YEO GEOK SENG V PP1 A DIRECTOR’S DUTY OF DISCLOSURE UNDER SECTION 156 COMPANIES ACT
|01 December 2000
|01 December 2000
|LEE SUET LIN JOYCE
concerns both the general situation where a director of a company has a conflicting interest in a transaction to be made by his company and the particular situation where the conflicting interest arises because of the director holding office in another company. Persons who are directors of more than one company should be conscious that certain transactions might constitute self-dealing. Both the Companies Act and equity require appropriate disclosure. Directors will have to be able to identify the self-dealing transactions and know the appropriate level of disclosure required of them in order to avoid liability.
The facts of the case are these. Yeo Geok Seng (“Yeo”) was the managing director of Mcspec Far East Development Pte Ltd (“MFED”) and a director of Xiamen Mcspec (S) Pte Ltd (“XMS”). He was also a director, manager and 50% shareholder of Triple Star Shipping and Trading Co (Pte) Ltd (“Triple Star”).
MFED was awarded a contract to build a community centre. Yeo, on behalf of MFED, entered into a contract (“the contract”) with XMS to award construction of the community centre to XMS. Consultation fees payable to MFED under the contract were to be deducted from XMS’s progress claims. When XMS was building the community centre, Triple Star was supplying building materials to XMS under a supplies agreement (“the supplies agreement”).
Yeo was charged and convicted under sections 156(5) and 156(1) of the Companies Act. The conviction under section 156(5) was for his failure to declare, at a meeting of the directors of XMS, his interest in the contract as the managing director of MFED. His conviction under section 156(1) was for his failure to declare, at a meeting of the directors of XMS, his interest in the supplies agreement as a director and shareholder of Triple Star. Yeo appealed against his convictions and sentences on both charges but the High Court dismissed his appeal.
Section 156(5) of the Companies Act provides as follows:
Every director of a company who holds any office or possesses any property whereby whether directly or indirectly duties or interests might be created in conflict with his duties or interests as director shall declare at a meeting of the directors of the company the fact and the nature, character and extent of the conflict.
Yong CJ found on the facts that there was a conflict of duty arising from Yeo’s office as managing director of MFED and that of director of XMS. As managing director of MFED, he owed a duty to MFED to secure the highest possible commission from XMS. As a director of XMS, Yeo owed a duty to XMS to ensure that the commission paid to MFED was as low as possible. Because Yong CJ’s decision was based on a finding of an actual conflict of duty arising from Yeo’s offices as managing director of MFED and director of XMS, the Chief Justice’s decision should not cause too much consternation among directors in Singapore. This is because there has never been a doubt, that where a director is put in a position of actual conflict, full disclosure is required of the director. For instance, in 2 the chairman of the board of directors of a railway company was also managing partner of a firm. The firm had entered into a contract with the railway to manufacture chairs for the company. The House of Lords found that conflict arose as a result of Blaikie holding the dual offices of director and partner. As director of the company, Blaikie was duty bound to obtain the lowest price for the company but his personal interest as partner of the firm would induce him to fix the price as high as possible.,
However, the Chief Justice added that Yeo might also be placed in a position of conflict of duty and interest if there was a dispute between MFED and XMS. His Lordship made it clear that the section does not require the director to have a personal interest that in fact gives rise to a conflict. This interpretation is undoubtedly correct as the statute used the phrase “might be created” as opposed to a conflict being in fact created. The court did not regard as applicable several Commonwealth cases3 because those concerned a director’s duty of disclosure at common law and had nothing to do with section 156(5).
Yeo had argued that he would have breached his fiduciary duty to the company only if there were a conflict between his personal interest and
the interest of the company. Yong CJ rejected the argument. His Lordship interpreted the words of section 156(5), in particular the words “directly or indirectly”, as being wide enough to impose a duty of disclosure on a director who holds a directorship in another company, even if he does not have a personal interest, as long as there is a potential conflict of duty arising from his office as a director in both companies.
Bearing in mind that thus far there had never been a prosecution under section 156(5), and if, indeed, the statutory provision is stricter than what had hitherto been understood to be the position at law, the decision may cause some disquiet. But has the decision really gone further than the developments in other Commonwealth jurisidictions?4 Does the law demand that a director may not hold shares in another company, occupy board positions in competing companies or hold a board position as a nominee director unless he declares the interest? It is obvious that if too strict a stance is taken, it would give rise to difficulties in various commercial contexts.5
It was said in 6 that it did not matter that Blaikie was one of a body of directors, not a sole trustee or manager, or that he was one of the firm of Blaikie Bros, not the sole person contracting with the company. In a local case ,7 Phillips became director in a company by the exercise of powers vested in the trustees of the testator’s estate. The High Court found that it was the duty of the trustees’ nominee on the board of directors to see that the covenants contained in the lease were complied with. If the board of directors were to propose to carry out some plan which would involve a breach of the covenants, the trustee’s nominee, who is himself a trustee, might find himself in a position of conflict. He might not wish to incur the displeasure of his co-directors and shareholders of the company and might give his consent to a plan of action which, if he were doing his duty as a trustee, he should have opposed. He would then be failing in
his duty to the beneficiaries of the testator’s estate. It could be inferred from these cases that there is no requirement that the director had to have a personal interest. All that case law requires is that there be an actual or potential conflict.
The interpretation of section 156(5) in Yeo’s case therefore does not appear to have gone much further than the case law position. The mere acceptance of more than one fiduciary position cannot be allowed to trigger the prohibition automatically since it is generally accepted that company directors may hold multiple directorships, a position which Yong CJ accepted. It may be inferred from this that potential conflict does not entail a theoretical conflict but something more real. In 8, Lord Upjohn had this to say about the phrase “possibly may conflict”: “In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict.”
The difficulty therefore lies in the determination as to when a conflict might potentially arise. This is particularly important since multiple directorships are very common.9 Yong CJ did not lay down any test but adopted a pragmatic approach by considering factors such as relevant circumstances, including the relationship between the companies of which the same person is a director. Presumably, the latter referred to whether there were dealings between the companies, which would certainly increase the likelihood of a potential conflict. It would appear from the judgment that while both actual and potential conflict require disclosure, the court adopted a situation-specific approach to determine if a potential conflict could arise. It is suggested that such an approach is right. As commercial situations become increasingly complex, it is no longer desirable nor practicable for the court to require that there be no appearance of conflict regardless of the facts.
It is suggested that other factors like the type of company and the...
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