to Desacorp having to bear additional costs arising out of the 25% higher contracting rate in the Aspire Agreement and the RM200,000 monthly marked up management fee in the Demeter Agreement.
However, the higher rate in the Aspire Agreement was successfully accounted for by the respondents as being the market rate at the material time whilst the previous contracting fee was no longer commercially viable.
In addition, having reviewed the marked up management fee in the Demeter Agreement, the Court of Appeal found that the management services provided by Demeter offered a more extensive range of services.
Having considered all the circumstances including the points above, the Court of Appeal found that the additional costs arising from both agreements were justified and neither Neil nor WKN had breached their statutory duty as Director under Section 132 of the CA 1965.
Crucially, the Court of Appeal recognised that the “objective of improving the estate of Desacorp had always been at the forefront of both WKN’s and Neil’s minds and not as a medium of profiteering”.
Key Takeaway
Acceptance of wrongful conduct may operate to prejudice a claim for breach of fiduciary duty.
Although certain actions (including non-disclosure of the Director’s interest) taken by a Director may appear prejudicial, the Court may not be too quick to find that a Director did not act in the best interest of the Company especially if valid reasons can be provided to show the commercial intention of the parties and justify the action of the Directors at the material time.
This article is authored by Edel Siva, currently a pupil of Messrs. Kuruvilla, Yeoh & Benjamin.
This article is intended to provide general information in summary form on legal topics, current at the time of first publication. The contents should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Formal legal advise should be sought in particular matters.
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