Case Update: Singapore High Court decided in exceptional case that directors were not liable for breach of fiduciary duty despite competing with plaintiff company
By Ronald JJ Wong and Stuart Peter
Executive Summary
In an unreported decision in HC/S 236/2022, the General Division of the Singapore High Court held the defendant directors not liable for breach of the duty not to compete with the plaintiff company by providing services to the plaintiff’s former customer. This was based in part on a critical finding of the Court that the directors had been effectively excluded from the plaintiff company by the time they had begun servicing the plaintiff’s former customer. In coming to its decision, the Court considered the exceptional case of In Plus Group Ltd v Pyke [2003] BCC 332 (CA) (“In Plus Group”).
Summary of Facts
This case concerns the plaintiff, a Singapore company, alleging that its loss of a customer was due to alleged breaches of directors’ and fiduciary duties by the 1st and 2nd defendants, and that the 3rd defendant was incorporated by them to take over the plaintiff’s business with the former customer’s.
However, the 1st and 2nd defendants had tendered letters of resignation from a related Thai company prior to the customer’s termination of business with the plaintiff. The Thai company had been subcontracted by the plaintiff Singapore company to provide the actual services it was contracted to provide to the customer.
The 1st and 2nd defendants argued that since the time of their resignation from the Thai company, they had ceased to act as directors of the plaintiff Singapore company and were cut off from participation in the business of the plaintiff and the Thai company. This was sometime before the former customer terminated the plaintiff and engaged the 3rd defendant on its own volition. At the trial, the plaintiff’s present directors admitted that upon the time of the 1st and 2nd defendants’ resignation from the Thai company, the 1st and 2nd defendants’ access to the companies’ information, email accounts and IT systems had been cut off.
Arguments
The defendants’ counsel submitted that the decision in In Plus Group Ltd applied to the instant case. The claimants there sought to force the defendant director to resign after he had suffered a stroke in June 1996. While he refused to resign, he was excluded from participation in directing the affairs of the claimant companies and was eventually only removed as a director of the company in March 1998. The claimants commenced proceedings against the defendant for having set up a new company through which he carried on business with the second claimant’s most important customer from June 1997. The UK Court of Appeal however found that the claim for breach of fiduciary duties failed because the defendant had been effectively excluded from the companies of which he was a director before any of the events complained of had occurred. He was also not being provided with any remuneration from the companies during such times and could not be treated as having owed the duty not to compete with the company at such times.[1] Sedley L.J. thus observed that the defendant’s duty had been “reduced to vanishing point”.[2]
In Halcyon House Ltd v Baines [2014] EWHC 2216 (QB) (“Halcyon House”),[3] the Court considered In Plus Group and was prepared to accept in that case that the director’s fiduciary duties ceased upon her effective exclusion from participation in the company.
In the alternative, it was submitted that the more nuanced legal principle is that when a director is effectively excluded from involvement in the company, the scope of his duty to the company is moulded into a bare minimum of not exploiting or taking company property. In particular, the duty of loyalty and to avoid conflict of interests ceases. Rix L.J. appeared to adopt this approach in the case of Foster Bryant Surveying Lid v Bryant and another [2007] 1 BUS LR 1565 (CA) (“Foster Bryant”) after he had also considered In Plus Group.[4] The court in Heating Trade Supplies Group Ltd v Matteo [2022] EWHC 1070 (Ch) appeared to have held a similar view.[5]
Academic commentators also analyse In Plus Group as a case of a director’s duty being “curtailed or modified in certain circumstances”, such that the defendant was a “director in name only” and there was no possible conflict between duty and other interests.[6]
In any case, the authorities show that where, exceptionally, a director is effectively excluded from a company, the director is held not in breach of duty for the following types of acts from the time of exclusion:
a. Carrying on a competing business with the principal;[7]
b. Poaching the principal’s most important customer;[8]
c. Doing business with the principal’s most important customer[9] under a new competing company;[10]
d. Poaching employees of the principal;[11]
e. Discussing and accepting terms, before the exclusion, for a competitive engagement after effective resignation;[12]
f. Refusing to consent to the principal’s bank unfreezing the principal’s bank account.[13]
Decision
The High Court in the instant case found that the 1st and 2nd defendants had remained as directors of the plaintiff even up until the time that the 3rd defendant had begun to service the plaintiff’s former customer.
However, the Court held that the 1st and 2nd defendants were effectively excluded from the business of the plaintiff from the time they had tendered their resignation to the related Thai company and accordingly had their access to the information, email accounts and IT systems of both the plaintiff and the Thai company cut off.
