DR. MD.

ABDUL JALIL, COMPANY LAW, 2013

CHAPTER NINE OFFICERS OF A COMPANY The following people act as officers of a company. They play an important role in the management of the company, in adopting policy decisions, in keeping necessary records for the company and arranging meetings and in auditing the account books of the company. These three types of officers are as follows: i. ii. iii. DIRECTORS People who controls the management of a company and make policy decisions are known as directors or managers of a company. A director is an officer of a company who controls and manages the administration and business affairs of a company and take policy decisions. According to section 4 of the Companies Act 1965 (Malaysia): A director includes any person occupying the position of a director of a corporation by whatever name called and includes a person in accordance with whose direction or instruction the directors of a corporation are accustomed to act and an alternate or substitute director. APPOINTMENT OF DIRECTORS The directors are appointed in the annual general meeting by ordinary resolution. They are appointed for one year only. Their term expires before the next annual general meeting. The first directors names are written in the memorandum of association of the company before its registration. So, they are not elected but nominated by the first shareholders. They can continue their administrative functions till the first annual general meeting. In the first annual general meeting new directors are appointed by the members by ordinary resolution. However, the previous directors might be re-elected if the shareholders want them depending on their efficient performance in the company business. QUALIFICATION OF DIRECTORS The directors must have certain qualification to be appointed as directors of a business company. The qualifications should include minimum educational qualification also but unfortunately the Companies Act is silent on this point. The Companies Act 1965 (Malaysia) recommends the following qualifications for persons to be appointed as directors of a company. i. ii. The person must be sane and has attained the age of majority. In other words, the person should not be mad and he must be at least 18 years old. He should not have been convicted for any offence. Directors Secretaries Auditors

DR. MD. ABDUL JALIL, COMPANY LAW, 2013

The offence can be related to the promotion of a company or related to fraud or dishonesty in business. A convicted person cannot be a director of a company for five years. If the person is jailed for five years and he spent fives years in the jail, he can be eligible to be a director in a company after the date of his release from jail. iii. His age should not exceed 70 years. If a person is above 70 years of age, he will not be eligible to become a director in a company. iv. Share qualification. The articles association of a company may require that to be a director, the person must have a certain amount of shares in the company. In that case, the person must have that amount of shares or he must submit a written promise to take that amount of shares in the company. As mentioned above, to be a director, educational qualification is not needed. However, to ensure good leadership in the company, the Companies Act may provide a minimum educational qualification as a requirement to be a director. DISQUALIFICATION OF BECOMING A DIRECTOR A person will be disqualified to be director if fails to fulfill the following conditions: 1. The person is insane and has not attained the age of majority under the Age of Majority Act (Malaysia). This Act requires that a person must of 18 years of age or above to be a major person, unless he will be treated as a minor. A minor is disqualified to be a directors in a company. 2. If a person has been convicted for any offence, he will be disqualified to be a director of a company. 3. If a person is over 70 years of age, he will be disqualified to be a director in a company. 4. If a person has not been able to achieve the share qualification requirement, he will be disqualified to be a director in the company. 5. If a person is undischarged bankrupt, he will be disqualified to be a director in a company. A person who has become a bankrupt and he has not been discharged from the liabilities of payment of the debt, he cannot be a director of a company. EFFECT OF DISQUALIFICATION A person who is disqualified to be a director in a company but nevertheless he becomes a director in a company, he will be liable for an offence for disregarding the law. However, any transaction made by the disqualified director with outsiders, will be valid and the company will be bound to fulfill the transaction.

DR. MD. ABDUL JALIL, COMPANY LAW, 2013

REMOVAL OF DIRECTORS If any person becomes disqualified to be a director in a company for certain reasons such as committing an offence can be removed from the position of director. To remove a director from his position, an ordinary resolution should be passed in a general meeting. 1 A director may be removed from his position even if any thing contrary to the memorandum and articles of association of the company. DUTIES OF DIRECTORS Directors are very important persons in the company as they are controlling the company business. Therefore, the directors have certain important duties while conducting company business. Those duties are as follows: There are two types of duties of a company director, such as i) Statutory duties and ii) Common law duties. 1. A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office. [Section 131(1) of Companies Act 1965] 2. A director of a company shall not make use of any information of the company to gain directly or indirectly an advantage for himself or for any other person or to cause detriment to the company. [Section 131(2) of Companies Act 1965] 3. Every director of a company who is 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 his knowledge declare the nature of his interest in the contract at a meeting of the directors of the company. 4. Duty to act bona fide in the interest of the company. Directors must exercise powers bona fide in the interest of the company. In Re Smith & Fawcett Ltd [1942] Ch 304, 306, CA, Lord Greene M.R. observed that the directors must exercise their powers bona fide at all the time for the interest of the company. In PJTV Denson (M) Sdn Bhd v. Roxy (Malaysia) Sdn Bhd [1980] 2 MLJ 136, FC, the company entered into a contract to purchase a piece of land for RM 15,000 and had paid RM 5000 as deposit for the price. Subsequently the land was registered in the names of two of the directors of the company. The issue was in the court whether the directors could buy the land in their own name as it was first negotiated for the company. It was held that the directors violated their fiduciary duty to act bona fide for the interest of the company at all time. In this case the directors raised the issue that the company lacked the funds to purchase the land and that the directors bought the land with their own money as
1

See section 128 (1) of the Companies Act 1965; See also Article 69 of Table A of the Companies Act 1965.

