Tutorial 3

1. Happening Place Pte Ltd is regulated by Table A of the Fourth Schedule of the Companies Act. Tuf Tan holds 45% of the shares in Happening Place Pte Ltd. Advise Tuf Tan and the directors as to the following:

a. The directors appoint Payne Soh as the company’s public relations officer (ie an employee). Payne Soh has a personal conflict with Tuf Tan on one occasion. As a result, at a requisitioned meeting of the members Tuf Tan manages to get a resolution directing the directors to fire Payne Soh. The directors refuse to obey.

Answer:
The issues in question are whether the directors are entitled to disobey the decision of the member’s resolution to fire Payne Soh and what rights does Tuf Tan has after the refusal to proceed with the resolution.

Under section 157A and Article 73 of Table A of the Fourth Schedule of the Companies Act (Cap. 50), the directors are conferred with the right to manage the business of the company under their direction. On the facts, the act of firing an employee, such as Payne Soh, is a management decision. Tuf Tan, as a member of the company, does not have managing rights and the power to enforce a decision on the directors.

This is also supported by Automatic Self-Cleasing Filter Syndicate Co Ltd v Cunningham [1906] 2 Ch. 34 where the court stated that since the directors were conferred the power to determine such issues under the articles of the association, the members could not interfere.

Therefore, the directors may sustain their decision of not firing Payne Soh in spite of the member’s resolution.

On the other hand, if Tuf Tan is adamant to fire Payne Soh, he may attempt to influence management decision by starting proceedings to create a ordinary resolution to replace the directors under Article 69 of Table A. This is with the assumption that he is able to garner the requisite number of votes, minimally obtaining a 50% majority with 1 additional vote, and the new directors appointed would make favorable decisions to change the existing director’s stance on firing Payne Soh.

Alternatively, Tuf Tan may attempt to pass a special resolution, which requires a 75% majority to amend the articles of association to confer powers on himself. Section 37 of the Companies Act provides that subject to the provisions of the Companies Act and the memorandum, the articles of association of a company too can be removed or altered by means of a special resolution. This may allow him to fire Payne Soh depending on the amendments to the articles of association. However, some of the serious considerations for such measures may include damaging the relationships between Tuf Tan and Happening Place Pte Ltd.

Lastly, he can also choose to sell his shares in the company and invest elsewhere. In the event that it is a private company and not listed, it may be challenging to liquidate and find buyers.

b. Tuf Tan is also unhappy that one director’s mistress Lolli, has been appointed production manager (ie an employee) of the company’s factory.

Answer:
The issues in question are what rights does Tuf Tan has against the appointment of Lolli and whether such appointment of Lolli by the directors is in breach of the directors’ duties.

Tuf Tan, as a member of the company, is not responsible for the management decisions of the company. By virtue of section 157A of the Companies Act, such rights to manage the company are conferred to the directors. Hence, matters such as appointment of employees are beyond the rights of the members. However, Tuf Tan may bring an action against the director in question (‘Director’) if certain duties are breached.

Under section 157(1) of the Companies Act, a director has the duty to act honestly and use reasonable diligence in the discharge of his duties. The term "act honestly" covers a multitude of matters, such as that the director must act in the best interests of the company, must not place himself in a position of conflicts of interests, and must not use his powers for improper purposes.

In order to determine if the Director has breached his duties, there is a need to first establish whether the Director is acting in the best interest of the company when he employs his mistress Lolli. If Lolli has the necessary qualities and is the most suitable candidate for the position, the Director may be said to have acted in the best interest of the company by employing her. In this case, Tuf Tan may not object to such appointment as a shareholder as it is a legitimate appointment. However, if Lolli does not possess such qualities and is not a suitable candidate for the position, the Director may have violated his duty to act in the best interest of the company and the hiring will be invalid under section 157(1) and the Director will be liable under section 157(3) for any profit made or any damage suffered by the company.

