Authors
Authors
Adrian Aw (Resource Law LLC)
Michael Kwan (Resource Law LLC)
Si Ting Chua (Resource Law LLC)
Key takeaways
- The Appellate Division of the High Court (the Court) considered the scope of directors’ duty of skill, care and diligence (Care Duty), as well as the law relating to the duty to act in the best interests of a company’s creditors when the company is insolvent or in a parlous financial position (Creditor Duty). The Court also addressed the issue of causation in relation to a breach of the Care Duty.
On Care Duty:
- A director is not expected to be a forensic investigator or a sleuth and detect fraud occurring within the company unless there are tell-tale or warning signs.
On Creditor Duty:
- A director owes duties to the company’s creditors to make decisions in good faith, based on what he/she considers to be in the best interests of the company, taking into account its finanical position at the material time.
On causation:
- To prove that the breach of a director’s duty has resulted in loss to a company, it is insufficient for the company to rely on bare assertions or common sense to discharge this burden of proof. More particularly, the company must state the specific steps the director would have taken if he/she had fulfilled his/her duty, and how those actions would have averted the loss.
Background
Dr Goh Jin Hian was a director of Inter-Pacific Petroleum Pte Ltd (IPP), a marine fuel supplier. IPP operated two businesses: (a) bunker trading and (b) cargo trading. Between June and August 2019, IPP drew down roughly US$146 million from two banks for cargo trading purposes (Cargo Drawdowns) and this amount was not repaid. The cargo sales were later found to be fraudulent as the customers denied liability on the ground that they had not entered into the trades in question. IPP entered into judicial mangement on 4 September 2019 and liquidation on 25 March 2021. IPP’s liquidators sued Dr Goh for (i) breach of the duty of skill, care and diligence as a director (Care Duty) and (ii) breach of the duty to act in the best interests of creditors when the company was insolvent or in a parlous financial position (Creditor Duty).
The General Division of the High Court found that Dr Goh had breached both the Care Duty and the Creditor Duty and awarded US$146 million in damages to IPP. Dr Goh appealed. On appeal, the Court considered the following key issues: (a) whether Dr Goh had breached the Care Duty by being entirely unaware that IPP had a cargo trading business; (b) whether Dr Goh had breached the Creditor Duty in respect of the Cargo Drawdowns; and (c) whether the breach of the Care Duty and/or Creditor Duty caused the loss (in the amount of US$146 million) suffered by IPP in relation to the Cargo Drawdowns.
Key holdings
(a) Care Duty
The Court found, on the evidence, that Dr Goh was entirely unaware of IPP’s cargo trading business, which amounted to a breach of the Care Duty.
The Court reiterated that directors, whether acting in an executive or non-executive capacity, must meet a minimum objective standard of care, which entails the obligation to take reasonable steps to place oneself in a position to guide and monitor the management of the company. In Dr Goh’s case, his lack of awareness of IPP’s cargo trading business constituted a breach of the Care Duty.
Having said that, the Court stressed that although directors are expected to act as sentinels, they are not expected to be forensic investigators or sleuths unless there are clear signs that would put them on inquiry. It is not part of a director’s duty of supervision and oversight to detect fraud unless there are tell-tale or warning signs.
(b) Creditor Duty
The Court did not find Dr Goh in breach of the Creditor Duty in relation to the Cargo Drawdowns for the following reasons:
(i) The touchstone for determining if there is a breach of the Creditor Duty is whether the director has exercised discretion in good faith in what he/she (and not the court) considers to be in the best interests of the company, as understood with reference to the financial state of the company at the time such discretion is exercised.
(ii) In the current case, Dr Goh could not have breached the Creditor Duty as he was unaware of the cargo trading business and therefore could not be said to have exercised any discretion in relation to the authorisation of the Cargo Drawdowns.
(c) Causation
The Court found that IPP failed to prove that Dr Goh’s breach of the Care Duty caused the company’s loss.
In this regard, IPP was required to prove (i) the specific steps that Dr Goh would have taken had he been aware of the cargo trading business, and (ii) how those steps would have prevented the fraudulent cargo trades and averted the loss. The Court emphasised that reliance on bare assertions or common sense was insufficient to discharge this burden of proof.
On the facts, the Court found that IPP had failed to discharge the burden of proving its loss, notwithstanding Dr Goh’s breach of the Care Duty. In the circumstances, the Court allowed Dr Goh’s appeal and set aside the award of US$146 million in damages to IPP.
Conclusion
This case emphasises that, while directors are subject to onerous duties to manage, direct and supervise the business of a company with care, skill and diligence, they are not expected to act as fraud detectors or investigators unless there are clear tell-tale signs of wrongdoing. A director who wilfully turns a blind eye to obvious red flags signalling fraudulent activity within the company will be found to be in breach of his/her director’s duties to the company and will be held liable for the losses sustained by the company if it can be shown that such losses would not have been suffered but for the director’s failure to take effective steps to prevent them.
Reed Smith LLP is licensed to operate as a foreign law practice in Singapore under the name and style Reed Smith Pte Ltd (hereafter collectively, "Reed Smith"). Where advice on Singapore law is required, we will refer the matter to and work with Reed Smith's Formal Law Alliance partner in Singapore, Resource Law LLC, where necessary.
Client Alert 2025-168
Authors
Authors
Adrian Aw (Resource Law LLC)
Michael Kwan (Resource Law LLC)
Si Ting Chua (Resource Law LLC)