Company directors are often responsible for key strategic and operational decisions which may affect the present state of the company and its future direction. Therefore, directors owe certain fiduciary and statutory duties to the company which are imposed to safeguard the interest of companies and that of its shareholders. In Protasco Bhd v PT Anglo Slavic Utama & Ors [2023] 1 LNS 2197, the plaintiff company, Protasco Bhd (the “Company”), found itself the victim of an elaborate multi- national fraud perpetrated by several of its own directors, the 2nd & 3rd Defendants (collectively, “said Defendants”), resulting in the misappropriation of the considerable sum of USD27million from the Company. Hence, the Company sued the said Defendants for fraud, conspiracy, and breach of their statutory and fiduciary duties.
Sometime in November 2012, the 2nd Defendant had introduced an opportunity for the Company to invest in the oil and gas industry of Indonesia, which involved acquiring the majority share capital in an Indonesian company called PT Anglo Slavic Indonesia (“PT ASI”), from PT Anglo Slavic Utama (“PT ASU”). One of PT ASI’s subsidiaries, PT Hase Bumou Aceh (“PT Haseba”) was granted an oil and gas concession for an oil field located at Kuala Simpang Timur, Aceh, Indonesia (“oil and gas concession”). The 2nd Defendant had assured the Company that security for the purchase price would be provided in the form of shares of an Indonesia company, known as PT Inovisi Infracom TBK (“PT Inovisi”) by a company incorporated in the British Virgin Islands, namely Acclaim Investments Limited (“Acclaim”). It was further represented to the Company that an extension on the validity of the oil and gas concession for a further 10 years would be procured by PT ASU. Premised on these representations, the Company made payment for the purchase price for the proposed acquisition, in the sum of USD22million, and a further sum of USD5million being shareholders’ advance, to PT ASU. Alas, despite numerous indulgences for extensions of time granted to PT ASU, the promised extension of the validity for the oil and gas concession for 10-years had failed to materialise. Notwithstanding PT ASU’s failure to adhere to the terms of the acquisition by obtaining the extension of 10-years for the oil and gas concession, both the said Defendants vigorously defended the proposed acquisition at a meeting held by the Company’s board of directors, and had even affirmed statutory declarations to the effect that the said Defendants did not have any interest in the proposed acquisition. This unusual conduct by the said Defendants prompted the Company’s board of directors to set up an internal committee to investigate the relationship between the said Defendants and the proposed acquisition, which subsequently revealed that those companies mentioned above, including PT ASU, PT ASI, PT Inovisi and Acclaim, were all either owned, related and/or controlled by the said Defendants or via their nominees.
The Company then exercised its right to terminate the said acquisition and sought to recover the said USD27million by disposing the shares in PT Inovisi. Unbeknownst to the Company, the signature by Acclaim for the execution of the share-blocking letter was a forgery. Hence, the Company was unable to dispose of the PT Inovisi shares. Upon realising this fraudulent scheme, the Company commenced its action against the said Defendants for fraud, conspiracy to defraud, and breaches of fiduciary and statutory duties for failing to act in the best interest of the company, the non-disclosure of their interest, and allowing the Company to enter into related-party transactions with individuals and/or corporate entities related to the said Defendants.
The Company sought reliefs for, amongst others, declarations that the said Defendants have acted in breach of their statutory and fiduciary duties, and the restitution of the USD27million which had been misappropriated from the Company. Prior to trial, the discovery of banking documents revealed that the USD27million paid by the Company had been transferred by PT ASU to various corporate entities, which are controlled by the said Defendants or their nominees. Altogether the Defendants’ scheme to defraud the Company had involved nearly 20 companies, domiciled in Malaysia and other foreign jurisdictions.
Further to the causes of action of fraud and conspiracy, the Company pleaded that the said Defendants had acted in breach of their director duties, for:
(i) acting in conflict with the director duties to exercise powers for proper purpose and in good faith in the best interest of the Company, under Section 131(1) of the Companies Act 1965;
(ii) failing to exercise reasonable care, skill and diligence, as required by Section 131(1A) of the Companies Act 1965;
(iii) that the web of companies involved in the fraudulent design are ‘persons connected’ to the said Defendants, under Section 122A of the Companies Act 1965;
(iv) failing to disclose their interest in the acquisition which is a related-party transaction, under Section 132E of the Companies Act 1965; and
(v) breaching of their fiduciary duties by acting in conflict with the best interest of the Company and failing to disclose their interest in the acquisition.
At trial, the Company sought to introduce evidence, including the trail of ban statements and financial records, which showed that part of the USD27million could be traced directly to margin trading accounts held by one of the said Defendants, as well as crucial audio recordings between the said Defendants and their nominees, which proved that the said Defendants had schemed with their accomplices and/or nominees in order to misappropriate the sum of USD27million from the Company for their own benefit.
Conversely, the said Defendants strenuously denied any wrongdoing, and relied on technicalities in the pleadings and admissibility of evidence, in order to defeat the Company’s action. This culminated in the landmark decision by the Federal Court in Protasco Bhd v Tey Por Yee & Anor and other appeals [2021] 6 MLJ 1, which clarified the scope of documents within the definition for ‘banker’s book’ under the Bankers’ Books (Evidence) Act 1949.
