Directors Duties : the development of the standards of duties of care, skill and diligence

2. The Development of Directors’
Duties of Skill, Care & Diligence.
UUUK 6265, Advance Company Law
Siti Fairuz Nor Azhar (P73969)

3. Contents
1.Introduction
2.Background
3.Directors : Development of its duties
4.Conclusion

4. Contents
1.Introduction
2.Background
3.Directors : Development of its duties
4.Conclusion

5. Introduction
<Why choose this topic?>
Interesting because in my opinion, directors, especially the from the private sectors,
specifically expatriates directors or directors from small company, tends to overlook
the importance of recognizing the statutory requirements required of them.
<Objective>
To identify the standards and the degree of skill, care and diligence that is required of
a director.
<Purpose>
1. The understand the linkage between the principles of corporate governance and
the directors’ duties.
2. To see the development and changes that took place in section 132 of the
Malaysian Companies Act 1965.
<Target>
To achieve the above objective and target, we need to see the historical developments
of the concept of the duties of the directors.

6. Contents
1.Introduction
2.Background
3.Directors : Development of its duties
4.Conclusion

7. Background
1. The concept of Corporate Governance:-
Dennis & McConnell, 2003 : “a set of mechanism to ensure that outside
investors get a fair return of their investment.”
Carlson, 2001 : “Good corporate governance exists when they address two
important integral aspects of corporate governance, i.e; accountability &
business prosperity.
2. The elements in Corporate Governance:-
Independence of the Directors and the Board of Directors as the caretaker of
the interest of the shareholders and other stakeholders;
Accountability:- those that hold the controlling power of the company should
be made accountable towards protecting the shareholders and other
stakeholders interest.
Roles & responsibility:- the directors need to understand the roles and
responsibility in order to make the right decisions in the best interest of the
company.
Integrity & ethical behavior:- the legal & ethical norms should act as a guide
for establishing & maintaining stakeholders relationships between
responsible and irresponsible notion of profit seeking.
Transparency:- good corporate governance should ensure that timely &
accurate disclosure is made so as to make relevant information easily
accessible by the shareholders.

8. Sample of Corporate Governance Model
Corporate
Governance
Accountability
Effectiveness
Shareholders
Board
Company
Stakeholders
Assurance
Assurance*source: Corporate Governance Insight, KPMG, 2001
Aspiration: that good corporate governance can be achieved via synergistic nexus between the
board of directors, management, shareholders and other stakeholders such as employees,
customers, creditors and the community.

9. Sample of CG structure in HMSB
CEO
HEAD OF
DIVISION
HEAD OF
DIVISION
HEAD OF
DIVISION
HEAD OF
DEPARTMENT
HEAD OF
DEPARTMENT
HEAD OF
DEPARTMENT
OPERATIONOPERATION OPERATION
ⓆDo you think this easy
governance structure can lead
the company’s operation to be
efficient, fair and transparent?
Absolutely Not!!

10. Sample of CG structure in HMSB
CEO & MD
HEAD OF
DIVISION
HEAD OF
DIVISION
HEAD OF
DIVISION
HEAD OF
DEPARTMENT
HEAD OF
DEPARTMENT
HEAD OF
DEPARTMENT
OPERATIONOPERATION OPERATION
DIVISION
REPORT
CHECKLIST
DIVISION
REPORT
CHECKLIST CHECKLIST
DIVISION
REPORT
CODE OF CONDUCT
HCG SECRETARIATCOMPANY
REPORT
COMPLIANCE
OFFICER
BUSINESS ETHICS
COMMITTEE
ETHICS
PROPOSAL LINE
REGIONAL AUDIT
Corporate Governance is about alignment of the shareholders’, the board of directors and the
management interests, also taking into consideration of the stakeholders’ rights in the company. It is
encourage that the shareholders and the board members engage in frequent dialogue about CG on
frequent basis so that the interest of the company is well taken care of.

