DIRECTORS DUTIES AND

LIABILITIES
1. INTRODUCTION

The duties of directors are defined both at general law and statutory (s. 157).
While the duties in s. 157 are mandatory, s. 157(4) also clearly states tt these are
in addition and not in derogation of the rules at general law.
In a way the two simple statutory duties spelt out in s. 157 serve as a macro lens
for viewing all the other duties.
As to the duty and liability of officers
157. (1) A director shall at all times act honestly and use reasonable diligence in the discharge of
the duties of his office.

s. 157(1)
Equivalen
t at
general
law
Conseque
nces of
breach
(s.
157(3))
Encompas
ses other
duties at
common
law

OVERVIEW
Duty to act honesty
Duty to use reasonable diligence
Duty to be loyal and act bona
Duty not to be negligent in the
fide / Fiduciary duties
discharge of his/ her functions /
Duty of care and skill
(i) Civil liable to Co. for any profit or damage suffered by Co.
(ii) Criminal punishable by fine up to $5000 / imprisonment up to 12
mths

1. Duty to act bona fide in the

interests of the company
2. Duty to avoid conflicts of
interest
[be it btw two principals or his
personal interest]
3. Employ powers for proper
purposes
4. Duty to retain discretions

1. Duty to exercise skill

2. Duty to take reasonable care
3. Duty to be diligent
[Various admin duties ss. 165,
199, 174
Reckless trading s. 339]

2. FIDUCIARY DUTIES
2.1
Duty to act Bona Fide in the Interests of the
Company

There are 2 parts to this duty:

o Acting bona fide; and
o In the interests of the company.

2.1.1 Acting bona fide

To act bona fide requires a director to have a subjective honest belief that
she is acting in the interests of the company
It is historically a subjective test. But, is it really?

Cheong Kim Hock v Lin Securities [1992] (SGCA)

They (referring to directors) must exercise their discretion bona fide
in what they consider not what a court may consider is in the
interests of the company and not for any collateral purpose
Cheam Tat Pang v PP [1996] (SGHC)
It is settled law that if directors take risks which no director could
honestly believe to be taken in the interests of the company, such
actions could well support allegations that the directors in question
had acted in breach of their fiduciary duties to the company.
**Intraco Ltd v Multi-Pak Singapore Pte Ltd [1995] (SGCA)
The proper test, I think, in the absence of actual separate
consideration, must be whether an honest and intelligent man in
the position of a director of the company concerned, could, in the
whole of the existing circumstances, have reasonably believed
that the transactions were for the benefit of the company

The language used, especially in Intraco, starts to hint at an objective

test. However, what the court really means to say is that the fact that a
directors alleged belief appears to the court to be unreasonable may
suggest that it was not in fact honestly held at the time of the alleged
breachbut a breach will not be established unless the court finds as a
fact that the director acted with a lack of bona fides.
o The policy reason is clear: The court should be slow to
interfere with commercial decisions taken by directors ...It
should not, with the advantage of hindsight, substitute its
own decisions in place of those made by directors in [their]
honest and reasonable beliefDirectors should not be coerced
into exercising defensive commercial judgment, motivated
largely by anxiety over legal accountability and consequences.
- Vita Health Laboratories Pte Ltd v Pang Seng Meng [2004,
SGHC]
In summary, directors who make bad decisions may not breach
fiduciary duties; but the more unreasonable the decision was, the more
likely courts are going to infer that it was not made in good faith.

2.1.2 In the interests of the company

In the interests of the company is a rather amorphous concept.

Exactly which stakeholders interests should be considered?
o Members / shareholders
o Employees
o Creditors
o Community/ customers?

2.1.2.1
Situation A: Company is solvent and not on the
brink of insolvency
Shareholders as a general body
In normal circumstances, the Dirs have to consider the interests
of the shareholders as a general body:
Chip Thye Enterprises Pte Ltd (in liq) v Phay Gi Mo [2004,
SGHC]
o Street CJ said: In a solvent company the propriety interests of the
shareholders entitle them as a general body to be regarded as the

company

This generally translates into the act being commercially

justifiable or one that furthers the prosperity of the Co. as a
whole.

Can a Co. do charity?

Charity, has no business to sit at boards of directors seemed
to be the conventional view; In Parke v. Daily News Ltd [1962,
EWHC], a Cos decision to philanthropically give out large sums
of money to its employees prior to insolvency was found to be
unjustified.
However, the law has relaxed in this regard. s. 24 has been
enacted to deal with the very case in Parke, and s. 23(1)(b)
has granted companies a right to make donations for charitable
purposes. Also, s. 159 charges companies with the
responsibility of looking at employees interests when making
business decisions.
How wide/ narrow should commercially justifiable be interpreted?
In a modern context, commercially justifiable does not mean
profit maximization in all cases. Hence, doing charity may been
seen as a way to improve the image of a Co.
A transaction which seems on the face of it to be a bad one may
be commercially justifiable if it leads to other long-term
intangible benefits for the Co:
*Intraco Ltd v Multi-Pak Singapore Pte Ltd [1995, SGCA]
Facts
Intraco (ITC) was a creditor of CC and its subsidiary BP
CC and BP were controlled by a group of individuals who also
control another company name MP
Neither CC nor BP could pay INT
There was a complex transaction in which MP purchased
CCs debt to INT for $2.3 million and in return INT subscribed
for $2,000,000 worth of shares in MP and lent MP $371,000
(debt-equity swap)
Officers of INT were appointed to Board of MP.
MP and CC went bust Liquidators of MP sued for the debt
payout undertaken by MP, arguing it was breach of fiduciary
duty.
Issues
Whether Dirs of MP were in breach of fiduciary duty for
approving the debt buyout of CC?
Decision Ct held that MPs decision was commercially defensible.
Reasoni
Although CCs debt was near-worthless (bec. it was quite
ng
apparent tt CC had no way to repay it), MP benefited from
having a strategic business alliance with INT, a govtlinked Co.
This allowed MP to tap into INTs contacts for marketing and
supply of raw materials.
There was also evidence that MP intended for CC to be
integrated into the groups business.

