handout 05 (2014)

CompanyLawHandout5AY201415,Term1

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SINGAPOREMANAGEMENTUNIVERSITY

COMPANYLAWLGST201Handout5DirectorsDutiesReadingYeo,Chapters11&12Woon,Chapter8;Koh,Chapter41. General o Directorsstand inavery importantpositionvisvis thecompany.Aswesaw last

week,themanagementofthecompanyisusuallyentrustedtothedirectorswhoarevestedwithalmostexclusivepowerstomanagethecompany.Theopportunity forthe abuse of these powers is therefore significant. Accordingly, the law has toimposedutiesondirectors.Themain sourceofduties imposedon thedirector inSingapore is theCompaniesAct.However, theActexpresslypreservesduties thatare imposed by the common law on directors. As such, directors duties are anamalgamofbothstatutoryandgenerallaw.

o Students should be aware that the duty of directors (including civil liability and

criminalsanction,etc.) isonlyonemechanismtocontroldirectorsbehavioursandtopreventtheirabuseofpower.Tohavealookatthebigpicture,thinkabout:

Whatisthepurposeofimposingliabilityonadirector? Canyouthinkofotherwaystocontroladirectorspowerandconduct,ifyou

areashareholder?o Althoughitisveryimportanttosafeguardthecompanyagainsttheabuseofpower

by itsdirectors,thestudentshouldneverthelessrememberthatdirectorsareveryoften also businessmen who are valued for their expertise in identifying goodbusiness opportunities. In practice, this fact gives rise to a very real tension indefiningtheboundariesofdirectorsduties.Ontheonehand,the lawdisapprovesofthedirectorsabuseofpower;thismayoccur,forinstance,whenheadvantageshimselfattheexpenseofthecompanybyexploitingabusinessopportunitywhichthe company is interested in forhisownbenefit.On theotherhand, too strict arestrictiononthedirectorsdutieswillhaveachillingeffectontheentrepreneurialinitiativesofbusinessmen.Thestudentshouldthereforebemindfulthatthe law is


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constantlystrugglingtoresolvethistension,asdemonstratedbysomeofthehardcaseswhichwewilldiscussinthisandthefollowingseminar.

2. DirectorsDutiesAnOverview

(a) Apart fromcontractualdutiesbetweenadirectorand thecompany,youwillnote

fromFig5.1thatdirectorsdutiesmayarisefrom:(1)commonorgenerallaw;and(2)theCompaniesAct(statutory).

(b) It is importanttonotethatthecontentofthesetwosourcesof lawoverlap. Thus,

for example, the directors obligation to act honestly under CA s 157(1) isinterpretedtoincludeallhisfiduciaryobligationsatcommonlaw(e.g.dutytoavoidconflict);andhisduty toactwithdiligenceunderCA s157(1) isequatedwithhisobligationtoactwithcare,skillanddiligenceatcommon law.SeeLimWengKeevPublicProsecutor[2002]2SLR(R)848;[2002]4SLR327,[2002]SGHC193(perYongPungHow CJ). Thus, if a director places himself in a position of conflictwithout

common law statutory contractual

bona fide in cos interests

to act within powers

avoidance of conflict

non-fetter of discretion

care skill & diligence

no-profit rule

for proper purposes

loyalty (fiduciary)

not ultra vires

honesty & diligence s 157(1)disclosure ss 156,165no improper use of info s 157(2) administrative

Fig 5.1

Directors Duties


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obtaining the companys consent, he will be in breach of his fiduciary duty atcommonlawandCAs157(1)aswell.

(c) Further,his statutorydutiesnot tomake improperuseof informationunderCA s

157(2), and his duty to disclose conflicting interests under CA s 156, are in factspecific applicationsofhis common lawduty to avoid conflicts, and not toprofitfromhispositionasdirector.

(d) Towhomdoesadirectorowetheseduties?

Considerthefollowingquestion:

ShareholderA,whotogetherowned20%oftheissuedsharesinCoX,wishedtoselltheirstakeinCoX.BandC,directorsofCoX,offeredtobuytheirsharesat$3.00 per share (ie 5% above the book value of the shares). This offer wasacceptedbyShareholderA.Subsequently,ShareholderAdiscoveredthatBandC had (at the time of their negotiation) received third party offers for Co Xssharesat$4.00pershare. AdviseShareholderA iftheycannowsueB&Cforbreachofdirectorsduties.

