Friend or Fiduciary? Finding the Right Approach in the Law of Fiduciaries

In its 2022 decision of Tan Teck Kee v Ratan Kumar Rai [2022] SGCA 62, the Court of Appeal considered, inter alia, the appropriate “test” for identifying a fiduciary relationship and whether and when a director may owe concurrent fiduciary duties both to a third party and his principal company.

Background

In 2011, Rai and several close friends (collectively, Investors) pooled their monies together to purchase a plot of land in Phnom Penh, Cambodia. They initially intended to sell the land subsequently for a profit (Venture). They did not sign any written agreement and relied solely on their trust and friendship in one another.

One of their friends, Seah, assisted with remitting the funds to Cambodia. Another of their friends, Tan, was designated to be the man on the ground in Cambodia to oversee the land investment. The Investors used Worldbridgeland (Cambodia) Co Ltd (WBL), a Cambodian company, as their corporate vehicle to purchase the land. Tan was appointed a director of WBL.

In 2013 or so, the Investors decided to develop, as doing so would make the land more profitable than selling it as an empty plot. WBL entered into a joint venture with Singapore-listed Oxley Holdings Limited to develop the land into a mixed-use development, known as “The Bridge”.

In 2015 and 2018, Rai received pay outs as a return of capital from the Venture and partial distribution of profits. However, those pay outs fell short of what Rai felt was due to him. He then asked for the accounts of the Venture. When those accounts were not forthcoming, Rai commenced proceedings against Seah, Tan and WBL for a full account of all matters relating to the Venture.

Parties’ Positions

Rai took the position that Seah and Tan had significant oversight and control over the Venture in Cambodia, which gave rise to fiduciary obligations on their part.

Seah and Tan denied the existence of any agreement or fiduciary obligation on their part. They claimed that it was WBL which had identified the investment opportunity and solicited the Investors’ contributions to finance the land acquisition. They asserted that Rai had a contractual relationship only with WBL.

Decision of the High Court

The General Division of the High Court (HC) largely ruled in Rai’s favour. The HC preferred Rai’s account as to the genesis of the Venture. The High Court found that Tan was a fiduciary to Rai with broad managerial oversight over the Venture. In addition, it was held that Tan had also committed various acts of wilful default.

Tan was ordered to provide Rai with a full account of all matters relating to the Venture on a wilful default basis.

Tan’s Appeal Against the Decision of the HC

Tan appealed against the decision of the HC. On appeal, he instructed Senior Counsel, who made, inter alia, the following new arguments on appeal:

1. The Judge erred because she failed to consider whether the putative fiduciary, Tan, had undertaken to act exclusively in the interest of the supposed principal, Rai. Tan could not have undertaken any duty of single-minded loyalty to Rai because he was already a director of WBL and, thus, would not have undertaken to act loyally to anyone else (Tan’s 1^st Argument).
2. Rai’s claim that Tan owed fiduciary obligations fell afoul of the principle in Said v Butt [1920] 3 KB 497, most recently clarified in PT Sandipala Arthaputra and others v STMicroelrectronics Asia Pacific Pte Ltd and others [2018] 1 SLR 818 (Sandipala). It was argued that the principle in Said v Butt applied because Rai’s real legal relationship arose from a contract with WBL and there was no legal relationship with Tan who was merely a director of WBL (Tan’s 2^nd Argument).

Decision of the Court of Appeal (CA)

The CA affirmed the HC’s finding that the evidence lent stronger support to Rai’s case. The Investors had transferred millions of dollars into the control of Seah, Tan and/or WBL without any documentation to record the purpose of these transfers. Therefore, there must have been some sort of oral understanding which provided a basis for these transfers.

The Investors trusted Tan to manage their investments. WBL was a nascent company with minimal capitalisation and no track record. WBL itself could not have been the source of such trust.

Tan’s First Argument

The CA considered differing approaches for identifying a fiduciary relationship but ultimately declined to depart from the open-ended approach preferred in Tan Yok Koon v Tan Choo Suan [2017] 1 SLR 654 (Tan Yok Koon), in the absence of full arguments from the parties (we shall address this in the commentary section below).

