Corporate Governance

Top 6 Director Liabilities After Resignation in Singapore

Resigning from being a company director is easy – just sign a few documents and you’re done. Unfortunately, managing legal liabilities after resignation is much more complex. Legal liabilities incurred while you served as a director do not cease to affect you once you resign – these liabilities will continue to follow you long after you thought you severed corporate ties.

In fact, directors can often be more vulnerable after they resign than when they are still with their company, because active board members at least have access to company indemnification and company resources should they be sued.

Here are the top 6 director’s liabilities after resigning in Singapore:

1. Shareholder Claims

Shareholders have a financial stake in the business, so if they feel the business has underperformed and caused them financial damages, they can sue the Board and company officers for mismanagement. These lawsuits may allege that mismanagement stretched over a period of time. If you happen to have served as a director in a period identified in the lawsuit, you’ll have to defend your conduct as a director in court.

Shareholder lawsuits against ex-directors commonly involve:

• Errors or misleading statements in financial reporting
• Breach of fiduciary duty leading to financial losses or bankruptcy
• Mismanagement of company causing poor financial performance
• Mergers & acquisitions
• Decisions exceeding authority given to company officer, which may be linked to poor oversight from directors

See: Pine Capital shareholders sue ex-directors in Singapore for breach of fiduciary duties, conspiracy

See: Goldman Sachs shareholder sues ex-director for criminal conduct

2. Employment Claims

In this litigious age, it is increasingly common for employees to file civil suits against company directors for perceived workplace wrongs. When employees sue the company for employment-related issues, it’s not just direct managers or HR staff that get hit with legal claims. Senior management and directors are often named in such lawsuits as well. The more employees you have, the greater the risk of unaddressed workplace issues potentially metastasizing into an angry legal claim.

Ex-directors are usually sued for:

• Wrongful dismissal
• Breach of employment contract
• Employment discrimination (e.g. hiring, promotions)
• Sexual harassment

See: Former WeWork employee sues ex-director Adam Neumann for “virtually destroying” the company

3. Customer Claims

Directors can face claims from customers if they fail to properly provide promised services or goods. When clients face financial damage or physical injuries, they can accuse directors of negligence, even if the directors were not the ones personally providing the service or goods.

When clients suffer personal damages significant enough to warrant a lawsuit, they can accuse company directors of all kinds of things. You can be accused of all manner of things, even if you didn’t actually commit the acts being said against you.

Customers file suits against ex-directors for:

• Fraudulent behaviour
• Contract disputes
• Professional negligence
• Misleading promises/claims

See: Director of construction firm sued for breach of contract

4. Creditor Claims

Many small businesses will borrow money to improve cash flow and boost growth. However, when a business borrows money, its directors face additional legal obligations to act in the best interests of creditors in addition to shareholders. If company loans are not fully repaid in a timely manner, creditors can launch legal action against directors. Some common disputes involve: claims that company financial statements were misrepresented to obtain the loan; allegations that dividends to shareholders were paid out when creditors were still owed money.

Ex-directors can be sued by creditors for:

• Breach of fiduciary duty to creditors, leading to a loss on assets owed/impairment of ability to repay debt
• Irresponsible or fraudulent accumulation of debt
• Conducting business while insolvent

See: Ex-directors of Singaporean public firm sued by creditors for breaching director’s duties

5. Competitor Claims

In Singapore’s competitive business environment, it’s not uncommon for small businesses to be litigated by rival firms. If you’ve made public statements about your competitors, they may take issue with your words and allege that you defamed them. If you operate in an industry with lots of proprietary technology/data or closely-protected trademarks, you may be sued for IP infringement.  If you’ve poached employees away from competitors, they may even allege that you hired these employees to steal trade secrets – as Google famously accused Uber of doing for their self-driving car unit.

Competitors commonly sue ex-directors for:

• Defamation/slander
• Infringement of Intellectual Property
• Theft of trade secrets
• Collusion & other anti-competitive behaviour

See: Zillow sues Compass for IP infringement, hiring employees who stole trade secrets

6. Regulator Claims

Singapore’s comprehensive regulatory regime ensures companies run their operations in a responsible fashion. However, with so many statutes to comply with, there’s a good chance that company directors may inadvertently breach regulations as they discharge their duties. Legal liabilities from breaching regulations can follow directors long after they’ve stopped holding office, surprising directors with painful penalties. This is especially true for businesses operating in tightly-monitored industries (e.g. financial services, law, and healthcare).

