UPDATE ON DIRECTOR’S DUTIES
In the recent Court of Appeal case of Foo Kian Beng v OP3 International Pte Ltd (in liquidation) [2024] SGCA 10, the Court of Appeal made some important observations on the duties of directors.
Act in best interests of the company. Directors are bound to act in the best interests of the company ([1]). And as cases have established, when the company is insolvent, the interests of creditors come to the fore when assessing what is in the best interests of the company ([2]).
But the difficulty lies in assessing when the interests of creditors “should assume significance and even pre-eminence in the mind of directors” ([3]).
This issue, i.e., the director’s duty to consider the interests of creditors in certain circumstances (the “Creditor Duty”) was addressed by the Court of Appeal in this important judgment ([4]; [58]).
In this short blog, we set out some key points made by the Court of Appeal on this.
Fiduciary duty. The Creditor Duty is a fiduciary duty owed by directors to the company, and not directly to creditors ([60]). Hence, the proper plaintiff for a breach of the Creditor Duty is presumptively the company ([60]).
The Court of Appeal then made some provisional views as to “whether liquidation operates as a condition precedent to the bringing of an action for breach of the Creditor Duty” ([62]).
The Court of Appeal opined that the High Court in Voltas Limited v Ng Theng Swee and another [2023] SGHC 245 correctly recognized the “practical reality” that a company which has not entered insolvent proceedings would not commonly bring a claim for breach of the Creditor Duty, as the directors would usually be still in charge of the company ([63]).
However, the Court of Appeal opined that (while making clear that its views are provisional) it is not convinced that only a company in liquidation may bring such a claim ([64] – [67]), stating that it may be possible that shareholders may be able to enforce the Creditor Duty by way of a derivative action.
It would be interesting to see further developments on this issue.
Creditor’s best interests not only when company is insolvent. The Court of Appeal then held at [69] that:
“… flowing from the fact that the Creditor Duty is a duty that directors owe to the company, the Creditor Duty is best understood in terms that in certain circumstances, that duty modifies how the company’s interests ought to be understood when a director considers his duty to act in the best interests of the company. The Creditor Duty essentially underscores the fact that the interests of creditors acquire discrete significance and require separate consideration at a certain stage in a company’s life cycle …”
The Court of Appeal emphasized that this should not be taken to suggest that the interests of creditors only become relevant when Creditor Duty is engaged (at [70]).
Rather, it is just that while the company is solvent, “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” as the “interests of shareholders and creditors broadly row in the same direction when the company is financially healthy” ([70]).
Therefore, it is possible for a director to act in breach of his duty to act in the best interests of the company by prejudicing the interests of creditors even when the company is solvent (at [71]): e.g., such as by acting to defraud creditors.
Director acting in good faith. The Court of Appeal made clear, however, that in an action for breach of the Creditor Duty, the question is “whether the director exercised his discretion in good faith in what he considered (and not what the court considers) 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” ([74]).
In doing so, the Court of Appeal made clear that the court will assess the director’s claim objectively (at [74]). Hence, the court will be “slow to interfere with commercial decisions made honestly but which, on hindsight, were financially detrimental to a company” (emphasis in original; [75]). Further, as this is an area of law “where clarity and practicality must be prioritised”, the Court of Appeal noted that the law must be developed with this recognition (that directors do not operate with the benefit of hindsight) in mind ([75]).
One of many duties. The Court of Appeal also observed that it is possible that a director, who acted honestly in the belief that he was acting in the best interests of the company, may be found to have not breached the Creditor Duty, even though the director may have, objectively, fallen below the standard of care and diligence expected of a director ([77]).
However, the Court of Appeal made clear that in such a situation, the director may be found to have breached other duties ([76]; [77]).
When Creditor Duty is first engaged and substance. Turning to the crux, the Court of Appeal at [105] set out three financial states of a company (based on when the transaction that was sought to be impugned was entered into / was likely to arise as a result of the transaction being entered into), and at [106] set out how a court would go about analysing whether the director has acted in what he considered to be the best interests of the company with reference to the relevant financial state of the company.
Given the importance of this issue, we set out in a table below the Court of Appeal’s holding for our readers’ ease of reference:
Conclusion. There is a lot of unpack and to digest in the Court of Appeal’s decision.
But it is a welcome clarification, as it makes clear when director’s duties to creditors should start coming to the forefront of a director’s mind with reference to the relevant financial stage of a company.
And the other important aspect of this decision is that the Court of Appeal was careful to emphasise that the Creditor Duty is merely one of several duties that director are subject to (see [108]).
So, directors (or people who want to be directors) would do well to ensure that they know what duties they are subject to, and ensure that they discharge their duties carefully and in accordance with the law.
This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.