Remedies and relief of liability for breach of duty
Every business always looks forward to ensuring a smooth process in operations. This is why directors are entrusted to make viable decisions that help the company grow and also approve transactions that do not bring about conflict of interests.
However, directors sometimes make decisions or enter into contractual agreements that breach their fiduciary duties. Therefore, it is important to know the duties and obligations of your company directors as well as the remedies you can apply when they breach their duties.
Remedies for Director’s Breach of Duty
As stipulated in the Companies Act, there are a number of remedies that a company can apply when directors breach their statutory obligations. It is also important to note that Singapore companies can resort to other relevant remedies.
Your company has the option to obtain an injunction with the purposes of taking a cautionary measure for a director who is in breach of duty. Only the company has standing to obtain an injunction, except in those cases where the court allows minority shareholders to bring a derivative action.
For example, where a director intends to enter into a personal contract to obtain property that rightfully belongs your company, you may commence an action to obtain an injunction, thus restraining the director from committing a breach of fiduciary duty.
Rescission of Contracts
Where the contract or transaction that the company has entered into is with the director who has breached his/her fiduciary duty, the company may rescind the contract or transaction. However, where the contract or transaction is with a third party, whether the transaction can be avoided depends on the extent to which the third party was aware that the director was in breach of duty.
To put this into context, for a company to set aside such a contract or transaction, knowledge of the director’s breach of fiduciary duty must be brought home to the third party.
Restoration of Company Property
A company can recover any property acquired by the director from the company in breach of fiduciary duty as such property is held on constructive trust for the company.
In relation to a third party, where a contract with a third party is avoided, any property received by the third party is to be restored to the company.
Account of Profits
When a director breaches his duties, your company has the right to recover any profits derived from transaction he/she entered into. For example, through using a corporate opportunity or information to his/her own advantage.
Apart from the above remedies, where a company has suffered loss due to a director’s breach of duty, for example, through a director’s negligence, the company may also sue the director for damages for the loss suffered.
Relief from liability for breach of duty
When you company director breached his/her duties, he/she may, in some circumstances, extricate himself/herself from liability.
The Companies Act provides for specific situations where a director will not be liable for breach of duty. At common law, an errant director will not be liable if the company ratifies his/her actions in general meeting.
As stipulated under Section 391 of the Companies Act, a company director who has breached his/her duties can use the court to extricate himself/herself.
A Singapore court may exercise this power in either an action brought against the director or prospectively before any action is brought.
For a director to avail himself/herself to relief under Section 391 of the Companies Act, the courts must consider that:
- the director acted reasonably;
- the director has acted honestly; and
- it is fair to extricate the director after examining all circumstances surrounding the case.
Members of a company may ratify and adopt an act of a director which would otherwise be a director’s breach of fiduciary duty. For the director to be absolved of his/her liability, he/she must fully and honestly disclose all material facts to your company members who must also pass a resolution.
However, the power to release a director from his/her liability is subject to limitations, for example:
- The release must not be associated with fraud or the creditors or to oppression or disregard of the interests of minority members as stipulated under Section 216 of the Companies Act.
- Members cannot ratify transaction that is illegal.
- The power to release can only be effective in solvent companies. Otherwise, It will intrude on creditors’ interests and displace the shareholders’ power to manage the company’s assets.
Indemnity and Insurance for Breach of Duty
An officer of the company (which includes a director) cannot be discharged from any liability related to:
- breach of trust; and,
- breach of duty.
No provision in the constitution or in any other contract can indemnify such an officer, meaning, he/she may be found guilty.
The Companies Act renders such provisions void, including those that place obligations on a company to directly or indirectly indemnify its directors for any such liability are also void apart from those legalised under Section 172A or 172B.
According to Section 172A, companies are allowed to insure their officers for liability resulting from default, negligence, breach of trust, and breach of duty. Such policies are generally referred to as Directors’ and Officers’ Liability Insurance Policies.
It is common for companies in Singapore, in particular listed companies, to purchase such policies for their officers or to provide an allowance for this purpose. While there is no restriction in the section on the type of breach for which a policy may be purchased by the company, insurance companies in Singapore shun away from insuring other company employees for breaching any duty, especially where the officer has been dishonest or has been in wilful breach of duty.
Section 172B allows companies to indemnify its officers against liability suffered to other individuals excluding the company. Exemptions include an indemnity against:
- court fines arising from criminal proceedings;
- penalties imposed by any regulatory authority due to non-compliance;
- liabilities suffered during criminal proceedings and the director is convicted;
- liabilities suffered by the company or a related company during civil proceedings and the court gives judgement against the director; or
liabilities suffered with regard to an application made under Section 76A(13) or 391 of the Companies Act and the director is not granted reliedf by the courts.
With the various responsibilities that your company directors have, you need to know the remedies when they breach their duty. This protects the future of your company by curbing any misconduct on their part.
Need further guidance? Contact Tianlong Services today and we will take it up with you every step of the way.