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members of the public. Raja Azlan Shah C.J. (Malaya) (as his Majesty then was) while delivering the judgment in this case observed that the directors were trustees and they held the land in trust for the company since they stood in a fiduciary position to the company.2 His Lordship also refereed to Regal Hastings case and held that the allegation that the company lacked the funds to purchase the land and that the directors bought the land with their own money as members of the public was a travesty of the facts. The directors could, had they wished, have protected themselves by a resolution of the shareholders in a general meeting. In default of such approval, the liability of the directors to account must remain.3 5. Duty to exercise powers for proper purpose of the company. Directors must exercise power only for the purpose for which it was given. They should not exercise a specific power given for one purpose but they use for another purpose. This is known as improper use of powers given and it amounts to misuse of power. In Hogg v. Cramphorn Ltd. [1967] the directors were given powers to issue share for the purpose of raising capital in the company and not for the purpose of preventing a take over of the company. However, the directors used the power to prevent take over of the company. 6. Duty to retain discretionary power The directors have discretionary power to be exercised in good faith for the interest of the company. Therefore, the directors should not limit the exercise of their discretion. For example, the directors may enter into an agreement whereby they agree to vote in a certain manner in future board meetings. Such an agreement to limit the exercise of power might be held invalid by the court if it goes against the interest of the company. 7. Duty to avoid conflict of interest The directors must avoid conflict of interest. Conflict of interest means that if a director makes a contract with another company where he has some personal interest, then he should avoid making such a contract. He should not make a contract by which he can gain some personal benefit. In Cook v. Deeks [1916] 1 AC 554, the directors of a company negotiated for a construction contract with Canadian Pacific Railroad on behalf of the company. At a later stage of the negotiations, the directors decided to take the contract in their won names. The Privy Council held that the directors were accountable to the company for the profits they made, because they had used their position as a
2 3

Ibid, at p. 138. Ibid, at p. 139.

DR. MD. ABDUL JALIL, COMPANY LAW, 2013

director and therefore they were able to make profit from the contract. In Aberdeen Railway Co. v. Blaikie Bros, A railway company entered into a contract with a partnership firm for the supply of a large quantity of iron seats. The company sought to avoid the contract on several grounds, including that at the time the contract was entered into, one of the partners was a director of the company. The House of Lords held that the company could avoid the contract on the ground of conflict of interest. In Boston Deep Sea Fishing & Ice Co. v. Ansell, Ansell was the Managing Director of the company and ordered for the construction of fishing boats for the company. However, unknown to his company, he was paid a commission by the ship builders. The company was also unaware that Mr. Ansell was a shareholder in an ice supplying company and a fish carrying company. He received bonuses from both of those companies. The court held that Ansells personal interests conflicted with his fiduciary duty to Boston Company in respect of both the commission received from the ship builders as well as the bonuses received from the other two companies. In Regal Hastings Ltd. v. Gulliver & Others4, the plaintiff company wanted to extend its business operations and acquired two other cinemas with a view to selling all of them as a single concern. Later the directors set up another subsidiary company and effected the sale of the business to this subsidiary. The directors earned 7000 pounds profit from this sale and it was not accounted for to the company. The House of Lords held that the directors were in a fiduciary position to the company and they were trustees for the company. So, they could not make personal profit by using their position as trustees for the company. Such making of personal profit conflicted their personal interest with the companys interest and were liable to account for the profit to the company. Lord Viscount Sankey observed: In my view, the (directors) were in a fiduciary position and their liability to account does not depend upon proof of mala fides. The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect. If he holds any property so acquired as trustee, he is bound to account for it to his cestui que trust.5 In the above case Lord Russell observed that: The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud,
4 5

[1967] 2 AC 134, HL. Ibid, at p. 137.

DR. MD. ABDUL JALIL, COMPANY LAW, 2013

or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intended, cannot escape the risk of being called upon to account.6

COMPANY SECRETARY A company must have at least one secretary and there can be more than one secretary in a company depending on the need of the company. If the company is a small company one secretary is enough. However, if the company is a group of companies with so many subsidiary companies, then the company may need at least one secretary for each subsidiary company. A secretary is considered as an officer of a company. APPOINTMENT OF SECRETARY First secretary of a company is named in the memorandum or articles of association and he/she acts as secretary. Subsequent secretary is appointed by directors upon such terms and conditions as they think fit (ref).

