students manuals iqs law c09
TRANSCRIPT
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Corporate Governance
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CHAPTER 9
CORPORATE GOVERNANCE
Chapter Objectives
After the completion of this chapter you should be able to understand amongst
other things:
the division of powers within a company
the meaning and effect of corporate governance
procedure for the appointment and removal of directors, company
secretaries and other officers of the company
proceedings at board meetings
the different types of directors
whether loans can be given to directors
The function of the company secretary
1.0 The initial directors (at least two) are specifically named and appointed in the
memorandum or articles: s 122(3). The directors collectively are referred to as a
board of directors.
DIVISION OF POWERS WITHIN A COMPANY
2.1 The board of directors and general meeting are both organs of the company with
their respective powers determined by the Act and articles.
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2.2 The general meeting has specific powers but the residual powers vest with the
directors.
2.3 If the members in general meeting disapprove of the actions of the board they can
alter the articles to deprive the directors of some of their powers or they can
exercise the power given to them by the articles to vote in directors whose
policies they approve.
The Power of management
2.4 Articles usually confer wide powers of management of a company's affairs on the
board of directors.
2.5 A common example of such a provision is Table A, art 73. It specifies that the
directors manage the companys business.
2.6 The MSEB LR gives shareholders of listed companies a role in significant
management decisions.
2.7 For, example, Rule 10.06 requires informed shareholder approval if a listed
company proposes to enter into a transaction which involves the acquisition or
disposal of assets with a value which exceeds twenty-five per cent of the
company's equity share capital.
General meeting cannot override management decisions
2.8 A question often arises whether the general meeting of members can override the
directors and involve itself in the management of their company.
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2.9 The general principle was established in the early English case ofAutomatic Self-
Cleansing Filter Syndicate Co vCuninghame where it was held that the members
can not interfere with directors decision.
2.10 The principle that members in general meeting cannot override management
decisions made by the board was confirmed in a different context in the English
case ofJohn Shaw &Sons (Salford) Ltd v Shaw [1935] 2 KB 113.
Powers of general meeting limited by articles
2.11 The inability of the general meeting to interfere with the powers of the directorsconferred by the articles was affirmed in the case ofRe Chi Liung & Son Ltd;
Tong Chong Fah v Tong Lee Hwa & Ors.
Statutory Powers vested in the General meeting
2.12 While the general power of management is exercised by or under the direction of
the companys directors, there are certain specific provisions in the Act stipulating
that directors may not exercise certain powers without the approval of the
company in general meeting. The important statutory powers of the general
meeting include the following:
Disposal or acquisition of
companys main undertaking-s
132C
The directors shall not enter into any transaction
for the acquisition of an undertaking or property of
substantial value, or the disposal of a substantial
portion of the companys assets which would
materially and adversely affect the companys
financial position, unless the proposal has been
approved by the general meeting.
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Acquisition or disposal of
substantial non-cash assets-s 132E
Certain property transactions of a substantial
value, between directors and their companies are
voidable at the instance of the company, unless the
company in general meeting ratifies the
transactions within a reasonable time. Transactions
entered into in breach of s 132E are voidable at the
instance of the company and the directors are
liable for severe criminal penalties
Issue of shares by directors-s 132D With the exception of shares issued as
consideration for the acquisition of shares or assets
by the company, any share issue of shares by
directors requires the prior approval of the general
meeting.
Payments made to directors upon
retirement or resignation-s 137
Proposed benefits to directors by way of
compensation for the loss of office or retirement
from office must be disclosed to the members. The
payment of such benefits is unlawful unless they
are approved by the members in general meeting.
Ratification by General Meeting
2.13 If the directors purport to exercise a power, which should properly have been
exercised by the general meeting, their action can be ratified by an ordinary
resolution of the general meeting and the improper exercise of power becomes
valid.
2.14 For example, Table A, art 98 vests the power to declare dividends to the company
in general meeting.
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2.15 If, contrary to that provision, the dividend is declared by the directors it is invalid
until ratified by the members in general meeting.
Separation of Ownership and Management
2.16 The practice whereby companies confer a wide power of management on the
board of directors results in separation of management and ownership. Ownership
vests in the members.
2.17 In the case of large, public companies it is essential that management vests in the
board of directors.
2.18 Where there are a large number of shareholders, it would quickly become
unworkable if the general meeting had the power to manage the company.
2.19 In most listed companies the responsibility for overseeing the day-to-day business
operations is in the hands of senior executives who are salaried employees.
2.20 The most senior executive may be designated the chief or principal executive
officer, under whom there may be a number of subordinate managers.
2.21 Persons employed in an executive capacity are included within the definition of
"officer" under s 4 of the Act, although apart from the chief executive officer,
they are not necessarily directors of the company.
2.22 The function of the board of directors in larger companies is to set goals and
policies for the company, to oversee the conduct of the company's business in
order to identify principal risks and to ensure the implementation of appropriate
systems to manage those risks.
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2.23 In the case of small private companies, the directors and shareholders of such
companies are often the same people and in practice there is no separation of
management and ownership.
2.24 These may have evolved from sole traders or partnerships and even after
incorporation, they continue to function in a similar manner as before.
2.25 However, to meet the requirements of the Act, the distinction between members
in general meeting and directors is maintained even if in many cases it is a
fictitious distinction.
CORPORATE GOVERNANCE
3.1 The development of increased interest in corporate governance reflects higher
expectations by the investment community for greater effort by listed public
companies to develop their own structures and procedures to ensure appropriate
standards of corporate behaviour.
3.2 The emphasis is on self-regulation rather than legislation.
3.3 Corporate governance mechanisms have the purpose of monitoring and
controlling the management of corporations so as to result in more effective
management and to enhance shareholder value.
3.4 The successful implementation of corporate governance principles enables a
corporation to balance the need for managerial risk-taking and entrepreneurial
abilities with mechanisms and procedures for monitoring and setting policy so
that the actions of management correspond with the interests of shareholders and
other interests in the community.
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3.5 The movement towards greater scrutiny of corporate governance issues has
developed worldwide in response to the globalisation of capital markets.
3.6 It is widely believed that mobile global capital will be increasingly invested in
corporations which are well managed, best maximise long-term shareholder
interests and follow corporate governance best practice.
3.7 It is important that corporate governance processes are revealed so that investor
confidence is enhanced by assurance that appropriate monitoring occurs and
procedures are in place.