PercivalvWright[1902]Ch421(Sealy&Worthington,277278)

On occasion, the courtmay find, on the facts, an assumption of an advisoryposition by the director(s) visvis the shareholders. In such a situation,obligationstodiscloseand toacthonestlymaybe imposedon thedirectors inconnection with their dealings with the shareholders. For example, this mayhappenwhenadirector isactingasanagentonbehalfofa shareholder (e.g.Allen v Hyatt (1914) 30 TLR 444), where directors have assumed a fiduciaryobligationtowardsshareholders(e.g.ColemanvMyers[1977]2NZLR225(Sealy&Worthington,278279).Whethersucharelationshiparisesdependson allthesurroundingcircumstancesandthenatureoftheresponsibilityassumedbythedirector.

Whataboutcreditors?Underwhatcircumstancesshouldobligations, ifany,be

owedtocreditorsofthecompany?3. DutiesatCommonLaw (a) The director is said to stand in a fiduciary position visvis the company. This

meansthatthedirectorwouldbesubjecttofiduciaryduties.Verybroadly,thesearedutiesthatexactahighstandardofloyaltyfromthedirector.Centraltotheideaoffiduciaryobligationsisselfdenial,i.e.adirectormustplacethecompanysinterestsabovehisown. Notalldutiesowedbyadirectorarefiduciaryinnature.However,


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classificationofdutiesisacontroversialexercise.Assuch,wewillconsiderthemaindutiesimposedonadirectorunderthisgeneralheading.

(b) Whoisafiduciary?

A fiduciary is someone who has undertaken to act for and on behalf of another in aparticularmatterincircumstanceswhichgiverisetoarelationshipoftrustandconfidence.The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal isentitledtothesinglemindedloyaltyofhisfiduciary.Thecoreliabilityhasseveralfacets.Afiduciarymustact ingood faith;hemustnotmakeaprofitoutofhis trust;hemustnotplacehimself inapositionwherehisdutyandhisinterestmayconflict;hemaynotactforhis own benefit or the benefit of a third person without the informed consent of hisprincipal. This isnot intended tobeanexhaustive list,but it is sufficient to indicate thenatureoffiduciaryobligations.Theyarethedefiningcharacteristicsofthefiduciary.~LawCommissionConsultationPaperonCompanyDirectors(Eng&Scot);SeealsoBristolandWestBuildingSocietyvMothew[1998]Ch1,16(perMilletLJ) InthedecisionofSMTradingServicesv IntersanctuaryLtd[2006]3SLR(R)397;

[2006]SGHC102,PrakashJfoundafiduciaryrelationshiptoexistbetweenoneKandthedefendantcompanyeventhoughKdidnotholdanyformalposition inthe company. The court, however, found that K had an interest in thedefendants business andwas actively involved the affairs of the company. ItappearedthatKwouldalsoadvisethedirectorsofthecompany,whowouldrelyonKsadvice.Query:wouldKbeadefactoorshadowdirectorthen?

(c) Dutytoactinthecompanysinterests

[Directors]mustexercisetheirdiscretionbona fide inwhattheyconsidernotwhatthecourtmayconsiderisintheinterestsofthecompany,andnotforanycollateralpurpose.perLordGreenMR,ReSmithandFawcettLtd[1942]Ch304. This duty of good faith has often been referred to as the primary obligation

owedbyadirectortohiscompany. Issues:

~ Whatarethecompanysinterests? Often, the collective interestsof the shareholdersof the companymaybe

equated with the interests of the company. What happens then if theshareholdersinterseareaffecteddifferently,asindifferentclassesofshares?


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~ Wesawintheintroductoryseminarthattherearevariousstakeholdersina company. Can the directors consider the interests of these groups ofstakeholders?

(i) EmployeesseeCAs159(a)(ii) Creditors

InTongTienSeeConstructionPteLtdvTongTienSee[2001]3SLR(R)

887, Tay Yong Kwang JC made the following observations atparagraph[54]:

Whenacompanyissolvent,itsinterestsandthoseofitsshareholdersareone.Inthiscase,therewouldnotevenbedivergenceofinterestsbetweenthecompanyanditsshareholders...Butwhenacompanyisinsolvent,theinterestsof its creditorsbecome thedominant factor inwhat constitutesthebenefitof the company as awhole (WestMercia Safetywear vDodd[1988]BCLC250). Doesthismeanthatdirectorsoweadutytocreditorswhenthe

company is insolvent? Consider the opinion of VK Rajah JA inLiquidatorsofProgenEngineeringPte Ltd vProgenHoldings Ltd[2010]4SLR1089,at[52]:

[T]he rationale for such aduty is that,when a company is insolvent, thecreditors interestscome to the foreas thecompany iseffectively tradingandrunningthecompanysbusinesswiththecreditorsmoney.Becauseofthe limited liability principle, the risks (of trading when the company isinsolvent)on shareholderswouldbeminimalas theywouldatworst loseonlywhat theyhavealready invested in the company in their capacityasshareholders.Unsecuredorpartially secured creditorson theotherhandmayneverrecoveranymoniesduetothem.Unlikeshareholderswhohavethe most to gain from risky ventures, unsecured creditors, in particular,haveeverythingtolosewhenillegitimaterisksaretaken.Assuch,itisonlyright thatdirectorsought tobeaccountable tocreditors for thedecisionstheymakewhenthecompanyis,orperilouslyclosetobeing,insolvent.Weadd,parenthetically,thatthisfiduciarydutyisstrictlyspeakingowedtothecompany; there is no duty owed directly to creditors. In other words,individual creditors cannot,without the assistance of liquidators, directlyrecoverfromthedirectorsforsuchbreachesofduty.

