Can Directors be Liable for Company Debts in Singapore If They Pass On?

Viewed by 10,677 Smart Towkays

Aug 04, 2023

Can Directors be Liable for Company Debts in Singapore?

The article was published on 18 Oct 2022 and was most recently updated on 31 July 2023

Scenarios As A Business Owner: What Will Happen When You Pass On

As a Singaporean business owner, it's essential to understand the effects of passing on your business, depending on the way it's incorporated.

Sole Proprietorship:

In a sole proprietorship, the corporation is owned by the individual who initiated it. When the owner passes away, the company ceases to exist and its assets are distributed to the owner's estate. If there is a legitimate will, the assets will be distributed according to the will. Otherwise, the Intestate Succession Act will take over the distribution.

Partnership:

A partnership that is owned by two or more partners is subject to dissolution when one of the partners dies, unless there is a previous agreement that states otherwise. Preplanning and having a formal agreement is essential to avoid problems.

Limited Liability Corporation (LLC):

Unlike sole proprietorships, an LLP is a separate legal corporation from the owners. If a partner is deceased, the partnership will continue as before, and the representative of the deceased partner will receive the partner's financial contributions and share in the accumulated profits (if any). Learn more about the Limited Liability Partnership Act here.

Private Limited Company:

Private limited companies have a separate charter that describes the behavior of shares after the death of a shareholder. If shares are owned individually, the formal personal representative can demand them. If collectively held, the surviving shareholders retain control.

Check out the summary table for different scenarios of what will happen to your business depending on types of company incorporation.

Company's Incorporation Type	Fate of Business Upon Owner's Death
Sole Proprietorship	Business ceases to exist; assets become part of owner's estate.
Partnership	Partnership dissolves, unless a prior agreement states otherwise.
Limited Liability Partnership (LLP)	Partnership continues; representative receives partner's capital and share of profits.
Private Limited Companies	Shares transmitted based on individual or joint ownership.

The Differences: a Share Transfer and a Share Transmission

Two methods are available to legally transmit shares from one party to another. The first approach 'share transfer' is to share the same transfer. As a shareholder, you can choose to sell your shares to another party. To accomplish this, you will need to complete a form called the instrument of transfer and pay the stamp tax.

However, remember that the share transfer rule doesn't apply to situations like the passing of ownership. In this instance, we utilize the 'share transmission' method to share the shares with another person. With share transmission, the need for a transfer instrument or stamp is eliminated.

When a shareholder passes away, their shares are automatically transferred to the intended recipient. This applies to both public and private companies that possess shares.

Recap: you can transfer shares voluntarily with the instrument of transfer and stamp duty, but when it comes to passing shares due to a shareholder's death, share transmission is the method used, and no additional paperwork or stamp duty is required.

What happens to the shares when a shareholder pass on?

When a shareholder dies, the share transfer process is initiated, transferring the shares to their legal recipients. The company's constitution, especially the Model Constitution, play an important role in who can acquire the vested shares.

If a shareholder holds shares jointly with others, the surviving joint shareholders become eligible recipients and receive legal title to the shares. In the event of the death of the sole shareholder, the authorized beneficiary will be the personal representative (the trustee if there is a will, or the trustee if there is no will).

Before the transfer of shares can take place, the personal representative must take legal action such as obtaining Grant of Probate (if there is a will) or Letters of Administration (if there is no will) from the court. These documents give personal representatives the power to manage the deceased shareholder's assets, including shares.

The company may have certain restrictions on the individuals who may receive transferred shares, and the directors of the corporation may have the power to prohibit certain individuals from membership.

In some cases, when the personal representative intends to liquidate the company, the transfer of shares must be completed before the company liquidation process begins.

It is important to keep an up-to-date copy of the Articles of Association, as they may contain specific restrictions and guidelines regarding the transfer of shares.

After the death of a shareholder, a share transfer allows the transfer of the shares to the appropriate recipients in accordance with the company's articles of association. Personal representatives must follow the legal process to obtain the necessary power of attorney before receiving submitted shares.

What Should Employers Do in case of Employee's Death in Singapore?

When faced with the unfortunate event of an employee's death, employers must take immediate steps to handle the situation properly, whether the death occurred at the workplace or outside of it.

If the employee's death happened at the workplace, employers should:

Notify the Commissioner for Workplace Safety and Health of the Ministry of Manpower (MOM) as soon as possible, providing relevant details.
Submit an incident report using the WSH Incident Reporting eService to MOM within 10 days of the accident or occupational disease leading to the death.
Inform the insurer promptly to seek reimbursement for any incurred expenses.