Upon the conclusion of trial conducted over 47 days, the High Court found that the said Defendants’ denial of wrongdoing was completely debunked amidst the cross-examination and evidence led by the Company. As such, the High Court held that the Company had successfully proven that the said Defendants were complicit in fraud and conspiracy to defraud, for misappropriation of the USD27million. The High Court found that the said Defendants’ conduct had deceived the Company, especially in light of fact that the said Defendants had
(i) controlled / dictated the actions of PT ASU and their nominees;
(ii) procured the security from Acclaim which turned out to be a sham, and
(iii) affirmed the statutory declarations in spite of their interest in the proposed acquisition. In this regard, the High Court found that “no clearer picture of deceit or, at the very least, dishonesty can be described” of the said Defendants’ conduct. With regard to the conspiracy to defraud, the High Court held that sufficient evidence was led at trial by the Company which showed that the said Defendants had “combined together with a common purpose or intention to defraud and injure and/or cause loss ... by unlawful means” to the Company.
The High Court further held that the said Defendants were precluded from acting in a manner which brings their personal interest into conflict with the interest of the Company, and Section 131 of the Companies Act 1965 mandates that company directors disclose their interest in transactions with the company. As such, the Defendants had acted in breach of this ‘no-conflict’ principle by failing to disclose their interest in the proposed acquisition. On related party transactions, the High Court found that the aforesaid companies were deemed ‘persons connected’ with the said Defendants as these companies, or their directors, were “accustomed to act in accordance with the directions, instructions or wishes of” the said Defendants, pursuant to Section 122A of the Companies Act 1965.4 Therefore, the said Defendants were obligated to disclose their interest in the proposed acquisition to the Company, pursuant to Section 131, 132 and 132E of the Companies Act 1965. By failing to do so, the said Defendants were liable under the provisions of Section 132E(4) of the Companies Act 1965, to account for any gains made directly or indirectly, or to indemnify the Company for any damages incurred resulting from the proposed acquisition. In the upshot, the High Court also held that the said Defendants acted in breach of their fiduciary and statutory duties to the Company, and thus were liable for damages in the sum of RM84,643,170.00 (after conversion of the USD27million). On the issue of pleadings raised by the said Defendants, the High Court held that distinct causes of action for fraud, conspiracy and breach of director duties have been pleaded when the statement of claim filed by the Company is read as a whole, and material facts in support were pleaded in summary form pursuant to Order 18 rule 7 of the Rules of Court 2012. As such, the said Defendants were not prejudiced nor caught by surprise by the Company’s pleaded case.
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As shown in Protasco (supra), fraudulent schemes by directors may give rise todifferent causes of action for which the company could bring its claim to obtain remedy. In this instance, the High Court held that fraud was established by the Company when “false representation has been made knowingly, or without belief in its truth, or recklessly without caring whether it be true or false” by the said Defendants.
Thus, the elements for the tort of deceit can be stated as:
(i) there must be a representation of facts made by words or conduct;
(ii) the representation must be made with the intent that it should be acted upon by the plaintiff;
(iii) the plaintiff had acted upon the representation;
(iv) the plaintiff suffered damage in doing so; and
(v) the representation was made with the knowledge that it was false, or at least in the absence of any genuine belief in its truth.
Significantly, this case involved thorough consideration of director’s duties under the Companies Act 1956, which are still relevant to the Companies Act 2016. In particular, Section 122A of the Companies Act 1965 (see also, Section 197 of Companies Act 2016), stipulated that body corporates which are accustomed to act in accordance with the directions, instructions or wishes of that director are deemed to fall within the category of ‘person connected’. The definition and scope of ‘person connected’ is relevant for the purpose of determining whether directors are required to disclose their interests pursuant to Section 132E of the Companies Act 1965 (see also, Section 228 of the Companies Act 2016). Otherwise, the directors may be liable to either (a) account for any gains made directly or indirectly; or (b) indemnify the company for any damage resulting from the arrangement or transaction, under Section 132E(4) of the Companies Act 1965 (see also, Section 228(5) of Companies Act 2016).
Overall, the case of Protasco (supra) comprehensively demonstrates that company directors have a duty to avoid conflicts of interest and must at all times exercise their powers in good faith and in the best interests of the company, and not for any collateral purpose. This would encompass disclosure of interest by company directors in transactions with the company which may benefit them. Failure to do so could result in the company directors being held liable for breaching their duties to the company. In matters of complex high-stakes litigation, it is imperative that our clients are provided with the best possible opportunity to establish their claim based on astutely drafted pleadings, careful analysis of documentary records, and by ensuring that all relevant evidence are properly admitted and led at trial before the Court. The above decision is pending an appeal before the Court of Appeal. Should you have any queries, please contact our partners in charge of the matter, Peter Justin Skelchy or Joycelyn Teoh Hooi Cheng.
