It is not uncommon to hear directors of companies being referred to as nominee, sleeping or non-executive directors (collectively “inactive directors”).
The recent case of BIT Baltic Investment & Trading Pte Ltd (in compulsory liquidation) v Wee See Boon [2023] SGCA 17, is a salutary reminder that the law does not make any distinction between active and inactive directors.
Rather, the Singapore Court of Appeal (“CA”) reiterated that all directors are subject to the same duties and are expected to acquire and maintain sufficient knowledge and understanding of a company’s business in order to perform their duties adequately.
General principles
A director has two overarching duties to the company. First, fiduciary duties and second, duties of care, skill and diligence.
A director’s fiduciary duties to the company can be simplified into the following elements:- the duty to act honestly and in good faith in the best interests of the company;
- the duty not to exercise his powers for an improper purpose such as to profit personally from his office; and
- the duty not to place himself in a position which will result in a conflict of interest.
The duty to act with due care, skill and diligence is a related but conceptually distinct duty owed by directors to their company. It is not a fiduciary duty because it is not imposed to exact loyalty from a director. Instead, it relates to the standard of care and diligence expected of a director that is assessed objectively.
The Case
BIT Baltic Investment & Trading Pte Ltd (in compulsory liquidation) (“BIT Baltic”) brought a claim against its former director, Mr Wee See Boon (“Mr Wee”) for damages in respect of breaches of fiduciary duties and duties of care, skill and diligence. The directors of BIT Baltic, at all material times, were Mr Wee and two foreign nationals, Mr Peter Christian Harren (“Mr Harren”) and Dr Martin Harren (“Dr Harren”). BIT Baltic’s claim centred around unfair preference payments (the “Payments”) that were made to two other entities known as HARPA Services & Support GmbH & Co. KG (“HARPA”) and HPS International Holding GmbH (“HPS”). Dr Harren was a director of HARPA and HPS at the material time.The Decision
At the first instance, the High Court (“HC”)Judge dismissed BLT Baltic’s claim. The HC Judge held that while the Payments were unfair preference payments, Mr Wee had a limited role in BIT Baltic and as a result did not breach his fiduciary duties or his duty to exercise due care, skill and diligence in relation to the Payments.
On appeal, the CA reversed the factual finding of the High Court and held that Mr Wee played a material role in BIT Baltic’s operations. While the CA held that Mr Wee did not breach his fiduciary duties, it found that he had breached his duty to act with care, skill and diligence in relation to the Payments. At that material time, Mr Wee’s duty, as a director acting in the best interests of BIT Baltic, was to have taken the necessary steps to enquire about the related party transactions declared in the financial statements and to alert the other directors to the wrongful payment and to request them to take steps to recover the payments.Key Points and Takeaways
While the case had its own specific facts, the CA made a number of points of general importance namely:
- 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.
It appears the Court’s objective was to deliver a clear message that inactive directors will be held to the same standard as active or executive directors.
Non-executive directors or nominee directors (including companies providing nominee director services) would be well advised to take steps or put in place safeguards to ensure that there is some degree of oversight over the company, especially where the company is experiencing financial difficulties.
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K. Murali PanyManaging Partner JTJB Singapore Office E : murali@jtjb.com T : 6224 3645 |
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Shannon LimAssociate JTJB Singapore Office E : shannonlim@jtjb.com T : 6329 2415 |
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