Case note on SGCA Decision in Foo x OP3 Intl Pte Ltd

Key takeaways 

Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 is a landmark case by the Singapore Court of Appeal that sets the test for how Singapore courts should in future approach the question of directors’ duties when a company is facing financial difficulties. 

The key takeaways from this case are as follows: 

• A director’s fiduciary duty to act in the best interests of the company is not static and owed only to the shareholders of the company. Indeed, a director’s fiduciary duty is better thought of as being owed to the main economic stakeholders of the company.

• The financial state of the company is therefore an important consideration which a director should bear in mind, as it is the indicia of a shift in the economic interests in the company from the shareholders to the creditors. 

• The Court of Appeal laid down an analytical framework for considering when the directors are required to consider the interests of creditors in the discharge of their fiduciary duties to the company (what the Court called the Creditors Duty) and, specifically, when the Creditor Duty arises.

We discuss the case and the analytical framework in greater detail below. 

Facts

OP3 International Pte Ltd (Company) carried on a business of interior decoration and was sued in 2015 by a former client for negligence in the works it had carried out. In November 2019, it was found liable for the sum of S$534,189. Unable to pay, the Company was put into liquidation.

The Company, through its liquidator, then brought a claim against Foo Kian Beng (Foo), who was its director and shareholder, for breaching his directors’ duties owed to it. In between 2015 (when the suit was commenced) and 2019 (when an order of damages was made), Foo had procured that substantial amounts in dividend payments and loan repayments were made by the Company to him. 

A more detailed timeline of events is set out in our update on the High Court decision (available here). For the purposes of this update, only the following payments made on the following dates were in dispute: 

• 27 December 2016: Payment to Foo of S$500,000 as dividends for 2015. Note that at this time, the Company had net assets of S$157,683 without factoring in its contingent liability for the negligence suit.

• 2017: Payment to Foo of S$682,394 as repayment of a loan made by Foo to the Company. (collectively, the Impugned Transactions)

The liquidator sought to recover these sums from Foo on the basis that in making these payments, he had breached his fiduciary duty to the Company, as the Company had been in a financially parlous situation at the time of making those payments. In procuring the Company to make those payments, he had failed to act in the best interests of the Company, as determined by the interests of its creditors. 

The High Court found that Foo had breached his fiduciary duty. Foo appealed to the Court of Appeal. 

Decision 

The Court ruled that a two-stage inquiry should be applied when considering how a court should approach the issue of whether a director had been in breach of his fiduciary duty to the company in a situation where it is alleged that the company was in a situation of financial distress: 

• A court should first objectively examine a company’s solvency at the time the material transactions were entered into. 

• Next the court should examine whether the director subjectively believed he had acted in the best interests of the company. 

A summary of the Court of Appeal’s analytical framework on whether the Creditor Duty is triggered

Category 1:

Financial state of the company - The company is solvent and able to discharge its debts.

Is the Creditor Duty Triggered? - No. It would typically be sufficient for the directors to act in the best interests of the shareholders.

Category 2:

Financial state of the company - The company is imminently likely to be unable to discharge its debts. Relevant factors in assessing whether a company is imminently likely to be unable to discharge its debts include:

• the recent financial performance of the company, in particular, whether the company’s financial performance has been improving or deteriorating, and the duration and extent of any such improvement or deterioration;

• the industry that the company operates in, including its recent and future prospects; and

• any other external developments (such as geopolitical risks) which may have an impact on the company’s business. 

Is the Creditor Duty Triggered? - Yes. However, if the directors in good faith consider that they can and should take action to promote the continued viability of the company and that there is a way out of the company’s financial difficulties, directors are not obliged to treat creditors’ interests as the exclusive or primary determining factor in determining what the company should do next.

The court will scrutinize the subjective bona fides of the director with reference to the potential benefits and risks that the relevant transaction might bring to the company and will be slow to second-guess decisions made honestly and in good faith to afford the company the best possible chances of revitalizing its fortunes. However, transactions undertaken which appear to exclusively benefit shareholders or directors will attract heightened scrutiny.

Category 3:

Financial state of the company - Corporate insolvency proceedings (e.g., insolvent liquidation or judicial management) are inevitable.

