Duties owed by directors
In Singapore, company directors are entrusted with the powers to make strategic and operational decisions that propel the entire corporation towards the right direction in accordance with the constitution.
Generally, the duties owed by directors are stipulated in Section 157A of the Companies Act. The directors:
- manage, supervise, and direct company business; and
- exercise all powers apart from the ones assigned to shareholders in a general meeting as per the company constitution or the Companies Act.
This provision of the Companies Act is typically adopted in the constitution. By taking into consideration the vital role directors play in managing operations and making strategic decisions in the company, their diverse duties and responsibilities are diverse.
The duties owed by directors to a company arise from the various sources as set out in the chart above. Regardless of the type of director listed out in the previous chapter, in Singapore, company directors generally have similar duties and responsibilities but they come with different standards dependent on the personal factors of the directors.
In Section 157(4) of the Companies Act, it is specifically stated that the provisions in the Companies Act complement other written laws when it comes to the duties owed by company directors. In other words, the Companies Act is not meant to be an exhaustive statement of directors’ duties.
Interaction between a Common Law Duty and a Statutory Duty
Although there is considerable overlap between the common law duties of a company director and his/her statutory duties, there are differences in substance and, more significantly, in the consequences of breach. The differences are shown in the table below.
Enacted written laws
Regulators or aggrieved persons
Civil liabilities and remedies
Criminal prosecution and/or criminal sanctions
Company can ratify breach
Company cannot stop the regulator from prosecuting if there is a breach
Generally, one of the duties that company directors need to comply with is fiduciary duty. A fiduciary duty refers to the legal duty to act in the best interests of another person. This imposition upon a director stems from the trust and confidence place in a director.
A director may not be the only person who owes fiduciary duties. Any other individual can also undertake a fiduciary the same by acting in the best interests of another person in specific matters that builds a relationship of trust and confidence as well as good faith and loyalty.
Thus, even an employee may owe fiduciary duties and be expected to act in the company’s best interests, but not all employees are fiduciaries. Whether such an employee who is not a director owes fiduciary duties is usually determined with reference to matters such as the scope of that person’s responsibilities and whether that person has the power to affect the company’s interests.
To Whom the Fiduciary Duties are Owed
In the normal course of governing the company operations, the director’s fiduciary duties are only owed to the company since it is a separate legal entity as elaborated in Chapter 1.
The duties are generally not owed to individual members, creditors or others. Accordingly, company directors should not act with neutrality when dealing with various shareholders.
In Relation to Shareholders
Generally, directors do not owe any fiduciary duty to company shareholders, but it depends on the collateral duty specified to circumstances. For example, a director who buys shares from a shareholder may owe the shareholder fiduciary duties if the director misleads the shareholder on either the share price at which shares are sold thereby depriving the shareholder of a higher price, or some relevant fact which if disclosed would have resulted in him/her not selling the shares at all as he/she is completely dependent on the director for information.
In Relation to Creditors
Generally, directors do not owe any fiduciary duty to company creditors. This is because their duties that touch on the interests of creditors are indirectly prescribed through the provisions of the Companies Act which imposes personal liability for fraudulent trading immediately prior to liquidation.
The provisions apply if it appears that the company entered into any business dealing geared towards defrauding creditors during the winding up process. In such circumstances, the court may declare that all involved parties are liable contribute to the assets of the company without any limitation of liability.
In Relation to Employees
Lastly, directors do not owe any fiduciary duty to company employees. However, as stated in Section 159(a) of the Companies Act, when it comes to defining the company’s best interests, directors must take into account the best interests of company employees. In addition, directors are bound by the legal obligations of employment law and other subsidiary laws relating to employment.
Nature of Fiduciary Duties
While the nature of a director’s fiduciary duties has many facets and is wide in scope, such fiduciary duties can be classified into 3 main types: A director has the duty:
(a) to act in good faith, or bona fide, in the best interests of the company;
(b) to act for proper purposes; and
(c) to avoid conflict of interest and duty.
Duty to Act in Good Faith in the Best Interests of the Company
The fiduciary duty to act for proper purposes requires your company directors to exercise their fiduciary powers as conferred. When the directors act in good faith in the company’s best interests, they may be in breach if the transaction does not serve the purpose that his/her powers confer.
When determining whether your company directors have used their powers for a proper purpose, the court will ascertain the nature of the power by looking at the company’s constitution and thereafter examine the considerable or actual purpose for exercising such powers.
The court will compare the nature of the power against the purpose for which the power was exercised and conclude whether the power was properly exercised or not. Where there were multiple purposes for exercising the power, a breach of fiduciary duty to act for proper purposes will be found where the impermissible purpose was the reason for the exercise of power.
