Case Update: Company Cannot Suspend Its Directors

The High Court in Dato’ Shun Leong Kwong & Anor v Menang Corporation (M) Bhd & Ors [2021] MLJU 870 (grounds of judgment dated 21 May 2021) dealt with, among others, the issue of whether the company could suspend its directors.  The Court also addressed issues relating to Board meetings and the requisition of the members’ meeting.

Summary of Decision and Significance

Decision by: Wan Muhammad Amin bin Wan Yahya JC

The underlying dispute centres on a tussle of control of the board of directors of the 1st Defendant company, Menang Corporation (M) Bhd. Menang Corporation is listed on the Main Board of Bursa Malaysia.

The Plaintiffs were two directors out of a total of nine.

By way of a directors’ written resolution, the Plaintiffs were suspended from exercising their duties and functions as directors of Menang Corporation. This was until the completion of investigations on certain irregularities on the part of the Plaintiffs.

Subsequent to the suspension, a virtual Board meeting was held. The Plaintiffs could not log in using the Microsoft Teams link.

The Plaintiffs filed court proceedings to seek certain declarations. The first issue was whether the company could suspend the Plaintiffs as directors. Next, whether the other directors had deliberately or intentionally excluded the Plaintiffs from that Board meeting.

The High Court held that the Companies Act 2016 does not allow for any express or implied power for the suspension of directors. Menang Corporation’s constitution also had no provision  for the suspension of directors.

On the exclusion from the Board meeting, the High Court found that the exclusion was not deliberate or was unintentional. The exclusion was an irregularity and was ratified by the directors subsequently.

The Court also could not make a finding of deliberate or intentional exclusion solely on affidavit evidence or based on the questions of law posed to the Court.

This case is important in confirming that there is no such express power to suspend a director. The question was left open whether an express provision in the company’s constitution could effectively suspend a director.  The decision also touches on other important issues on Board meetings and the directors’ consideration of the members’ requisiton for a general meeting.

Background Facts

Back in February 2021, The Edge had covered the news on how Menang Corporation had suspended its two non-independent non-executive directors.

The Court judgment set out these background facts.

On 12 February 2021, a Memorandum was issued. It contained the preliminary finding of a due diligence exercise by Menang Corporation. The memorandum showed irregularities on the part of the Plaintiffs.

On 15 February 2021, through a directors’ written resolution, Menang Corporation suspended the Plaintiffs from exercising their duties and functions as directors of Menang Corporation until the investigative committee had completed their findings.

On 17 February 2021, a notice of the audit committee meeting and a notice of Board meeting were issued. The meetings were scheduled for 25 February 2021, with the audit committee meeting first and then followed by the Board meeting. The Plaintiffs were not included in the audit committee meeting invitation list. But the notice of Board meeting included the Plaintiffs.

These meetings would be held through the Microsoft Teams platform. It seemed that the audit committee meeting contained a first Microsoft Teams link (First Teams Link) while the Board meeting contained a different Microsoft Teams Link (Second Teams Link).

On 22 February 2021, two shareholders issued a Notice of Requisition to request the directors to hold a general meeting. The proposed resolution for the general meeting was to remove the Plaintiffs as directors.

on 25 February 2021, the directors proceeded with the audit committee meeting first at 2.30pm. After the audit committee meeting, the directors continued with the Board meeting at 3.45pm by using the First Teams Link. The directors had not used the Second Teams Link. On the other hand, the Plaintiffs tried to log in using the Second Teams Link but could not do so.

At this Board meeting on 25 February 2021, the directors present agreed to fix 30 March 2021 to be the date for the general meeting as requisitioned by the shareholders.

On 16 March 2021, a directors’ circular resolution was issued to ratify, confirm and accept the decisions made by the Board on 25 February 2021.

On 18 March 2021, the directors’ circular resolution was approved by seven out of the nine directors. The Plaintiffs were the two directors who did not sign it.

