Director’s duties in Singapore

Directors’ duties under Singapore law

The duties of a Director under Singapore law may be classified into statutory duties and duties under general law.

Statutory duties

Statutory duties are set out in the Companies Act (Cap 50) of Singapore (the Companies Act). However, the Companies Act is not an exhaustive statement of the law relating to directors’ duties under Singapore law as director duties have not been codified. For the purposes of this memorandum, section numbers shall refer to sections of the Companies Act.

The following provisions of the Companies Act set out the primary statutory duties of a director

• Section 157A(1) prescribes that “the business of a company shall be managed by, or under the direction or supervision, of the directors”. The powers of a company are presumptively vested in the board of directors, except in matters where action by the company in general meeting is required under the Companies Act or the constitution of the company.
• Sections 157(1) and (2) set out the statutory statement of directors’ duties under the Companies Act as follows
  • A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office (Section 157(1)).
  • An officer or agent of a company shall not make improper use of his position as an officer or agent of the company or any information acquired by virtue of his position as an officer or agent of the company to gain, directly or indirectly, an advantage for himself or for any other person or to cause detriment to the company. (Section 157(2)).
  • The word “honestly” in Section 157(1), which requires that the director’s subjective state of mind must be found to be blameworthy, covers three basic propositions.
  • The director must act in what he honestly considers to be the company’s interests, and not in the interests of some other person or body.
  • A director must not place himself in a position where his duty to the company and his personal interests may conflict.
  • A director must employ the powers and assets that he is entrusted with for proper purposes and not for any collateral purpose.
• Consequences of breach
  Under Section 157(3), a breach of the provisions of Section 157(1) or (2) is a criminal offence and renders the relevant director liable to a fine not exceeding $5,000 or to imprisonment for a term not exceeding one year. Civil liability is not derogated from and the director may also be liable to the company for any profit made by him or for any damage suffered by the company as a result of such breach.
• Other statutory duties
  The duty of disclosure: The Companies Act further requires directors to disclose certain information to the company
  • Section 156(1) reinforces a director’s duty to make full disclosure under general law and requires the following matters to be disclosed to the board of directors:
    • The nature of a director’s interest in any contract or proposed contract with the company.
    • The nature, character and extent of any conflict that might arise by virtue of a director holding any office.
    • The nature, character and extent of any conflict that might arise by virtue of a director owning any property.
      Failure to make a disclosure under Section 156 is punishable by fine not exceeding $5000 or to a term of imprisonment not exceeding one year.
  • Section 165(1) imposes a general duty on directors to disclose the following
    • Particulars of such interests in the shares, debentures, participatory interests, rights, options and contracts as are necessary for the purpose of maintaining the register of directors’ shareholdings.
    • Particulars of any changes in the interests mentioned above.
    • Such particulars, as are necessary for maintaining the register of directors, secretaries, managers and auditors.
• Duty to prepare accounts properly: The directors are responsible for keeping such accounting and other records as will sufficiently explain the transactions and financial position of the company and enable true and fair profit and loss accounts and balance sheets to be prepared from time to time, and shall cause those records to be kept in such manner as to enable them to be conveniently and properly audited (Section 199). Section 201 requires the directors to present, at the annual general meeting of the company, a profit and loss account and balance sheet showing a true and fair view of the company's financial position together with a statutory directors’ report. All directors are required to take reasonable steps to ensure that the company complies with the provisions of the Companies Act regarding accounts and any failure to provide financial statements that adhere to the Accounting Standards and give a true and fair value of the financial position and performance of the company is a criminal offence and can lead to a fine not exceeding $50,000 (Section 204(1)).
• In addition, every company registered in Singapore should have an audit committee comprising of at least three members appointed by the directors. Executive directors of the company can be appointed as audit committee members, but cannot be the majority composure of the committee. The audit committee is responsible for
  • Appointing an auditor (section 201B(5)(b)).
  • Reviewing (section 201B(5)(a))
    • (1) with the auditor, the audit plan;
    • (2) with the auditor, their evaluation of the system of internal accounting controls;
    • (3) with the auditor, their audit report;
    • (4) the assistance given by the director’s to the auditor;
    • (5) the scope and results of the internal audit procedures; and
    • (6) the financial statements of the company;
  • All such other functions as may be agreed to by the audit committee and the board of directors.

