Cases & Deals
Indemnification of Directors
The Companies Act 2016, like many statutes of other jurisdictions, confers discretionary power upon companies to indemnify their directors for legal costs personally incurred by them in successfully defending themselves against proceedings brought against them for alleged breaches of duties. Legal costs may involve large sums of money, particularly if a dispute ends up before the Federal Court, i.e., Malaysia’s Apex Court. In an oral decision, the Federal Court in Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra & Ors v Perdana Petroleum Berhad  held that where an indemnification article is built into a company’s constitution as statutorily permitted by the Companies Act 2016, the issue of indemnification is not a matter of common but statutory law.The decision represents the first of its kind in caselaw that deals with the indemnification of directors pursuant to the Companies Act 2016.
The Federal Court overruled the decision of the Court of Appeal that a company’s constitution only binds the company and its members qua members to the exclusion of ‘third parties’ such as directors and an article providing that a company ‘shall indemnify’ the directors was inapplicable in the absence of evidence to show how such indemnification article was contractually incorporated into a director’s terms of appointment.