172. Provision protecting officers from liability Flashcards
- Provision protecting officers from liability
[172.01] Before this section was enacted, directors of the company, who are often also the shareholders of the company often insert provisions in the constitution, or in any shareholders’ agreement which exclude them from any liability arising from their office as directors of the company for any negligence, default, breach of duty or trust. To prevent them from mismanaging the company and also getting themselves absolved from liability for their breach of fiduciary duty or trust, this section declares such exempting provision to be void: s 172(1). In addition, a provision of an indemnity to cover such breaches is also void, except as provided by ss 172A or 172B. This section was adopted from s 232 of the Companies Act 2006 (UK), where predecessors of the section were introduced as a knee-jerk reaction to the horrendous decision in Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, Ch D where the company lost a substantial amount of money owing to the fraud of the chairman and the other directors were sued for negligence in failing to prevent the fraud. The action failed, inter alia, because of a provision in the articles exempting the directors from liability apart from losses caused by “their own wilful neglect or default”. The previous s 172(2) was discussed in Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra & Ors v Perdana Petroleum Bhd (formerly known as Petra Perdana Bhd) [2013] 8 MLJ 280, HC where it was held that the directors of a company could not avail themselves of such an indemnity merely because the derivative action brought by them was dismissed and there was no finding or judgment by the court whether they were liable for the alleged breaches of duty.