Is the Creditor Duty Triggered? - Yes. Directors are prohibited from authorising corporate transactions that have the exclusive effect of benefitting shareholders or themselves at the expense of the company’s creditors, such as the payment of dividends. 

Discretion to relieve the director of liability 

Should the court find that a director had acted in breach of their fiduciary duty, it should then consider whether it is appropriate to relieve them of liability under section 391 of the Companies Act 1967. Under this statutory provision, the court retains the discretion to so relieve a director on the cumulative account of them having acted honestly and reasonably, and in so far as it is fair for the court to excuse them for their default.

Availability of other statutory remedies against the director

The Court also considered the argument that where a company sought to bring a claim of breach of directors’ duties in respect of a particular transaction and that transaction was also covered by a specific prohibition or remedy in the Companies Act 1967, the claim for breach of fiduciary duty could not be brought. The Court rejected the argument.

As noted above, the Company was claiming that Foo had breached his fiduciary duty to it by causing the Company to pay Foo dividends of S$500,000 and to repay a shareholders’ loan made by Foo to the Company: 

• As regards the payment of dividends, Foo asserted that the only remedy was under section 403 of the Companies Act 1967 which makes it an offence to pay dividends except out of profits and which gives creditors a claim against the directors who had caused the dividends to be paid. 

• As regards, the repayment of the shareholders’ loan, Foo asserted that it amounted in substance to an unfair preference for which the only remedy was to seek a clawback under section 329 of the Companies Act (now, section 225 of the Insolvency, Restructuring and Dissolution Act 2018), and that in this case, the clawback period had passed. 

The Court ruled that in both cases the existence of the statutory remedy did not exclude the Company from claiming for breach of fiduciary duty in respect of the transactions. 

Application to the facts of the case

In this case, the Creditors Duty had arisen at the time Foo effected the Impugned Transactions as the Company was imminently likely to be unable to pay the potential liability in the negligence suit of approximately S$1.8 million for the following reasons:

• Although the Company was advised that it had a “strong defence” to the negligence suit, the legal advice obtained was cursory in nature and there was no evidence that the Company’s lawyers had considered all the relevant documents and evidence.

• The Company only had cash / cash equivalents of S$87,000 at the end of 2016 and had a net negative asset value of S$545,568 at the end of 2017.

• The Company had experienced a steep decline in business and made losses of S$79,299 and S$703,251 in 2016 and 2017, respectively.

• A number of the Company’s major clients declined to engage the Company after the negligence suit was filed, and the Company’s sub-contractors insisted on cash terms.

Foo was also found to be in breach of the Creditors Duty as the Impugned Transactions were solely for his personal benefit. Unsurprisingly, the Court declined to grant Foo relief from liability under section 391 of the Companies Act as he had not acted reasonably and in good faith such that he ought to be excused from liability.

A&O Shearman means Allen Overy Shearman Sterling LLP and/or its affiliated undertakings. A current list of A&O Shearman offices is available here.

Allen Overy Shearman Sterling LLP is a limited liability partnership registered in England and Wales with registered number OC306763. Allen Overy Shearman Sterling (Holdings) Limited is a limited company registered in England and Wales with registered number 07462870. Allen Overy Shearman Sterling LLP (SRA number 401323) and Allen Overy Shearman Sterling (Holdings) Limited (SRA number 557139) are authorised and regulated by the Solicitors Regulation Authority of England and Wales.

The term partner is used to refer to a member of Allen Overy Shearman Sterling LLP or a director of Allen Overy Shearman Sterling (Holdings) Limited or, in either case, an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen Overy Shearman Sterling LLP’s affiliated undertakings. A list of the members of Allen Overy Shearman Sterling LLP and of the non-members who are designated as partners, and a list of the directors of Allen Overy Shearman Sterling (Holdings) Limited, is open to inspection at our registered office at One Bishops Square, London E1 6AD.

A&O Shearman was formed on May 1, 2024 by the combination of Shearman & Sterling LLP and Allen & Overy LLP and their respective affiliates (the legacy firms). This content may include material generated and matters undertaken by one or more of the legacy firms rather than A&O Shearman.

© Allen Overy Shearman Sterling LLP 2024