Company Law

Published date01 December 2019
Citation(2019) 20 SAL Ann Rev 198
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 SC LLB (National University of Singapore), LLM (Cambridge); Advocate and Solicitor (Singapore); Dean and Chair Professor of Commercial Law, City University of Hong Kong.
Date01 December 2019
Publication year2019
I. Directors' duties

9.1 The case of Lim Seng Choon David v Global Maritime Holdings Ltd1 is a straightforward, yet salutary, reminder of the importance for a director to act bona fide and in the best interests of his company. In that case the laundry list of breaches was long, including making unnecessary business trips, obtaining reimbursement wrongly for overseas trips, making claims and obtaining reimbursement for personal expenses, issuing unnecessary and unauthorised cheques to various third parties, and causing the company to enter into lease agreements for properties owned by the director's wife and himself.

9.2 Other cases involving the duty of directors to act bona fide and in the best interests of the company require a more complex legal analysis. This often occurs when the court must grapple with the vexed issue of whether an objective or subjective standard should be applied — which often manifests itself in cases where directors engage in bribery and then claim that their actions were carried out in the best interests of the company. In Ong Bee Chew v OngShu Lin2 (“Ong Bee Chew”), the plaintiff and the defendant were the only directors and shareholders of Hocen

International Pte Ltd (“Hocen”). After entering liquidation, Hocen sued the defendant for breach of fiduciary duty, alleging that he had caused Hocen to make payments of $1.8m to Crossbridge International Pte Ltd to facilitate bribes to procure business in China for Hocen. This claim was later assigned to the plaintiff. As the court found on a balance of probabilities that the allegation of bribery was made out, the court held the defendant to be in breach of his duty to Hocen.

9.3 The decision is consistent with the earlier Court of Appeal decision in Ho Kang Peng v Scintronix Corp Ltd3 (“Ho Kang Peng”). Nevertheless, there are two points that merit further discussion. First, the court made some observations on the objective-subjective basis on which to determine a director's liability for breach of fiduciary duty. It is suggested that, generally speaking, a director's honest subjective belief that an act is in the best interests of the company is determinative, given that courts do not usually sit in judgment of commercial decisions. However, an entirely subjective approach arguably leads to a lack of accountability on the part of directors. Accordingly, the courts may also ask themselves if the decision was one that a reasonable director could have arrived at or, as it is sometimes put, whether the decision was one that no reasonable director could have arrived at. For instance, in Goh Chan Peng v Beyonics Technology Ltd4 (“Goh Chan Peng”), the Court of Appeal stated that “where the transaction is not objectively in the company's interests, a judge may well draw an inference that the directors were not acting honestly”.5

9.4 In Ong Bee Chew, the court said that Goh Chan Peng could be read in two ways. First, it may be read as relying on the objective assessment of a director's intention purely as an evidential basis upon which to draw an inference as to his subjective intention. To the extent that this is true, Goh Chan Peng departed from the Court of Appeal's earlier approach in Ho Kang Peng. According to the court, Ho Kang Peng was regarded in a leading local text as laying down a purely objective approach to determining a civil breach of the duty to act bona fide in the interests of a company. The second way in which Goh Chan Peng may be read is that it lays down a substantive objective component, consonant with Ho Kang Peng. The court said it would approach Goh Chan Peng in this second way to be consistent with Ho Kang Peng.

9.5 With respect, it is submitted that Ho Kang Peng did not lay down a purely/substantive objective approach to determining a civil breach of the duty to act bona fide in the best interests of the company. It bears observing that in both Ho Kang Peng and Goh Chan Peng the Court of Appeal endorsed the subjective approach, namely, that it was for directors to exercise their discretion bona fide in what they considered — not what a court may consider — to be in the best interests of the company. Accordingly, a court would be slow to interfere with commercial decisions made honestly even if they were ludicrous business decisions.

