DIRECTORS BeAWARE – A Postscript
On 20th June 2023, we published an article titled “DIRECTORS BeAWARE”. That article discussed the case of BIT Baltic Investment & Trading Pte Ltd (in compulsory liquidation) v Wee See Boon [2023] SGCA 17 and highlighted key takeaways namely:
- The law does not make any distinction between active and inactive directors.
- Every director is subject to the same duties and is expected to acquire and maintain sufficient knowledge and understanding of a company’s business in order to perform those duties adequately.
- This is so regardless of whether the director has an inactive role or is appointed for the sole purpose of satisfying statutory requirements.
- Directors’ duties serve as a level of safeguard against potential corporate misconduct. Permitting certain directors to “sleep on duty” contributes nothing to reducing such misconduct.
The recent case of Inter-Pacific Petroleum Pte Ltd v Goh Jin Hian [2024] SGHC 178 provides a timely reminder of the current judicial attitude towards director’s duties.
The Facts
Inter-Pacific Petroleum Pte Ltd (“IPP”), a company in insolvent liquidation, brought claims against its director, Dr Goh Jin Hian, for various breaches of duty on his part as a director of IPP.
IPP, which was in the fuel oil cargo and bunkering business, had been used as a vehicle of fraud by its other directors and officers.
This fraud entailed IPP borrowing large sums from banks on the pretence of financing commercial transactions which were shams. As these transactions were shams, the assets the purchase of which the banks had purportedly financed were, in fact, non-existent.
IPP sought compensation from Dr Goh in the sum of US$146,047,099.60 being its liability to repay the banks the loans taken.
IPP’s Case
IPP’s case was essentially that Dr Goh had been asleep at the wheel as a director and failed to take the steps required of him under the law to apprise himself of IPP’s affairs and to monitor the same.
Specifically, Dr Goh failed to detect that IPP was being run in a fraudulent manner, and failed to prevent IPP from making particular drawdowns so as to become liable to the Banks to repay the same. In particular:
- Dr Goh had no knowledge of one of the principal lines of IPP’s business i.e. its cargo trading business. The fact that Dr Goh had not known of this line of business meant that he could never have been in a position to discharge his minimum obligation to monitor and supervise the activities of IPP.
- Dr Goh had failed to act reasonably in the face of three “red flags”:
Dr Goh had “blindly signed off on an audit confirmation request for a significant sum without applying his mind to its contents”. The audit confirmation request was a red flag that should have triggered Dr Goh to investigate IPP’s receivables position.
Dr Goh did not take any steps or action following the suspension of IPP’s Bunker Craft Operator Licence. The suspension was a significant event that affected IPP’s profitability and even its potential survival. Any reasonable director in Dr Goh’s position would have been “jolted … into making some queries as to IPP’s financial health”.
Dr Goh signed three confirmations of indebtedness to a bank, which should have prompted him to inquire into IPP’s financial situation, but he did not do so.
Dr Goh had also failed to follow up in any way after being told by IPP’s Chief Financial Officer that IPP’s auditors had raised a “going concern issue” with IPP.
Dr Goh’s Case
Dr Goh’s case was essentially that he should be subjected to a lower standard of care; more specifically, he had substantially reduced obligations of monitoring of and supervision over IPP’s affairs, and was entitled to rely on the information provided to him by his fellow directors and subordinates.
Further, he had acted honestly and reasonably, and that it was fair in the circumstances of the case that he be excused for any breaches of duty established against him under s 391 of the Companies Act 1967 (2020 Rev).
The Decision
The Court found that Dr Goh had breached his duty of skill, care and diligence owed to IPP. Thus, he was liable for the loss suffered by IPP.
Crucially, the Court found that:
Dr Goh could not escape liability for negligence by saying that he had a “confined area of responsibility” in IPP. By its nature as a minimum and non-delegable obligation that all directors are subject to, Dr Goh’s duty to monitor and supervise IPP’s affairs was a default standard that he could not disapply regardless of the actual role that he played in IPP.
With regard to the audit confirmation request, even if the debtor was a strong trading counterparty, the fact remained that a large sum of receivables could quickly graduate into a major problem for IPP; because of this, even for credible trading counterparties, a reasonable director would have monitored the potential delinquency of their receivables.
And to be in a position to monitor, Dr Goh had to first ask. Further, given that a reasonable director would have proactively inquired as to IPP’s receivables position, it was no answer for Dr Goh to rely on his subordinates’ failure to raise the matter to him.
Key Takeaways
While every case will turn on its own facts, we consider the following to be key takeaways from the case for all company directors:
A director’s particular designation is not determinative or conclusive of the role that he plays in the company. Rather, the content of a director’s duty is determined by the involvement, responsibilities or functions he undertakes. Put simply, the focus is on substance rather than form.
Regardless of whether a director was in form or substance an executive or non-executive director, he would be subject to a “minimum objective standard of care which entails the obligation to take reasonable steps to place himself in a position to guide and monitor the management of the company”.
The standard of care owed would never be lowered, but may be heightened, by the subjective characteristics of the particular director at hand.
Although there is nothing wrong per se in a director delegating some functions, there comes a point when delegation crosses into dereliction or abdication. Thus, a director must always supervise the discharge of delegated functions, failing which he would have breached his duty of skill, care and diligence.
Even if a director receives periodic financial information from his subordinates, this does not obviate the need for him to make his own inquiries into the company’s financial health at appropriate junctures.
A director’s duty to acquire and maintain a sufficient knowledge and understanding of the company’s affairs was a continuing “The law does not permit a director to get by in a state of somnambulism for the most part, only to be roused on occasion by his subordinates”.
Directors are officers who must remain alert and watchful at the helm. A director cannot now be viewed as a mere sentinel who may occasionally “doze off at his post”;
While directors may take commercial risks, this is not an excuse for a director who considers his role to be a sinecure or an honorary function.
Dr Goh has filed an appeal to the Court of Appeal. So watch this space.
 | K. Murali PanySenior Partner JTJB Singapore Office |  | Einson PangAssociate JTJB Singapore Office |
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