Company Law

Citation(2020) 21 SAL Ann Rev 224
Date01 December 2020
Publication Date01 December 2020
AuthorAlan K KOH LLB (National University of Singapore), LLM (Boston), Dr jur (Frankfurt); Advocate and Solicitor (Singapore); Assistant Professor of Law, Division of Business Law, Nanyang Business School, Nanyang Technological University, Singapore. Dan W PUCHNIAK BA (Manitoba), LLB (Victoria), LLM & LLD (Kyushu); Barrister & Solicitor (Ontario); Associate Professor, Faculty of Law, National University of Singapore. TAN Cheng Han SC1 LLB (National University of Singapore), LLM (Cambridge); Advocate and Solicitor (Singapore); Dean and Chair Professor of Commercial Law, City University of Hong Kong.
I. Directors' duties

9.1 In Sim Poh Ping v Winsta Holding Pte Ltd,2 a director submitted that he was not in breach of the no-conflict rule as he had not favoured his own interests over those of the plaintiff group since he had no interests in the defendant corporations to whom the opportunities had been diverted. This is an extremely narrow conception of the no-conflict rule and was rightly rejected by the Court of Appeal, which pointed out that a breach of this duty can take place if the interests of a third party are preferred over those of the party to whom the duty is owed.

9.2 More significantly, the court helpfully clarified the approach to the issue of causation in relation to non-custodial breaches of a core fiduciary duty, these being the duty to act in good faith, not to make an unauthorised profit from the relationship, and not to be in a position of conflict. This was because the court said that the High Court had

adopted different approaches to this issue in previous decisions. The Court of Appeal held that in such cases the plaintiff-principal must first establish that the fiduciary breached the duty and establish the loss sustained. Once this is done, the legal burden then falls on the fiduciary to rebut the presumption that the fiduciary's breach caused the loss. If the fiduciary is unable to prove that the principal would have suffered the loss in spite of the breach, the fiduciary must pay equitable compensation to the principal, such compensation being assessed at the upper limit by reference to the position the principal would have been if not for the breach.

9.3 In exceptional circumstances, directors may owe fiduciary duties to persons other than their companies. One well-established situation where this is so is where the company is insolvent or near insolvency, though it is more accurate to say that in these circumstances the duty to the company must take into account the interests of creditors as a whole instead of the shareholders collectively as in the case of a solvent company. This was reiterated in Ho Pak Kim Realty Co Pte Ltd v Ho Soo Fong3 (“Ho Pak Kim”), where Audrey Lim J found that the defendant directors were in breach of their fiduciary duty to the company and its creditors as the company was insolvent or in a “parlous financial position”, and the directors had, inter alia, failed to take reasonable steps to collect debts owing to the company and caused the books and records of the company to be destroyed to render collection difficult or impossible.

9.4 Ho Pak Kim also contains some useful comments on the statutory duty of “reasonable diligence” in s 157(1) of the Companies Act4 (“the Act”), a statutory duty which encapsulates the separate common law duty on directors to act with due care, skill and diligence. It is sometimes argued that the law in this area is overly rigid and that a “one size fits all” standard of diligence or care cannot take proper consideration of the different types of companies and the variety of skills that are needed on boards of directors. This criticism is an oversimplification because the standard can be calibrated according to the facts of the case. What the law sets out is a minimum standard that it expects all directors to meet while other directors, as a result of their special skill or involvement within the company, will find that what is sufficient skill and care for them is set at a higher bar. In Ho Pak Kim, the court reiterated what was said in previous cases, that the standard of care and diligence owed by a director is not fixed and is a continuum depending on various factors such as the role of the director, the type of decision, and the size and business of the company.

9.5 In the present case, although one of the directors was non-executive, this did not mean he could simply be a “dummy” director. He was not a greenhorn to business or to the company's affairs. As a director, he was subject to a minimum standard of care to take reasonable steps to monitor the management of the company. This would entail some knowledge of the company's business activities and what assets and liabilities it had, even if he did not know the minute details. If he had taken some steps to monitor the company's management, he would have known that the company's main asset was the debt owing to it by related parties, which remained uncollected. Accordingly, he had not discharged the minimum objective standard of care required of him in monitoring the management of the company.