The CA affirmed the HC’s holding Tan was a fiduciary to Rai. Tan had undertaken to manage the Venture in his personal capacity whilst concurrently being a director of WBL, not in his capacity as a director of WBL. The CA attached weight to the following facts:

1. Substantial sums of money towards the purchase of land had been transferred into Tan’s personal bank account rather than WBL’s bank account; and
2. Tan had effectively distributed earnings from the Venture to the Investors in his own capacity.

The CA affirmed the HC’s finding that Tan had voluntarily undertaken a position with a high degree of control over the Investors’ interests. He could exercise unilateral custodial powers over the assets of WBL in which the Investors had an interest.

Tan’s Second Argument

The CA likewise rejected Tan’s second argument. The CA held that there is nothing – as a matter of general principle – which prevented a director from voluntarily placing himself in a position which gives rise to a second fiduciary relationship to a third party.

The CA dismissed Tan’s appeal.¹The CA dismissed Tan’s main appeal against the HC’s finding that he was a fiduciary of Rai who committed acts of wilful default. The CA allowed Tan’s appeal against the HC’s decision to dismiss his application to set aside leave granted to Rai to commence committal proceedings against him.

Commentary

The “Test” for Identifying a Fiduciary Relationship

As stated above, the CA in Ratan Kumar Rai (2022) declined to depart from the open-ended approach in Tan Yok Koon, in the absence of full arguments from the parties.

Open-ended approach in Tan Yok Koon

The relevant inquiry here is whether the putative fiduciary had “voluntarily place[d] himself in a position where the law can objectively impute an intention on his … part to undertake [fiduciary duties]”²Tan Yok Koon at (194) (at [194]).

As the CA in Ratan Kumar Rai (2022) observed, this question is “notoriously” open-ended.³Ratan Kumar Rai (2022) at (69) In determining whether such an intention ought to be imputed, the Court can rarely be more precise than broadly examining and evaluating the specific nature of the role played by the putative fiduciary.⁴See, eg, the characteristics suggested in Susilawati v American Express Bank Ltd (2009) 2 SLR(R) 737 at (41) citing Frame v Smith (1987) 2 SCR 99; Commodities Intelligence Centre Pte Ltd v Mako International Trd Pte Ltd and others (2022) SGHC 131 at (53)–(55) citing Burdett v Miller, 957 F.2d 1375 (7th Cir 1992) These include the extent to which the putative fiduciary may exercise discretion which affects the position of the supposed principal and the degree of vulnerability to which the supposed principal is subject.⁵Ratan Kumar Rai (2022) at (69)

In How Weng Fan v Sengkang Town Council [2022] SGCA 72, which was decided two months after Ratan Kumar Rai (2022), the CA cited with approval Millett LJ’s exposition in Bristol and West Building Society v Mothew [1998] Ch 1 that, “A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.”

Narrower approach

In Ratan Kumar Rai (2022), the CA considered a narrower approach put forward by Professor Sarah Worthington⁶“Fiduciaries Then and Now” (2021) 80(S1) Cambridge Law Journal s154 and Professor Len Sealy.⁷“Fiduciary Relationships” (1962) 20(1) Cambridge Law Journal 69 Under this approach, the precise nature of trust and confidence that defines fiduciary obligations is the fiduciary’s duty of self-denial, as embodied by the “no conflict” and “no profit” rules. Fiduciary relationships are specific to cases where the putative fiduciary “has control of another’s property or has undertaken to act on another’s behalf and for the other’s benefit and not the fiduciary’s own benefit”.⁸Worthington “Fiduciaries Then and Now” (2021) 80(S1) CLJ s154, s163. These are “legally significant facts” which indicate when fiduciary obligations are imposed.

There is some degree of objectivity in the analysis.⁹Ratan Kumar Rai (2022) at (76) Sealy stated that the distinguishing feature between fiduciaries and persons who possess some discretion which needs to be exercised in good faith but who are not typically considered fiduciaries (eg, holders of contractual discretions, mortgagees with a power of sale), is that a fiduciary is one who is “seen to have given [an undertaking] not to act in his own interests”.