In the circumstances, the Court held that the 1st and 2nd defendants were not liable for breach of duty. Accordingly, the 3rd defendant was held not liable for alleged dishonest assistance.
Comment
Generally, a director’s fiduciary duties to his company are strictly and wholly enforceable up until the time that the director ceases to hold those duties. Academic commentary suggests that this is when the director has in fact ceased to hold office. While a director may sometimes be liable in respect of circumstances which occur after the office has ceased, the proper doctrinal analysis is that this is in fact rooted in a breach of duty which occurred prior to the cessation of office.
However, there has been little commentary and case authority on the exceptional situation as in In Plus Group, where a director is held not liable for competing with his principal even though he technically remains in office. The instant case appears to be the first decision in Singapore where the case of In Plus Group was considered and applied. [14] It should be emphasised that such a factual matrix is rare and exceptional and thus does not in fact derogate from the ordinarily strict fiduciary duties of a director. The doctrinal underpinnings of fiduciary duties justify such decisions in that a fiduciary cannot reasonably be held to a duty of loyalty if he is in fact treated as if he has ceased as a fiduciary and is prevented from exercising his powers to act in the interests of the principal.
In this regard, it would be worth remembering that a director of a company is strongly presumed to owe fiduciary duties, but this presumption is rebuttable.[15] Thus, if a person is in substance all but a director in name, it could well be that the presumption is rebutted, and the person is not in fact deemed to owe fiduciary duties at all. This could arise in scenarios such as where a person remains as a director in name only because the formalities for removal of office have not been complied with or followed through and that person does not in fact have any way to perform the duties or powers of a director.
This should, however, be distinguished from the position of a ‘sleeping director’ or non-executive director who is in fact capable of exercising their duties but fails to do so. Likewise, nominee local resident directors are subject to the same duties and are expected to acquire and maintain sufficient knowledge and understanding of a company’s business in order to perform those duties adequately.[16] After all, all the foregoing categories of directors may still be deemed to have breached their duty to exercise reasonable diligence or to exercise due care, skill and diligence. They would be subject to a minimum standard of care to take reasonable steps to monitor the management of the company, even if they do not know the minute details.[17] As the Court of Appeal said, “Directors are not (and should not be) allowed to shirk responsibility on the basis of apathy and non-involvement”.[18]
Ronald JJ Wong and Stuart Andrew Peter from Covenant Chambers LLC successfully acted for the defendants in this instant case. For any questions on this article or on company shareholders and directors’ disputes, please feel free to contact them at ronald.wong@covenantchambers.com and stuart.peter@covenantchambers.com.
Footnotes
[1] In Plus Group at [76] and [94].
[2] In Plus Group at [90].
[3] Halcyon House Ltd v Baines [2014] EWHC 2216 (QB).
[4] Foster Bryant Surveying Lid v Bryant and another [2007] 1 BUS LR 1565 (CA) at [93]; Pearlie Koh, "The Resigning Director - A Tale of Two Cases" [2008] 1 SJLS 205 at 214.
[5] Heating Trade Supplies Group Ltd v Matteo [2022] EWHC 1070 (Ch)).
[6] Hans Tjio, Pearlie Koh and Lee Pey Woan, Corporate Law (Academy Publishing, 2015) at [09.053], [09.056].
[7] In Plus Group at [89]-[90].
[8] In Plus Group at [90].
[9] In Plus Group at [3].
[10] In Plus Group at [77].
[11] In Plus Group at [41].
[12] Foster Bryant at [81], [87], [92].
[13] Heating Trade Supplies Group Ltd v Matteo [2022] EWHC 1070 (Ch) at [226].
[14] Although it was briefly considered in Wei Fengpin v Raymond Low Tuck Loong and others [2022] SGCA 32, it was distinguished on the facts.
[15] Swift Maids Pte Ltd and another v Cheong Yi Qiang and others [2023] SGHC 317 at [206]-[207].
[16] BIT Baltic Investment & Trading Pte Ltd (in compulsory liquidation) v Wee See Boon [2023] SGCA 17 at [43].
[17] Ho Pak Kim Realty Co Pte Ltd (in liquidation) v Ho Soo Fong and another [2020] SGHC 193 at [97]-[98].
[18] Ho Soo Fong and another v Ho Pak Kim Realty Co Pte Ltd (in liquidation) [2021] SGCA 35 at [10].