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SINGAPOREMANAGEMENTUNIVERSITY

COMPANYLAWLGST201

Handout5DirectorsDuties

Reading
Yeo,Chapters11&12
Woon,Chapter8;
Koh,Chapter4

1. General

o Directors stand in a very important position visvis the company. As we saw last
week,themanagementofthecompanyisusuallyentrustedtothedirectorswhoare
vested with almost exclusive powers to manage the company. The opportunity for
the abuse of these powers is therefore significant. Accordingly, the law has to
impose duties on directors. The main source of duties imposed on the director in
Singapore is the Companies Act. However, the Act expressly preserves duties that
are imposed by the common law on directors. As such, directors duties are an
amalgamofbothstatutoryandgenerallaw.

o Students should be aware that the duty of directors (including civil liability and
criminal sanction, etc.) is only one mechanism to control directors behaviours and
topreventtheirabuseofpower.Tohavealookatthebigpicture,thinkabout:
Whatisthepurposeofimposingliabilityonadirector?
Canyouthinkofotherwaystocontroladirectorspowerandconduct,ifyou
areashareholder?

o Althoughitisveryimportanttosafeguardthecompanyagainsttheabuseofpower
by its directors, the student should nevertheless remember that directors are very
often also businessmen who are valued for their expertise in identifying good
business opportunities. In practice, this fact gives rise to a very real tension in
defining the boundaries of directors duties. On the one hand, the law disapproves
ofthedirectorsabuseofpower; thismay occur,forinstance, when headvantages
himself at the expense of the company by exploiting a business opportunity which
the company is interested in for his own benefit. On the other hand, too strict a
restriction on the directors duties will have a chilling effect on the entrepreneurial
initiatives of businessmen. The student should therefore be mindful that the law is
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constantlystrugglingtoresolvethistension,asdemonstratedbysomeofthehard
caseswhichwewilldiscussinthisandthefollowingseminar.

2. DirectorsDutiesAnOverview

(a) Apart from contractual duties between a director and the company, you will note
fromFig5.1thatdirectorsdutiesmayarisefrom:(1)commonorgenerallaw;and(2)
theCompaniesAct(statutory).

(b) It is important to note that the content of these two sources of law overlap. Thus,
for example, the directors obligation to act honestly under CA s 157(1) is
interpretedtoincludeallhisfiduciaryobligationsatcommonlaw(e.g.dutytoavoid
conflict); and his duty to act with diligence under CA s 157(1) is equated with his
obligation to act with care, skill and diligence at common law. See Lim Weng Kee v
PublicProsecutor[2002]2SLR(R)848;[2002]4SLR327,[2002]SGHC193(perYong
Pung How CJ). Thus, if a director places himself in a position of conflict without
common
law
statutory contractual
bona fide in cos
interests
to act
within powers
avoidance of
conflict
non-fetter of
discretion
care skill & diligence
no-profit rule
for proper
purposes
loyalty
(fiduciary)
not ultra
vires
honesty & diligence
s 157(1)
disclosure ss 156,
165
no improper use
of info s 157(2)
administrative
Fig 5.1
Directors Duties
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obtaining the companys consent, he will be in breach of his fiduciary duty at
commonlawandCAs157(1)aswell.

(c) Further, his statutory duties not to make improper use of information under CA s
157(2), and his duty to disclose conflicting interests under CA s 156, are in fact
specific applications of his common law duty to avoid conflicts, and not to profit
fromhispositionasdirector.

(d) Towhomdoesadirectorowetheseduties?

Considerthefollowingquestion:

ShareholderA,whotogetherowned20%oftheissuedsharesinCoX,wishedto
selltheirstakeinCoX.BandC,directorsofCoX,offeredtobuytheirsharesat
$3.00 per share (ie 5% above the book value of the shares). This offer was
acceptedbyShareholderA.Subsequently,ShareholderAdiscoveredthatBand
C had (at the time of their negotiation) received third party offers for Co Xs
shares at $4.00 per share. Advise Shareholder A if they can now sue B & C for
breachofdirectorsduties.
PercivalvWright[1902]Ch421(Sealy&Worthington,277278)

On occasion, the court may find, on the facts, an assumption of an advisory

position by the director(s) visvis the shareholders. In such a situation,
obligations to disclose and to act honestly may be imposed on the directors in
connection with their dealings with the shareholders. For example, this may
happen when a director is acting as an agent on behalf of a shareholder (e.g.
Allen v Hyatt (1914) 30 TLR 444), where directors have assumed a fiduciary
obligationtowardsshareholders(e.g.ColemanvMyers[1977]2NZLR225(Sealy
& Worthington, 278 279). Whether such a relationship arises depends on all
thesurroundingcircumstancesandthenatureoftheresponsibilityassumedby
thedirector.