Finance Committee Report on Corporate Governance
3.8 In March 1999 the Finance Committee released its Report on Corporate
Governance, which contained 70 recommendations pertaining to three broad
areas:
the development of the Malaysian Code on Corporate governance
outlining a set of principles and best practice for corporate governance for
listed companies
reform of laws and regulations concerning the duties of directors and
officers, improving disclosures, enhancing the rights of shareholders and
improving the value of company meetings
training and education for the corporate sector, particularly in improving
the skills and qualifications of directors.
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3.9 The Finance Committee will continue in existence to oversee the implementation
of its recommendations to enhance corporate governance.
The Malaysian Code on Corporate Governance
3.10 The role of the Code is to guide boards of listed companies by clarifying their
responsibilities and providing prescriptions strengthening the control exercised by
boards over their companies
Meaning of Corporate Governance
3.11 The Finance Committee adopted the following definition for the purpose of the
establishment of the Code on Corporate Governance:
Corporate governance is the process and structure used to direct and manage the
business and affairs of the company towards enhancing business prosperity and
corporate accountability with the ultimate objective of realising long term
shareholder value, whilst taking into account the interests of other shareholders.
3.12 The Finance Committees Report is set out in four parts, as follows:
Principles-Part 1 sets out broad principles of good corporate governance for
Malaysia. The objective is to allow companies to apply these flexibly and with
common sense to the varying circumstances of individual companies.
Best Practices in Corporate Governance-Part2 sets pit best [practices for
companies. It identifies a set of guidelines or practices intended to assist
companies in designing their approach to corporate governance.
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Exhortations to other participants-part 3 is not addressed to listed companies but
to investors and auditors to enhance their role in corporate governance. They are
purely voluntary.
Explanatory notes and mere best practice- part 4 provides explanatory notes to
the principles and practices set out in parts 1 and 2 and 3. Part 4 also sets out best
practices directed at listed companies that do not require companies to explain
circumstances justifying departure form best practices-mere best practices.
3.13 The recommendations of the Malaysian Code on Corporate Governance were
incorporated into Part E, Chapter 15 of the MSEB LR, which was reissued in
January 2001.
3.14 Directors of listed companies are required by virtue of paragraph 15.26(a) of the
Listing Requirements to include in their annual report a narrative statement of
how they apply the principles set out in Part I of the Code to their particular
circumstances.
3.15 This is to ensure sufficient disclosure so that investors and others can assess
companies performance and governance practices, and respond in an informed
way.
3.16 Compliance with the best practice guidelines of the Code is not
mandatory.
3.17 However, paragraph 15.26 (b) of the Listing Requirements requires companies to
explain any circumstances justifying departure from such best practices and the
alternative to the best practice principles, if any, the company has adopted.
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THE BOARD OF DIRECTORS
Powers of the board
4.1 The board of directors generally have wider powers than the general meeting of
members.
4.2 This is because the articles typically provide directors with wide management
powers: Table A, art 73.
4.3 The general meeting, though, is able to control the exercise of the board's powers
indirectly through its power of appointment.
4.4 In Chan Choon Ming v Low Poh Choon & Ors, VC George JCA said that
the directors - have powers conferred on them to manage the
company.
4.5 The articles also usually confer various specific powers on the board of
directors.
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Management Directors have power to manage the business of the company.
Table A, art 73 specifies that they may exercise all powers of the
company except those specifically conferred on the company in
general meeting by the Act or the articles themselves
Delegation of
powers
The board usually has specific powers in the articles to delegate its
management function. Unless its articles provide otherwise, the
directors may delegate any of their powers to a committee of
directors, a director, an employee or any other person. Frequently,
the board will appoint one of its members to the office of managing
director: Table A, art 91. The board may delegate any of its powers
to the managing director: Table A, art 93.
Issue shares Once the company is incorporated the directors have the power to
issue further shares subject to such rights and restrictions as they
think fit: Table A, art 2.
Registration of
Transfer of shares
When a member wishes to transfer shares to another, the articles
often give directors the right to refuse to register the transfer: Table
A, art 22.
Negotiable
instruments andreceipts
A necessary adjunct to the power of management is the ability to
pay debts and give receipts on the company's behalf. Table A, art77 specifies that the company's cheques, other negotiable
instruments and receipts are to be signed, drawn, accepted and
endorsed by any two directors or in such other manner as the board
directs.
Calling Meetings All companies must hold a general meeting of its members at least
once in every calendar year: s 143. The articles may bestow the
power of convening general meetings on the directors.
Common seal Every company is required to have a common seal: s 16(5). The
common seal when affixed to a document and authenticated by the
appropriate officers represents the company's signature. The seal is
affixed to deeds, certain instruments such as transfers of land, share
certificates, and formal agreements. Table A, art 96 provides that
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every document to which the seal is affixed shall be signed by two
directors, a director and secretary or a director and some other
person appointed by the directors. Art 96 also specifies that the
directors must provide for the safe custody of the seal, which must
only be used, with their authority.
Dividends The power to declare dividends is granted to the company in
general meeting: Table A, art 98. This power is qualified by art 98
in that the dividend must not exceed the amount recommended by
the board. This enables directors to control the amount of
dividends
Proceedings of the board
Meetings
4.6 The management of the company's business is usually vested in the board of
directors collectively and not in individual directors, though sometimes, the boardmay delegate its powers to a managing director.
4.7 Table A, art 79 enables the directors to meet together as a board and regulate their
meetings as they think fit.
4.8 A person elected by the directors must chair directors meetings: Tab A, art 85. To
constitute a valid directors meeting requires more than the directors meeting
together informally to discuss the companys affairs.
4.9 According to the case ofPatch v Kennedy, a discussion between directors will not
amount to an effective directors meeting unless the directors are aware, before
proceeding to business that the occasion is to be a directors meeting. Informal
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meetings are common in the case of small companies where the directors and
shareholders are identical.
4.10 In order to expedite the decision-making process in these companies. Directors
may also make valid informal decisions without calling a proper meeting. The
consent of all directors is required in the case of such informal decisions of the
board.
Resolutions
4.11 Directors make decisions at directors meetings by passing resolutions. Tab A, art
A provides that a directors resolution shall be decided by a majority of directors
present and voting.