2.1.2.2
Situation B: Company is insolvent or on the brink
of insolvency

A Co. that is near insolvency must place interests of creditors

above that of all others.
Chip Thye Enterprises Pte Ltd (in liq) v Phay Gi Mo [2004, SGHC]
o But where a company is insolvent the interests of the creditors
intrude. They become prospectively entitled, through the
mechanism of liquidation, to displace the power of the
shareholders and directors to deal with the companys assets.
It is in a practical sense their assets and not the shareholders
assets

It appears that in Singapore creditors with a direct right to sue

the directors in the case of a breach (per Lai J. in Federal
Express Pacific Inc v Meglis Airfreight Pte Ltd [1998, SGHC]).
o This is at odds with most other common law jurisdictions.
Duty is owed to both present and future creditors, hence Co. has
to consider if decision will prejudice its ability to meet debts in
future.

2.1.2.3
Situation C: Company is deeply divided among
different factions
When there is a distinct difference in the interest between

various shareholder factions in a solvent company the test is not

a question of the interests of the company as a whole, but a
question of what is fair as between different factions of
shareholders .
Exception to the interests of the Co. test?
Tokuhon (Pte) Ltd v Seow Kang Hong (No 2)[2003, SGCA]
o In our judgment, the test of the interest of the company would
not be the appropriate test to be applied in the present
case....What we should be looking at is whether Mrs Seow had
obtained any unfair advantage vis--vis the other two partners.

2.1.2.4
Situation D: Company is part of a larger, legallydefined Group
Theoretically, each company in a group is a separate legal

entity and therefore Dirs of that Co. is obliged to only consider

how that Co. will benefit. But this position is practically
untenable bec. the Dirs interests are often interwoven with the
success of the Group as a whole.
Hence, the SGCAs answer is that directors may consider the
interest of the group as a whole when making decisions as long
as they do not sacrifice the interest of any company within the
group.
Per Intraco:
Mr Bagnall for the bank contended that it is sufficient that the
directors of Castleford looked to the benefit of the group as a
whole. Equally, I reject that contention. Each company in the
group is a separate legal entity and the directors of a

2.2

Duty to Avoid Conflicts of interest

The first thing that must be said is to note the wording of the duty. It is not a
duty to not conflict principals interest but a duty to avoid being in a position
where there is a possibility of conflict.
The duty is strict (some have called it inflexible) and preventive in nature.
(i)
Strict
It is no excuse even if a company could not have or would not have
taken the transaction.
Even if Dir did not have any ulterior intention, he could still be liable
if he was in a position where there was a possibility of conflict.
o Essentially, even the faintest whiff of impropriety will be
censured.
Also, the Dir may be liable to indemnify the Cos damages even
when Dir did not gain any profit or benefit from acting the way he
did.
(ii)

particular company are not entitled to sacrifice the

interest of that company.
Court found tt Dirs of MP had acted to benefit the Group as a whole
and did not sacrifice MP in the process.
The policy behind this is that if a parent Co. were to let its
subsidiary collapse, there could be grace repercussions for the
entire Group.
Hence, it is possible for a parent to lend money to a
subsidiary at nil interest or w no fixed repayment, in
order to keep subsidiary afloat.
Note that this is only for legally-defined groups ie. a holding
Co. and its subsidiaries. Hence, even if Mr A is director of
numerous companies, if they are not officially linked in a parentsubsidiary relationship, it would not hold.
How does one make a legally-recognised parentsubsidiary relationship??

Preventive / like a prophylactic medication

It is meant to lean toward disclosure whenever there is doubt.
It covers a wide area of possible situations where there may be
conflict.
o It aims to make directors conduct themselves in an entirely
aboveboard manner.
The juridical basis is expediency, and not morality:
Bray v. Ford [1896, HL]
o It does not appear to me that this rule is founded upon
principles of morality. I regard it rather as based on the
consideration that, human nature being what it is, there
is danger, in such circumstances, of the personbeing
swayed by interest rather than by dutyIt has therefore
been deemed expedient to lay down this positive rule.

Often, this duty to avoid conflict overlaps with the duty to act in best interest
of Co.
o If you place yourself in a position of conflict, you are not placing the
best interests of the Co. at the forefront.

This Duty is embodied in 3 rules:

(i)
No conflict rule
(ii)
No secret profit and corporate opportunities rule
(iii)
No misappropriation of company assets rules

2.2.1 No Conflict Rule

Directors cannot place themselves in situation where there is a conflict

with:
(a) Their personal interests (eg. Co. involved in a deal with another Co.
where Dir has a stake); or
(b) Interests of another principal (ie. the double employment rule)

The test is simply whether a reasonable person would think that

conflict is possible.
Boardman v Phipps [1967] 2 AC 46 (House of Lords) (Per Lord Upjohn)
The phrase possibly may conflict requires consideration. In my view it
means that the reasonable man looking at the relevant facts and
circumstances of the particular case would think that there was a real
sensible possibility of conflict; not that you could imagine some situation
arising which might, in some conceivable possibility in events not
contemplated as real sensible possibilities by any reasonable person, result
in a conflict

(a) Conflict with personal interests

s. 156(1), (2) specifies when that conflict arises:
o When director is directly or indirectly interested in a
transaction of the Co.; but only if it is a material interest.
The section does not define this material interest
but it states which situations are insufficient to deem
a director as being materially interested: s. 156(2),
(3)
Yeo Geok Seng v PP [2000] 1 SLR 195
It appeared to me that the amount of shareholding which constitutes a
material interest under s 156(2) of the Act may vary according to the
facts of each case. In most instances, a controlling interest in a company
would be a material interest and would require disclosure. In this case,
even if the appellants 50% shareholding in Triple Star was not a
controlling interest, it was clearly a substantial shareholding by which he
could influence the decisions of the company and thus constituted a
material interest under s 156(2).