What about creditors? Under what circumstances should obligations, if any, be

owedtocreditorsofthecompany?

3. DutiesatCommonLaw

(a) The director is said to stand in a fiduciary position visvis the company. This
meansthatthedirectorwouldbesubjecttofiduciaryduties.Verybroadly,theseare
dutiesthatexactahighstandardofloyaltyfromthedirector.Centraltotheideaof
fiduciaryobligationsisselfdenial,i.e.adirectormustplacethecompanysinterests
abovehisown. Notallduties owed by a directorarefiduciaryinnature.However,
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classificationofdutiesisacontroversialexercise.Assuch,wewillconsiderthemain
dutiesimposedonadirectorunderthisgeneralheading.

(b) Whoisafiduciary?

A fiduciary is someone who has undertaken to act for and on behalf of another in a
particularmatterincircumstanceswhichgiverisetoarelationshipoftrustandconfidence.
The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is
entitledtothesinglemindedloyaltyofhisfiduciary.Thecoreliabilityhasseveralfacets.A
fiduciary must act in good faith; he must not make a profit out of his trust; he must not
placehimself inapositionwherehis duty and hisinterest may conflict; hemay notact for
his own benefit or the benefit of a third person without the informed consent of his
principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the
natureoffiduciaryobligations.Theyarethedefiningcharacteristicsofthefiduciary.~Law
Commission Consultation Paper on Company Directors (Eng & Scot); See also Bristol and
WestBuildingSocietyvMothew[1998]Ch1,16(perMilletLJ)

In the decision of SM Trading Services v Intersanctuary Ltd [2006] 3SLR(R) 397;

[2006]SGHC102,PrakashJfoundafiduciaryrelationshiptoexistbetweenoneK
and the defendant company even though K did not hold any formal position in
the company. The court, however, found that K had an interest in the
defendants business and was actively involved the affairs of the company. It
appearedthatKwouldalsoadvisethedirectorsofthecompany,whowouldrely
onKsadvice.Query:wouldKbeadefactoorshadowdirectorthen?

(c) Dutytoactinthecompanysinterests

[Directors] must exercise their discretion bona fide in what they consider not what the
courtmayconsiderisintheinterestsofthecompany,andnotforanycollateralpurpose.
perLordGreenMR,ReSmithandFawcettLtd[1942]Ch304.

This duty of good faith has often been referred to as the primary obligation
owedbyadirectortohiscompany.

Issues:

~ Whatarethecompanysinterests?
Often, the collective interests of the shareholders of the company may be
equated with the interests of the company. What happens then if the
shareholdersinterseareaffecteddifferently,asindifferentclassesofshares?

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~ Wesawintheintroductoryseminarthattherearevariousstakeholdersin
a company. Can the directors consider the interests of these groups of
stakeholders?

(i) EmployeesseeCAs159(a)

(ii) Creditors

InTongTienSeeConstructionPteLtdvTongTienSee[2001]3SLR(R)
887, Tay Yong Kwang JC made the following observations at
paragraph[54]:

Whenacompanyissolvent,itsinterestsandthoseofitsshareholdersare
one.Inthiscase,therewouldnotevenbedivergenceofinterestsbetween
thecompanyanditsshareholders...Butwhenacompanyisinsolvent,the
interests of its creditors become the dominant factor in what constitutes
the benefit of the company as a whole (West Mercia Safetywear v Dodd
[1988]BCLC250).

Doesthismeanthatdirectorsoweadutytocreditorswhenthe
company is insolvent? Consider the opinion of VK Rajah JA in
Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd
[2010]4SLR1089,at[52]:

[T]he rationale for such a duty is that, when a company is insolvent, the
creditors interests come to the fore as the company is effectively trading
andrunningthecompanysbusinesswiththecreditorsmoney.Becauseof
the limited liability principle, the risks (of trading when the company is
insolvent) on shareholders would be minimal as they would at worst lose
only what they have already invested in the company in their capacity as
shareholders. Unsecured or partially secured creditors on the other hand
mayneverrecoveranymoniesduetothem.Unlikeshareholderswhohave
the most to gain from risky ventures, unsecured creditors, in particular,
haveeverythingtolosewhenillegitimaterisksaretaken.Assuch,itisonly
right that directors ought to be accountable to creditors for the decisions
theymakewhenthecompanyis,orperilouslyclosetobeing,insolvent.We
add,parenthetically,thatthisfiduciarydutyisstrictlyspeakingowedtothe
company; there is no duty owed directly to creditors. In other words,
individual creditors cannot, without the assistance of liquidators, directly
recoverfromthedirectorsforsuchbreachesofduty.

