What happens when a Director fails his or her duties?

Directors are generally in charge of the company’s management and have the authority to exercise all the company’s powers. Failure to perform the duties of a director can result in significant penalties, including personal liability for any losses suffered by the company, its shareholders, and its creditors.

Directors’ Duties and Responsibilities

Fiduciary Duties

A company’s directors are responsible for a number of fiduciary duties that must be met. Directors are morally and legally obligated to look out for the company’s best financial interests because they have the authority to make the most important decisions for it. To fulfil their fiduciary duties, directors are required to:

1. Directors are expected to give the company their undivided loyalty and to act in the best interests of the company. As a result, all decisions should be made in ways that benefit the company’s interests, while personal and third-party interests should be ignored.
2. Conflicts of interest should be avoided at all costs, and directors should do everything in their power to avoid situations in which their personal interests and the interests of the company are in direct opposition to one another.
   • Conducting business in a way that will result in personal gain for a director while the company loses money is a conflict of interest.
   • The practice of transferring customers from one company to another that is in direct competition with it.
   • Participating in the management of a rival company as a director.
3. Employ care, expertise, and diligence: Directors will be judged based on the experience they bring to the company, and it is expected of them that they will run the company to the best of their ability. Exercise care, expertise, and diligence.
4. It is expected of directors that they will not abuse the power and information that has been vested in them by the company but rather that they will use it solely for the benefit of the company.

Statutory Duties

1. To demonstrate the company’s financial health, a director is obligated, under section 199 of the Companies Act, to ensure that appropriate accounting records are maintained. Easily accessible to other company directors is a must for the records’ storage location.
2. Keep Annual Accounts: Section 201 of the Companies Act stipulates that at least once a year, at the company’s Annual General Meeting, the directors must present financial statements to the shareholders.
3. The following meetings are mandatory for directors to hold, but others may be added or removed depending on the company’s size and organizational structure.
   • Each company must hold an annual general meeting (AGM) at least once a year.
   • Directors of publicly traded companies are required by law to hold a statutory meeting no later than three months after the company’s inception.
   • When requested by shareholders holding at least 10% of the company’s shares, the board of directors must convene an extraordinary general meeting (EGM).

Liabilities on Breach of Duties

Directors who violate their fiduciary responsibilities may be held criminally and/or financially liable. The following is a non-exhaustive list of potential legal consequences that a director may face as a result of breaching their legal and fiduciary obligations.

Companies can do any of the following in civil court for violations of any of the four fiduciary duties:

1. Demand that the director compensates the company for any losses that have been incurred.
2. Ask for a full refund of the director’s earnings while in violation.
3. Put an end to the director’s authority to act and nullify his or her decisions.

Criminal liabilities similar to those listed above can be imposed on a director who has violated their fiduciary duties.

1. A fine of up to S$5,000 or up to 1 year in prison
2. Any director who violates section 199 of the Companies Act and fails to maintain accounting records may be subject to a fine of up to S$2,000 and/or imprisonment for up to three months.
3. A director can be fined up to S$10,000 or sent to jail for up to 2 years for failing to keep the company’s annual accounts as required by Section 201 of the Companies Act.
4. Failure to hold a statutory meeting can result in a fine of up to S$1,000 and a default penalty for a director of a public company, as stated in section 174 of the Companies Act. In a similar vein, a director can be fined up to S$5,000 and given a default penalty for failing to call an annual general meeting under section 175.
5. If a director violates section 205 of the Companies Act and fails to name an auditor, that director could be fined up to S$5,000.
6. To the contrary, a director can be fined up to S$5,000 and sent to jail for up to 12 months if he or she pays dividends from funds other than the company’s profits, as stated in section 403 of the Companies Act. Directors are personally responsible for repaying any debts that were taken on to cover dividends.
7. If a director issue shares without shareholder approval, the company and the shareholder receiving the shares may be entitled to compensation under section 161 of the Companies Act.
8. A director may be fined up to S$5,000 for violating section 156 of the Companies Act if he or she fails to disclose an interest in a company transaction or the ownership of office property.

Conclusion

Directors have fiduciary duties to the company and must strictly adhere to them. This includes the no-conflict rule and any other rules that apply. Diverting business to companies in which they have an interest and engaging in related party transactions are two behaviours that are especially likely to violate these guidelines. Any conflicts of interest between directors and competitors or other transaction parties must be disclosed.

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 us at:  info@silvesterlegal.com.