When ignorance isn't bliss: directors' duties in the spotlight again in Singapore

Another significant judgment was handed down in Singapore recently clarifying the scope of directors' duties. On 11 July 2024, the High Court of Singapore gave its decision in favour of the plaintiff, Inter-Pacific Petroleum Pte Ltd (in liquidation), (IPP, or the Company), in a case against its former director, Dr Goh Jin Hian (Goh). The judgment, covering no less than 164 pages, concludes with Justice Aedit Abdullah upholding the Company's claim for USD146 million in compensation for Goh's breaches of duty as a director. In coming to this decision, the Court noted that Goh had failed to take reasonable steps and make the necessary inquiries when various “red flags” about the Company's financial position arose.¹

At the time of writing, it is understood that Goh is appealing the decision.

 

Background

IPP was placed into liquidation by the High Court of Singapore in March 2021 on the application of its judicial managers, who were subsequently appointed as liquidators. The liquidators brought claims against Goh, a director of IPP from June 2011 until his resignation in August 2019, to recover over USD146 million in losses suffered by the Company.

It was claimed that Goh had been “asleep at the wheel” and “failed to take the steps required of him under the law” as a director to apprise himself of IPP's affairs and to monitor the Company appropriately. Specifically, the Court heard that Goh's “nonfeasance” resulted in IPP's cargo trading business being used as a “vehicle of fraud” by other directors and officers at the Company during the time of his directorship. As such, IPP borrowed large sums from various banks on the pretence of financing commercial transactions which were ultimately shams.

The liquidators sought compensation from Goh in respect of the Company's liability to repay the bank loans. In doing so, IPP's case against Goh was two-fold, based on breaches of: (i) his duty of skill, care and diligence; and (ii) his duty to have regard to the interests of IPP's creditors (Creditor Duty).

 

Decision

The Court found that Goh had breached both his director duties and duties to the Company's creditors. Although Goh was not a direct perpetrator of the fraud itself, the Court held that he was still responsible for its “disastrous consequences”.

Justice Abdullah was persuaded by IPP's submissions focusing on:

1. Goh's negligence

It was not disputed that as a director of the Company, Goh owed a duty of care, skill and diligence to IPP. The Company argued that at all material times, Goh was an executive director of IPP. In this role, Goh ought to be held to a higher standard of care than a non-executive director in his obligation to monitor and supervise IPP's affairs. In the alternative, IPP submitted that if Goh was to be categorised as a non-executive director, this “would not absolve him” as such a director would be “subject to the same minimum and non-delegable core duties”.

It was submitted that Goh, in failing to act with the requisite skill and care, did not know of IPP's cargo trading business. This was “such an egregious degree of ignorance (and therefore) a breach of…Goh's duty of care.” IPP also pointed to three “red flags” which should have put Goh on a path of inquiry into IPP's financial position and sham transactions.

Goh, on the other hand, argued that his role at IPP did not entail any involvement in the cargo trading business. Justice Abdullah found that regardless of Goh's actual role, Goh could not “disapply” his liability for negligence on the basis that he claimed the cargo trading business was outside of his remit. As a director of IPP, Goh owed a duty to monitor and supervise all of IPP's business and affairs.

The Court also held that a director, whether executive or non-executive, should be “sufficiently appraised” of the company's business and affairs and it is their responsibility to seek such information. In his reasoning, Justice Abdullah made reference to Vita Health² remarking that “a guard dog that has no understanding of what it is guarding cannot sensibly discharge its function”. Instead, a director has an obligation “to equip himself with sufficient knowledge of what he is to monitor and supervise”. Justice Abdullah went further in noting that Goh's duty as a director to monitor and supervise IPP's affairs was a “default standard”.

Justice Abdullah also held that any reasonable director would have at least made inquiries into the so-called “red flags”.

2. Goh's breach of the Creditor Duty

IPP contended that when the drawdowns under the bank loans were made, the Company was in a “financially parlous state” so as to “engage…Goh's fiduciary duty to take into account the interest of IPP's creditors”. In particular, it was asserted that the Company was balance sheet insolvent by June 2019 and its financial position was worsening with each drawdown. This failure to appreciate the true extent of IPP's financial peril and the failure to prevent the drawdowns “constituted a clear disregard of the interests of IPP's creditors” and a breach of the Creditor Duty by Goh.

In upholding this argument, the Court applied the recent Singapore Court of Appeal's landmark judgment in Foo Kian Beng v OP3 International Pte Ltd³ (Foo Kian Beng). The Foo Kian Beng decision sets out a two-pronged approach for determining whether the Creditor's Duty is engaged, namely: (i) the courts must first objectively examine a company's solvency at the time a transaction was made; and (ii) the courts must subjectively consider whether the director believed he acted in the best interests of the company and creditors in authorising it (see our article linked (here) for more detail on this decision).

When applying these two limbs, Justice Abdullah held that (i) liquidation was inevitable at the time IPP entered into certain transactions in 2019 and as such the Creditor Duty had been “squarely engaged” and was in “full force” at that time; and (ii) it was clear that Goh had breached that duty.

