Company Law

Citation(2002) 3 SAL Ann Rev 91
Date01 December 2002
AuthorTAN CHENG HAN LLB (NUS), LLM (Cantab), Advocate & Solicitor (Singapore) Associate Professor, Faculty of Law, National University of Singapore
Publication Date01 December 2002

7.1 In Lim Weng Kee v PP[2002] 4 SLR 327, the Chief Justice took the opportunity to comment on the standard of care and diligence expected of a director. The appellant, Lim Weng Kee, faced three identical charges under s 157(1) of the Companies Act (Cap 50, 1994 Ed), namely, as managing director of Thai Shin Pawnshop Pte Ltd (“Thai Shin”), Thai Hong Pawnshop Pte Ltd (“Thai Hong”) and Wang Wang Pawnshop Pte Ltd (“Wang Wang”), he failed to use reasonable diligence in the discharge of the duties of his office by permitting various jewellery items pawned to the three companies as pledges for loans from the companies to be released to one Kalimahton binte Md Samuri (“Samuri”) without proper redemption, thus resulting in losses to the companies. The three charges were for the same offence committed at different premises, namely, at each of the three companies. The appellant was fined $4,000 on each of the charges in the district court under s 157(3)(b) of the Act. He appealed against his conviction and sentence.

7.2 Yong Pung How CJ dismissed the appeal. At the date of the alleged incidents, on or around 28 October 1998, the appellant had had 20 years of experience in running the business. He had been the managing director of Thai Shin and Thai Hong since 1978 and the de facto managing director of Wang Wang (which he founded) since 1996. The appellant admitted that he was the person-in-charge of the businesses of the three pawnshops at the time of the alleged incidents. The three pawn licenses were also issued in his name. The appellant first came to know Samuri on 12 December 1997. The appellant said that Samuri struck him as well-dressed and a high society type. Samuri in turn perpetuated the impression by arriving at the pawnshops in a chauffeur-driven Mercedes and claiming to be married to the brother of the Sultan of Brunei. Her “residence” at Punggol was two adjacent bungalows, three-storeys high, bearing a single address. Between 1997 and 1998, she pawned $4m worth of jewellery items at the three pawnshops. All these were in fact pretence. She was not a royal but an owner of a restaurant. The Punggol “residence” did not belong to her and the jewellery items were conned from a diamond merchant. The appellant did not see through the façade.

7.3 On 12 October 1998, Samuri informed the appellant of her intention to redeem the jewellery items. She proceeded to issue a $6m cheque in favour of Wang Wang, with the balance to be refunded to her later. To prevent the

appellant from discovering her ploy, Samuri told him that she would be attending prayers for a deceased relative for the next 21 days and the cheques must not be deposited during that period of time. On 28 October 1998, at the premises of Thai Shin, Samuri told the appellant that she wanted the jewellery items back there and then. The appellant refused to release the items as the cheque had not been cleared. However, he relented when Chong Yok Yin, his sister-in-law and also a director of Thai Hong and Thai Shin, assured him that Samuri would pay up. Samuri chose some items at Thai Shin. Samuri and the appellant then left for Thai Hong and Wang Wang where she chose other items. On 5 November 1998, the cheque was dishonoured. The shareholders of the three pawnshops suffered very substantial losses.

7.4 The appellant submitted that while an objective test of “reasonable diligence” applies for civil breaches of directors” duties under s 157(3)(a), a subjective test should apply for criminal breaches under s 157(3)(b). Section 157(3)(a) states that an officer or agent who commits a breach of any of the provisions of this section shall be liable to the company for any profit made by him or for any damage suffered by the company as a result of the breach. At the same time, such a person shall, pursuant to s 157(3)(b), also be guilty of an offence and shall be liable on conviction to a fine not exceeding $5,000 or to imprisonment for a term not exceeding one year.