A construction company in Singapore, Genocean Pte Ltd, and their directors were fined $257,000 for converting private residences into worker dormitories, and for housing workers in overcrowded conditions. Although there were no ex-directors involved in this particular instance, this case is a perfect example of how directors who resign can still be held accountable by the courts. If you had served as a director with Genocean while these activities were being carried out, and later resigned, you would still be held accountable the illegal activities carried out by Genocean’s other directors. Maybe you didn’t know management was converting the residences. You can still be liable for breach of care. Maybe you knew it was going on, but you’re friends with the other directors and you felt pressured to just go along with it. In any case, because you served a director while these unlawful activities were carried out, regulators can still hold you liable long after you’ve resigned. Also, shareholders can sue you for mismanaging the company and causing them financial damages.

Regulators can file lawsuits or fine Directors for:

• Breaching industry regulations
• Professional negligence that results in loss or injury to third-parties
• Engaging in deceptive marketing
• Causing pollution
• Any other unlawful conduct

See: Ex-company director in Singapore charged with cheating investors out of $3 million

How should directors looking to resign protect themselves from personal liabilities?

If you plan to resign from your directorship, there’s a few steps you can take to protect yourself from becoming the target of legal action:

1. Implement good corporate governance practices (URL) while you serve as a director. Having strong corporate governance will minimise the chances of unethical or unlawful actions creating liability for directors.
2. Have a well-drafted indemnification agreement between the company and you before you resign. An indemnification agreement is a document that limits the legal exposure of directors after they leave the company.
3. Have a D&O policy that features protection for resigned directors. A comprehensive D&O policy, like the ones Provide offers, will pay for lawyer’s fees and damages if directors get sued. This protection lasts for between 5-7 years after they resign.

Where should directors looking to resign purchase a D&O policy?

Provide is the best place for to purchase a D&O policy online. Get covered in 60 seconds. You’ll save up to 25% on your premiums – our online platform creates low overheads, so we pass every dollar saved back to you.

Top 5 Personal Liabilities of Directors Under Singapore’s Companies Act

1. Personal liability for corporate debt

Corporate debt is usually limited to the company only, with directors enjoying limited liability. However, under certain circumstances, the courts can hold directors personally liable for their company’s debt. This most often occurs when:

       1(a). Directors commit fraud

If debt is accumulated through fraudulent means (e.g. falsifying financial statements to obtain loans), company directors become personally responsible for repaying creditors. Under Section 340 (3) of the Companies Act, fraud is punishable by up to 7 years in prison and/or up to a $15,000 fine.      

       1(b). Directors continue incurring debt while the business is insolvent

Companies cannot take on debt if there are no reasonable or probable expectations that the debt will be repaid. Under Section 339 (3) of the Companies Act, it is a criminal offence for directors to cause the company to take on debt while they know the business is insolvent. Those guilty can be jailed up to 3 months or fined up to $5,000. They also become personally liable to pay creditors.

      1(c). Directors treat the company’s assets as their own

Company assets must be kept strictly separate in form and function from directors’ personal assets. If directors freely use company assets as if they were personal ones (e.g. drawing from corporate accounts to pay for personal expenses), then the courts can rule that no limited liability exists between the company and directors.

For a thorough examination of this issue, read this article. 

2. Failure to disclose personal interests in transactions

Directors must disclose the nature and extent of personal interests they have in transactions, or proposed transactions, the company is undertaking. Section 156 (1) of the Companies Act prescribes serious penalties failing to disclose material interests: directors can face a fine up to $5,000, or a jail term of up 12 months. Non-disclosure also exposes directors to being sued by other directors or shareholders.

Example: You are a director a company that just signed a contract to buy goods from a supplier. However, you happen to have shares in this supplier. You choose to hide this material fact from the other directors. You have now committed a criminal offence (well done!). You can also be sued by your director colleagues.

