The Director, the Supplier and the Undisclosed Stake
Selasih Engineering Sdn Bhd has five directors. Hafiz is the operations director and also owns 60% of Mutiara Parts Sdn Bhd, which supplies components to Selasih. In January, Selasih's board considers a three-year supply contract worth RM2.4 million a year. Hafiz attends the meeting, says the pricing is 'market rate', and votes in favour; the other four directors approve unanimously. Hafiz does not mention his shareholding. The minutes record only that 'the contract was approved after discussion'. Six months later, an internal audit shows Mutiara's prices are 28% above comparable suppliers, costing Selasih about RM670,000. The shareholders' agreement requires related-party transactions to be approved by disinterested shareholders, but no such approval was sought. Hafiz has received RM410,000 in dividends from Mutiara since the contract began. The company now wants to recover the loss and possibly remove Hafiz.
1. What duties did Hafiz breach, and does the fact that the other directors approved the contract cure the breach?
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Hafiz wore two hats: director of Selasih and 60% owner of Mutiara. The Act requires a director with an interest in a transaction to disclose the nature and extent of that interest to the board; the duty is not satisfied by saying the price is market rate. He also owed a duty to act in Selasih's best interest and to avoid conflicts. Voting in favour without disclosure is a breach even if the other directors would have approved anyway. The approval by the other four does not cure it: they were not told the material fact, so their consent was not informed. The minutes' vague reference to 'discussion' is poor evidence. The shareholders' agreement adds a disinterested-shareholder approval requirement; that was ignored. The breach is both a statutory matter and a breach of fiduciary duty. The fact that Hafiz received RM410,000 in dividends from Mutiara strengthens the case that he had a personal stake in the inflated price.
2. Can Selasih recover the RM670,000, and can the shareholders ratify the contract?
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The company's primary remedy is against Hafiz for breach of duty and, depending on the contract, against Mutiara if it had notice of the breach. The transaction is potentially voidable at Selasih's instance, and Hafiz may have to account for secret profits or the benefit he obtained. Damages are measured by the loss - here the 28% overcharge, about RM670,000, subject to proof that comparable suppliers were available. Ratification by disinterested shareholders is possible in principle, but only with full disclosure of all material facts. A ratification resolution that hides Hafiz's interest, or that is procured by his votes, would be ineffective and could be challenged as oppressive. Because the shareholders' agreement requires disinterested approval, any meeting must exclude Hafiz and his associates. If ratification is not properly obtained, the company can sue; if it is properly obtained, the court may still scrutinise fraud on the minority or oppression. The secretary should ensure the required resolution is passed, with a circular disclosing the audit findings.
3. How should the board handle removal of Hafiz, and what immediate governance steps are needed?
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Removal of a director is a shareholder decision, not a board one. The company may remove Hafiz by ordinary resolution after special notice, and he has a right to be heard and to make representations. Check the constitution and shareholders' agreement for additional requirements, such as weighted voting or a reserved matter. If Hafiz is also an employee, his service contract is separate; termination must follow that contract. Pending removal, the board should set up an independent committee of disinterested directors, suspend Hafiz's involvement in procurement, preserve documents, and consider whether to terminate or renegotiate the Mutiara contract. The secretary must minute the conflict, issue proper notice, and avoid letting Hafiz vote on matters where he is interested. If the company intends to claim the RM670,000, a demand letter should be sent and privilege considered. Do not use a written resolution to remove him if the Act requires a meeting.