Most people think that the CEO wields all the power in the company, but the CEO is really only the 2nd highest position in any company. Ultimate power really rests with the company’s Board of Directors. Directors are the individuals who are ultimately responsible for ensuring that the company’s best interests are fulfilled. Because directors wield the greatest legal power over a company, they have a significant list of highly important directors’ duties that they must discharge with great care and deliberation. Directors who fail to perform these duties can face significant legal liability.
The 8 Key Duties of Directors in Singapore:
- Duty to act in good faith
- Duty to act in shareholder’s interests
- Duty to act in employee’s interests
- Duty to act in creditor’s interests
- Duty to use powers for proper purpose
- Duty to disclose material interest in transactions
- Duty to disclose conflicts of interest
- Duty to use reasonable skill, care, and diligence
Definition: A fiduciary duty is a duty to put another person’s interests above your own.
Duties 1 to 5 in the list below are called “fiduciary duties”. A fiduciary duty is the highest and most sacred duty recognised by the law.
Some key examples of fiduciary duties include:
- Doctor-patient relationship
- Lawyer-client relationship
- Partner-partner relationship (e.g. in a law firm LLP)
- Trustee-beneficiary relationship (e.g. in a family trust fund)
1. Duty to act in good faith
As a director, your ultimate responsibility is your duty to act in good faith. This means you must act in the best interests of the company as a whole.
At all times, company directors:
- Must act honestly, and conduct reasonable due diligence for all their dealings
- Must NOT use their position to gain an advantage or profit for themselves
- Must NOT enter into a conflict of interest with the company
- Must NOT use their position to cause the company harm
The interpretation of what is truly in the “best interests of the company” might appear to be subjective. However, the Courts actually apply an objective test when faced with lawsuits concerning directors who act in bad faith. The legal test is this: would an honest and intelligent man reasonably think your actions to be in the best interests of the company? As you go about your director’s duties, it is worth bearing this legal standard in mind.
Under Section 157 of the Companies Act, it is an offence for a director to:
- Act dishonestly or recklessly
- Use their position to gain personal advantage or profit
- Cause the company to suffer harm
If a director breaches Section 157 and is convicted, they can be:
- Held liable to pay the company compensation for any profit illegally earned by the director, or any losses incurred by the company as a result of the dishonesty
- Jailed up to 1 year, and/or fined up to $5,000
Further elaboration on directors’ duty to act in the company’s interests:
Acting in the best interests of the company doesn’t mean that every single decision has to produce a profit for the company. Directors will make mistakes. They may decide to okay management’s decision to roll out a new product that eventually fails. They may decide to expand into a new overseas market that ends up generating losses. Under Singapore law, directors will not be held liable for such business decisions, as long as they made them in good faith.
2. Duty to act in shareholders’ interests
Since shareholders own the company, acting in the best interests of the company generally also means acting in the best interests of shareholders. Now, this doesn’t mean that directors should simply follow the demands of shareholders without any independent thought.
Directors must be careful not to act in the interests of any one shareholder, or any particular group of shareholders. Directors must represent the company as a whole, which also means representing shareholders as a whole. Remember that the duty of a director is to act in the interests of the “company as a whole”. This means that and shareholders are but one component of the company. Directors should not act in a way that actively harms the interests of shareholders.
Shareholders have the power to hold directors to account, if they feel that they have been unfairly treated. This applies not only to majority shareholders, but also to minority shareholders, who without the law would have little recourse to directorial oppression.
Shareholders can initiate legal action to:
- Modify or block a transaction or company resolution
- Purchase shares of the company or shares belonging to other shareholders
- Reduce the company’s paid-up capital
- Wind up the company
- Change the way company affairs are handled
3. Duty to act in employees’ interests
Directors have a duty to consider their employees’ interests when making decisions. Directors should not hold employee interests above shareholder interests, but should accord due consideration to employees when making decisions. Sometimes, directors must make difficult decisions that will affect many employees. For instance, in difficult times, directors may decide that retrenchments are necessary to save the company. Generally, such actions are not bad faith decisions, since even though they may be against the interests of (some) of the employees, they are undertaken with the ultimate best interest of the company as a whole.
4. Duty to act in creditors’ interests
When a company has taken on debt, directors must be careful to also consider the interests of creditors. Corporate Finance 101 teaches that creditors have the first claim on company assets. As such, it’s important that directors do not take actions that would unduly jeopardise the repayment of debt. Otherwise, directors can be held liable for some very serious penalties.
There are important directors’ duties here that must be fulfilled:
- Directors cannot take on debt if they know the debt likely can’t be repaid
- Directors cannot take on debt if they know that the company is approaching insolvency, or is already insolvent
- Directors cannot continue trading (i.e. running the business) if they know the company is insolvent
It is a criminal offence to breach the above conditions. Criminal penalties will vary depending on the offence. For instance, if directors infringe upon the 2nd condition in the list above (taking on debt while business is insolvent or approaching insolvency), they can be jailed up to 3 months, and/or fined up to $5,000.