(iii) GroupInterests


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Aredirectorsofagroupcompanyallowedtomakeadecisionthat isin the interestsof thegroupbutwhichcompromises the interestofthe company? Consider Intraco Ltd v MultiPak Singapore Pte Ltd[1995]1SLR313,andWalkervWimborne(1975)137CLR1.

Considerthefollowingproblems:

P,Q,R& S are thedirectorsofCo ZeePte Ltd. R and S are also thedirectorsofCoQueePteLtd,theholdingcompanyofCoZee.Discuss iftheboardofCoZeehas inanywayfailed intheirdutiesasdirectorsbyapprovingthefollowingboardresolutions:o (a)Toincreasethesalariesofallemployeesbyapercentagematching

theaveragerateof inflation (asdeterminedby thegovernment) foreachfinancialyear.

o (b) Tomake a $2m donation toGreenWorld Society, a nonprofitorganisation that is committed to educating the public onenvironmentalconservation.

o (c)TochargesomeassetsofCoZee infavourofBankTeeinrespectofaloandueandowingfromCoQueetoBankTee.

o (d) Assume that Co Zee is currently experiencing severe cashflowproblems.Nonetheless,theboardauthorisedthecompanytoplaceabulkorderforrawmaterialstoexpanditsproductionoutput.

Howshouldthecourtdecidewhetheradirectorhasactedintheinterests

of thecompany? Should the testbesubjectiveorobjective? Comparethefollowingtwostatements:

[Directors]mustexercisetheirdiscretionbonafide inwhattheyconsidernotwhatthecourtmayconsiderisintheinterestsofthecompany,andnotfor any collateral purpose. Per LordGreenMR, Re Smith and Fawcett Ltd[1942]Ch304.Bona fides cannot be the sole test, otherwise you may have a lunaticconductingtheaffairsofthecompany,andpayingawayitsmoneywithbothhandsinamannerperfectlybonafideyetperfectlyirrational.Thetestmustbe what is reasonably incidental to, and within the reasonable scope ofcarryingon thebusinessof thecompanyperBowenLJ inHuttonvWestCorkRlyCo(1883).

Goodfaithandhonesty

o Ishonestyalonesufficient?o Canadirectorfailinhisdutyevenwhenhehasactedingoodfaithin

thecompanysinterests?


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(d) DutytoActforProperPurposes~ Adirectormustexercisehispowers for thepurpose forwhich suchpower

wasconferred;seeHowardSmithLtdvAmpolPetroleumLtd[1974]AC821(Sealy,306).

~ This means that even if he honestly believes that he is entering into a

transactionthatisintheinterestsofthecompany,hemaystillbeinbreachofhisduty to thecompany if thepurposeof the transaction isoutside thepurposeforwhichthepowerwasconferredonhim.

~ InHowardSmithLtdvAmpolPetroleumLtd,didthedirectorsacthonestly?

Wouldtheirconducthavesatisfiedthedutyofgoodfaith?

~ Howdoesthecourtdecideifthedirectorshadactedforaproperpurpose?

In their Lordships'opinion it isnecessary to (1) startwithaconsiderationof thepowerwhoseexercise is inquestion, in thiscaseapower to issue shares.Havingascertained,onafairview,thenatureofthispower,andhavingdefinedascanbestbedone inthe lightofmodernconditionsthe,orsome, limitswithinwhich itmaybeexercised, (2) it is thennecessary for the court, ifaparticularexerciseof it ischallenged,toexamine thesubstantialpurpose forwhich itwasexercised,andtoreachaconclusionwhetherthatpurposewasproperornot. (3) Indoingso itwillnecessarilygivecredittothebonafideopinionofthedirectors, ifsuch isfoundtoexist,andwill respect their judgmentas tomattersofmanagement;havingdonethis,theultimateconclusionhastobeastothesideofafairlybroadlineonwhichthecasefalls.":perLordWilberforce(emphasisadded).Thus,under this test, there ismore room for judicial interventionbecausenotdependentwhollyondirectorssubjectiveview.Note:mostof thecases involvingallegationsof improperpurposeconcerntheissueofsharesbydirectors.InSingapore,thisislargelyanonissuesinceissueofsharesgenerallyrequiresthepriorapprovalofshareholdersasinCAs161.

