Changes to the Companies Act 1965

There are many major changes to the Companies Act 1965 during the Companies (Amendment) Act 2007 which came into force in 15th of August year 2007. The amendments falls into a few categories which involve the [1] :

Directors and officers (Section 131, S132, S132A, S132B, S132C, S132E, S134)

Meeting and proceedings (Section 145 and S145 A)

Accounts and audit (Section 167A, S172A, S174, S174A)

Of all the amendments, only certain amendments involved the roles and responsibilities of company directors, which are section 131 and section 132.

Reason for Amendment

The reason for keeping amendment Company Act is to fulfill the changing of the economic restructure and business environment. The amendment is still not enough to fulfill the faster changing of economic growth and business structure. Protection the interests of the investors and other shareholders is the main purpose for amending the Companies Act. Concurrently, new amendment is one of the methods to avoid fraud or occupational abuse in management of a company. In addition, there had a lot of companies collapsed in year 1997. A lot of companies went into bankruptcy and Malaysia’s economic has been affected. Thus, the duties and roles of directors would be questioned when this situation happened. This was because the duties and roles of a director had a direct effect to the good management of a company. Therefore, the constitution of Malaysia has done some amendments in Company Act 1956 which includes amendment in roles and responsibilities of company directors.

Argument and The Impact of New Amendment

Section 131A

The amendment of 2007 added a new section 131A to prohibit the director from participating in the deliberation of or the voting on the transaction at any board meeting which there was no any restriction on these previously. However, the law does not prohibit him from being present during the deliberation of any broad meeting. It is submitted, this may raise governance issues, the direction of the discussion may shape and effect on the board’s decision for his mere attendance. [2]

Section 131(7A)

Section 131 of the principal Act is amended by inserting after subsection (7) the following subsections: For the purpose of this section, an interest of the spouse of a director of a company (not being herself or himself a director of the company) and an interest of a child, including adopted child or stepchild, of a director of the company (not being himself or herself a director of the company) in the shares or debenture of the company, shall be treated as an interest in the contract and proposed contract. [3] Example of case law:

Tan Bok Seong V Sin Be Seng & Co (Port Weld) Sdn Bhd [4]

If the director proves that the other directors aware of his interest, then that director needs not formally declare his interest.

This section still has the arguable point. The section doesn’t clearly state that how many interest do the director’s spouse and child can get. If the director suddenly dies, the interest which should get by the director’s spouse and child will be appropriated by the other shareholders.

Section 132(1)

This new section requires directors to act in the best interest of the company during his duties while the old provision one did not specify to act in the interest of company. However, there is still a flaw in this act where the word “best interest” is not specifically defined in order to maintain flexibility. Action of the director is arguable in this. Director may argue that their action is for the company best interest even though there is no prove that their action will benefit stakeholder. It is arguable when the director of a company refused to lay off the current employee during financial crisis moment with the reason to act in the best interest of the company as in corporate responsibility which causes a major loss to the company. A director may also act in the best interest of the company but the transaction is motivated by improper purpose. This is supported by the case Howard Smith Ltd v Ampol Petroleum Ltd. [5] Ampol petroleum ltd wished to take over RW Millers even though RW Millers’s director was not agreed on the takeover and by that time Ampol petroleum ltd already held 55 shares of RW Millers. RW Millers director announced issuing a new share in order to finance the construction of new tanker but all the new share issue were given to the competitor of Ampol petroleum who was also interested to takeover RW Millers. As a result of the new share issuance, the Ampoule petroleum ltd lost in the bid to takeover RW Millers. The court held that the director’s purpose of issuance of share to finance the development of new tanker was not genuine and unconvincing also it was for an improper purpose. The purpose of issuance of new shares was to maintain the control of the company in the hand of the director themselves but RW Millers director issued new shares for the purpose to allow Howard smith ltd had the chance to take over the company rather than being taken over by Ampol petroleum. So the director was held liable for the action although he was said to act in the best interest of the company but the act was motivated by improper purpose.

Another famous case occurred in Malaysia was between Kedah Barisan Nasional (BN) Youth and PAS-led Kedah government. Chairman of Kedah BN Youth, Badrol Hisham Hashim claimed that the PAS-led Kedah government had awarded the contract to a company which had not submitted a tender in order to build the Insaniah University College (IUC) campus for the second phase of the project. This had contravened the PAS government’s promise in its (2008) general election manifesto to award contracts through the tender system. [6]

In a nutshell, we could see that, a director may enter into a contract without considerate on the advantages of the company. Furthermore, a director could claim that he has acted honestly although his is not acting in the best interest for the company. [7]

Section 132(1A)

Section 132(1A) stated that 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 in fact has.

