The Director Who Voted Against the Loan
Meghna Engineering Ltd has five directors. At a board meeting, the managing director proposed a Tk 50,000,000 loan to a company owned by his brother-in-law, secured only by a personal guarantee. Three directors voted in favour, one abstained, and one - Farhana - voted against and asked for her dissent to be minuted. The loan was made and the borrower defaulted within nine months; the company has lost Tk 42,000,000. A shareholder is now threatening action against all directors. Farhana argues she should bear no liability because she voted against and her dissent is recorded. The company's articles are silent on related-party transactions, and there is no independent audit committee.
1. Assess Farhana's position. Does voting against and having the dissent minuted relieve her of liability?
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Not automatically. A director's duties are duties of the individual, and they are not discharged by a single dissenting vote. The governing analysis:
Duty to act in the company's best interests and avoid conflicts. The loan was to a related party of the MD, unsecured except by a personal guarantee, with no independent scrutiny. A reasonably diligent director should have done more than vote against: she should have sought independent valuation, required full disclosure of the MD's interest, and, if the board proceeded, escalated the matter.
Dissent is evidence, not a defence. A minuted dissent is powerful evidence that she did not consent to the breach. It shifts the burden of explanation but does not by itself extinguish liability. Liability turns on whether she took reasonable steps to prevent the loss - for example, requesting a board minute recording her objection to the substance (not merely the vote), seeking a shareholder resolution, or resigning and notifying the board in writing.
What would help her most: (a) a minute recording her reasons - conflict of interest, absence of security, no independent advice; (b) written notice to the chair; (c) evidence she proposed safeguards that were rejected. A bare 'voted against' minute is weaker.
Conclusion: Farhana faces a real risk of liability, but her exposure is materially lower than the three who voted in favour and arguably lower than the abstainer, who neither supported nor opposed. Her best defence is the quality of the steps she took, not the fact of the vote.
2. The abstaining director says: 'I didn't vote for it, so I'm in the clear.' Evaluate this and recommend governance reforms.
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The abstainer is in the weakest position of all. Abstention is not neutrality in law: a director who is present and abstains has failed to exercise independent judgement and has not acted to prevent a transaction they had reason to believe was improper. In many codes, silence in the face of a conflicted transaction is treated as acquiescence. The abstainer had the same information as Farhana but took no protective step and left no record of concern.
Recommended reforms:
- Related-party transaction policy. Any transaction with a director, their relatives, or entities they control must be disclosed in writing, approved by disinterested directors only, and supported by independent valuation above a threshold (e.g. Tk 5,000,000).
- Mandatory conflict register maintained by the company secretary and tabled at each meeting.
- Independent audit committee (or, given size, at least one independent non-executive director) to review related-party transactions before commitment.
- Minuting standards: record interests declared, the reasons for decisions, and any dissent with reasons.
- Director training on duties, including that abstention is not a safe harbour.
Judgement tested: the exam wants the candidate to see that liability follows conduct and diligence, not the arithmetic of votes. Both the dissenter and the abstainer are exposed, but for different reasons and to different degrees.