~ Canadirectorsfailuretoactforaproperpurposeberatified(pardoned)byshareholders?SeeHoggvCramphorn[1967]Ch254(Sealy,303).

~ Whathappensifadirectorhasactedformixedpurpose?

(e) ConflictingInterests&Duties


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~ Itisafundamentalprincipleofequitythatapersoninafiduciarypositionis not allowed to put himself in a position where his interest and dutyconflictperLordHerschell,BrayvFord[1896]A.C.44.

~ Theruleswhichfallwithinthiscategorymayfurtherbesubdividedintotwo

broadcategories:(1)toavoidconflicts;and(2)nottoprofitfromtheuseofcompanyspropertyorhispositionasadirector.

~ A prominent characteristic of these rules is that they are strict, i.e. their

application does not depend on the directors state ofmind, and hemayinfringetheruleevenifhehasactedinperfectgoodfaith.

~ Thefollowingaresituationsinwhichsuchaconflictmayarise:

(i) TransactingwiththeCompany(orcalledselfdealinginsomecountries)

o When a director transacts with a company, he has to disclose hisinterestsinthetransaction.

o What is the effect of nondisclosure on the transaction?Recall the

differencesbetweenvoidandvoidablefromBusinessLaw.

o Is it possible for the company to ratify such a transaction? NorthWestTransportationCo Ltd vBeatty (1887)12AppCas589 (Sealy,272)

o Canadirectorvote inaresolutiontoratifyacontract inwhichhe is

interested?

(ii) Note the obligation to disclose interests in contract is reinforced bystatutesunderCAss156(attached)and169(1).o When reading CA s 156, you should take care to differentiate

betweenthesituationsreferredtoins156(1)ands156(5).Canyouidentifythedifferences?

o UnderCAs156(9),whatistheconsequenceofafailuretodisclose?o Does itmeanthatadirectorwhohasmadeadisclosureunderCAs

156willdefinitelynotbeliabletothecompanyforbreachofduty?

(iii) ConflictingDuties


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o Isthereanylegalprohibitionofmultipledirectorships?o NotethedutytodiscloseunderCAs156(5).

o ThespecialproblemwithNomineeDirectors

Is a nominee director permitted to act in the interests of his

nominator?SeeScottishCooperativeWholesaleSocietyvMeyer[1959]AC324.

Considerthefollowingexcerpt:

We agree it is settled law thateverydirectorowes the sameresponsibility to the company as a whole. It is no differentwhereadirector is thenomineeofagroupofshareholdersorcreditors. He should not regard himself as a watchdog forthosewho put him on the board. A nominee director shouldexercisehis judgment in thebest interestof thecompanyandshouldnotbeboundtoact inaccordancewiththedirectionorinstructionofhisappointor.However,thedutyisasubjectiveone and it is fulfilledprovided it isexercisedbona fide in theinterestofthecompanyandnotforanycollateralpurpose.Butthat isnottosaythatanomineedirectormustactagainsttheinterest of his appointor. A nominee director may take intoaccount the interestofhisappointor if such interestdoesnotconflictwiththeinterestofthecompany".PerChaoHickTinJAinOverseaChineseBankingCorpLtdvJustloginPteLtd[2004]2SLR(R)675,[2004]SGCA20,at[31].

Doyou think this isa realistic rule? Note that thepredicament

whichthenomineedirectorfacesismarginallyattenuatedbytheintroduction of CA s 158 (attached). This is a relatively newprovisionwhichessentiallyallowsnomineedirectors todisclose,subject to the satisfaction of the conditions in CA s 158(3),informationobtainedinhiscapacityasdirectortohisnominator.

(f) NoProfitrule&UseofCorporateOpportunityandInformation

o Thisruleoverlapssubstantiallywiththedutytoavoidconflictofinterests.Inreality, directors are often disloyal because they place themselves in aposition of interest with a view to profit from that position. When thathappens,theyareclearlyinbreachofthenoconflictrule,aswellasthenoprofitrule.


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o However, there are some exceptional situations where the directors arepenalized formaking aprofit fromhisposition as adirector, even thoughtheredoesnotseemtobeaconflictwiththecompanysinterests.ThecasesofIDCvCooley(Woon,para8.60)andRegalHastingsvGulliver(Woon,paras8.64and9.54)areclassicexamples.Directorsbonafidesisirrelevantinthisregard.

o Obviously,ifadirectormakesaprofitbyusingthecompanysproperty,that

isaplainlydisloyalact,andheshouldbeliableforbreachofduty.However,sometimes it is difficult to know precisely what property means.Confidential information may be a type of property. But what aboutbusiness opportunities? You should consider these questions as you readcasessuchasCookvDeeksandRegal(Hastings)LtdvGulliver[1942]1AllER378(Sealy&Worthington,316317):

Whatisthenatureofthepropertythatisusedbythedirector? Doesliabilitydependonwhetherthedirectorhasacteddishonestlyorin

badfaith? Canthedirectorsbreachofdutyberatifiedbyshareholders?