(iii) GroupInterests

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Are directors of agroup company allowed to make a decision that is
in the interests of the group but which compromises the interest of
the company? Consider Intraco Ltd v MultiPak Singapore Pte Ltd
[1995]1SLR313,andWalkervWimborne(1975)137CLR1.

Considerthefollowingproblems:

P, Q, R & S are the directors of Co Zee Pte Ltd. R and S are also the
directorsofCoQuee Pte Ltd, the holdingcompanyofCoZee. Discuss if
the board of Co Zee has in any way failed in their duties as directors by
approvingthefollowingboardresolutions:
o (a)Toincreasethesalariesofallemployeesbyapercentagematching
the average rate of inflation (as determined by the government) for
eachfinancialyear.
o (b) To make a $2m donation to Green World Society, a nonprofit
organisation that is committed to educating the public on
environmentalconservation.
o (c)TochargesomeassetsofCoZee infavourof BankTeeinrespect
ofaloandueandowingfromCoQueetoBankTee.
o (d) Assume that Co Zee is currently experiencing severe cashflow
problems.Nonetheless,theboardauthorisedthecompanytoplacea
bulkorderforrawmaterialstoexpanditsproductionoutput.

Howshouldthecourtdecidewhetheradirectorhasactedintheinterests
of the company? Should the test be subjective or objective? Compare
thefollowingtwostatements:

[Directors] must exercise theirdiscretion bona fide in what they consider

notwhatthecourtmayconsiderisintheinterestsofthecompany,andnot
for any collateral purpose. Per Lord Green MR, Re Smith and Fawcett Ltd
[1942]Ch304.

Bona fides cannot be the sole test, otherwise you may have a lunatic
conductingtheaffairsofthecompany,andpayingawayits moneywithboth
handsina mannerperfectlybonafideyetperfectlyirrational. Thetestmust
be what is reasonably incidental to, and within the reasonable scope of
carrying on the business of the company per Bowen LJ in Hutton v West
CorkRlyCo(1883).

Goodfaithandhonesty
o Ishonestyalonesufficient?
o Canadirectorfailinhisdutyevenwhenhehasactedingoodfaithin
thecompanysinterests?

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(d) DutytoActforProperPurposes
~ A director must exercise his powers for the purpose for which such power
was conferred; see Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
(Sealy,306).

~ This means that even if he honestly believes that he is entering into a

transactionthatisintheinterestsofthecompany,hemaystillbeinbreach
of his duty to the company if the purpose of the transaction is outside the
purposeforwhichthepowerwasconferredonhim.

~ In Howard Smith Ltd v Ampol Petroleum Ltd, did the directors act honestly?
Wouldtheirconducthavesatisfiedthedutyofgoodfaith?

~ Howdoesthecourtdecideifthedirectorshadactedforaproperpurpose?

In their Lordships' opinion it is necessary to (1) start with a consideration of the

power whose exercise is in question, in this case a power to issue shares. Having
ascertained,onafairview,thenatureofthispower,andhavingdefinedascanbest
be done in the light of modern conditions the, or some, limits within which it may
be exercised, (2) it is then necessary for the court, if a particular exercise of it is
challenged, to examine the substantial purpose for which it was exercised, and to
reach a conclusion whether that purpose was proper or not. (3) In doing so it will
necessarily give credit to the bona fide opinion of the directors, if such is found to
exist, and will respect their judgment as to matters of management; having done
this,theultimateconclusionhastobeastothesideofafairlybroadlineonwhich
thecasefalls.":perLordWilberforce(emphasisadded).

Thus, under this test, there is more room for judicial intervention because
notdependentwhollyondirectorssubjectiveview.

Note: most of the cases involving allegations of improper purpose concern

theissueofsharesbydirectors.InSingapore,thisislargelyanonissuesince
issueofsharesgenerallyrequiresthepriorapprovalofshareholdersasinCA
s161.

~ Canadirectorsfailuretoactforaproperpurposeberatified(pardoned)by
shareholders?SeeHoggvCramphorn[1967]Ch254(Sealy,303).

~ Whathappensifadirectorhasactedformixedpurpose?

