Directors’ liability and protection

Introduction
WHERE there is a corporate failure of any magnitude, attention would inevitably turn to the directors of the company. Common law and statute bestows upon a director certain duties. Essentially, a director shall act honestly and use reasonable diligence in discharging his duties whilst acting in the best interests of the company.
An honest and reasonable director can still be negligent, in default or in breach of a trust or duty affixed to him and there is little a director can do to circumvent the accountability attached to him.
Enter Section 354 of the Companies Act 1965 which gives the court powers to relieve a director from the consequences of his negligence, default and breach of duty or trust.
It is pertinent to note that any provision indemnifying a director against liability for negligence, default or breach of duty/trust is void regardless of whether such a term is in the company's Articles of Association or in an employment contract. Notwithstanding this, a professional indemnity insurance policy may be taken out to indemnify the insured against any claims for breach of professional duty. In a standard policy the indemnity would not cover dishonest or fraudulent acts.
Prerequisites
As far as Section 354 is concerned, the director must show that he acted honestly, reasonably and that it is fair for the courts to excuse him having regards to all the circumstances of the case.
These three prerequisites are to be read conjunctively. The Court of Appeal in Pioneer Haven Sdn Bhd v Ho Hup Construction Co [2012] 5 CLJ 169 suggested that 'honestly' refers to a subjective state, free from any intention to deceive or defraud.
As to the court's evaluation of the prerequisite 'reasonably', whether a director has acted reasonably depends to some extent on the way in which matters have been handled in the company in the past coupled with an evaluation on whether the director acted in the affairs of the company as he would have in relation to his own affairs. This suggests a semi-subjective test as opposed to a purely objective test where the experiences of the director are not considered (Re Duomatic Ltd [1969] 1 All ER 161).
Finally, it must be shown that the circumstances are such that it is fair to excuse the director of his liability. This ultimately boils down to the level of discretion exercised by the courts.
Parameters of Section 354
Perhaps, the main importance of this 'get out of jail' provision is that it only applies to relieving a director from liability where it is the company that is suing him rather than a third party enforcing a civil liability.
In Mohd Izzat Ismail v Matrix Business Consulting [2011] 1 LNS 300, the High Court held that the court's power to excuse a director from any breaches of duty is limited in its operation to offences under the Companies Act 1965 only. This mirrors the position taken by the English courts which added that relief may be granted to criminal as well as civil offences within the English Companies Act.
In addition to that, relief under Section 354 should be sparingly applied as it is trite law that a fiduciary is always put under a strict duty of care.
A person seeking relief under Section 354 is not bound to plead it specifically and may raise it as a defense during proceedings. They need not wait until proceedings are commenced against them and may opt to apply for relief as a pre-emptive measure.
Separately, a company may elect to ratify breaches of duties by its directors at a general meeting of its shareholders.
Conclusion
With the protection availed to directors through Section 354, directors are no longer held hostage to the whims of the members of a company when the issue of liability arises. This is especially significant when the breach is merely negligent but not necessarily deliberate. A director has an alternative recourse to the courts if the members of the company are indifferent to his genuine reasons for committing the breach.
However, it must be borne in mind that the relief permitted is ultimately dependent on the extent of the discretion employed by the courts in determining whether it is fair for relief to be granted. It is this "judicial discretion" that limits the extent of the protection to cases where it is just to do so.

This article was contributed by John Rolan of Christopher & Lee Ong. (www.christopherleeong.com)