This duty is discharged:

o At general law, when the director has disclosed the potential
conflict + the Co. (ie. S/Hs in general meeting) has given
the go-ahead.
o Under statute, when the director has declared the nature
and specifics of his interest in the transaction to a meeting
of the Board (s. 156(4))

CONFORMING WITH THE STATUTORY REQUIREMENTS OF DECLARATION

(ie. s156) ONLY ABSOLVES CRIMINAL LIABILITY.
(b) Conflict with interests of another principal (s. 156(5))
This could come in the form of a Director being a director of more
than one company; or
Nominee directors appointed by their principals (Double
employment rule)
o The Dir is minimally obliged to declare his holding of such
other office that may put him in conflict.
o At other times, he may be required to abstain from voting if
the particular decision is one where the two Cos positions
are misaligned
o In extreme cases, he may be required to resign one position.
Nominee Directors
o WOON claims tt the CA ignores the appointment of nominee
directors. However, seeing that many nominee directors are
employees of their principals who sit on investee companies,
it may arguably be caught by the holding such office ambit
of s. 156(5).
o In any case, the law does not forbid nominee directors
serving two masters per se, but he/she cannot sacrifice the
interests of the investee Co. in favour of the interests of his
principal.
Raffles Hotel Ltd v. Rayner [1965, SGHC]:
A company is entitled to the undivided loyalty of its directors. A
director who is a nomineeshould exercise his best judgment in the
interests of the company he serves and not in accordance with the
directions of his patron.
o

However, Winslow Js direction to ignore the directions of the

principal (above quote) may be unrealistic bec. the principal
is the one who pays the director.
Oversea-Chinese Banking Corp Ltd v. Justlogin Pte Ltd [2004,
SGCA]:
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 interests of his appointor if such interest does not conflict with
tihe interest of the companyThe court wil only interfere if it is of the
view that no reasonable director would consider the action to be in
the interest of the Co.

But this is still tricky in reality bec. interests often conflict

esp if the nominee director holds an executive role in the
Co. on which Board he serves.
Problems also arise when a Dir has to report back
information to his principal.
Hence, s. 158 provides a mechanism by which a nominee director
may disclose to his principal information obtained by reason of his
position as a director. Three conditions must be met:
1. Dir must declare at a meeting of the directors of the

company the name and office held by the person to whom

the information is to be disclosed and the particulars of
such information
2. The director must receive prior authorization by the board
of directors to make disclosure
3. The disclosure cannot be likely to prejudice the company

2.2.2 No Secret Profit and corporate opportunities Rule

A director, being a fiduciary, is not allowed to obtain for himself any

deal which properly belongs to the Co. for which he has been
negotiating.
This extends even if the Dir sets up a separate competing firm to take
the deal (Cook v. Deeks [1916, PC (Canada)].

What if the Dir has already resigned?

Where the Dir is an employee, it is not a breach to take preparatory
steps to set up competing business, so long as he does not actually
compete against the Co. before resignation (Universal Westech (S) Pte
Ltd v. Ng Thiam Kita [1997, SGHC]), subject to any restraint of trade
clauses in their employment contract.
o The qn is when the Rubicon is crossed such tt it is no longer in
the preparatory stage.
o In Universal Westech, the Rubicon was actually crossed bec.
the Dfs went beyond merely incorporating and getting premises
for new company. They actually solicited from current clients of
their employer and persuaded them to transfer the contracts to
them instead.
But if a Dirs resignation was prompted by the wish to obtain the deal,
he is barred from taking it.
Canadian Aero Service Ltd v OMalley (1973, Canadian SC)
Facts
The Dfs were senior officers in the company were conducting
negotiations on behalf of the company and resigned while
these negotiations were ongoing
The Dfss subsequently bid for and obtained the contract in the
name of their own company
The SCC found the defendants in breach of their fiduciary duty
Decision
Sup Ct of Canada found them in breach of fiduciary duty.
Reasonin In my opinion, this ethic disqualifies a director or senior officer
g
from usurping for himself a maturing business opportunity
which his company is actively pursuing; he is also precluded
from acting even after his resignation where the resignation
may fairly be said to have been prompted or influenced by
a wish to acquire for himself the opportunity sought by the
company, or where it was his position with the company rather
than a fresh initiative that led him to the opportunity which he
later acquired
Possible
1) Did opportunity arise during course of negotiations on behalf of
3-stage
principal?
2) Was resignation prompted or influenced by desire to take the
test?
deal?
3) Was it their position in Co, rather than a fresh initiative tt led
them to the opportunity?

What if the Co. was clearly unable to pursue that deal? Still NO-GO.
Industrial Development Consultants Ltd v Cooley [1972, EWHC]
Facts
IDC Ltd. attempted to enter into a contract with a 3rd P.
The 3rd P was unsatisfied with the set-up and plans of
IDC and refused to enter into the contract with them
(and the 3rd P independently came to this decision).
Then, the 3rd P approached a dir.(Cooley) of IDC to enter into
the same contract that IDC Ltd. was denied.
Cooley resigned from the company (on the pretext of illhealth) without disclosing to the company that the third party
had offered him the contract
Decision Cooley was held liable in breach of directors duties and had to
account for his profits even though IDC Ltd. could not have gotten
the contract from the 3rd P.
Reasoni To the courts, only 2 questions are relevant:
1. Did C place himself in a position where his duty to Co. and
ng
personal interests conflict?
2. If yes, then C cannot, under any circumstances, be allowed
to keep any profit that he gains from being in a position of
conflict.
The Ct answered YES to the 1st Qn and hence held tt C cannot
keep the profits.
What about the fact tt the 3rd P went up to C in private?
Counsel for C had argued tt no fiduciary r/s arose when 3rd P
went up to C in private to recruit him for the project.
But Ct disagreed: I think that argument is wrong. The Df had
one capacity and one capacity only in which he was carrying
on business at that time. That capacity was as managing
director of the Pfs. Information which came to him while he
was managing director and which was of concern to the
plaintiffswas information which it was his duty to pass on to
the plaintiffs
Evaluati
on

Is this case very unfair?