7.5 Yong CJ rejected the argument. His Honour said that while the traditional approach stated that the standard of “reasonable diligence” was essentially objective, it contained an important subjective qualification: it was measured against what an “ordinary” director, sharing the same level of knowledge and experience as the defendant, would or would not have done on the facts of the case. This made it possible for a defendant to escape liability by appealing to his own lack of knowledge or experience. Yong CJ said that the traditional approach may have been formulated with non-executive directors in mind and in an age where such directors were essentially ornamental. This approach was no longer suitable today. The policy under the modern approach that is found in certain Commonwealth jurisdictions is clear. A person who accepts the office of director undertakes the responsibility that he understands the nature of the duty required of that office. That duty will vary depending on the circumstances, the size and the business of the particular company and the experience or skills that the director held himself out to possess in support of appointment to the office.

7.6 The modern approach also represents the law in Singapore. Yong CJ stated that the law hence stands as thus: the civil standard of care and diligence expected of a director is objective, namely, whether he has exercised the same degree of care and diligence as a reasonable director found in his position. This standard is not fixed but a continuum depending on various

factors such as the individual”s role in the company, the type of decision being made, and the size and the business of the company. However, it is important to note that, unlike the traditional approach, this standard will not be lowered to accommodate any inadequacies in the individual”s knowledge or experience. The standard will, however, be raised if he held himself out to possess or in fact possesses some special knowledge or experience.

7.7 His Honour went on to say that his position is not just in line with recent developments in England and Australia but supported by two other reasons on principle: firstly, the traditional approach made it too easy for directors to escape responsibility for breaches of duty by relying on their personal lack of experience or knowledge. Surely the law cannot act as an excuse for directors to continue in their ignorant state. Unfortunately, that was exactly the effect of the traditional approach. This detracted from the protection to shareholders intended by s 157. Secondly, most of the older cases predated the modern objective test of negligence propounded by the House of Lords in Donoghue v Stevenson[1932] AC 562 and should be read in the light of subsequent developments. Hence, the traditional position exemplified in cases such as Lagunas Nitrate Co v Lagunas Syndicate[1899] 2 Ch 392 should no longer be followed.

7.8 It is submitted respectfully that this declaration of Singapore law is to be welcomed. Executive directors can surely not complain for they are full-time employees of the company and must surely be expected to use reasonable diligence in the discharge of their duties. Non-executive directors should also not assume that all that is expected of them is to attend occasional meetings without necessarily understanding the business of the company, particularly where listed companies are concerned, as effective non-executive independent directors are widely seen today as one of the cornerstones of good corporate governance. As Yong CJ pointed out (at [36] and [37]):

“[T]he aim of criminal liability is to protect the wider public interests by deterring directors from acting negligently. … [C]orporate scandals, especially in large listed companies, impact adversely not only on the company in question, but may also have a ripple effect on the wider stock market and the economy. Civil liability is … not intended to protect, and in many cases is ineffective in protecting, the wider public interests, simply because a civil action is not brought in many cases. …

The traditional approach … in allowing an errant director to escape liability because of his inexperience and lack of knowledge, is certainly not robust enough. Often, losses are caused precisely because of the director”s inexperience and ignorance: giving allowance to such failings will negate any intended protection of the public interests. Public interests demand that the law places a duty on directors to acquire the experience and knowledge required to run the company, which is well reflected in the modern approach …”

7.9 Accordingly, Yong CJ held that the civil and criminal standards of care and diligence expected of a director are the same. The standard is objective, namely, whether he has exercised the same degree of care and diligence as a reasonable director found in his position. However, although the standard of care and diligence required is the same, the standard of proof to establish the lack of care and diligence will be different between civil and criminal cases. In criminal cases, the Prosecution must establish the objective lack of diligence beyond reasonable doubt and not merely on a balance of probabilities. As the appellant had 20 years of experience in the pawnshop business, there was no doubt that he had not exercised reasonable diligence in authorising the release of the pawned items before the cheque from Samuri had been cleared. No reasonable managing director in his shoes would have done as he did. As the fines imposed were not excessive at all, the appeal was dismissed.

Breach of fiduciary duty

7.10 In Tong Tien See Construction Pte Ltd v Tong Tien See[2002] 3 SLR 76, the High Court had to consider a case brought by a company against its former directors (the first, third, fourth and fifth defendants) and/or shareholders, its affiliated companies (the sixth, seventh and eighth defendants), and relatives of the...

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