(e) ConflictingInterests&Duties

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~ Itisafundamentalprincipleofequitythatapersoninafiduciaryposition
is not allowed to put himself in a position where his interest and duty
conflictperLordHerschell,BrayvFord[1896]A.C.44.

~ Theruleswhichfallwithinthiscategorymayfurtherbesubdividedintotwo
broadcategories:(1)toavoidconflicts;and(2)nottoprofitfromtheuseof
companyspropertyorhispositionasadirector.

~ A prominent characteristic of these rules is that they are strict, i.e. their
application does not depend on the directors state of mind, and he may
infringetheruleevenifhehasactedinperfectgoodfaith.

~ Thefollowingaresituationsinwhichsuchaconflictmayarise:

(i) TransactingwiththeCompany(orcalledselfdealinginsomecountries)

o When a director transacts with a company, he has to disclose his

interestsinthetransaction.

o What is the effect of nondisclosure on the transaction? Recall the

differencesbetweenvoidandvoidablefromBusinessLaw.

o Is it possible for the company to ratify such a transaction? North

West Transportation Co Ltd v Beatty (1887) 12 App Cas 589 (Sealy,
272)

o Can a director vote in a resolution to ratify a contract in which he is

interested?

(ii) Note the obligation to disclose interests in contract is reinforced by

statutesunderCAss156(attached)and169(1).

o When reading CA s 156, you should take care to differentiate

betweenthesituationsreferredtoins156(1)ands156(5).Canyou
identifythedifferences?

o UnderCAs156(9),whatistheconsequenceofafailuretodisclose?

o Does it mean that a director who has made a disclosure under CA s

156willdefinitelynotbeliabletothecompanyforbreachofduty?

(iii) ConflictingDuties

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o Isthereanylegalprohibitionofmultipledirectorships?

o NotethedutytodiscloseunderCAs156(5).

o ThespecialproblemwithNomineeDirectors

Is a nominee director permitted to act in the interests of his

nominator? See Scottish Cooperative Wholesale Society v Meyer
[1959]AC324.

Considerthefollowingexcerpt:

We agree it is settled law that every director owes the same

responsibility to the company as a whole. It is no different
where a director is the nominee of a group of shareholders or
creditors. He should not regard himself as a watchdog for
those who put him on the board. A nominee director should
exercise his judgment in the best interest of the company and
should notbe bound to act in accordance with the direction or
instructionofhisappointor.However,thedutyisasubjective
one and it is fulfilled provided it is exercised bona fide in the
interestofthecompanyandnotforanycollateralpurpose.But
that is not to say that a nominee director must act against the
interest of his appointor. A nominee director may take into
account the interest of his appointor if such interest does not
conflictwiththeinterestofthecompany".PerChaoHickTinJA
inOverseaChineseBankingCorpLtdvJustloginPteLtd[2004]2
SLR(R)675,[2004]SGCA20,at[31].

Do you think this is a realistic rule? Note that the predicament

whichthenomineedirectorfacesismarginallyattenuatedbythe
introduction of CA s 158 (attached). This is a relatively new
provision which essentially allows nominee directors to disclose,
subject to the satisfaction of the conditions in CA s 158(3),
informationobtainedinhiscapacityasdirectortohisnominator.

(f) NoProfitrule&UseofCorporateOpportunityandInformation

o Thisruleoverlapssubstantiallywiththedutytoavoidconflictofinterests.In
reality, directors are often disloyal because they place themselves in a
position of interest with a view to profit from that position. When that
happens,theyareclearlyinbreachofthenoconflictrule,aswellastheno
profitrule.

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o However, there are some exceptional situations where the directors are
penalized for making a profit from his position as a director, even though
theredoesnotseemtobeaconflictwiththecompanysinterests.Thecases
ofIDCvCooley(Woon,para8.60)andRegalHastingsvGulliver(Woon,paras
8.64and9.54)areclassicexamples.Directorsbonafidesisirrelevantinthis
regard.

o Obviously,ifadirectormakesaprofitbyusingthecompanysproperty,that
isaplainlydisloyalact,andheshouldbeliableforbreachofduty.However,
sometimes it is difficult to know precisely what property means.
Confidential information may be a type of property. But what about
business opportunities? You should consider these questions as you read
casessuchasCookvDeeksandRegal(Hastings)LtdvGulliver[1942]1AllER
378(Sealy&Worthington,316317):

Whatisthenatureofthepropertythatisusedbythedirector?

Doesliabilitydependonwhetherthedirectorhasacteddishonestlyorin
badfaith?