9.6 The context of both cases must be kept in mind. In Ho Kang Peng6 the issue related to the payment of bribes to procure business, and in Goh Chan Peng7 the director in question had wrongfully diverted business away from his company and received bribes from a third party. In the face of such blatant wrongdoing, it is understandable why the Court of Appeal in both cases felt that the objective facts indicated that there could not have been an honest subjective belief on the part of the respective directors that they were acting in the best interests of their companies. The starting point should not be the objective analysis. The objective analysis is a useful means by which to test the subjective bona fides of directors, albeit through the relatively narrow lens of whether a reasonable director could have regarded what was done as being in the best interests of the company regardless of whether this was a decision that would be so regarded by all reasonable directors or even a majority of reasonable directors.

9.7 Second, the court said that the objective approach, which was unexceptional in a case like Ho Kang Peng that involved a listed company with many stakeholders, seemed anomalous in a case like the present where the company was a small, closely held, private company with a complete coincidence of identity between the directors, shareholders and the company. Unlike companies that are large, in small and closely held companies, there may be no abstract third-party interests or principalagent concerns that require protection. The law relating to directors' duties should nevertheless be applicable to closely held companies so as to vindicate a public interest in holding directors to minimum standards of commercial morality in directing a company's affairs. In addition, it is preferable for company law to take a single approach to all companies, whether large or small and whether widely or closely held. Just as all directors are subject to the same fiduciary, common law and statutory duties regardless of the size and nature of their companies, so too all directors must be subject to the same objective approach.

9.8 The authors respectfully agree with these reasons though we disagree that there is a purely objective approach if, by this suggestion, it is intended that the subjective intention of directors is subsidiary to the court's objective assessment of such intention. In addition, it is suggested that, instead of using the arguably vague (and new) language of “commercial morality”, it may be better at this time to justify the public interest on the prevention of wrongdoing given that the cases in question are of this nature. In saying this, the authors are not suggesting that only such cases would give rise to the said public interest, but simply that it is preferable to avoid a wide and arguably subjective concept such as “commercial morality”. The law can then develop incrementally as necessary.

9.9 Another complexity in the context of directors' duties in Singapore arises from the fact that directors are subject to both statutory duties articulated in the Companies Act8 (“the Act”) and duties at common law and equity. The extent to which these duties overlap, or create distinct obligations and liabilities from each other, is a matter that is not yet entirely clear and settled.9 In Traxiar Drilling Partners II Pte Ltd v Dvergsten, Dag Oivind10 (“Traxiar”), the defendant director, against whom allegations of a conflict of interest had arisen, argued that he did not breach the no-conflict rule as he had, pursuant to s 156(5) of the Act, made full disclosure to the board. The court rejected the argument on the basis that a director's statutory obligation to disclose interests to the company's board under s 156 of the Act was independent of the general duty at common law to avoid conflicts of interest stemming from the no-conflict rule and the rule against self-dealing. In fact, s 156(14) of the Act expressly provided that s 156 shall be in addition to and not in derogation of the operation of any rule of law. As such, the defendant's submission conflated the director's statutory obligation to disclose his interests in related entities with the director's obligation to avoid conflicts of interest at general law. If anything, disclosure pursuant to s 156(5) of the Act would only mean that the defendant would not incur civil and criminal liability under s 156 of the Act. To avoid a breach of the no-conflict rule at general law, there must have been full disclosure to all the shareholders of all the material facts together with subsequent shareholder approval.

9.10 While it is a plausible view that the no-conflict rule can be avoided only by fully informed shareholder approval, it is submitted respectfully that the better position is that disclosure to the board coupled with the board's fully informed consent can in certain circumstances relieve a director from what would otherwise be a breach of such director's duty to the company arising from a conflict of interest.

9.11 Such a position was articulated in Dayco Products Singapore Pte Ltd v Ong Cheng Aik11 (“Dayco”), where the High Court expressed the view that s 156(1) of the Act — and sometimes the articles of a company permit — a director who is interested in a proposed transaction to take the benefit of the transaction if the director discloses her interest to the board and takes no part in the decision of the board on the transaction. If the director makes such disclosure and abstains from taking part in the decision, the validity of the transaction will not be impaired. On the other hand, a failure to...

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