The Liability of Directors for Company Insolvencies

The Liability of Directors for Company Insolvencies

5 fingers and the man pointing at himself

Directors of an insolvent company owe a fiduciary duty to the general body of creditors of company. Directors may be found in breach of such duties if they continue the business of their company without due regard for the collective interest of the creditors.

There is, however, no specific rule which states that a company may not continue their operations if it is deemed to be insolvent. However, if a director of a company, with knowledge, contracts a debt, which at the time they had no reasonable or probable ground to expect the company’s ability to repay, then that director may be charged as guilty for an offence and shall be liable upon conviction of a fine of up to S$2,000 or to a prison term of up to three months. The Act also states that civil liability to a company for losses incurred, without limitation of personal liability, may follow if such criminal liability is made out.

A director may also be criminally liable for winding up if it appears that any business or company was carried on with the intent to defraud creditors.

The court may also make an order to disqualify a director from being a director or being involved in the management of a company for a period of up to five years if, in an insolvent company, the director’s conduct makes him or her unfit to be in the position of a director or have any involvement in the management of other companies.

Generally, a company’s directors and agents are not deemed to be personally liable for the debts or obligations of the company. However, a director of a company may be deemed to be personally liable in respect of antecedent transactions made by the company that are eventually set aside by the court due to how these are considered breaches of the director’s fiduciary duty to the general body of creditors.

At all times, a director ought to act honestly and make use of reasonable diligence in the discharge of her duties. A director must not make improper use of their position to gain an advantage for themself or any other person or to cause detriment to the company. A director of a company found to be in breach of the aforementioned duties may incur both civil and criminal liability:

 

  • Civil liabilityà the errant director is liable to the company for any profit made by them for any damage suffered by the company resulting from the breach; and

 

  • Criminal liability à the director will be liable on conviction of a fine of up to $5,000 or to imprisonment of up to 12 months.

 

Defences available to directors in the context of an insolvency or reorganisation

According to the Act, lack of intention to (i) defraud, (ii) conceal the state of affairs of the company or (iii) defeat the law may be constituted as good defence.

Under section 239 of the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”), exposure to personal liability for wrongful trading of the company is not limited to directors and officers of the company. ‘Any person who was a party to the company trading in that manner’ may be deemed personally liable.

 

Shift in director’s duties

In accordance with the laws in Singapore, a company director’s fiduciary duty to act in the company’s best interests shifts to act in the best interests of the creditors of the company where the company is insolvent or near insolvency.

 

Shift in director’s duties Director’s powers after proceedings commence

In a scheme, the company’s management remains vested in the current board of directors.

In Judicial Management (“JM”), all the powers of the director are transferred to the judicial managers for the period the JM order lasts. Further, the director’s powers of management also cease.

The director’s powers of a company in the case of liquidation cease upon the appointment of a liquidator, except to the extent that the liquidator approves.

 

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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