Is a director exonerated from liability by the fact that the opportunity

wasonewhichthecompanycouldnothaveutilized?SeeRegal(Hastings)LtdvGulliver(above)andHytechBuildersPteLtdvTanEngLeong[1995]1SLR(R)576.

o Thenoprofitrulemayextendtoformerdirectors,seeCanadianAeroService

LtdvOMalley (1973)40DLR (3d)371. Compare,however,thedecision inPesoSilverMinesLtdvCropper(1966)58DLR(2d)1.

o Again, there are statutory reinforcements as regards the use of corporate

information,seeCAss157(2)and158(attached).

CA s 157(2) what is the scope of this restriction? What are theconsequencesofabreachofthisobligation?

CAs158CA(discussedabove)

o Apartfromthedutynottomisusethecompanysinformation,thecompany

might also use contracts to impose a duty not to disclose or use thecompanys informationwhileaperson isthecompanysdirectororafterhe


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retiresfromhisoffice.Thisiscommonlyseenasaconfidentialityagreementoraconfidentialityclauseinaserviceoremploymentcontract.

o Practice:

Considerthefollowingscenarios:1. XCoPteLtdwasinterestedinleasingafactoryfromWCoPteLtd.Thedirectors

ofXCoincorporatedacompany,YCoPteLtd,forthispurpose.WCohoweverinsistedthatthedirectorseithergiveapersonalguaranteeorthatthepaidupcapital of Y Co be at least $100,000. The existing resources of X Co did notpermitittocommitmorethan$60,000tothesharecapitalofYCo.Assuch,thedirectors agreed to subscribe for the remaining $40,000 amongst them.Subsequently,allthesharesinXCoandinYCoweresoldtoZCoPteLtd,asaresult of which the directors made a profit of $2 per share. Under a newmanagement,XConowwantstosuethedirectorsforbreachoftheirduty.

2. JandKarebrothersandshareholdersinJKPteLtd,acompanyoperatingshops

and leasingcommercialproperty.Followingabreakdown inrelationsbetweenthetwobrothers,itwasmutuallydecidedthatnofurtherpropertiesshouldbepurchasedby the company.Oneweekend,aftergoing to themovieswithhisson,Jcameacrossaplotoflandsituatedadjacenttoasupermarketownedandoperated by the company. He contacted the landlord and was successful inpurchasing the land. Can JK Pte Ltd claim against J for breach of directorsduties?

3. ACoPteLtdisinbusinessasbuildingcontractorsanddevelopmentconsultants.

The articles of association of the company provide that the business of thecompanyshallbemanagedbythedirectors.

(a)Tan,aqualifiedarchitect,isadirectorofACoPteLtd.Tanhasbeeninvolved,on

behalfofACo, inthenegotiationswithBCoPteLtd inrespectofaproposedcontracttodesignandbuildashoppingcomplexforBCo.Inthecourseofthenegotiations, it became clear that B Co will not grant the contract to A Cobecause of some disagreement over certain fundamental terms. B Co, highlyimpressedwithTanspersonalcredentialsandability, invitesTantodesign forthemandoverseethebuildingoftheshoppingcomplex.Tan,withoutdisclosingthistoACo,resignsandacceptstheoffer.

(b)AssumethatBCodecidestoofferthecontracttoACo.However,ACohas, in

themeantime, secured othermajor contracts. The board of A Co, after dueconsideration of all the companys existing obligations, decides that thecompanydoesnothavetheresourcestoacceptBCosofferandcommunicatesthis toBCo.BCo thenoffers thecontract toTan,who,withoutdisclosinghisintentions,resignsfromACoandsetsuphisowncompanytoaccepttheBCocontract.


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Should itmake any difference if Tanwas a nonexecutive directorwhowas notinvolvedinnegotiations?

(g) EffectofBreachofFiduciaryDutiesonCorporateTransactions

i. Companytransactionswithdirectorii. Companytransactionswiththirdparties

(h) DutyofCare,Skill&Diligence

o Likeanyotherprofessional,adirectorhas toexercise reasonable care skill

anddiligencewhenmanagingtheaffairsofthecompany.Yourshouldnotethat this is a common law duty, it is not a fiduciary duty. Why is thedistinction important? First, carelessness and disloyalty are too distinctconcepts. A director may have conducted the companys affairs verycarelessly or negligently, but he may not have been disloyal. Secondly, abreachof fiduciary (loyalty)dutyresults inmoresevereconsequences. Forexample,thecompanywouldbeentitledtoclaimanaccountofprofitsforabreachofdirectorsduties,butthisremedyisnotavailableforbreachofthedutyofcare.Inthelattercase,themoreusualremedyisdamagesforloss.

o How do we decide whether the director has exercised the appropriate

degreeofcareandskill?