Canthedirectorsbreachofdutyberatifiedbyshareholders?

Is a director exonerated from liability by the fact that the opportunity

wasonewhichthecompanycouldnothaveutilized?SeeRegal(Hastings)
LtdvGulliver(above)andHytechBuildersPteLtdvTanEngLeong[1995]
1SLR(R)576.

o Thenoprofitrulemayextendtoformerdirectors,seeCanadianAeroService
Ltd v OMalley (1973) 40 DLR (3d) 371. Compare, however, the decision in
PesoSilverMinesLtdvCropper(1966)58DLR(2d)1.

o Again, there are statutory reinforcements as regards the use of corporate

information,seeCAss157(2)and158(attached).

CA s 157(2) what is the scope of this restriction? What are the

consequencesofabreachofthisobligation?

CAs158CA(discussedabove)

o Apartfromthedutynottomisusethecompanysinformation,thecompany
might also use contracts to impose a duty not to disclose or use the
companys information while a person is the companys director or after he
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retiresfromhisoffice.Thisiscommonlyseenasaconfidentialityagreement
oraconfidentialityclauseinaserviceoremploymentcontract.

o Practice:

Considerthefollowingscenarios:

1. XCoPteLtdwasinterestedinleasingafactoryfromWCoPteLtd.Thedirectors
ofXCoincorporatedacompany,YCo PteLtd,forthispurpose.WCohowever
insisted that the directors either give a personal guarantee or that the paidup
capital of Y Co be at least $100,000. The existing resources of X Co did not
permitittocommitmorethan$60,000tothesharecapitalofYCo.Assuch,the
directors agreed to subscribe for the remaining $40,000 amongst them.
Subsequently,allthesharesinXCoandinYCoweresoldtoZCoPteLtd,asa
result of which the directors made a profit of $2 per share. Under a new
management,XConowwantstosuethedirectorsforbreachoftheirduty.

2. JandKarebrothersandshareholdersinJKPteLtd,acompanyoperatingshops
and leasing commercial property. Following a breakdown in relations between
thetwobrothers,itwas mutuallydecidedthatnofurtherpropertiesshouldbe
purchased by the company. One weekend, after going to the movies with his
son,Jcameacrossaplotoflandsituatedadjacenttoasupermarketownedand
operated by the company. He contacted the landlord and was successful in
purchasing the land. Can JK Pte Ltd claim against J for breach of directors
duties?

3. ACoPteLtdisinbusinessasbuildingcontractorsanddevelopmentconsultants.
The articles of association of the company provide that the business of the
companyshallbemanagedbythedirectors.

(a)Tan,aqualifiedarchitect,isadirectorofACoPteLtd.Tanhasbeeninvolved,on
behalf of A Co, in the negotiations with B Co Pte Ltd in respect of a proposed
contract to design and build a shopping complex for B Co. In the course of the
negotiations, it became clear that B Co will not grant the contract to A Co
because of some disagreement over certain fundamental terms. B Co, highly
impressed with Tans personal credentials and ability, invites Tan to design for
themandoverseethebuildingoftheshoppingcomplex.Tan,withoutdisclosing
thistoACo,resignsandacceptstheoffer.

(b) Assume that B Co decides to offer the contract to A Co. However, A Co has, in
the meantime, secured other major contracts. The board of A Co, after due
consideration of all the companys existing obligations, decides that the
companydoesnothavetheresourcestoacceptBCosofferandcommunicates
this to B Co. B Co then offers the contract to Tan, who, without disclosing his
intentions, resigns from A Co and sets up his own company to accept the B Co
contract.

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Should it make any difference if Tan was a nonexecutive director who was not
involvedinnegotiations?

(g) EffectofBreachofFiduciaryDutiesonCorporateTransactions

i. Companytransactionswithdirector
ii. Companytransactionswiththirdparties

(h) DutyofCare,Skill&Diligence

o Like any other professional, a director has to exercise reasonable care skill
anddiligencewhenmanaging theaffairsofthecompany. Your shouldnote
that this is a common law duty, it is not a fiduciary duty. Why is the
distinction important? First, carelessness and disloyalty are too distinct
concepts. A director may have conducted the companys affairs very
carelessly or negligently, but he may not have been disloyal. Secondly, a
breach of fiduciary (loyalty) duty results in more severe consequences. For
example,thecompanywouldbeentitledtoclaimanaccountofprofitsfora
breachofdirectorsduties,butthisremedyisnotavailableforbreachofthe
dutyofcare.Inthelattercase,themoreusualremedyisdamagesforloss.

o How do we decide whether the director has exercised the appropriate

degreeofcareandskill?

