In the world of business, directors are like the captains of a ship, steering the company through both calm and stormy seas. But what happens when the captain dips into the ship’s treasure chest for personal gain? That is where corporate governance steps in, waving its big rulebook to ensure everyone plays fair.
What Constitutes Misuse of Company’s Funds, And Its Consequences
A director has statutory duties towards the company as well as duties under the common law. It is undisputable that directors have control over the company, especially in the management of the company. As such, directors are duty-bound not to misuse or misapply the position as director when dealing with the property of the company. Misappropriating company funds or making secret profits violates these duties and can lead to personal liability, as highlighted in Simpson Wong v Vas Car Auto Parts Sdn Bhd [2017] MLJU 355. The court in this case emphasized that such actions breach both fiduciary obligations and statutory obligations under Section 213(1) of the Companies Act 2016 (“CA 2016”).
Misuse of funds may also attract criminal liability under the Penal Code. For instance, misappropriation of company funds can amount to criminal breach of trust (Section 409 of the Penal Code), while making false claims to secure funds may constitute cheating (Section 420 of Penal Code). Breaches of Section 213 of the CA 2016 also carry criminal penalties under Section 213(3) of the CA 2016.
Compliance Strategies: How Directors Can Mitigate Legal Liability?
(a) The use of company funds by directors must be authorised or sanctioned
Directors are custodians of company funds and as such, their use of these funds must always be properly authorised or sanctioned by the board or shareholders. The key question often arises as to whether the directors can expend the company’s funds to pay themselves or any director in the company.
In CIMB Bank Bhd v Jaring Communications Sdn Bhd [2016] MLJU 920, the director failed to provide any documentary evidence of board or shareholder approval for the payments made to himself. The payments, whether intended as loans, remuneration, or reimbursements for the director’s expenses, were deemed unauthorised. The court held that the entire sums disbursed to the director were recoverable pursuant to Section 305 of Companies Act 1965 (now Section 541 of the CA 2016).
The principle of proper authorisation is reinforced by the English case of Re George Newman & Co [1895] 1 Ch 674, where the English Court of Appeal held as follows:
“…Directors have no right to be paid for their services and cannot pay themselves or each other, or make presents to themselves out of the company’s assets unless authorised so to do by the instrument which regulates the company or by the shareholders at a properly convened meeting…”
Having said that, another question arises as to whether a resolution can be passed retrospectively after a director has invested or used the company’s funds.
This is addressed by the Federal Court in Re Kong Thai Sawmill (Miri) Sdn Bhd; Ling Beng Sung v Kong Thai Sawmill (Miri) Sdn Bhd & Ors [1976] 1 MLJ 59 where the court held that retrospective resolutions passed by the directors to approve prior unauthorised use of company funds were invalid. The court held that the directors were liable to repay the misused funds, except for certain drawings, and voided the ex post facto resolution approving the purchase of a yacht. It further ordered the director involved to personally bear the costs of the yacht and its maintenance, emphasising that no retrospective authority could legitimise unauthorised expenditure made without prior board approval.
(b) The director must act in the interest of the company
Directors must always act in the company’s best interests. In determining whether a director is acting in the interest of the company, the Federal Court in Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra [2018] 2 MLJ 177 determined that the tests applicable are both subjective and objective.
· Subjective test – the breach of duty is determined on an assessment of the state of mind of the director. The court’s opinion on whether the exercise of such discretion is in the interest of the company is not a consideration.
· Objective test – the director’s own assessment of the company’s best interest is subject to an objective review or examination by the courts, i.e. whether an honest and intelligent man in the position of a director of a company concerned could, in the whole of the existing circumstances, have reasonably believed that the transaction was for the benefit of the company.
Nonetheless, directors are permitted to take calculated risks for practical reasons. The Court of Appeal in Tan Joo Chai & Anor v Eco Water Technologies (M) Sdn Bhd [2015] 3 MLJ 380 endorsed an excerpt from the Companies Act of Malaysia An Annotation by Walter Woon & Andrew Hicks that: “…Directors may take risks with the company’s property where they honestly believe that to do so is in the company’s interest: Cheam Tat Pang v PP [1996] 1 SLR 541, 561 (High Court, Singapore). This is indeed the essence of entrepreneurship. Just because a director makes a wrong decision does not mean that he breached his fiduciary duty to the company. The above dicta imply that the test is subjective and that the courts will not interfere in a management decision.”
Conclusion
To sum up, it would seem clear from the authorities that there are two fundamental principles as regards the position of directors. First, they are trustees of the company’s money and property in the sense that they must account for all the company’s money and property over which they exercise control and must refund to the company any of its money or property which they have improperly paid away. Secondly, they are trustees of the powers entrusted to them in the sense they must exercise their powers honestly and in the interests of the company and the shareholders and not in their own interests, failing which they may render themselves liable for their misuse of such powers.
Corporate governance is not just about compliance – it is about fostering trust, transparency, and accountability. Directors who adhere to these principles will not only protect themselves from legal repercussions but also uphold the integrity of the companies they lead.
11 March 2025