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Due diligence is defined as an inquiry, exercise, or research undertaken on a business, firm, or individual before entering into a contract with another party The Importance of Corporate Due Diligence in Malaysia (2019). There are no specific legal definition exists for the term "due diligence”. However, according to the Securities Commission Malaysia, due diligence can be referred to the process by which a person must conduct inquiries and investigations, risk tolerance consideration for investment prospects, and disclose all relevant evidences such as financial statements in a timely, sufficient, and accurate manner (Securities Commission Malaysia, 2022). The Malaysian regulatory environment for publicly listed corporations requires all entities to submit corporate proposal and create warranties as per the due diligence requirements (The Importance of Corporate Due Diligence in Malaysia, 2019).

According to Teacher (2013), Lord Judge Bowen describes the duties of a director in these eloquent terms: "Directors are sometimes regarded as agents, sometimes as trustees, and sometimes as managing partners." However, each of these statements should not be interpreted as exhaustive of their abilities and responsibilities but rather as showing valuable viewpoints from which they might be viewed for the present and the intended purpose. The directors of a corporation are responsible for the company's and shareholders' interests, as well as the company's well-being. Directors are essentially fiduciary agents who owe duties to the firm; shareholders designate them to manage the company's activities for the benefit of the shareholders. In addition, no company can attain success without excellent and trustworthy directors. The only way for a firm to achieve success is if its directors fulfil their responsibilities and ensure their enforcement. Consequently, directors are essential to any system of corporate governance. Numerous common law rules and equitable principles govern the general responsibilities of an administrator. The duties of directors alone are no importance if they cannot be adequately executed; this work focuses on the system of enforcement that provides the many forms of controls that ensure the performance of these duties.

One of the duties that directors must uphold is the duty to exercise with diligence. A violation of these duties will result in suspicion on the internal administration of a firm and empowers creditors and others to hold the director personally accountable for any misconduct. As a result, all directors and business owners must understand the scope and depth of the need to undertake due diligence, lest they fall prey to it. According to Vanja (2019), the responsibility to exercise with diligence states that a corporation's director must exercise their powers and perform their duties with the degree of care and diligence that a reasonable person would exercise if they were the director. In this assignment, we will discuss director’s duties to exercise with diligence.

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Legal Provision Director's Duty To Exercise With Diligence Of The Companies Act 2016

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Legal Provision Director's Duty To Exercise With Diligence Of The Companies Act 2016

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Section 213 of the Companies Act 2016  explained about the duties and responsibilities of directors. The first duty is spelled about in section 213(1), which requires directors to operate within the authorities delegated to them. To put it another way, in Malaysia, a director can obtain authority in two ways. The first is through the Companies Act of 2016, and the second is through the company's constitution.

Section 213(1) of Companies Act 2016

“A director of a company shall at all times exercise his powers in accordance with this Act, for a proper purpose and in good faith in the best interest of the company.”

For example, suppose the CA 2016 stipulates that directors are entitled to assign business shares with the approval of a company resolution. This means that if a director distributes shares without a resolution authorising it, they are operating outside of their jurisdiction and may be in violation of their director obligations.

The second duty is stated in Section 213(2) and is as follows:

“A director of the company shall exercise reasonable care, skill and diligence with –

(a) the knowledge, skill and experience which may reasonably be expected of a director     having the same responsibilities; and

(b) any additional knowledge, skill and experience which the director in fact has.”

This duty to take reasonable precautions, exercise skill, and  diligence may look vague, but the courts will analyse it using objective and subjective elements. The objective test is specified in section 213(2)(a) of the Companies Act 2016, where the court evaluates whether the director acted in the same way that other directors with comparable skills and responsibility would have done. This implies that the court would take into account how the majority of directors would have acted.

The subjective test was then mentioned in Section 213(2)(b). A subjective test is one in which the judge looks directly at the director's added knowledge and skills rather than the general population of directors' knowledge and skill. This indicates that if you possessed any particular expertise that would enable you to outperform a "normal" director, you would be rated against those standards as well. As a result of the objective and subjective criteria in section 213(2), the court must evaluate both the objective knowledge of directors and the knowledge of the director in question.

Next, the director also cannot engage in dishonest deals which means to prevent directors from abusing their roles as directors for personal gains. The Companies Act 2016 tries to prevent situations by forcing directors to report any potential conflicts of interest in a proposed transaction. According to Section 221(1):

“Subject to this section, every director of a company who is in any way, whether directly or indirectly, interested in a contract or a proposed contract with the company, shall as soon as practicable after the relevant facts have come to the director’s knowledge, declare the nature of his interests at a meeting of the board of directors.”