Ignoring creditors’ interests as a director can unleash serious consequences
In addition to criminal penalties, the Courts can also order such directors to bear unlimited personal liability for all debts incurred by the company. This means that even if the company is organised as a Private Limited entity, limited liability protections will not apply. This is called “piercing the corporate veil”.
These are hugely significant liabilities. If you’re a director and your company owes other entities money, make sure to manage your company’s finances with extra diligence. Don’t take actions that would impair the ability of the company to repay the entities that you owe money to.
What happens to directors’ powers when a company becomes insolvent?
When a company is insolvent, directors no longer have power over the company. Power over the company’s affairs is transferred to creditors. The creditors’ interests now become paramount, and must be considered above the interests of other parties, such as the shareholders. This is because the assets of the company don’t truly belong to the company anymore – it is really the assets of the creditors, since they are the ones who loaned money to the company and have a right to be repaid.
5. Duty to use powers for proper purpose
The scope and purpose of a director’s powers is defined by the company constitution. The constitution is made up of:
- Articles/memorandums of association
- Shareholder resolutions that have been passed
- Other constitution agreements that may apply (e.g. joint venture agreements)
Directors must only act within the boundaries of the company’s constitution.
They cannot use their powers in ways, and for purposes, that exist outside of these boundaries. If directors do so, then their actions are considered invalid. Shareholders can apply to the Courts to invalidate such actions. It’s important to note here that if a director acts outside of his scope of powers, their actions are considered legally invalid, even if the director acted in good faith.
If the company learns of such actions, there are two courses of action that the company can take:
- Invalidate the director’s action
- If the company suffered a loss as a result of the director’s actions, the company can demand that the director compensate the firm for the loss
Consider the following hypothetical situation.
Example: A company has a constitution that prohibits any investment that requires more than $10 million in capital. If the directors wish to approve such investments, they must first seek the consent of shareholders, and receive at least 50% approval. This clause was written into the constitution to ensure oversight over riskier investments. The directors of this company, however, went ahead to approve a $20 million investment plan without seeking shareholder approval first. This decision was made after rigorous analysis showed a hugely profitable opportunity existed for the company. The directors felt their actions were justified, since they were acting in the company’s and shareholders’ best interests.
Verdict: The directors’ actions are void in the eyes of the law. They may have acted in utmost good faith to secure a profitable investment for the firm, but that is irrelevant here. The directors had a responsibility to act only within the powers granted to them by the company constitution. They disregarded this material fact, and actively pursued a course of action that was expressly prohibited. If the shareholders so wish, they have a right to strike out the directors’ decisions, and file a lawsuit against them for a breach of directors’ duties.
6. Duty to disclose material interest in transactions
Under Section 156 of the Companies Act, directors are legally required to disclose any material interest they have in company transactions. This is to prevent “self-dealing”, where the directors personally benefit from company transactions.
Example: A director’s family member owns a company. The director’s company proceeds to acquire his family member’s company, on the pretext of “strategic synergies”. This is a clear case of material interest/self-dealing. The material interest must be disclosed to the company before it can be completed. Otherwise, the director can face both criminal and civil liabilities. If convicted, directors can be jailed up to 3 months, and/or fined up to $5,000.
7. Duty to avoid conflicts of interest
Directors must generally avoid putting themselves in positions where their interests would compete with the interests of the company. Remember, a fiduciary duty means that the interests of the company must be placed before the interests of the director.
Some examples of conflicts of interest include:
- A director owning shares in a competitor
- A director receiving compensation from a supplier, whose goods are being purchased by the director’s company
- A director holding another directorship in a firm that does business with the director’s company
It’s important to note that the law treats the interests of immediate family members (e.g. a child or a sibling) as the director’s own interests. This means that the appropriate disclosures must be made if any family members are involved in the same company, or another firm that the director’s company is dealing with. If such disclosures are not made, the offending directors can face jail time, fines, and lawsuits from the company and its shareholders/fellow directors.
8. Duty to use reasonable skill, care, and diligence
Given that the Board of Directors is the ultimate body providing oversight over the entire company, all members of the Board are expected to perform their jobs competently.
The law establishes two tests to judge whether a director has exercised reasonable skill, care and diligence.
First test: Possession of reasonable skill and knowledge
Does the director possess the skills and knowledge that a reasonable person would expect of someone in that position?
For example, a reasonable expectation of the skill level required to be a director of a $100 billion-dollar global corporation, would be very different from a director sitting on a $1 million-dollar local company.
Second test: Act with reasonable skill and knowledge
Did the director act according to the skill and knowledge they had?
For example, if a director is a chartered accountant, and sits on the company’s audit committee, then did the director utilise his accounting background to properly keep the firm’s finances in check?
The first test establishes a baseline level of skill that all directors should possess, in relation to their position and the company they’re serving on. The second test ensures that directors with specialised skillsets actually bring those skills to bear in their directorships for the good of the company.
If directors act without exercising due skill, care, and diligence, they can be found guilty of negligence. Directors’ negligence is a very common cause of lawsuits filed against directors.