Fiduciary Duties of Directors

2 February 2017

One of the duties that company directors need to comply with is fiduciary duties. This is so as company directors are said to be in a fiduciary relationship with the company. When directors are in a fiduciary relationship with the company, they are prohibited from doing any acts deemed prejudicial to the company. In other words, by applying the judgment in Hospital Products Ltd v United States Surgical Corpn, directors cannot and should not use his position to receive personal gains. The traditional view is that the directors owed a fiduciary duty to the company.This is the reason why directors are prohibited from receiving personal gain from their status as directors in a company.

The nature of the relationship i. e. fiduciary relationship between directors and a company rendered the directors to act for the best interest of the company. This point can be supported by looking at Section 132(1) of the Companies Act 1965 which states that a director must act in bona fide when exercising his powers for a proper purpose and that he must act in the best interest of the company.Nonetheless, there is an issue of whether the directors also owed fiduciary duties to other persons besides their fiduciary duties to the company. In relation to shareholders, the court decided in the case of Percival v Wright that the directors did not owe any fiduciary duty to disclose the negotiations made when they intended to purchase shares. However, this case also did not lay down any rules that directors of a company can never be in fiduciary relationship with shareholders.

Fiduciary Duties of Directors Essay Example

For instance, in Allen v Hyatt, the court held that the directors in the case had placed themselves in fiduciary relationship with some of the shareholders in an agency capacity. This case shows that even though in Percival v Wright the directors did not owe any fiduciary duties to the shareholders, the possibility that there exist a fiduciary relationship between directors and shareholders of a company cannot be denied. Apart from shareholders, the directors may also have a fiduciary duty to the employees.However, the situation in Malaysia as to the directors’ fiduciary duty to the employees is still unclear as according to Chan and Koh on Malaysian Company Law, the Companies Act 1965 ‘does not expressly provide that the directors of a company are to have regard to the interest of the company’s employees’ in the performance of their functions’. In exercising their fiduciary duties to the company, there are scopes that the directors need to act in accordance with.The scopes of the fiduciary duties are yet to be codified by the Malaysian legislators but the principle founded in cases based on the common law can be applied by virtue of Section 132(5) of the Companies Act. Section 132(5) of the Act reads, ‘this section is in addition to and not in derogation of any other written law or rule of law relating to the duty or liability of the directors or officers of the company’ and the word ‘rule of law’ can be interpreted as including the rule under the common law.

Firstly, the directors are in a duty to act in the best interest of the company.This means that in exercising their powers as directors of the company, they must put the company first in all acts that they intend to do. Section 132(1) of the Companies Act reaffirms this duty as it states, inter alia, that a director of a company must exercise his powers in the best interest of the company. To illustrate this point, the case of Re Smith and Fawcett Ltd can be referred to. In this case, Lord Greene M. R. held in his judgment that the directors must act in good faith in what they consider is in the interest of the company.

What his Lordship tried to say is that the director must act for the best interest of the company and what is deemed as the best interest of the company is for the directors to consider and not for the court. Another case that can be looked into is Re W & M Roith Ltd. In this particular case, Roith, a company director, had entered into a service contract with his company for the purpose of providing a pension for his wife in the event of his death and without taking into consideration whether the contract was for the benefit of the company.The court held that the whole object of the contract was not to be binding on the company as it was to benefit Mrs Roith and not the company. By analyzing this case, it can be seen that as Roith did not act for the best interest of the company as he acted for the interest of his wife, he had breached his fiduciary duty that is duty to act in the best interest of the company. That is why in this case, the court held that the contract was not binding to the company.Next is the duty to act for a proper purpose and not to act for a collateral purpose.

Again, by looking at the provision of the Companies Act namely section 132(1), it states that a company director must act for a proper purpose. This duty is mainly concerns on the power of directors to issue new shares in an attempt to avoid takeover bids. However, the power of directors to issue new shares is restricted under section 132D. The provision provides that directors may issue new shares only with prior approval of the members in general meeting.In Hogg v Cramphorn Ltd & Ors, the articles of the defendant company empowered the directors to allot or dispose of the shares to persons on several terms and conditions and at times which the directors think fit. When there is an attempt to takeover the company, the directors worked out a scheme whereby 5707 new preference shares were allotted to a trust newly established for the benefit of the company’s employees. The board of directors made a loan of ? 5705 out of the company’s funds free of interest to the trustees to enable the trustees to subscribe and pay for the shares.

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