In Iris Corporation Berhad v Tan Sri Razali bin Ismail & Ors [2025] MLJU 3079, the Court of Appeal provided valuable practical insights into the application of the “business judgment rule” embodied in section 214 of the Companies Act 2016 (“CA 2016”).
 
Background Facts
 
The Appellant is a public listed company that invented the world’s first electronic passport and multi-application electronic identification system. Trusted identification remained the Appellant’s core business and primary revenue generator for over two decades.
 
The Respondents were executive and non-executive directors of the Appellant at the material time, most having served on the Appellant’s board for several years. In particular, the 1st Respondent was Chairman from May 2015 to August 2017, whilst the 2nd Respondent was one of the Appellant’s founders and was its Chief Executive Officer and Managing Director from August 2013 to October 2017.
 
The Appellant was given the opportunity to invest in a company, Border Control Solutions Limited (“BCS”) (“BCS Investment”) which was solely owned by one Joseph Vijay Kumar (“JVK”) and was pursuing a project for the privatisation of the United Kingdom Border Force.
 
The Appellant accepted an offer to subscribe for 10% of BCS’s shares for £2.0 million and seconded several of its senior staff to BCS to assist in developing the privatisation proposal. Between January and August 2016, the Appellant made payments totalling £2.05 million in relation to the BCS Investment to BCS directly and to JVK personally, the latter pursuant to consultancy agreements entered into between the Appellant and JVK.
 
Subsequently, concerns emerged as to the viability of the BCS Investment and the Appellant’s board resolved on 5 October 2016 to withdraw from the investment. BCS and JVK did not refund any payments made by the Appellant despite the latter’s efforts. BCS was subsequently wound up by the UK High Court on 31 January 2018.
 
The Appellant commissioned two investigative reports in relation to the BCS Investment, namely: 

Scope
 
This case note will focus on the findings by the Court of Appeal in relation to sections 214 and 215 of CA 2016, notwithstanding that several other issues were litigated before the court.
 
The High Court’s Decision
 
Relying primarily on the findings in the EY report¹, the Appellant commenced proceedings against the Respondents, alleging breaches of fiduciary duties, duties to act in good faith, duties of care and skill, and various statutory duties under the CA 2016 and contended that the Respondents had approved the BCS Investment without adequate information, due diligence, or independent assessment.
 
The High Court dismissed the Appellant’s claims against all Respondents, finding that the Respondents had not breached their duties and were protected by the business judgment rule under sections 214 and 215 of the CA 2016. The High Court also found the Respondents to be credible witnesses who had acted honestly, in good faith, and in the best interests of the company.
 
The Court of Appeal’s Decision
 
The Appellant’s appeal to the Court of Appeal was dismissed.
 
The business judgment rule (section 214 CA 2016)
 
The Court of Appeal was satisfied that the High Court had properly analysed and applied the four requirements in section 214(1) of the CA 2016. Section 214 provides as follows: The Court of Appeal then considered the High Court’s findings in respect of each of the requirements under section 214(1) of the CA 2016:
 
(i)  Proper purpose and in good faith (section 214(1)(a))
 
Having assessed the credibility of the witnesses, the High Court found the Respondents to be credible. While recognising minor discrepancies in their evidence, these did not detract from the overall finding of honest decision-making. The evidence established that the Respondents were motivated by their assessment of what would benefit the company rather than any desire for personal gain. Their long service on the Appellant’s board and continued involvement even during the company’s subsequent financial difficulties supported the inference that they were genuinely motivated by the company’s interests.
 
(ii)  Absence of material personal interest (section 214(1)(b))
 
There was no evidence that any Respondent had a personal financial stake in the BCS Investment. The investment was within the Appellant’s core business, and the Respondents stood to gain no personal advantage from the decision.
 
(iii) Adequately informed (section 214(1)(c))
 
The High Court was satisfied that the Respondents had substantial prior knowledge of the UK immigration privatisation project through various means including personal meetings, office visits and board awareness of the Appellant’s intended participation. As such, the Respondents were not making decisions in a vacuum but drew upon their accumulated knowledge of the company’s business and the specific project. Given their expertise and experience, the Respondents had reasonable grounds to believe they possessed adequate information to assess the merits of the BCS Investment.
 
(iv) Best interest of the company (section 214(1)(d))
 
The Court of Appeal delved in detail into this requirement, which according to their Lordships, “forms the cornerstone of business judgment rule protection”. Referring to the Federal Court’s decision in Tengku Dato’ Ibrahim Petra Tengku Indra Petra v Petra Perdana Berhad & Another Case [2018] 2 MLJ 177 (“Petra Perdana”), the Court of Appeal held that the correct test, for breach of duty as a director to act in good faith and in the best interest of the company combines both subjective and objective tests: Elaborating on the subjective element, the Court of Appeal said the test requires assessment of whether the directors genuinely believed the decision would benefit the company. The High Court’s finding that the decision was “honestly arrived at, bona fide and in the best interests of the company as a whole” addressed this subjective component. Their Lordships cautioned that it would be wrong for a court to substitute its opinion for that of the management or to question the correctness of the management’s decision on such a question, if bona fide arrived at (Howard Smith Ltd v Ampol Ltd [1974] AC 821).
 
