DIRECTORS; THEIR DUTIES TO THE
COMPANY AND BEYOND
The terms ‘directors’
connotes person who give directions, managing, and operates. To put the terms
directors in a context of a company, we may say that a director is a person who
manage and operates the day-to-day management of a company. Section 4 of the
Companies Act 1965 (“CA 1965”) defines a
director as follows:-
“director”
includes any person occupying the position of director of a corporation by
whatever name called and includes a person in accordance with those directions
or instructions the directors if a corporation are accustomed to act and an
alternate or substitute director”
However, a director
cannot arbitrarily manage a company to its whim and fancy but to acknowledge
his duty towards the company. A director must act in the best interest of the
company. Section 132 of the CA 1965 stated that:-
A
director of a company shall at all times exercise his powers for a proper
purpose and in good faith in the best interest of the company.
Section 132 of the CA
1965 gives the impression that a director has the duty to the company and the
company alone and no one else. Not just a duty, a director owes a fiduciary
duty to the company as enunciated in the case of Great Eastern Rly v Turner
“The
Directors are the mere trustees or agents of the company, trustees of the
company’s money and property, agents in the transactions which they enter into
on behalf of the company”
Fiduciary duties arise
whenever there is a trust relationship. A Director is an agent to the company;
being the mind and soul, flesh and muscle of the company. Such great powers may
tempt to corrupt a director in abusing their powers.
“The
fiduciary duty may be more accurately expressed by saying that he is under
obligation not to promote his personal interest by making or pursuing a gain in
circumstances in which there is a conflict or a real or substantial possibility
of a conflict between his personal interests and those of the persons whom he
is bound to protect”.
Hospital
Products Ltd v United States Surgical Corps
It is an eschewed notion
if we concentrate or confine the notion ‘best interest of the company’ to means
profit of the company as the company consist of many stakeholders. A second
look at the CA 1965, the law also imposes duties to other stakeholders of the
company.
The traditional view is
that the director must act on the best interest of the company even to the
contrary of the instruction of the shareholders. The shareholder appoints the
Directors and may remove the Directors from the Boards of Directors. With their
own career is on the line, the Directors may have a conflict of interest to
please the shareholders at the expense of the company. Hence, the directors may
not be able to live up to the expectation of acting solely on the best interest
of the company.
Apart from the
shareholders, in the event that the company is in the process of winding up,
the director may owe a duty to the company’s creditors. The general principle
is that the directors owe no duty to the current or future creditors of the
company. However, as the company is insolvent or nearing insolvency, creditors
may have a direct or indirect interest in the company. The duty was laid down
by the court in the case of Kinsela v
Russel Kinsella Pty Ltd (in liq) when the court held that:
“In
a solvent company, the proprietary interests of the shareholders entitle them
as a general body to be regarded as the company when questions of the duty of
directors arise. But where a company is insolvent the interests of the
creditors intrude. They become prospectively entitled, through the mechanism of
liquidation, to displace the power of the shareholders and directors to deal
with the company’s assets. It is in a practical sense their assets and not the
shareholders’ assets that, through the medium of the company, are under the
management of the directors pending either liquidation, return to solvency, or
the imposition of some alternative administration”.
I also would like to draw
the attention to the new trend of ideas that a director may also owe a duty to
the employee. This duty is not a statutory duty, as the CA 1965 does not
provide duty of the Directors to the employee. However, this duty is arguably a
moral duty as a director when discharging its duty in managing the company,
which have a direct impact to the livelihood of the employee. We may look at
the Enron for example when the directors are acting on their personal interest,
which caused the company to collapsed. Thousands of workers lost their job and
their life savings. Hence, we may argue that a director also must act on the
best interest of the employee.
In conclusion, a director
under the law must act on the best interest of the company. However, a company
consists of many stakeholders. These stakeholders have their own peculiar
interest that they jealously want to protect. To avoid duties to other
stakeholders may have an adverse impact on the survival of the company, which
may at the end negate the director’s duties to the company. It seems that the director have to balance
the interest among the stakeholders and not pick and choose the interest of one
stakeholder to another. A director seems to be always have to do a ‘trapeze’,
balancing the interest of various parties (including their won). I also observe
that there are trend to include consumers and society as one of the
stakeholders in a company. Perhaps in the future, the law may impose a duty to
the directors to protect the interest of consumers and society as well.
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