Vindicated From Allegations Of Breaches Of Duties – Directors Can Now Seek Indemnity For Legal Costs Incurred

In the recent High Court decision of Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra v Petra Perdana Berhad [2020] 8 CLJ 109, the High Court had the opportunity to interpret subsections (3) and (4) of Section 289 of the Companies Act 2016. Among others, the said statutory provisions provide that a company may indemnify an officer of the company for any costs incurred by him in respect of any proceedings that relate to the liability for any act or omission in his capacity as an officer; and in which judgment is given in favour of the officer and/or in defending any proceedings where judgement is not given against him.
The proceedings had been brought by the former directors of Petra Perdana Berhad following the landmark Federal Court decision of Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra v Petra Perdana Berhad [2018] 2 CLJ 641 where the Federal Court in examining the discretion afforded to a director to exercise his business judgment had held that the test for breach of a director’s duty is a combination of both a subjective test (to assess the director’s state of mind) and an objective test (whether an intelligent and honest man would have acted in that manner). The Federal Court eventually held that the former directors of Petra Perdana Berhad had not acted in breach of their duties.
Vindicated by the Federal Court, the former directors filed the present proceedings to have the company indemnify them for their legal costs incurred in successfully defending the suit brought against them by the company. In a double blow for the company (having already lost the initial proceedings), the High Court held that pursuant to Article 170 of the company’s Articles of Association and/or Section 289 of the Companies Act 2016, the former directors were entitled to be indemnified by the company for the legal costs incurred as the Court judgment had found in favour of the former directors in the main action.  
The Court further clarified that the indemnity provisions would apply in favour of the former directors as there was certainly a causal connection between their conduct as directors and their duties owed towards the company which was the subject of the litigation. This therefore brought the litigation within the frame of Article 170 of the company’s Articles of Association and/or Section 289 of the Companies Act 2016. The Court found that directors who are sued for any breach of their duties towards the company may later look to the company for indemnity and reimbursement of all legal expenses incurred in the event the directors were successful in defending themselves from the allegations that were levelled against them.
The Court also opined that the failure to seek an order for costs on an indemnity basis in the initial proceedings was not fatal and instead a claim could be made in separate proceedings. The Court went on to hold that the claim for indemnity should, for practical reasons, in fact be made in subsequent separate proceedings for the purpose so that there could be proper argument and mature consideration on the multifarious issues that could arise.
On a further note, interestingly, the High Court also held that the articles of association/constitution of a company did not just form a contractual relationship between a company and its members, but also formed one between a company and its directors. As the directors had been appointed via the articles of association, it followed that the articles of association formed part of the contract between the company and the directors.
An appeal has been filed against the aforementioned High Court decision. Subject to the outcome of the appeal, this case may be the springboard for future litigation arising as a natural consequence of a company being unsuccessful in proceedings taken against allegedly errant directors (whether taken on its own accord or through derivate proceedings). Being successful in defending an action brought for breach of directors’ duties, it would be unsurprising if the directors would also want to recover their legal costs to the fullest extent.
Article by Nimalan Devaraja (Partner) of Skrine.