The Appellate Division of the High Court of Singapore (Appellate Division) provided helpful guidance on when a director may be considered to have breached their duty of care to their company.
Goh Jin Hian (Dr Goh) was an executive director of Inter-Pacific Petroleum Pte Ltd (IPP). Around the time IPP was entering judicial management, Dr Goh learnt that IPP owed a total of approximately US$156 million to two banks for drawdowns for trades made on IPP’s bank facilities (Drawdowns), and began to suspect that there may be the possibility of fraud in some of IPP’s previous transactions.
IPP’s judicial managers later found that there were large amounts of receivables from various customers, and the Drawdowns were predicated on these receivables. However, these transactions underlying the receivables turned out to be shams as the supposed customers asserted that they did not contract with IPP.
IPP had two lines of business: bunker trading and cargo trading. However, Dr Goh was not aware of IPP’s cargo trading business and of three suspicious incidents or “red flags” that had occurred. Thus, IPP claimed Dr Goh was in breach of his director’s duty of care, skill and diligence (Care Duty).
IPP also claimed that the Drawdowns were in breach of Dr Goh’s duties to IPP’s creditors (Creditor Duty), as it took place when the company was in a parlous financial situation. IPP alleged that Dr Goh failed to prevent IPP’s assets from being dissipated, causing IPP to suffer loss. On the other hand, Dr Goh highlighted that he did not arrange or authorise the Drawdowns.
The Appellate Division found that the three purported “red flags” were not in fact red flags that would have put Dr Goh on a train of inquiry leading to uncovering the fraud in the cargo trading business. For example, IPP’s auditor did not detect fraud when investigating one of the red flags, and a director is not expected to take more steps than the auditor to uncover fraud.
Although there was no breach of the Care Duty in relation to the “red flags”, there was still a breach in relation to being unaware of the cargo trading business. However, the Appellate Division determined that this breach did not cause IPP’s losses. IPP bore the burden of proving “but for” causation – that the loss would have been avoided if Dr Goh had discharged his Care Duty. As IPP failed to do so, Dr Goh was not held liable, since his ignorance of the cargo trading business was not the proximate cause of IPP’s losses.
The Appellate Division also held that Dr Goh did not breach the Creditor Duty. The Creditor Duty relates to a director’s subjective state of mind when a transaction is entered into, and whether the director exercised their discretion in good faith in the best interests of the company at the time. In this case, Dr Goh did not authorise the Drawdowns and had no discretion in relation to them, and therefore could not have breached the Creditor Duty.
All directors, regardless of their role, are required to take reasonable steps to understand and oversee their company’s core business. Failing to do so, such as being ignorant of a company’s business line, may breach the duty of care. Nonetheless, a director’s breach of duty does not automatically lead to liability because the company must also prove that such breach caused its losses.
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Disclaimer: This article is for general information only and does not constitute legal advice.
