Foo Kian Beng v OP3 International Pte Ltd

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ,Steven Chong JCA,Belinda Ang Saw Ean JCA,Kannan Ramesh JAD,Judith Prakash SJ
• Judgment Date: 27 March 2024
• Court: Court of Appeal (Singapore)
• Year: 2024
• Docket Number: Civil Appeal No 47 of 2022

Foo Kian Beng

and

OP3 International Pte Ltd (in liquidation)

[2024] SGCA 10

Sundaresh Menon CJ, Steven Chong JCA, Belinda Ang Saw Ean JCA, Kannan Ramesh JAD and Judith Prakash SJ

Civil Appeal No 47 of 2022

Court of Appeal

Companies — Directors — Duties — Director causing company to pay him dividends and repay him loans when company was imminently likely to be unable to discharge its debts — Whether company lacked standing because statutory regime intended to exclusively regulate position whenever director authorises payment of dividend — Section 403(1) Companies Act (Cap 50, 2006 Rev Ed)

Companies — Directors — Duties — Director causing company to pay him dividends and repay him loans when company was imminently likely to be unable to discharge its debts — Whether director ought to be relieved of liability — Section 391 Companies Act (Cap 50, 2006 Rev Ed)

Companies — Directors — Duties — Director causing company to pay him dividends and repay him loans when company was imminently likely to be unable to discharge its debts — Whether director's duty to consider interests of creditors (“Creditor Duty”) engaged — Whether Creditor Duty breached

Insolvency Law — Avoidance of transactions — Unfair preferences — Director causing company to pay him dividends and repay him loans when company was imminently likely to be unable to discharge its debts — Whether company prohibited from bringing claim against director for breach of Creditor Duty because transactions were, in substance, unfair preferences and prevailing statutory clawback period for unwinding such transactions had lapsed — Sections 225 to 227 Insolvency, Restructuring and Dissolution Act 2018 (2020 Rev Ed)

Held, dismissing the appeal:

The nature, scope and content of the Creditor Duty

(1) The director's duty to consider the interests of creditors in certain circumstances was referred to as the “Creditor Duty” even though it was an integral part of his duty to act in the best interests of the company: at [4].

(2) The Creditor Duty was a fiduciary duty that directors owed to the company. This duty was not one that directors owed directly to creditors and creditors therefore could not sue directors for breach of the Creditor Duty. Rather, the proper plaintiff in an action for breach of the Creditor Duty was presumptively the company: at [60].

(3) Flowing from the fact that the Creditor Duty was a duty that directors owed to the company, the Creditor Duty was best understood in terms that in certain circumstances, that duty modified how the company's interests ought to be understood when a director considered his duty to act in the best interests of the company. The Creditor Duty essentially underscored the fact that the interests of creditors acquired discrete significance and required separate consideration at a certain stage in a company's life cycle: at [69].

(4) It was not the case that the interests of creditors only became relevant when the Creditor Duty was engaged or that those interests were otherwise immaterial. The predicate duty was a duty to act in the best interests of the company, and this enjoined directors to have regard to the interests of different stakeholders, including creditors, at all times. It was simply that when the company was financially healthy, directors would be justified in treating the interests of shareholders as a proxy for the interests of the company and in according commensurately less or even no discrete weight to the interests of creditors: at [70].

(5) The rationale that underlay the Creditor Duty lay in the shift in who might be said to be the main economic stakeholder of the company as the company approached insolvency and the asymmetry in corporate governance. Whereas shareholders were the primary bearers of the risk of loss arising from the manner in which directors exercised their powers when the company was solvent, creditors displaced them from this position when the company was insolvent because an insolvent company effectively traded and conducted its business with its creditors' money. And even as creditors bore the risks of continued corporate trading in such a situation, they generally had no control over the conduct of the company's business. There was consequently a need to constrain directors from externalising the risks of continued trading onto creditors, bearing in mind that shareholders usually had nothing to lose and everything to gain, and creditors, contrastingly, had everything to lose and nothing to gain by the continued trading of a company which was on the cusp of insolvency: at [72].

