Compliance Issues for Directors

Under the Companies Act

Mr Fong Zhiguang

Legal Policy Officer, Legal Services Division

Accounting and Corporate Regulatory Authority (ACRA)

Presentation Outline Who is a Director

definition

requirements

Statutory Duties

Sections 145, 156, 157, 165, 197

common law (or case law)

Enforcement of Duties

breaches & enforcement

Ensuring Continuing Compliance

vital for good corporate governance

online filing & resources

Conclusion

Who is a Director

Definition of a Director

Section 4(1) of the CA defines “director” to include:

“any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the directors of a corporation are accustomed to act and an alternate or substitute director”

ie: de facto, shadow, independent, nominal, nominee, executive and non-executive directors are equally liable under the law

Section 145 of the CA states:

145(1) Every company shall have at least 1 director who is ordinarily resident in Singapore

(2) Must be a natural person who has attained 18yrs of age and who is otherwise of full legal capacity.

A corporate body cannot be a director

(5) A director shall not resign or vacate his office unless there is at least one remaining director in the company ordinarily resident in Singapore. Any purported resignation or vacation in breach of this subsection shall be deemed to be invalid.

Requirements of a Director

Statutory Duties

Statutory Duties –

Management & Administration

S 157(1) A director shall at all times act honestlyand use reasonable diligence in the discharge of the duties of his office.

(2) [a director] shall not make improper use of any information acquired by virtue of his position as an officer or agent of the company to gain… an advantage for himself or for any other person or to cause detriment to the company.

A director who breaches these provisions shall be liable to both civil and criminal penalties.

Statutory Duties – S 157(1)

What does it mean to “act honestly”?

Directors must act in good faith (or bona fide) in the interests of the company.

Interests of the company include:

the company as a commercial entity separate from its members

members

creditors, suppliers, customers

employees

other companies within the group

Directors need to know what is meant by interests of the company if they are to be sure that they do not breach this duty.

Statutory Duties – S 157(1)

Intraco v Multi-Pak [1995] 1SLR 313

“The word ‘honestly’ does not mean that a director would only be in breach of duty if he had acted fraudulently. It means to act bona fide in the interests of the company.

…

We were of the opinion that an honest and intelligent man in the position of the directors, taking an objective view, could reasonably have concluded that the transactions were in the interests of the respondents.” – LP Thean JA

Statutory Duties – S157(1)

What is “reasonable diligence”?

A director who is not negligent.

A diligent director would be expected to seek the advice of his fellow directors or a professional advisor on matters that he is not familiar with and not make unwarranted assumptions about the conduct of the company’s business without making proper inquiries.

Jurong Readymix Concrete Pte Ltd v Kaki Bukit Industrial Park Pte Ltd [2000] 4 SLR 723

Statutory Duties – S157(2)

What is “improper use”?

Insider trading

Conflict of interests No profit rule – A director must not make a profit for

himself by using:

Company’s property or money

Company’s information he has acquired as director

His position as director

Chew Kong Huat v Ricwil (S) Pte Ltd [2000] 1 SLR 385

Statutory Duties – S156

S 156 Directors shall disclose potential conflict of interests in transactions, whether directly or indirectly, as soon as is practical at a meeting of the directors of the company.

Yeo Geok Seng v PP [2000] 1 SLR 195

“Section 156 of the Act exists for the benefit

and protection of the company so that its board of directors may make informed decisions in the light of declarations of interest by individual directors.” - Yong Pung How CJ

Statutory Duties – S165

General duty for directors to disclose particulars of interests relating to shares, debentures, participatory interests, rights, options and contracts; and events or matters relating to himself as necessary for purposes of compliance by the company

This is for the purpose of maintaining:

the register of directors’ shareholdings

register of directors, secretaries, managers and auditors (s. 173)

Statutory Duties – Meetings &

Proceedings

S 171 – Duty of directors to appoint secretary with requisite knowledge and experience.

