3 August, 2017
Every director of a company has a duty under s 157(1) of the Companies Act (“CA”) to “act honestly and use reasonable diligence in the discharge of the duties of his office”. While the statutory duty to act honestly and exercise reasonable diligence is a fundamental one, s157(1) of the CA does not define the precise standard of reasonable diligence required of a director in each case. The Singapore courts have established that this standard may vary depending on the particular circumstances such as the individual’s role in the company, the experience or skills possessed by the director, as well as the size and business of the company. A recent Singapore High Court decision, Abdul Ghani bin Tahir v PP [2017] SGHC 125, considered whether a local resident director (“ the Accused ”) should be held to a higher standard of care and diligence under s 157(1) of the CA in view of his background as a chartered accountant providing corporate secretarial services and his experience as a director of more than 20 companies at the material time. The Accused was charged under s 157(1) of the CA for failing to exercise reasonable diligence in the discharge of his duties vis-à-vis a company which was involved in the commission of money laundering offences.
This decision was a novel one as it was the first reported case where a director had been:
- sentenced to imprisonment for an offence under s 157(1) of the CA; and
- convicted and sentenced to imprisonment for an offence under s59(1) of the Corruption, Drug Trafficking and Other Series Crimes (Confiscation of Benefits) Act (“CDSA”).
This commentary will focus primarily on the High Court’s observations on the standard of reasonable diligence expected of local resident directors under s 157(1) of the CA.
BRIEF FACTS
The Accused was a chartered accountant who was in the business of providing corporate secretarial services. The Accused had incorporated four companies, including World Eastern International Pte Ltd (“WEL”) and Kassar Logistics Pte Ltd (“Kassar”) in Singapore for foreign nationals introduced by one Nadia Monica (“Nadia”). He had also agreed to act as the non-executive local resident director for these companies.
WEL was held by one Marius-Anotonio-Costel Sima (“Sima”) as the sole shareholder and the Accused and Sima were the only two directors of WEL.
As the local resident director of WEL, the Accused had opened bank accounts for WEL with United Overseas Bank Limited and Sima was the sole signatory of WEL’s bank account. Over the course of a few months, there were multiple suspicious transactions in WEL’s bank account and the Accused had received several recall notices from the bank in respect of six deposits in WEL’s bank account. The Accused did not take any active action to enquire but merely scanned and forwarded the bank notices to Nadia and asked her to deal with them. However, Nadia did not reply to these emails.
The Accused was also aware that the Commercial Affairs Department was investigating Kassar in relation to possible CDSA offences, and that Kassar’s bank accounts had been closed.
It was subsequently ascertained that the six deposits in WEL’s bank account were stolen properties for the purposes of s 411 of the Penal Code and that they were quickly transferred out of the WEL’s bank account within a few days.
The Accused was charged on six counts under s 59(1) of the CDSA and one count under s 157(1) of the CA.
The District Judge convicted the Accused of these offences and sentenced the Accused to an aggregate imprisonment term of 26 months and 4 weeks. The Accused was also disqualified from being a director for 5 years.
SUMMARY OF HIGH COURT’S DECISION
The Accused appealed against both his conviction and sentence. The High Court upheld the Accused’s convictions, but reduced his aggregate term of imprisonment to 12 months and imposed an additional fine of S$50,000.
REASONABLE DILIGENCE UNDER S 157(1) OF THE CA
The Accused argued that he had not breached his duty to exercise reasonable diligence in the discharge of his duties under s 157(1) of the CA for three reasons:
- he should only be held to the standard expected of a reasonable resident director of companies whose directors are not ordinarily resident in Singapore
- local resident directors are not expected to take steps to ensure that their company scrupulously obeys the laws because they are engaged solely to fulfil the local statutory requirements; and
- the provision of resident director services is a common practice in Singapore.
The High Court rejected the Accused’s contentions as follows:
- it agreed with the prosecution’s view that, based on prior case law, the standard of reasonable diligence expected of the Accused must take into account the skills and experience held out by him as a chartered accountant and a veteran local resident director;
- it emphasised that although a non-executive local resident director should not be held responsible for legitimate commercial decisions made by the company, he could not simply be a “dummy director” who approved, ignored or was nonchalant as to whether the company was engaging in any illegal activities. Otherwise, the statutory requirement for a local resident director would be easily circumvented so as to allow “the corporate shield of the company to be used for nefarious or illegal purposes”; and
- it was not a common practice for resident directors to act indifferently as to a company’s affairs despite the presence of red flags. Even if such a practice was common among directors, it would still be considered negligent.
On the facts, the High Court found that the Accused had breached the standard of reasonable diligence expected of him as a non-executive local resident director because of his cavalier attitude in relation to WEL’s affairs, even though there were multiple instances which should have alerted the Accused to the possible money laundering activities of WEL.
In deciding on the Accused’s appeal against sentence for the offence under s 157(1) of the CA, the High Court upheld the sentence imposed by the trial judge, namely 4 weeks’ imprisonment. The High Court held that where breaches of directors’ duties were intentional, knowing or reckless, the rationale of protecting the public by deterring directorial misconduct took precedence over the other rationale of not interfering with commerce through over-criminalisation. As the Accused was found to have been largely reckless in failing to exercise diligence over WEL’s affairs, the short custodial sentence was not manifestly excessive.
NEGLECT UNDER S 59(1) OF THE CSDA
Section 59(1)(b) of the CDSA imposed criminal liability on a director of a company if an offence under the CDSA committed by the company was proved to be attributable to any neglect on his part.
The High Court observed that a director’s duty to use reasonable diligence under s 157(1) of the CA was a general one and should not be conflated with the requirement of “neglect” under s 59(1) of the CDSA which was specifically linked to the commission of the offence in question by the company.
Thus, to prove neglect on the part of an officer of the company, the prosecution must show that the director knew or ought to have known of the existence of facts requiring him to take steps which fell within the scope of the function of his role in the company and that he failed to take such steps.
The High Court found that having regard to the functions of his office, the Accused ought to have been aware that WEL was dealing with stolen properties, which required him to take steps to prevent WEL’s commission of the offences. The fact that the Accused was merely a non-executive director with no active management duties was not exculpatory, as the duties of a director (whether imposed under the common law or by statute) could not be circumvented by contract. In this case, there were a number of circumstances or “red flags” which ought to have put the Accused on inquiry. Such red flags included the Accused’s receipt of several recall notices from WEL’s bank and the closure of Kassar’s bank accounts. Hence, the Accused was found to be negligent as he chose not to take any action despite the multiple red flags present.
On the appeal against sentence, the High Court found that the sentences mposed by the District Judge for the CDSA offences were manifestly excessive because, among other things, the Accused was only a secondary offender due to his negligence/recklessness and did not perform any of the transfers himself.
CONCLUSION
Directors and other officers of companies should pay close attention to his case and their statutory duties under the CA and the CDSA.
This decision serves as a timely reminder that all directors, whether executive or non-executive, nominee or otherwise, have to discharge the duties imposed on their office by statute or common law. Such duties may not be contracted out of or avoided by taking a cavalier attitude in supervising the company’s affairs.
In Singapore’s current economic environment, governmental authorities and agencies are proactively taking measures to counter money laundering and the financing of terrorism. Directors and other officers of companies should be vigilant to detect any illicit activities taking place within their organisation.
For further information, please contact:
Azman Jaafar, Partner, RHTLaw Taylor Wessing
