We have published a series of articles dealing with directors’ duties in the zone of insolvency. In previous briefings, we have written about the high-profile UK Supreme Court ruling in Sequana (link here) and the New Zealand Supreme Court decision in Mainzeal (link here). This latest instalment focuses on the Singapore Court of Appeal judgment in Foo Kian Beng v OP3 International Pte Ltd (in liquidation) [2024] SGCA 10 (“OP3 International”).
These cases provide authoritative guidance in relation to what has been referred to as the “Creditor Duty”. It is trite that directors are required to act in the best interests of the company they serve. This is an irreducible fiduciary duty and is at the core of the director role.
However, it is acknowledged in these authorities that it is the interests of the creditors, as opposed to shareholders, that will come to the fore when the company is insolvent because “… at that point, the directors are effectively trading and running the company’s business with the creditors’ money” (see paragraph 2 of the OP3 International judgment). The analysis is more complex and nuanced when the company is in financial difficulty, as opposed to a hopeless and irreversible state.
The Two-Stage Test
The Singapore Court of Appeal has confirmed that, when analysing an alleged breach of the Creditor Duty, the test involves:
- ascertaining the company’s solvency at the time of the relevant transaction(s). In answering this question, the court is not only concerned with whether the company was technically insolvent or whether it would have been appropriate to liquidate the company. The “balance sheet” or cashflow solvency tests may, however, form part of the overall analysis; and
- having analysed the financial health of the company, the court must then examine the subjective intentions of the director and determine whether s/he acted in what s/he considered to be the best interests of the company.
Stages 1 and 2 are inter-related. If the company is in such a state that insolvency proceedings are inevitable, the directors will have far more obvious and strict obligations to act in the best interests of creditors.
Helpfully, the Court identified relevant phases in respect of the financial state of a company and offered guidance on what would broadly be expected of directors in respect of the so-called Creditor Duty during each of the following phases:
- the company is solvent and able to pay its debts;
- the company is imminently likely to be unable to discharge its debts; or
- the onset of insolvency proceedings are “inevitable”.
The Balancing Act
Depending on the severity of the financial difficulties, the court will be keen to assess whether the director considered in good faith that s/he could and should have taken action to promote the continued viability of the company, and whether there was a way out of the company’s financial difficulties which would benefit all stakeholders.
The court will not substitute its own decisions in place of those made by directors in the honest and reasonable belief that they were for the best interests of the company, even if those decisions turned out subsequently to be wrong ones. A director is not required to “get it right” in relation to every decision s/he makes. It is acknowledged that directors operate in a fast-moving commercial environment and the court will assess their decisions based on the facts and circumstances prevailing at the material time those decisions were taken.
However, it is a balancing act. As per the classic statement from Bowen LJ in Hutton v West Cork Railway Company, “bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational.”
Comment
As the Cayman courts grapple with similar issues, we expect that this Singaporean formulation of the test and the analysis recorded in other appellate decisions from like-minded common law jurisdictions will be highly persuasive.
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