Duties under common law

The following briefly describes the common law fiduciary duties of directors under Singapore law

• Duty to act in the company’s interests: A Director is required to exercise his discretion bona fide in what he considers to be in the interests of the company. Directors have a duty to ensure that any transactions authorised by the board or the directors are commercially justifiable from the company’s point of view. Whilst the company has various stakeholders such as its members, employees and creditors as well as the corporate group of which the company may form a part, a director’s primary duty is to consider the benefit of the transaction to the company (of which he is a director) as a commercial entity.
• Duty to avoid conflicts of interest: A director occupies a fiduciary office and the attendant duty of loyalty obliges a director not to place himself in a position where his duty and interest may conflict. Wherever a director has personal interests that may conflict with those of the company, he must make full disclosure in order to obtain a release from his obligations as director. Unless a director has provided full disclosure and obtained the requisite informed consent of the company, a director who acquires a benefit in connection with his office is accountable to the company for that benefit. The duty to avoid conflicts of interest is not confined to instances where a director obtains a profit; a director is also obliged not to place himself in a position where the interests of the company which he is bound to protect come into conflict with his personal interest or the interest of a third party for whom he acts or may be interested in. A breach of this duty makes any contract entered into by the company voidable and the director accountable for secret profits (if any).
• Duty to act for the proper purpose: Use by a director of powers conferred upon him to pursue objectives which are outside the scope of the purpose for which such powers are conferred is not permitted. As such, a director should not use his powers for the wrong purpose or misapply company assets. If a director uses his powers for the wrong purpose or misapplies company assets, the company can declare the action or transaction void and the director will be liable to indemnify the company for its losses, irrespective of whether he acted honestly and he may also be convicted of criminal breach of trust, even if he did not personally benefit from the misappropriation.

Directors’ negligence

• Duty to be skilful: There is a distinction to be made between executive directors and non-executive directors here. Whether an executive director has breached his contractual duty to exercise skill, care and diligence is determined by reference to the objective body of knowledge and expertise possessed by those in the same calling. In respect of non-executive directors, the position is that a director need not exhibit in the performance of his duties, a greater degree of skill than may reasonably be expected from a person of his knowledge and experience i.e. there is no objective standard of skilfulness expected of a non-executive director.
• Duty and standard of care: A director needs to maintain the minimum objective standard in discharging his duties i.e. the standard of care reasonably expected of a person discharging the responsibilities that the director has assumed. The standard is that of a reasonably diligent person having both the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company and the general knowledge, skill and experience that the director has.
• Duty to be diligent: a director is required to exercise “reasonable diligence” in discharging the duties of his office.

Nominee directors

• A majority shareholder would typically appoint a nominee director to the board of the company. While the relationship between the principal and the nominee director is of a fiduciary nature, that relationship cannot supercede the duties owed by the director to the company. However, where no conflict of interest arises, the nominee director may take into account the interests of the principal in discharging his duties as director.
• Section 158 permits disclosure by a nominee director to his principal subject to the following conditions
  • The director must declare at a meeting of the board, the name and office or position held by the person to whom the information is to be disclosed and the particulars of such information.
  • The director receives prior authorisation of the board to make the disclosure.
  • The disclosure will not be likely to prejudice the company.
• Sections 218 and 219 of the Securities and Futures Act (Cap. 289) further prohibits the principal from trading in the company’s securities where the nominee director is in possession of price sensitive information which is not generally known.

