Directors may not enforce indemnity provisions unless they can substantiate incorporation into contracts of appointment, with mere appointment as director insufficient.

Darryl Goon Siew Chye JCA:

Introduction

[1] This appeal relates to a claim by the respondents, as former directors of the appellant Company, to be indemnified by the appellant for their legal expenses and costs incurred in having to defend two legal proceedings that were brought against them, both of which, it was claimed, were resolved in their favour. On 29 May 2019, the High Court in Kuala Lumpur allowed the respondents' claim. This then is the appellant's appeal against that decision.

[2] Specifically, the central issue in this appeal concerns the enforceability of a provision for indemnification of directors that is found in the articles of association of the appellant, a company incorporated pursuant to the provisions of the Companies Act of 1965 (" CA 1965"), prior to the coming into force of the Companies Act of 2016 (" 2016").

[3] Although under CA 2016, the memorandum and articles of association of a company incorporated prior to its coming into force are now known as the company's constitution, the term "articles of association" will continue to be used for the purposes of this judgment. This is largely because this case concerns, primarily, only the articles of association of the appellant with no particular involvement of its memorandum of association and to a minor extent, the nostalgic appeal of the term.

[4] The four respondents were all former directors of the appellant. All four respondents ceased to be directors of the appellant on 4 February 2010. Their claims for indemnity against the appellant were in respect of two separate actions namely (i) Kuala Lumpur High Court Civil Suit No: D-22NCC-735-2009 ("Suit 735") and (ii) Kuala Lumpur High Court Civil Suit No: D-22NCC-1057-2011 ("Suit 1057").

Suit 735

[5] While still serving as directors of the appellant, Suit 735 was commenced against the four respondents. Suit 735 was a derivative action brought on behalf of the appellant by a minority shareholder of the appellant by the name of Shamsul Bin Saad. Among the allegations levelled against the respondents were breaches of their statutory and fiduciary duties as directors. The reliefs sought were several declarations pertaining to their alleged breaches of duty including a claim for damages allegedly suffered by the appellant.

[6] Suit 735 was, however, dismissed by the Court on 16 August 2010, upon an application by the respondents and a determination of a point of law pursuant to O 14A of the then applicable Rules of the High 1980.

[7] Suit 735 was premised upon an allegation of a fraud on the minority and commenced as a common law derivative action, as an exception to the rule in Foss v. Harbottle . However, subsequent to the commencement of Suit 735, the respondents were removed as directors of the appellant by its shareholders in an extraordinary general meeting held on 4 February 2010.

[8] It was upon those circumstances that the High Court ruled, pursuant to the respondents' application invoking O 14A of the Rules of the High 1980, that the substratum for maintaining the derivative action had collapsed and the action was held no longer "suitable in fact and law". It could no longer be maintained that the appellant was still under the control of the respondents, necessitating a derivative action. Upon those circumstances the High Court dismissed Suit 735 on 16 August 2010. In dismissing Suit 735, costs of RM10,000.00 was awarded in favour of the respondents.

[9] Following the dismissal of Suit 735, the respondents commenced Originating Summons No D-24NCC-73-02/2012 ("OS 73") against the appellant. OS 73 was commenced with the view of obtaining an indemnity from the appellant for the legal expenses and costs incurred by the respondents in Suit 735. The amount claimed by the respondents was a sum of RM304,500.00.

[10] The respondents' claim to be indemnified in OS 73 was premised upon art 170 of the appellant's articles of association.

[11] The respondents' claim in OS 73 was, however, dismissed by the