Directors Beware: Indemnity In A Company's Constitution Is Not Foolproof

• Published date: 29 June 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers
• Law Firm: Herbert Smith Freehills
• Author: Mr Glynn Cooper, Wan Jian Loh and Jarry Tay

The constitution (formerly known as articles of association) of companies in Malaysia generally contains an indemnity provision in favour of directors, indemnifying them against liabilities (for example, associated legal fees and financial costs) incurred by the directors in defending legal suits by third parties where judgement has been given in their favour in respect of any negligence, default, breach of duty or breach of trust. However, to what extent can the directors solely rely on an indemnity provision in a company's constitution to bring an indemnity claim against the company? This question was considered by the Malaysian Court of Appeal in the case of Perdana Petroleum Bhd (formerly known as Petra Perdana Bhd) v Tengku Dato' Ibrahim Petra bin Tengku Indra Petra & Ors [2021] 6 MLJ 663.

Facts of the Case

In this case, four former directors of Perdana Petroleum Berhad (Company) filed an action at the High Court to seek an indemnity against the Company to claim for their legal fees and expenses incurred in defending two previous lawsuits commenced by the Company (or on the Company's behalf) against the directors for, among other things, breaches of statutory and fiduciary duties.

The directors successfully sought an order from the High Court, requiring the Company to indemnify the directors in respect of their legal expenses (approximately RM2.6 million) in connection with the previous lawsuits. The directors had largely relied on Article 170 of the Company's constitution (which followed Article 113 of the Table A model articles under the now repealed Malaysian Companies Act 1965) in their indemnity claim, which provided as follows:

Indemnity

Every director, managing director, agent, auditor, secretary, and other officer for the time being of the company shall be indemnified out of the assets of the company against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in connection with any application under the Act in which relief is granted to him by the Court in respect of any negligence, default, breach of duty or breach of trust.

Dissatisfied with the outcome, an appeal was brought by the Company to the Court of Appeal. One of the principal issues before the Court of Appeal, which forms the focus of this article, was whether the former directors were entitled to avail themselves of the above indemnity provision found in the Company's...