Court of Appeal passed up opportunity to make landmark decision

In a usual housing project, a purchaser buys a house from the developer, then takes a loan to finance the purchase. The bank pays the developer periodic payments based on architect's certificate. Problem is, sometimes the architect's certificate may not be reflective of actual development on site. Of course, the architect owes a duty of care as a professional, but money would have been released to the developer already by then.

In Cheah Swee Fah v BBMB, the purchaser sued by the bank argued that the bank has paid improperly as the architect's certificate was not reflective of the status of development on site. The Court of Appeal held (correctly) that the bank ought to continue releasing the payments because the bank is neither obligated nor capable of ascertaining actual status of development on site.

Whilst there is nothing technically wrong with such a ruling, this ruling has failed to consider the reality that many times, when projects are abandoned, purchasers actually know about the abandonment and do write in to the banks to request for there to be no further payments authorised. Under such circumstances, how can the bank feign ignorance of the development on-site?

The grim reality is that banks who receive such letters from purchasers nevertheless would advise them that they are obligated to continue releasing payment to the delinquent developer. It seems that the banks are more concerned about their liability based on documents, rather than on actual liability in the event a disgruntled purchaser decides to sue the bank for its refusal to honour the communication made.

In this, like many other circumstances, the man in the street falls afoul on the wrong side of the law. Revolutions start when justice through law (the motto of the Bar Council) fail to achieve justice in fact. The superior courts would do well to seek to administer justice beyond the written word alone.

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I write because I have not given up on courts of law to administer justice, even this side of Eternity. E-mail me at khenghoe@mycounsel.com.my.

Directors of multiple companies beware

It is quite common in Malaysia for individuals to hold directorships in multiple private companies. Usually, these companies would be somehow related, or in a related industry. However, unless one company is a wholly-owned subsidiary of the other, or that the sets of directors-shareholders in the different companies are identical, such individuals expose themselves to the risk of being held liable for breach of fiduciary duty.

Like it or not, the law considers each and every company as a separate legal entity. As separate legal entities, the law expects the directors of each company to owe a fiduciary duty to the company concerned. This means that the directors must ALWAYS act in the best interests of the company. So, if a director comes across some opportunity or information which may be of use to the company, the director is compelled in law to offer that to the company and not keep it to himself.

What then happens when one is a director of multiple companies? To whom does one offer the opportunity? Herein lies a potential conflict of interest. The law expects the director to owe a separate fiduciary duty to each individual company, which clearly puts the director in an untenable position. If a director affords the opportunity to 1 company only, the other companies can hold the director liable for its loss.

How then can a director overcome this? One possible way is to recognise the potential conflict situations before they occur, and to come to an agreement with all other directors and shareholders concerning such conflict situations and how they would be resolved. A simple directors and shareholders agreement entered into during incorporation (and definitely whilst parties remain on friendly terms) would be most helpful. Towards this end, it is frightening to note how few companies actually take the trouble to draft terms of a directors and shareholders agreement from the start. Failing to plan is, of course, planning to fail.

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The above entry was inspired from the latest Federal Court decision of The Board of Trustees of the Sabah Foundation v Dato Syed Kechik Syed Mohamed, which held a director liable in breach of fiduciary duty even though he took the trouble of placing nominees in his stead. For any questions or comments, email me at khenghoe@mycounsel.com.my.