The Plaintiffs filed an Originating Summons to seek certain declarations, among others, on the Plaintiffs’ suspension and to invalidate the Board meeting of 25 February 2021.

The Originating Summons needed to be decided urgently before the 30 March 2021 date for the general meeting. The parties agreed for the Court to determine two questions of law:

  • whether, on the facts presented before the Court, the 1st Defendant company has the power, express or implied, to suspend the Plaintiffs as directors appointed pursuant to Article 110 of the Constitution of the 1st Defendant; and
  • in the event the answer to the above is negative and having regards to the facts presented before the Court, what is the effect in law on the Board of Directors’ decisions including the decision to call for a meeting of members pursuant to the notice of requisition received from Dato’ Lee Chin Hwa and Nicholas Pun Chee Cheang dated 22-2-2021 to be held on 30-3-2021.

Decision

The Court proceeded to address the two questions of law.

Whether the Company had the power, express or implied, to suspend the Plaintiffs as directors

The Court decided that the Company did not have the power, express or implied, to suspend the Plaintiffs as directors. The reasons are as follow.

First, the Court took note that there is no express power to suspend a director either in the Companies Act 2016 (CA 2016) or in the Company’s constitution. Therefore, the Court must consider whether the power to suspend can be implied.

Second, the Court decided that the Interpretation Act would not assist in interpreting the Company’s constitution. The Interpretation Act applies only to written law. The CA 2016 does not make it mandatory to have a constitution. This is in contrast with the CA 1965 which imposes the mandatory requirement for the constitution (then, the Articles of Association) to have certain default provisions in Table A of the Fourth Schedule.  Arguably, the Table A Articles of Association might be ‘written law’ under the Interpretation Act. But the constitution under the CA 2016 regime does not fall within the Interpretation Act.

Third, section 211 of the CA 2016 does not assist the Company’s interpretation on the power to suspend. Section 211 sets out the Board’s power to manage the business and affairs of the company. The wording of section 211 cannot be stretched to include the power to suspend.

Fourth, in interpreting the power to suspend, there is no distinction between a director appointed by the members or a director appointed by the directors (e.g. to fill a casual vacancy). A director, howsoever appointed, is a director whose rights, duties and obligations are the subject matter of uniform regulation under the CA 2016 and the constitution.

Fifth, the Court applied the earlier High Court decision in Kwan Teck Hian v Insulflex Corporation Sdn Bhd [2018] 2 CLJ 335. That a company has no power to suspend its directors from office unless such power is expressly granted under its constitution. A director has specific statutory duties. Suspending a director from office will prevent that director from carrying out those duties which are mandatory.

As the CA 2016 does not provide for the suspension of a director, the Companies Commission of Malaysia will not recognise the director’s suspension. Nor would third parties be aware of the suspension since that director would remain on CCM’s records as a director of the company.

The Court declined to follow the earlier High Court decision of Fong Poh Yoke & Ors v The Central Construction Company [19980 4 CLJ Supp 112. This case suggested that the Board could exercise a power to suspend a director.

What is the effect in law on the Board’s decisions including the decision to call for a meeting of members pursuant to the requisition?

The Court considered the two positions in law:

  1. If the Plaintiffs’ exclusion from the Board meeting of 25 February 2021 was deliberate or intentional, then the Board meeting is a nullity or invalid – applying the Court of Appeal decision of Aik Ming v Chang Ching Chuen [1995] 2 MLJ 770.
  2. However, if the Plaintiffs’ exclusion was not deliberate or is unintentional, then the exclusion was a mere irregularity and is ratifiable. The Court set out several authorities that an irregularity can be ratified.

The Plaintiffs’ counsel pitched their case that the Plaintiffs were “deliberately suspended and subsequently excluded” from the Board meeting of 25 February 2021.