11. Contents
1.Introduction
2.Background
3.Directors : Development of its duties
4.Conclusion

12. Malaysian Code of Corporate Governance
1996:-
The ROC (now
CCM) had
introduced a
Code of Ethics for
directors
1995:-
Securities
Commission
started disclosure
requirement for
primary & public
listed companies
1993:-
The Securities
Commission Act
& Future Industry
Act was
introduced
1989:-
The Banking &
Financial
Institution Act
was introduced
2000:-
The Malaysian
Code of
Corporate
Governance was
first issued
1999:-
The High Level
Finance
Committee
released 70
recommendations
about CG
practices in M’sia
2012:-
Malaysian Code
of Corporate
Governance was
updated
2007:-
The C/A 1965
was amended
and the revised
Malaysian Code
of Corporate
Governance was
issued
1998:-
The
establishment of
National
Economic Action
Council & the
High Level
Finance
Committee
1997:-
The Financial
Crisis & financial
fraud activities
2003:-
CCM announced
to amend the C/A
1965 & formed
Corporate Law
Reform
Committee

13. Malaysian Code of Corporate Governance
Malaysian Code of
Corporate
Governance
Part I
Contains 13 principles
of good corporate
governance
▪ Board of Directors
▪ Directors’ Remuneration
▪ Shareholders
▪ Accountability & Audit
Part II
Contains 33 Best
Practices for
Company
▪ Board of Directors
▪ Accountability & Audit
▪ Relationship with
shareholder
Part III
Exhortations to other
participants
Its addressed to
investors, especially to
institutional shareholders
and auditors
Part IV
Contains Explanatory
Notes & mere best
practices
Provides explanatory
notes to Part 1-3
2000:- the MCGG was first issued → 2007:- the MYCG was revised to strengthen the roles and
responsibilities of the Board of directors, audit committee and internal audit function → 2012:- the MYCG
focuses on strengthening board structure and composition recognizing the role of directors as active &
responsible fiduciaries.

14. In A Nutshell: Directors’ Roles & Responsibilities
Before appointment After Appointment & During tenure
After resignation or
disqualification
1. Appointment committee
2. Remuneration Committee
3. Appointment as director
4. Induction or training for the new
director
5. Director obligations:-
a) Understand;
b) Meet the expectations;
c) Review and strategic planning
6. Think critically
7. Ask questions:-
a) To whom I owed my duties?
b) What is the duty of skill and care?
c) What is the duty of good faith;
d) How much can I delegate and rely on others?
e) What is the business judgment rule?
f) What is position of conflict of interest and insider trading?
g) What must I disclose?
h) What must I do to make sure I comply with the statutory
requirements?
8. Understand the potential liability under other acts @ risk
management and internal controls.
9. Special circumstances:-
a) What is the position if the company is insolvent?
b) What is the position that is designated with take overs?
c) To whom should I notify first if company is near insolvent?
d) What is my defense?
e) In what situations will the corporate veil be lifted?
10. Is there insurance to cover
me?
11. What situations justify
disqualification?
12. How do I resign?
13. Will I still be liable after
disqualified or after resigned?
Before appointment After appointment On going duties Self Defense for Directors

15. DIRECTORS’ DUTIES
Fiduciary duties of
loyalty and good faith
Care, skill and diligence
Duty to
act bona
fide in
interest
of the
company
Duty to
use
powers
for
proper
purpose
Duty not to
fetter
discretions
Duty to
avoid
actual and
potential
conflict of
interest
Duty to
ensure
integrity of
financial
information
Directors’ Duties under the Common Law

16. DIRECTORS’ DUTIES
Fiduciary duties of
loyalty and good faith
Care, skill and diligence
Duty to
act bona
fide in
interest of
the
company
Duty to use
powers for
proper
purpose
Duty not to
fetter
discretions
Duty to
avoid actual
and
potential
conflict of
interest
Duty to
ensure
integrity of
financial
information
S.132(1):-
Duty to act
for proper
purposes
and in good
faith
S.132E:-
Related
party
transactions
S.132(2):-
Duty not to misuse
property, information,
opportunity or
competing with
company
S.131(1), S.131A,
S.134 & S.135 :-
Disclosure of interest
in contracts, property,
offices
S.132(1A):-
Duty to use care and
reasonable diligence
subject to business rule
(S.132(1B)) and reliance
on others (S.132(1C).
Directors’ Duties under the Companies Act 1965

