The Law on Creditors’ Interests and Directors’ Fiduciary Duties in Singapore

Answers from the Present and Questions for the Future

This article examines the law on when directors’ fiduciary duties to act in the best interests of the company are modified to require the interests of creditors to be considered. Through the lens of recent cases in Singapore and the UK, it is argued that the normative justifications for this duty, as well as existing case law, shed much light on the content of this duty and its relationship with other areas of liability for directors.

When – and to what extent – are directors of financially distressed companies obliged to consider or even act in the interests of their company’s creditors? The contemporary relevance of this question is reflected in the October 2022 decision of the UK Supreme Court (UKSC) in BTI 2014 LLC v Sequana SA (Sequana),¹ BTI 2014 LLC v Sequana SA [2022] UKSC 25; [2022] 3 WLR 709. and the September 2023 decision of the Singapore High Court (SGHC) in Voltas Ltd v Ng Theng Swee (Voltas).² Voltas Ltd v Ng Theng Swee [2023] SGHC 245. This is also the first reported case in Singapore to cite Sequana. Indeed, this issue, among other matters, was most recently addressed by the Singapore Court of Appeal (SGCA) in its decision in Foo Kian Beng v OP3 International Pte Ltd (Foo Kian Beng), which was rendered on 27 March 2024.³ Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10. In its judgment, the SGCA also addressed the interaction among the duty to consider the creditors’ interests, section 403(1) of the Companies Act (Cap 50, 2006 Rev Ed), and the law on unfair preferences. While this makes for interesting discussion, it remains outside the scope of this article and does not affect the arguments presented here. Therefore, although the present article was accepted for publication in February 2024, it has been edited to include references to the SGCA’s recent judgment. No changes have been made to the original arguments in this article and instead, the similarities and differences in approaches between the Foo Kian Beng decision and this article are highlighted. It will be seen that several (but not all) of the conclusions independently reached by the SGCA dovetail with the suggestions in this article. This judgment also leaves sufficient room for certain aspects of this subject to be revisited in future cases, for which the points in this article may be useful.

This article first introduces the current state of this duty and the position that it occupies within the wider framework of directors’ duties, before highlighting four key doctrinal matters. These issues pertain to: (1) the nature of the fiduciary duty of directors insofar as the creditors’ interests are concerned, (2) what this duty entails for directors in practice, (3) when this duty is triggered, and (4) the relationship between this duty and other causes of action (in particular, the tort of unlawful means conspiracy). It is argued that a proper understanding of the first issue will pave the way towards a clearer answer to the fourth issue, and solutions to the second and third issues can be gleaned from a more careful analysis and consistent application of existing case law.

In addition to local case law developments, this article will also refer to several conclusions from the majority judgment and three concurring judgments in Sequana.⁴ The ratio decidendi was that no duty to consider or act in the creditors’ interests arises when a company merely faces a “real risk” of insolvency, although the UKSC also addressed the specificities of this duty in great depth (albeit in obiter). For more details on the UKSC’s decision and a comparative analysis of the pre-Foo Kian Beng approach in Singapore, see: Jared Foong, “Reconciling Shareholders’ and Creditors’ Interests in Financially Distressed Companies: Lessons from the UK and Singapore” (2024) 2 International Company and Commercial Law Review 112–126. This article was published on 16 January 2024. This comparative approach is meaningful since the local approach to this issue was originally based on UK case law, with the SGHC in Federal Express Pacific Inc. v Meglis Airfreight Pte Ltd initially pointing out “a dearth of local judicial authority” on this matter.⁵ Federal Express Pacific Inc. v Meglis Airfreight Pte Ltd [1998] SGHC 417 at [15]. In the 26 years that have passed since then, the Singapore courts have developed a stable, autochthonous approach that culminated in the decision in Foo Kian Beng, although this does not detract from the lessons that may be drawn from a comparative analysis (which the SGCA also undertook in Foo Kian Beng).