This invalid appointment may be brought to the attention of the other directors for them to decide if they want to fire Lolli and sue the Director for breach of directors’ duties imposed on him such as the following:

a. Duty to act for proper purpose

The case of Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 has established that directors have to use powers for proper purposes. By appointing the director’s mistress as an employee, solely on the reason that he wants to find his mistress a job, the Director is not using his powers properly.

b. Duty to act in the best interests of company

The case of Re W & M Roith Ltd [1967] 1 WLR 432 have established that directors must act in the best interests of the company. By employing his mistress as an employee and if she is not qualified enough, the director is not acting in the best interests of the company.

c. Duty to avoid conflict of interests

In cases such as Furs Ltd v Tomkies (1935) 35 CLR 583, Canadian Aero Services Ltd v O’Malley (1973) 40 DLR and Industrial Development Consultants Ltd v Cooley [1972] 2 1 WLR 443 have established that a director owns fiduciary duties to the company and, as such, should not place himself in a position whereby his duties to the company and his personal interest conflict. Conflict of interests might possibly arise between the company and the Director with the employment of his mistress. Moreover, if the appointment of Lolli is for fraudulent purposes and can be proven with evidence, the Director can also be criminally prosecuted under section 157(1) of the Companies Act that the Director must act honestly and use reasonable diligence in the discharge of his duties. In this case, Lolli will likely be prosecuted as well and the company would remove Lolli from her position.

However, if the other directors fail to take any action on the issue even though there is proof that Lolli was not appointed legitimately, Tuf Tan can try to remove the director in question by ordinary resolution pursuant to Article 69 Table A. However, he will not be able to fire Lolli directly as the directors have the power to manage the company and which he cannot interfere under section 157A.

Another option that Tuf Tan has is to apply to court for personal remedies under section 216(1) of the Companies Act. In order to do this, he must have evidence that the appointment of Lolli was not in the best interest of the company and its members. The court may then make the relevant necessary orders.

2. Rain, Snow and Moon are directors of Nature Productions Pte Ltd. Advice them as to whether they can continue as directors in the following circumstances:

a. A month ago, Moon was declared a bankrupt by a court in Malaysia where he has property and business dealings. Moon is still acting as a director of Nature Productions Pte Ltd.

Answer:
Rain and Snow will still be able to continue as directors.
However, Moon will not be able to continue as a director due to an automatic disqualification under section 148(1) of the Companies Act where every person who is an undischarged bankrupt, regardless of being adjudged bankrupt by a Singapore Court or a foreign court having jurisdiction in bankruptcy, shall not act as a director of a company.

Despite so, Moon may continue as a director if she obtains the leave of the Court or the written permission of the Official Assignee under section 148(2) or is considered as a discharge bankrupt where he has already paid off his debts or applied a discharge order from the court and is approved.

b. Rain was also the director of Water Works Pte Ltd which was made insolvent sometime back.

Answer:
Moon and Snow will still be able to continue as directors. On the other hand, Rain may or may not be able to continue as a director as it is not an automatic disqualification. However, this is dependent on the time frame of “sometime back”.

Assuming that the period of “sometime back” is less than 3 years, the minister or official receiver may make an application to the court under section 149(1) of the Companies Act asking for disqualification of Rain. The conditions set out in section 149(6) are to be considered in determining whether the conduct of Rain renders him unfit to be a director. Such conditions include whether the director breached his fiduciary duties or other duties in relation to the company, whether the director misapplied any money and whether the director's conduct contributed to the company's insolvency. If the court is convinced that the two conditions are satisfied, a disqualification order for up to five years may be imposed.

Therefore, if Rain was the director of Water Works Pte Ltd when it became insolvent or within 3 years since its insolvency and his conduct as the director breached section 149(6), which made him unfit to be a director, he will be disqualified under section 149(1) of the Companies Act. If he disobeys the qualification order, it would amount to be offence, with Rain liable on conviction to a fine not exceeding $10,000 or to imprisonment for a term not exceeding 2 years or to both. However, if he has obtained a court order to lift the disqualification, and continues to be a director, that will not result in an offence.

However, the disqualification under section 149 is not automatic, meaning if no one makes an application to court asking for a disqualification order directed at Rain, Rain would still be able to continue as a director for Nature Productions Pte Ltd. Furthermore, if Rain has already served his five years of disqualification under the disqualification order, he is again fit to be a director.

c. Snow is also a director of Flakes Pte Ltd and has been convicted of an offence under section 157(1) in relation to that company.

