Turning a Blind Eye

A commentary on MPI Polyester Industries Sdn Bhd v Eng Koo Kiang & Ors [2011] 8 CLJ 236 by Siva Kumar Kanagasabai

THE FACTS

The facts, as elicited from the testimony of witnesses and documents produced at the trial are set out below.

The Plaintiff carried on the business of the manufacture and sale of polyester resins.

The defendants are the former General Manager, Marketing Manager, Logistics Executive and Plant Manager respectively of the Plaintiff ("Defendants").

Despite the rising prices of the Plaintiff's products at the material time, the Plaintiff experienced low profit margins. The Plaintiff then commenced an internal audit in early 2003 to investigate into the matter.

The internal audit disclosed that the 2nd Defendant had procured the Plaintiff to sell its products to non-existent companies, companies owned by relatives of the 2nd Defendant or by way of dubious contracts at low prices. The products were on-sold by the purported purchasers for higher sums, thereby enriching the 2nd Defendant.

The Plaintiff also produced evidence that the 1st Defendant had wrongfully and in breach of his contract of service, caused the Plaintiff to sell its products to a company where the contact person was the 1st Defendant's son at a price which was lower than the Plaintiff's actual average export price for the products.

During the trial, the Plaintiff also produced 10 personal registers and 16 cheque butts that had been seized from the 2nd Defendant. These documents disclosed that the 1st Defendant had received RM170, 760 the 3rd Defendant RM8, 950 and 4th Defendants RM178,827 from the 2nd Defendant.

Arising from the findings of the internal audit, the Plaintiff terminated the employment of the 1st to 3rd Defendants in July 2003. The 4th Defendant resigned in February 2003.


THE HIGH COURT PROCEEDINGS

The Plaintiff brought a claim against the Defendants on the premise that the Defendants had wrongfully and/or maliciously conspired amongst themselves to defraud and injure the Plaintiff in its business.

The Plaintiff also alleged negligence and breach of fiduciary duty against the 1st and 4th Defendants and sought an account of secret profits or commission by the 1st and 4th Defendants.

The 2nd Defendant chose not to defend the claim after filing his defence and judgment was entered against him before the trial. The 3rd Defendant entered into a consent judgment a day before trial.

The 1st and 4th Defendants, in their defence, asserted that they had no knowledge of the 2nd Defendant's actions. They also contended that the payments received from the 2nd Defendant were loans made to them.

The High Court allowed the Plaintiff's claim and ordered the 1st and 4th Defendants to pay various sums to the Plaintiff.

The following were among the issues that were considered by the learned Judicial Commissioner, Harmindar Singh Dhaliwal, in his judgment.

Negligence by the 1st Defendant as the General Manager

The Court held that it was undeniable that the 1st Defendant, as a general manager who had overall control of the operations and assets of the Plaintiff, owed a duty to the Plaintiff to exercise reasonable diligence to ensure that there were no losses and certainly no profits made by the employees at the expense of the Plaintiff.

The learned Judicial Commissioner was satisfied that on the facts of the case, the 1st Defendant had knowledge of, and was complicit with, the actions of the 2nd Defendant. Accordingly, the Court held that it was patently obvious that the 1st Defendant had breached his duty.

Breach of fiduciary duty by the 1st and 4th Defendants

The learned Judicial Commissioner cited various authorities, including Clerk & Lindsell on Torts and Bristol v West Building Society v Mothew [1996] 4 All ER 698, as authority for the proposition that a breach of fiduciary duty is a civil cause of action for a failure to meet one of the obligations that, in equity, had created a special relationship of fiduciary and principal, which if established would entitle the principal to equitable compensation for his loss or to restitution for the fiduciary's unauthorized gain.

From the nature of the functions and duties the 1st and 4th Defendants, the Court had no doubt that both these Defendants owed fiduciary duties to act in good faith and of loyalty and fidelity to the Plaintiff. These duties precluded the Defendants from acting in a manner whereby their duty and interest may conflict and from acting for their own benefit to the detriment of their employer without their employer's consent.