Background

It is well-established that directors owe, to their company, the fiduciary duty to act bona fide in what they consider to be the company’s interests.⁶ Re Smith & Fawcett Ltd [1942] Ch 304 at 306, affirmed by the Singapore Court of Appeal in Cheong Kim Hock v Lin Securities (Pte) (in liquidation) [1992] 1 SLR(R) 497; [1992] SGCA 17 at [26]. While the company’s interests are generally equated with the interests of shareholders as a whole when the company is financially stable, this changes once the company is insolvent or even approaching insolvency.⁷ Walter Woon (ed), Woon’s Corporations Law (Desk Edition) (LexisNexis 2019) at [2051]. For a thorough historical analysis along with a discussion of Sequana, see: The Right Honourable Lady Arden of Heswall, DBE, “In Whose Interests Should Companies Be Run?” Singapore Academy of Law Journal (published on e-First 13 February 2024). In 2010, the SGCA held in Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd (Progen Holdings) that in such circumstances, the “creditors’ interests come to the fore”.⁸ Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd [2010] 4 SLR 1089; [2010] SGCA 31 at [52]. Four years later, the SGCA in Dynasty Line Ltd (in liquidation) v Sukamto Sia (Dynasty Line) clarified that “as long as there are reasons to be concerned that the creditors’ interests are or will be at risk because of difficult financial circumstances, the directors ignore those interests at their peril”.⁹ Dynasty Line Ltd (in liquidation) v Sukamto Sia [2014] 3 SLR 277; [2014] SGCA 21 at [35].

Issue 1: The Nature of – and Terminology for – the Duty

The SGCA (in the 2010 decision of Progen Holdings) and the UKSC (in the 2022 decision of Sequana) independently reached similar conclusions as to the rationale for this duty: when a company is insolvent, the company is “effectively trading … with the creditors’ money”.¹⁰ Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd [2010] 4 SLR 1089; [2010] SGCA 31 at [52]. This is because if the company is eventually liquidated, the creditors will be entitled to the company’s assets – so even before liquidation, when the company is insolvent or nearing insolvency, the creditors can be said to be “prospectively entitled” to the company’s assets.¹¹ Kinsela v Russell Kinsela Pty Ltd (in liquidation) (1986) 4 NSWLR 722 at 730, cited in Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd [2010] 4 SLR 1089; [2010] SGCA 31 at [49]. The keyword here is “prospectively” because the creditors are only legally entitled to the company’s assets following liquidation. For more on this, see BTI 2014 LLC v Sequana SA [2022] UKSC 25; [2022] 3 WLR 709 at [45], [147], [246], [256]. Since unsecured creditors will have “everything to lose” if “illegitimate risks” are taken, while shareholders’ losses will be circumscribed due to the limited liability principle, the directors must be prevented from taking “illegitimate risks” with company assets that creditors practically and economically have an interest in.¹² Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd [2010] 4 SLR 1089; [2010] SGCA 31 at [52]. The courts have therefore intervened to require directors to consider the interests of creditors when the company is insolvent or approaching insolvency (the precise trigger is discussed below). This rationale has most recently been affirmed in Foo Kian Beng.¹³ Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [72]. An important corollary is that the directors’ wrongdoings cannot be ratified by the shareholders when the company is insolvent or “the creditors’ interests are endangered”, as the directors’ duties are held for the benefit of both the shareholders and creditors.¹⁴ Traxiar Drilling Partners II Pte Ltd (in liquidation) v Dvergsten, Dag Oivind [2019] 4 SLR 433; [2018] SGHC 14 at [111]–[112].