9.6 One must be careful to not overgeneralise cases beyond their specific facts, but it is suggested that the approach is a generally sensible one. The main role of non-executive directors is to monitor management. To do this they must take steps to have a reasonable understanding of the company, including its business, assets, prospects and challenges. Such knowledge need not be at the same level expected of executive directors but must be sufficient for the non-executive directors to effectively discharge their monitoring obligations. It is unacceptable today (if it ever was) for non-executive directors to be passive bystanders and rubberstamps.

9.7 In Innovative Corp Pte Ltd v Ow Chun Ming5 (“Innovative Corp”), a director who resigned his directorship in order to take advantage of a maturing business opportunity that his company had been pursuing was found to have breached his fiduciary duties. Although there was some doubt over whether the company would have obtained the opportunity in view of the client's concerns over the competency of another director of the company, the decision is correct as it was incumbent on the defendant director to do all he could to try to retain the opportunity for the company. He did not appear to have done so.

9.8 Innovative Corp is also useful for its acceptance of the proposition that where a company's board of directors had expressly considered and rejected an offer, a director's subsequent decision to form a company to take up the offer was not in breach of the director's fiduciary duties. This proposition was thrown in doubt in Traxiar Drilling Partners II Pte Ltd v Dvergsten, Dag Oivind.6

II. Directors' disqualification

9.9 The Court of Appeal had to consider s 155A of the Act in Kardachi, Jason Aleksander v Attorney-General.7 This provision is a relatively recent addition to the Act, having only come into force on 3 January 2016. It provides that a person may be disqualified from being a director or being concerned in any way in the management of a company where such person was a director of a company that had been struck off the register under s 344 of the Act, and who “within 5 years immediately before the date on which [such company] was struck off” was a director of two other companies whose names had been struck off the register under the said section. The disqualified director applied, inter alia, for leave under s 155A(3) of the Act to act as a director. His application was dismissed and he filed an appeal.

9.10 One question before the Court of Appeal was whether the first two companies had to be struck off within a five-year period immediately before the date the third company was struck off, or within a five-year period ending on the date the third company was struck off. The question arose because four companies had been struck off within a five-year period and the second and third companies were struck off on the same date. The disqualified director argued that the disqualification should therefore have commenced from 8 January 2018, the date when the second and third companies were struck off, instead of 6 August 2018 when the fourth company was struck off. While on 8 January 2018 three companies would have been struck off under s 344 of the Act, there was only one company prior to such date that had been struck off under this section. On a literal interpretation, the fact that only one company had been struck off prior to the date when the second and third companies were struck off led the court to hold that s 155A was not applicable on 8 January 2018 and the proper date from which the disqualification took place was 6 August 2018.

9.11 On the issue of whether leave should be given to the appellant to act as a director, the court outlined three non-exhaustive considerations: (a) the applicant's capacity for compliance in the future; (b) whether there were any exculpatory reasons for the applicant's non-compliance with the Act; and (c) whether the applicant has provided an explanation of why it was necessary for him to be a director of the specific company or group of companies together with sufficient detail of these entities for which leave was being sought. Taking these considerations into account, the court denied the leave application.

9.12 Bijynath s/o Ram Nawal v Innovationz Pte Ltd8 was another decision involving director disqualification. The disqualification had been on the basis that the applicant was listed as the director of three companies which had been struck off the register pursuant to s 344(1) of the Act. Subsequently, one of the companies was restored to the register and the applicant brought an application under s 344G(3) of the Act that he should be placed “in the same position (as nearly as may be) as if the company had not been dissolved or its name had not been struck off the register”. Ang Cheng Hock J granted the application on the basis that the court had a very broad discretion to do what was “just”. In the circumstances, the failure to file the company's annual returns had been caused by the other directors going incommunicado, and there was nothing to suggest this could have been foreseen by the plaintiff at the time of his appointment as nominee director. There were also no realistic preventative measures which the plaintiff could have taken to avoid the striking off. The plaintiff's continued disqualification would also have imposed significant hardship as it would...

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