(6) Creditors ought to be understood as a class for the purpose of the Creditor Duty: at [73].

(7) In an action for breach of the Creditor Duty, the relevant question was whether the director exercised his discretion in good faith in what he considered (and not what the court considered) to be in the best interests of the company, as understood with reference to the financial state of the company prevailing at the material time. Although the duty was a subjective one in that sense, the court would assess a director's claim objectively, by asking whether the view the director claimed to have formed was one that was credible or was reasonably open to him, given the information available at the time. In so doing, the court might very well draw an inference that a director was not acting honestly where the transaction was objectively not one in the interests of the company: at [74].

(8) In determining whether the Creditor Duty was engaged, a court objectively examined a company's solvency at the time the material transactions were entered into. When ascertaining whether the director had acted in breach of the Creditor Duty, the court examined whether the director subjectively believed he had acted in the best interests of the company. The two inquiries served different purposes, embodied different standards, and the question of whether the Creditor Duty was engaged on the facts was logically anterior to the issue of breach: at [93] to [95].

(9) The court should objectively determine which of three financial stages the company was in at the time the transaction was entered into or that was likely to arise as a result of the company entering into the said transaction: at [105].

(a) Category one: Where all things, including the contemplated transaction, having been considered, the company was solvent and able to discharge its debts.

(b) Category two: Where a company was imminently likely to be unable to discharge its debts. This category encompassed cases where a director ought reasonably to apprehend that the contemplated transaction was going to render it imminently likely that the company would not be able to discharge its debts. The court should assume the vantage point of that director and consider which factors he ought reasonably to have then taken into account in assessing whether the contemplated transaction would result in imminent corporate insolvency.

(c) Category three: Where corporate insolvency proceedings were inevitable. It was not only the onset of liquidation itself that converted creditors into the main economic stakeholders of the company; rather, a clear shift in the economic interests in the company (from the shareholders to the creditors as the main economic stakeholders of the company) would occur where insolvent liquidation or judicial management was inevitable. Even at this relatively earlier stage, the shift in who might be said to be the main economic stakeholder of the company would be apparent.

(10) Having ascertained the financial state of the company at the material time, the court should then examine the subjective intentions of the director and determine whether he acted in what he considered to be the best interests of the company. The financial state of the company provided a useful analytical yardstick against which the subjective bona fides of the director might be tested: at [106].

(a) Category one: Where a company was, all things considered, financially solvent and able to discharge its debts, a director typically did not need to do anything more than act in the best interests of the shareholders to comply with his fiduciary duty to act in the best interests of the company. In short, the Creditor Duty did not arise as a discrete consideration in these circumstances.

(b) Category two: In this intermediate zone, the court would scrutinise the subjective bona fides of the director with reference to the potential benefits and risks that the relevant transaction might bring to the company. The court would be slow to second-guess the honest, good faith commercial decisions made by a director to afford the company the best possible chances of revitalising its fortunes. Transactions undertaken at this time which appear to exclusively benefit shareholders or directors would attract heightened scrutiny. The greater the extent to which the transaction was one which exclusively benefitted shareholders or directors (and did not benefit the company as an entity), the more closely a court would scrutinise the decision of the director to determine whether he had breached the Creditor Duty.

(c) Category three: Lastly, where corporate insolvency proceedings were inevitable, there was a clear shift in the economic interests in the company (from the shareholders to the creditors as the main economic stakeholders of the company) because the assets of the company at this stage would be insufficient to satisfy the claims of creditors. In the context of liquidation, shareholders as residual claimants would stand to recover little or nothing. Consequently, the Creditor Duty operated during this interval to prohibit directors from authorising corporate transactions that had the exclusive effect of benefitting shareholders or themselves at the expense of the company's creditors, such as the payment of dividends.

(11) Should the court find that...