Directors duty of care, skill and diligence under common law & Companies Act 1965.

Prepared by : Najihah

Introduction Directors are the alter ego of a company which is a persona ficta (Artificial Person). Directors have duties that must be carried out in proper manner ; one of them is duty not to be negligent. This is known as duty of care, skill and diligence.

COMMON LAW (TRADITIONAL APPROACH) *Re Brazilian Rubber Plantation & Estate Ltd (1911) 1 Ch 425 Facts: Four directors who knew absolutely nothing about rubber and another aged 75 and deaf were appointed to be directors of a rubber company. The company made losses from rubber speculation. The court held that the directors had not breached their duty of care. Neville J: A directors duty has been laid down as requiring him to act with such care as a reasonably to be expected from him, having regard to his knowledge and experience. He is, I think, NOT bound to bring any special qualifications to his office. He may undertake the management of a rubber company in complete ignorance of everything connected with rubber, without incurring responsibility for the mistakes which may result from such ignorance ; while if he is acquainted with the rubber business he must give the company the advantage of his knowledge when transacting the companys business. (NO special requirement was required)

*Re City Equitable Fire Insurance Co Ltd Facts : The company had lost $ 1200000 owing partly to the failure of certain investments mainly to the frauds of the chairman of directors, Bevan. In this action the liquidator sought to make the other directors liable for the losses on the ground of negligence. The action failed because the provision in the articles exempted the directors from liability apart from losses caused by their own wilful neglect or default. Note : According to the qualification of the person. Use subjective standard ; which operates differently depending on a particular person. For example : Lawyer : Subjective to the lawyer Hawker : Subjective to the lawyer

Principles A director need not exhibit in the performance of his duties a greater degree of skill than may be reasonably be expected from a person of his knowledge and experience. A director is not required to give continuous attention to the affairs of the company and his duty arises intermittently while performing his functions at board meetings. A director is entitled to delegate his duties. In the absence of grounds of suspicion, the director is justified in trusting the official ; to whom his duties were delegated to perform such duties honestly.

The test used is subjective test. There is no minimum reasonable amount of skill being required. Director with no specific skill or expertise need not be accountable and a director with little or no skill or little or no experience stood a better chance of escaping liability and it did not encourage directors to acquire skills or experience.

DEVELOPMENT
*Dorchester Finance Co Ltd v Stebbing (1989) BCLC 498 Facts : A money lending company had 3 directors, Stebbing, Parsons and Hamilton. Stebbing worked full time for the company; the other two paid very little attention to it and visited its premises only rarely. They signed blank cheque forms at Stebbings request and he used these to make loans that were illegal and accordingly irrevocable. No board meetings were held. All three directors were held liable for the losses. Foster J : The signing of blank cheques by Hamilton and Parsons was in my judgment negligent, as it allowed Stebbing to do as he pleased. Apart from that they not only failed to exhibit necessary skill and care in the performance of their duties as directors, but also failed to perform any duty at all as directors of Dorchester. In the Companies Act 1948 the duties of a director whether executive or not are the same.

*Re DJan of London Limited (1994) BCLC 561

Facts: The liquidator alleged that the respondent Mr DJan was negligent in completing and signing a proposal form for fire insurance with Guardian Royal Exchange Assurance. As a result, the insurers repudiated liability for a fire at the companys premises in Cornwall which had destroyed stock said to be worth some 174000. The company is insolvent, having a deficiency as regards unsecured creditors about 500000. The liquidator therefore brought these proceeding for the benefit of the unsecured creditors. His lordship gave judgment against D Jan .

Principles Directors have both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the companys business to enable them to properly discharge their duties as directors. Directors are entitled (subject to AOA of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent. However, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions.

*Daniels v AWA Ltd (1995) 13 ACLC 614

AWA Ltd engaged in foreign exchange dealings and an employee , Koval managed these dealings. AWAs senior executives did not put in place adequate internal controls to monitor Kovals activities nor were proper records kept. Kovals unsupervised activities generated large losses but he was able to conceal this from his superiors. Two audits were carried out by AWAs auditors Deloitte Haskins & Sells. The audit partner warned AWA of the inadequacies of internal controls but not of the full extent. AWA sued its auditors for negligence. The auditors claimed contributory negligence on the part of AWA. Held: - Auditors were negligent. - Senior executives and chief executive officer were negligent. They failed to make inquiries of senior management which would have led to better appreciation of the risks and dangers of foreign exchange dealings. - Non executive directors did not breach their duties because they have made inquiries and requested information about the foreign exchange dealings from the senior management and auditors, but the full details were concealed from them. Note : This case led to incorporation of higher standard in our Companies Act 1965.

Principles :
The New South Wales Court of Appeal proposed the following as the minimum standard of care, skill and diligence expected of all directors :

A director must acquire a basic understanding of the business of the company and must be familiar with the fundamentals of the companys business Directors are under a continuing obligation to keep informed about the activities of the company. Detailed inspection of day-to-day activities is not required. What is required is a general monitoring of the companys business affairs. Accordingly, a director should attend board meetings regularly. Directors are not required to audit the companys books, but they should maintain familiarity with the financial status of the company by a regular review of financial statements.

COMPANIES ACT 1965

DEVELOPMENT IN MALAYSIA
In Malaysia, there was a limited statutory recognition of directors duty to show diligence. The old s 132(1) provided that a director shall use reasonable diligence in the discharge of the duties of his office. In 1999, the High Level Finance Committee Report on Corporate Governance recommended that s132(1) should be amended to incorporate the duties of skill and care of directors. In 2007, Companies (Amendment) Act 2007 (Act A1299) was enacted. It came into effect on 15 August 2007. S132(1A) was incorporated into the Companies Act 1965.

S 132 (1A) : Duty of Care, Skill & Diligence

A director of a company shall at all times exercise reasonable care, skill and diligence with (a) The knowledge, skill and experience which may be reasonably be expected of a director having the same responsibilities and (b) Any additional knowledge, skill and experience which the director in fact has.

The first part of the standard is an objective standard which today becomes the minimum benchmark for directors. A director is deemed to have the knowledge, skill and experience which a person carrying his functions should be expected to have. If the director does not meet this standard, the second subjective test need not be considered. Where a director does meet the first objective standard, he may still be liable if he fails to meet the subjective standard in the second part which is based on any additional knowledge, skill and experience which the director actually has.

S132 (1B) Business Judgment

A director is deemed to have made a business judgment if he : 1. Makes the decision in good faith for a proper purpose 2. Does not have any material personal interest in the subject matter 3. Makes the decision based on information given which director reasonably believes to be appropriate under the circumstances 4. Reasonably believes the decision is in the best interest of the company. A director who makes a business judgment is deemed to have met the requirement of duty under s132(1A).

S 132 (1C) & (D) : Reliance on Information

A director may have to rely on information by others in exercising his duties.

S132 (1C) : Director may rely on

1. 2. 3. 4. An officer whom the director believes is reliable and competence A professional or expert retained by the company Another director A committee to the board of directors, where the director is not a member

S132(1D) : In relying on the information, the director must

1. 2. Act in good faith Make independent assessment of the information based on the directors knowledge

S132 ( 1E) : Nominee director

* Nominee director : Representative of shareholders ( Majority shareholders : Nominator). * A nominee director has to act in the best interest of the company. In the event of any conflict, his duty towards the company prevails over that to the person who nominated him.

S132(1F) & (1G) : Delegation

Section 132(1F)
The board of directors is allowed to delegate any power of the board to a committee, director, officer, employee, expert unless such delegation is prohibited by 1. The Companies Act 1965 2. The companys MOA / AOA 3. Members resolution

Section 132(1G)
The directors are not responsible only if the directors believe that 1. The delegatee would have exercised the power in conformity with the duties imposed on the directors 2. The delegatee was reliable and competent

Conclusion Directors standard of care,skill and diligence has been raised up by virtue of Section 132(1A). Currently, there exists a combination of OBJECTIVE & SUBJECTIVE tests to determine whether a director can be held negligent in exercising his duty.
This principle under this provision has been developed by the common law and has been given statutory effect by the said provision. As for Section 132(1B)- (1G) ; these new amendments have introduced additional stricter guidelines to be complied with by the director in order not to be regarded as negligent in discharging his duty.