BUSINESS JUDGEMENT RULE

MGM4321
: AP Dr Zahira Mohd Ishan
Business Judgment Rule
 BJR: Courts will not review the merits of
business decisions made by directors.
 Howard Smith Ltd v Petroleum Ltd : courts do not
supervise decisions within powers of
management honestly arrived.
 Embedded in S.214: director who makes business
judgment is deemed to meet the
requirements of duty under s.213(2) & the
equivalent duties under c/l & equity.
s.213 (2) & s.214
 S.213 (2): Statutory duty of care: ‘dir shall exercise reasonable
care, skill & diligence with….”
 S. 214: Dir making business judgment has not breached s.213 (2)
or the equivalent duties under c/l or equity if the director:
(a) makes BJ for proper purpose & in good faith
(b) no material personal interest in the subject matter of the BJ
(c) reasonably believes the subject matter of the BJ is appropriate
under the circumstances; &
(d) reasonably believes that the BJ is in the co’s best interest.

s. 214(2): “business judgment” means any decision on whether or not to

take action in respect of a matter relevant to the business of the company
Duty to Act in Good Faith in the Best
Interest of Co.
 GF: act honestly & any decision is not tainted with self-
interest ~ same as c/l.
 Co’s interest: those of
Members

Employees,
Customers,
Company per se
Suppliers,
Community? Interest of
Company

Creditors
Subsidiary Co.
Dir with duty to act in best interest of company:
1-Members: interests of the co as a whole (Greenhalgh’s case)
: balance majority & minority members interest & acknowledge:
interest of co = majority of its co.
2-Company per se: depending on the fact of the case.
3-Creditors: when co nearly insolvent or is insolvent.
: Kinsela v Russell Kinsela Pty Ltd; Walker v
Wimborne; Hilton Intnl Ltd v Hilton; Spies v The Queen.
4-Corporate Group: co in parent-subsidiary relationship. Each having its own
interests; dirs of subsidiary to act in interest of subsidiary as it got its
own creditors & (if not wholly-owned) members other than parent co.
:if make decisions with effect that benefitting another co in
group ~ whether an intelligent & honest person in the position of the dir
cd have reasonably believed that the decision was for the co’s benefit?
(Charterbridge Corp Ltd v Lloyds Bank Ltd)
: Equiticorp Finance Ltd (in liq) v Bank of NZ
 Equiticorp Finance Ltd (in liq) v Bank of NZ: Uruz Pty
Ltd,subsidiary of Equiticorp Holdings Ltd borrowed $200 m
from D to finance takeover of anor co. 2 other cos (incl.P) in
the group had $50m on deposit with D. D requested this $ be
used to repay part of the $200m & this was done. Subsequently,
the Equiticorp group collapsed & liquidators of the 2 other cos
(incl P) sued the dirs for breach of their duty to act in the
interests of the cos. That when dirs permitted the repayment of
the $50m for loan between D & Uruz.
Held: using the objective test, the dirs of the 2 cos were not to
be in breach of their duty to act in the interests of their cos.
5-Employees, customers, suppliers & the community: stakeholders :
refer to other specific laws that require the dirs to consider those
interests; eg e’ee (ind relations lgstn), customers (consumer
protection lgstn).
: Parke v Daily News Ltd: employees & other stakeholders
interest should not stand in priority over the co members’
interests.
~ D owned 2 n’papers; making losses for several years; so dirs
decided to sell the two n’papers resulting in redundancy of most of
co’s employees. Dirs decided to distribute proceeds of selling to
the e’ees made redundant after deducting necessary expenses.
Minority s’hs challenged the payment to e’ee. Held: Dirs had
breached their duty to act in co’s interests because payment was
very substantial sum & to former e’ees.
Duty to Act For a Proper Purpose
 Proper purpose: look at dir’s power: depends on co’s constitution