Based on the evidence presented, the Court held that both the 1st and 4th Defendants had clearly breached their fiduciary duty by acting in a manner which enriched themselves at the expense of the Plaintiff.

Conspiracy to injure the Plaintiff's business

In determining the issue of conspiracy, the Court identified and restated the law governing the 2 forms of the tort of conspiracy, namely 'conspiracy to use unlawful means' and 'conspiracy to injure'. 'Conspiracy to use unlawful means' is proven when 2 or more individuals combine to commit an unlawful act or to effect an unlawful purpose with the intention of causing injury or damage to the plaintiff.

In the case of 'conspiracy to injure', lawful means are used but the plaintiff must prove that there was a predominant purpose on the part of the defendants to injure the plaintiff in carrying out their common purpose.

Although the Plaintiff had used the phrase ‘conspiracy to injure’, the Court held that the Plaintiff had argued its case on the basis of 'conspiracy to use unlawful means'. Hence in essence, all that the Plaintiff had to prove was that the Defendants had the intention to injure the Plaintiff and that it was not necessary to prove that it was the predominant motive. According to the Court, it was clear in the present case that the Defendants had used unlawful means to carry out their illegitimate activities by the manner in which they had acted to procure secret profits for themselves.

The learned Judicial Commissioner held that conspiracy involved an agreement to work on the furtherance of a common purpose. As there was clear evidence of knowledge and complicity on the part of the Defendants of the transactions that enriched them to the detriment of the Plaintiff, the Court was more than satisfied that the Plaintiff had succeeded in establishing that the Defendants had committed conspiracy.

Whether 1st and 4th Defendants received secret profits from the 2nd Defendant

The Court rejected the 1st and 4th Defendants contention that the payments received from the 2nd Defendant were loans. On the evidence of the cheque butts, the 1st Defendant's personal registers and the evidence of the 3rd Defendant, the Court was satisfied that the payments were in fact secret profits or commissions received by the 1st and 4th Defendants.


COMMENTARY

Given the strong evidence produced to the Court that the Defendants had conspired and participated in a scheme to earn secret profits for themselves to the detriment of the Plaintiff and that the 1st and 4th Defendants had received a part of such secret profits from the 2nd Defendant, it was foregone that the Court would award judgment in favour of the Plaintiff.

Nevertheless this case is interesting as the learned Judicial Commissioner had imposed a duty on the 1st Defendant, as the general manager who had overall control of the operations and assets of the Plaintiff, to exercise reasonable diligence to ensure that no profits were made by the employees at the expense of the Plaintiff and not just plead ignorance. This proposition is consistent with the duty of an employee to report the wrongdoings of his fellow employees even where the wrongdoing is committed by his superior. In Swain v West (Butchers) Ltd [1936] 3 All ER 261, Greene LJ put it as follows:

“The Plaintiff was responsible for the management of the business and was responsible for seeing that the business was conducted honestly and efficiently by all who came under his control. If the dishonesty of a fellow servant came within his notice he should tell the board ... The plaintiff's duty was to report to his employer that the managing director had endeavoured to persuade him to do something which was dishonest and which would, if carried out, be a breach of his duties in controlling the business of the company.”

This proposition was applied by the Malaysian Industrial Court in Mohamad Aminuddin Md Zain & Anor v Perbadanan Usahawan Nasional Berhad [2006] 3 ILR 2172. In that case, the Company Secretary and the Legal Advisor were dismissed inter alia for committing misconduct in not reporting to the board of directors the instructions from their superior, the Chief Executive Officer, to participate in the issuance of a bond on behalf of the employer without the knowledge of the board. The Industrial Court found their dismissal to be justified.

It can be seen from the above that employees, management staff in particular, have to be vigilant and when they become aware of the wrongdoings of their fellow employees, whether subordinate or superior, they have a duty to report it to their employer and not just turn a blind eye.



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