One fundamental issue is whether this duty exists independently of other fiduciary duties, or whether it only involves an adjustment of existing duties owed to the company. The SGCA in Foo Kian Beng explicitly adopted the latter position,¹⁵ Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [4], [69]. though this was already implicitly accepted before this decision. For instance, the SGHC in OP3 International Pte Ltd (in liquidation) v Foo Kian Beng held that by declaring dividends without considering the creditors’ interests, the director had breached his fiduciary duty to act bona fide in the best interests of the company.¹⁶ OP3 International Pte Ltd (in liquidation) v Foo Kian Beng [2022] SGHC 225 at [118]. This is reinforced by the structure of other judgments where the courts begin with the basic principle that directors have a duty to act in the company’s interests, and describe this duty as changing in the creditors’ favour in certain circumstances.¹⁷ Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd [2010] 4 SLR 1089; [2010] SGCA 31 at [52]; Lim Oon Kuin v Ocean Tankers (Pte) Ltd [2022] 1 SLR 434; [2021] SGCA 100 at [11]. Read together, these cases suggest that at no point is a new, free-standing duty created in favour of the creditors: the existing fiduciary duty to act in the best interests of the company is merely adjusted to require the interests of creditors (as a class) to be considered.¹⁸ A similar conclusion was reached by the UKSC in BTI 2014 LLC v Sequana SA [2022] UKSC 25; [2022] 3 WLR 709: see [96], [261]–[277]. This further justifies the conclusion in Progen Holdings that the duty to consider the creditors’ interests is owed to the company, not the creditors.¹⁹ Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd [2010] 4 SLR 1089; [2010] SGCA 31 at [52]. See too Max-Sun Trading Ltd v Tang Mun Kit [2016] 5 SLR 815; [2016] SGHC 203 at [95]–[96], and Trans Asian Shipping Services Pte Ltd v Pua Teck Ann and Teo Bee Lay [2018] SGDC 207 at [30]–[43] for an accurate application of these principles. Only the company – following a pre-liquidation derivative action under section 216A of the Companies Act (Cap 50, 2006 Rev Ed) or through the liquidator after liquidation – can bring a claim for breach of this duty.²⁰ This article only refers to a derivative action prior to liquidation because even though directors remain in control of the company at this stage, they are unlikely to authorise legal action being taken against themselves – see Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [63]. Breach of this duty may lead to civil liability (that may be either loss- or gain-based), on top of criminal liability and possible disqualification.²¹ Criminal liability may result because the duty to act honestly under section 157(1) of the Companies Act (Cap 50, 2006 Rev Ed) has been interpreted to refer to the duty to act bona fide in the company’s interests – see Multi-Pak Singapore Pte Ltd (in receivership) v Intraco Ltd and others [1994] 1 SLR(R) 513. The criminal penalties for breach of this duty are set out in section 157(3)(b) of the Companies Act (Cap 50, 2006 Rev Ed). On disqualification, see section 154(2)(b) of the Companies Act (Cap 50, 2006 Rev Ed). However, as the SGCA recently pointed out in Foo Kian Beng v OP3 International Pte Ltd [2024] at [107], the court may, in appropriate cases, exercise discretion to relieve an errant director of liability under section 391 of the Companies Act (Cap 50, 2006 Rev Ed).

It is for this reason that this author, in an earlier article, proposed the term “consider-creditors duty-modification” of the fiduciary duty to act in the company’s best interests, to emphasise that no new duty is created.²² Jared Foong, “Reconciling Shareholders’ and Creditors’ Interests in Financially Distressed Companies: Lessons from the UK and Singapore” (2024) 2 International Company and Commercial Law Review 112–126. This is inspired in part by Justice Hayne’s reference to the “consider-creditors theory” (Justice Hayne AC, “Directors’ Duties and a Company’s Creditors” (2014) 38(2) MULR 795) and Professor Davies’ reference to the “creditor-regarding duties” (Paul Davies, “Directors’ Creditor-Regarding Duties in Respect of Trading Decisions Taken in the Vicinity of Insolvency” (2006) 7(1) EBOR 301). This is equivalent to what the SGCA in Foo Kian Beng referred to as “Category two” cases. This is crucial because such terminology directly affects our understanding of the relationship between this duty and other causes of action, which is addressed in the penultimate section below.

Another benefit of the proposed terminology is that it allows for a clearer distinction from (what this author has described as) the “creditors-primacy duty-modification” – that is, the point at which directors are required to act in the creditors’ interests, to the exclusion of the shareholders. Prior to Foo Kian Beng, the distinction between the points at which the directors only need to consider the creditors’ interests and when they need to act in those interests had not been definitively addressed in Singapore, so a comparative analysis may be useful. Following Sequana, the current position in the UK is that directors are only obliged to act in the creditors’ interests when the company is irreversibly insolvent, or, put another way, when an insolvent liquidation or administration is inevitable. It is only here that the shareholders’ interests can be overridden as their shares will become worthless upon those procedures eventually being entered into.²³ BTI 2014 LLC v Sequana SA [2022] UKSC 25; [2022] 3 WLR 709 at [50]. With appropriate revisions (judicial management in place of administration), this rationale arguably applies with equal force in our local context.²⁴ For completeness, it should be noted that Lord Briggs suggested in BTI 2014 LLC v Sequana SA [2022] UKSC 25; [2022] 3 WLR 709 (see [172]) that an additional reason for adopting this trigger (of inevitable insolvent liquidation or administration) is that the creditors’ interests should become paramount at the same time that section 214 of the UK Insolvency Act 1986 (on wrongful trading) is engaged. Briefly, section 214 provides for the statutory priority of creditors to share in any distributions of the company assets following liquidation. If this is so, one might doubt if the trigger for the creditors-primacy duty-modification in Singapore should be the same as that in the UK, because Singapore’s provision on wrongful trading was explicitly drafted differently from the UK’s analogous provision (see the 2013 Final Report of the Insolvency Law Review Committee at pp. 201–203). In the UK, one prerequisite to liability for wrongful trading is that the company must have gone into insolvent liquidation (section 214(2)(a) of the UK Insolvency Act 1986) – but this is not necessary in Singapore (section 239(12) of the Insolvency, Restructuring and Dissolution Act 2018 (2020 Rev Ed)). Be that as it may, Lord Briggs’ point was not adopted by the other UKSC judges and as discussed in the main body of this article, the Court’s unanimous reasoning is relevant in Singapore. Before formal insolvency proceedings are inevitable, the company – even if it is actually insolvent – is by definition capable of being rescued by the directors, who should not be legally obliged to prioritise the creditors’ interests and displace the shareholders’ interests.²⁵ In BTI 2014 LLC v Sequana SA [2022] UKSC 25; [2022] 3 WLR 709, Lord Briggs noted that that many start-up companies start off being balance sheet insolvent but eventually become “spectacularly successful” after their new product is released. The question is whether there is “light at the end of the tunnel”, in terms of the company being able to “trade out of insolvency” – see [120]. Conversely, requiring creditors’ interests to be paramount by law (not just on the facts of each case) merely upon the company entering or approaching insolvency might incentivise directors to take unnecessarily risk-averse actions to avoid personal liability, instead of taking calculated risks that could help the company survive as a going concern. To be clear, it is entirely possible that the courts may decide that based on the facts of a specific case, the creditors’ interests should be given more weight than the shareholders’ interests even before insolvent liquidation becomes inevitable; this article is merely arguing that the legal requirement to do so only kicks in after this point.