(i) Traditionalapproach:ReCityEquitableFire InsuranceCo [1925]Ch407(Sealy&Worthington,301303):Indischargingthoseduties,adirector(a)mustacthonestly,and(b)mustexercise such degree of skill and diligence as would amount to thereasonablecarewhichanordinarymanmightbeexpectedtotake,inthecircumstances, on his own behalf. But, (c) he need not exhibit in theperformanceofhisdutiesagreaterdegreeofskillthanmayreasonablybe expected from a person of his knowledge and experience; in otherwords,heisnotliableformereerrorsofjudgment;(d)heisnotboundtogivecontinuousattentiontotheaffairsofhiscompany;hisdutiesareofanintermittentnaturetobeperformedatperiodicalboardmeetings,andatmeetingsofanycommitteetowhichheisappointed,andthoughnotbound to attend all such meetings he ought to attend them whenreasonablyable todo so;and (e) in respectofalldutieswhich,havingregardtotheexigenciesofbusinessandthearticlesofassociation,may


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properlybelefttosomeotherofficial,heis,intheabsenceofgroundsforsuspicion,justifiedintrustingthatofficialtoperformsuchdutieshonestly.

Isthisanobjectiveorsubjectiveapproach? Does it make allowances for the personal experience and level of

knowledgeoftheparticulardirector? Whatistheproblemwiththisapproach?

o Modern approach in Singapore: LimWeng Kee v PP [2002] 2 SLR(R) 848,

[2002]4SLR327(Youarestronglyencouragedtoreadthiscase.)

Considerthefollowingexcerpt:

The civil standard of care and diligence expected of a director wasobjective,namely,whetherhehadexercisedthesamedegreeofcareand diligence as a reasonable director found in his position. Thisstandardwasnot fixedbutacontinuumdependingonvarious factorssuchastheindividual'sroleinthecompany,thetypeofdecisionbeingmade,thesizeandthebusinessofthecompany.However,unlikethetraditional approach, this standard would not be lowered toaccommodate any inadequacies in the individual's knowledge orexperience.The standardwouldhoweverbe raised ifheheldhimselfout to possess or in fact possessed some special knowledge orexperienceAt[28].

HowisthistestdifferentfromoneinReCityEquitableFireInsuranceCo(above)?

How is thedirectorspersonalknowledgeorexperience relevantunderthisapproach?

In Lim Weng Kee, Mr Lim was held to be guilty under section 157(3)because he ran the business for 20 years qualified as "specialexperience" and would raise the expected standard. That he was incontrolof thepawnshopsandvoluntarilyauthorised the releaseof theitems, despite knowing that the cheque had not been cleared, wassomethingno reasonabledirector inhispositionwouldhavedone (At[40]).

o Obviously,adirectorisnotexpectedtodoalltheworkbyhimself.Infact,in

medium to large companies, the actual execution of daytoday work iscarried on by employees,while directors focus onmakingmanagerial andpolicydecisions.ThedirectorsrighttodelegatewasdiscussedbyVKRajahJC


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inVitaHealthLaboratoriesPteLtdvPangSengMeng[2004]4SLR(R)162atparas2021:

It would be wholly impractical to expect directors to be omniscient or topersonallydischargeallcorporatepowersandfunctions.Thelargerthebusiness,thegreaterthecommercialneedfordelegation.Themorespecialisedfunctionsare, the greater the need for independent operations and powers. Legalpragmatismimbuedwithlatitudetowardsbusinessefficacyiscrucialinassessingadirectorsdelegationofduties.Admittedly,hemustreasonablybelievethathissubordinateswillcompetentlydischargetheirdutiesinthecompanys interests.Other than that it is fair to say that there is no acid test thatwill provide adefinitiveanswer.ItcanhoweverbesafelyassumedthatIthasbeensaidthatdelegationmaybeimproperonlyifthesituationisofsucha character, so plain, somanifest and so simple of appreciation that no onewouldrelyonthesubordinates(cfRomerJ in InreCityEquitableFire InsuranceCompany, Limited [1925] Ch 407 at 428, quoting from Overend & GurneyCompanyvGibb(1872)LR5HL480at486487).Thishistoricalview,set inthecontextofawhollydifferenteraofcommerce, isno longerapposite.Adirectorcannotnowbeviewedasameresentinelwhomayoccasionallydozeoffathispost.Directors are officerswhomust remain alert andwatchful at the helm.Directorsoughttohavean inquiring,thoughnotnecessarilysuspicious,mind indischargingtheirsupervisoryfunctions.TheEnglishCourtofAppealinReBaringsplc (No5) [2001] 1 BCLC 523 at [36], approved (per MorittLJ) the instructivesummaryofprinciplesbyParkerJat first instance (seeReBaringsplc [1999]1BCLC433at489):(i)Directorshave,bothcollectivelyandindividually,acontinuingdutytoacquireand maintain a sufficient knowledge and understanding of the companysbusinesstoenablethemproperlytodischargetheirdutiesasdirectors.

