The Companies Act 1967 of Singapore (“CA”) provides that a director includes, firstly, any person occupying the position of director of a corporation by whatever name called, secondly, a person in accordance with whose directions or instructions the directors or the majority of the directors of a corporation are accustomed to act, and thirdly, an alternate or substitute director.
Once an individual is appointed as a director of a Singapore-incorporated company, there are directors’ duties imposed on that director under Singapore law. The breach of directors’ duties may result in potential consequences on conviction, such as fines or in more serious cases, imprisonment.
While there are various types of directors with different titles, the CA subjects all directors to the same level of duties. To be a director, an individual must be at least 18 years of age and of full legal capacity. For a Singapore-incorporated company, at least one director must ordinarily reside locally.
In addition, the locally-resident director must be a Singapore citizen, Singapore permanent resident (PR), EntrePass Holder, or an Employment Pass holder whose appointment has been approved by the Ministry of Manpower by way of a Letter of Consent. Directors must also not be undischarged bankrupts, or be disqualified from appointment under any statutory law.
By accepting the position of a director, the individual is subject to the responsibilities and liabilities which the position carries. Generally, directors are required to dutifully exercise the powers conferred on them by the constitution of the company (the “Constitution”), and control the property and assets of the company.
Directors are also subject to fiduciary duties, which are one of the highest standards of requirement which the law can impose. In the case of directors, the law requires that they act in good faith and with reasonable care and diligence. Importantly, they must act in a way that ensures the interests of the company supersede their personal interests, or those of other associated parties.
While some of the fiduciary duties imposed on directors are elaborated below, do note that the following information is not exhaustive. Directors or shareholders seeking specific advice or further clarification on any of their directors’ duties should consult legal counsel with expertise in company law matters.
(a) Duty to Act in Good Faith
Directors have a duty under law to ensure that every act and omission made in the capacity of their position is honest, bona fide and in the best interests of the company. In general, the law provides that directors are liable for any profit made or damage suffered by the company under their leadership.
While the law affords directors with the discretion to decide subjectively what are the company’s best interests, the Courts typically implement a further objective test if it is required to decide.
(b) Duty to Act in the Interests of the Company
Another primary duty of a director is to act solely for the purposes of promoting and protecting the interests of the company. Importantly, the director must consider the interests of the company alone, and not in conjunction with those of the parent or group. In practice, however, this distinction is less realistic, given that the interests of a subsidiary may often overlap with those of the parent. As such, it has been ruled by the Court that while it is permissible to consider the collective interests of the entire group of companies, every director of each company within the group must nevertheless act in accordance with their fiduciary duties in relation to the respective company(ies) of which they are a director.
While the Court will not retrospectively substitute its own judgement for those of directors, especially where poor commercial decisions are concerned, it might infer dishonesty in instances where the reasonableness of the risks taken seem questionable.
Directors are also entitled to consider the interests of shareholders, although the interests of the company take precedence. The importance of considering shareholders’ interests is underpinned by how the Courts can declare a decision made as void or ineffective due to defects in the decision-making process. Possible grounds include, but are not limited to, the use of improper considerations, the intention to prejudice certain groups of shareholders, or the failure to adopt procedures established by the law or the Constitution.
When a company is approaching insolvency, or is in a situation where creditors’ interests might be jeopardised, the director has a duty to consider the interests of its creditors. If a director acts in a manner prejudicial to the interests of creditors – for example, by contracting a subsequent debt that the director knows that there is no reasonable or probable expectation that the company would be able to repay – the director may be found guilty of misfeasance.
A key lesson which may be gleaned from case law and statutory law is that, while the foremost duty of a director is to act in the interests of the company, the director may also have to consider the interests of other stakeholders. Directors who engage legal counsel in ambiguous situations will be guided so that they are in a position to make decisions which would not unlawfully prejudice certain parties, and perform their duties in full accordance with the law.
Directors are exposed to both criminal and civil liabilities for breaches of their duties. There is a risk of a director being subject to both types of liability in relation to the same act or transaction, for example, when a director is found to have received bribes. While criminal liability may be triggered in offences against penal laws, civil liability may arise where fiduciary duties are breached under a range of legislation related to health and safety, the environment, employment, consumer protection, and anti-corruption.
The law allows companies to seek a variety of remedies against a director for a breach of duty. These include, but are not limited to, damages, a recovery of misapplied property (including the clawback of unlawfully declared dividends), accounting for profit made through the breach, an injunction to prevent a breach, and a revocation of executed contracts. Directors could also face personal liability in situations where a conflict of interests resulted either in: (a) personal or associated benefit; or (b) an outcome contrary to the company’s interests.
There are three main ways in which directors can be protected from liability.
First, directors can be protected through shareholder ratification, where the shareholders ratify conduct of a director that is negligent or in breach of fiduciary duties. Subject to further conditions, such as the requirement that the transaction must not be illegal and that there cannot be fraud on the minority or creditors, a full and frank disclosure of the character, nature, and extent of the breach, and all material facts must be made to all relevant shareholders for ratification to be valid.
Second, directors can be protected through the use of indemnity. While the company cannot in this way exempt or indemnify a director from liability arising from negligence, default, breach of duty or breach of trust, it can indemnify against certain liabilities incurred by third parties. Indemnity also cannot be provided in certain circumstances, including for the payment of fines in criminal proceedings and penalties for regulatory non-compliance.
Third, directors can be protected through the use of directors’ and officers’ (D&O) insurance purchased by companies for their directors. This is one of the most widely used method as D&O insurance policies provide coverage for individual directors for claims made against them in their decision-making capacity. D&O policies can in certain cases cover company reimbursements when it has indemnified directors, and where indemnification is not an option, it can also cover the costs to defend directors against claims. Often, companies pay for D&O insurance rather than providing a direct indemnity. Notwithstanding the foregoing, do note that D&O insurance cannot be used to insure directors against their own wilful or fraudulent act.
Where there are situations requiring clarification, companies and directors should engage legal counsel to advise on what would be the most applicable form of liability protection in their given circumstance.
Directors have a range of fiduciary duties, some of which may not be immediately apparent to them. Nonetheless, a good rule of thumb for directors to abide by is that the foremost duty is to act in the best interests of the company. Breaches of directors’ duties could result in either criminal sanctions or civil claims being made against the director. While there are multiple means to safeguard against the breach of directors’ duties, it is advised that companies and directors engage legal counsel with expertise in corporate and commercial law matters to ensure that their rights and interests are well-protected.
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Our firm frequently advise directors and companies on the duties and liabilities of directors under the relevant Singapore law.
The author, Waltson Tan, is a corporate lawyer trained in London and Singapore. He is qualified as an advocate and solicitor in Singapore, and has more than eight years of post-qualification experience.
Waltson focuses his practice on mergers and acquisitions, private equity, joint ventures, investment funds and other general corporate and commercial transactions. He has also represented numerous leading multinational organisations on a broad spectrum of corporate, regulatory, cross-border restructuring and employment matters.
Waltson also advises clients on a monthly and yearly retainer basis, where he provides dedicated services to each client in relation to the issues which clients face, including general corporate and employment related matters.
If you require further information and/or expert guidance on the above or any other area of law, you may wish to contact the author of the article, whose details are as follows:
Waltson Tan Director +65 8079 0028 waltson.tan@28falconlaw.com |
Office address: 101A Upper Cross Street #13-11, People’s Park Centre Singapore 058358 |