Court of Appeal Rules on Effect of a Bankrupt Director in a 2 Director Company under the Companies Act, 1965
Bumi Bersatu (BB) had successfully obtained three (3) adjudication Orders against Sazean Engineering (SE) and filed in the High Court to register the three decisions. SE similarly filed to set aside the 3 adjudication Orders. One of the grounds relied upon by SE was that BB had no legal capacity to file any action, or to appoint solicitors to represent them as one of the directors, Bernard Lim, had been declared a bankrupt prior to the filing of the adjudication proceedings.
It was also argued that BB, being a company, had ceased to exist and/or that at the very least, it was paralyzed from bringing the adjudication proceedings and from opposing the applications to set aside the Adjudication Decisions. It was also argued the the Board of Directors (BOD) of BB did not have the power to appoint solicitors. Therefore, the Adjudication Decisions were null and void ought to be set aside.
BB claimed that at all material times, there was a second de facto Director named Allan and that the law was silent on the effect of having only one director in the Board of Directors (BOD). BB argued that since section 4 of the Companies Act 1965 (CA) defined a ‘director’ to include a de facto director and a shadow director, then the presence and involvement of one Allan whose instructions the other director was accustomed to follow, would mean that there was no vacancy or gap left on the BOD of BB by reason of the other director’s bankruptcy.
The High Court decided in favour of BB and allowed the enforcement of the adjudication decisions against SE. Hence, SE filed this appeal.
Court of Appeal
In the Court of Appeal, counsel for SE took only one point in the appeal which was stated by the Court of Appeal in the Report as follows: “..this appeal has been succinctly described by the learned counsel for Sazean Engineering as follows: “This appeal raises a short but important point with regards to the effect an undischarged bankrupt director has on a company with only two directors on the BOD of the company. Learned High Court Judge held that the fact that one of the two directors in Bumi Bersatu was an undischarged bankrupt did not render Bumi Bersatu’s actions, subsequent to the director being adjudged a bankrupt, null and void pursuant to the saving provision of section 127 of the Companies Act 1965 (“CA 1965”).”
The threshold issue that was to be decided was whether the effect of bankruptcy of Bernard Lim had rendered the BOD of Bumi Bersatu to be legally incompetent for being devoid of legal standing, in view of the fact that Bernard Lim’s bankruptcy had left Bumi Bersatu’s BOD with only one valid director. This breached the mandatory statutory requirement under section 122(1) CA 1965 which dictated that a BOD of a company registered under the CA 1965 must, at all times, have at least two directors on its BOD.
The Court of Appeal then considered Regulation 72, Table A of the Articles of Association of BB and also section 38, Bankruptcy Act, 1967. The Court of Appeal held that whereas section 38(1)(d) of the BA 1967 prohibits a bankrupt from becoming a director of a company [except with leave of the DGI or the Court] Regulation 72 reiterated that embargo on a bankrupt remaining as a director by providing expressly that the office of a director shall fall vacant when he is declared a bankrupt.
As a consequence thereof, the Court of Appeal held that Bumi Bersatu’s BOD was at all material times, after Bernard Lim was decalred a bankrupt, legally incapacitated when its membership dipped below the minimum legal requirement under section 122(1) of the CA. Therefore the resolutions passed at the material time were invalid.
Section 122(6) CA, 1965
The Court of Appeal went on to consider whether the facts of this case fell within section 122(6) of the CA 1965 i.e. that a director resigning or vacating his office shall be deemed as invalid, if it has the effect of reducing the number of directors of the company below the minimum number required by section 122 (1). The Court of Appeal held that section 122(6), CA only applied to an affirmative or positive acts attributable to the director himself or herself in wanting to resign as a director or vacating his or her office of a director. In other words, that phrase refers to a voluntary act on the part of a director, to either resign or vacate the office of a director. In such a situation, section 122(6) of CA 1965 has gone on to state that such resignation or vacation of office shall be deemed as invalid, if it has the effect of reducing the number of directors of the company below the minimum number required by subsection (1).
However, here there was no positive step taken by the director concerned. The bankruptcy of the director was an involuntary intervening act that had the effect disqualifying as a director in Bumi Bersatu.