When an employee's death occurs outside the workplace, employers still need to notify the Commissioner and submit an incident report if the death is work-related. Examples include accidents during work-related travel or from work injuries.

It's important to settle all outstanding employment issues, including the payment of any owed salary or monies to the deceased employee's personal representative, as authorized by the will or the Letters of Administration.

Employers should also be aware of the payment of maternity benefits if a female employee dies during maternity leave, as outlined by the Employment Act.

Compensation under the Workplace Injury Compensation Act (WICA) may apply in cases where the employee's death is work-related. Employers, or their insurers, may be required to pay compensation to the deceased employee's estate or dependants.

For foreign employees, employers must notify MOM of the death and cancel the work passes or permits within the specified timelines. Employers may also have to bear the cost of handling the employee's body and belongings, depending on the family's decision.

If the deceased employee's family members are on Dependant's Passes in Singapore, employers must buy air tickets to repatriate them, unless the family members agree to bear the cost.

When directors can be held personally responsible for company liabilities

If you're a director of a Singapore-incorporated private limited (Pte. Ltd.) or Limited Liability Partnership (LLP) business, you probably won't face personal liability for the debts of your business. Incorporating a Pte. Ltd. Or LLP business is to avoid legal liabilities and protect yourself from lawsuits by limiting who can sue you personally.

There are some exceptions to this general rule.

Exceptional Situations Where Directors Can Be Responsible For Company Debts

You are the borrower or guarantor of the business loans

If you co-signed a loan or credit facility that was taken out by your company, then you could potentially be held personally liable for the repayment of the loan. In such cases, you might personally sign a loan guarantor for the credit facility took up.

A guarantor is an individual or entity that agrees to be held liable for the debt of another if they default on their loan. In other words, if the borrower does not repay their loan, the guarantor will be responsible for repaying it, because he was the one who gave a personal guarantee.

Where creditors make a court ruling against the directors/shareholders

If a creditor were ever to sue your business, they'd probably attempt to hold you personally liable for any debts your business owes. But suing someone isn't always an easy task, and it only happens under certain circumstances.

To pierce the corporate veil, the creditor usually has to either:

Prove that you've misused your corporation to show that you've committed fraud against your creditors. There needs a demonstration that you've taken advantage of the limited liability protections afforded by your corporation in order for the creditors to be able to sue you personally.

Treat the company’s assets like your own, breaching his fiduciary duty to the company. Withdrawing cash from the company’ s bank accounts for your personal uses whenever you want without any authorisation by the company’s governing body or any claim to be personally entitled to its receivables.

Non-compliance with the Companies Act 1967

Limited statutory protections exist that specify certain situations where directors or shareholders may be held personally responsible for their companies' debts.

Section 145(10)(a) of Singapore's Companies Act states that if a corporation (private company) operates for 6 months or longer without having a resident director, then anyone who knows about it must be jointly and severally responsible for its debts.

Under Section 144(2), any director or shareholder who signs a bill of exchange or promissory note on behalf of the company becomes personally liable for the payment obligation of such documents if payment is not ultimately made by the company. This applies even if the names of the company and the individual signing the document do not appear together in the document.

In short, if you sign a bill of exchange or a promissory note on the company's behalf without mentioning its name, you could potentially become personally liable for the payments due on those notes.

Comparing Liabilities and Debt

The terms ‘liabilities’ and ‘debt’ have similar definitions, but there is a fundamental difference between the two. Liabilities are a broader term that includes debt.

Debt refers to money that is borrowed and is to be paid back at some future date. Bank loans are a form of debt. Debt only arises out of borrowing activities. Whereas, liabilities arising out of other business activities as well. For example, accrued wages are payments to employees that have not been paid yet. These wages are obligations on the company’s part and are categorized as a liability.

Liability includes all kinds of short-term and long term obligations, as mentioned above, like accrued wages, income tax, etc. However, debt does not include all short term and long term obligations. Only obligations that arise out of borrowing like bank loans or bonds payable.

The debt of a company exists in the form of money. When a company borrows money from a bank or its investors, this money borrowed is considered to be debt for the company. On the other hand, liability does not necessarily have to be in the form of money. Liability can be anything that imposes a cost on the company. Future expenses like salaries to employees or payment to suppliers are liabilities for the company and not debt.

Director's Duties And Liabilities

The duties of a director include general duties, fiduciary duties, statutory duties, and common law duties.