4.12 Tab A, art 88 further specifies that in the event of an equality of votes the
chairman has a casting vote, in addition to any vote they have in their capacity as
a director.
4.13 Powers conferred upon directors are conferred upon them collectively as a board;
therefore notice of an intended resolution must be given to every member of the
board. If this were not the case there could be a situation where the company was
managed by a clique and not by the board:Khoo Chan Yam v Gan Miew Chee @
Gan Gan Chua Poh & Ors 6 [2000] MLJ 20.
Resolutions without meetings
4.14 Whilst it is usual for directors to meet together to conduct board meetings this is
not always practical, particularly, as we noted above, in the case of small private
companies.
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4.15 Directors may therefore pass resolutions without a meeting being held by passing
a circulating resolution.
4.16 Accordingly, Table A contemplates that directors need not be physically
present in order to meet.
4.17 If all directors sign a document in favour of a resolution, that resolution is deemed
to have been passed at a board meeting held on the day it was signed. Tab A, art
90 allows for such a resolution to consist of several documents in like form, each
signed by one or more directors.
Notice of meetings
4.18 The company's articles regulate meetings, however the frequency of board
meetings is usually a matter for the directors to decide.
4.19 It is common practice for large public companies to hold meetings at regular
intervals.
4.20 Table A, art 79, however, enables a director at any time to requisition the
secretary to convene a board meeting.
4.21 Unless the articles provide otherwise, the general rule is that directors must
receive notice of board meetings and of the agenda to be discussed, in sufficient
time to enable them to attend. Notice of each meeting is not necessary, however,
if the articles or the directors set regular fixed meetings.
4.22 The Court of Appeal inAik Ming Sdn Bhd v Chang Ching Chuen, held that unless
the articles of a company provide otherwise, a meeting convened without any
notice at all is a nullity and all the business conducted at the meeting is void.
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4.23 The Court has discretionary power under s 355 of the Act to make an order
declaring that proceedings are valid notwithstanding such irregularity or
deficiency where substantial injustice would result from the invalidation of
proceedings at the meeting.
4.24 Section 355 (2) (a) vests in the Malaysian High Court the original discretion to
make a validation order.
Quorum
4.25 The articles usually specify how many directors constitute a quorum for a
valid board meeting.
4.26 A quorum is the minimum number of directors required for a valid meeting.
4.27 Table A, art 83 leaves the decision of the number necessary to constitute a
quorum to the directors themselves. In the absence of such a determination, a
board meeting requires a quorum of two directors.
4.28 A meeting cannot be constituted by one member and any resolutions purported to
be passed at such a meeting are invalid: United Investment & Finance Ltd v Tee
Chin Yong & Ors.
4.29 Statutory requirements with respect to minutes of directors meetings are those set
out in ss 156 and 157.
4.30 Section 156 (1) requires the company to keep minutes of meetings of directors,
signed by the chairman of the meeting.
4.31 Minutes, entered into books kept for that purpose, are to be taken as evidence of
the proceedings to which the minutes relate: s 156(2).
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4.32 These minutes must be kept at the companys registered office and shall be open
to the inspection of any member without charge: s 157(1).
Delegation of powers by the board
4.33 The articles bestow general and specific powers on the board. It has long been
held that unless there is some provision in the memorandum or articles to the
contrary, the board cannot delegate its powers to others: Totterdell v Fareham
Blue Brick Co.
4.34 In the above case of small private companies, it may be that there is no necessity
for delegation of the board's powers.
4.35 However, even in such cases it is not unusual for the articles to enable the board
to delegate broad powers to one or more of their number.
4.36 In the case of large companies there is a trend toward compartmentalisation
whereby the board delegates its powers inrelation to specific matters to particular
directors or as is increasingly common, to committees of directors.
4.37 For example, it is not uncommon for a director with accounting expertise to be
delegated the task of management of the company's financial affairs.
4.38 An increasingly common trend is for the board of public companies to be divided
among directors to whom day-to-day management has been delegated and
directors who do not take an active role in the daily management of the company
but participate in broader policy decisions. There is thus a distinction between
executive and non-executive directors.
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4.39 Non-executive directors are frequently appointed because of their experience in
business affairs or because their reputations add prestige to the company.
DIRECTORS
Definition
5.1 A director of a company is defined in s 4 as a person who is appointed to the
position of a director or alternate director regardless of the name given to their
position.
5.2 A director is not just a person formally appointed to the office. The s 4 definition
also regards certain persons to be directors even though they are not validly
appointed.
5.3 Unless the contrary intention appears, a person who is not validly appointed as a
director is also regarded as a director if:
the directors are accustomed to act in accordance with the persons
instructions or wishes (shadow director); or
they act as an alternate or substitute director.
De facto directors
5.4 A director is, by virtue of s 4, not just a person formally appointed to the office.
The definition also includes person who claim and purport to act as directors.
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5.5 Such persons are sometimes referred to as de facto directors and are subject to
the same statutory and fiduciary duties as directors who have been validly
appointed.
5.6 For example, in Corporate Affairs Commission v Drysdale, Drysdale was
appointed as a director to fill a casual vacancy on the board. The articles
provided that such a director could only hold office until the next annual
general meeting at which he or she was permitted to stand for re-election.
Drysdale's retirement or re-election was, however, not considered at the general
meeting. Consequently, under the articles, he was no longer a director of the
company. Nevertheless, he continued to participate in the management of the
company as if he were a director. The High Court of Australia held that,
despite the defect in his appointment, he was deemed to be a director and
subject to various fiduciary and statutory duties of directors.
5.7 It seems that a person who acts as a controller of the company, whether or not
they are held out or claim to be a director may be regarded as a de facto director:
Mistmorn Pty Ltd v Yasseen.
Shadow directors
5.8 The s 4 definitions also includes persons who act as shadow directors. These are
persons whose instructions or wishes are customarily followed by the directors of
a company,Re Hydrodam (Corby) Ltd.
5.9 Section 4(2) provides that a person who merely gives advice to the directors in his
or her professional capacity is not to be regarded as a "director" for the purposes
of s 4(1),Yap Sing Hock & Anor v PP.
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Types of directors
5.10 The most common types of directors within the board are:
managing directors;
chairman of directors;
governing directors;
executive and non-executive directors;
alternate or substitute directors;
associate directors; and
nominee directors.
