Date01 December 2016
Published date01 December 2016
AuthorVictor YEO Chuan Seng LLB (National University of Singapore), LLM (University of Melbourne); Advocate and Solicitor (Singapore); Associate Professor, Nanyang Business School, Nanyang Technological University.

Observations and Comments on Select Issues *

This paper provides some observations and comments on two key aspects of directorial criminal liability for lapses in governance – the directors' duty of care and the liability for lapses in corporate disclosure obligations. Select issues discussed include the rising standards expected of directors and the impact of this on the directors' performance of their role; criminal liability for negligence; the interaction between liability for negligence and liability for lapses in disclosure obligations; and liability for failure to comply with corporate disclosure requirements itself.

I. Introduction

1 There are several roles which directors play as “gatekeepers” of companies in the context of good corporate governance. The first is to enhance the value of the company for the benefit of its shareholders (having regard to the interests of other stakeholders). The second, which may be seen as corollary to the first, is to prevent or minimise the destruction of value in the company. A third role, which applies to directors of companies which are publicly listed, is to ensure proper corporate disclosure of information so as to enable investors to make informed decisions relating to the issued securities.

2 This article provides the author's observations and comments on several issues of concern faced by directors in relation to two key aspects of directorial liability for lapses in governance – the directors'

duty of care and the liability for lapses in corporate disclosure obligations.
II. Issue one: Directors' duty of care – Rising standards, rising costs

3 Directors owe a duty under both common law1 and statute2 to the company of which they are directors to act with reasonable care3 in the discharge of their duties. The common law duty is often traced to Re City Equitable Fire Insurance Co Ltd4 in which the court held that directors owed a duty to act with “reasonable” care. In determining the reasonableness of a director's actions, regard is to be given to the level of the specific director's knowledge and experience, thus suggesting a subjective approach to establishing liability. This has since evolved, incorporating a more objective standard by which a director's actions are to be measured.5 This modern approach has been adopted in Singapore. In Lim Weng Kee v Public Prosecutor6 (“Lim Weng Kee”), it was held that the tests for determining the standard of care and diligence is the same for both civil and criminal actions against directors 7 and that: 8

… [t]he 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, 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.

4 In pegging the test to that of a “reasonable director found in his position”, the standard of care expected of directors will continue to

evolve over time as expectations of what is reasonable behaviour will progress as businesses get more sophisticated and complicated and directors more educated. The court is expected to “apply a standard of care that reflects contemporary community expectations”.9 The evolution of these expectations over time will cause the standard to drift higher and higher. The promulgation of various regulatory responses and codes of corporate governance and best practice which followed the collapse of huge corporations and corporate conglomerates in the developed world has also played a significant role in raising community expectations of standards that directors should be held up to.10 While the decision in the landmark Australian case of AWA Ltd v Daniels11 may have been “well received by the business community”12 at the time, the more recent decision of Australian Securities & Investments Commission v Healey13 raised levels of anxiety for directors significantly. In the latter case, non-executive directors were held liable for failing to note errors in the reported financial statements of a company relating to the categorisation of certain short-term debts and guarantees. The implication of that decision is that directors are now expected to be familiar with the relevant accounting standards applicable to the categorisation of certain transactions and to have a working knowledge of how these are to apply. A similar expectation has recently been voiced in Singapore. It has been explicitly stated by the Accounting and Corporate Regulatory Authority (“ACRA”) that directors are expected to “have sufficient and up-to-date knowledge of the accounting principles and practices to perform an effective high-level review of the financial statements” in the context of financial reporting and review of their company's financial statements.14 It is unlikely that this would have been a community expectation of directors a decade or so ago.

5 There are several practical implications which flow from these rising standards. First, the rising expectations of, and hence standards imposed on, directors will no doubt make directors pay closer attention to corporate affairs and their governance responsibilities. While this is no doubt a good thing, there is also a downside. First, there will be a direct increase in expenses (such as increases in premiums for directors' and officers' liability insurance, directors' fees, and advisory fees incurred as more and more directors seek professional advice for their decisions etc). Secondly, there are also likely to be indirect opportunity costs associated with directors spending an inordinate amount of time focusing on compliance and accountability issues, and insufficient time on issues that can enhance corporate performance at board meetings. Related to this is the possibility that directors (in particular non-executive directors) will be less inclined to take risks or may insist on checks which either limit or restrain the ability of the company to move forward quickly when opportunities present themselves. Finally, there is the question of whether these rising standards may dissuade candidates from taking up the role of non-executive directors. The fact that there may be criminal liability imposed on directors for breach of their duty of care only adds to these potential challenges. It is to this issue that the author next turns his attention.

III. Issue two: Criminal liability for breach of duty of diligence imposed by s 157 of the Companies Act

6 Another issue which continues to receive significant attention is the imposition of criminal liability for breach by a director of the duty of diligence imposed by s 157 of the Companies Act15 (“CA”). The removal of criminal liability for breach of directors' duties was suggested and mooted during the consultation phase of the latest review of the CA.16 It is likely that the impetus for the suggestion was, at least in part, the result of the increased expectations of directors discussed earlier and the concern which directors have in possibly being prosecuted for not meeting those standards. Some in the industry have also suggested that the potential for criminal liability, in light of the onerous duties imposed, have made it more and more difficult to get competent directors to step forward to serve on corporate boards.

7 The Steering Committee which reviewed the CA observed that jurisdictions such as Australia, New Zealand and the UK had already taken steps to decriminalise breach of duties provided for by statute.17 It recommended, however, that Singapore not follow suit due to concerns that this may send a wrong signal and encourage misconduct.18 In making its recommendation, the Steering Committee did not distinguish between the various duties covered by s 157. Section 157 deals not only with the duty of diligence but also the duty to act honestly as well as the duty not to make improper use of one's position19 and information acquired by virtue of one's position to benefit oneself or to cause detriment to the company.

8 It is respectfully submitted that while keeping the criminal penalties for breach of a director's duty to act honestly and the duty not to make improper use of information under s 157 may be appropriate, the retention of criminal liability for breach of a director's duty of care and diligence may be somewhat onerous. It is difficult to ascertain whether removal of criminal liability will make directors less careful or diligent in performing their duties. The potential of being sued and the risks of facing possible disqualification from acting as directors or involvement in future management of companies and loss of reputation are already significant deterrents to such misconduct. Also, unlike situations where breach of a director's duty involves fraud or dishonesty or cases involving conflicts of interests, a failure to exercise care and diligence generally does not result in any benefits for the director. There is no intent of a reprehensible nature involved. The primary concern where breach of duty of care or diligence occurs should be the possibility that the company may suffer losses resulting from the breach, and to ensure that it is properly compensated. Consequently, the focus of the regulatory framework should be on whether adequate safeguards are in place to...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT