Introduction

Commonly known as the business judgment rule, section 214 of the Companies Act 2016 (“CA 2016”) protects directors against inherent business uncertainties and honest errors in the making of business decisions. Section 214 of CA 2016 provides that a director who makes a business judgment is deemed to meet the requirements of the duty under subsection 213(2) of the CA 2016, which is generally the duty to exercise reasonable care, skill and diligence, and the equivalent duties under the common law and in equity if the director:

1. a. makes the business judgment for a proper purpose and in good faith;
2. b. does not have a material personal interest in the subject matter of the business judgment;
3. c. is informed about the subject matter of the business judgment to the extent the director reasonably believes to be appropriate under the circumstances; and
4. d. reasonably believes that the business judgment is in the best interest of the company.

How does a court of law decide whether these four elements, most of which are subjective, are satisfied? Recently, the Court of Appeal in the case of Iris Corporation Bhd. v Tan Sri Razali bin Ismail & Ors [2025] MLJ 3079 revisited the business judgment rule and its application. In dismissing the company’s claim against nine former directors for alleged breaches of fiduciary and statutory duties over a failed foreign investment project, the Court of Appeal offered significant guidance on the application of the business judgment rule.

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Background Facts

1. 1. Iris Corporation Bhd. (the “Appellant”) was the inventor of the world’s first electronic passport and multi-application electronic identification system. The field of trusted identification was the Appellant’s core business and primary revenue generator for over two decades.
2. 2. Tan Sri Razali bin Ismail (“1st Respondent”) was the chairman of the Appellant from May 2015 to August 2017, whilst Datuk Tan Say Jim (“2nd Respondent”) was the Appellant’s chief executive officer and managing director from August 2013 to October 2017, along with seven other individuals who served as executive and non-executive directors in the Appellant with varying tenures (collectively, the “Respondents”).
3. 3. In 2016, through a directors’ circular resolution dated 6 January 2016, the Appellant’s board of directors, the Respondents, approved an investment in Border Control Solutions Limited (“BCS”), a UK company incorporated in April 2015 as a special purpose vehicle to pursue the proposed privatisation of the United Kingdom Border Force (“Privatisation Project”). The Appellant agreed to buy 10% of BCS shares for £2 million (“BCS Investment”).
4. 4. The 2nd Respondent was introduced to the Privatisation Project in 2015 owing to the Appellant’s expertise in trusted identification technology which the project required. As part of the Appellant’s involvement in the Privatisation Project, two of the Appellant’s senior staff were seconded to BCS and equipment was supplied to a subsidiary incorporated for the project.
5. 5. The Appellant also appointed BCS’s sole shareholder Joseph Vijay Kumar (“JVK”) as a consultant for the BCS Investment. Between January and August 2016, the Appellant paid £2.05 million to BCS and JVK in relation to the BCS Investment.
6. 6. On 5 October 2016, the Appellant’s board, the Respondents, resolved to withdraw from the BCS Investment as concerns emerged about the viability of the Privatisation Project. The 2nd Respondent undertook to procure a refund by 31 December 2016, but to no avail. BCS was subsequently wound up by the UK High Court on 31 January 2018.
7. 7. On 24 April 2019, the Appellant filed a claim against the Respondents for RM11.7 million (£2.05 million) for allegedly breaching their directors’ duties in relation to the BCS Investment.  
8. 8. Two conflicting investigative reports became a central issue of the litigation:
   1. a. A report dated 28 July 2017 from Ferrier Hodgson MH Sdn. Bhd. (“FH”), commissioned by the Appellant’s board, the Respondents, which found no irregularities in the BCS Investment and confirmed that it was “commercially considered and approved” (“FH Report”).
   2. b. A report dated 19 April 2019 from Ernst & Young Services Sdn. Bhd. (“EY”), commissioned by the Appellant after its new substantial shareholder took over, which identified irregularities in relation to the BCS Investment and suggested potential breaches of directors’ duties (“EY Report”).
9. On the basis of the EY Report, which formed the backbone of the Appellant’s lawsuit, the Appellant contended that the Respondents had approved the BCS Investment without adequate information, due diligence, or independent assessment.
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The High Court’s decision

The High Court dismissed the Appellant’s claim against all nine Respondents. Relying on the credibility of the Respondents’ witnesses and material evidence of the Respondents’ substantial prior knowledge of the Privatisation Project, and preferring the FH Report over the EY Report, the High Court found that the Respondents had acted honestly, in good faith, and in the best interests of the company in making the collective decision to invest in BCS, and are therefore protected by the business judgment rule.

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The Court of Appeal’s decision

The Court of Appeal agreed with the High Court’s decision that the four cumulative requirements under Section 214 of the CA 2016 had been fulfilled:

Application of the business judgment rule without hindsight bias

The Court of Appeal recognized that company directors are tasked with navigating risk and making complex decisions without the benefit of hindsight, and therefore the business judgment rule serves as a doctrinal shield that prevents courts from interfering with the commercial discretion of directors, so long as their decisions are made honestly, on an informed basis, and in the company’s interests. The courts must guard against the unfair effects of hindsight bias during judicial evaluation of their decisions. It is for this reason that the Court of Appeal rejected the EY Report, being derived from incomplete forensic findings and representing the very type of retrospective analysis that the business judgment rule is designed to prevent.

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Key Takeaways

The Iris Corporation Bhd. v Tan Sri Razali bin Ismail case has once again reaffirmed the business judgment rule in protecting reasonable business decisions made in good faith, even if they ultimately fail, and highlights the defensive shield against hindsight-based litigation. This legal safeguard is vital in fostering a corporate environment where competent individuals are willing to assume directorial roles and where prudent risk-taking is encouraged rather than punished through retrospective legal scrutiny. In the eyes of the court, the business judgment rule does not demand successful outcomes or for directors’ judgment to be perfect; instead, it focuses on the decision-making process, ensuring that directors are not held liable for honest mistakes made in good faith, thereby promoting strategic autonomy and innovation within corporate governance.

That said, a key concern arises from the court’s willingness to accept industry familiarity and informal briefings on a project as sufficient due diligence, which may lead to board complacency, hubris, and a rubber-stamp culture. Left unchecked, this is detrimental to shareholders who rely on the board’s expertise in navigating the company through high-risk strategic initiatives such as the BCS Investment, where robust due diligence and risk assessments are not just a box-ticking exercise but necessary in ensuring that all decisions are made in the best interest of the company.

From a record-keeping perspective, this case also underscores the importance of documenting board decisions and justification on investment decisions, especially on riskier investments, demonstrating independent assessment, and informed and honest decision-making.

About the authors

Shaun Lee Zhen Wei
Senior Associate
Corporate & Capital Markets
Halim Hong & Quek
shaun.lee@hhq.com.my

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Sherzanne Lee
Associate
Corporate & Capital Markets
Halim Hong & Quek
sz.lee@hhq.com.my

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Adrian Tan Zhi Chung
Pupil-in-Chambers
Corporate & Capital Markets
Halim Hong & Quek
adrian.tan@hhq.com.my

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