This indicates that it may be a violation of a director's obligations if he tried to lead the firm towards a contract that benefited him rather than the company. It recognises that this responsibility may overlap with the first duty, which provides that directors must act "in the best interests of the company." Under the Company Act 2016, every director of a company has a duty to utilise his or her powers for a valid purpose and with due diligence in the interest of the company at all times. Despite this, board directors tend to capitalise on opportunities to act in manipulative operations that result in fraudulent misrepresentation and others. Directors who disobey this guideline and offend or breach their duty may be held personally responsible if they fail to satisfy their obligations. Refer to Section 213 (3) of the Company Act 2016, “a director who contravenes this section commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or to fine not exceeding three million ringgit or to both”.

Moreover, when a director fails to properly carry out his or her duties as a director of the company, the corporate entity may file a lawsuit against the board. Stakeholders who are seeking recompense for financial loss or injury commonly initiate this action. For example, a person has been defrauded, The person who has been deceived has the right to demand compensation including losses and damages arising from the deception. The contract being rescinded, is the most typical remedy requested, as such contracts are voidable due to false misrepresentation. Section 346 of the Companies Act 2016 states how to sue the directors in remedy in cases of oppression and reads as follows:

“Any member or debenture holder of a company may apply to the Court for an order under this section on the ground –

(a) that the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the members or the debenture holders including himself or in disregard or his or their interests as members, shareholders or debenture holders of the company; or

(b) that some act of the company has been done or is threatened or some resolution of the members, debenture holders or any class of them has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the members or debenture holders, including himself.”

This remedy was designed to allow a shareholder to file a lawsuit if he or she has been wronged personally. This remedy was created to facilitate a shareholder to file a lawsuit when he or she has suffered damage. Normally, the courts will examine any contracts involving shareholders and directors to see whether there was any misunderstanding or genuine expectations. If they are discovered, shareholders will have a better chance of demonstrating persecution.

Next, there are numerous implications of an infringement, including the removal of a director from the firm if more than half of the shareholders vote in favour, and the removal of a director from office, either temporarily or permanently. The director will then be held liable for any financial losses caused, which in significant circumstances can lead to legal action, the loss of house, and perhaps bankruptcy. Nevertheless, any infringement of a director's duty might result in a range of penalties such as personal liability and criminal offences and fines. The directors may be personally liable if they fail to meet their responsibilities, such as failing to account to the company for profits made from transactions where a conflict of interest existed or failing to declare an interest as required, as well as any false or misleading reporting that causes the company to lose money. Next, breaching the company legislation might be considered a violation punishable by fines. Legislative provisions exist for criminal offences as well as the penalties that may be imposed on companies if they are guilty. Charges of minimum or maximum amounts defined as per relevant regulations, piling, and suspension of trade are examples of punishments that may be imposed on the company.

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According to the legislation, directors cannot be held liable for decisions that are made on behalf of the firm if they did act sincerely, reasonably, and in the best interests of the company in full compliance with the Companies Act 2016. Directors who violate this rule contribute an offence and face imprisonment, a perfectly legal, or maybe both. Nonetheless, it has not prevented company directors from taking advantage of opportunities to engage in deceptive transactions that result in fraudulent misrepresentation. The tort of deception includes fraudulent misrepresentation. It happens when someone makes a representation while knowing it is false, not pretending to believe it is true, or being reckless about its truth. Sections 213(1), 213(2)(a), and 213(2)(b) of the Companies Act 2016 have some decided cases. Lord Denning stated in Parker-Knoll Ltd v Knoll International Ltd (No 2):

“When you deceive a man, you tell him a lie. You make a false representation to him and thereby cause him to believe a thing to be true which is false. You may not do it knowingly, or intentionally, but you still you do it, and so you deceive him”

Once it comes to company contracts, the cause of action depended on by companies to obtain legal remedies is fraudulent misrepresentation. In the case of Bounty Dynamics Sdn Bhd v Chow Tat Ming & 175 Ors, the Court of Appeal emphasised the significance of pleading false or misleading statements especially when initiating a legal proceedings. An allegation of fraud may be made only if there is transparent evidence supporting it, so the allegation must be specific enough to demonstrate that evidence exists. This is a crucial step in bringing a deception claim against a Director. In the case of Standard Chartered Bank v Pakistan National Shipping Corporation, in which a director purposefully and intentionally made a wrong statement in return for the payment on the justification of a letter of credit, the court will not allow the director to evacuate personally liable by relying on the concept of contributory negligence. The House of Lords ruled that a director should face personal liability for the deception. Since Lord Hoffman kept it:

“No one can escape liability for his fraud by saying I wish to make clear that I am committing this fraud on behalf of someone else and am not to be personally liable”

According to the preceding case, the fact that the person is a company director doesn't really make them responsible within itself, but also because the director actually made a fraudulent statement on the grounds of his or her own negligent misrepresentation, not that of the firm. It thus puts a great responsibility on company directors to be cautious of their actions. If an individual is falsely represented, the breaching party may seek compensation for all losses incurred by the falsely represented. The most common remedy pursued is contract rescission because falsely represented includes such contracts unenforceable. In simpler words, the contract is voided and the parties are returned to their pre-contract positions. Because an action for falsely represented is founded on the law of torts, a claim for damages is readily available to rescission.