This approach has now been confirmed judicially – the SGCA in Foo Kian Beng aligned itself with the approach in Sequana, so as suggested here, the creditors will only be the “main economic stakeholders” when insolvent liquidation or judicial management is inevitable.²⁶ Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [105(c)]. The SGCA referred to these as “Category three” cases. However, it was only stated that in such cases, the directors are prohibited from “authorising corporate transactions that have the exclusive effect of benefiting shareholders or themselves at the expense of the company’s creditors”.²⁷ Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [106(c)]. Foo Kian Beng itself was not such a case so this formulation may not be exhaustive, but it is argued that in addition to this prohibition, the directors must positively act in the creditors’ interests at this stage. Once corporate insolvency proceedings become inevitable, the shareholders’ economic interests are, by definition, negligible and the directors’ fiduciary duty to act in the company’s best interests must be modified to account for the primacy of the creditors’ interests. This will be discussed further in the next section.

Issue 2: What is Required of Directors in Practice?

Directors of a financially stable company (that is, solvent and able to discharge its debts) are entitled to treat the interests of the company as equivalent to the interests of the shareholders as a class. Of course, as was noted in Foo Kian Beng, directors are still prohibited from defrauding creditors in such “Category one” cases.²⁸ Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [71], [97], [106(a)].

When the consider-creditors duty-modification is engaged (or, put another way, in “Category two” cases), directors must balance the interests of shareholders as a whole and those of creditors as a whole. In so doing, directors should reach reasoned decisions and document the rationale for their actions in full. Any planned transaction should be entered into only after consideration of the following (non-exhaustive) factors:

1. The financial position of the company, which requires taking account of all of the company’s claims, debts, obligations, and contingent and prospective liabilities. Directors should also consider how close the company is to cash flow and balance sheet insolvency, and the chances of recovering from this through the planned transaction.
2. Contractual terms, security undertakings or guarantees agreed upon with the creditors.
3. Advice provided by non-directorial professionals, for instance lawyers, accountants and auditors.
4. Whether the directors themselves, associates of the directors, or parties related to the company will profit from, or are involved in a conflict of interest with, the planned transaction. The SGCA in Foo Kian Beng similarly highlighted that the greater the extent to which a transaction will exclusively benefit shareholders or directors, “the more closely a court will scrutinise [that decision]”.²⁹ Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [106(b)].
5. Whether the planned transaction will have the effect of preferring selected creditors (especially related parties) and, as a result, undermine the collective liquidation procedure. Relevant to this is whether existing avoidance rules pertaining to unfair preferences and undervalue transactions will be contravened by entering into the planned transaction.³⁰ For instance, see Living the Link Pte Ltd (in creditors’ voluntary liquidation) v Tan Lay Tin Tina [2016] 3 SLR 621; [2016] SGHC 67 at [78], [88]. However, the SGCA in Foo Kian Beng clarified that this factor is not necessarily conclusive.³¹ Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [120]–[122].