Cross directorships

The holding of cross directorships is not per se a breach of a director’s duty of loyalty. However, a director is required to disclose the existence and nature of any possible conflict. A common practice is for a director to abstain from voting where such a conflict may arise. In some circumstances, the director may need to resign from his directorship in one of both of the companies where there is no other way to deal with the conflict.

Remedies for breach of directors’ duties and effect of breach

A company may pursue three remedies for breach of duty by its directors

• Sue for damages (in the case of negligence or breach of fiduciary duty) or for the return of specific property (in the case of misapplication of property).
• Claim any secret profit that the director has made (as in the case of breach of fiduciary duty).
• Require that the exercise of a power in breach of directors’ duty be declared invalid.

Effect of breach of directors’ fiduciary duties on corporate transactions: where a transaction is entered into in breach of a director’s fiduciary duty, that transaction is not void but may be voidable at the instance of the company. There are two relevant scenarios here

• Transactions with directors who have breached their fiduciary duty: where directors have entered into contracts with the company in breach of their fiduciary duties, such contracts or transactions are voidable at the instance of the company.
• Transactions with third parties by directors in breach of their fiduciary duty: where a transaction has been entered into with third parties by the company, whether or not the transaction can be avoided by the company vis a vis the third party would depend upon whether the third party knew or ought to have known of the director’s breach of duty in procuring the company to enter into the transaction.

A member may restrain the directors from entering into a transaction in breach of their fiduciary duties to the company under Section 409A and seek an injunction against a breach of Section 157.

Indemnification of directors

Under Section 172(1), any provision indemnifying a director against any liability for negligence, default, breach of duty or breach of trust is void. However, members may, acting together, release a director from his fiduciary duties and excuse him from liability for breaches of duty.

Section 391 gives the court (in certain specific circumstances) the power to relieve directors from the consequences of their negligence, default, breach of duty or breach of trust. This power is only applicable in an action by the company against a director and not to an action by a third party. In order for Section 391 to apply, it must be shown that the director acted honestly and reasonably and that it is fair to excuse him having regard to all the circumstances of the case.

Duties of directors of an entity regulated by the Monetary Authority of Singapore (MAS)

The MAS has published a set of guidelines on risk management practices relating to the board of directors and senior management (March 2013) (the Guidelines). The Guidelines note that the board of directors is collectively accountable to its stakeholders for the long-term success and financial soundness of the company. The board is therefore responsible for

• Approving and overseeing implementation of the company’s overall strategic direction, risk appetite and strategy, and related policies.
• Establishing and communicating corporate culture and values.
• Establishing conflicts of interest policies and a strong control environment.

The board has the following duties to

• Approve the company’s organizational structure and ensure that adequate corporate governance frameworks and systems are in place.
• Ensure that senior management formulates policies that promote fair practices and professionalism.
• Ensure it receives regular professional development training.
• Critically review its own performance to assess the quality of risk management and adequacy of internal controls.
• Oversee the design and operation of the company’s remuneration policies.
• Establish fit and proper standards in appointing senior management.
• Ensure that the company’s related party transactions are undertaken on an arm’s length basis.
• Ensure that the company’s recordkeeping systems produce adequate and reliable data for the purpose of preparing financial statements in line with the relevant accounting standards.
• Maintain adequate records of all board meetings.
• Oversee the risk governance of the company and ensure senior management maintains a sound system of risk management and internal controls to safeguard stakeholders’ interests and the institution’s assets.

The board must notify MAS in advance of any substantive changes in the company’s business activities, structure and overall condition, or as soon as they become aware of any material adverse developments, including breach of legal or prudential requirements. The MAS should be notified of material information that may negatively affect:

• The suitability of a relevant shareholder.
• The fitness and propriety of a board member or a member of the senior management.

This document is intended to be a general overview of directors’ duties in Singapore and as such we have not included case law analysis and other in depth analyses. We are able to provide a more detailed analysis on request. Should you require further assistance on any matter involving determining the scope or application of directors’ duties in Singapore, please get in touch with Sheela Moorthy and Dexter Tan.