The Companies Act 2016 seeks to prevent situations like this by forcing directors to reveal any potential conflicts of interest in a merger agreement. This implies that it could be a violation of a director's duties if he or she tried to steer the firm into an offer that benefited him or her rather than the firm. So the statement is accurate because the sections that govern directors' duties can overlap, which generally means that several old-school images of directors living life and pricey meals are no longer valid. Directors are not permitted to run the company in a hands-off manner. This was demonstrated in the United Kingdom case of Lexi Holdings v Luqman, where the court stated that boards must stay informed about what is happening in the firm and take part in operations.

Furthermore, as a general rule established in the case of Foss v Harbottle, a firm is the proper plaintiff. This suggests that the firm is the only who has the constitutional right to sue. But there was a catch to the rule in Foss v Harbottle as if the firms are the proper plaintiffs and directors control the firms, how would someone ever sue a director who's been screwing up. The regulation in Foss allows for several exceptions, but they are difficult to apply. Hence, Section 346 of the Companies Act 2016 provides them with options for suing its directors in this situation. There are many other ways to file a lawsuit against a director via a shareholders' contract, the firm's constitution, or a proceedings petition. An instance of an unfair action affecting someone's interests as a shareholder or member of the firm is where someone might be offered that they could take part in corporate management but the directors then are exempted  despite telling them otherwise. This was the scenario in the Ebrahimi v Westbourne Galleries case.

Another case involving Section 346 of the Companies Act 2016 is Chuah Seong Keat v Din Tan Yong Chia, also known as the Thai Odyssey case. The case involved a well-known Malaysian company with various outlets that provide Thai massage and spa services. In summary, the plaintiffs filed an action to seek a variety of common oppression remedies, including the winding up of the businesses or convincing the majority to purchase out the plaintiffs' share of the company in the Thai Odyssey Group. The plaintiffs' complaints were based primarily on the dismissal of the first plaintiff as director of the company, the appointment of additional board committees, director wages and compensation, and capital calls. Nevertheless, the statements that a few of the defendants found offensive and thus sought to strike were all those corresponding to the first plaintiff's individual claim of trademark rights and a domain name (IP asserted). The high court granted the striking-out application and dismissed the IP claims, based primarily on the assumption that the commands sought and granted must be in correlation with the alleged autocratic legislation, with the eventual goal of ending or remedying such an act if persecution is recognised.

The high court granted the striking out application and dismissed the IP claims, based primarily on the assumption that the commands sought and granted must be in correlation with the alleged autocratic legislation, with the eventual goal of ending or remedying such an act if persecution is recognised. In the other sentences, the remedies provided under Section 346 of the Companies Act should bring an end to the issues raised by the member organisations. After reviewing the facts in regards to the IP assertions and the alleged autocratic acts, the court determined that the IP assertions involved entirely different issues that did not emerge from or not been dependent on the alleged autocratic acts. The IP assertions, in particular, associated the first plaintiff's personal claims representing a different set of facts and regulations. As an outcome, the court determined that the IP assertions would alter the aspect of the persecution action and create unnecessary latency in its resolution. As a result, the courts found that the IP assertions should be considered totally separate by the IP high court.

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By completing this group assignment, we gained a lot of new knowledge especially about directors duty of diligence. Firstly, in order to work in group, we decided to select a leader to make communication smooth and clear during the allotment of task of each group member. Everyone shared their ideas on the project. We gave a chance to everyone to contribute their ideas about assignment. Our goal was to produce as many ideas as possible. We listened all the ideas carefully and then we mentioned all the ideas sheet so we don’t forget them or they don’t get lost. We are very grateful to have a great group members and our lecturer also helps a lot in completing this group assignment.

In term of understanding the task, we understand that director have a duty of diligence that is the use of care or persistence in performing duties, thorough attention to a matter, heedfulness and assiduity. Diligence is the opposite of negligence. Due diligence is the use of reasonable care ordinarily required by the circumstances.

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Duties Of Directors To Exercise With Diligence

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Duties Of Directors To Exercise With Diligence

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The Companies Act 2016 outlines general obligations as a director of an incorporated body. This declaration codifies the current 'common law' standards and equitable principles pertaining to the duty of company directors that have evolved over time. The common law has concentrated on the interests of stockholders. The Companies Act of 2016 emphasises the link between what makes a company's good and its broader corporate social responsibility. The Act compels directors to operate in the best interests of their firm, not in the best interests of any other party including shareholders. Even lone director or shareholder firms must examine the repercussions of not prioritising their personal interests over those of the company. The goal of codifying directors' obligations in the Companies Act 2016 is to make the law more uniform and accessible. The Act specifies seven statutory directors' obligations, which must also be addressed by shadow directors.