Firstly, IDC would never have gotten the contract. At assessment
of damages stage, it was estimated tt IDC only had a 10% chance
of actually securing contract. If C did not actually make a profit, it
would not have been worth IDCs time to sue.
Once again, the purpose of this strict rule is not to protect the
principal Co. from losses. Rather, it is an overriding principle
of equity that a man must not be allowed to put himself in a
position in which his fiduciary duty and his interests conflict.
In a way since a fiduciary r/s is one where P reposes trust and
confidence in F, there must not be any reason for P to call into
qn that trust.
Ct was not entirely convinced tt C was acting in an overboard
manner as seen by his misrep tt he was resigning bec. of ill
health.
Secondly, what more could C have done? It was clear tt 3rd P had
given up on IDC.

It was adduced in evidence tt IDC would not have given C

their blessings if it was disclosed.
Furthermore, since 3rd P was not happy with IDCs capability,
perhaps Cs job was to spruce up that capability, rather than
just leave. Maybe this strict duty imposes an obligation to
improve your principal Co.

What if the Co. has already rejected the deal?

Here, two authorities seem to conflict each other. Canadian SC in the
following case says tt if Board has bona fide rejected the opportunity,
the Dir is allowed to take deal w/o disclosure.
Peso-Silver Mines Ltd v Cropper (1966, Canadian SC)
Facts
3rd P had approached Peso with some mining deal. Board
considered the deal in good faith and rejected it in the interest
of Peso (and this was not in doubt).
Trial J found as a finding of fact tt Df, C, also did not have any
ulterior motive in making the decision to pass over the offer.
Later, C was approached by Pesos geologist with the
suggestion tt they should quit to set up a new Co. to take up
the mining deal.
A new Co. was set up C subsequently quit due to
disagreements with the chairman of the Board of Peso.
Decision C not liable for breach of fiduciary duty.
Reasoni Since the decision of Pesos board to reject the corporate
ng
opportunity had been taken in good faith and for sound
business reasons in the interests of Peso,
The rejected opportunity thus ceased to be a corporate
opportunity as such and cannot be said then to have come to
the director (Cropper) by reason of his position as a director
It was, therefore, open to Cropper to take up the rejected
opportunity for himself as a member of the public

However, this view does not square with the orthodox Eng law view:
* Regal (Hastings) Ltd v Gulliver [1942, HL]
Facts
R Ltd owned a cinema; R had 20 S/Hs and 5 directors
The Df Dirs decided to incorporate a subsidiary of R (called H
Ltd) to acquire leases of two other cinemas so as to sell all 3
as a group.
The owner of the two cinemas required that the paid-up
capital of H to be at least 5000 pounds
R had invested 2000 pounds in H and could not afford more
Four of the Df Dirs therefore subscribed for 500 pounds in
shares each--with the remainder being taken up by Rs lawyer
and some outsiders
Three weeks after the directors subscribed for the Hs shares,
all of the shares of R and H were sold to a new owner
The directors made a huge profit on their H shares
The directors of Regal were replaced by directors representing
the new owners and the new directors had Regal sue the old
Regal directors (one of which was Gulliver)
The claim was that the old Regal directors had breached their

Decision
Reasoni
ng

duty and the profit that they made on their Hastings shares
belonged to Regal
HL held the Df Dirs liable.
HL found that the defendant directors were all acting honestly
and further that Regal did not have the money to invest in
Hastings.
However, the directors breached their duty (of conflict) as the
opportunity had come to them in their capacity as fiduciaries
and they therefore could not take a secret profit or corporate
opportunity
Lord Russell in obiter opined that if the defendant directors
had wished to protect themselves they could have ratified the
breach by a vote at the general meeting
The rule of equity which insists on those, who by use of a
fiduciary position make a profit, being liable to account for that
profit, in no way depends on fraud, or absence of bona fidesor
whether the plaintiff has in fact been damaged or benefited by
his actions. The liability arises from the mere fact of a profit
having, in the stated circumstances, been made. The profiteer,
however honest and well-intentioned, cannot escape the risk of
being called upon to account

Evaluati
on

It is, however, not true that such a person is absolutely barred,

because he could by obtaining the assent of the shareholders
have secured his freedom to make the profit for himself. Failing
that, the only course open is to let the opportunity pass.
Seems even more onerous than the Industrial Development
case bec. the Dirs here probably did all this just so tt R could
get a slice of the deal. They risked their buck so tt R could
potentially profit.
Also, this was not a case where a 3rd P came to offer a deal to
the Co.; the Dirs thought up this deal to prosper the Co.

But perhaps the strictness is to ensure there is no excuse for

disclosure, especially when it is only after the event tt Cts find
the Dirs exercised bona fide in rejecting deals. Since, Dirs
control whether the Board passes over the deal, perhaps too
much power is vested if they are not required to disclose to
S/Hs in general meeting?
o Then again, the facts of Regal suggest tt the directors
had control over the majority of shares in the Co.
anyway.

One last note: these cases show tt the No Conflict Rule is at

times a different duty from the duty to place best interests of
Co. first. In these cases, the Dirs had the interests of the Co.
first, yet they were found liable. Arguably this is a stricter duty
that the duty to place Co. foremost.