Directors should not be concerned about this duty being oppressive because courts ordinarily will not question commercially sensible decisions made in good faith to save a financially imperilled company, so long as these decisions are based on views that are objectively credible or were reasonably open to the directors.³² This is especially since a director’s intention will be assessed on both a subjective and an objective basis for the purposes of determining liability for breach of the duty to act bona fide in the company’s interests: Walter Woon (ed), Woon’s Corporations Law (Desk Edition) (LexisNexis 2019) at [2052], citing Goh Chan Peng v Beyonics Technology Ltd [2017] 2 SLR 592; [2017] SGCA 40. The SGCA recently confirmed this approach: see Foo Kian Beng v OP3 International Pte Ltd [2024] at [74]–[75], [106(b)]. Even so, directors should bear in mind the full range of duties to which they are subject, because compliance with one duty may not necessarily preclude liability for breach of another duty.³³ Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [76]–[77], [108].

The main doctrinal issue (that was not raised in Foo Kian Beng) is that in several recent cases in Singapore, the creditors’ interests have been taken to be paramount as a matter of law once the company is insolvent or nearing insolvency, so the test that has been applied is whether the disputed agreements or transactions were in the best interests of the creditors.³⁴ Australian Property Group Pte Ltd v H.A. & Chung Partnership [2015] SGHC 147 at [80]–[83]; Parakou Shipping Pte Ltd (in liquidation) v Liu Cheng Chan [2017] SGHC 15 at [112]–[133]; Parakou Investment Holdings Pte Ltd v Parakou Shipping Pte Ltd (in liquidation) [2018] 1 SLR 271; [2018] SGCA 3 at [89], [93], [111], [116]. This, however, overlooks the aforementioned distinction between the consider-creditors and creditors-primacy duty-modifications. Further, this is contrary to the SGCA’s decision in Progen Holdings, where it was held that directors of financially imperilled companies must ensure that the company’s assets are not “dissipated or exploited for [the directors’] own benefit to the prejudice of creditors’ interests” (emphasis added).³⁵ Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd [2010] 4 SLR 1089; [2010] SGCA 31 at [48], citing Winkworth v Edward Baron Development Co Ltd [1987] 1 All ER 114 at 118. The italicised words are vital because they suggest that so long as the creditors’ interests are properly considered and weighed, the dissipation of company assets for the shareholders’ benefit may be permissible, even if this will prejudice the creditors. Unfortunately, those italicised words have been omitted in several cases,³⁶ Prima Bulkship Pte Ltd (in creditors’ voluntary liquidation) v Lim Say Wan [2017] 3 SLR 839; [2016] SGHC 283 at [62], [69]; BIT Baltic Investment & Trading Pte Ltd (in compulsory liquidation) v Wee See Boon [2023] 1 SLR 1648; [2023] SGCA 17 at [32], [54]. distorting the original meaning of the SGCA’s decision.³⁷ It may be possible for the effect of a certain transaction to be in the creditors’ interests even though there is no recorded evidence of the directors considering the creditors’ interests – in such cases, the courts will surely adopt a substance over form approach in finding that the directors did act bona fide in the company’s best interests.

Part of the confusion might have arisen from several decisions in the early 2000s that the interests of the creditors of an insolvent company “become the dominant factor in what constitutes the ‘benefit of the company as a whole’”.³⁸ Tong Tien See Construction Pte Ltd (in liquidation) v Tong Tien See [2001] 3 SLR(R) 887; [2001] SGHC 381 at [54]; Chip Thye Enterprises Pte Ltd (in liquidation) v Phay Gi Mo [2004] 1 SLR(R) 434; [2003] SGHC 307 at [13]; W&P Piling Pte Ltd (in liquidation) v Chew Yin What [2007] 4 SLR(R) 218; [2007] SGHC 124 at [73]. However, these decisions were made solely based on the citation of West Mercia Safetywear Ltd (in liquidation) v Dodd, where the EWCA had affirmed the proposition that the creditors become “prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets”.³⁹ West Mercia Safetywear Ltd (in liquidation) v Dodd (1988) BCC 30; [1988] BCLC 250 – where the Court, in turn, relied on Kinsela v Russell Kinsela Pty Ltd (in liquidation) (1986) 4 NSWLR 722 at 730. Evidently, this indicates that the creditors’ interests are not necessarily dominant until liquidation occurs, a position that is now accepted in Singapore. It is suggested that the earlier cases should be re-interpreted as stating a practical matter of fact that in an insolvent company, it will often but not necessarily be the case that the creditors’ interests will dominate.