One of the duties of directors is to exercise with diligence. Until the Companies Act of 2016, this responsibility was a common law duty. However, once the CA 2016 went into effect, the requirement was codified in Section 174 of the same Act. A director must use reasonable care, skill, and diligence under section 174. This obligation codifies the common law norm of duty of care and skill, imposing both subjective and objective requirements. Directors must use reasonable care, skill, and diligence, as well as the care, skill, and diligence that may reasonably be anticipated of a person performing the tasks of a director. As a result, a director with extensive experience must apply the required amount of diligence in carrying out their obligations, in accordance with their higher level of knowledge.

Directors must use reasonable care and diligence. A business director must make decisions and carry out activities with the same care and attention that a reasonable person would exercise if they held the same position in the same firm. This does not imply that when a firm fails, the directors have failed to perform their responsibilities. Consideration is given to the reality that business is dangerous, and that occasionally, despite the best efforts of all parties involved, things simply do not work out or mistakes are made. To avoid falling foul of this obligation as a director, they have to make certain that they became knowledgeable about the issue and made a sound business judgement in good faith and in the best interests of the firm.

As a director, they are not obligated to perform every duty of the firm and may employ and assign some responsibilities to others, such as accounting and personnel monitoring. However, as a director, they must position themselves in a position to oversee and monitor all of the company's actions, including those entrusted to others. It is a frequent situation to find family businesses with directors who are no longer involved in the day-to-day operations of the firm. These directors will be subject to the same amount of risk as the decision-making directors. All directors have a positive responsibility to use care and diligence in order to keep the company sustainable and in compliance with the responsibilities placed on it by a variety of pieces of law. A director's claim that they were not involved in day-to-day operations or that they had assigned that portion of the company's operations to another director or employee is not a defence. So, if a firm has directors who are not active in, or kept aware of, the company's activities, that person should consider retiring as a director to shield themselves from the hazards that come with it.

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In conclusion, due diligence is defined as an investigation, undertaking, or research carried out on a company, business or individual prior to entering into a contract with another party in Malaysia. Directors cannot be held responsible for decisions made on behalf of the company as long as they have acted honestly, fairly, and in the company's best interests under the Companies Act 2016. This rule will commit a crime and face prison, a perfectly legal sentence, or both. A breach of these obligations would jeopardize the internal management of a business and would empower creditors and other holding directors to be personally liable for any misconduct. The requirement to exercise accountability says that corporate directors must exercise their powers and carry out their responsibilities with the degree of care and attention that a reasonable individual would exercise if they were a director. This statement codifies applicable common law standards and fairness principles related to the duties of corporate directors that have evolved over time. The purpose of systematizing directors' duties in the Companies Act 2016 was to make the law more uniform and accessible. To avoid breach of this obligation as directors, they must ensure that they are knowledgeable about the matter and make sound business judgments in good faith and in the company's best interests. Directors are not required to perform all corporate functions and may recruit and delegate some responsibilities to others, such as accounting and supervisory staff. All directors are responsible for actively exercising due care and diligence to ensure the company's continuity and comply with the responsibilities outlined in various legal regulations. The roles and obligations of directors were outlined in Section 213 of the Companies Act 2016.

The objective test is outlined in Section 213 of the Companies Act 2016, in which courts assess whether a director is acting like other directors with equal skill and responsibility. Because of Section 213's objective and subjective criteria, the court must evaluate both the objective knowledge of the directors and the knowledge of the director in question. The Companies Act 2016 attempts to prevent situations by requiring directors to disclose any potential conflicts of interest in a proposed transaction. This shows that it is possible to violate a director's obligations if they tried to run the company under a contract that benefits them rather than the company. Directors who fail to follow these guidelines and perform their duties may be held personally liable if they fail to meet their obligations. Referring to Section 213 of the Companies Act 2016, a director who violates this section shall be guilty and punished with a term of imprisonment not to exceed five years or a fine not to exceed three million ringgit or both. When a director fails to perform their duties as a corporate officer properly, the company can sue the board of directors.

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Teacher, Law. (November 2013). Duties and Responsibilities of Company Directors. Retrieved

from:https://www.lawteacher.net/free-law-essays/company-law/duties-and-responsibilities-of-directors.php?vref=1

The Importance of Corporate Due Diligence in Malaysia. (2019, August 14). Retrieved from:

https://mahwengkwai.com/the-importance-of-corporate-due-diligence-in-malaysia/#:~:tex

t=The%20term%20

Vanja, S (2015, September 8). What is a Director’s duty of care and diligence? LegalVision. Retrieved from:https://legalvision.com.au/what-is-a-directors-duty-of-care-and-diligence/