17. Problem Analysis
Situation Analysis:-
1.In Re Cardiff Savings Bank, Marquis of Bute’s Case (1892) 2 Ch 100:-
The Marquis De Bute assumed office replacing his late father as President at the age of 6 months old. Under the
Bank’s constitution, the bank is managed by the president and the managers. But in reality, the bank is managed
by bank officials. One of the bank officials committed fraud which resulted in the bank failure.
The Marquis was 39 years old at that time and he only attended one meeting once.
The liquidators brought an action against the Marquis for neglect of his duties as president of the bank.
Court held: The Marquis took no part in the conduct of the business by the bank & therefore, cannot be made
responsible for the loss suffered by the bank.
2.In Re Brazilian Rubber Plantations and Estate Ltd. (1911) 1 Ch 425:-
Neville Judge states that: “for a director, the degree of care that he has to have or the reasonable care that he is
required to practice is to be “measured by the care of an ordinary man might be expected to take in the
circumstances on his own behalf.”
Problem Analysis:-
1. A director that is not involved in the operation of the business can simply be excused from liable based on the
above principle, hence what about the rights of the shareholders or the creditors and what about their
protection?
2. Basic rule is that directors are answerable to the shareholders and the company, can they simply deny liability for
the negligence?
3. Is the above standard of care i.e.; “of an ordinary man” suitable to be applied in the developing company
principles and law (which is becoming more and more complex and multi-disciplinary?)

18. In A Nutshell : The Development of the standards
The Subjectivity Test The Objectivity Test The objectivity and subjectivity test
1. In Re City Equitable Fire
Insurance Co. Ltd (1925):-
a) A director need not exhibit , in
the performance of his duties,
a greater degree of skill than
may be reasonable expected
from a person of his
knowledge and experience.
b) A director is not required to
give continuous attention to
the affairs of the company
and his duty arise
intermittently while
performing his functions at
board meeting.
c) 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.
2. In Dorchester Finance Co. Ltd
v Stebbing (1989):- applied
the subjectivity test and found
the directors negligent.
1. In Re D’Jan (1994):-
The duty of care owed at common law is
accurately stated in s.214 (4) of the Insolvency
Act A986. It is the conduct of a reasonable
diligent person having both:-
a) The general knowledge, skill and
experience that may be reasonable
expected of a person carrying out the same
functions as are carried by that director in
relation to the company; and
b) The general knowledge, skill and
experience that the director has.
2. In Daniels v Anderson (1995) @ AWA:-
a) A director must acquire a basic
understanding of the business of the
company and must be familiar with the
fundamentals of the company’s business.
b) Directors are under continuing obligation
to keep informed about the activities of the
company.
c) Detailed inspection of day-to day activities
is not required but what is required is
general monitoring of the company’s
business affairs.
d) While directors are not required to audit
the company’s book, they should maintain
familiarity with the financial status of the
company by regular review of the financial
statements.
Director Director
vs.
Director Director
vs.
Special skill etc: accountant
1. The United Kingdom Company Law Review proposed
three options in relation to the standard of care
required of a company directors:-
a) The first option specified a subjective standard of care
where the director’s duty is measured against a
reasonable person having the director’s skill and
experience;
b) The second option specified a mixed test of an
objective and subjective standard
c) The third option specified an objective standard where
any of the director’s skill will be ignored.
2. Thereafter, the UK Companies Act 2006 at s.174:- the
double threshold (item b) is adopted i.e; using both the
objective and subjective test approach.
3. Australia :-S.180 of the Australian Corporations Act
provides that in determining what standard of care will
be exercised by a reasonable person, regards will be
given to the nature of the company, nature of the
decision and the position and responsibility undertaken
by that director.
4. Singapore:- S.157 of the Singapore Companies Act
specifically places an obligation on directors to use
reasonable diligence when discharging their duties in
the office. Breach of this section will expose the
director to civil liability and penal sanctions.