In sum, a return to orthodoxy as set out in Dynasty Line – and which is entirely in line with Foo Kian Beng – should be emphasised in future cases: following the consider-creditors duty-modification (now known as “Category two” cases), directors must act in the company’s best interests having regard to the positions of shareholders and creditors.⁴⁰ Certain sections of the SGHC’s judgment in OP3 International Pte Ltd (in liquidation) v Foo Kian Beng [2022] SGHC 225 provide a relatively recent example of an appropriate application of the consider-creditors duty-modification. It was held that the director had failed to consider the creditors’ interests, as illustrated by his failure to seek relevant legal advice before the directors paid dividends when the company was insolvent, particularly since the opinion rendered by an auditor then was merely informal and not fully informed (see [116]–[118]). However, in a later section of this judgment, the test applied was whether the director’s actions were in the interests of the creditors (see [125]). On appeal, the SGCA applied the appropriate test of whether the creditors’ interests had been considered by the directors, though this discussion was relatively brief given that this point was not “seriously pressed” by counsel – see Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [153]–[155]. The relative weight of the interests of shareholders and creditors will vary depending on the company’s financial position. The courts may decide that the creditors’ interests should override those of the shareholders, but this will be contingent on the facts of each case. It is only when the creditors-primacy duty-modification is separately triggered (now known as “Category three” cases) that the creditors’ interests must always – as a matter of law, not fact – displace those of other stakeholders, including the shareholders.⁴¹ This position has also been affirmed in the UK: see BTI 2014 LLC v Sequana SA [2022] UKSC 25; [2022] 3 WLR 709 at [81], [164]–[177], [247(iv)], [291].

Issue 3: When Does the Consider-creditors Duty-modification Apply?

This issue is especially important in the light of the SGCA’s decision in Foo Kian Beng that the questions of whether the duty has arisen and whether it has been breached cannot be collapsed into “a single composite inquiry”, and instead must be considered separately and sequentially.⁴² Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [89]–[95].

The standard formulation relied upon by local courts, citing Progen Holdings, is that the duty to consider the creditors’ interests is triggered when a company is insolvent, “perilously close to being insolvent”, or even in a “parlous financial position”. A more useful overarching question previously suggested by the SGHC – and separately affirmed by the SGCA – is “whether the company is in fact financially imperilled”.⁴³ Traxiar Drilling Partners II Pte Ltd (in liquidation) v Dvergsten, Dag Oivind [2019] 4 SLR 433; [2018] SGHC 14 at [91]; Lim Oon Kuin v Ocean Tankers (Pte) Ltd [2022] 1 SLR 434; [2021] SGCA 100 at [12]. However, this test was not cited by the SGCA in Foo Kian Beng, with the Court instead preferring a test of whether a company is “imminently likely to be unable to discharge its debts”, which includes situations where a director “ought reasonably to apprehend” that a contemplated transaction will put the company in such a position. Other factors to consider include the company’s recent financial performance”, “the industry that the company operates in” and “any other external developments, such as geopolitical ones, which may have an impact on the company’s business”. All of these factors are to be considered from the perspective of the director, at the time that they undertook the relevant decisions or transactions for the company.⁴⁴ Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [105(b)]. This article suggests that despite the comprehensiveness of this formulation, defining and applying the test of “imminent likelihood” may be challenging in practice and may give rise to further litigation. Conversely, the aforementioned test of general financial imperilment allows the same factors to be taken into account, while facilitating consideration of the degree of financial imperilment, which is in turn positively correlated to the weight that ought to be accorded to the creditors’ interests. This would avoid requiring separate definitions of when a company’s financial health is “parlous” (as has already been disputed in practice),⁴⁵ The SGHC has held that a company that is in a “parlous financial situation” is in a less severe position than a company that is “on the verge of insolvency”: OP3 International Pte Ltd (in liquidation) v Foo Kian Beng [2022] SGHC 225 at [28]–[34]. or, more recently, “imminent likelihood” of the company’s inability to discharge its debts.