(i) Traditional approach: Re City Equitable Fire Insurance Co [1925] Ch 407

(Sealy&Worthington,301303):

Indischargingthoseduties,adirector(a)mustacthonestly,and(b)must
exercise such degree of skill and diligence as would amount to the
reasonablecarewhichanordinarymanmightbeexpectedtotake,inthe
circumstances, on his own behalf. But, (c) he need not exhibit in the
performance of his duties a greater degree of skill than may reasonably
be expected from a person of his knowledge and experience; in other
words,heisnotliableformereerrorsofjudgment;(d)heisnotboundto
givecontinuousattentiontotheaffairsofhiscompany;hisdutiesareof
anintermittentnaturetobeperformedatperiodicalboardmeetings,and
at meetingsofany committee towhichheisappointed,andthoughnot
bound to attend all such meetings he ought to attend them when
reasonably able to do so; and (e) in respect of all duties which, having
regard to the exigencies of business and the articles of association, may
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properlybelefttosomeotherofficial,heis,intheabsenceofgroundsfor
suspicion,justifiedintrustingthatofficialtoperformsuchdutieshonestly.

Isthisanobjectiveorsubjectiveapproach?
Does it make allowances for the personal experience and level of
knowledgeoftheparticulardirector?
Whatistheproblemwiththisapproach?

o Modern approach in Singapore: Lim Weng Kee v PP [2002] 2 SLR(R) 848,

[2002]4SLR327(Youarestronglyencouragedtoreadthiscase.)

Considerthefollowingexcerpt:

The civil standard of care and diligence expected of a director was

objective, namely, whether he had exercised the same degree of care
and diligence as a reasonable director found in his position. This
standard was not fixed but a continuum depending on various factors
suchastheindividual'sroleinthecompany,thetypeofdecisionbeing
made, the size and the business of the company. However, unlike the
traditional approach, this standard would not be lowered to
accommodate any inadequacies in the individual's knowledge or
experience. The standard would however be raised if he held himself
out to possess or in fact possessed some special knowledge or
experienceAt[28].

HowisthistestdifferentfromoneinReCityEquitableFireInsuranceCo
(above)?

How is the directors personal knowledge or experience relevant under

thisapproach?

In Lim Weng Kee, Mr Lim was held to be guilty under section 157(3)
because he ran the business for 20 years qualified as "special
experience" and would raise the expected standard. That he was in
control of the pawnshops and voluntarily authorised the release of the
items, despite knowing that the cheque had not been cleared, was
something no reasonable director in his position would have done (At
[40]).

o Obviously,adirectorisnotexpectedtodoalltheworkbyhimself.Infact,in
medium to large companies, the actual execution of daytoday work is
carried on by employees, while directors focus on making managerial and
policydecisions.ThedirectorsrighttodelegatewasdiscussedbyVKRajahJC
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inVitaHealthLaboratoriesPteLtdvPangSengMeng[2004]4SLR(R)162at
paras2021:
It would be wholly impractical to expect directors to be omniscient or to
personallydischargeallcorporatepowersandfunctions.Thelargerthebusiness,
the greater the commercial need for delegation. The more specialised functions
are, the greater the need for independent operations and powers. Legal
pragmatismimbuedwithlatitudetowardsbusinessefficacyiscrucialinassessing
adirectorsdelegationofduties.Admittedly,hemustreasonablybelievethathis
subordinates willcompetently dischargetheirdutiesinthecompanys interests.
Other than that it is fair to say that there is no acid test that will provide a
definitiveanswer.Itcanhoweverbesafelyassumedthat
Ithasbeensaidthatdelegationmaybeimproperonlyifthesituationisofsuch
a character, so plain, so manifest and so simple of appreciation that no one
would rely on the subordinates (cf RomerJ in In re City Equitable Fire Insurance
Company, Limited [1925] Ch 407 at 428, quoting from Overend & Gurney
Company v Gibb (1872) LR5HL 480 at 486487). This historical view, set in the
context of a wholly different era of commerce, is no longer apposite. A director
cannot now be viewed as a mere sentinel who may occasionally doze off at his
post. Directors are officers who must remain alert and watchful at the helm.
Directors ought to have an inquiring, though not necessarily suspicious, mind in
dischargingtheirsupervisoryfunctions.TheEnglishCourtofAppealinReBarings
plc (No5) [2001] 1 BCLC 523 at [36], approved (per MorittLJ) the instructive
summary of principles by ParkerJ at first instance (see ReBarings plc [1999] 1
BCLC433at489):
(i)Directorshave,bothcollectivelyandindividually,acontinuingdutytoacquire
and maintain a sufficient knowledge and understanding of the companys
businesstoenablethemproperlytodischargetheirdutiesasdirectors.
(ii) Whilst directors are entitled (subject to the articles of association of the
company) to delegate particular functions to those below them in management
chain, and to trust their competence and integrity to a reasonable extent, the
exerciseofthepowerofdelegationdoesnotabsolveadirectorfromthedutyto
supervisethedischargeofthedelegatedfunctions.
(iii)Noruleofuniversalapplicationcanbeformulatedastothedutyreferredto
in (ii) above. The extent of the duty, and the question whether it has been
discharged, must depend on the facts of each particular case, including the
directorsroleinthemanagementofthecompany.

