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Court of Appeal provides guidance on the law of fiduciaries – The Fine Line Between Friendship and Fiduciary Duty: Tan Teck Kee v Ratan Kumar Rai [2022] SGCA 62

Introduction

In the recent case of Tan Teck Kee v Ratan Kumar Rai [2022] SGCA 62, the Court of Appeal clarified the test to determine the presence of a fiduciary relationship and the requirements for a court to make an order to account on a wilful default basis.

Notably, the court held that even if one party is a director, who owes a fiduciary duty to the company, he or she can still concurrently owe a fiduciary duty to another third party.

 

Brief Facts

Mr Rai, the plaintiff in this case, entered into an oral agreement with several of his close friends (collectively referred to as “the investors”) to pursue a joint investment into plots of land in Cambodia. The investors did not sign any written agreement on the account of their close relationship. One of Mr Rai’s friends, Mr Seah, assisted with remitting the funds to Cambodia.

As Cambodian law precludes foreigners from owning land, the parties relied on a Cambodian-incorporated company, Worldbridgeland (Cambodia) Co Ltd (“WBL”), for their joint investment. Mr Tan, another one of Mr Rai’s friends, was appointed director of WBL, alongside with, one Mr Rithy, a Cambodian national.

The investors decided to develop the plots of land as doing so would be more profitable. WBL eventually entered into a joint venture with a developer, resulting in a profitable development. From this development, Mr Rai received several payouts as part of return on his capital and profits. Mr Rai felt that the payouts fell short of what was due to him.

Mr Rai proceeded to ask Mr Seah and Mr Tan to provide accounts of the joint venture. When they were not forthcoming with the accounts, Mr Rai commenced proceedings against Mr Seah and Mr Tan, on the basis that they were liable to account to him because they were his fiduciaries.

In the General Division of the High Court, the High Court Judge (the “Judge”) ruled for Mr Rai and held that both Mr Seah and Mr Tan were his fiduciaries. The Judge also ordered a common account to be taken against Mr Seah and an account to be taken on a wilful default basis against Mr Tan.

 

The Appeal

Mr Tan appealed against the decision on two broad grounds: (1) the Judge erred in finding that Mr Tan was a fiduciary to Mr Rai and (2) even if a fiduciary relationship is present, the Judge erred in ordering an account on the basis of wilful default. An account on a common basis should be ordered instead.

Whether Mr Tan was a Fiduciary to Mr Rai

Counsel for Mr Tan made two legal arguments in relation to the first ground of appeal:

  1. First, the obligation owed by fiduciaries to their principals is that of single-minded loyalty. Mr Tan could not have undertaken any duty of single-minded loyalty to Mr Rai because he was already a director of WBL and, thus, would not have undertaken to act loyally to anyone else
  2. Second, a fiduciary relationship could not be present because a director may not, outside of his capacity as a director of a company, voluntarily undertake another role that would give rise to fiduciary obligations to a third party.

 

In relation to the first argument, the court considered different tests for identifying a fiduciary relationship. The court ultimately affirmed its earlier decision in Tan Yok Koon v Tan Choo Suan and another and other appeals [2017] 1 SLR 654, whereby the relevant inquiry is whether the putative fiduciary had voluntarily placed himself in a position where the law can objectively impute an intention on his part to undertake fiduciary duties. This includes the extent to which the putative fiduciary may exercise discretion which affects the position of the supposed principal and the degree of vulnerability the supposed principal is subjected to.

In the present case, Mr Tan’s position gave him a high degree of control in the handling of the investors’ funds and interest. Furthermore, the investors were also particularly vulnerable to Mr Tan’s exercise of power. In view of this, the court held that Mr Tan should be imputed with the intention to undertake fiduciary obligations.

In relation to the second argument, the court refused to lay down a rule that no fiduciary duties to third parties can ever arise in such a situation as it would immunise an errant director from the consequences of his actions. The court agreed that a director owing fiduciary duties to his company should not voluntarily placed himself in a position that would give rise to fiduciary duties to a third party as it may potentially create a conflict of interest. However, the court stated that, as a matter of general principle, there is nothing preventing a director from doing this.

 

Whether a Common Account Should be Ordered Instead

Having determined that Mr Tan was a fiduciary to Mr Rai, Mr Tan was thus liable to account. The next issue the court had to deal with was whether Mr Tan should be ordered to render a common account or an account on the basis of wilful default.

The court cited the case of Ong Jane Rebecca v Lim Lie Hoa and others [2005] SGCA 4, whereby it was held that an order for an account on the basis of wilful default requires at least one instance of such default.

In relation to this point, the court clarified that if only one instance is established, that single instance of default would have to be significant. The court will look to whether that default allows a prima facie inference to be drawn that there may be other instances of wilful default yet to be uncovered.

Nonetheless, on the facts, the court held that there were multiple instances of wilful default on Mr Tan’s part and upheld the Judge’s decision for an account on the basis of wilful default.

 

Key Takeaways

This decision signifies that as long as you have voluntarily placed yourself in a position which could result in the law objectively imputing an intention to undertake a fiduciary relationship, such a fiduciary relationship would arise. The mere fact that you are holding other fiduciary duties, such as a director’s duty to a company, does not preclude another fiduciary relationship from arising.

In this particular case, Mr Tan’s fiduciary duties to both WBL and the investors happened to align and there was no real conflict. However, in the event that that there is a conflict of interest between the concurrent fiduciary duties, the company would be entitled to take an action against the director for acting in a situation of actual conflict or placing himself in such a position.

Be careful from placing yourself in a position that could give rise to fiduciary duties, especially if you are already a director of a company, or have undertaken some form of fiduciary duty, e.g. trustee to a beneficiary, partners in a partnership, etc. If you find yourself needing to handle funds or assets as a potential ad hoc fiduciary, check for conflicts with your existing fiduciary duties before doing so.

If you are unsure on whether you may have undertaken to become an ad hoc fiduciary (intentionally or otherwise), please seek for legal advice.

 

Please note that this case summary/article does not constitute express or implied legal advice, whether in whole or in part. For a Consultation or if you simply require more information, email us at info@silvesterlegal.com.

Contributions to this article were made by the following lawyers with the help of Lim Chia Yeh (Legal Intern).

walter silvester profile picture
Walter Silvester

walter@silvesterlegal.com

 

 

 

 

 

Siraj Shaik Aziz

siraj@silvesterlegal.com

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