9 February, 2017
Selvam LLC, the Singapore Law Practice of Duane Morris & Selvam LLP, recently succeeded in securing the dismissal of a suit brought by a liquidator in the High Court of Singapore against a defendant director in Prima Bulkship Pte Ltd (In Creditors’ Voluntary Liquidation) and Another v Lim Say Wan And Another [2016] SGHC 283.
The two plaintiff companies, Prima Bulkship Pte Ltd and Star Bulkship Pte Ltd (both in creditors’ voluntary liquidation) (“Companies”) were shell companies. Each of the Companies entered into a contract to purchase a vessel for US$34 million. The contracts were not performed, and the Companies subsequently went into liquidation. The liquidator alleged that the defendants were in breach of their director’s duties (such as duties of care, skill and diligence and duties owed when the Companies were insolvent or of doubtful solvency) and as a result the Companies suffered a loss of approximately US$3.4 million each.
The defendants argued inter alia that they were directors appointed only to fulfil a statutory purpose, and that they were nominee directors and had not breached their director’s duties.
The issues before the Singapore High Court included:
- What were the duties and/or scope of duties owed by each of the defendants as a director of the respective Companies?
- Whether each of the defendant directors breached any of their duties as a director to their respective Companies.
- If the defendant directors did breach any of their director’s duties, whether such breach(es) caused the Companies to suffer the alleged losses and damage.
Judicial Commissioner Kannan Ramesh exonerated the nominee directors. He held that:
- It seemed unreasonable to suggest that the defendant directors had a duty to ensure or insist that funds or financing for the purchase be put in place before the contracts were executed. The sellers did not seem bothered by the financial standing of the Companies or the lack thereof as they knew that the Companies were shell companies.
- It was reasonable for the defendant directors to leave all matters pertaining to the contract to power of attorneys.
- Even if the defendant directors had kept abreast of the situation and opposed entering into the contracts and/or breaching the contracts, this would likely have been inconsequential.
- Although the Companies, which were shells, were technically insolvent, the surrounding circumstances must be examined to determine whether there was a breach of fiduciary duties. The purpose of the duties owed by a director of an insolvent or a near-insolvent company to take into account the interest of creditors was to ensure that the company’s assets were not dissipated or exploited to the prejudice of creditors’ interests. The duty did not extend to preventing the entry into a bona fide transaction that was believed, based on reasonable commercial grounds, to be beneficial to the company.
The case is pending an appeal by the plaintiffs to the Singapore Court of Appeal. The full judgment of the High Court of Singapore can be found on SingaporeLawWatch.com.
For further information, please contact:
Ho May Kim, Duane Morris & Selvam
mkho@selvam.com.sg
