RECENT lawsuits and regulatory enforcement actions against company directors have awakened common concerns on the extent of their duties and responsibilities.
Board directors are seen as stewards of a company; and the board is responsible for leading the company.
The board of directors is also tasked with institutionalising the corporate culture, values, and management policies, as well as exercising oversight in the risks management, controls, and business operations of the company and its subsidiaries.
However, there have recently been several notable Singapore lawsuits, criminal investigations and prosecutions by enforcement agencies against directors. These include:
(i) Civil claim by the liquidators of Inter-Pacific Petroleum against a former non-executive director for the sum of US$156 million in losses resulting from his alleged breach of director’s duties. The liquidators accused the defendant of “sleepwalking through his time as a director” and failing to discover and stop the drawdowns in trade financing at the relevant time to fund alleged “non-existent or sham transactions”.
(ii) Four independent directors (IDs) of Hyflux were each charged with one count under the Securities and Futures Act (SFA) for their neglect in connection with the company’s failure to disclose material information relating to its Tuaspring project. Each of the IDs were also charged with one count under the SFA for Hyflux’s omission to state information in the offer information statement relating to its public offer of securities in 2011. Another ID was separately charged under the SFA for (a) intentionally failing to notify the Exchange that the Tuaspring project was Hyflux’s expansion into a new business of selling electricity, and (b) criminal liability under the SFA for false and misleading statements in relation to Hyflux’s public disclosures on its Tuaspring project, and possible accounting irregularities.
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(iii) Five Raffles Education directors, including three IDs, were reported to have been formally arrested and out on bail relating to a potential offence under the SFA for failing to disclose material information concerning a claim by a Malaysian bank against certain subsidiaries of the company.
(iv) Former and current Singapore-based directors of Eagle Hospitality Trust were also reported to have been formally arrested and out on bail over alleged breaches of disclosure rules under the SFA.
(v) In May 2023, the former lead ID of Singapore O&G was convicted of two counts of cheating under the Penal Code and sentenced to four years’ jail for failing to disclose that he would receive a S$1.5 million “introduction fee” from a business that the company was acquiring for S$26.5 million. The case is under appeal.
(vi) In February 2022, two former executive directors of Kimly were fined for failing to notify the Singapore Exchange that the company’s acquisition of Asian Story Corporation involved a conflict of interest. Both directors were charged under the SFA for failure to disclose that the acquisition was an interested persons’ transaction.
Under the Singapore Companies Act, all directors are statutorily required to act diligently and honestly in the discharge of their duties and responsibilities.
The recent court and enforcement cases highlight the importance for IDs and non-executive directors to be vigilant and diligent in keeping abreast of material corporate and legal developments as well as the financial position of the company.
From the start
The law makes no distinction as regards the duties and responsibilities of executive and non-executive directors, including IDs.
IDs should not flinch or cringe when management attempts to ride roughshod over the board with dubious corporate plans and transactions that do not make sense to them.
The IDs who form the Audit Committee should ensure that robust group internal controls and risk management measures are put in place at the outset.
The Audit Committee should also ensure that competent professional advisers are periodically engaged to review the controls of the group. Regular internal audits should also be conducted systematically by external professionals to detect and spotlight non-adherence of controls and/or management override.
IDs should be fully cognisant of the board’s disclosure responsibilities under the listing rules and under the SFA.
There could be instances where management may prefer not to disclose or to make selective public disclosures which could fall short of the prescriptive regulatory standards of disclosure.
When in doubt, IDs should not hesitate to seek independent legal advice if they have reasons to take a different position canvassed by management.
Seeking timely, competent professional advice on whether a matter or information is disclosable and the extent of any public disclosure is critical. This would enable the directors in question to raise the defence of reasonable reliance in the event there is any criminal investigation and/or enforcement actions for a breach of the disclosure rules.
The criminal convictions of the directors of Singapore O&G and Kimly demonstrate the importance of ensuring that a director does not put himself in a conflict of interests position.
This is especially so when the director is involved in making a decision on any transaction or commercial project involving the company and any entity that he has direct or indirect pecuniary interests in.
Listed companies, in particular, have compliance regulatory requirements regarding interested persons transactions requiring timely public announcements, possible professional valuations, independent financial advisers’ recommendations and non-interested shareholders’ approval in a general meeting.
It is also pertinent for directors to take note of the “wrongful trading” statutory provision under section 239 of the Insolvency, Restructuring and Dissolution Act (IRDA).
A company would have traded wrongfully if it incurs debts or other liabilities (i) without reasonable prospect of meeting them in full when insolvent, or (ii) that it has no reasonable prospect of meeting the debts or liabilities which results in the company becoming insolvent.
Directors who are convicted of wrongful trading face potential disqualification for up to 15 years, plus other fines or liabilities.
The errant directors may also be held personally liable for the company’s debts and liabilities incurred as a result of wrongful trading.
The threat of money laundering
Another perennial threat to the integrity of the Singapore market is money laundering.
The recent island-wide raid by enforcement agencies culminating in the arrest of 10 foreign nationals suspected to be involved in a billion-dollar money-laundering syndicate demonstrates the vulnerability of the Singapore market, despite its vaunted strict market controls and compliance guard-rails.
The board must remain actively involved in all aspects of the company’s controls in combating money laundering.
Directors must ensure that effective and robust anti-money laundering (AML) controls are put in place.
The board must further ensure that there are competent and qualified persons in the company’s compliance team to effect the proper implementation and execution of the company’s AML controls and measures.
A breach of AML rules can cost companies enormous financial losses and irreparable reputational damage. Companies who have breached such rules could be disenfranchised from using the capital and financial markets.
The directors of a company that is in breach of AML rules will also face severe personal criminal sanctions and penalties if they have been tardy in their duty of care.
On Feb 9, 2023, ClientEarth, a minority shareholder, filed a claim in the English High Court on behalf of Shell against the company’s directors for breach of their statutory duty of care in respect of Shell’s climate change risks management.
While the High Court dismissed the claim in May 2023, the court case highlights the challenges faced by directors from shareholder environmental activists pressuring directors to re-balance competing factors in their decision-making to take due account of the adverse effects of climate change and global warming.
Market regulators are currently pivoting in the direction to define standards of corporate disclosures on the environmental, social and governance (ESG) policies and practices of public listed companies.
It can be envisaged that the authorities will, at some point, consider imposing regulatory accountability on directors to accurately disclose and properly implement their company’s ESG policies and practices, as part of their fiduciary responsibility.
There is real conflict faced by directors between practical business considerations vis-a-vis environmental sustainability goals.
There is an inevitable “disconnect” between what some companies say are their efforts to promote a sustainable world and what majority of the shareholders expect directors to do to raise profitability.
Trade-offs between corporate profitability and global corporate social responsibility are unavoidable.
Regulators could legislate guard-rails for the actual implementation of a company’s ESG policies and practices, and to hold directors accountable for the company’s compliance.
More holistic approach
A more holistic approach duly considers the global benefits of ESG and striking a proper balance between corporate profitability that immediately impacts shareholder returns, and the interests of other stakeholders in a sustainable healthy global environment. These could be employees, suppliers, or local communities where the group has business operations.
Boards would be better off leading sustainability efforts rather than waiting for compliance metrics to be legislated to benchmark companies’ ESG practices, or for prescriptive standards of assurance to properly audit these practices.
The writer is a partner at Kennedys Legal Solutions
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