Non-executive and independent Directors are subject to the same obligations and liabilities as executive directors, including the duty to exercise due diligence in relation to the company’s affairs. This includes making reasonable inquiries into matters affecting the company’s performance and taking appropriate action where necessary. A company director must discharge his/her functions honestly and fairly, and without bias or prejudice. He/she must perform his/her functions diligently and in good faith, and he/she cannot use his/her position to obtain personal advantage.

A director who holds executive office must exercise reasonable skill and diligence in discharging his duties. He is responsible for the quality of his own conduct and shall not use his position to obtain any advantage for himself at the expense of the company.

Non-Executive Directors are not expected to possess any particular skill set. However, they must be able to take reasonable measures to familiarize themselves with the affairs of the company and the requirements of Singapore Law in general.

Learn more about Duties and Liabilities of Directors here

When You Are Personally Liable For Your Company's Debts, Be Prepared For The Consequences

In general, if a creditor sues you for your company's debts, you should immediately engage a lawyer to enter an appearance and defend the suit. This is because it can be quite difficult to pierce the corporate veil and it is impossible at the very beginning of a suit to predict the outcome.

Therefore, if you have a lawyer, they may be able to help you beat the claim or negotiate with the creditor in order to settle for a smaller sum. If the people who are trying to collect your debt start harassing you at your home, tell your lawyer so that they can apply for a protection order or file harassment charges against them.

What Could Happen After Losing the Lawsuit Against your Creditors

If you lose the lawsuit against the creditor and have to pay the company's debts, the creditor may have asked for an “execution” at the end of your case. If they get an execution from the judge, they can “levy on the execution.” This means it is legal for them to take your property. They will hire a sheriff. The sheriff will bring you a copy of the execution and take your car or put a lien on your house.

For some instances, the plaintiff and the judge will likely ask you questions regarding your ability to pay back any debt owed multiple times. They may also inquire if you're amenable to creating a repayment plan.

A repayment plan is an understanding between you and the creditor that entails returning the debt through monthly installments. This agreement can become a court order called an “agreement for judgment,” with which comes legal repercussions if not followed through properly.

If you're unable to repay your debt, your creditors can force you into bankruptcy which in this case the debtor can no longer commence or continue any legal action against the bankrupt to recover monetary claims that arose during the bankruptcy.

Summary

Directors of Singapore-based corporations (Pte. Ltd. or LLP) cannot be sued personally for their company's debts. However, there are certain circumstances under which directors may be liable for their company's debts, including if they knowingly sign off on fraudulent financial statements (breach of duty).

If you're a business owner and a creditor has filed suit against you personally for your business' debts, the best thing you can do is to contact an attorney right away. He or she will be able to help you navigate the legal system.

Frequently Asked Questions

What is an Asset?

An asset is anything owned by an individual or company. Assets include cash, inventory, equipment, real estate, etc.

How do I remove/employ a director from a company?

A removal of a director is usually done through an ordinary vote of the shareholders. However, a public limited company can remove a director without shareholder approval if they give special written notification of at least 28 consecutive business days to the director.

Executive directors usually have a contractual relationship with the companies they serve as directors. Non-executive directors typically don't have any kind of employment agreement with the companies they serve.

What Liabilities Does A Director Hold After Resignation? Read more here

How many types of director are there?

There are three main categories of directors: executive directors, non-executive directors and independent directors. Executive directors are those who hold positions like CEO or chairman.

Non-executive directores are those who hold positions such as secretary or treasurer. Independent directors are those who are not employed by the company. They are often appointed by the board of directors to ensure that all sides of a particular issue are represented.

What is the difference between a private and a public limited company?

A Limited Liability Partnership (LLP) is a partnership in which some of the partners have limited liabilities. A limited liability partnership structure is a cross hybrid between a partnership and a private limited company. The structure is highly suitable for individuals engaged in professional services. Non-resident individuals and foreign entities may also register an “LLP” but must appoint a local resident manager.

Private Limited Company is the most popular business entity in Singapore. Unlike business entities such as a Sole Proprietorship and Partnership, it has a separate legal status from its shareholders and directors who have limited liabilities for the debts and losses of the company.

It has the rights to own properties. It usually has the words ‘Pte Ltd‘ or ‘Ltd‘ as part of its name. .

What does it mean by civil liability?

Civil liability usually takes one of two forms: (1) financial penalties, or (2) lawsuits against individuals who were involved in the company’s operations.