Answer:
Rain and Moon will still be able to continue as directors. However, Snow may or may not be able to continue as a director depending on the circumstances of which Snow had been convicted for the offence.

Section 157(1) of the Companies Act states that a director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office.

If Snow was convicted under section 154(1) of the Companies Act for breaching the notion of “acting honestly” in section 157(1), which provides that if a person has been guilty of an offence, whether in Singapore or elsewhere, involving fraud or dishonesty punishable on conviction with imprisonment of three months or more, he is automatically disqualified for five years from being a director or taking part in the management of a company. Snow will be disqualified from being a director in Nature Productions Pte Ltd. However, if he has served his five years of disqualification under the disqualification order, he is free to be a director in Nature Productions Pte Ltd.

Alternatively, if Snow was disqualified under Section 154(2) of the Companies Act for breaching the notion of “using reasonable diligence in the discharge of the duties of his office” in section 157 (1), which provides that if a person has committed any offence in Singapore in connection with the formation or management of the company, or any offence under section 157 or section 339 for liability occurred where proper accounts not kept, he may be disqualified for up to five years. If the offence made is a technical one and not one that involves a purposeful intent to defraud others, the court may decide not to issue a disqualification order against Snow altogether. Again, if he has served his disqualification order if issued, then he is free to be a director in Nature Productions Pte. Ltd.

Therefore, it depends whether Snow was convicted under section 154(1) or section 154(2) of the Companies Act and also the severity of his offence to consider if he is able to continue as a director.

d. Assuming Moon, Rain and Snow are disqualified from acting as directors on the grounds stated in (a), (b) and (c) respectively, can they continue to run another business organisation which is not a company (ie: SP, P, LP or LLP)?

Answer:
All the 3 of them cannot continue to act as director of company.

Moon cannot run a sole proprietorship or a partnership as under section 26 of the Business Registration Act, an undischarged bankrupt cannot try to manage a business. However, Moon can be a partner of a Limited Partnership or Limited Liability Partnership but not a manager under section 29 of the Limited Partnership Act and section 33 of Limited Liability Partnership Act.
Rain and Snow can run a Sole Proprietorship, Partnership or Limited Partnership but not Limited Liability Partnership. Section 37 of the Limited Liability Partnership Act states a person subjected to disqualification of section 149 or 151 of the Companies Act shall not act as managers of a Limited Liability Partnership. As there is unlimited liability for Sole Proprietorship, Partnership or Limited Partnership, Rain and Snow will be liable for their own actions for all the debts of these entities. This serves as a safeguard and therefore there is no disqualification.

3. Trust, Ernest and Honest are directors of No Problems Ltd, a public listed company. Advice No Problems Ltd and the directors in the following circumstances:

a. No Problems Ltd, enters into a contract for the purchase of 1000 tons of iron from another company. Trust is the majority shareholder in that other company.

Answer:
Trust, a director of No Problems Ltd, enters into a contract for the purchase of 1000 tons of iron from another company, of which he is a majority shareholder of, without declaring the nature of his interest in the contract, breaches section 156(1) of the Companies Act.

Section 156(1) states that when a company enters into a contract, or is proposing to enter into a transaction, and a director has directly or indirectly an interest in that transaction, he must declare the nature of his interest at the directors' meeting as soon as the relevant facts have come to his knowledge. Section 156(2) also states that interest shall be taken to mean material interest.

Thus, since Trust is the majority shareholder in the other company, he is likely to benefit from the transaction. Also, there would be a breach of either company’s interest no matter how he acts. This is because, as the major shareholder of the other company, in order to act in the best interests of that company, he would want to acquire the 1000 tons of iron at the highest price to make a profit. Doing so would cause No Problem Ltd’s interests to suffer as No Problems Ltd. On the other hand, as the majority shareholder of the other company, he would want to purchase the 1000 tons of iron at the cheapest price. However, as Trust is the director of No Problems Ltd but only a shareholder of the other company, Trust only owes fiduciary duty to No Problem but not to the other company.

Therefore, he should declare the nature of his material interest to the other directors of both companies as if there is a full disclosure of the nature of such interest, Trust will not be considered to have committed an offence. Failing which, he has breached his director's duties, and will be guilty of an offence, liable on conviction to a fine not exceeding $5,000 or to imprisonment for a term not exceeding 12 months.

