Chance for gain
08/07/2003 The Star Articles of Law with Bhag Singh
MORE people are getting involved in business and becoming directors of companies.
There are occasions when a director may find himself purchasing a property
which either the company had originally intended to purchase, or coming to
know about the property due to his position in the company. The latter being
the case, is he permitted to seize the opportunity? Is it an offence or a
breach, asks a reader.
Words like “knowledge” and “opportunity” are words of general
use. Legal accountability depends very much on the facts and circumstances.
One aspect involves an opportunity that comes into existence.
These are opportunities for the company. A person who is a director comes
to know about the opportunity because of his position. In such a situation
the director is clearly the beneficiary of such opportunity in his capacity
as director. He is clearly under an obligation to exploit the opportunity
for the benefit of the company.
If the director seizes the opportunity for his personal
benefit or passes it to another company in which he has an interest, he would
be in breach of his duties and obligation. Such an action would be tantamount
to “hijacking” an opportunity for the company to be engaged in that activity
which would be a breach of fiduciary duty that could expose the director for
breach for damages and, in some cases, prosecution.
Thus directors have the duty to act in their company’s
best interests. There are of course grey areas in which it would be difficult
to decide whether the opportunity was for the director in his personal capacity
or as a director of the company. In such cases, it would be prudent for a
director to err on the side of caution and consider it an opportunity for
the company. Of course a director would be well protected if the opportunity
was disclosed to the company and the company decided it was not interested
in pursuing the offer.
Another aspect is where a company enters into a contract
to buy a property but then changes its mind. One or more directors can take
over and acquire the property personally. If, in such a case, the company
were to go into liquidation, could the directors who acquired the property
be deprived of the property?
In one such case, which took place locally, the respondent
had obtained judgement against the first appellant company . The first appellant
had agreed to buy land in Petaling Jaya; the sale agreement stipulated a transfer
to the first appellant or its nominees. Subse-quently the land was registered
in the names of the second and third appellants, the directors of the first
appellant.
The respondent brought the action claiming a declaration
that the land was the property of the first appellant against which the judgement
might be executed. The defence of the first appellant was a denial of ownership
and that the land was bought by the second and third appellants with their
own money.
The trial judge gave judgement for the respondent as he
held in effect that the transfer was voluntary and in fraud of the judgement
creditors.
The following were the events that took place and the manner
in which the transaction was carried out: On June 6,1974, the respondent obtained
judgement against the first appellant in the sum of $ 95,611.34. It lay unsatisfied.
Only $1,906 was recovered by garnishment. Execution proceedings by way of
judgement debtor summons were taken but proved abortive.
On June 1,1973, the first appellant had entered into a
sale agreement for the purchase of a piece of land in Petaling Jaya measuring
1,540 sqft for $15,000 and had paid a deposit of $ 5,000. The sale agreement
stipulated a transfer to the first appellant or its nominee or nominees, the
usual conveyancing phrase.
The court took the view that the inevitable result of the
transfer of the land on Oct 13,1975, when taken together with all the surrounding
circumstances was to defeat any attempt to execute the judgement.
Of course this was the position of this case, in which
the bona fide nature of the deal was in question and the suggestion of fraud
assumed greater importance. The situation would be otherwise where the director
had actually paid for the property and the funds had gone into the company's
operations and had been utilised for the purpose of its operation. Of course
it would be a different matter if the transaction was carried out at an under-valuation
or over-valuation which would give rise to different considerations.
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