The Company’s response was that there was no such deliberate exclusion. The company secretary had sent out the notice of Board meeting and the Second Teams Link to all the directors, including the Plaintiffs. When the directors continued to use the First Teams Link, that had caused the Plaintiffs to not be able to join the Board meeting. This was an inadvertent mistake.

The Court found that the Plaintiffs failed to provide this deliberate or intentional exclusion. An intentional act is not something that can be easily proven via affidavit evidence. The Court noted that it was perhaps the Plaintiffs’ main flaw to assume that the Originating Summons was to be decided on questions of law.

Instead, the Court found that it appeared to be a genuine mistake. The company secretary also did not realise this mistake as the person administratively involved in the running of the Board meeting. It was a plausible explanation, especially considering the nature of these types of meetings can keep a person’s attention away from other matters except for the work they were presently engrossed in.

Since the exclusion was found to be not deliberate or intentional, the Court next considered whether the decisions at the Board meeting was ratifiable.

The Court did hold that the irregularity was validly ratified by the subsequent directors’ circular resolution. The Court also noted that when the circular resolution was issued, the two Plaintiffs did not object per se to the circular resolution or its issuance.

Next, the Court also took into consideration that the decision at the Board meeting of 25 February 2021 or the directors’ circular resolution was an inevitable outcome. Seven out of the nine directors had approved the decisions on both occasions.

Finally, the Court considered the final issue of whether the Board was duty-bound to summon a general meeting in light of the members’ requisition under section 311 of the CA 2016.

The Court took note that the Plaintiffs’ ultimate purpose was to prevent the general meeting on 30 March 2021 from proceeding. This general meeting would consider the resolution for the removal of the Plaintiffs as directors.

The Court held that when the Board met to consider the section 311 requisition notice, the Board had no discretion to refuse to call the general meeting. This is where the relevant provisions of section 311 of the CA 2016 had been satisfied. Thus, the outcome of the Board meeting of 25 February 2021 would have been inevitably the same.

While the Plaintiffs may disagree with the decisions of the majority of the Board, but as long as the majority are not abusing their powers and are not depriving the Plaintiffs as the minority of their rights, there is no reason for the Court to interfere with the said decision of the majority.

Comments

First, on the issue of suspension of directors. Consistent with the earlier case of Kwan Teck Hian, this case held that the CA 2016 does not allow for the suspension of a director.

Second, I wonder that even if the constitution were to allow for a provision to suspend a director, can there be a valid suspension of a director?

There would continue to be the issue of the CCM records not recognising the suspension of a director. In law, an individual is either a director or not a director. Being a director carries with that position all the statutory powers and liabilities under the CA 2016 and other statutes. It is difficult to see how a resolution by the directors or shareholders can suspend the duties and functions of a director.

Further, the statutory definition of a director under the CA 2016 is wide in that it “includes any person occupying the position of director of a corporation by whatever name called…” Any suspension would not remove that person’s name from the CCM records as holding the position of a director. Further, as a public listed company, the Bursa Malaysia Listing Requirements would have also continued to hold that person as a director, and there would continue to be powers and obligations under the Listing Requirements as well.

Third, the case also highlights the technical issues that can arise from virtual Board meetings, considerations on the notice of meeting, and the virtual venue. But where there are irregularities or genuine mistakes, these mistakes can be subsequently ratified.

Fourth, the case highlighted the almost mandatory need for the directors to consider the requisition notice under section 311 of the CA 2016 and the directors’ duty under section 312 to call the general meeting. However, section 311 also recognises these exceptions when the resolutions cannot be properly moved:

  • if the resolution is passed, would be ineffective whether by reason of inconsistency with any written law or the constitution;
  • the resolution is defamatory of any person;
  • the resolution is frivolous or vexatious; and
  • if passed, the resolution would not be in the best interest of the company.

Therefore, when considering the requisition notice under section 311, the directors do have some discretion in deciding whether the proposed resolution falls within the above exceptions. If they do, the directors could validly decide that no general meeting should be held.

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