o Thus, a director is not expected to be an expert in all aspects of the

companys business and operations. He is entitled to rely on the advice of
otherprofessionals.ThisrightisnowexpresslyrecognizedinCAs157C.This
provisionisrelativelynew.Inessence,itsetsouttheconditionsunderwhich
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a director may place reasonable reliance on the companys employees,
professional advisors, and other directors with specialised expertise.
Generally,however,adirectormayonlyclaimtheprotectionofCAs157Cif
hehasactedreasonablyandingoodfaith.

o Anotherprinciplewhichoughttobeborneinmindisthatthecourtsdonot
like to secondguess directors business decisions. This is known as the
business judgment rule. In Vita health Laboratories Pte Ltd v Pang Seng
Meng[2004]4SLR162,VKRajahJCexplained(atpara17)thereasonforthis
rule:

Itistheroleofthemarketplaceandnotthefunctionofthecourttopunishand
censuredirectorswhohave ingood faith,madeincorrectcommercial decisions.
Directorsshouldnotbecoercedintoexercisingdefensivecommercialjudgment,
motivated largely by anxiety over legal accountability and consequences. Bona
fide entrepreneurs and honest commercial men should not fear that business
failureentailslegalliability.Acompanyprovidesavehicleforlimitedliabilityand
facilitates the assumption and distribution of commercial risk. Undue legal
interference will dampen, if not stifle, the appetite for commercial risk and
entrepreneurship.

Whatistherolethatthemarketplacecanplaytodeterminethequality
of a business decision of the board of directors? What are relevant
markets?

What do you think the preconditions of making a sound business

decisionare?

o Thus, in determining whether a director has exercised sufficient care, the

court does not look at the merits of his decision. Rather, it looks at the
process of decisionmaking, i.e. he has he taken the steps that a reasonable
businessmanwouldtakeinmakingthisdecision?

o Students should be aware that the business judgment rule is a broad

conceptthatmaytakedifferentformsindifferentcountries.Forexample,in
the US, the courts presume that directors exercise due care unless other
certainconditionsaremet(e.g.withconflictofinterestorinbadfaith).Ifthe
presumptionisrebutted,thedirectorthenhastoprovethatthetransaction
is fair in order to avoid liability. Do you think Singapore should introduce a
similarpresumptiononabusinessdecision?

5. StatutoryDuties

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(a) CAs157

o CAs157(1)readsasfollows:

Adirectorshallatalltimesacthonestlyandusereasonablediligenceinthedischargeofthe
dutiesofhisoffice.

o Aswehavementionedintheintroductiontothisseminar,thisshortstatementis
oftenunderstoodtoencapsulateallthedirectorscommonlawduties.Thus,the
dutytoacthonestlywillincludethecommonlawdutyofgoodfaith,theduty
to act for proper purposes, as well as the noconflict and the noprofit rules.
Similarly, the duty to use reasonable diligence is equated with the common
law duty of care. Thus, in Lim Weng Kee v PP, the defendant, who has failed to
exerciseduecare,wasalsoguiltyofanoffenceunderCAs157(1).

o Because s 157(1) CA is so tersely worded, however, it does not provide much

guidanceastothecontentofthedirectorsduties.Thus,inpractice,wealmost
always look first to the case law to understand what the law expects from
directors.

o Youshouldnotethats157(3)expresslysetsouttheconsequencesofabreachof
directorsdutiesunders157(1)and(2).Thesewillincludebothcivilandcriminal
liability.Shouldthetestbedifferentinbothcivilandcriminalcasesforabreach
ofs157?

o CAs157(2)reads:

An officer or agent of a company shall not make improper use of any information
acquiredbyvirtueofhispositionasanofficeroragentofthecompanytogain,directly
orindirectly,anadvantageforhimselforforanyotherpersonortocausedetrimentto
thecompany.

