Introduction
In the recent case of BIT Baltic Investment & Trading Pte Ltd v Wee See Boon [2023] SGCA 17, the Singapore Court of Appeal (“SGCA”) considered the minimum objective standard of care required of a director, which served as a timely reminder that the Singapore courts will take a robust stance in imposing such standards.
This case concerns a claim by a company in compulsory liquidation, (“BIT Baltic”) against one of its former directors (“Mr Wee”). BIT Baltic sought damages against Mr Wee for breaching his duties of care, skill and diligence in allowing BIT Baltic to make certain unfair preference payments to related parties.
At first instance, the High Court dismissed BIT Baltic’s claims on the basis that given Mr Wee’s limited role as a local resident director, it could not be said that he knew or ought to have known of the unfair preference payments at the time of the payments.
On appeal, the SGCA allowed BIT Baltic’s appeal, finding that Mr Wee was in fact aware of the unfair preference payments, and his omissions in relation to the payments were in breach of his duties of care, skill and diligence owed to BIT Baltic.
BIT Baltic was successfully represented by our firm’s Mr Ponnampalam Sivakumar and Ms Phang Shi Ting.
Brief Facts
In or around December 2018, BIT Baltic made a series of payments (“Payments”) to two German entities, HARPA Services & Support GmbH & Go. KG (“HARPA”) and HPS International Holding GmbH (“HPS”).
At the material time, BIT Baltic’s directors comprised Mr Wee, a local resident director, as well as Mr Peter Harren and Dr Martin Harren, who were simultaneously directors of HARPA and HPS. Subsequently, BIT Baltic was wound up in June 2020.
By way of an originating summons, BIT Baltic applied to the General Division of the High Court to find Mr Wee liable for breach of his directors’ duties.
In BIT Baltic Investment & Trading Pte Ltd (in compulsory liquidation) v Wee See Boon [2022] SGHC 110, the High Court Judge agreed with BIT Baltic’s submission that the Payments were made in an unfair preference towards HARPA and HPS over BIT Baltic’s other creditors. HARPA and HPS repaid the Payments.
However, the High Court Judge found that Mr Wee did not breach his duties in failing to determine whether it was permissible for BIT Baltic to make the Payments under an unfair preference. This was because it could not be said that Mr Wee knew or ought to have known of the Payments, in light of his duties as a local resident director being “limited to that of doing the necessary paperwork with auditors, relevant agencies and dealing with regulatory authorities in Singapore”.
BIT Baltic appealed against the High Court Judge’s decision in respect of Mr Wee’s liability for breach of his director’s duties.
Holding of the SGCA
On appeal, the Court of Appeal found that Mr Wee was aware of the Payments, that his role in BIT Baltic was not so limited, and that he did breach his duty of care, skill and diligence.
The Court of Appeal found that Mr Wee was aware of the Payments, at latest, when he sighted BIT Baltic’s 2018 financial statements which would have fixed him with the knowledge that BIT Baltic was insolvent when the Payments were made to related parties.
The financial statements ought to have made it clear to Mr Wee that the Payments were not in the best interests of BIT Baltic. In the circumstances, Mr Wee’s duty was to then alert the other directors to the wrongful Payments and to take steps to recover the Payments. Given his failure to do so, Mr Wee had breached his duty to act with care, skill and diligence.
Despite Mr Wee’s claims to merely be a “nominee” director, the totality of the evidence showed that Mr Wee actively participated in the financial activities of BIT Baltic such as signing BIT Baltic’s annual financial statements, albeit he may not have been a main decision maker.
Mr Wee breached his duty to act with care, skill and diligence by failing to make the necessary inquiries about the Payments, when he signed the 2018 Financial Statements which recorded the Payments as significant related party transactions and contained the auditor’s qualified opinion on BIT Baltic’s ability to continue as a going concern.
In reaching its decision, the Court of Appeal referred to the “robust stance on the standards imposed in relation to a director’s duties of care, skill and diligence” in the US case of J Francis v United Jersey Bank 432 A 2d 814 (1981), and the Australian case of Daniels v Anderson (1995) 16 ACSR 607, under which while a director is not required to audit corporate books, they should maintain familiarity with the company’s financial status through a regular review of financial statements, and the review of financial statements may give rise to a duty to inquire further into matters revealed by those statements.
The Court of Appeal reiterated that every director, including a nominee local resident director, is expected to acquire and maintain sufficient knowledge and understanding of a company’s business in order to perform his or her duties adequately.
The Court of Appeal also found Mr Wee liable to pay to BIT Baltic interest on the Payments from the date of the 2018 financial statements, to be compounded annually.
Concluding Thoughts
This decision is a reminder to all directors, including nominee, non-executive and/or local resident directors, of the minimum objective standard of care expected of them, which entails the obligation to take reasonable steps to place oneself in a position to guide and monitor the management of the company.
This would include raising the necessary inquiries and taking steps to correct any misconduct, even if such misconduct is discovered after the fact, such as upon reviewing the company’s financial statements which may raise a red flag. The failure to do so may amount to a breach of the duty to act with care, skill and diligence, even if the director was not personally responsible for the misconduct but then became aware of it after the fact.
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This article is produced by BR Law Corporation. It does not constitute legal advice and is intended to provide general information only.
