Must A Director Disclose His/ Her Personal Interest In A Contractual Transaction?

Can a company director influence another director to enter into commercial agreements/ contractual transactions while secretly reaping personal benefits out of the agreement/ transaction? Can a director put his personal gain above that of the company and influence the rest of the directors to ensure that the company lands commercial agreements/ contractual transactions?

Generally speaking, it is the duty of the directors of a company to direct, steer and make decisions in the best interests of the company (whilst putting aside his personal interest or gain that he might potentially reap out of the commercial agreements/ contractual transactions).

Hence, in the event the above scenario happens, a company director has the obligation to disclose his or her personal interests in the commercial agreements/ contractual transactions.

The law on this issue

Section 221 of the Companies Act.  

The act states that a director is required to disclose/ make known his interest to the rest of the directors of the company so the company can come to an informed decision as to whether to continue pursuing the contract and allow the particular director to reap personal profit or vice versa. 

This is to ensure that: 

1. There is transparency in terms of the running of the company; and
2. The people who manage the company have some form of integrity whilst managing the company.

When is the right time to disclose?

As soon as practicable after the relevant facts have come to the director’s knowledge. 

How to determine if an interest must/ no need to be disclosed?

There is no set test for this topic- as long as a director questions the need to disclose, the court says: ‘‘just disclose it”.

What happens after a director discloses his personal interest?

The director can still attend board of directors meetings. However: 

1. He cannot participate in any discussion while the contract or proposed contract is being considered during the meeting; and 
2. He cannot vote on the contract or proposed contract.

Does it mean that after disclosing his interest, he is exempted from acting in the best interest of the company? 

No. Even after disclosure, the director still has the fiduciary obligation to act in the best interest of the company.

What are the exceptions to the general rule?

1. There is no material interest;
2. The interest relates to any loan to the company that the director has guaranteed or joined in guaranteeing the repayment of the loan or any part of the loan; 
3. Where the contract is made for the benefit of the company by virtue of the fact:
   1. That both contracting companies are related to each other; and 
   2. The director is also the director of the other company.  

What happens if a director chooses to ignore the rules above?

If found guilty and convicted, can be liable to imprisonment not exceeding 5 years/ fine not exceeding RM3,000,000.00/ both. 

Conclusion
Is it harsh? Probably so. Is it necessary? A resounding yes, as directors are entrusted with the responsibilities of managing their companies’ businesses and making corporate decisions for the benefit of their companies and not theirs. 

As noted earlier: ‘‘when in doubt,  disclose”.

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