~ As observed above, this section overlaps substantially with the common law
prohibition against the use of the companys information and property for the
directorsprofit.

~ The Companies (Amendment) Bill 2013 proposes to change slightly the

wordings of s 157(2) to An officer or agent of a company shall not make
improper use of his position as an officer or agent of the company or any
information
1

1
Companies (Amendment) Bill 2013 s 91.
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(b) PreparetrueandfairaccountsCAs201

o The obligation to prepare accounts is placed largely on the directors. Currently,

the law requires that directors ensure that accounts are (where appropriate)
audited,complywithAccountingStandards,andaretrueandfair.Fore.g.CA
s201(3)states:

Subjectto subsections (14) to (14C), the directors of every company shall cause to be
made out, and to be laid before the company at its annual general meeting with the
profit and loss account required by subsection (1) a balancesheet as at the date to
which theprofitandlossaccountismadeup being a balancesheetthat complies with
the requirements of the Accounting Standards, and gives a true and fair view of the
stateofaffairsofthecompanyasattheendoftheperiodtowhichitrelates.

o Adirectorwhodoesnottakesufficientstepstoensurethattheaccountscomply
withtherequirementsoftheCompaniesActwillcommitanoffenceunderCAs
204.

6. Release&Indemnity

(a) Insuranceandindemnity:

A question relevant to the duties of directors is whether a director can ask

the company to buy liability insurance or provide indemnity to compensate
anyfutureliabilityforhisbreachofduties.

How far do you think such insurance or indemnity might compromise the
effectofadirectorsdutiesundercommonlawandtheCompaniesAct?

(b) CAs172reads:

(1)Any provision, whether in the articles or in any contract with a company or

otherwise, for exempting any officer or auditor of the company from, or
indemnifying himagainst,anyliability whichby lawwould otherwise attachto him
inrespectofanynegligence,default,breachofdutyorbreachoftrustofwhichhe
maybeguiltyinrelationtothecompany,shallbevoid.
(2)Thissectionshallnotpreventacompany
(a) from purchasing and maintaining for any such officer insurance against any
liabilityreferredtoinsubsection(1);or
(b) fromindemnifyingsuchofficerorauditoragainstanyliabilityincurredbyhim
(i) indefendinganyproceedings (whethercivil orcriminal) inwhich judgment
isgiveninhisfavourorinwhichheisacquitted;or
(ii) in connection with any application, under section 76A (13) or 391 or any
otherprovisionofthisAct,inwhichreliefisgrantedtohimbythecourt.
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o Whatdoyouunderstandbys172(1)?Ingeneral,isthecompanyallowedto
indemnifythedirectoragainsttheconsequencesofhisownbreachofduties?

o Whattypeofinsurancesisthecompanyallowedtobuyforthedirector?

o NewdevelopmentintheCompanies(Amendment)Bill2013:
In the future, a provision to exempt or indemnify a director from his
liability to the company will still be rendered void in new s 172. The
prohibition will also be extended to an officer. However, it will be fine
foracompanytopurchaseliabilityinsuranceforadirectororoffice(asin
new s 172A). A thirdparty indemnity will also be allowed under certain
conditions(seenews172B).
2

Anews208Awillbeinsertedtorenderaprovisionorcontractexempting
orindemnifyinganauditortobevoid.

(c) Courtspowertoreleasedirectorsfromliability

CAs391reads:

(1) If in any proceedings for negligence, default, breach of duty or breach of trust
against a persontowhom thissectionapplies itappears tothecourtbeforewhich
theproceedingsaretakenthatheisormaybeliableinrespectthereofbutthathe
hasactedhonestlyandreasonablyandthat,havingregardtoallthecircumstances
of the case including those connected with his appointment, he ought fairly to be
excused for the negligence, default or breach the court may relieve him either
whollyorpartlyfromhisliabilityonsuchtermsasthecourtthinksfit.

o Whataretheconditionsthathavetobemetbeforeadirectorcouldapplyto
thecourtforreliefunderCAs391(1)?

o Notethatsection391(1A)hasrecentlybeeninsertedtoreversethedecision
in Hytech Builders Pte Ltd v Tan Eng Leong, see CLRFC Final Report,
Recommendation3.13.

2
Companies (Amendment) Bill 2013 s 104.