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Being a Towkay Is Not As Easy As It Looks – What Are Directors’ Duties & Responsibilities?
Viewed by 5,156 Smart Towkays
It has been reported recently that Dr Goh Jin Hian, the son of Emeritus Senior Minister and former Prime Minister Goh Chok Tong, is facing a lawsuit in relation to his role as a director for Inter-Pacific Petroleum. A marine fuels and cargo supplier, Inter-Pacific Petroelum (IPP) is now insolvent and its judicial managers - Deloitte & Touche - filed the suit against Dr Goh alleging a breach of director’s duties.
The suit accuses him, among other things, of breaching his duty to act with due care, skill and diligence to ensure that IPP's affairs were "properly administered and that its assets and property are not dissipated", and seeks to recover losses which are claimed to be a result of Dr Goh's alleged negligence.
These losses come up to approximately US$156.5 million, due to the Singapore branches of Societe Generale and Maybank.
As reported in the Business Times, according to the judicial managers (JMs), Dr Goh signed off on IPP's financial statements for 2017 and certified that the audited financial statements gave a true and fair view of the company's financial position. The judicial managers' checks found that some invoices issued for transactions between 2017 and last year were non-existent.
Had Dr Goh discharged his duties with care and diligence, the JMs alleged, the fictitious transactions would have been uncovered and the funds would not have been drawn down from the banks.
Dr Goh told the Straits Times, “what did the banks who are experts in trade financing miss that I should have picked up? What should I have done as a director that I did not do?” This suggests he is refuting the “sham” transactions found came under his remit of acting with due diligence as a director.
The case will continue to unfold as legal proceedings run its due course, and it may well be that Dr Goh is found not to have been a negligent director.
However, it may be worth looking into what directors necessarily are and what duties such a role entail.
What are “Directors”
Under Singapore’s Companies Act (CA), a director is broadly defined as “any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the directors of a corporation are accustomed to act and an alternate or substitute director”.
Black’s Law Dictionary defines “director” as “[a] person appointed or elected to sit on a board that manages the affairs of a corporation or other organisation by electing and exercising control over its officers”. This gives a better general idea of what directors do.
The specific roles of company directors are usually left to their respective companies’ articles of association. There are wide areas of responsibilities which directors can be expected to cover. A significant point of similarity is that they are all under a duty to act bona fide in the interests of the company as a whole.
As can be seen from the CA, Singapore does not make many distinguishments between different types of directors, whether they are “active”, “alternate” or “shadow” directors. All kinds of directors are equally accountable in law.
Duties and Liabilities of Directors
The duties of a director include general duties, fiduciary duties, statutory duties, and common law duties.
General duties, as mentioned, are related to their roles and would be included in a company’s articles of association. These general duties refer to a director’s range of responsibilities within the company. Thus, they can vary a lot and largely depend on the arrangements of the internal management structure adopted by the company concerned.
Some commonly accepted general duties include establishing direction and broad policies for the company and acting as trustees of the funds and assets of the company.
The Common Law Duties of Skill, Care and Diligence
Singapore operates a common law legal system. This means that outside of law that is set by legislation (statutory law), law can also be made through cases that have been decided by the courts.
Duties of skill, care and diligence relate to negligence, which is a common law tort. A director is traditionally allowed a great deal of latitude in their handling of company affairs as it is neither the place of the courts nor the government to decide how a company should be run. However, directors are expected to hold a standard of care, and so the courts have decided there are minimum objective standards imposed on directors with regard to skill, care and diligence. Failure to uphold these standards can cause a director to be liable for negligence.
In Dr Goh’s case, the basis of the lawsuit against him is the accusation that he did not discharge his duty as a director with the minimum objective standards of skill, care and diligence.
Directors, being the principal management organ of the company, must act for its benefit and they therefore occupy a fiduciary position. Generally, a fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter. A fiduciary relationship is a relationship of “trust and confidence”, calling for fiduciary duties. By imposing these duties, the law reduces the risk of abuse of a beneficiary by the fiduciary.
Directors are thus expected to act in good faith, and to exercise their powers for proper purposes for which they were conferred.
Fiduciaries must generally abide by 2 rules:
1) The No-Conflict Rule
Directors must avoid a conflict of interest by not placing himself in a position where he has, or can have, a personal interest conflicting, or which may possibly conflict, with this duty. This includes not being able to sell a beneficiary’s assets to himself without informed consent, not being able to act for 2 principals with potentially conflicting interests, and not entering into transactions with third parties that compete with the principal.
2) The No-Profit Rule
Directors must not misuse their position to make unauthorised profits for their own personal advantage. There are 5 sub-rules:
- the rule prohibiting the acceptance of bribes and secret commissions;
- the rule against the misuse of confidential information;
- the rule against engaging in sale or purchase transactions with one’s principal;
- the rule against diversion of opportunities; and
- the rule against speculation with fiduciary property.
These consist of duties found in legislation, such as the Companies Act.
Two most important statutory requirements are to convene and hold the company’s Annual General Meeting (AGM), and the subsequent filing of its annual returns by the specified due dates (normally within a month of the AGM). Many statutory requirements exist, some to regulate and restrict directors’ actions by imposing a duty on them not to do something. Examples of this include restricting directors from contracting debt without reasonable expectation of repayment, and demanding that directors make sure they have sufficient authority from their principal in their dealings with third parties.
Under Singapore’s Companies Act, either civil or criminal action may be initiated against a company director who breaches his duties. While statutory duties are enforced by ACRA, the company imposes the common law duties on its directors.
This means that a director who breaches his statutory duties will be prosecuted by the state, and can incur criminal as well as civil liabilities.
A breach of common law duties will need to be pursued by the company against its director, and will only incur civil liabilities. This also means that if the company wishes to excuse the director’s actions, they can easily do so; a director’s action can be ratified, usually by shareholders in a general meeting.
However, where a director causes the company to do an act which the company cannot lawfully do, it would not be possible for the company to ratify the conduct.
Nominee directors (NDs), in the strict sense, means a person who has been nominated and appointed to the board of directors by another person who may or may not be a shareholder of the company. The purpose of doing so may be for the nominee director to represent a special interest.
One significant purpose of appointing a nominee director pertains to the requirement under the CA that every company which is registered in Singapore must have at least one director who is a Singapore resident.
As such, if a foreigner wishes to incorporate a company in Singapore, but does not have a Singaporean resident within the company’s ranks who can take a position on the board, the foreigner may then appoint either a Singapore Citizen or a Permanent Resident (with a permanent address in Singapore) to be a nominee director in order to comply with the law.
Nominee directors may hold limited powers and responsibilities, but the law makes no distinction between duties owed by different directors. As such, nominee directors are subject to the same duties and liabilities as a normal director. In fact, the Singapore government’s objective in imposing the local director requirement was so that there would be someone liable for any misdeeds (as foreigners in the company might not be within Singapore’s jurisdiction to pursue any legal action) committed by the company. The assumption then is that the nominee director would undertake necessary due diligence to make sure that the company continues to comply with the law.
Ultimately this article looks at what directors are, and gives an overview of the myriad of duties and responsibilities that a director holds under the law. A full comprehensive understanding of directors’ duties can be found here. We highly recommend seeking legal advice if any clarification needs to be sought over directors’ duties.
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