(ii) Whilst directors are entitled (subject to the articles of association of thecompany)todelegateparticularfunctionstothosebelowthem inmanagementchain,and to trust their competenceand integrity toa reasonableextent, theexerciseofthepowerofdelegationdoesnotabsolveadirectorfromthedutytosupervisethedischargeofthedelegatedfunctions.(iii)Noruleofuniversalapplicationcanbeformulatedastothedutyreferredtoin (ii) above. The extent of the duty, and the question whether it has beendischarged, must depend on the facts of each particular case, including thedirectorsroleinthemanagementofthecompany.

o Thus, a director is not expected to be an expert in all aspects of the

companysbusinessandoperations. He isentitled to relyon theadviceofotherprofessionals.ThisrightisnowexpresslyrecognizedinCAs157C.Thisprovisionisrelativelynew.Inessence,itsetsouttheconditionsunderwhich


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a director may place reasonable reliance on the companys employees,professional advisors, and other directors with specialised expertise.Generally,however,adirectormayonlyclaimtheprotectionofCAs157Cifhehasactedreasonablyandingoodfaith.

o Anotherprinciplewhichoughttobeborneinmindisthatthecourtsdonot

like to secondguess directors business decisions. This is known as thebusiness judgment rule. InVitahealthLaboratoriesPteLtdvPangSengMeng[2004]4SLR162,VKRajahJCexplained(atpara17)thereasonforthisrule:

Itistheroleofthemarketplaceandnotthefunctionofthecourttopunishandcensuredirectorswhohave ingoodfaith,madeincorrectcommercialdecisions.Directorsshouldnotbecoercedintoexercisingdefensivecommercialjudgment,motivated largelybyanxietyover legalaccountabilityand consequences.Bonafide entrepreneurs and honest commercialmen should not fear that businessfailureentailslegalliability.Acompanyprovidesavehicleforlimitedliabilityandfacilitates the assumption and distribution of commercial risk. Undue legalinterference will dampen, if not stifle, the appetite for commercial risk andentrepreneurship.

Whatistherolethatthemarketplacecanplaytodeterminethequality

of a business decision of the board of directors? What are relevantmarkets?

What do you think the preconditions of making a sound business

decisionare?

o Thus, in determiningwhether a director has exercised sufficient care, thecourt does not look at the merits of his decision. Rather, it looks at theprocessofdecisionmaking, i.e.hehashetakenthestepsthatareasonablebusinessmanwouldtakeinmakingthisdecision?

o Students should be aware that the business judgment rule is a broad

conceptthatmaytakedifferentformsindifferentcountries.Forexample,intheUS, the courts presume that directors exercise due care unless othercertainconditionsaremet(e.g.withconflictofinterestorinbadfaith).Ifthepresumptionisrebutted,thedirectorthenhastoprovethatthetransactionis fair inorder toavoid liability.Doyou thinkSingaporeshould introduceasimilarpresumptiononabusinessdecision?

5.StatutoryDuties


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(a) CAs157o CAs157(1)readsasfollows:Adirectorshallatalltimesacthonestlyandusereasonablediligenceinthedischargeofthedutiesofhisoffice.o Aswehavementionedintheintroductiontothisseminar,thisshortstatementis

oftenunderstoodtoencapsulateallthedirectorscommonlawduties.Thus,thedutytoacthonestlywillincludethecommonlawdutyofgoodfaith,thedutyto act for proper purposes, aswell as the noconflict and the noprofit rules.Similarly, theduty to use reasonablediligence isequatedwith the commonlawdutyofcare.Thus, inLimWengKeevPP,thedefendant,whohasfailedtoexerciseduecare,wasalsoguiltyofanoffenceunderCAs157(1).

o Because s157(1)CA is so terselyworded,however, itdoesnotprovidemuch

guidanceastothecontentofthedirectorsduties.Thus,inpractice,wealmostalways look first to the case law to understand what the law expects fromdirectors.

o Youshouldnotethats157(3)expresslysetsouttheconsequencesofabreachof

directorsdutiesunders157(1)and(2).Thesewillincludebothcivilandcriminalliability.Shouldthetestbedifferentinbothcivilandcriminalcasesforabreachofs157?