2.2.3 No Misappropriation of company assets Rule

2.3

A director cannot use company property or take a corporate

opportunity for her own personal advantage or for the benefit of any
third party
It is not open to the company in general meeting to ratify the misdeed
and excuse the director from liability where the director has
misappropriated corporate assets or opportunities from the company
This distinguishes secret profit from misappropriation
cases
Cook v. Deeks to be confirmed

Duty to Employ Powers for proper purposes

Directors are obligated to exercise the powers that they are given and to use
the companys assets for the purpose they were intended
o It is no defence for a director to assert that she acted bona fide in the
interests of the company or was ignorant of the law if his actions were
for an improper purpose
Most commonly arises in a hostile takeover situation in which directors via the
M&A have been given a wide scope of authority to issue shares
o But this is somewhat limited by s 161 in Sgp (S/Hs in gen meeting must
approve issuing of new shares)
A two part test may be used to establish a breach of the duty. The court must
(1) Determine the limits within which the power can be exercised
(2) Decide whether the substantial purpose for which the power was
exercised fell within
those limits
In considering the purpose (or limits of the power) credit may be given to the
bona fide opinion of the directors
Where there are two or more competing purposes underlying the exercise
of a power, there will be a breach of duty if the impermissible purpose was
causative in the sense that but for its presence the power would not have
been exercised
o ie. the improper purpose was the cause for the power to be exercised.
Any decision concerning a particular exercise of a power will be in part a value
judgment as to the propriety of a particular action in a particular context.
This approach is not usually appropriate in company law, where we say that
we do not second guess the decisions of the board of directors. It is a means
to control fiduciary power.
*Howard Smith Ltd v Ampol Petroleum Ltd [1974, PC on appeal fr NSW]
Facts
M Ltd was a Co. caught in a takeover bid by both HS Ltd and AM
Ltd.
Dirs of M believed it would be in the best interest of M to be taken
over by HS rather than AM.
However, AM controlled sufficient shares in M to block HSs
takeover bid.
Thus, the Dirs of M decided to issue new shares to HS, thereby
diluting AMs holdings to the pt where it could no longer block the
takeover.
At trial, Ms Dirs testified tt they issued shares so as to raise
capital for M; however trial J. found tt this was not their sole
purpose.

Issue
Decision

Reasonin
g

Was the power of the Dirs to issue shares exercised for the proper
purpose?
PC held tt the proper purpose for issuing shares was for raising
money, but the Dirs had used it here to forestall a takeover bid
instead.
DECLARED the issue of new shares a nullity.
The factors that titled the court against the directors claim were
Events leading up to the board meeting in question that
demonstrated the directors concern about the takeover
The urgency with which the board meeting was called and the
shares were allotted
The lack of information given to the board about the capital needs
of the company
The boards failure to consider the tax consequences of a share
issue versus a loan
The absence of a reason for why the rights issue was made to a
particular party rather than all shareholders if the purpose was to
raise capital
The PC accepted tt Dirs had an honest belief that control by the party
whom shares were allotted was indeed in the companys best
interests. However, this serves as no defence to a claim of improper
purpose.

2.4

Quare: What is the penalty for applying power for improper purpose? In
the Howard Smith case, since Co. did not suffer loss and Dirs did not
profit; what remedy is there?

Duty to Retain Discretions

As fiduciaries, directors are required to actively exercise their discretion before
coming to a decision that they can honestly say is in the companys interests
Therefore, directors cannot bind or fetter themselves to decide in any
particular manner
E.g., agreeing to vote at board meetings in accordance with the direction of
some other person
This duty is most relevant in the case of nominee directors
Section 158 provides conditions for nominee or multiple directors to disclose
to his principal or other company information obtained by reason of his
position as a director.

3. NEGLIGENCE DUTIES/ DUTY OF CARE AND SKILL

The second large component of Dirs duties is the duty to not be negligent. Insofar
as the large component above calls into question the character of a director, this
component pertains to the competence of a director.
o As such, it is natural tt the law looks at a host of factors, the more common
ones being: (1) the nature of the Co. and S/Hs expectation of directors; (2)
executive or non-executive director and (3) particular skill of that person.

First comparison: Traditional view vs. Modern view

No. of
duties
Standard

Industrial
attitude
to
directorsh
ip

Directors were commonly

seen as mere figureheads of
the company

MODERN
Treated as comprising 3 distinct
components
Minimum objective standards
which is made more stringent (but
not lowered) based on a directors
particular expertise and/or position
in the company
Dirs. have a direct hand in
management and even NEDs are
seen as critical monitors of
management

Second comparison: Executive vs. non-executive director.

Expertise/
Qualificati
ons

Expectatio
ns from
public and
S/Hs
Knowledg
e of Cos
affairs

TRADITIONAL
Treated as a single
component
Purely subjective Dirs. had
to merely display only such
competence as they
themselves were capable of

EXCUTIVE DIRECTORS
Usually hired bec. they
possess certain qualification
or experience in the industry

Hired to actually improve and

direct management direction

Works for Co. and shd be

familiar with day-to-day
operations.

NON-EXEC DIRECTORS
No particular expertise or at least
they are very diversely qualified.
Many are appointed bec. they are
reputable names in commercial
circles.
Expected to be a second pair of
eyes esp. so for the Audit
Committee.
NEDs of many years appointment
may still lack intimate knowledge
of the COs affairs; Usually
dependent on management to
keep them informed.

Locus Classicus: The birth of negligence duties and traditional view

*Re City Equitable Fire Insurance Co Ltd. [1925, ECA]
Note tt this decision was before Donoghue v. Stevenson, hence tort of
negligence wasnt formally in existence then.
Facts
Co. lost 1.2m (which was unthinkable at that time), owing to the
frauds of the chairman of the Board, a one Bevan.
Liquidator sought to make the entire Board liable for (1) giving the
chairman free rein to wreck such mischief and (2) for allowing
securities to be retained by the brokers.
Decision HELD tt Dirs not liable bec. of provision in Articles tt exempts liability
unless losses were caused by their own willful neglect or default.
Reasonin o While the court did not consider it as 3 distinct duties, we see the
g
standard expected of the traditional equivalent of the 3 modern
duties:
1. Duty to exercise skill
A director 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[D]irectors are not

liable for mere errors of judgment.