QUALIFICATION OF SECRETARY To be secretary in a company, the person must have certain qualification such as: i. The secretary must be natural person. An artificial legal person for example a corporation cannot be appointed as a secretary of a company (ref); The person must attain age of majority. He/she must be of 18 years of age to be a secretary of a company (ref). The person must have a principal place of residence in Malaysia.7 a member of a professional body or any other body for example, Malaysian Association of Certified Public Accountants;8

ii. iii. iv.

6 7

Ibid, p. 144-145. Section 139(1) of the Companies Act 1965. 8 Section 139A of the Companies Act 1965.

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v. vi. vii.

licensed by the Registrar of Companies to practice as a company secretary. The person has not been convicted of an offence mentioned in section 130 of the Companies Act 1965 (Malaysia). The person should not be an undischarged bankrupt.

DISQUALIFICATION OF SECRETARY For certain reasons a person might be considered as disqualified to act as a company secretary, such as: i. An artificial legal person cannot be appointed as a secretary. The secretary must be a natural person. An artificial legal person for example a corporation cannot be appointed as a secretary of a company; If the person has not attained age of majority he is disqualified to be a secretary of a company. He/she must be of 18 years of age to be a secretary of a company. If the person does not have a principal place of residence in Malaysia, he is disqualified to be a secretary.9 If the person ceases to be a member of a professional body; He ceases to be a holder of valid license to practice as a secretary in a company. He has been convicted for an offence mentioned in section 130(1) of Companies Act; He is an undischarged bankrupt;

ii.

iii. iv. v. vi. vii.

FUNCTION OF A SECRETARY The secretary of a company has many functions to discharge and some of them are as follows: i. ii. iii. iv. v.
9 10

Lodging a declaration of compliance with the Companies Act and Companies Regulation to the Registrar of Companies under section 16(2); Recording any declaration of interest by directors made under section 131 of the Companies Act; Allowing inspection of register of directors or secretaries under section 141 of the Companies Act; Allowing inspection of register of members under section 160; Lodging annual return10 to the Registrar of Companies under section 165.

Section 139(1) of the Companies Act 1965. Annual return includes certain documents of the company, such as statement of comprehensive income, statement of financial position, statement of change in equity, statement of cash flows,

DR. MD. ABDUL JALIL, COMPANY LAW, 2013

AUDITORS Auditor is an officer of a company. A company may appoint one or more auditors. An auditor plays a very important role in the company as he is the person who is asked to detect any fraud or irregularities in the account books of the company. APPOINTMENT OF AUDITOR The first auditors are appointed by the directors and they can continue till the first annual general meeting. Subsequent auditors are appointed at the first annual general meeting by the shareholders and they continue till the next annual general meeting. QUALIFICATION OF AUDITOR To be an auditor a person must have certain qualifications. The position of an auditor is a trustworthy position. All the shareholders rely on him that he will review the account books and prepare a comprehensive report where he will disclose all the irregularities, mistakes, frauds, misappropriation of money etc. Hence, an auditor: i) Must be an honest and God-fearing (muttaqi) person who will bear in mind that he will be accountable to God if anything unethical he has done. An honest and trustworthy auditor will be rewarded in the Day of Qiamah. The person must be a sane person to be an auditor. He must attain age of majority i.e. he must be of 18 years of age. He has not been convicted of an offence. He has no interest in the company. The person must be an approved company auditor. Approved company auditor means the person has been approved and given a certificate by the Minister of Finance to act as company auditor.

ii) iii) iv) v) vi)

Prior to the appointment for the position of auditor, the person must submit a written consent that he is willing to act as company auditor. DISQUALIFICATION OF AUDITOR For certain reasons a person might be disqualified to act as company auditor such as:
auditors report etc.

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i. ii. iii. iv. v. vi. vii. viii.

If is an insane person. He has not attained the age of majority. He has been convicted of an offence. He is not an approved company auditor; He is indebted to the company an amount exceeding RM 2500; He is an officer of the company; He is a partner or employer or employee of an officer of the company; He is a partner or an employee of an employee of an officer of a company.

FUNCTIONS OF AUDITORS The basic function of an auditor is to prepare a report on accounts of a company and submit to the general meeting. The report will mention whether the company accounts are maintained properly or not, whether there is any fault or irregularities in the accounts or not. There is a possibility that the auditor becomes dishonest as the directors of the company may request him not to report any fraud or irregularities in the account books and thereby he might be offered bribe by the directors. So, it is the ethical duty of an auditor to be honest all the time and disclose in his report any fraud, secret profit or irregularities noticed in the account books.