5.11 A company is required to keep a register of directors, managers and secretaries
under s 141. The register must contain particulars of directors and their consent
in writing for appointment: s 141(2). This register is open to inspection by
members and any other person: s 141(5
Managing directors
5.12 Many companies appoint a managing director to be their chief executive officer
and manage their day-to-day business.
5.13 Table A, art 91provides for the board of directors to delegate some of its functions
to a managing director. Under art 93 the managing director has such of the
board's powers as are conferred by the directors.
Chairman of directors
5.14 Neither the Act nor the Table A articles bestow any special authority on the
chairman of directors who is merely the director appointed to chair and exercise
procedural control over directors meetings: Table A, art 85; and sign the minutes:
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s 156. In practice, however, the chairman is often given special powers and in
large public companies the position carries great prestige :AWA Ltd v Daniels
Governing directors
5.15 It is unusual for public companies to have a governing director. Some private
companies, which are formed to operate a family business, provide for the
nomination of a governing director: Re Chi Liung & Son Ltd; Tong Chong Fah v
Tong Lee Hwa & Ors.
Executive and Non Executive directors
5.16 Executive directors are full-time employees of the company.
5.17 Their main role is to carry out the day-to-day management of the companys
business. In this respect they comprise the senior management of the company.
5.18 In the case of large listed companies, the style and complexity of the business
means that the board of directors must delegate substantial control of the
companys activities to its management.
5.19 Non-executive directors have an important role to play in bringing an independent
view to the boards deliberations.
5.20 They should consider the interests of the company as a whole rather than
any sectional interest.
5.21 It is widely seen as a crucial aspect of good corporate governance that listed
company board comprise a number, if not a majority of non-executive directors.
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5.22 The effectiveness of company boards as monitors of management is enhanced by
the appointment of a significant number of non-executive directors.
Alternate or substitute directors
5.23 If a director of a company is unable for any time to act as a director, he or she
may appoint an alternate or substitute director.
5.24 A director of a public company, however, can only assign his or her office if
approved by a special resolution of the company: s 138(1).
5.25 It is more common for the articles to provide a mechanism for the appointment of
an alternate or substitute director.
5.26 Under Table A, art 82, a director may, with the approval of the board, appoint
another to be an alternate or substitute director in his or her place during such
period as is thought fit.
5.49 The appointment of an alternate director does not constitute an assignment of the
office of director: s 138(2).
5.28 An alternate director is entitled to notice of, and to vote at, board meetings. He or
she is an officer of the company and is subject to all the duties of directors.
Anaray Pty Ltd v Sydney Futures Exchange Ltd
5.29 The practice of appointing alternate directors may come to be regarded as
incompatible with the principles set out in the Code on Corporate Governance.
Those principles highlight the importance of all directors having a continuous and
informed role in the administration of the company and for appointments to the
board to be made in accordance with formal and transparent procedures.
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Associate directors
5.30 Some companies adopt the practice of appointing their junior executives as
associate directors. This is done to increase the status of the person appointed. In
some cases associate directors are appointed to act in an advisory capacity
because of their expertise in a particular area. The articles usually limit the
powers of an associate director. Under Table A, art 94 the associate's right to
attend or vote is subject to the board's approval.
Nominee directors
5.31 Sometimes a director is appointed to represent the interests of particular
shareholders or creditors on the board of directors.
5.32 A holding company usually has power to appoint officers to the board of its
subsidiary companies and frequently, they share the same boards. Where
directors are appointed to represent the interests of a particular group, they are
called nominee directors.
Committee of members
5.33 Companies with relatively large numbers on the board may decide that various
management functions be delegated to committees of directors.
5.34 Table A, art 86 provides that committees of directors exercise such powers as are
conferred by the board.
5.35 Any powers so exercised are deemed to have been. exercised by the board.
Committees of directors are often delegated the task of overseeing the company's
large-scale borrowings or construction of a particular project.
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5.36 Where powers are delegated to a committee, the committee only as power to act
within the scope of the powers delegated :Datuk Haji Harun bin Haji Idris & ors
v Public Prosecutor
Appointment of directors
5.37 Section 122 requires every company to have at least two directors.
5.38 The first directors must be appointed by being named in the memorandum or
articles: s 122(3).
5.39 The company cannot be registered unless this is done: s 16(7).
5.40 The Act does not set out the manner in which directors may be subsequently
appointed. The articles generally regulate this.
5.41 Under Table A, art 63 directors so appointed retire from office at the first annual
general meeting.
5.42 The articles of a company formed to take over the business of a sole trader or a
partnership frequently name the vendor of the business as its first director.
5.43 That person is often also named as a governing or managing director to ensure
continued control over the company.
Consent
5.44 A director must consent in writing to holding the position.
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5.45 Section 123(1) of the Act provides that a person shall not be named as a director
or proposed director in the memorandum or articles or in a prospectus of the
company unless they have consented in writing and the consent lodged with the
Registrar.
5.46 Failure to comply with s 123 does not mean that an appointment is invalid. A
person may still be regarded as a de facto director notwithstanding that the
formalities of consent have not been complied with.
Appointment by general meeting
5.47 The general meeting usually makes subsequent appointments of
directors: Table A, art 66.
5.48 Provision is usually made for the directors to appoint someone to fill a casual
vacancy: Table A, art 68.
5.49 In the case of public companies, where appointment of directors is by the general
meeting, each director must be individually appointed by separate resolution.
5.50 More than one director may be appointed by a single resolution if the
general meeting has first unanimously agreed to a resolution to that effect:
s 126(1).
5.51 This section prevents the voting in of a director who was on a joint ticket with
another who had strong support.
5.52 The appointment of a director in contravention of this section is void: S 126(2).
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Who may be appointed as a director?
5.50 A director must be a natural person of full age: s 122(2).
5.51 Any provision in the memorandum or articles of a company which was in force
prior to the commencement of the Act and which operated to constitute a
corporation as a director is to be construed as if it authorised that corporation to
appoint a natural person in its stead: s 122(4).
5.52 On the commencement of the Act any corporation which held office as director of
a company shall cease to hold office and the vacancy may be filled as a casual
vacancy in accordance with the articles: s 122(5).
5.53 Every director must have his principal or only place of residence within Malaysia:
s 122(1).
5.54 The term residence is not defined in the Act but has been held to mean
residence in one place with some degree of continuity:Fong Poh Yoke & Ors v
The Central Construction Company (Malaysia) Sdn Bhd[1998] 4 CLJ Supp 12.
