Singapore Court of Appeal rules on responsibilities of 'passive' directors

In Singapore, as with many other countries, a company’s directors are ultimately in charge of the company. A CEO may run the day-to-day operations of, and the shareholders may collectively own, the company, but it is the directors who have the final say in almost all the company’s "big ticket" decisions.

Therefore, the law entrusts directors with duties that they owe to the company.

It is common, however, to have directors who have a passive role in the company. They may be appointed solely to fulfil the Singapore law requirement that a Singapore-registered company must have at least one director who is ordinarily resident in Singapore. Alternatively, such a director might be intended to be a non-executive director with limited roles in relation to the company, or be appointed by an important shareholder to safeguard that appointer’s interests (a "nominee" director).

The question is, would such a director’s responsibilities vis-à-vis the company be lessened or altered, as compared to the duties owed by a director who takes a more active role?   

The Singapore Court of Appeal's recent decision of BIT Baltic Investment & Trading Pte Ltd v Wee See Boon [2023] SGCA 17 addresses the responsibilities of a more "passive" director.

Payments dispute

The appellant, BIT Baltic, chartered and managed sea vessels. It had three directors, two of whom were foreign nationals and one of whom was the managing director. The third director was Mr Wee, the respondent, who was the only Singapore-resident director.

Between March 2014 and September 2016, two related companies, HARPA and HPS, provided BIT Baltic with various services. BIT Baltic paid HARPA and HPS for their services in a series of payments totalling approximately US$1.5 million in December 2018.

BIT Baltic was not doing well. As of December 2017, it had stopped generating revenue. Its 2018 financial statements showed that it was insolvent, and even contained a qualified opinion from its auditors stating that there was significant doubt on its ability to continue as a going concern and discharge its liabilities in the ordinary course of business.

Unsurprisingly, one of BIT Baltic's creditors filed a winding up petition in April 2020, and BIT Baltic was wound up by an Order of Court on 19 June 2020.

BIT Baltic's liquidator alleged that the payments were unfair preference payments. The liquidator commenced an action against Mr Wee alleging breaches of his director's duties; that is, failing to determine whether it was permissible for BIT Baltic to make the payments in preference to BIT Baltic’s other creditors when BIT Baltic was insolvent, or when the payments would have resulted in BIT Baltic becoming insolvent.

High Court judgment

The High Court judge held in favour of Mr Wee. Although she held that the payments were indeed unfair preference payments, she also held that Mr Wee had not breached his directors' duties because BIT Baltic failed to prove that Mr Wee knew or should have known about the payments, and that his limited role would impact the extent to which he would have been expected to be informed of BIT Baltic’s affairs.

The Court of Appeal decision

The Court of Appeal (CA) allowed the appeal; that is, it reversed the judge’s decision and held in favour of BIT Baltic.

The main issue on appeal was pithily framed as “What was Mr Wee’s role in BIT Baltic and how did this affect the duties he owed to BIT Baltic, if at all?”

Two kinds of duties

The CA began by clarifying exactly what sort of duties a director owed to the company. It recognised that there were two main kinds: firstly, a fiduciary duty and, secondly, a duty of care, skill and diligence. The CA emphasised that these were distinct.

Fiduciary duty was a duty of loyalty – to act honestly and in good faith in the best interests of the company, a duty not to exercise powers for an improper purpose such as to profit personally for their office, and a duty not to place themselves in a position of conflict of interest. The CA held that, when a company was insolvent, a director’s fiduciary duty extended to ensuring that the company’s assets were not misapplied to the company’s creditors’ prejudice.

The duty of care, skill and diligence included the obligation to put oneself in a position to guide and monitor the company’s management. This applied regardless of whether the director was non-executive or otherwise.

Duty to stay informed

A director’s duties require them to take steps to stay informed about the financial state of the company and in relation to any improper transactions. The CA found that Mr Wee did not breach his fiduciary duty, because he played no part in deciding to prefer HARPA and HPS over other creditors, and that the evidence showed that he was not consulted before the payments were made.

However, the CA found that Mr Wee had breached his duty of care, skill and diligence, by failing to make the necessary inquiries about the payments. In this regard, the CA found that, by August 2019 at the latest, Mr Wee knew that the payments had been made, when he signed a director’s statement in relation to BIT Baltic’s 2018 financial statements. Therefore, he ought to have known, that the BIT Baltic was insolvent and had been insolvent when the payments were made. The CA held that, at this point, his duty of care, skill and diligence would have required Mr Wee to alert the other directors to the wrongful payment, request them to take steps to recover the payments and take other follow-up steps.

Osborne Clarke comment

This case guides directors of Singapore companies on fulfilment of their directors’ duties. One of the fundamental tasks of a director is to review and sign off on a company’s financial statements. This case emphasises that a director must be diligent in such a review and keep an eye out for "red flags".

It is also common for a Singapore-resident director to be appointed solely to comply with statutory requirements. The directors typically take little to no part in the company’s management. However, a director cannot be completely passive, as this case makes it clear that they still have a duty to acquire and maintain sufficient knowledge and understanding of a company’s business to perform their duties, including the one mentioned above, adequately.