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