If No Problems Ltd and the company’s directors choose to proceed with the contract knowing that Trust is the majority shareholder in that company and a director in No Problems Ltd., they can exclude Trust from the important decision-makings and information regarding the said contract.

However, if Trust did not disclose his material interest, directors from No Problems Ltd or the company may be able to seek a court order to reverse this transaction where any act or contract done will be declared invalid as Trust is in breach of his director's duty.

Trust has also breached section 157(1) of the Companies Act which states that a director must act honestly and use reasonable diligence in the discharge of his duties. The term "act honestly" covers a multitude of matters, such as that the director must act in the best interests of the company, must not place himself in a position of conflict of interests, and must not use his powers for improper purposes. Hence, from the explanations above, it is clear that Trust has breached section 157(1). Of which, Trust will be liable to the company for any profit made by him or for any damages suffered by the company as a result of the breach of provisions. Besides the civil action, he will be pursued for criminal charges, which includes a fine not exceeding $5,000 or to imprisonment for a term not exceeding 12 months.

b. At a board meeting in which Honest is present, it is revealed that the company is going to lose the company’s biggest client. Honest on hearing this, sells off his shares in No Problems Ltd, a few days later.

Answer:
This is an issue of insider trading whereby No problems Ltd and its directors may expose Honest to criminal liability in court for his actions.

Under the Securities and Futures Act, section 218(2) provides that if a person connected to a corporation possesses information concerning that corporation that is not generally available, and the information is such that a reasonable person would expect it to have a material effect on the price or value of securities of that corporation, and the connected person knows or ought reasonably to know that the information is not generally available and might have a material effect on the price or value of those securities, then he should not subscribe for, purchase, sell any such securities. This is also supported by the case of Public Prosecutor v Koh Soe Khoon [2006] SGDC 84.

Honest, firstly, is present at a board meeting, meaning that he is a director of No Problems Ltd. Hence he is connected to the company, as defined in section 218(1), which states that a person connected to a corporation includes officers, who are directors, secretaries and employees of the corporation.

Secondly, the information is revealed only in the board meeting, hence it can be taken that it is not generally made known to the public.

Thirdly, a reasonable person would expect the price of the company’s shares to fall, which means to have a material effect on the price as the company loses its biggest client.

Therefore, Honest fulfills all the conditions of section 218(1), and the act of him selling his shares causes him to breach the statute as he is essentially trading with material information that he is privy to, which is not available to the public, to minimize his loss. This results in criminal liability as stated in section 221 of the Securities and Future Act, where any person who contravenes section 218 or 219 shall be liable on conviction to a fine not exceeding $250,000 or to imprisonment for a term not exceeding seven years, or both.

In addition, he has also breached section 157(2) of the Companies Act which states that an officer of a company (such as director) shall not make improper use of any information acquired by virtue of his office to gain advantage for himself or any other person, or to cause detriment to the company. This is clearly unfair to the rest of the public as well as the shareholders of the company. Breaching of which, he is liable to the company for any profit made by him or for any damage suffered by the company as a result of the breach of any of those provisions; and guilty of an offence and shall be liable on conviction to a fine not exceeding $5,000 or to imprisonment for a term not exceeding 12 months.

Last but not least, under section 232 of Future and Securities Act, Monetary Authority of Singapore (MAS) may bring a civil claim for a civil penalty to be imposed.

However, the crux of the situation is whether the information is made known to the public before Honest has sold his shares as there are still a few days of discrepancies, during which the information might have been known to the public. If the information has already been made known to the public, then Honest will not be liable for any offences stated above.

c. Would any of your answers definitely be different if the director involved was a non-executive/independent director (search the web).

Answer:
A director who does not work for the company in full time capacity, such as not participating in the day to day management of the company is known as a non-executive director. However, he can influence the rest of the executive directors by questioning how the management is done and whether it is done in the best interest of the company.

In the case of AWA Ltd V Daniels (1992) 10 ACLC 933, the distinction between executive and non-executive directors is clear in large companies. However, in section 4 of Companies Act, the word “directors” is interpreted as to “include any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the directors of a corporation are accustomed to act and an alternate or substitute director”. Hence this tells us that, in the eyes of the law, non-executive directors are still considered to be directors and they are bound by all the statutes in the Companies Act.