Inter Play between section 122(6) and s122 (7), CA, 1965
The Court of Appeal then went on to consider the inter play between section 122(6) and s122 (7), CA, 1965. Section 122(7) provides as follows:
“(7) Subsection (6) shall not apply where a director of a company is required to resign or vacate his office if he has not within the period referred to in subsection 124(1) obtained his qualification or by virtue of his disqualification under this Act or any other written law.”
The Court of Appeal held that the wording of section 122(7) further underscores the view of the Court on the interpretation of section 122(6). It states that section 122(6) does not apply in cases where the director is required to resign or vacate his office or by his disqualification under this Act or any other written law. While subsection (6) by operation of law seeks to prevent a company from breaching the minimum number of the directors as a result of a voluntary resignation or vacating of office by a director or directors by invalidating such resignation, subsection (7) makes it clear that such safety net is withdrawn if the vacating of a director’s office is occasioned by his disqualification by law.
If a company is left with only one director because the only other director is required to vacate his office due to a disqualification, the company has a duty to appoint a new director so as to fulfil the dictates of section 122(1) of the CA. It cannot persist with a BOD consisting of a director who had been declared a bankrupt and who at all material times remained an undischarged bankrupt. Under the CA, 1965, a one-man director BOD did not have any power to act as a competent and properly constituted BOD. Such a BOD did not have any business in issuing any board resolution in the name of the company. It goes to the question of power, not merely the question of exceeding the objects of the company. Any such resolution so passed, would be not only invalid but also illegal. It is beyond ultra vires. It is a locus issue. (See Jack James as administrator of ZYL Limited  WASC 57.).
The Court of Appeal held that the moment Bernard Lim was declared a bankrupt in 2012, his office as a director fell vacant by operation of law. Regulation 72 of the Article of Bumi Bersatu expressly provided for that. When that happened, the BOD of Bumi Bersatu had only one competent director left. Because the vacancy of Bernard Lim’s office had fallen vacant by operation of law, section 122(7) of CA 1965 kicked in and the number of directors on BOD of Bumi Bersatu had dipped below the minimum statutory number as required under the law obtaining at that time. That event had rendered the remaining BOD as being an incompetent one whereby it had been stripped of its powers to function as a competent BOD that was properly constituted under the law to pass board resolutions for the company to engage in business undertakings. In other words, with Bernard Lim’s bankruptcy in 2012, the BOD of Bumi Bersatu had no locus standi to act as a proper BOD as envisaged under the CA 1965, simpliciter.
In effect, the BOD of Bumi Bersatu was rendered legally impotent from discharging its functions as such under the law. Any resolution purportedly passed by such an incompetent BOD must be one that is null and void and of no legal effect.
The only remaining issue was whether the “saving provision” under section 127, Companies Act, 1965 would apply to this case.
Section 127, Companies Act, 1965
Section 127 of the CA 1965 states as follows:
“127. Validity of acts of directors and officers. The acts of a director or manager or secretary shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or disqualification.’
The Court of Appeal considered the words “notwithstanding any defect that may afterwards be discovered in his appointment or qualification” in section 127 and held that the words were as a “qualifier”. The “qualifier” was not meant to exempt or forgive all acts that have been done by a director or a manager or an officer of a company. Rather, it is quite circumscribed in the ambit of its intended embrace. The Court of Appeal held that section 127 of CA 1965 only saves acts done by such persons if those acts have been done bona fide in the course of doing business for the benefit of the company they belong to. The undisputed material facts obtaining in this case have revealed that Bernard Lim was aware of his bankruptcy since 2014 and so was Bumi Bersatu. It was not disputed that Sazean Engineering was not aware of the bankrupt status of Bernard Lim that had effectively rendered him disqualified as a director until much later. Premised on this the Court of Appeal held that when Bernard Lim and the BOD passed the resolutions to commence the adjudication proceedings and appoint solicitors, the BOD could not be said to have acted bona fide. As such, those acts could not be saved within the framework as envisaged by section 127 CA 1965.
The Appeal was then allowed with costs.
Alex De Silva acted for the Sazean Engineering & Construction. For further information, please contact firstname.lastname@example.org.