Case Note: DISCLOSING CONFLICTS OF INTERESTS

• Citation: (2005) 17 SAcLJ 465
• Date: 01 December 2005
• Published date: 01 December 2005

Dayco Products Singapore Pte Ltd v Ong Cheng Aik [2004] 4 SLR 318

Directors are subject to strict fiduciary obligations to avoid a conflict of interests. This obligation, however, does not mean that a corporate director can never contract with the company on whose board he sits, an obvious example of a situation of conflict. The general law requirement is that the fully informed consent of the company’s shareholders, obtained in advance, will remove the conflict and prevent a breach from arising. In addition, s 156 of the Companies Act requires, on pain of penal sanctions, disclosure of the conflict to the board of directors. This case raises questions in connection with the director’s obligation to disclose, both under general law and under the Act.

I. The facts

1 The recent decision of the High Court in Dayco Products Singapore Pte Ltd v Ong Cheng Aik1 raises important issues in connection with the nature of the corporate director’s obligation to disclose a situation of conflict in the context of the director’s fiduciary obligations. The facts may be briefly stated.

2 The defendant, Ong, was the managing director of and in charge of the day-to-day affairs of the plaintiff company, a wholly-owned subsidiary of Delaware-incorporated Dayco Products Inc, which was in turn part of a group of companies, the ultimate holding company of which was Mark IV Industries Inc. The board of the plaintiff comprised, in addition to Ong, his wife (who was appointed for “administrative reasons”) and three foreigners who were not resident in Singapore. Dayco

Products Inc apparently had no board of directors. The oversight of the plaintiff’s affairs was therefore undertaken by Dayco Europe SRL, a subsidiary of Mark IV Industries Inc. Specifically, Ong reported on the plaintiff’s matters directly to Purden, who was the vice-president and general manager of Dayco Europe SRL. Purden in turn reported to Johansson, an officer of Mark IV Industries Inc, who would then report to its board of directors. Purden was the person to whom Ong looked for information, advice and instructions with respect to the plaintiff’s matters. Sometime in June 1999, Ong was told that the plaintiff’s operations would be shut down and the plaintiff subsequently voluntarily liquidated. With a view to taking over the business operations of the plaintiff, Ong incorporated Mark IV Singapore Pte Ltd (“Mark Sing”) and Asia Pacific Automotive Pte Ltd (“APA”) in July 1999. Specifically, Ong wanted to buy over certain goods, which the plaintiff had, through Purden, authorised Ong to sell in June 1999 to the plaintiff’s current distributors at certain prices. Eventually, in August/September 1999, through a number of transactions involving nominee purchasers effected by Ong in his capacity as managing director of the plaintiff, the goods were sold to Ong’s companies, which subsequently dealt with them at a profit. The plaintiff, through its liquidator, claimed against Ong for an account of the profits made in breach of his fiduciary duty in failing to make proper disclosure of his personal interests in the transactions. The court found Ong liable to account.

II. The “no-conflict” rule and the requirement of disclosure

3 Belinda Ang Saw Ean J opined that:2

[T]he defendant breached his fiduciary duty as a director of the company by placing his personal interest in making and completing the sales of the [goods] above his duty to act in good faith for the benefit of the plaintiff. … The defendant had … acted in conflict between his fiduciary duty and his personal interest.

Undoubtedly, Ong, as a fiduciary, is subject to fiduciary obligations of loyalty. It is a fundamental principle of equity that “a person in a fiduciary position … is not allowed to put himself in a position where his interest and duty conflict”.3 This “disability”4 is:5

a consequence of that relation between [parties] which imposes on the one a duty to protect the interest of the other, from the faithful discharge of which duty his own personal interest may withdraw him. In this conflict of interest, the law wisely interposes. It acts not on the possibility, that, in some cases, the sense of that duty may prevail over the motives of self-interest, but it provides against the probability in many cases, and the danger in all cases, that the dictates of self-interest will exercise a predominant influence, and supersede that of duty.

Cases of self-dealing by directors, where the director contracts with the company, are obvious situations of conflicting interests. The “no-conflict” rule, however, is not absolute, and the company, for whose protection the rule is imposed, is entitled to relax it. Thus, a director may enter into a transaction notwithstanding a conflict of interests provided he has obtained the informed consent of the shareholders in general meeting.6 Vinelott J in Movitex Ltd v Bulfield7 explained the position as follows:

The resolution in general meeting protects the director not because it operates to release him … from the consequences of a breach of the self-dealing rule but because, to the extent that the company … gives its informed consent to the transaction there is no breach; the conflict of duty and interest is avoided.

4 Key to the avoidance of a potential breach of the duty to avoid a conflict is therefore the disclosure of the director’s conflicted or potentially conflicted interests and obtaining the necessary corporate consent. For the purposes of giving such consent under general law, the company is usually represented by the shareholders in general meeting.

5 In the present case, it was asserted by Ong that the plaintiff, through Purden, was apprised of his intentions and had given its consent. In the case of a wholly-owned subsidiary which the plaintiff was, consent would have to be given by the holding company’s board of directors.8

However, the plaintiff’s immediate holding company, Dayco Products Inc, had no board of its own, and was controlled by Mark IV Industries Inc.9 The chain of command, with respect to the plaintiff’s affairs, led up to the board of Mark IV Industries Inc, through Purden. Any disclosure would therefore have to be made to Purden, as the agent of the plaintiff’s overseas management. This much appeared, at least implicitly, to have been accepted by Ang J.10 On the facts, however, her Honour found that the defendant “[had] not established on a balance of probabilities, that Purden knew or was aware of, or even acquiesced in the respective sales of the [goods] to the defendant’s companies … The evidence … is limited and cannot constitute a ‘vicarious’ attribution of knowledge sufficient to satisfy the requirement of disclosure to the board or shareholders”.11 This should undoubtedly have disposed of Ong’s defence to the plaintiff’s civil claim for an account of profits. Her Honour, however, went further, opining as follows:12

Specifically on the question … whether informal disclosure or knowledge informally acquired is sufficient to satisfy the disclosure requirements, I am of the view that it is unsustainable in law… [emphasis added]

6 This would be a significant development indeed. Hitherto, the focus of the general law has been to ensure that the assent of the shareholders to the director profiting from his conflict is fully informed. The process of disclosure is of less import than the fact that they are fully informed. Thus, the informality of the process by which the shareholders came to be in possession of full knowledge of the conflict has not been an obstacle to the validity of the consent obtained. This must be a logically necessary corollary of the unanimous consent rule,13 by which the consent of all the shareholders, for the purposes of preventing a breach of the director’s...