5.55 Presumably temporary or accidental absences will not preclude a person from
being a director.
Share qualification of directors
5.56 The articles of a company often require a director to hold a minimum number of
shares in the company. This required number of shares is called the director's
share qualification.
5.57 A share qualification serves two purposes.
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5.58 It provides directors with an added incentive to ensure the financial success of
their company. It is also attractive to shareholders to see that directors are risking
their own money as well as that of the members.
Persons disqualified from acting as a director
5.58 The Companies Act and Securities Industry Act (SIA) contain a number of
provisions under which directors may be disqualified.
Automatic disqualification Convicted person S 130 (1) CA
Disqualification by court
order
Directors of insolvent
companies
Breach of KLSE Listing
Rules
s 130A CA
s 100 (1) (kk) SIA
5.59 An undischarged bankrupt who acts as director of, or directly or indirectly takes
part in the management of a company, except with the leave of the court is guilty
of an offence: s 125(1).
5.60 The Act does not provide for the removal or disqualification from office of the
bankrupt.
5.61 The articles usually provide that the office of director shall become vacant if the
director becomes bankrupt or enters into any arrangement or composition with
creditors: Tab A, art 72.
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5.61 The acts of a person disqualified from the office of director are still binding on the
company: s 127 Asia Commercial Finance (M) Bhd v Pasadena Properties
Development Sdn Bhd
Managing a Corporation
5.62 The meaning of management of a company for the purpose of the
disqualification provisions is not defined in the Act. The Australian case of
Commissioner for Corporate Affairs v Bracht(1989) 7 ACLC 40, held that a
bankrupt participated in the making of decisions that affected a substantial part of
the companys business and was therefore involved in managing the corporations.
Automatic Disqualification
5.63 A person who has been convicted of certain offences cannot be a director,
promoter or in any way take part in management of a company, within five years
of conviction or release from prison, without leave of the court: s 130(1). The
specified offences include: (i) an offence in connection with the promotion,
formation or management of a corporation; (ii) any offence involving fraud or
dishonesty punishable by imprisonment for a period of three months or more, (iii)
offences under ss 132, 132A and 303 of the Act.
Disqualification by Court Order
5.64 Section 130A provides creditors with additional protection from persons who
continually set up companies which fail.
5.65 This section enables the Registrar and the Official Receiver to apply for court
orders prohibiting certain persons from being a director or from being in any way
concerned in or taking part in the management of a corporation for a period of
five years from the date of the order, without leave of the court.
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5.66 Under this section, a person may be prohibited if he or she was a director of two
or more insolvent companies in the previous five years an the court determines
that persons conduct as a director makes him or her unfit to be concerned in the
management of a company.
5.67 A person applying for leave must give not less than ten days' notice to the
Registrar and the Registrar must be made a party to the proceedings: s 130(2).
5.68 The burden of proving that leave should be granted is on the applicant.
5.69 Section 100(1) of the Securities Industry Act 1983 allows an application to the
High Court by the Securities Commission or by a stock exchange for an order
removing a person form the position of director of a public company for such time
as the Court thinks fit.
5.70 The application may be made where a person has committed an offence in
relation to dealing in securities or has contravened the listing requirements of the
stock exchange.
Vacation of office
Under the Act
5.71 The Act provides various grounds upon which the office of director becomes
vacant:
where a director has not obtained the share qualification within two
months of appointment or has ceased to hold the share qualification. He
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or she may be reappointed after obtaining the qualification: s 124(1) and
(4).
in the case of a public company or subsidiary of a public company, where
a director attains the age of 70 years, the director's office is vacated at the
conclusion of the next annual general meeting: s 129(2). The person may,
however, be reappointed in subsequent years but the maximum duration of
the appointment can only be from one annual general meeting to the next.
Where the director seeks such reappointment the director must disclose his
or her age and the general meeting must pass a special resolution
approving the appointment.
Under the articles
5.72 Where the articles provide for the appointment of a director for a specified period
of time, the appointment ceases at the expiration of that time and the position
becomes vacant.
5.73 The articles usually specify additional grounds for vacation of the office of adirector. Under Table A, art 72 the office becomes vacant if a director.
ceases to be a director by virtue of the Act;
becomes bankrupt or makes any arrangement or composition with his
creditors generally;
becomes prohibited from being a director by reason of any order made
under the Act;
becomes of unsound mind or a person whose person or estate is liable to
be dealt with in any way under the law relating to mental disorder;
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resigns his or her office by notice in writing to the company;
for more than six months is absent without permission of the directors
from meetings of the directors held during that period;
without the consent of the company in general meeting holds any other
office of profit under the company except that of managing director or
manager; or
is directly or indirectly interested in any contract or proposed contract with
the company and fails to declare the nature of his interest in manner
required by the Act.
Termination of appointment as director
5.74 A director may be appointed for such a term as is provided by the articles.
5.75 Table A, art 63 requires a proportion of the directors to retire from office in
rotation. A retiring director is then eligible for re-election.
5.76 This ensures that management of the company retains continuity by allowing
most directors to remain in office for more than one year.
5.77 To meet the needs of particular companies, the articles may allow directors to be
appointed for life, for an indefinite term or a certain prescribed term.
5.78 Where a director is appointed for a particular term, at the expiration of that term
the appointment is terminated.
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5.79 A director may also resign from office.
5.80 Table A,art 72(c) provides that the office of a director becomes vacant if the
director resigns from office by notice in writing to the company.
Removal of directors
5.81 The general meeting of shareholders can only remove a director if empowered to
do so by the articles. Most articles have a provision to this effect.
5.82 Table A, art 69 empowers the company to remove any director before the
expiration of the term of office by ordinary resolution.
5.83 If the articles confer no such power, a special resolution would first be necessary
to alter the articles to provide the necessary authority.
5.84 In the case of public companies, s 128 provides that the general meeting may, by
ordinary resolution, remove a director before the expiration of his or her period in
office.
5.85 Removal in this manner is permitted despite anything to the contrary contained in
the articles or in a separate agreement between the director and the company:
Tuan Ishak Ismail v Leong Hup Holdings Bhd & Ors.
5.86 Section 128 attempts to give shareholders of public companies some control over
the composition of the board of directors. It prevents directors who are opposed
by the majority of shareholders from remaining in office.