Duty to Avoid Conflict of Interest and Duty
In this case, the fundamental principle is that any individual with a fiduciary duty cannot make a profit unless otherwise stated. This means that your company directors cannot put themselves in a position where there is conflict between their duty and interest.
If one of your company directors is involved in a transaction that brings about conflict between his/her fiduciary duty and personal interests, he/she must reveal it and seek approval to carry out the transaction.
Generally, if any of your company directors illegally uses his position to gain profit or personal advantage, a court will oblige him/her to pay damages arising from any incurred losses.
However, an exception is stipulated in Section 158 of the Companies Act. Company directors in Singapore are allowed to reveal information that they would not been able to have access to under certain conditions. This arises most commonly in relation to nominee directors such as a director of a joint venture company who is appointed by 1 of the shareholders.
Parties to whom the directors may disclose the information to include individuals whose interests are protected and supported by the directors as per their powers and duties. This arrangement only applies when the disclosure must not prejudice the company and must authorised by the board.
The following are common examples of conflict:
- Using company property, information or opportunity
Your company directors are not allowed to obtain any business property for their own personal benefits. When this happens, it is considered that they would be in breach of their duties and your company can seize any profits arising from such transactions in equity.
Since directors are considered trustees of company property and finances, misappropriating either or both may find them guilty of breach of trust or illegal embezzlement, which is indictable under the Penal Code (Cap 224) of Singapore.
Where a corporate opportunity is concerned, it is considered irrelevant that your company could not have seized the business opportunity or property. In such circumstances, the director must convey knowledge of the opportunity to the company instead of benefiting from the opportunity. Even if a director resigns from his/her position as a director, he/she may still be legally responsible for breach of fiduciary duty.
- Competing with the Company
In Singapore, a person can serve as a director in more than one company; however, such a position may bring about conflicts. In accordance with Section 156 of the Companies Act, it is the duty of such a director or CEO to reveal to the board any potential conflict of interest.
On the other hand, if any of your company directors is holding an office in other noncompeting companies, they are also obliged to disclose that there are no conflicts. At common law, it is at a general meeting that company directors can disclose the existence of a conflict of interest to the shareholders.
It is important to note that if your company directors hold more than one directorship office, they are not allowed to compete directly with your company or obtain any business or property belonging to your company for other competing companies. This obligation will persist even if the director has resigned, especially where the letter of resignation is received under such circumstances.
However, if the director had fully disclosed the facts in a general meeting and your company disallowed those business opportunities or contracts, the position would be different. In addition, if the directors were majority shareholders in your company, the disclosure may be inadequate.
- Dealings with the Company
Even though no rule of law exists in Singapore that stipulates that a company director is not allowed to make business deals with certain companies, their fiduciary relationship with a company obliges them to disclose their interests in such transactions.
- Secret Profits
Common law stipulates that company directors are not allowed to retain profits while they still have a fiduciary relationship with your company. For instance, a company director cannot obtain commissions while still in office unless stated in the company constitution.
This strict application of this rule comes when your director profits from a business deal while still in the fiduciary office even if no genuine conflict arose between his/her duties and interests.
- Making Improper Use of Information
According to Section 157(2) of the Companies Act, company directors are not allowed to use their positions improperly by personally benefitting directly or indirectly at the expense of your company.
In addition, according to Section 218 of the Securities and Futures Act, a person (which would include a director) must not engage in insider trading. To put this into perspective, this means that the directors of your company are prohibited from dealing in securities where they have key information that the public cannot access. The fact that they have such information could significantly affect the pricing of your company’s securities.
- Conflicting Duties
A director is bound to exercise his/her powers with the key intention of bringing substantial benefit to the company. Thus, as a general rule, they must not place any constraints on their discretion e.g. rigging a vote using an outsider.
However, if directors enter into a valid contract, which they bona fide believe is in the best interest of the company and the voting outcome would be genuine.
Also, as mentioned in the previous chapter, a nominee director represent the interests of a particular person or group but they are not allowed to sacrifice your company interests for selfish gain.
Duty of Skill, Care and Diligence
Did you know that your company directors are imposed with the duty to apply the least possible level of care, skill and diligence to execute their duties? This duty is generally codified under Section 157(1) of the Companies Act by the words “use reasonable diligence”.
Power to Delegate
Although the board of directors have the power to manage your company, the constitution of most companies allows the board to delegate its powers. This has been recognised by Singapore courts which have stated that “it is impractical to expect directors to be omniscient or to personally discharge all corporate powers and functions”.
As a matter of necessity, a director must trust the company’s officers to carry out their duties suitably and honestly as well as with integrity, skill and competence.
