SINGAPORE - A recent High Court ruling has sent a strong warning that those who are not good stewards of the businesses in their care can face severe liabilities under the Companies Act.
High Court Justice Aedit Abdullah on Jan 24 found Goh Jin Hian, a former director of insolvent marine fuel supplier Inter-Pacific Petroleum (IPP), liable for US$146 million (S$196 million) in financial losses due to his breach of fiduciary and statutory duties under the Companies Act.
Justice Abdullah pointed out that a directorship is “not a sinecure, nor an honorary function. The obligation is to monitor the affairs of the corporation”. This entails, among other things, at least broad-level supervision of the activities of the officers of the corporation, for the protection of the company, shareholders and creditors, he added.
The judge said the financial position of the company was suspect, and should have primed Goh to look further and obtain a picture of the true state of the affairs of the company and monitor what was happening within it.
“That was his duty as a director,” added Justice Abdullah.
For his failure to act on several red flags that had emerged around Feb 7, 2018, “the full extent of the losses claimed by IPP should be allowed”, the judge ruled.
Mr Robson Lee, senior corporate lawyer and partner at Kennedys Legal Solutions, said a director has the fiduciary duty to manage and conduct the affairs of the company with due care.
He added that if a director is found wanting in his fiduciary duty, he can be responsible for compensating the company for losses that it had suffered under his mismanagement or negligence.
“A director cannot be a sleeping director and raise the defence that he was not an active director but merely a nominee director, when the company is in trouble and the enforcement agencies take action or when faced with a lawsuit for negligence or mismanagement.
“The law imposes statutory and fiduciary duties on all directors to act with due care, irrespective of their executive or non-executive positions,” Mr Lee said.
Professor Mak Yuen Teen of the National University of Singapore Business School noted that directors may be “protected by the business-judgment rule if their decisions turn out to be wrong and the company suffers losses”.
But he stressed that this protection is available only if they make a business judgment honestly for the benefit of the company, do not have a material personal interest, are appropriately informed about the matter, and reasonably believe that it is in the best interest of the company.
Even if directors are non-executive directors, and not closely involved in the company’s management, it does not mean that they will not be held responsible if they do not exercise reasonable diligence, Prof Mak added.
As such, directors should make sure they are properly informed and exercise their own judgment before signing documents or agreeing to decisions, he said.
“They should not just sign documents or agree to decisions based on the word of others, or if they do not understand,” he added.