After establishing that non-executive, like directors are bound by the Companies Act, and thus are imposed the same liabilities or restrictions as directors, Rain, Honest or Trust even as non-executive directors are still liable for the respective duties imposed. In all two scenarios regarding section 156 of the Companies Act and the Securities and Future Act, our answers would be the same.

4. As can be seen a director can face a lot of potential liabilities. From a practical/business viewpoint, what can you do to reduce the risk? For instance, can you buy insurance to cover the risks? Search the web. If so, does it mean directors can slacken in their duties?

Answer:
A business can take measures to protect itself from the mistakes and subsequent liabilities caused by its directors. However, such measures can only protect the business from a financial aspect.

Measure 1: Directors and Officers Liability Insurance

Directors can consult their house lawyers and buy Directors & Officers’ insurance if he/she is a member of the Singapore Institute of directors. Directors and Officers Liability Insurance (often referred to as D&O) is liability insurance payable to the directors and officers of a company, or to the organization(s) itself, to cover damages or defense costs in the event they suffer such losses as a result of a lawsuit for alleged wrongful acts while acting in their capacity as directors and officers for the organization. Director and Officers indemnity insurance protects them from legal liabilities that may incur personally in managing a corporation. Director and Officers liability insurance protects directors and officers from liability arising from actions connected to their corporate positions.

An example of a Director & Officers' liability insurance is NTUC Income's D&O Legal Liability Insurance. The insurance policy is designed to protect the directors and officers for the amount that he becomes legally bound to pay for claims made against him for wrongful acts. Wrongful acts are usually defined as actual or alleged breach of duty, breach of trust, neglect, error, misstatement, misleading statement, omission, breach of warranty of authority or any other wrongful acts committed by the directors in their respective capacities in the company.

However, the insurance only covers civil liability and not criminal conduct, such as fraudulent or dishonest acts, professional indemnity, bodily injury, property damage, punitive or exemplary damages, fines or penalties and all known claims, circumstances and allegations that may lead to a claim at policy inception date.

Despite so, it doesn’t mean that directors can slacken in their duties because any breach will still result in civil and criminal liability, D&O only helps to cover damages and defense costs. A common misperception of D&O insurance is that it makes directors or officers able to engage in acts they know to be wrong but this is not the case. Intentional illegal acts or any illegal gains or profit obtained by directors/officers are not covered under most D&O insurance policies; coverage would only extend to "wrongful acts" as defined under the policy, which may include certain acts, omissions, misstatements while acting as a director/officer of the organization. In addition, there are many statutes under the Company's Act that results in the disqualification of directors, which will not be covered in the insurance policy. Exclusionary language, however, would not provide coverage for fraud, illegal profits/gains, or intentional/wanton illegal conduct by such director/officer. Also, as the insurance will only cover a certain amount and types of claims depending on the insurance, directors will still have to be careful in their work.
They may also purchase indemnity and liability insurance, however Indemnity and liability insurance does not cover criminal liabilities, fees and fines. Under section 172 of Companies Act, an arrangement made between the company and the directors so that the company pays for the liabilities of the directors is prohibited and void. However, section 172(2) provides for 2 exceptions where the company can purchase and maintain for any officer insurance against any liability in subsection (1) or indemnify him for his expenses against any liability incurred by him. Therefore, it does not prevent a company from purchasing D&O insurance for the directors.

Pursuant to section 157(1) of the Companies Act, a director must act honestly and use reasonable diligence in the discharge of his duties. Section 157(3) states that if section 157 is breached, the director would be guilty of an offence. This would be considered an act of criminal conduct. Therefore, as long as it is proven that a director does not act with reasonable diligence, a claim can no longer be made.

Measure 2: Reliance on Professional Advice

Sometimes, a director's standard of performance on technical or complicated matters will be good enough if the director relies on others, e.g., accountant, lawyer, engineer, etc. However, a director must still make sure advice is obtained from professionals who are independent and have appropriate experience and expertise. Directors cannot ignore their own knowledge of the facts or fail to exercise responsible judgment. In the end, directors' decisions can be supported by professional advice; but the decision cannot be delegated to such professionals.

