JJ Chan

In the following guest post, my good friend JJ Chan takes a look at some key principles of Malaysian corporate law, including important appellate cases interpreting the Business Judgement Rule under Malaysian law. JJ is the Managing Partner of the Chan Ban Eng law firm in Malaysia. I would like to thank JJ for allowing me to publish his article on this site. Here is JJ’s article.

Introduction

Can directors make major decisions — even multi-million-ringgit transactions — on the eve of being removed from office? And if those decisions later fail, does liability automatically follow?

Two appellate decisions — Pioneer Haven Sdn Bhd v Ho Hup Construction Co Bhd & Ors and Iris Corporation Bhd v Former Directors — offer clear judicial guidance.

Together, they represent important appellate court decisions illustrating how Malaysian courts apply the Business Judgment Rule: courts will not interfere with bona fide commercial decisions made honestly, on an informed basis, and in the interests of the company — even if those decisions ultimately fail.

1. Pioneer Haven v Ho Hup — Can Directors Sign a RM265 Million Deal the Day Before Removal?

This was the question before the Court of Appeal in Pioneer Haven Sdn Bhd v Ho Hup Construction Co Bhd & Ors [2012] 5 CLJ 169, decided by Tan Sri Datuk Zainun Ali JCA (as she then was).

Background

Ho Hup was in serious financial distress (PN17 status). A day before its board was to be removed at an EGM, its subsidiary, Bukit Jalil Development, signed a RM265 million Joint Development Agreement (JDA) with Pioneer Haven.

Shareholders challenged the deal, alleging:

  • It was a “disposal of land” requiring shareholder approval under Section 132C of the Companies Act 1965; and
  • The directors acted improperly by binding the company just before being removed.

Court of Appeal Ruling

  • No disposal under Section 132C

No legal or beneficial ownership was transferred. A power of attorney for development did not amount to disposal. Shareholder approval was not legally required.

  • Reflective loss — wrong plaintiff

Ho Hup could not sue for losses suffered by its subsidiary. Any loss was company loss, not personal shareholder loss.

  • Business Judgment Rule applied

The Court recognised commercial reality:

  • Ho Hup faced delisting, RM300 million liabilities and insolvency
  • The JDA guaranteed RM265 million without capital risk
  • A reasonable board could have made the same decision — there was no bad faith

Why It Still Matters

  • The Federal Court endorsed these principles in Tengku Ibrahim Petra v Petra Perdana [2018], making this binding precedent.
    • The Court of Appeal reaffirmed them in Iris Corporation v Former Directors (2025).
    • It clarifies what counts as a “disposal” — relevant today under Section 223 of the Companies Act 2016.
    • It confirms the reflective loss doctrine in Malaysian law.
    • It assures directors that prudent risk-taking in corporate distress situations will be protected.

Not a free pass: The Business Judgment Rule does not protect fraud, self-dealing or undisclosed conflicts of interest.

2. Iris Corporation v Former Directors — Failure ≠ Liability

“Directors who act honestly, with reasonable care and in good faith are entitled to protection — even if their business decisions are unsuccessful“

In Iris Corporation Bhd v Former Directors, the Court of Appeal reaffirmed that directors will not be held personally liable for failed business decisions — provided they comply with Section 214 of the Companies Act 2016.

Key Ruling

Directors are protected if they:

  • Act in good faith
    • Have no material personal interest
    • Make decisions on an adequately informed basis
    • Hold a reasonable belief that the decision is in the company’s best interests

Judicial Emphasis

Justice Datuk Ahmad Fairuz Zainol Abidin cautioned against hindsight bias:

“If directors faced personal liability for every business decision that ultimately proved unsuccessful, qualified individuals would be deterred from serving on company boards, and those who did serve would adopt excessively conservative approaches that could stifle business growth and innovation“

He added:

“The ultimate failure of the investment does not retrospectively invalidate the reasonableness of the directors’ belief“

Facts

  • In 2016, Iris invested RM11.72 million in UK-based Border Control Solutions Ltd (BCS)
    • The venture failed; BCS was wound up by UK court in 2018
    • Iris sued nine former directors to recover losses
    • The High Court (2022) and Court of Appeal (2025) dismissed all claims

Why This Matters

This ruling is significant because it:

  • Confirms statutory protection under Section 214 CA 2016
  • Reassures directors that prudent risk-taking will not automatically expose them to liability
  • Reinforces the importance of process — being informed, independent, and documenting deliberations
  • Encourages responsible commercial risk-taking and innovation

Upshot

The message is clear: Malaysian courts will protect directors who act in good faith and with due care — even if the outcome is unsuccessful.

3. Combined Takeaways — What These Cases Establish

Read together, Pioneer Haven and Iris Corporation affirm several key principles governing directors’ liability and judicial restraint in commercial decision-making:

Commercial failure is not misconduct. A transaction that leads to loss does not, by itself, amount to breach of duty.

Good faith and informed decisions are protected. Courts will not interfere where directors act honestly, without personal interest, are properly informed, and believe their actions serve the company’s interests.

Timing (even just before removal) does not invalidate decisions. Decisions made shortly before changes in board composition remain valid, if done for proper purposes and without bad faith.

No “disposal of assets” unless ownership is actually transferred. Granting development rights or power of attorney is not disposal under company law.

Reflective loss doctrine applies. Shareholders cannot recover losses suffered by the company.

Protection is not absolute. The Business Judgment Rule does not extend to fraud, self-dealing, abuse of power, or undisclosed conflicts.

Conclusion

These decisions reaffirm a crucial message for directors and boards in Malaysia:

The law does not demand perfection — it requires honesty, diligence and loyalty.

Courts will not punish directors for making difficult commercial decisions during financial distress or uncertainty, provided they act in good faith, are properly informed, and believe their actions are in the company’s interests.

But the protection of the Business Judgment Rule ends where fraud, bad faith or personal conflict begins.

JJ Chan

Barrister-at-law of Grays Inn, London

Managing Partner

CBE

Advocates & Solicitors | Notary Public

Malaysia