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What Liabilities Does A Director Hold After Resignation?
There are many reasons why a director may wish to resign from their position in a company. These include retirement, disagreement with other members of the company, or simply a desire to move on to a new venture.
The process of resigning itself is relatively easy. In Singapore, the resignation of a director is valid as long as:
1) The resignation procedure complies with the company’s articles of association;
2) The company continues to have at least one director living in Singapore.
Once a company accepts the resignation of a director, it must then notify ACRA of the now ex-director’s cessation of his post within 14 days.
As we’ve covered previously, directors have various duties to fulfil, some of which are imposed by law while others are stated in the company’s articles of association. A breach of these duties can incur liabilities, whereupon either civil or criminal action can be brought against the director, depending on who is taking said legal action.
As a matter of common sense, once a director has resigned from his position, his liabilities are over as far as the company is concerned. However, any breach or misconduct on the part of the director that happened during his tenure can still be actionable.
Some of these liabilities are as follows:
Shareholders have a financial stake in the business, and hold the ultimate say in a company. Directors and other high paying executives are hired (albeit at often very high rates of remuneration, particularly for larger companies) by the shareholders. As such, if there is any indication of mismanagement or failure to carry out duties competently on the part of directors which in turn harms the company’s bottom line, shareholders have the legal right to bring a civil action against them. These lawsuits may allege that mismanagement stretched over a period of time. If one happens to have served as a director in a period identified in the lawsuit, it is absolutely valid for him to be part of the lawsuit and face potential liabilities.
An example of this can be seen from Advance Capital Partners Asset Management (ACPAM), a subsidiary of Catalist-listed Pine Capital Group, commencing legal proceedings against two former directors, alleging mismanagement and a breach of their common law, statutory and fiduciary duties.
Employees, both former and current, have the right to file civil suits against company directors for perceived workplace wrongdoings. Instances of this are admittedly less common in Singapore as we have an Employment Claims Tribunal which oversees most matters related to salary disputes or wrongful dismissals in a bid to resolve disputes efficiently and at low costs.
However, claims which are not about salary or termination of work, such as those regarding workplace discrimination or sexual harassment, will still come under the civil litigation process and directors are not immune to this.
Many enterprises borrow money in the process of doing business. However, when a business borrows money, its directors face additional legal obligations to act in the best interests of creditors in addition to shareholders. Common law has established multiple conditions under which this is manifested, including when a company is insolvent or in such bad financial shape that insolvency is imminent. In such situations, directors must not act in a way that prejudices the interests of creditors.
Creditors have the right to launch legal action against directors if they have sufficient reason to believe that a company’s poor financial health was causally linked to directors breaching their duties. Naturally, this applies even if a director has already resigned as long as the breach happened during the time when he held the position.
Famously, Dr Goh Jin Hian, the son of Singapore’s former Prime Minister Goh Chok Tong, was recently sued by the judicial managers of an insolvent company for alleged breach of duties despite Dr Goh having left his position as the company’s director the year before.
Singapore famously runs a tight ship, demanding good corporate governance through a comprehensive regulatory regime, ensuring that companies are run responsibly. In the event that company directors, in discharging their duties, breach statutory regulations which needed to be complied with, legal liabilities can arise. These can follow directors long after they’ve stopped holding office.
When a “number of irregularities” were uncovered by the Singapore Stock Exchange, action was taken against the company, China Sky, as well as its directors, to freeze their accounts and stop them from taking money out of their Singapore account.
Are Directors more at risk after they resign?
All in all, directors face the same potential liabilities regardless of whether they are currently still holding the position or not. The best way to avoid these liabilities is clearly to perform their duties with skill, care and diligence in full accordance with the law while they are in their post.
Having said that, in some instances, directors may have put themselves out of the realm of limited liability, which would complicate matters.
Limited liability essentially means that a company’s financial liabilities does not extend to the company’s directors personally; the courts in Singapore are very reluctant to allow creditors to pursue directors in their personal capacity for the repayment of their company’s debts.
However, should the director have signed a personal guarantee for a company loan, credit card, or other financial agreement, he would hold responsibility as guarantor until the money is paid back in full. Resigning as director does not invalidate a personal guarantee.
In this case, a director may wish to reconsider resigning as having done so, he would no longer have a say in how the company is run and is no longer granted access to its accounting details. This means he would still be personally liable for a company debt, but has no right to influence how the company could solve the issue.