S 175 – Holding of Annual General Meeting (AGM)

S 197 – Filing of annual returns

S 201 – Present audited accounts, balance sheets and directors’ report at AGM. Accounts must comply with Accounting Standards.

Statutory Duties –

Disqualification of Directors

S 148 – Undischarged bankrupt

S 154(1) – Automatic disqualification for up to 5yrs if convicted of an offence involving fraud or dishonesty

S 155 – No direct/indirect involvement in management of company after conviction of 3 or more offences relating to filing requirements within a period of 5 yrs

Liabilities of Directors

Directors commit an offence if Companies Act duties are breached.

Remedies for breach of directors’ duties include:

Company may sue for damages or return of specific property

May have to forfeit any profits made

Company may avoid contracts director signed

May be personally liable for debts if company’s business carried out with intent to defraud

Enforcement of Duties

Enforcement of Duties Owed

by Directors and other Officers

Statutory duties

enforced by ACRA

General law duties –

enforced by company or individual member on behalf of company against the director(s)

2 very important functions of ACRA are:

investigating breaches of the Companies Act

enforcing the Companies Act

Differences Between Statutory

& Common Law Breaches

Statutory Duty:

A breach of statutory duty will result in criminal prosecution and criminal sanctions.

Common Law:

Breach of common law duty results in a civil suit and remedies.

Common Defaults of

Statutory Duties

Common defaults of statutory duties include:

failure to hold AGM (s. 175)

failure to file annual return (s. 197)

failure to file changes in particulars, especially resignation of directors (s. 173)

change of company’s registered office address (s. 143)

Depending on the section(s) breached, the company shall be liable to a fine not exceeding $5,000 and may include the company and every officer of the company.

Summary of Criminal Sanctions for

Breach of Key Statutory DutiesDuties Governed by

StatuteSection Penalty

Duty to act honestly and with reasonable diligence

157(1) Fine not exceeding $5,000 or imprisonment for a term not exceeding 1 year

Duty to disclose interests that directors have in the company

165(1) Fine not exceeding $15,000 or imprisonment for a term not exceeding 3 year; further fine of $1,000 for every day offence continues after conviction

Duty to disclose potential conflicts of interests in transactions or ownership or property

156(1) & (6)

Fine not exceeding $5,000 or imprisonment for a term not exceeding 1 year

Duty to keep proper accounts

199(1) Fine not exceeding $2,000 or imprisonment not exceeding 3 months and also to a default penalty

Ensuring Continuing Compliance

Ensuring Continuing

Compliance It is essential that companies put in place

internal systems and processes to ensure continuing compliance

This is vital because transparency and disclosure are essential to good corporate governance in market-driven economies

The significance that investors place on corporate governance is further incentive for ensuring compliance

ACRA – Facilitate business transactions and operations in Singapore

On-line filing

On-line reference materials & resources

Public education

Conclusion

Conclusion

All directors (de facto, shadow, nominal, nominee, independent, executive and non-executive) are equally liable under the law.

Statutory duties for directors include: Duty to act honestly and with reasonable

diligence (s. 157)

Duty to use powers for a proper purpose (s. 157)

Duty to avoid conflict of interests (s. 165)

Duty to disclose potential conflicts (s. 156)

Directors commit an offence when statutory duties are breached and may be subject to criminal prosecution and penalties.

Conclusion

Ensuring continuing compliance is vital to maintaining good corporate governance and investor confidence.

ACRA strives to promote a pro-business, pro-enterprise environment through effective enforcement and the integration of e-services (e-filing, online reference materials) and public education.

For more info, please visit:

http://www.acra.gov.sg/

The End

Thank you

Bibliography

Companies Act (Cap 50)

Reference Materials:

C.H. Tan (2005) Walter Woon on Company Law, Sweet & Maxwell Asia

Pamela Hanrahan et al (2004) Commercial Applications of Company Law in Singapore, CCH Asia Pte Ltd

Shenoy G. & Koh P. “Corporate Governance in Asia”, [2001] 31 ABLR 38

Eilis Ferran “Company Law Reform in the UK”, [2001] SJICL 516