Directors And The Scope Of Fiduciary Duties

Directors And The Scope Of Fiduciary Duties

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Introduction

A director of a company is subject to a wide scope of fiduciary duties. The issue as to whether certain acts or omissions may constitute a breach of these fiduciary duties is an issue that is often brought before the courts, and may pose further complications if the entity concerned is a family-run organisation.

The case of Winsta Holdings Pte Ltd and another v Sim Poh Ping and others [2018] SGHC  239 concerned a family-owned business. A substantial stake of the business was bought over by an investor. The family members remained in the company to manage the business acting as directors and senior management. However, they were later alleged by the investors to have breached their fiduciary duties because they diverted business from the company and failed to declare conflicts of interest.

The Singapore High Court found that the Sim family did breach their fiduciary duties, and were liable to provide compensation to the group of companies that suffered multiple losses as a result of the breach.

 

Brief Facts

The dispute involved a series of companies (“Winsta Group”) which the Sim family, inclusive of the two daughters and father, founded and managed. The companies dealt in leasing and management of hostels and serviced apartments, and were subsidiaries of the main holding company (“Winsta Holding”).

M Development later acquired a majority controlling stake in Winsta Holding. However, the Sim family continued to run the management as directors of Winsta Holding and its subsidiaries.

Upon investigation, M Development, Winsta Holding and its subsidiaries uncovered wrongful activities that were engaged in by the Sim family. The wrongful activities primarily consisted of interested party transactions which were not declared, and business opportunities that were diverted to companies beneficially owned by the Sim family.

A claim was brought against the Sim family by the Plaintiffs for breach of fiduciary duties owed to the Winsta Group as directors, along with other individual and corporate defendants who dishonestly assisted the Sim Family in their unlawful breaches.

 

Holding of the High Court

The High Court of Singapore found in favour of the Plaintiffs. The High Court held that the Sim family had in fact, acted in breach of their fiduciary duties and were therefore liable for to provide compensation to the Plaintiffs as a result of the losses they suffered from.

 

Directors’ Duties

As a fiduciary, a director is subject to strict obligations of loyalty:

 

  • A director must avoid putting himself in a position where his duty to the company conflicts with his own interest (the no-conflict rule); and

 

  • A director cannot profit out of his fiduciary position (the no-profit rule).

 

The no-profit rule also disallows a director who receives a business opportunity because of his directorship from diverting the opportunity to himself or an entity in which he may have interest in. Whether the company itself is in a position to take advantage of the opportunity is irrelevant.

 

The daughters

The daughters (“Lynn” and “Joyce”) were responsible for managing the daily operations of Winsta Holding and its subsidiaries. On the facts, the daughters were in fact found to be in breach of the no-conflict rule and the no-profit rule on the basis of a series of acts and omissions.

 

  • Lynn and Joyce diverted several business opportunities for leasing and provision of accommodation to companies of which they were recognised as the beneficial owners. The opportunities were procured in their capacities as directors of Winsta Group. Further, the daughters failed to disclose their interests or obtain consent from the Board of Winsta Group.

 

  • Lynn and Joyce secured tenancy and catering agreements between Winsta Group and companies in which they were recognised as the beneficial owners which resulted in interested party transactions. Further, the daughters also failed to disclose to the Plaintiffs their interests in these companies.

 

  • They utilised resources of Winsta Group in order to act on their own interests.

 

Mr Sim

The Sim family made the argument that Mr Sim had no involvement in any of the matters which were made subject to the Plaintiff’s claim because he was not involved in the operations of the business.

The Court, however, refuted this claim and did not accept Sim’s denial of any knowledge or involvement on the matter. On the facts, the Court held that Sim ought to have known of his daughters’ interests in the defendant companies, which he would also be regarded to have a personal interest in the companies, and that he should not have agreed to the actions of Lynn and Joyce.

 

Concluding Words

Directors are advised to observe their fiduciary duties to the company strictly, including the no-conflict rule and the no-profit rule. Particularly, diversion of business to companies in which they may possess an interest and related party transactions are likely to result in a breach of such rules. Directors ought to ensure disclosure of their interests in competing companies or counterparties to any transaction.

Where family-run companies are concerned, it is likely that corporate governance practices are informal. It is imperative to note that in such situations, companies are subject to the same corporate governance regime, and that their directors must act in adherence to the same fiduciary requirements.

 

Please note that this article does not constitute express or implied legal advice, whether in whole or in part. If you require legal advice, please contact me at walter@silvesterlegal.com.

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