allocating powers between dirs & members
 Howard Smith Ltd v Ampol Petroleum Ltd: 2 step analysis by
courts:
1- what is the ptclr power in ques & for what legal purpose it was
used?
2- examine the facts of the case & dirs’ intention & decide what was
the actual purpose for which the dir exercised the power in ques.
~ compare step 2 with step 1. If actual purpose not within legal
purpose, then there’s breach of duty to act in proper purpose.
 Eg: 1-power to issue shares: improper:
~ diluting s’holding of a member (Kokotovich Const. Pty Ltd v
Wallington)
~ entrenching control of a co in certain s’holders by issuing them
more shares (Whitehouse v Carlton Hotel Pty Ltd)
~ attempting to reduce to a minority position, member(s) with
majority voting power (Howard Smith)
~dirs maintaining control of co (Hogg v Cramphorn Ltd)
2- using co’s fund to conduct campaign … (Advance Bank of Aust Ltd
v FAI Ins Aust Ltd)
3- contract for purchasing property (Permanent Building Soc (in liq)v
Wheeler)
4-power to register a transfer of shares (Kwality Textiles (M’sia) Sdn
Bhd v Arunachalam & Ors); Lim Koei Ing v Pan Asia Shipyard &
Engineering Co Pte Ltd ; Townsing Henry George v Jenton Overseas
Investment Pte Ltd (in liq) [2007]
 Dirs with mixed purposes: both proper & improper.
~ courts to decide which one was the most important.
Courts have developed a test: for there to be a breach of duty. It
must be shown tt the substantial purpose was improper &
that, but for the improper purpose, the director would not
have exercised the power (Kokotovich’s case; Whitehouse v
Carlton Hotel Pty Ltd)
 THE HIGH COURT UPHELD THE CONVICTION AGAINST
KUMARASAMY A/L NACIAPPIAN FOR COMMITTING THE OFFENCE
UNDER SECTION 132(1) COMPANIES ACT 1965 [s.213 (1) of CA 2016]
 21st February 2013: The High Court of Malaya in Johor Bahru, Johor affirmed
the decision of the Johor Bahru’s Sessions Court in convicting Mr. Kumarasamy a/l
Naciappian for breaching his fiduciary duties under section 132 (1) of the
Companies Act 1965 in Innoseal (M) Sdn Bhd.
 On 15th June 2012, the Sessions Court Judge had convicted and sentence Mr.
Kumarasamy a/l Naciappian with a fined of RM25,000.00 in default 12 months
imprisonment. The Sessions Court ruled that Mr. Kumarasamy a/l Naciappian had
failed to raised reasonable doubts on the prosecution’s case i.e. he had withdrawn
RM100,000.00 from the company’s current account without any valid purpose.
 Deputy Public Prosecutor, Puan Nur Izzaini Ishak appeared on behalf of the Public
Prosecutor.
 Suruhanjaya Syarikat Malaysia (SSM) hopes the aforesaid decision serves as a
reminder to all company directors that they have to perform their duties with high
integrity and exercise the highest quality of good governance.
 ISSUED BY : SURUHANJAYA SYARIKAT MALAYSIA
 DATED : 21st February 2013
 Read proper purpose (s.213(1) which is acting in the company’s
best interest with s. 218(1) for illustrations:
A director or officer of a company shall not, without the consent or
ratification of a general meeting—
 (a) use the property of the company;
 (b) use any information acquired by virtue of his position as a
director or officer of the company;
 (c) use his position as such director or officer;
 (d) use any opportunity of the company which he became aware
of, in the performance of his functions as the director or officer of
the company; or
 (e) engage in business which is in competition with the company,
To gain directly/indirectly for himself / any other person, or cause
detriment to the company.
Director (& officers) must act in best
interest of company
 Regal (Hastings) Ltd v Gulliver
 IDC v Cooley

 Avoid conflict of interest: s.221(6) & (7): declare the fact &
extent at board meeting.

 Failure to observe: criminal liability (s.218); past & present

officer to compensate the company during winding up of
company (s 541)