In considering the objective element, the court is required to evaluate whether such belief was reasonable in the circumstances. The objective test laid down in Petra Perdana requires the court to assess whether “an intelligent and honest man in the position of a director of the company concerned could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company”. The Court noted that factors supporting the reasonableness of the Respondents’ belief in this case were as follows: 

The Court of Appeal added that the requirement does not demand successful outcomes or perfect directors’ judgment. The test focuses on reasonableness of belief at the time the decision was made, not whether subsequent events vindicated their judgment. The ultimate failure of the BCS Investment does not retrospectively invalidate the reasonableness of the Respondents’ belief when they approved the BCS Investment in February 2016.
 
In considering the Appellant’s contention that the High Court had failed to apply the objective test laid down in Petra Perdana, applying the test to the facts, their Lordships were of the view that several factors supported the conclusion that reasonable directors in the Respondents’ position could genuinely believe the BCS Investment would benefit the company. First, the investment leveraged the company’s core expertise in trusted identification technology, an area where it had demonstrated world-leading capabilities for over two decades. Second, the UK Border Force privatisation represented a substantial government contract with significant revenue potential.
 
Third, the company had already invested resources in the project through staff secondment and proposal development, suggesting management’s positive assessment of its viability. Fourth, the Respondents brought extensive board experience and deep knowledge of the company’s business to their assessment. Fifth, the Respondents had received briefings from experienced management with specific expertise in the relevant technology.
 
In light of the above, the Court of Appeal held that, contrary to the Appellant’s contention, the High Court’s finding that the Respondents’ belief was objectively reasonable was well-founded and consistent with the objective test standard laid down in Petra Perdana.
 
According to the Court of Appeal, the business judgment rule serves important policy objectives in encouraging competent individuals to serve as directors and in promoting legitimate business risk-taking. The Court of Appeal was of the view that: The Court of Appeal concluded that the High Court’s application of the business judgment rule in this case properly recognised the aforesaid policy considerations while ensuring that directors who act honestly and in the best interest of the company receive appropriate legal protection.
 
The independent assessment requirement (section 215 CA 2016)
 
The Court then considered the Appellant’s contention that the Respondents has failed to conduct “independent assessment” as required under section 215 of CA 2016, which reads as follows: For the reasons summarised below, the Court of Appeal dismissed this contention as being without merit and bordered on nitpicking: 

Application of the business judgment rule without hindsight bias
 
In evaluating the Respondents’ decision to approve the BCS Investment, the Court of Appeal was mindful of the principle that business decisions must not be assessed with the benefit of hindsight
 
Referring to Peoples Department Stores Inc (Trustee of) v Wise [2004] 3 SCJ No 64 decided by the Supreme Court of Canada and the Singapore Court of Appeal case of Goh Chan Peng and Others v Beyonics Technology Ltd [2017] SGCA 40, the Court held that it ought not to determine the decision by the Respondents to undertake the BCS Investment on account of post-facto information² and concluded that the decision, made in the circumstances that existed when the investment was approved, appeared to fall within the statutory business judgment rule under sections 214 and 215 of the CA 2016.
 
The Court of Appeal dismissed the Appellant’s appeal and affirmed the High Cout’s decision in its entirety.
 
Comments
 
Although this Court of Appeal decision does not break new legal ground, the detailed analysis of the facts by the High Court and the Court of Appeal in relation to the requirements under sections 214 and 215 of the CA 2016 and Petra Perdana provide helpful and practical guidance as to the factors that should be considered when applying the business judgment rule under the CA 2016.
 
Furthermore, the Court of Appeal’s decision relating to the business judgement rule provides for healthy risk-taking in corporate governance and ensures that directors will not be deterred from serving on company boards or from making commercial decisions by fear of personal liability, which could otherwise lead to excessively conservative approaches that “stifle business growth and innovation”. Nevertheless, directors should not presume that the business judgement rule provides an automatic defence. Where there is reliance on information provided by others, as stated in section 215(2) of the CA 2016,  directors are required to make an independent assessment of the information or advice, opinions, reports or statements, including financial statements and other financial data, having regard to the director’s knowledge of the company and the complexity of the structure and operation of the company in order to successfully rely on the business judgment rule defence.
 
Case Note by To’ Puan Janet Looi (Partner) and Siti Ayenaa Binti Mohd Anis (Associate) of the ESG Practice of Skrine.
 
 

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