No room for ignorance: Singapore High Court clarifies directors’ duties

Inter-Pacific Petroleum Pte Ltd (in liquidation) v Goh Jin Hian [2024] SGHC 178 

In what could be seen as a wake-up call, the High Court of Singapore clarified the scope of director’s duties in Singapore, emphasizing the minimum standard of care required.

Background

Inter-Pacific Petroleum Pte Ltd (“IPP”), a petrochemical and ship bunkering company, was placed under judicial management in September 2019, and later liquidated in March 2021. IPP had borrowed over US$150 million to fund its cargo trading and bunkering transactions. These sums were never repaid to the banks. IPP’s judicial managers later discovered that the Facilities’ underlying cargo trading contracts were for sham and non-existent transactions.

The defendant, Dr Goh Jin Hian (“Goh”) was a director of IPP from June 2011 until his resignation in August 2019. Following IPP’s liquidation, the liquidators commenced legal action against Goh for breaches of duty in his capacity as a director of IPP, asserting that Goh was negligent in failing to apprise himself of, and to monitor, IPP’s affairs. As a result, IPP was used as a vehicle of fraud by its other directors and officers, which resulted in significant financial losses for the company.

Standard of Care

IPP claimed that Goh, as an “executive” director, and due to his special knowledge/experience, ought to be held to a higher standard of care.

Goh argued that as he had transitioned into the role of a non-executive director since 2015, he should be subjected to a lower standard of care. Specifically, he had substantially reduced obligations of monitoring and supervising IPP’s affairs and was entitled to rely on the information provided to him by his subordinates. 

The court held that all directors, regardless of their role, are subject to a minimum objective standard of care of a reasonably diligent director having both: (a) the general knowledge, skill and experience that may reasonably be expected of a person in a similar role; and (b) the general knowledge, skill and experience which that director has. This standard requires directors to take reasonable steps to monitor the company’s management.

The court observed that the focus is on the substance of the director’s role, rather than the form of his formal designation. Regardless of whether Goh was an executive or non-executive director, he was subject to a “minimum objective standard of care which entails the obligation to take reasonable steps to place [himself] in a position to guide and monitor the management of the company”.

The court declined to subject Goh to a higher standard of care in view of his special knowledge / experience.

Goh was therefore held to the standard of a reasonably diligent executive director, who would be expected to have considerable experience in managing companies, as well as knowledge of his company’s line of business.

Breach of Duty of Care

IPP argued that by being completely unaware of IPP’s cargo trading business throughout his tenure as a director, Goh displayed an egregious degree of ignorance and was ipso facto in breach of his duty of care.

On the facts, Goh was completely unaware of IPP’s cargo trading business for the entire duration of his directorship, only learning of it after his resignation.

This, the court held, amounted to a breach of his duty, skill and diligence. A director – whether executive or non-executive – would have to be sufficiently apprised of the company’s business and affairs in order to discharge his supervisory functions properly. Goh could never have been able to discharge his minimum obligation of monitoring and supervising IPP. As the court put it: “A guard dog that has no understanding of what it is guarding cannot sensibly discharge its function.”

The court observed that while there is nothing wrong per se in a director delegating some functions, there comes a point when delegation crosses into dereliction or abdication. A director must always supervise the discharge of its delegated functions.

Duty to Inquire

IPP submitted that had Goh acted with reasonable skill and care, there were three “red flags” which independently, should have led Goh on a path of inquiry into IPP’s financial position which would have uncovered the sham transactions.

Goh argued that the “red flags” were red herrings, and instead he had relied on “green flags”, such that no further inquiry had been necessary.

The court found that the three “red flags” raised by IPP should have prompted Goh to investigate IPP's financial situation and cargo trading business:

1. Goh signed an audit confirmation for an outstanding amount of $132 million from an IPP customer without inquiring about the status of this receivable, especially given the large sum.
2. IPP’s Bunker Craft Operator License was suspended in June 2019, significantly impacting its operations. Any reasonable director would have made inquiries about IPP's financial health following this event.
3. Goh signed three confirmations of indebtedness to Maybank in July 2019 without adequately understanding their implications. The confirmations should have prompted him to investigate IPP's financial position. This oversight indicated a failure to engage with the company’s financial situation.

Regarding Goh's two “green flags”:

1. The court rejected Goh’s “trip-wire” theory which suggested that the repayment to the banks was contingent on customer payments, deeming it ineffective as a proactive measure and akin to waiting for a crisis to act.
2. The court rejected Goh’s claim that he was entitled to rely on financial information from IPP’s CFO, holding that Goh had a continuous obligation to understand IPP's affairs and could not afford to remain passive and be inattentive.

The court also denied Goh discretionary relief under Section 391 of the Companies Act 1967 which gives the court jurisdiction to relieve an officer from liability for negligence, default, breach of duty or breach of trust, stating that Goh’s breaches undermined the essence of a director’s duties and were too egregious to warrant leniency.

Comment

This decision serves as a vital reminder to directors to actively monitor and supervise their company’s affairs, regardless of their title or role. Directors need to be alert and engaged, and ensure that they are well-informed about the business operations they oversee. Even in complex corporate structures, a director cannot excuse their lack of knowledge, especially when significant “red flags” are present.