Measure 3: Self-defence

A director who is present at a directors' meeting is deemed to have consented to resolutions passed or actions taken unless:

i. the director requests that an abstention or dissent be entered in the minutes; ii. the director sends written dissent to the secretary of the meeting before the meeting is adjourned; iii. the director sends a dissent by registered mail or delivers it to the registered office of the association immediately after the meeting is adjourned, or iv. the director otherwise proves that he or she did not consent to the resolution or action.

A director who votes for or consents to a resolution or action is not entitled to dissent. So, if a director thinks the Board is wrong, it is not enough to abstain, instead he should vote against the motion and make sure the vote is recorded.

Measure 4: Due Diligence

Directors will not be liable for errors made in circumstances where they acted honestly, in good faith and made reasonable efforts to make an informed decision that was in the association's interests. Simply put, assume some directors face personal lawsuits because they made a bad decision. If the bad decision was made after due diligence, the directors should be all right.

Due diligence can be established if the record or evidence shows the directors made an informed decision. This is demonstrated by: 1. Obtaining necessary information relating to the issues involved; 2. Examining the information; 3. Making inquiries; 4. Where appropriate, seeking outside professional advice; and 5. Taking the time necessary to ensure that the decisions are informed decisions.
It helps if directors put in place systems to address compliance and that the systems are periodically reviewed for adequacy. That is why a Director's Handbook, including various check sheets, is commonly developed by societies and associations. Of course, if check sheets are available and not followed, then the directors will likely pay.
Measure 5: Risk Management
Risk management is not buying insurance or winning lawsuits. It is protecting and conserving the association's resources and providing membership services sensibly. The purpose of risk management is to improve the operations by having risks acknowledged and controlled. Additional actions an organization can adopt to reduce risk is to train and supervise its staff, enforce rules, inspect and maintain equipment, properly document meetings and decisions, and meeting all statutory reporting requirements.

5. Read the case of Lim Weng Kee v Public Prosecutor [2002] 2 SLR (R) 848 (via Lawnet) to get a brief outline. The case deals with a breach of director’s duties and concerns a director of a pawn shop who released pawned items without making proper checks.

a. Did the facts give rise to criminal proceedings or civil proceedings or both?

Answer:
The facts gave rise to both criminal and civil proceedings.
The appellant was in breach of section 157(1) of the Companies Act which gives rise to criminal proceedings.
The appellant was also in breach of standard care and diligence expected of him from the other directors, thus giving rise to civil proceedings where the other directors may bring an action against him.

b. What section of the Companies Act was breached and why was it breached?

Answer:
Section 157(1) of the Companies Act was breached as the appellant had failed to use reasonable diligence as managing director of the pawnshops in the discharge of his duties. The judge found that the appellant had breached his duties as director, and convicted and fined him $4,000 on each of the three charges.

It was breached as the appellant has failed to use due diligence to ensure the cheque was cleared before allowing her to redeem the jewellery

c. Would there have been a civil proceeding or criminal prosecution if it was an ordinary partnership instead of a company? Why?

Answer:
There would have been no criminal proceedings if this was an ordinary partnership. This is because a partnership is governed by the Partnership Act, and not the Companies Act. As such, there is no criminal infringement of the Companies Act under section 157(1) by Lim Weng Kee. There is no such provision under the Partnership Act to enforce a director’s duties. Thus, there would be no criminal prosecution of Lim Weng Kee if it was an ordinary partnership where liability is unlimited.

However, if it was an ordinary partnership, there would still be the possibility of civil proceedings. This is because Lim Weng Kee has caused economic losses to the partnership. As such the other partners can sue Lim on behalf of the partnership to recover the losses incurred. This is premised upon a duty of care that Lim owes to the other partners. If this duty of care is breached, and the other partners had no contributory negligence, they can then bring a suit against Lim to recover the losses incurred. In this case, Chong, Feok, and Yeow, fellow partners all had contributory negligence by allowing the jewellery items to be taken away from the pawnshop. Hence, only if there are other partners in this partnership would civil proceedings arise, as Chong, Feok and Yeow all had contributory negligence and thus would not be able to hold Lim personally liable for the economic losses.