In any case, the test in Foo Kian Beng must now be applied by courts and counsel, and its practical impact remains to be seen in future cases. One overarching point that remains unchanged is that the trigger for the consider-creditors duty-modification in Singapore is not defined with reference to insolvency (unlike in the UK following Sequana),⁴⁶ Although slightly different phrases were used by the concurring judges, the UKSC in BTI 2014 LLC v Sequana SA [2022] UKSC 25; [2022] 3 WLR 709 generally agreed that the consider-creditors duty-modification is engaged when a company is insolvent, bordering on insolvency, or when insolvent liquidation or administration is probable (see [88], [203], [247(iv)], [279]). The majority further held that the directors must know or ought to know of these circumstances (see [203]), though two other judges chose to leave this question open (see [90], [281]). even though the usual insolvency tests may “provide useful indicia” of the company’s financial health.⁴⁷ Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [104]. Local courts have routinely followed Dynasty Line in objectively assessing the “general financial health and solvency of the company”, which calls for consideration of “all claims, debts, liabilities and obligations of a company”.⁴⁸ Dynasty Line Ltd (in liquidation) v Sukamto Sia [2014] 3 SLR 277; [2014] SGCA 21 at [33]–[35]. Even so, it is unclear if the directors must know or ought to know of the company’s parlous financial state before the consider-creditors duty-modification is triggered. The majority in Sequana held that this requirement is necessary, the minority in Sequana left this question open, and the SGCA in Foo Kian Beng did not address this matter. It is suggested that no additional knowledge requirement should be imposed since such knowledge, if present, can already be taken into account in determining whether directors acted bona fide in what they believed to be their company’s interests.⁴⁹ A lengthier argument in favour of this approach can be found in the author’s separate journal article. Besides, a director’s supposed lack of knowledge of the company’s insolvency will not be taken at face value given a director’s duties to “make due inquiry and establish [the company’s] financial health”.⁵⁰ Ho Pak Kim Realty Co Pte Ltd (in liquidation) v Ho Soo Fong [2020] SGHC 193 at [87]–[89].

Issue 4: How Does the Duty-modification Relate to Other Causes of Action?

The circumstances in which parties can bring actions premised on breach of the consider-creditors-modified fiduciary duty were recently addressed by the SGHC in Voltas. Among other matters, this case centred on a claim in the tort of unlawful means conspiracy brought against a director who had allegedly caused his company to breach its obligations under a contract entered into with the claimant. For this claim to succeed, a combination between the director and his company to do certain acts had to be proven, and this would have been satisfied if the director had breached his fiduciary duties “owed to the company by causing the company to commit the unlawful act(s) in question”.⁵¹ Voltas Ltd v Ng Theng Swee [2023] SGHC 245 at [31], citing PT Sandipala Arthaputra v STMicroelectronics Asia Pacific Pte Ltd [2018] 1 SLR 818; [2018] SGCA 17. The SGHC held that the “creditor-regarding duty” was irrelevant as “liquidation is a condition precedent to the relevance of the creditor-regarding duty in an action that is premised on its breach”.⁵² Voltas Ltd v Ng Theng Swee [2023] SGHC 245 at [37]. This conclusion was reached solely based on precedent, not any separate principle. Properly understood, this decision does not affect the possibility of shareholders bringing a derivative action for breach of the consider-creditors-modified fiduciary duty prior to the company’s liquidation (as set out in the “Issue 1” section above), although in practice there will usually be little incentive for shareholders to do so given their different economic interests from the creditors. Instead, the Voltas decision means that a separate action premised on this breach can only be brought after the company’s liquidation.

It is respectfully suggested that there are at least three reasons that militate against this approach.⁵³ For more elaboration on this, see: Jared Foong, “Reconciling Shareholders’ and Creditors’ Interests in Financially Distressed Companies: Lessons from the UK and Singapore” (2024) 2 International Company and Commercial Law Review 112–126. It should be noted, however, that the outcome in the case would not have differed even if the proposed arguments are accepted, since the SGHC held that even if the creditor-regarding duty was relevant, it had not been breached (see Voltas Ltd v Ng Theng Swee [2023] SGHC 245 at [38]). First, recall that the need to consider the creditors’ interests only involves an adjustment of existing fiduciary duties; no additional duty is created. Thus, if a director’s breach of fiduciary duty will suffice in establishing a combination between that director and her company for the purposes of the tort of unlawful means conspiracy, it is unclear why a condition precedent of liquidation should apply to the fiduciary duty to act in the company’s best interests merely because the consider-creditors duty-modification has taken effect.

Second, the SGHC in Voltas relied on an extract from Progen Holdings that “individual creditors cannot, without the assistance of liquidators, directly recover from the directors for such breaches of duty”. However, this statement was only made in relation to the decision in Progen Holdings that the consider-creditors-modified fiduciary duty is owed to the company (not the creditors); no decision was made to restrict the relevance of the duty to liquidated companies.

