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Singapore – Judicial Clarification On Section 157(1) Of The Companies Act.

4 July, 2013

 

Legal News & Analysis – Asia Pacific – Singapore – Dispute Resolution

 

In the recent case of Falmac Limited v Cheng Ji Lai Charlie[2013] SGHC 113, the Singapore High Court (“HC”) was given the opportunity to clarify that the breach of a director’s statutory duties under the Companies Act (“Act”) may not amount to a breach of a director’s fiduciary duties pursuant to section 157(1) of the Act. 


Facts 


Falmac Limited (“the Company”) made a claim against its former director and Chief Executive Officer (“CEO”), Mr Cheng (“the Defendant”) for breach of fiduciary duties. The Company was listed on Catalist of the SGX-ST and its business operations were mainly carried out through its subsidiaries located in China (“Chinese Subsidiaries”).

 

 In October 2004, the Company’s board consisted of the Defendant and with 3 other directors. The Company was in dire financial position and consequently defaulted its repayment on 2005 and the creditor bank called on the entire restructured loan. Business Corporate Services Pte Ltd (“BCS”) bought over the Company’s outstanding debt from the creditor banks on 2008 and pursuant to a debtto-equity swap, became a shareholder in the Company. BCS then attempted to restructure the Company’s debt by arranging a reverse takeover (“RTO”) involving a third party, CNMC. 

 

The Defendant resigned as CEO on July 2009, after which, he purported made some statements which related to “accounting irregularities” and “false accounting” within the Company and were published by The Edge Singapore. A trading halt was imposed on the Company’s shares on the same day. Three days after trading halt, the suspension of trading was imposed. While the trading was suspended, BSC caused the removal of the Defendant as a director and the Company sued the Defendant for breach of director’s duties. 


One of the issues before the HC was whether the breaches of the statutory requirements under section 201(3A) would ipso facto result in a breach of a director’s fiduciary duties under common law or the specific duties imposed by statute (i.e. Section 157 of the Act). 


Fiduciary Duties 


The HC noted that an allegation of breach of fiduciary duty of good faith is essentially a charge of dishonesty and must be distinctly alleged and proved. 

 

The HC held that every director owes certain duties as a fiduciary to his company including a duty to act bona fide in the interests of the company and a duty to act honestly and use reasonable diligence in the discharge of the duties of his office under the section 157 (1) of the Act. This is separate and distinct from the director’s statutory duties including duties to make and retain adequate financial records, to convene an Annual General Meeting (“AGM”) by statutory deadlines and to ensure the consolidated accounts and a balance sheet are laid out before the company at its AGM under section 201 (3A). 


The HC held that a breach of said statutory duties, which may well give rise to certain consequences under the Act, does not necessarily and by itself result in a breach of fiduciary duty. Persistent failure to comply with obligations as regards the filing of accounts and returns may amount to unfitness to hold appointment as a director under Section 155 of the Act. However, such failures need not involve any dishonest intent, nor would such conduct constitute a breach of fiduciary duty. In order for a particular act or omission to constitute a breach of fiduciary duty, it must fall within the various obligations of a fiduciary that reflect the core duty of loyalty recognised at common law or the duties that fall within the scope of director’s duties as defined under section 157 of the Act. 


Similarly, non-compliance with the Listing Rules did not automatically result in a breach of the Defendant’s fiduciary duty as a director. A complainant alleging breach is required to identify the specific fiduciary obligation of which the director is said to have been in breach. 


Application 


Applying the legal principles to the facts, the HC found that the Company failed to make its case that the Defendant has breached his director duties under Section 157 (1) of the Act and his fiduciary duties owed to the Company. The essential question before the HC was whether the Defendant had failed to act honestly and with the same degree of care and skill as a reasonable director in his position. The HC found that the based on the facts, this matter was not proven. 

 

 

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