2. Duty to take care
In respect of all duties thatmay properly be left to some other
official, a director isjustified in trusting that official to perform
such duties honestly.
How do Dirs. know whether they are justified in delegating?
It is the duty of each director [to see to the business of the Co.]
except in so far as the companys articles of association may
justify him in delegating that duty to othersThat Bevan and
Mansell were persons enjoying the highest reputation is beside
the mark. If the shareholders had desired to leave hundreds of
thousands of pounds of the Cos money under the sole control of
Bevan, they would have done so.
3. Duty to be diligent
A director is not bound to give continuous attention to the affairs
of his company. His duties are of an intermittent nature to be
performed at periodical board meetings

3.1

Duty to be skilful
Must a director share his knowledge or use his particular skill-sets in
discharging his duty?
From the outset, it was clear that the standard would differ btw executive and
non-exec directors:
o Executive Dir. obliged to share his skill or expertise because he is
usually under a contract of employment where he has promised to do
so.
Held to standard of the objective body of knowledge and
expertise possessed by those in the same calling (Permanent
Building Society (in liq) v Wheeler (1994, SC of Western Aus).
o Non-Exec Dir need not have any particular skill to be appointed.
Held only to the level of competence (or incompetence) that he
really has.
Re Brazilian Rubber Plantations and Estates Ltd [1911, EWHC]
[A director] is, I think, not bound to bring any special qualifications to his office.
He may undertake the management of a rubber company in complete ignorance
of everything connected with rubber, without incurring responsibilities for the
mistakes which may result from such ignorance; while if he is acquainted with
the rubber business he must give the company the advantage of his knowledge
when transacting the companys business.

However, the law now seems to be a bit more strict toward NEDs. While the
standard for them remains largely subjective, they are expected to at least
take reasonable effort to become familiar with the affairs of the company.
o Does that mean tt NEDs have a duty to ensure they have the requisite
skill to understand the Cos business?
Commonwealth Bank of Australia v Frierich (1991)
[T]he stage has been reached when a director is expected to be capable of

understanding his companys affairs to the extent of actually reaching a

reasonably informed opinion of its financial capacityI think it follows that he is
required by law to be capable of keeping abreast of the companys affairs, and
sufficiently abreast of them to act appropriately

3.2

Duty to take care

The question of standard of care has changed over the times. Traditionally,
the law employs a subjective standard that of the level of knowledge and
expertise possessed by that particular director.
However, the modern approach now subjects director to a minimum objective
standard expected of a person discharging the responsibilities that the
director has assumed. Of course, what that standard is depends on the
structure of the Co. and what the Dir. Has held himself out to possess.
Daniels v Anderson [1995, NSW CA]
That duty will vary according to the size and business of the particular
company and the experience or skills that the director held himself or herself
out to have in support of appointment to the office.
Lim Weng Kee v PP [2002,SGHC] (Dir. of pawnshop allowed redemption
bef. Cheque cleared)
The law hence stands as thus: the civil standard of care and diligence
expected of a director is objective, namely, whether he has exercised the
same degree of care and diligence as a reasonable director found in his
position. This standard is not fixed but a continuum depending on various
factors such as the individuals role in the company, the type of decision being
made, the size and the business of the company. However, it is important to
note that, unlike the traditional approach, this standard will not be lowered to
accommodate any inadequacies in the individuals knowledge or experience.
The standard will however be raised if he held himself out to possess or in
fact possesses some special knowledge or experience.

This duty to take care usually plays out in two areas:

1) Director must discover what his rights and obligations are under the
Arts and at law. Ignorantia juris non excusat While Dir does not need to
be a legal expert, he is required to have general familiarity with what the
law requires of him.
2) Directors may delegate their powers and can trust their delegates to
do work properly in the absence of circumstances that would arouse the
suspicion of a reasonable man.
o Re National Bank of Wales [1899, ECA] Business cannot be carried
on upon principles of distrust. Men in responsible positions must be
trusted by those above themuntil there is reason to distrust them.
o Directors are also entitled to trust their fellow directors.
Huckerby v. Elliot [1970, EWHC] H charged with negligence for
failing to obtain gaming license for Co. tt ran a gaming club H
knew little of the business and left the running to her codirector Acquitted bec. she was entitled to trust her fellow
director in the absence of any reason to doubt.
o Once a Dir. Has reason to suspect his delegate, he must make
reasonable inquiries. In considering whether a Dir. ought to have

suspected, once again we must look at the level of skill and experience
tt the Dir. has and whether a reasonable Dir. in the same position
would have enquired.
Thus means tt the standard for Exec Dir. and NED may be quite
different.
*Daniels v Anderson [1995, NSW CA]
Facts
AWA Ltd manufactured electronic products.
To manage their exposure, they set up an FX operation
which was run by a single person (Koval) who
combined the functions of trading, recording and
settlement
K was effectively unsupervised and ran up massive
liabilities
The board was concerned about the FX operations. In
response to these concerns, the board was assured by
management and by the auditor that all was well
It turned out that K was in fact losing money and
concealing this fact from his supervisors and his
activities caused substantial losses to AWA
The company sued its auditor for negligence. The
auditor pleaded that the company had been
contributorily negligent
Decision HELD tt the non-executive directors had not been negligent
under the circumstances but that the chairman/CEO
was negligent
Reasoni
o Chairman of Board, H, was liable because he had
ng
basically lost control of his subordinates and left them
to their own devices.
o This case illustrates quite plainly how the executive Dir
was liable but not the NEDs.

3.3
o
o

Duty to be diligent
This pertains to how much work directors are expected to put in.
The standard is objective, but different for executive directors and NEDs
o Executive directors are expected to attend all meetings (unless there is
a good reason not to) and to give continuous attention to the affairs of
the company
o NEDs are only expected to provide intermittent attention to the
company
The articles of most companies automatically disqualify directors if they are
absent, without permission, from board meetings for a specific period (often
six months).
Another question is how this duty should be applied considering tt many NEDs
rely on subordinates to keep them informed of what is going on.
o WOON contends tt there is a significant different between not knowing
because ones subordinates kept the information back and not
knowing because one was too busy to pay attention to what was
going on.

s. 157 Diligence only?

