To guard against fraud and any potential liability, company directors must be familiar with all business lines and subsidiaries’ operations, while making sure all transactions “make sense”, says Thio Shen Yi, joint managing partner at TSMP Law Corporation.
This becomes especially important when certain business lines turn loss-making. The challenge, however, is identifying early signs of trouble, adds Thio at a July 14 panel organised by the Singapore Institute of Directors (SID).
“There’s very little indication; there’s no bright line. Sometimes, the company is just gradually going into insolvency; it’s parlous, but it can still trade,” says Thio. “If you find that a company is not making money on a certain business line, you should be asking: ‘Why am I not making money on this? Should we be continuing to trade on this?’”
Successful appeal
Thio, along with TSMP Partner Nanthini Vijayakumar, represented former Inter-Pacific Petroleum (IPP) director Goh Jin Hian and won an appeal last month to overturn a 2024 ruling that found Goh liable for the losses of the now-insolvent marine fuel supplier.
The Appellate Division of the High Court found that while Goh had breached his duty of care as a director, his breach did not cause loss to IPP.
See also: ‘Water under the bridge’? SID panel discusses CDL saga, restoring trust
Thio offers an anecdote to explain why Goh was not found liable: “On the road, maybe [if] we switch lanes too [quickly], we’re in breach of the Road Traffic Act. But if I don’t knock into anybody, if I don’t kill anybody, then I can’t be sued; I might be charged with a criminal offence for reckless driving, but I haven’t knocked into anyone… I breached my duty, but it has not caused a loss.”
IPP’s two primary business lines included cargo trading and bunker trading. The company had accused Goh of failing to look into certain issues, which would have led him to discover drawdowns of over US$146 million for cargo trades and over US$10 million for bunker trades between June 21 and August 2, 2019.
Goh maintained that he was provided with falsified documents before the company became insolvent.
See also: Goh Jin Hian wins appeal against Inter-Pacific Petroleum
Three red flags
IPP asserted that Goh had failed to act with reasonable skill and care in the face of three “red flags”. The company claims that had Goh examined these warning signs, the sham cargo trades would have been uncovered.
The first “red flag” was an audit confirmation request that Goh signed. The second was the Maritime and Port Authority’s temporary suspension of IPP’s bunker craft operator licence. The third was three confirmations of indebtedness signed by Goh and sent to Maybank.
Goh, in his appeal, maintained that he was unaware IPP was involved in cargo trading.
In a judgment issued by the Appellate Division of the High Court, Justice Kannan Ramesh wrote: “It cannot be part of a director’s duty of supervision and oversight to pick up fraud unless there are tell-tale or warning signs. A director may be a sentinel, but he is not a forensics investigator or a sleuth, unless there are signs that would put him on inquiry. There is no suggestion by IPP there were any, apart from the ‘red flags’, which we have concluded were not in fact red flags,”
Thio, attempting to “summarise the legal position” on how much company directors are expected to do, says: “There is, and I quote, a minimum, objective standard of care, which entails the obligation to take reasonable steps to place oneself in a position to guide and monitor the management of the company.”
This “minimum standard of care”, however, “will not be lowered to accommodate any inadequacies in the individual’s knowledge”, he adds. “Instead, it will be raised if he held himself up to possess, or in fact, possesses some special knowledge or experience.”
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Duty of care
Thio’s comments drew questions from some 120 participants at SID’s panel — many directors themselves. In a subsequent question-and-answer session, they asked a panel of experts for a finer interpretation of directors’ duty of care.
In some situations, the feeling is that “the world is quite unfair”, says panellist Tham Sai Choy, former chairman of KPMG in Asia Pacific and now independent director at DBS Group Holdings. “If you don’t know, you’re okay. If you understand enough to have a basis to ask questions and you didn’t ask a question, you’re in so much trouble.”
Tham, who chairs the audit and nominating committees on DBS’s board, adds: “It may be unfair, but — correct me if I’m wrong — that’s exactly how it works. If it’s within your area of expertise that the board expects you to have to help them spot trouble when it’s coming, you have a duty, [which] nobody else on the board has, to then follow through.”
A director with skills in a certain area “should be sensitised to red flags” in those areas, says Thio. “Like it or not, the smarter you are, the more qualified you are in a specific area, the more onerous these duties are… As a lawyer, I suppose if I’m on a board, I should immediately be more sensitised to legal issues.”
From left: moderator Ng Wai King, chairman and managing partner, WongPartnership; Thio and Vijayakumar from TSMP; Lily Low, independent director, Standard Chartered Bank; and Tham from DBS Bank
Legal risk
One participant asked why Goh was singled out from IPP’s board. TSMP’s Vijayakumar says there were only three board members, and the other two directors — who are siblings — had fled to China. “So, it was Goh or nothing.”
Hypothetically, litigators could “go after the entire board” but “reframe the case” against each director, “depending on their knowledge [and] the scope of their duties”, she adds.
Thio notes a “moral hazard” in cases where directors and officers (D&O) insurance is involved, “because fraud is not covered by insurance”.
“So, you don’t go after the fraudsters because maybe they’re impecunious, and then you go after the independent directors that are covered by the insurance,” Thio adds. “Sometimes, you don’t go after some people because they are in other jurisdictions, and it’s too inconvenient. Ultimately, when anybody sues, the claimant has a choice of whom to sue, though he could be questioned on, why do you sue A and not B?”
DBS’s Tham, meanwhile, says Goh was caught in “the real moral hazard”. “The real moral hazard here is [that] two people had knowledge of the fraud, so they won’t be sued for the fraud. The one person that doesn’t have knowledge of the fraud gets sued for not having knowledge of the fraud. Think about that.”
