What is the “director’s duty to make a disclosure”?
Ideally, in every contractual transaction between two companies, it is the duty of the directors of a company to direct, steer and make decisions (in regards to the contractual transaction) in the best interests of the company.
However, what happens when a director cannot see past his own personal gain in such a situation (i.e. he would reap personal profit from the contractual transaction)? Can he influence the rest of the directors to ensure that the company lands the contract?
The short answer is, no he cannot. The long answer is this- Section 221 of the Companies Act actually requires a director to actually disclose/ make known his interest to the rest of the directors so the company can come to an informed decision as to whether to continue pursuing the contract and allow the particular director to reap personal profit or vice versa.
The need to disclose, as the court noted1, is rooted in the need to ensure transparency in the dealings by the management of the company and the moral integrity of those helming the administration of the company2.
What is the law on this topic?
|The general rule||Every director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company shall, as soon as practicable after the relevant facts have come to the director’s knowledge, declare the nature of his interest at a meeting of the board of directors3.|
|The test to determine whether there is a need to disclose||It all depends on the facts of each case. Generally, the courts have said that:” when in doubt, disclose4”.|
As the court noted5, this means that even an innocent failure to disclose with no proven loss to the relevant company can bring about the conviction of the director involved.
|The effect of the general rule||A director can still attend board of directors meetings. However, he cannot participate in any discussion while the contract or proposed contract is being considered during the meeting and shall not vote on the contract or proposed contract9.|
|The failure to comply with the general rule||If convicted, can be liable to imprisonment not exceeding 5 years/ fine not exceeding RM3,000,000.00/ both10.|
What happens after disclosure?
Does it mean that after disclosing his interest, he is exempted from acting in the best interest of the company? The short answer is no. The long answer is this, on the contrary, as noted by the court- even with full and frank disclosure would not have excused or exempted a director from his fiduciary duty to act bona fide in the interest of the company and for proper purposes11.
This is a harsh reality but the fact remains that directors are under an onerous duty by virtue of their positions as fiduciaries entrusted with the responsibilities of managing their companies’ businesses and making corporate decisions for the benefit of their companies. If a person undertakes such duties and responsibilities as a company director, he should also be responsible for familiarising himself with the various rules of disclosure and other statutory duties under the Act.
1. Delta-Pelita Sebakong Sdn Bhd v Wong Hou Lianq & Ors  MLJU 109.
2. Ibid, Paragraph 50.
3. Section 221 (1), Companies Act 2016.
4. Delta-Pelita Sebakong Sdn Bhd v Wong Hou Lianq & Ors  MLJU 109, Paragraph 50.
5. Yeo Geok Seng v Public Prosecutor  1 SLR 195.
6. Section 221 (2), Ibid.
7. Section 221 (3)(a), Companies Act 2016.
8. Section 221 (3)(b), Ibid.
9. Section 222(1), Ibid.
10. Section 222(4), Ibid.
11. Magnifying Sdn Bhd v Yap Mun Him  6 CLJ 413, page 423, Paragraph F.