Third, the decision in Voltas is particularly surprising given the wide range of scenarios in which the relevance of the duty-modification has been accepted. Apart from the archetypal case of a liquidator bringing a claim of breach of fiduciary duty against the former directors of a company that has since entered liquidation, breach of the consider-creditors-modified fiduciary duty has been used to: (a) satisfy the requirement in the tort of unlawful means conspiracy that the impugned acts were “unlawful”,⁵⁴ Parakou Shipping Pte Ltd (in liquidation) v Liu Cheng Chan [2017] SGHC 15 at [161]–[166]. (b) reinforce a statutory presumption regarding unfair preferences,⁵⁵ Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd [2010] 4 SLR 1089; [2010] SGCA 31. (c) rebut the directors’ defences to a claim of breach of duty,⁵⁶ Australian Property Group Pte Ltd v H.A. & Chung Partnership [2015] SGHC 147. and (d) establish dishonest assistance and knowing receipt claims against third parties who received payments from directors made in breach of fiduciary duty.⁵⁷ Parakou Shipping Pte Ltd (in liquidation) v Liu Cheng Chan [2017] SGHC 15 at [144]–[156]. The fact that the companies in most of these cases had in fact entered into liquidation is beside the point because liquidation was neither treated as a legal requirement nor central to the reasoning of the courts in applying the duty-modification. Besides, the consider-creditors duty-modification has also been applied to companies under judicial management,⁵⁸ Australian Property Group Pte Ltd v H.A. & Chung Partnership [2015] SGHC 147; Re HTL International Holdings Pte Ltd [2021] 5 SLR 586; [2021] SGHC 86 at [41]. thus directly undermining the requirement for liquidation specifically to have occurred.

The SGCA in Foo Kian Beng adopted a similar approach in obiter, provisionally suggesting that the relevance of the duty to consider the creditors’ interests may not necessarily be limited to companies in liquidation.⁵⁹ Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [61]–[67]. The interpretation of Progen Holdings suggested in this article (in the second reason above) is also similar to the SGCA’s reading in Foo Kian Beng. However, since the company in Foo Kian Beng was “indisputably in liquidation proceedings” at the time that the action was brought against its director, the SGCA left this question open for consideration in a future case.⁶⁰ Foo Kian Beng v OP3 International Pte Ltd [2024] SGCA 10 at [62], [68]. It is hoped that the courts will explicitly overrule Voltas on this matter as soon as the appropriate case arises for resolution, and this may occur sooner rather than later since Voltas is now the subject of a pending appeal.

Finally, the SGHC in Voltas noted that it was inappropriate for a creditor (who was the claimant in this case) to invoke the “creditor-regarding duty” which is only owed to the director’s company.⁶¹ Voltas Ltd v Ng Theng Swee [2023] SGHC 245 at [37]. It is suggested, however, that a creditor should be permitted to plead breach of fiduciary duty owed to the company specifically to prove a combination between the director and company. As was held in Progen Holdings, allowing creditors to bring claims directly against directors for breach of this duty would undermine the collective procedure of insolvency and possibly lead to double recovery (if the creditors and the company both brought claims against the directors). Yet neither of those concerns arises when creditors are merely claiming under a separate cause of action, of which breach of fiduciary duty is only one out of multiple elements.⁶² See Voltas Ltd v Ng Theng Swee [2023] SGHC 245 at [27] for the five elements required to establish a claim in unlawful means conspiracy – especially relevant in this context are the requirements to prove that the director intended to cause damage to the claimant creditor, and that the director’s acts caused loss. Indeed, if the creditor was forbidden from raising the duty-modification in Voltas to establish unlawful means conspiracy, it is highly unlikely that the company (which had yet to enter liquidation) would or could have done so. This is because the defaulting director was the majority shareholder of the company and made all relevant business decisions (as is often the case when conspiracy is alleged).

Conclusion

In closing, the effect of gradual, interstitial judicial development of the law is apparent in this area. 26 years after the first reported case in Singapore to address the intersection of directors’ duties and creditors’ interests, the decision in Foo Kian Beng thoroughly elucidates the nature of and underlying normative justification for the consider-creditors duty-modification. The SGCA’s distinction between “Category two” and “Category three” cases also parallels the suggested delineation between the consider-creditors and creditors-primacy duty-modifications. However, the courts in future cases should take this a step further by emphasising the different obligations that these stages entail for directors at various levels of severity of their company’s financial imperilment. In particular, this includes the requirement to proactively prioritise and act in the creditors’ interests in “Category three” cases. It has also been argued that well-established precedent and the principles regarding the nature of the consider-creditors duty-modification point the way forward on the relationship between this duty and other causes of action, such as the tort of unlawful means conspiracy.

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