Saturday, 17 December 2016

Implications On Wrongful Loss By Directors

Within the last two months, the Securities Commission Malaysia (SC) had taken three different actions against directors or former directors of three listed companies in relation to causing wrongful losses to those companies.
In the first case, a former ED and CEO was reprimanded and fined RM200,000 for remitting more than US$1 million (RM4.19 million) to foreign parties without the authorisation of the board. The monies were later used to purchase assets in the name of the director. Another former ED and CFO was reprimanded and fined RM150,000 for approving the vouchers for the remittances. The amount remitted was eventually refunded to the company.
A former MD and three former EDs were charged for causing wrongful loss in the second case. The charges are related to payments totalling RM5.1 million purportedly for the development of various software for the company which were allegedly used for other purposes.
The third case involves a suit filed by the SC against a deputy MD of a listed company. A sum of more than RM11 million non-refundable deposits were paid to several local representatives of 23 foreign companies for the exclusive rights to market and promote their products in Malaysia and Singapore. The amount was then allegedly paid by the local representatives into the deputy MD’s personal account. The SC had managed to obtain an injunction to restrain the deputy MD from dealing with the monies in the person’s bank accounts and is also seeking various orders, including for the amount to be restituted, the director concerned be barred from being a director of a listed company for five years and a civil penalty of RM1 million.

Directors are entrusted by shareholders with power and authority to make decisions in running and managing the company. Hence, they are required to act in the best interest of the company, act in good faith and discharge their duties by exercising reasonable care and skill. What happens when a director, or a group of directors together, conspire to breach these duties?
In addition to the provisions of the Companies Act, section 317A was introduced into the Capital Market and Services Act, to deal with the conducts of directors and officers of public-listed companies with the intention of causing wrongful loss to the companies irrespective of whether the conducts cause actual wrongful loss.
The meaning of “director” under this section is wide and includes CEO, COO, chief financial controller or any other person primarily responsible for the operations and financial management of a company. Wrongful loss is defined as loss of property by unlawful means to which the person is legally entitled.
Given the fact that a breach could occur even when there is no actual loss occurring, directors and senior management of companies should ensure their internal control systems are functioning effectively and all transactions must be approved based on merits and solely for the interests of their companies.
Perhaps, the following measures could be considered:
The rationale of the proposed transactions and how would they benefit the company commercially. Any other non-commercial benefit, if considered, should only benefit the company, not any other party.
The credibility of the counter-party and its track records. A simple step such as googling the party may provide useful information about their products and conducts. The proof that they are the real counter-party should be obtained.
The structure of the transaction. It should not defy how other ordinary commercial deals are structured. Proposals where huge sums of money to be paid in advance when the delivery of the goods and services would be made very much later should be a redflag and warrant further scrutiny and justification.
The value of the transaction and whether the company would be paying for a fair price or otherwise. If the price is inflated, it would be difficult for directors and management to defend their decision should problems are discovered in the future.
Independent board members should demand that the executives produce evidence and explanations if they are not clear with the proposed deal or transaction. There is no wrong questions and they should not refrain themselves from asking basic and simple question for the concern of being considered petty. Simple questions may not be simply answered in many cases.
The regulators have a wide range of options in dealing with wrongful loss cases. As demonstrated above, all the three cases were dealt differently, perhaps due to their facts, circumstances and the impact the regulator want out of their actions. Not prosecuting someone with criminal charge does not mean regulators are not doing their work. Sometimes, better impact could be achieved using other regulatory tools.
This article was also published in my column The Boardroom View in The Malaysian Reserve
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