A problem maybe will be aroused in the new paragraph (b). This is because if the current director is once an auditor the director is expected to perform his skill as an auditor during his post as a director. The past knowledge was immeasurable that there was no standardized knowledge among the auditor. Things that are well aware by one could not be a yardstick to conclude that it will be well aware by the others. Hence the paragraph (b) will not be effective to hold a director liable if the director is found guilty based on the past experience knowledge. This will be more debatable when the current director has leave his previous profession for sometime which may lead to not update himself with the latest amendment and neglect unintentionally on the particular knowledge.

Section 132(2A)

Section 132 (2)(a) says that a director of a company shall not, without the consent or ratification of a general meeting to use the property of the company which detriment to the company or benefits himself or other person directly or indirectly. [8] This will be impossible for a director to hold a general meeting every time when the director needs to use company vehicle to seek approval and permission from the shareholder. The word ‘to gain indirect benefit’ of this section 132(2)(a) is debatable in the event where the director wishes to drop by a shop for some personal purchases while on the way to attend company meeting . Under this section 132(2)(a) the director will be held liable for using the company vehicle to gain indirect benefits as in dropping by for personal purchases. This will be absolutely awkward because dropping by a place in conjunction to the journey is prevalent and will not affect the benefit of the company on using the company vehicle for this purpose.

Section 132C

Section 132C is about the approval of company required for disposal or undertaking property by company directors. Mischief behind the Old S132C(1):

Dato’ Toh Kian Chuan v Swee Construction and Transport Company (Malaya) Sdn Bhd [1995] 1 LNS 317

The Facts: A minority shareholder sought to set aside an agreement for the sale of a piece of land as he alleged that the land was sold at undervalue.

Held: The old S132C permitted such transactions as the approval of the company in general meeting had been obtained.

The new S132C(1) has removed the requirement that the transaction must adversely affect the performance or financial position of the company. [9]

The 2007 amendment attempted to expand the coverage of section 131, but much is to be desired due to bad drafting. [10] Firstly, based on the amendment to section 131, a director shall be required to disclose the interest of his spouse or child including adopted child and step child in a contract where the company is a contracting party. However, the new section 131(7A), it does not reflect the intention of the legislature. It stated that, an interest of the spouse and child of a company director (who was given not one of the directors in the company) in the shares or debenture of the company, should be treated as an interest in the contract and proposed contract .Secondly, assuming that the court would give a purposive interpretation to sub-section (7A), the director was required to disclose his interest of his spouse and child’s interest in the contract or purported contract. It was unluckily that the net was not casted wide enough to include the interest of any other person connected with him as defined in section 122A of the Companies Act 1965. Section 122A was also found in Division 2 of the Act as Section 131, suggested that for good governance, a director should be required to declare the interest of any person connected with him in the contract or proposed contract with the company. [11]

Conclusion

In a nutshell, the Companies (Amendment) Act 2007 has incorporated the director’s duties which are shown in section 132. It laid down the functions and power of the directors and clarified the disclosure of interests in contracts, property, offices and etcetera. Moreover, the provision of calling a meeting and incorporated the holding of meeting using technology were the amendment of Companies (Amendment) Act 2007. The audit process was the one under amendment. It laid down a mandatory requirement for public company to set up a system of internal control.

In addition, amendment can affect a company management. For instance, the stock price of a company will be affected by the corporate governance and the reputation of the board of directors. [12] Besides that, new amendment can improve the company management and concurrently prevent fraud or occupational abuse from occurring. However, amendment can also bring some negative effects if the interest and the responsibilities of directors do not state clearly.

However, one may also take advantage on the amendment in a condition where the interest and the responsibilities of directors are not well stated. As a result, good governance requires the regular checks in order to ensure prioritization of the interests of the shareholder. It also requires the company to comply with the law and concurrently make sure the board’s mission, vision and strategy are compliance.

Besides that, the new amendments have improved the company board effectiveness and strengthen the director capability in managing the company. The requirement for director to perform their duties with standard reasonable care, skill and in accordance to their actual skill and experience required the directors to carry out their duties and responsibility accordingly and reasonably at all time. Besides safeguarding the shareholder interest, this standard will contribute to the positive growth of a company as well as further strengthen and promote market freedom and investment protection.