Reference was made to the business judgment rule (i.e. courts should be slow to second-guess bona fide commercial decisions with the benefit of hindsight). Justice Abdullah found that although the courts are inclined to give directors autonomy with regards to the commercial risks that they undertake, they will intervene when a director wilfully or negligently misapprehends their role.

 

Key takeaways

The IPP judgment serves to remind directors that they should remain informed and actively engaged in all aspects of their company's affairs. Passivity is not acceptable and ignorance is certainly not bliss. Regardless of their role as executive, non-executive or nominee directors, the High Court of Singapore has made it clear that directors will all be held to the same minimum standards and have an obligation to take reasonable steps and make enquiries to remain appraised of their company's affairs regardless of whether they have delegated certain functions to management.

This is a warning for all Singapore company directors that they will not be able to simply rely on delegating their functions to management or others within the organisation. A reasonably diligent director should always take steps to monitor the company's management or anyone else to whom any functions have been delegated so as to ensure they are discharging their own duties as a director.

Directors need to be continuously alive to any “red flags” and err on the side of caution by being prudent and making enquiries when such warning signs present themselves. It is also critical for directors to seek appropriate legal and financial advice early on to support them both in terms of navigating financial and operational difficulties and to militate against subsequent claims being brought against them personally.

 

Global perspectives

There has been a spate of similar judgments in other common law jurisdictions over the last twelve months, where directors and former directors of insolvent companies have been held accountable for their roles in the period leading up to the company's liquidation and found personally liable for their actions in dereliction of their duties. The High Court in England has taken a similar approach with respect to former directors of BHS Group Limited (BHS), an erstwhile British retailer and department store. The quantum decision, handed down on 19 August 2024, ordered two of the former directors to pay the insolvent estate up to GBP110 million (equivalent to USD142 million) in equitable compensation for “misfeasance trading”; the first time a court in England and Wales has made such an order of this scale.

This order followed the initial judgment in Re BHS Limited (in liquidation) (2024) EWHC 1417 (Ch) of 11 June 2024, whereby three of the former directors were found to have known or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation for BHS.⁴ The directors continued to trade the business causing an increase in the net deficiency of the group's assets. They were found liable for wrongful and misfeasance trading as they failed to consider the interest of BHS' creditors in taking the decision to trade the business at a time when the company was insolvent or bordering on insolvency. In total, across the various judgments, the total aggregate payable was c. GBP180 million (equivalent to c. USD237 million).

In a similar vein, the Supreme Court in New Zealand handed down a judgment last year ordering the directors of Mainzeal Property and Construction Limited (Mainzeal) to pay NZD39.8 million (plus interest) (equivalent to USD24.8 million) on account of “insolvent trading” in the case of Yan v Mainzeal Property and Construction Limited (in liquidation) (2023) NZSC 113. You can read more about this case in our article, here.

The directors were found to have breached their duties under sections 135 and 136 of the Companies Act 1993. These provisions provide for a duty not to agree to business of the company being carried on, or cause to allow the business of the company to be carried on, in a manner likely to create “a substantial risk” of “serious loss to the company's creditors”; and a duty not to agree to the company incurring an obligation unless the director believes at the time on reasonable grounds that the company will be able to perform the obligation when it is required to do so. The directors of Mainzeal continued to trade the business despite it being balance sheet insolvent and having cash flow issues resulting from a major contract. One director was fully liable, while the other three directors’ liabilities were capped at NZD6 million each (equivalent to USD3.7 million).

The New Zealand government has asked its Law Commission to review the laws on directors' duties in the country with legislation anticipated to be introduced in 2025. This review aims to cover reforms for the duties themselves, director liability and enforcement.

 

Conclusion

It is likely that directors' actions and management decisions taken in the run up to insolvency procedures will continue to be interrogated and claims will come before the courts over the next few years given the challenging macroeconomic environment for many businesses since the pandemic. Liquidators are required to scrutinise directors' actions in the period before a company's formal insolvency in order to determine whether claims should be brought against them personally for any wrongdoing, including non-feasance for breach of their duties or bringing wrongful trading actions. These recent decisions in Singapore, the UK and New Zealand exemplify why actions against delinquent directors ought to be pursued as a pathway to improve recoveries for an insolvent company's creditors. These decisions and the guidance they provide will be welcomed by insolvency professionals, creditors and litigation funders and will no doubt help streamline similar actions being brought (and settlements being reached) in the future for the benefit of creditors of insolvent companies.

Ultimately, liquidators will only bring claims against delinquent directors where there is both merit and funding to do so – any victory against a director for breach of duties or wrongful trading is arguably a pyrrhic one unless it results in actual recoveries by the liquidators for the creditors of the insolvent company. Clearly those directors with the deepest pockets and/or adequately covered by D&O insurance policies make the most attractive targets.

From a director's perspective, these decisions should serve as cautionary reminders of the need to fully understand the scope of their duties (and to whom they are owed) and underscore the importance of seeking appropriate professional advice especially during times of financial stress and distress.

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¹See here.
² Vita Health Laboratories Pte Ltd and others v Pang Seng Meng (2004) 4 SLR(R) 162 at (21)
³ Foo Kian Beng v OP3 International Pte Ltd (in liquidation) (2024) 1 SLR 361
⁴ Re BHS Limited (in liquidation) (2024) EWHC 1417 (Ch) para 983