S. 157 states tt Dirs. are required to use reasonable diligence. Does this
refer to all 3 negligence duties above or only to the duty to be diligent?
o IN Lim Weng Kee v. PP, the CJ. was making reference to standard of
care and diligence and didnt seem to restrict it to any particular
sub-duty.
o But in Byrne v Baker [1964, Aus SC],
The Supreme Court of Victoria considered a provision that was
the predecessor to the provision on which s 157 is based. The
court expressed the view that as the provision only included the
term diligence and not care or skill that what the legislature
by the subsection is demanding of honest directors is diligence
only
o This position has not been adopted (but also has not been expressly
rejected) in Singapore.

4. EFFECT OF A BREACH OF DIRECTORS DUTIES

o
o
o

Effect on transactions (a) with 3rd P and (b) with that director himself.
Liability of 3rd Ps
Remedies available to a Co.

4.1
Transactions with Dirs. who breach their fiduciary
duties
o
o
o

Transactions are voidable but not void. The Co. has the option of affirming the
contract, otherwise it can set aside the contract.
Also, there is no way the offending Dir. can get specific performance.
Equitable principle tt a court will not assist a Dir. when he is himself in breach
of fiduciary duty (One who comes into equity must come with clean hands).

4.2
Transactions with 3rd Ps by Dirs. who breach their
fiduciary duty
o

Whether a Co. can set aside the transaction with a 3rd P depends on whether
3rd P knew or ought to have known of the Dirs breach of duty.
*Cheong Kim Hock v. Lin Securities (Pte) Ltd [1992, SGCA]
A vendor was offered 3 times the mkt price for his property CA held tt he
had notice (actual or constructive) of the breach of FD by the Dir. of the
purchasing Co. bec. the vendor knew tt prop mkt was depressed and there
was no way his prop could have fetched that price.
He wilfully closed his eyes to the obvious suspicion tt the Dir. was cheating
his Co.

The basis for notice entitling the Co. to set aside the contract:
Agency law Rogue Dir. has apparent authority until 3rd P has or ought to
have notice of the breach of authority. Otherwise, what is a breach of FD is
a matter btw the Dir. and the Co.
Undue Influence A Dir. who breaches FD is akin to one who exerts undue
influence on the Co. A 3rd P is entitled to assume that there is no UI until
and unless he has notice (actual or constructive) of the UI.

4.3

But the decision in Cheong Kim Hock does not stand for the principle tt simply
because I am getting a good deal, I should suspect a breach of fiduciary duty
on the part of my counterpart. Such a position is commercially unfeasible.
o D & C Property Pte Ltd v. Four Seas Constructions Pte Ltd [1997, SGHC]
As a general rule, commercial transactions cannot be property
conducted on the basis that a person who is dealing with a companys
agent is, without more, obliged to take steps to convince himself that
the agent in question is not breaching his fiduciary duty
o This would penalise contracting parties for driving a hard bargain.
From Cheong Kim Hock: Liability is only attached where a
person knows of circumstances sufficient to put him on
inquiry.

Recipient liability/ Accessory liability of 3rd Ps

Recipient liability 3rd P is liable for receiving property subject to a trust or

fiduciary obligation and then passing it on, provided he knew that he was in
possession of trust property OR he knew that he would be assisting someone
pass on trust property.
o If prop is still in his hands, he is deemed to hold prop as constructive
trustee. If passed on, 3rd P has to compensate the Co.

Accessory liability 3rd P assisted or participated in the breach of duty by a

fiduciary.
o Not dependent on receipt of trust property but so long as 3rd P is
deemed to act dishonestly.
o He would either compensate Co. for losses or disgorge profits.
Royal Brunei Airlines Sdn Bhd v. Tan Kok Ming [1995, PC (Brunei)]
Elements to establish dishonest assistance:
(a) that there has been a disposal of his assets in breach of trust or fiduciary
duty;
(b) in which the defendant has assisted or which she/he has procured;
(c) the defendant has acted dishonestly;
(d) resulting loss to the claimant.
How is dishonesty defined
o Defendant must himself appreciate that what he was doing was dishonest
by the standards of honest and reasonable men.
o Law will not find a defendant 'dishonest' in assisting in a breach of trust if
he knew of the facts which created the trust and its breach but had not
been aware that what he was doing would be regarded by honest men as
being dishonest.
o

4.4

[t]he standard of what constitutes honest conduct is not subjective.

Honesty is not an optional scale, with higher or lower values according to
the moral standards of each individual"

Remedies available to a Co.

3 remedies available:
i.
Sue for damages (in case of negligence of breach of FD) / return of a
specific property (where there has been misapplication of Co property)
ii.
Force Dir. to disgorge any secret profit (if any)

iii.

Declaration (in cases where Dir.s exercise of power was not for proper
purpose)
The choice btw (i) and (ii) is entirely the Cos choice. Generally, where the
damage done is greater than any profit the Dir. might have made, Co will sue
for damages. Where there is little damage done, then Co. will want Dir. to
account for profits instead. Choice need only be made when time comes for
judgement to be entered in Cos favour.

Proper Plaintiff (more in next topic)

Per Foss v. Harbottle, members generally cannot sue Dir. for damage. This is
because a Co. is a separate entity from the members (theoretical reason) and
also because usually the member suffers no additional damage other than the
damage that the Co. suffers (practical reason).
Interlocutory remedies
In the course of proceedings, s. 409A of CA allows Co. to apply to court to
restrain an ongoing transaction on the basis tt it was entered into in breach of
fiduciary duties.