If the board has the express authority to delegate, it may do so. As such, ‘care’ should ensure that the power to delegate is expressly stipulated in the constitution. A board may delegate some or all of its management powers to a committee or committees or even to a single director, unless specified otherwise in the constitution. It may not, however, delegate all of its powers and functions as the board must retain general control.
However, a director may delegate his/her power and trust to his/her delegate only if the circumstances would not raise any suspicion. Where suspicion arises in relation to such delegate, the director must make reasonable inquiries. Otherwise, such a director will have to bear the consequences of his/her own inaction.
Reliance on Advice and Information
In accordance with Section 157C (1) of the Companies Act, a director must rely on the information and pieces of advice from the following individuals in specific situations:
- an employee of the company;
- a professional advisor or an expert; and
- any other director or any committee of directors.
Nonetheless, this does not detract from the director’s duty to exercise skill, care and diligence. In particular, Section 157C (2) provides inter alia that a director must make proper inquiry where the need arises and must not have knowledge that reliance on such information and advice are unwarranted.
It should be noted that while an action brought against a director should be by a company, shareholders may recover from a negligent director if it is established that a director separately owed a duty of care to a shareholder and had caused loss to such shareholder.
Apart from the duty found in Section 157 of the Companies Act, which captures the fiduciary duties and the duty to exercise skill, care and diligence owed by directors, other examples (which are not exhaustive) of statutory duties are further described below.
Relevant Section of the Companies Act
Requirements in Brief
Liability for Non-compliance
Every company shall:
(a) keep records of accounting and related facts and figures that exhaustively give details on all relevant transactions and the company’s financial position; and
(b) Maintain such records for a minimum of 5 years counting from the end of the financial year the transactions were recorded and reported.
The company along with its related officers shall be found guilty and forced to pay a maximum fine of SGD$5,000 or to serve a prison term of 12 months or less.
Section 201, 204
At least 18 months after your company’s incorporation and at least once every financial year or 15-months intervals, the directors shall hold its Annual General Meeting (AGM) to present financial statements for the period since the preceding financial statements made up to a date not more than 4 months (in the case of public listed companies) or in any other case, 6 months, before the date of the meeting as per the Accounting Standards (defined in the Companies Act)
The director shall be found guilty and forced to pay a maximum fine of SGD$50,000
Section 201(5), 204
Directors of a parent company are not obliged to abide by Section 201(2) above, but must held an AGM at the end of its financial year to lay:
(a) Consolidated financial statements describing the performance and financial position of the group for the period beginning from the date the preceding financial statements were made and ending on a date not more than 4 months (in the case of public listed companies) or in any other case, 6 months;
(b) A balance sheet dealing with the state of affairs of the parent company at the end of its financial year.
The financial statements shall reflect the Accounting Standards (defined in the Companies Act)
The director shall be found guilty and forced to pay a maximum fine of SGD$50,000
Section 201(16), 204
The financial statements laid before the company at its general meeting shall be accompanied by a statement signed on behalf of the directors by 2 directors of the company, containing the information under the Twelfth Schedule under the Companies Act.
The director shall be found guilty and forced to pay a maximum fine of SGD$50,000
Sections 336(1)(c), (g) and (h)
These provisions impose criminal liability on a person that deals with, disposes of the company’s property or falsifies company documents within 12 months before the commencement of winding up proceedings or at any time thereafter. They apply to both past and present officers of the company.
The director shall be found guilty and forced to pay a maximum fine of SGD$50,000 or to serve a prison terms of not more than 2 years.
Sections 339(3) read with Section 340(2)
If a debt is contracted on behalf of the company and at the time that the debt was contracted, the director had no reasonable or probable ground or expectation (even though he/she was not fraudulent or dishonest), after taking into consideration the other liabilities, that the company would be able to pay the debt and the director would be guilty of an offence.
The director shall be found guilty and forced to pay a maximum fine of SGD$2,000 or to serve a prison terms of not more than 3 months. The director may also be made personally liable for the payment of the whole or any part of the debt so contracted.
A director shall be found guilty if he/she knowingly engages in a business transaction aimed at defrauding company creditors or creditors of any another individual
The director will be personally responsible for the debts of the company without any limitation of liability. The director shall also be guilty of an offence and shall be liable to a fine not exceeding S$15,000 or to imprisonment for a term not exceeding 7 years or to both.
A director allows dividends to be paid when there are no profits is guilty of an offence.
The director shall be found guilty and forced to pay a maximum fine of SGD$5,000 or to serve a prison terms of not more than 12 months. The director shall also be personally liable to the creditors of the company for the amount of the debts due to them to the extent that the dividends so paid have exceeded the available profit.