5.86 A resolution for the removal of a director by the general meeting under s 128
requires special notice of 28 days to be given.
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5.87 This notice must also be given to the director concerned who is given the right to
be heard on the resolution at the meeting, irrespective of whether he or she is a
member: s 128(2).
5.88 The director may also require the company to send copies of his or her
representations regarding the removal to every member of the company: s 128(3).
5.89 In Solaiappan v Lim Yoke Fan, the Federal Court considered whether the special
notice requirements for the removal of directors under s 128 applied where the
companys articles provided for a lesser period
5.90 The vacancy created by the removal of a director may be filled at the general
meeting at which he or she was removed or it may be filled by the directors as a
casual vacancy under Table A, art 68: s 128(5).
5.90 Section 128 only applies to the removal of directors of public companies. In the
case of private companies, the articles govern the procedure for removal of
directors.
5.91 Table A, art 69 provides that a company may remove a director by ordinary
resolution.
5.92 The board notwithstanding anything in the articles or any agreement cannot
remove a director of a public company to that effect: s 128(8).
5.93 Section 128(2) only applies where removal is by resolution and not by other
means specified in the company's articles.
5.94 For example, in Tien Ik Sdn Bhd & Ors v Kuok Khoon Hwong Peter, the
company's articles allowed a director to be removed by serving notice, in
accordance with its art 85(f) and signed by a majority of directors, to that effect.
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The Supreme Court held that s 128(2) of the Act does not apply to the removal
of a director by notice under which the director was required to vacate his office
as director but may apply to cases where the director is removed
5.95 Section 128 permits a public company in general meeting to remove all appointed
directors, despite its reference to a singular director.
5.96 This would not result in a breach of s 122(1) which requires every company to
have at least two directors where it is proposed to immediately replace the
removed directors:
5.97 In Malaysia, the High Court has held that it is acceptable for a company to have
only one director so long as he or she takes steps to appoint another or others
within the grace period allowed by the Act: Wong Kim Fatt v Leong & Co Bhd.
5.98 Where a director is removed prior to the expiry of his term, the question arises
whether he can restrain the company from so acting or obtain damages for
wrongful dismissal.
5.99 A director cannot prevent the company from exercising its right to remove him.
The equitable remedies of injunction and specific performance are not granted to
enforce personal relations on unwilling parties: Noor Aini binte Majid v Pentex
Sdn Bhd.
6 PAYMENT AND OTHER BENEFITS TO DIRECTORS
6.1 One consequence of the fact that directors stand in a fiduciary relationship with
respect to the company will be discussed.
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6.2 Table A, art 70 provides that directors may receive such remuneration as is from
time to time determined by the company in general meeting. That article also
sanctions the payment of travelling and other expenses properly incurred by the
directors in connection with the company's business.
6.3 The payment of excessive remuneration to directors may constitute oppressive or
prejudicial conduct under s 181, especially where dividends are not paid or
reduced to a small amount.
6.4 This may be unfairly detrimental to a shareholder who is prevented from being a
director.
Unless there is evidence of oppression is not the function of the court to question
whether payments or remuneration sanctioned by the company are excessive or
improper: Low Tien Sang & Sons Holding Sdn Bhd & Ors v How Kem Chin &
Ors (High Court, Kuala Lumpur).
Disclosure
6.5 Information concerning directors remuneration must be contained in the financial
statements laid before the annual general meeting of all companies.
6.6 The annual return, lodged by all companies, except exempt private companies,
with the Registrar and placed on the public record also contains the companys
financial statements: s 165, Eight Schedule Part 11.
6.7 In order to comply with the accounts requirements of the Ninth Schedule of the
Act, the profit and loss statement must set out the total amount paid to directors as
remuneration for their services to the company or its subsidiaries.
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Loans to directors
6.8 A specific type of contract, which may be entered into by a director with his
company is a loan to the director from the company.
6.9 Section 133 restricts the giving of such loans to directors by 'Companies other
than exempt private companies: s 133(1).
6.10 This recognises that small, tightly held companies, in which the directors and
shareholders are mostly the same people, often find it useful to lend to their
directors. Where the interests of directors and shareholders closely coincide,
there is little likelihood of abuse in the company granting loans to directors.
6.11 In the case of larger companies, which may directly or indirectly raise money
from the public, however, s 133 aims to prevent directors improperly using the
funds of the company.
6.12 This may arise where the terms of the loan are more favourable to the director
than would be commercially available elsewhere.
6.13 Even where the terms of the loan are similar to those available commercially, the
policy of the section is that the director should borrow from those available
outside sources and not from the company.
6.14 Section 133A prohibits a company, other than an exempt private company, from
making a loan to any person connected with a director of the company.
6.15 Section 122A states that, for the purposes of Div 2 of Pt V, a person shall be
deemed to be connected with a director if he or she is -
(a) a member of that director's family; or
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(b) a body corporate which is associated with the director; or
(c) a trustee of a trust (other than an employee share scheme or pension); or
(d) a partner of that director or a partner of a person connected with that
director.
6.16 "Member of that director's family" is defined in s 122(2) to include the spouse,
parent, child (including adopted child and stepchild), brother, sister and the
spouse of his or her child, brother or sister.
6.17 A body corporate is associated with a director for the purposes of s 122A(1)(b) in
the following cases: s 122A(3):
(i) the body corporate is accustomed to act on the directions, instructions or
wishes of that director; or
(ii) that director has a controlling interest in the body corporate; or
(iii)that director or persons connected with that director or that director and
person connected with that director are entitled to exercise or control the
exercise of not less than 15 per cent of the votes attached to voting shares
in the body corporate.
6.18 Also included within the prohibition of s 133A are guarantees and the provision
of security given by a company in connection with a loan made to a person
connected to a director by any other person.
