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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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