3. Conflict of interest

Directors cannot use their position to gain personal advantages for themselves at the expense of the company, unless they seek explicit consent from the directors or officers of the firm. Under Section 156 (14) of the Companies Act, directors who fail to adhere to this are guilty of a criminal offence: you can face a fine of up to $5,000, or a jail term of up to 12 months.

Example: You are a director of an interior design company. You come across a potential customer, and instead of referring this customer to the company, you decide to provide interior design services yourself so you can pocket more money. If the other company directors find out about this, you can face a criminal trial, and also be sued for breach of fiduciary duty.

4. Negligence

Directors have a duty to act with skill, care and diligence. Failure to do so can result in lawsuits alleging professional negligence.

Example: You are a director of an accounting practice. Your reports for a customer contained several errors, causing financial damages to the client. You can be sued for professional negligence.

5. Misrepresentations

Directors have a duty to act honestly and in good faith. Failure to do so can result in lawsuits from parties like customers or shareholders. Intentional misrepresentations are a criminal offence under Section 401 and 402 of the Companies Act.

Example: You are a company director and issue a glowing annual report to shareholders. On the basis on this report, your shareholders decide to invest more money into your business. Later on, some company financials turn out to be inaccurate, which causes financial damage to shareholders. Your shareholders can sue you for misrepresentation. If you deliberately lied in your annual report, you can also expect to face criminal charges.

Nominee director risks in Singapore

Foreigners looking to incorporate a business in Singapore must appoint at least one director who is a Singaporean citizen, ordinarily resident in Singapore for at least 6 months of each year.

Because of this requirement to have at least one resident local director, many company secretaries in Singapore offer nominee director services, matchmaking locals with foreign-owned companies looking to incorporate here. If you’ve ever been offered a nominee directorship in exchange for a fee, it might be tempting to accept what seems like easy cash. Just offer your name up as a company director, sign a few documents, and collect your dues – simple, right?

Unfortunately, the reality is much more complex – and legally precarious – than simply sitting back to collect an annual cheque. Nominee directors face the exact same liabilities as active directors. If the company for which you serve as a nominee director commits wrongful acts and gets sued, you’ll likely have to defend yourself in court – even if you weren’t involved in running or overseeing the business.

If you choose to serve as a nominee director, make sure you purchase D&O insurance for the company in which you’re holding office. This way, even if you take a hands-off approach to the company’s affairs, you won’t have to worry about the significant cost of lawsuits if you do face legal action.

How should directors protect themselves from personal liabilities?

There are 2 key steps directors can take to protect themselves from legal liabilities:

1. Implement a strong corporate governance framework

Good corporate governance helps directors keep close watch over the affairs of their company. It minimises the chances of wrongful acts being committed, whether intentionally or negligently. It also maximises the performance of employees, and the business as a whole.

Some best practices for corporate governance include:

1. Ensure that proper accountability structures are in place, and that they are enforced from the most junior to the most senior staff.
2. Implement a written code of conduct for all company members.
3. Hold regular board meetings, and thoroughly review company policies.
4. Set measurable performance targets, and make transparent and justifiable compensation decisions.
5. Seek legal advice when you are unsure if certain actions may lead to liability.
6. Maintain thorough accounting records at all times

Ensure that expenses, sales, receipts, and other financial transactions are properly accounted for whenever they occur. Keep a close eye on accounting records to ensure that no members of the company are engaging in unethical or illegal transactions. This will also serve as an important reservoir of evidence you can use to defend yourself should you end up the target of lawsuits that allege things like misuse of company funds or corporate underperformance.

2. Always have a good D&O insurance policy to safeguard directors’ personal assets

Directors & Officers (D&O) insurance must be a standard part of your risk-mitigation strategy. Unless each director has several million dollars to spend on defending a lawsuit if you’re sued, a D&O policy is the best way to protect directors from the massive burden of legal liability.

Provide is the easiest place to get D&O insurance online. Premium start from just $42/month, and you’ll get a quote within 24 hours. You’ll save up to 25% on your premiums, with broad coverage and high indemnity.