Court of Appeal Rules Petra Perdana Directors in Breach of Duties

I highlight the recent Grounds of Judgment dated 27 August 2015 by Justice Dr Prasad Abraham in the Petra Perdana Court of Appeal decision.

The case involved the former directors of Petra Perdana Bhd being sued for breach of their duties in selling down the company’s stake in Petra Energy Bhd. The High Court had dismissed the suit finding that they had not acted in breach of their duties. They had exercised their business judgment in selling off those shares due to liquidity and cash flow problems (see Petra Perdana Bhd v Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra & Ors [2014] 11 MLJ 1).

At the Court of Appeal, the Court focused on the interplay between the directors’ powers of management (including the power to deal and dispose assets of the company) and the shareholders right to make resolutions to intrude on those powers of management.

This case suggests that the directors powers of management can be curtailed and restricted by shareholder resolutions, especially with the relevant provision in the Articles of Association in this case. The relevant provision essentially mirrored Article 73 of Table A in the Companies Act. The section reads:

“The business of the Company shall be managed by the directors who may exercise all such powers of the Company … subject, nevertheless to any of these regulations, to the provisions of the Act, and to such regulations, being not inconsistent with the aforesaid regulations or provisions as may be prescribed by the Company in general meeting …” (emphasis added)

Any breach of those shareholder resolutions could render the directors in breach of section 132 of the Companies Act which is the general duty to act in the best interests of the company. The shareholder mandate in the general meeting provided a barometer as to what the shareholders gauge as being the best interests of the company. This is relevant when the directors’ conduct is put under the microscope to ascertain whether the directors were in breach of section 132 of the Act.

The Court of Appeal interpreted the phrase “regulations … as may be prescribed by the Company in general meeting” as being the terms of the resolutions provided by the shareholders in general meeting and therefore the directors must comply with such mandate.

The classical legal position (see Automatic Self-Cleansing Filter [1906] Ch 34] is that there is a demarcation of powers between the Board of directors and the shareholders in general meeting. The directors have the exclusive powers of management and they must act in the best interests of the company. The shareholders ought not interfere in those powers of management and it is merely by statute, that directors may have to seek approval from the shareholders (but it is not the shareholders imposing such business decisions on the directors). So for example under section 132C of the Act, the directors need to seek approval from the shareholders in general meeting for a disposal of the company’s undertaking or property of a substantial value.

This Court of Appeal decision in the Petra Perdana case may now blur the position on this strict demarcation of powers. Shareholder resolutions may now very well impinge on the directors’ powers to make business and management decisions.

 

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