6.19 Exceptions to the prohibition set out in ss 133 and 133A include:
loans made by a company to a related corporation;
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provision of funds to meet expenditure incurred for the purposes of the
company or to enable an officer of a company properly to perform his or
her duties. The provision of such funds is subject to approval by the
general meeting of the company. Full disclosure must be made at the
general meeting: s 133(2)(a). This requirement is also necessary for the
following exceptions:
the provision of funds to a full time employee of a company or its holding
company to purchase a home. The provision of such funds is also subject
to approval of the general meeting of the company as outlined above;
a loan made by a company to a director who is a full time employee of the
company or a related corporation where the company at a general meeting
has approved a scheme for the making of such loans and the loan is made
in accordance with the scheme. This allows a company to make loans as
part of an employees incentive scheme; and
loans made by a company engaged in the business of lending money,
where the loan is in the ordinary course of its business. Thus, for
example, a bank may make loans to its directors. Where a company
makes a loan, gives a guarantee or provides security in contravention of ss
133 or 133A, the company is not guilty of an offence but any director, ofthe company who gave the authorisation is guilty of an offence.
6.20 Loans coming within the exceptions still require disclosure in the annual
companys financial statements in accordance with the Ninth Schedule of the Act.
6.21 In addition, directors in default are jointly and severally liable to indemnify the
company against any loss arising from for loans, guarantees or security made
without company approval under s 133: s 133(3).
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Consequences of breach of s 133
6.22 The company retains the right to recover the loan or its liability under a guarantee
or security where the prohibition under ss 133 or 133A is breached: ss 133(5) and
133A(3).
6.23 This overcomes the common law rule that the parties to an illegal contract are not
assisted by the courts to enforce any rights under the contract.
6.24 Given the right of recovery, the Federal Court later held that a guarantee or
security given in breach of the s 133 (1) prohibition is valid and not void: Co-
operative Central Bank Ltd v Feyen Development Sdn Bhd.
Compensation for loss of office
6.25 Section 137 attempts to limit the power of the board of directors to pay
compensation to a director for loss of office. At common law, directors are under
a duty to exercise their powers in good faith. Section 137 goes further in
safeguarding the interests of shareholders.
6.26 It is unlawful for a company to make a payment or give any benefit to a director
by way of compensation for the loss of office or retirement from office unless
particulars of the proposed payment have been disclosed to the members of the
company and approved by the general meeting: s 137(1).
6.27 Certain payments set out in s 137(5) are "exempt benefits" which are not subject
to the prohibitions of s 137(1).
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THE COMPANY SECRETARY
7.1 Every company is required to have at least one secretary: s 139(1).
7.2 The Act only prescribes one as the minimum number.
7.3 A company may, however, have more than one secretary. Large companies often
have a secretary, as well as assistant or deputy secretaries.
7.4 The term "secretary", unlike "director, is not defined in the Act.
7.5 However, a secretary of a company is included within the s 4 definition of
officer and is subject to the statutory duties of officers and agents under s 132
of the Act.
Appointment of secretaries
7.6 Section 139(1A) requires the first secretary of the company to be named in the
memorandum or articles. The office of secretary must not be vacant for more
than one month at any one time: s 139(1B).
7.7 Table A, art 95 provides that a secretary of the company holds office on such
terms and conditions, as to remuneration and otherwise, as the directors
determine.
7.8 Section 139(3) states that secretaries are to be appointed by the directors; the
procedure is not laid out.
7.9 Presumably it is by a resolution of the board. In the case of small private
companies, it has been recognised by the courts that certain formalities need not
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be strictly complied with where all the shareholders have consented or
acquiesced.
7.10 InNorthside DevelopmentsPty Ltd v Registrar-General(1987) 5 ACLC 642, a
private company, whose only function had been to hold land, was managed by
one director and his accountants.
7.11 One of the accountants, Horder, had acted as secretary despite no formal
appointment.
7.12 The Australian equivalent of s 139(3) did not specify how the appointment of a
secretary was to be made; however, it was held that the directors and shareholders
had all acquiesced to Horder exercising the office of secretary and the directors
were regarded as having done that in which they had all acquiesced.
On the other hand, Horder's purported successor was held not to have been
appointed. A notice filed with the Corporate Affairs Commission [the Companies
Registry] purporting to show a change of secretary provides prima facie evidence
but cannot stand in the face of actual evidence. Directors who leave management
to one director cannot be assumed to have delegated authority to the one director
to appoint whomever he wished as secretary without prior consultation.
7.13 Though the Act is silent, Table A, art 95 states that the directors have the power to
remove the secretary.
7.14 A secretary may normally resign on reasonable notice to the company, that is, to
the board of directors.
7.15 In the Northside Developments case, resignation notified to a de facto managing
director without authority to accept it was held to be invalid.
7.16 A director of a company may also be its secretary.
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7.17 However, s 139(5) specifies that where a provision requires something to be done
by a director and a secretary, that requirement is not satisfied if it is done by the
person who is both director and secretary.
7.18 A person may be a secretary of more than one company and may have
other employment.
7.19 Section 141 requires the company to keep a register of its directors,
managers and secretaries.
7.20 With respect to the secretary, the register must specify his or her full name,
residential address and other occupation, if any.
7.21 Under s 141(6) the company is required to lodge with the Registrar:
within one month after its incorporation, a return containing the
particulars of the register of secretaries;
within one month after a secretary is appointed, a return containing the
secretary's full name, address and other occupation (if any); and
within one month after a person ceases to be a secretary, a return
notifying that fact.
Who may be appointed as a secretary?
7.22 A secretary must be a natural person of full age: s 139(1).
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7.23 The secretary, or if there is more than one, each of them, must name his or her
principal or only place of residence in Malaysia: s 139(1).
7.24 The secretary who is ordinarily so resident is required to be present at the
company's registered office either in person or by an agent or clerk during the
hours when the office is required to be open and accessible to the public: s 139(3).
7.25 A company secretary must be:
a member of a professional body or any other body prescribed by the
Minister; or
licensed by the Registrar of Companies: s 139A.
7.26 The Finance Committee recommended that formal and ongoing training be
required for public company secretaries to ensure compliance with the Code on
Corporate Governance.
7.27 This recommendation recognises the crucial role of the company secretary inadvising the board of its compliance with the Code and with other relevant laws
and rules, particularly securities and banking laws.
7.28 Additionally, the Committee recommended that company secretaries must also be
educated on their independence regarding giving advice without fear or favour.
7.29 A person cannot act as a secretary if he or she is:
an undischarged bankrupt;
convicted of any of the following offences:
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(a) those in connection with the promotion, formation or management of a
corporation;
(b) those involving fraud or dishonesty where the punishment is imprisonment
for a period of three months or more;
(c) those involving dishonesty and lack of reasonable diligence in the
discharge of director's duties:
(d) insider trading; and
(e) those involving situations where proper company accounts are not kept; or
no longer a member of a body prescribed by the Minister under s 139B; or
no longer holding a licence to act as company secretary issued by the
Registrar of Companies: s 139c(l).