o CAs157(2)reads:

An officer or agent of a company shall not make improper use of any informationacquiredbyvirtueofhispositionasanofficeroragentofthecompanytogain,directlyorindirectly,anadvantageforhimselforforanyotherpersonortocausedetrimenttothecompany.~Asobservedabove, this sectionoverlaps substantiallywith thecommon lawprohibitionagainst theuseof thecompanys informationandproperty for thedirectorsprofit.~ The Companies (Amendment) Bill 2013 proposes to change slightly thewordings of s 157(2) to An officer or agent of a company shall not makeimproper use of his position as an officer or agent of the company or anyinformation1

1 Companies (Amendment) Bill 2013 s 91.


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(b) PreparetrueandfairaccountsCAs201o Theobligationtoprepareaccounts isplaced largelyonthedirectors.Currently,

the law requires that directors ensure that accounts are (where appropriate)audited,complywithAccountingStandards,andaretrueandfair.Fore.g.CAs201(3)states:

Subjecttosubsections(14)to(14C),thedirectorsofeverycompanyshallcausetobemadeout,and tobe laidbefore thecompanyat itsannualgeneralmeetingwith theprofit and loss account required by subsection (1) a balancesheet as at the date towhichtheprofitandlossaccountismadeupbeingabalancesheetthatcomplieswiththe requirementsof theAccounting Standards, and gives a true and fair viewof thestateofaffairsofthecompanyasattheendoftheperiodtowhichitrelates.

o Adirectorwhodoesnottakesufficientstepstoensurethattheaccountscomply

withtherequirementsoftheCompaniesActwillcommitanoffenceunderCAs204.

6. Release&Indemnity

(a) Insuranceandindemnity:

Aquestionrelevant tothedutiesofdirectors iswhetheradirectorcanaskthecompanytobuy liability insuranceorprovide indemnitytocompensateanyfutureliabilityforhisbreachofduties.

How far do you think such insurance or indemnitymight compromise the

effectofadirectorsdutiesundercommonlawandtheCompaniesAct?

(b) CAs172reads:

(1)Any provision, whether in the articles or in any contract with a company orotherwise, for exempting any officer or auditor of the company from, orindemnifyinghimagainst,anyliabilitywhichby lawwouldotherwiseattachtohiminrespectofanynegligence,default,breachofdutyorbreachoftrustofwhichhemaybeguiltyinrelationtothecompany,shallbevoid.

(2)Thissectionshallnotpreventacompany(a) from purchasing and maintaining for any such officer insurance against any

liabilityreferredtoinsubsection(1);or(b) fromindemnifyingsuchofficerorauditoragainstanyliabilityincurredbyhim

(i) indefendinganyproceedings(whethercivilorcriminal) inwhich judgmentisgiveninhisfavourorinwhichheisacquitted;or

(ii) in connectionwith any application,under section76A (13)or391or anyotherprovisionofthisAct,inwhichreliefisgrantedtohimbythecourt.


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o Whatdoyouunderstandbys172(1)?Ingeneral,isthecompanyallowedto

indemnifythedirectoragainsttheconsequencesofhisownbreachofduties?o Whattypeofinsurancesisthecompanyallowedtobuyforthedirector?

o NewdevelopmentintheCompanies(Amendment)Bill2013:

In the future, a provision to exempt or indemnify a director from hisliability to the company will still be rendered void in new s 172. Theprohibitionwillalsobeextended toan officer.However, itwillbe fineforacompanytopurchaseliabilityinsuranceforadirectororoffice(asinnews172A).A thirdparty indemnitywillalsobeallowedundercertainconditions(seenews172B).2

Anews208Awillbeinsertedtorenderaprovisionorcontractexemptingorindemnifyinganauditortobevoid.

(c) Courtspowertoreleasedirectorsfromliability

CAs391reads:(1) If in any proceedings for negligence, default, breach of duty or breach of trust

againstapersontowhomthissectionapplies itappearstothecourtbeforewhichtheproceedingsaretakenthatheisormaybeliableinrespectthereofbutthathehasactedhonestlyandreasonablyandthat,havingregardtoallthecircumstancesofthecase including thoseconnectedwithhisappointment,heought fairly tobeexcused for the negligence, default or breach the court may relieve him eitherwhollyorpartlyfromhisliabilityonsuchtermsasthecourtthinksfit.

o Whataretheconditionsthathavetobemetbeforeadirectorcouldapplyto

thecourtforreliefunderCAs391(1)?

o Notethatsection391(1A)hasrecentlybeeninsertedtoreversethedecisionin Hytech Builders Pte Ltd v Tan Eng Leong, see CLRFC Final Report,Recommendation3.13.

2 Companies (Amendment) Bill 2013 s 104.

handout 05 (2014)

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