25 September 2002

Directors' Statutory Duties Under The Companies Act ("the Act")

Section 157 of the Act sets out the statutory duties of directors.  Firstly, directors in discharging their duties, have a statutory duty at all times to (a) act honestly and (b) use reasonable diligence.  Secondly, officers and agents of the company cannot make improper use of any information acquired by virtue of their position to gain, directly or indirectly, (a) an advantage for himself or for any person, or (b) to cause detriment to the company. This is often referred to as a fiduciary duty. A director is an officer of the company.  The extensive application of this statutory fiduciary duty to anyone who is deemed to be an officer or agent of the company has significant implications for the corporate governance responsibilities of those persons.

The statutory duties of a director, officer or agent under section 157 are in addition to, and not in derogation of, any other written law or rule of law relating to the duty or liability of directors or officers of a company. A director’s breach of this statutory duty can be a civil breach rendering the director liable to the company for any profit made by him or for any damage suffered by the company.  The breach can also be a criminal offence.

Directors' Fiduciary Duties Under The Common Law

A director is regarded as a fiduciary both at common law and under the Act. A fiduciary relationship arises when one party (the company) is entitled to expect that the other party (the director) will act in the first party’s interests to the exclusion of the second party’s separate interests. Of all the duties of a director, his fiduciary duty is conceptually the most demanding. It is an all encompassing duty. A director’s duty is not merely to serve the company’s interests. He must avoid placing himself in a position where he prefers his own interests, or the interests of a third party, instead of or to the detriment of the company’s interests. This fiduciary duty is also a statutory duty under section 157(2) of the Act. As the application of the fiduciary duty is very broad, this duty may be recognised under the following rules under the common law :

1. a director has to act bona fide in the interests of the company and not for any collateral purpose. In doing so, the director must make sure he does not in any way benefit from the act of good faith or have any interest whatsoever in the act. Unlike a trustee, a director can exercise his own interest so long as he has obtained the company’s fully informed consent. This consent must be obtained through a full disclosure of all the facts and of the director’s own interests in the transaction.

10. the rule of “no secret profit” is applied so strictly that even if there is no realistic possibility of conflict between the interest of the company and the duty of the director, so long as the director has made a profit which is sufficiently connected with his fiduciary office, an account of the profit is required. In the landmark English case of Regal (Hastings) Ltd v Gulliver, the House of Lords held that the directors of the plaintiff had to account for the profit made as the profit arose in the execution of their fiduciary duties as directors. There was no dispute that the directors were honest and well-intentioned, there was no bad faith. The House of Lords rejected the Court of Appeal’s argument that once the directors came to a bona fide decision that the company could not take up the opportunity, the directors’ obligation to refrain from taking up the opportunity for themselves ceased. Their Lordships recognised that the person in a fiduciary position might be the only person in the world who could not avail himself of the opportunity. This was not true absolutely since all that a director need to do was to obtain the consent of the shareholders to secure his freedom to make the profit for himself. Failing that, the only course open to the director was to let the opportunity pass.

The Singapore Corporate Governance Environment

In Singapore, shareholders have the right to ensure that a company is properly run. This right is enforced via the derivative action. In fact any person whose interests have been, are or would be affected by the conduct or likely conduct of another person in contravention of the Singapore Companies Act (“the Act”) can apply for an injunction. Similarly that same aggrieved person may apply for an injunction to require a person to do an act or thing that he is required to do by the Act.

Directors are also required to have regard to the interests of the company’s employees generally (as well as the interests of its members) in exercising their powers. Singapore’s corporate governance regime does not require that employees be represented on the board or on committees of the board, as is the practice in, for instance, Germany. The powers of a company shall, if these powers would not otherwise do so, be deemed to include the power to provide for employees on cessation of business. The application of these sections of the Act have not been tested in the Singapore courts.

Creditors are not specifically protected under the Act except in so far as the security rights of secured creditors are recognised in situations where a receiver, a judicial manager or a liquidator is appointed. Creditors have some measure of protection in that it is a criminal offence for any officer of the company to knowingly contract a debt when there is no reasonable or probable ground to expect that the company can pay the debt. Any creditor may apply to the Court for a declaration that any person who knowingly carries on the business of the company with intent to defraud creditors shall be personally responsible for all of the debts and liabilities of the company. An important deterrent for directors is section 406 of the Act which makes it a criminal offence to induce creditors to give credit to the company by deceitful, fraudulent or dishonest means; and to defraud creditors by effectively removing the property of the company beyond the reach of creditors.

Are Directors' Duties Owed To The Company Or To The Shareholders?

Directors must exercise the powers vested in them collectively as a board and not individually. The directors are duty-bound to remain impartial as between groups of shareholders in the company. The SGX Listing Manual recognises this principle when its rules require that an independent financial adviser be retained to advise minority shareholders on a material interested person transaction. The directors’ duty is owed to the body of shareholders as a whole. However, in the governing and management of the company, the classic view, decided in 1902 in Percival v Wright, is that fiduciary duties of the directors are owed to the company only.

This view is increasingly challenged in cases in Australia, New Zealand and England starting with Coleman v Myers, Peskin v Anderson, Glandon Pty Ltd v Strata Consolidated Pty Ltd, and the more recent well-known case of Glavanics v Brunninghausen. The Court of Appeal in Brunninghausen v Glavanics held that although a director’s fiduciary duties are owed to the company and not to the shareholders, where a particular transaction does not concern the company but only another shareholder, this should not preclude the recognition of a fiduciary duty to the shareholders in circumstances where this duty would not compete with the fiduciary duty to the company. This paper will not go further into this developing area of the law.

To summarise, factors that may give rise to a director’s fiduciary duty to shareholders include : (a) the existence of a relationship of confidence as in Coleman v Myers, this is likely to apply to Singapore companies where a liability may arise through a family relationship; (b) limited number of shareholders; (c) dependence on the directors for full and relevant information; (d) where directors mislead the shareholders; and (e) positive action on the part of directors to persuade or induce the shareholders to a course of action. In the Singapore case of Tai Kim San & Anor v Lim Cher Kia, the High Court considered the line of cases enumerated above, and held that on the facts, the director did not owe a fiduciary duty to the particular shareholders in a transaction where the managing director purchased the shares of two shareholders

This is not the full article.

The contents on the Site are copyrighted. Any unauthorized use of any materials on the Site will violate copyright, trademark and other laws. Materials on the Site may not be modified, reproduced or publicly displayed, performed or distributed or used for any public or commercial purposes.

Information is not advice. The information provided in this paper should not be acted upon without professional advice. As this is an Executive Summary, important conditions and other details may be or are omitted. We accept no liability for persons who act on this publication without consulting us or their professional advisers.