Function of a secretary
Administrative role
7.30 The nature of the secretary's duties varies from company to company.
7.31 Responsibilities are imposed upon the secretary by the Act, the articles or the
appointing board of directors.
7.32 The courts' present view of the function of a company secretary has changed from
that held in the late 19th and early 20th centuries.
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7.33 Secretaries were initially regarded as persons of low status and authority
in the company.
7.34 In Newlands v NationalEmployers Accident Assoc, the functions of a secretary
were described as clerical and ministerial only. In Bamett, Hoares & Co v
South LondonTramways Co., the secretary was regarded as a mere servant of
the company. This is no longer the present view. The office of secretary,
particularly in large companies, is now regarded as a position of importance
with significant responsibilities and influence.
7.35 Salmon LJ in the case ofPanorama Developments (Guilford) Ltd vFidelis
Furnishing Fabrics Ltd, described a secretary as the company's chief
administrative officer.
7.36 A company secretary is now also seen as having customary authority to bind the
company to certain contracts with outsiders.
7.37 The customary authority of a secretary includes the authority to enter into
contracts connected with the administration of a company and the counter-signing
of the affixation of the companys seal pursuant to a resolution of the board of
directors. It does not extend to entering into commercial transactions decided
upon by the secretary:Mohamed b Othman v Abdul Shattar b Abdul Rahim .
Responsibility imposed by the board
7.38 The company secretary's role in the company is not managerial or
executive.
7.39 Apart from statutory duties, he or she undertakes functions which are assigned by
the articles or by contract of service, or as is usually the case, by the directors.
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7.40 This is illustrated in Wong Kim Fatt v Leong & Co Sdn Bhd & Anor. The
company had two shareholders. The majority shareholder, acting in accordance
with his rights under the articles requisitioned for the purchase of the shares of
the plaintiff, the shareholder. One of the grounds on which the plaintiff
opposed this compulsory acquisition was that the company's secretaries had no
authority to issue the notice of requisition of his shares. Chang Min Tat J
dismissed this argument, holding that the secretaries were carrying out the
instructions of the other director, which were given properly and in accordance
with the company's articles.
7.41 In many instances, the secretary is responsible for the preparation of the
company's accounting records.
7.42 This responsibility is not imposed by the Act, but rather the board of directors.
7.43 A secretary who assumes that responsibility may be made liable as an officer in
default under s 370(3).
7.44 InDeputyCommr. for Corporate Affairs v Stokes, the Commissioner argued that
the secretary was responsible to ensure the company maintained accounting
records that correctly record and explain its transactions and financial position
under the Australian Uniform Companies Act equivalent of s 167. The court
rejected this argument. Burt CJ held that directors have the responsibility to
ensure the company's compliance with accounting records. In order to
ascertain whether the secretary is an officer in default in respect of a failure to
keep accounts, the proper approach is to determine what obligations the
secretary assumes in each particular case.
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Statutory Responsibilities
7.45 Some provisions of the Act specify that a breach renders the officers in default
guilty of an offence.
7.46 Section 370(3) provides that an officer in default is one who is in any way
knowingly and wilfully guilty of the offence or authorises or permits the
commission of the offence.
7.47 Accordingly, the Act makes the secretary prima facie responsible for:
the maintenance of the company's registered office in accordance with s
119;
the lodgement of returns with the Registrar of the particulars of directors,
managers and secretaries required by s 141;
the lodgement of the company's annual return with the Registrar in
accordance with s 165.
Some of the main duties of a secretary.
7.48 The list is not exhaustive:
to carry out the functions of the chief administrative officer of the
company;
to ensure that the necessary registers required to be kept by the Act are
established and properly maintained;
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to ensure that all returns required to be lodged with the Registrar are
prepared and filed within the appropriate time limits;
to organise and attend meetings of the shareholders and directors,
including the sending out of notices, the preparation of agendas etc;
to be conversant with meeting procedures;
to ensure that the company's books of accounts are kept in accordance
with the Act and that the annual accounts and reports are prepared in the
form and at the time required by the Act;
to supervise the company's share capital generally, including the
preparation of allotment letters, issue of share certificates, etc;
to supervise the preparation of tax returns etc;
to attend to the company's insurance requirements; and
to be conversant with statutory requirements.
7.49 The articles may also impose responsibilities on the secretary.
7.50 A document upon which the company's seal is affixed must be signed by a
director and countersigned by a secretary: Table A, art 96.
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DEFECTIVE APPOINTMENTS
8.1 Both the Act and the articles impose formal requirements with respect to the
appointment and qualification of directors.
8.2 In some cases directors or secretaries may act despite the fact that there is a
technical defect in their appointment.
8.3 Section 127 deals with the problem of defective appointments.
8.4 The acts of directors, managers or secretaries are valid notwithstanding any defect
that may afterwards be discovered in their appointment or qualification: s 127.
8.5 Table A, art 89 similarly validates the acts of the board of directors or committees
of directors.
8.6 The court also has power to validate contraventions of the Act: s 355.
8.7 This power does not extend to validating acts which are void and therefore anullity:Aik Ming Sdn Bhd v Chang Ching Chuen [1995] MLJ 770.
8.8 Section 127 applies to validate acts of directors, managers and secretaries which
may affect not only the shareholders but also outsiders.
8.9 In so far as that section affects outsiders, it is governed by the rule in Royal
British Bank v Turquand
8.10 Under s 124(3) and art 72 the office of director is vacated if a director does not
have the required share qualifications, becomes bankrupt or becomes prohibited
from being a director by reason of any order of court.
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8.11 Section 127 validates the acts of such directors notwithstanding any defect that
may afterwards be discovered in his or her appointment or qualification.
8.12 In Asia Commercial Finance (M) Bhd v Pasadena Properties Development Sdn
Bhd[1991] 1 MLJ 111, the High Court held that a person disqualified under s 125
had no capacity to affirm an affidavit on behalf of the company. However, the
court did not consider the application of s 127, which provides that the acts of a
person disqualified from the office of director are still binding on the company.
8.13 Section 127 does not, however, apply to validate acts of directors who in fact
were never appointed to the office or who continue to act after their term has
expired