A1: TOWNSING HENRY

*Townsing Henry George v. Jenton Overseas Investment Pte Ltd (in liq) [2007, SGCA]
Facts
Normandy Nominees Ltd (NN) wanted to invest in the Newmans Grp which consisted of
companies, Jenton (JN) and its subsidiary, NQF.
NN paid $2m for JN shares; this was subsequently converted to loan notes issued by NGH,
a newly-incorporated Co. of the Newmans Grp.
The effect was for NGH to assume JNs liability to pay NN and as part of this agreement,
the Appellant, Mr THG was appointed nominee on JNs Board.
NN decided to subscribe for more and gave another loan of $431K, in exchange for deeds
of charge from all 3 Cos in the Newmans Grp.
However the Charges were deficient and was not registered under our CA.
NN sought to execute deeds of rectification, but the Dirs. of NGH, JN and NQF refused.
Pursuant to the NGH Charge, NN appointed receivers for NGH and removed all of JNs
existing directors, leaving only THG. THG was also appointed as JNs corporate
representative in the subsidiary NQF.
At that time, NQF had sold its assets to a 3rd P Co. and had received $2.7m (the Relevant
Sum, R$ for short). THG quickly passed resolutions to have the R$ transferred to NNs
bank account; rectified the NQF Charges and liquidated JN and NQF.
Liquidators of JN discovered this and sued THG for his breach of fiduciary duties as a
director of JN in causing NQF to pay the R$ to NN.
Decision
HELD tt THG had breached his fiduciary duties owed to JN by ordering the R$ to be
transferred to NN.
Reasonin Relationship btw the various fiduciary duties of a director
g
JN averred tt THG breached 4 fiduciary duties:
a) Duty to act honestly
b) Duty to act bona fide
c) Duty of trusteeship
d) Duty of proper purpose
(c) and (d) did not apply - JN is alleging breach of fiduciary duties owed to JN and the R$
belonged not to JN but to NQF; (d) could not apply bec. THG had directed the R$ in the
capacity of Dir. of NQF and not Dir. of JN.
(a) and (b) are the same thing - s.157(1) duty to act honestly is the statutory equivalent
of the duty to act bona fide: These two duties impose a unitary obligation to act bona
fide in the interests of the Co. in the performance of the functions attaching to the
office of director.
The duty of loyalty (ie. that to avoid conflicts) is a facet of the unitary duty of honesty
above. This duty of loyalty or the no conflict rule is divided into four sub-categories:
(i)
Double employment rule Simply acting for two masters (provided the two
masters have potentially conflicting interests) without disclosure is prohibited even if a Dir. has not actually prejudiced ones interest over the other yet.
(ii)
Duty of good faith a duty not to prefer one principals interests over the other.
(iii)
No inhibition principle ie. duty not to fetter discretion.
(iv)
Actual conflict rule rule states tt a Dir. who finds himself in a situation of actual
conflict has to stop and recuse himself by ceasing to act for one or preferably both
parties.
On the facts, (i) and (iii) were not breached bec. THG had JNs consent and knowledge
that he was working for Newmans Grp and NN + THG did not act as if he was only
acting in interest of JN or NQF.
However, he had breached (ii) and (iv).
Whose interests were potentially in conflict?
Clearly, the interests of NN and Newmans Grp were in conflict.
However, as Dir. of both NQF and JJ, the two might potentially be in conflict even

Impt
points

though NQF was wholly-owned subsidiary of JN.

o But in this case, JN and NQF were clearly not in conflict bec. JN owned NQF entirely
and was NQFs sole creditor.
What was unusual in this case is that JN and not NQF sued THG. Nevertheless, the Ct
found duties (ii) and (iv) breached bec. THG preferred NNs interests over JNs by
transferring R$ to NN who had no claim over NQF, it deprived NQFs sole creditor, JN, of
repayment thereby breaching his fiduciary duties owed to JN.

No Reflective Loss Principle

It is a principle as laid down by HL in Johnson v. Gore Wood & Co[2002] tt a S/H may
not sue for his personal loss due to a breach of a Dirs fiduciary duty owed to a Co. if the
shareholders loss is merely a reflection of the loss of value of the Co.
o The reason is tt the S/H has not suffered any loss over and above tt of the Cos
The plaintiffs shares are merely a right of participation in the Co.[the] shares
themselves, his right of participation are not directly affected by the wrongdoing.
The plaintiff still holds all the shares as his own absolutely unencumbered
property Prudential Assurance at 222
o Policy reason behind this rule is to ensure protection of the Cos creditors if S/Hs
have free rein to claim, they might decide to mount action instead of the Co. doing
so and creditors would get nothing.
o But there have been some courts tt doubt this rule eg. NZ CA in Christensen v.
Scott; but SGCA accepts the HL position in Johnson.
No reflective principle rule extends to barring S/Hs claiming a share of dividends or
claiming qua creditor of Co.
o Simple test as to which claims by S/H is barred: [a] claim will not lie by a
shareholder to make good a loss which would be made good if the companys
assets were replenished through action against the party responsible for the loss
Johnson at 51
o Only exception is when the wrongdoers breach has disabled the Co. from pursuing
the cause of action that the Co. might have had.
In this case, if THG had pleaded the no reflective loss principle, arguably it would apply
bec. JNs loss of the R$ was merely reflective of the loss suffered by NQF.
o However, bec. this was not argued at trial but was a point tt the SGCA instructed
the parties to look at only at appeal stage, the Court accepted JNs objections tt
this would prejudice their claims.
o Further, Court was convinced tt JN could have compelled NQF to make an
undertaking not to make a double claim against THG and so there was no chance
of double-recovery. There was thus no reason to strike out the claim and force NQF
to mount the action instead
Hence, no reflective loss principle was not applied.
A parent and its subsidiarys interests are usually aligned but not always so. A Dir. of both
will be in breach if he sacrifices ones interests over the other, even if it may be in the
best interest of the entire Group.

A2: REGAL HASTINGS

* Regal (Hastings) Ltd v Gulliver [1942, HL]
Facts
Facts above, at p. 9

Reasonin
g

Ratification

Impt
points