19. The approach in Malaysia Companies Act 1965
Pre 2007:-
Section 132 of the C/A
1965:- “ A director shall at
all times act honestly and
use reasonable diligence in
the discharge of the duties
of his office.”
Note:-
1. the above section is
silent on the degree of
skill & care that is
required for directors
to exhibit;
2. The High Level Finance
Committee had
recommended that
section 132 (1) should
not be amended as
they do no want to
codified the subjective
standard of care that
was introduced in Re
Equitable Fire
Insurance.
2003:-
1. The CLRC thinks otherwise,
that the section 132 should
be amended because:-
a) The subjectivity test is too
flexible which its application
will varies according to the
skill that a director brings to
the office; which can create
some sort of an excuse for a
director that has no skill or
expertise to be made
accountable merely because
there is no minimum
objective standard of care
that is required of him.
b) By having & codifying the
standards, this approach is
targeted to encourage for
the directors to be proactive
and not passive and to at
least have the relevant skills
and know how of the
industry in which his
company is operating.
2007:-
Section 132 (1) was amended
& section 132 (1A) was
introduced.
S.132(1):- “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.
S.132 (1A):- A director of a
company shall exercise
reasonable care, skill and
diligence with:-
a) The knowledge, skill and
experience which may be
reasonable expected of a
director having the same
responsibilities;
b) Any additional knowledge,
skill and experience which
the director in fact has.
The new section follows s.174 of the UK Companies Act 2006. Para (a) sets out the objective standards and
para (b) sets out subjective standards.

20. Contents
1.Introduction
2.Background
3.Directors : Development of its duties
4.Conclusion

21. Conclusion
PROPOSED BILL COMPANIES ACT 1965
Duties and responsibilities of directors
211. (1) 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.
(2) A director of a company shall exercise reasonable care, skill and
diligence with –
a) The knowledge, skill and experience which may reasonable be
expected of a director having the same responsibilities;
b) Any additional knowledge, skill and experience which the
director in fact has.
(3) A director who contravenes this section commits an offence and
shall, upon conviction, be liable to imprisonment for a term not
exceeding ten years or a fine not exceeding three million ringgit or to
both.
Section 132. As to the duty and liability of officers
(1) 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.
(1A) 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 has.
No provision in the existing Act.
With the implementation of new laws into the country such as the Competition Act 2010, the Whistleblower Act 2010 and the
Personal Data Protection Act 2010, the directors need to be on alert as they are subjected to potential risks of being liable if their
acts or company are found to be in contravention of these laws. The new laws such as mentioned above are very aggressive in the
sense that they have statutory powers to make the directors personally liable and also maybe be subjected to imprisonment.
For example, under the Competition Act 2010, they have quasi-judicial power to impose penalty on a company that conducts
anti-competitive activities or the Competition Commissioner can also made a direction and request the shareholders of a
company to remove any director that is found guilty of approving anti-competitive acts.
In the meantime, the Companies Act 1965 is also going through another round of amendments and are in the finalization stage.
One of the related sections that are proposed for amendment is Section 132 of the Companies Act 1965.
The comparison of the proposed amendment and the current section can be seen at below table:-

22. Conclusion
Disadvantages of not observing the
statutory requirements when carrying out
duties as a director:-
1. Passive directors will not be able to rely on
the defenses accorded in the Companies Act
1965.
2. If the proposed draft Companies Bill 2013 on
breach of the directors’ duty and
responsibilities is enforced, the director who
contravene the section commits an offence
and shall upon conviction, be liable for
imprisonment for a term not exceeding 10
years or fine not exceeding RM3.0 million or
both.
3. The company will lose its appeal to potential
investors as the issue of transparency is being
doubted.
Advantages of observing the statutory
requirements when carrying out duties as a
director:-
1. Directors who observe the recommendations
made by the corporate governance will
observe the statutory requirements and will
be able to use the BJR or Reasonable Reliance
Defenses to protect them from being liable or
disqualified.
2. Compliance will not be subjected to any civil
suits or penal sanctions.
3. By implementing corporate governance, the
company will be able to grow healthy and
sustain longer as the investors are confident
with the company.
4. Potential creditors will not turn away from
agreeing to provide loans since they know
that the financial status of the compliance
company is strong and able to pay back the
loans.

23. THANK YOU