Malaysia Court of Appeal holds company’s constitution does not give rise to an indemnity for directors

29 November 2021

Perdana Petroleum Berhad v Tengku Dato’ Ibrahim Petra & Ors (Civil Appeal No.: W-02(NCC)(A)-1194-06/2019)

In Perdana Petroleum Berhad v Tengku Dato’ Ibrahim Petra & Ors, the Malaysia Court of Appeal considered whether a company’s former directors could rely on the indemnification provision in the company’s constitution.

The appellant (“Company”) appealed against an order of the High Court which instructed the Company to indemnify its former directors for legal expenses and costs incurred by them in defending earlier legal proceedings brought against the former directors for breach of their fiduciary duties. In the present appeal, the former directors relied on section 289 of the Companies Act 2016 (“CA 2016”), which provides that a company may indemnify an officer of the company in respect of costs incurred by such officer in defending or settling any claim or proceedings arising out of an act or omission in his capacity as an officer.

The Court of Appeal considered the legal status of a company’s memorandum and articles of association and held that a company’s constitution primarily constitutes a contract only between the members and the company. While the provisions of the articles of association may be expressly or impliedly incorporated into a contract between a company and a third party (including its director), there must be clear evidence of such article being incorporated into the contract. Whether or not there is sufficient incorporation will depend on the facts and circumstances of the case.

Based on the facts of this case, the Court of Appeal found that nothing within the directors’ employment contracts, whether in written or verbal form, incorporated the relevant article they sought to rely on. Further, the court noted that section 289 of CA 2016 is merely permissive, and does not in itself confer any statutory right to be indemnified to directors or auditors of companies.