In Foo Kian Beng v OP3 International Pte Ltd (in liquidation) [2024] SGCA 10, the Court of Appeal upheld the decision that a director of a company had breached his duty to consider the interests of the company’s creditors, as part of his fiduciary duty to act in the best interests of the company. In reaching its decision, the Court considered the scope and application of a director’s duty to consider the interests of the company’s creditors (“Creditor Duty“).
The appellant, Mr Foo, was the sole director and shareholder of the respondent company, OP3 International Pte Ltd (“OP3“). Mr Foo caused OP3 to pay him dividends and repay him loans that he had earlier extended to the company. The High Court Judge found that (i) OP3 was in a financially parlous state at the time of the payments to Mr Foo; (ii) that Mr Foo was obliged in these circumstances to consider the interests of OP3’s creditors as part of his fiduciary duty to act in the best interests of the company; and (iii) that Mr Foo had breached that duty because there was no legitimate reason for him to have paid himself in preference to the claims of other creditors. Mr Foo appealed against the Judge’s findings.
The Court of Appeal (“Court“) upheld the High Court Judge’s decision. The Court set out the following principles in relation to the Creditor Duty:
(a) A director has the duty to act in the best interests of the company, which requires having regard to the interests of different stakeholders, including creditors, at all times.
(b) The rationale that underlies the Creditor Duty lies in the shift in the main economic stakeholder of the company (from shareholders to creditors) as the company approaches insolvency.
(c) The relevant question in an action for breach of Creditor Duty is whether the director exercised his discretion in good faith in what he considered to be in the best interests of the company, as understood with reference to the financial state of the company prevailing at the material time.
(d) In determining whether the Creditor Duty is engaged, a court objectively examines a company’s solvency at the time the material transactions were entered into. When ascertaining whether the director had acted in breach of the Creditor Duty, the court examines whether the director subjectively believed he had acted in the best interests of the company.
(e) Significantly, breach of the Creditor Duty is actionable against the director, even if the relevant transactions that founded the breach fell outside of the relevant statutory periods for clawback actions.
On the facts, the Court found that OP3 was imminently likely to be unable to discharge its debts at the time Mr Foo authorised the payments to himself, and that the Creditor Duty was engaged at the time. The Court found that Mr Foo failed to consider the interests of OP3’s creditors and acted in breach of the Creditor Duty by authorising the payments to himself, as the payments singularly enriched Mr Foo at the expense of OP3’s creditors.