Sealy and Worthington argue that such labelling is important because the obligation of self-denial is onerous, and the resulting remedies, notably account of profits, are exceptionally favourable for claimants. This means the law should be “crystal clear” in identifying when these obligations arise. This clarity is provided by the “legally significant facts”. The goal is making the imposition of fiduciary obligations consistent and predictable, where academics and judges have previously lamented the doctrine’s unpredictability.¹⁰Al-Nehayan v Kent (2018) CLC 216, (157); Birks “Equity in the Modern Law – An Exercise in Taxonomy” (1996) 26 UWALR 1, 18.

What is less clear about Sealy and Worthington’s approach is the degree of flexibility it affords beyond dogmatic adherence to those legally significant facts. As much as clarity and precision are desirable, these goals must be balanced against the flexibility to allow justice to be achieved. Tight adherence to a narrow conception of when fiduciary obligations arise could lead to justice not being served in fringe cases that fall outside the strict ambit of these legally significant facts.

Two sides of the same coin?

Both approaches appear to us to be two sides of the same coin. Though the starting points may be different, there is unlikely to be much practical difference in the end results under both approaches.

Worthington acknowledges this, noting that the objective of her approach is precision rather than narrowing the scope of who should owe fiduciary obligations.¹¹Worthington, “Fiduciaries Then and Now”, s167.

One of Sealy and Worthington’s key concerns in ensuring the “fiduciary” label is used in a precise manner is avoiding the conflation between fiduciary duties and duties owed by fiduciaries, such that aforementioned beneficial remedies are only available for breaches of the former, but not the latter. However, this is not exactly a novel viewpoint, with several academics,¹²Conaglen, “The Nature and Function of Fiduciary Loyalty” (2005) 121 L.Q.R. 452, 460; P.J. Millett, “Equity’s Place in the Law of Commerce” (1998) 114 L.Q.R. 214, 222-223. English cases¹³Al-Nehayan (159); Bristol and West Building Society v Mothew (1998) Ch 1, 16 and 18. and Singaporean cases¹⁴Tonny Permana v One Tree Capital Management Pte Ltd and another (2021) 5 SLR 477, (100)-(101); POA Recovery Pte Ltd v Yau Kwok Seng and others and another appeal (2022) 1 SLR 1165, (67). all raising the same distinction. Practical differences are only likely to arise if Sealy and Worthington demand strict adherence to the “legally significant facts”, and even so only in fringe cases.

Can a Company Director Concurrently Owe Fiduciary Obligations to a Third Party?

In Ratan Kumar Rai (2022), the CA held that there is no general principle preventing a company director from voluntarily placing himself in a position which gives rise to a second fiduciary relationship to a third party. In that case, though Tan was a director of WBL, he concurrently owed Rai fiduciary obligations.

The CA’s position must be correct as a matter of principle – ad hoc fiduciary relationships arise based on the Court’s factual assessment of relationships between parties. There is no reason why such an assessment should be impacted by the existence of other duties owed by one of the parties (e.g. Tan’s duty to WBL qua director).

This should serve as a warning signal to directors of companies who procure investment opportunities through personal relationships with friends or family. A director’s duties to the company and the third party may well conflict, so the onus is on the director to avoid that conflict which they themselves may have inadvertently created.

When Will the Court Order an Account to be Taken on a Wilful Default Basis?

In Ong Jane Rebecca v Lim Lie Hoa [2005] SGCA 4 (Ong Jane Rebecca), it was then held that the Court could order an account to be taken on a wilful default basis if at least one instance of such default was proved.

In Ratan Kumar Rai (2022), the CA clarified that proving a single instance of wilful default may not be sufficient. If only one instance is established, that would likely have to be a significant instance of default. The Court would have to consider whether the proven instance of default gave rise to the prima facie inference that there were other instances yet to be uncovered.

This is a positive development given that an account on a wilful default basis is wide-ranging. The court is granted a “roving commission” to inquire into all aspects of the fiduciary’s management of the principal’s property.¹⁵UVJ and others v UVH and others and another appeal (2020) 2 SLR 336

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