FOO KIAN BENG v OP3 INTERNATIONAL PTE. LTD. (IN LIQUIDATION)

1 The appellant, Mr Foo Kian Beng (“Mr Foo”), was at all material times the sole director and shareholder of the respondent company, OP3 International Pte Ltd (“OP3”). Between 2015 and 2017, Mr Foo caused OP3 to pay him dividends and repay him loans that he had earlier extended to the company.

2 In OP3 International Pte Ltd (in liquidation) v Foo Kian Beng [2022] SGHC 225, the High Court judge (“Judge”) found that OP3 was in a financially parlous state at the time of the payments to Mr Foo. The Judge found 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 at the time he authorised those payments to himself, and that he breached that duty because there was no legitimate reason for him to have paid himself in preference to the claims of other creditors. Dissatisfied, Mr Foo appeals against the Judge’s findings.

3 Central to this appeal is the question of when the interests of creditors should acquire discrete significance and even pre-eminence, as part of the director’s fiduciary duty to always act in the best interests of the company.

4 The UK Supreme Court recently set forth its views on this issue in BTI 2014 LLC v Sequana SA and others [2022] UKSC 25 (“Sequana”). The court appointed Mr Lee Eng Beng SC as Independent Counsel to assist the court in navigating the legal issues that this appeal presents.

5 OP3 was ordered to be liquidated on 3 April 2020 arising from its failure to satisfy a judgment sum it was ordered to pay in HC/S 498/2015 (“Suit 498”).

6 Suit 498 arose from a contract OP3 entered into with Smile Inc Dental Surgeons Pte Ltd (“Smile Inc”) to provide fitting out works at one of Smile Inc’s clinics (“Clinic”). OP3 was found to be responsible for the delay in completing the fitting out works, and OP3’s fitting out works were found to be defective and the principal cause of two episodes of flooding in the Clinic (the “First Flood” and “Second Flood” respectively). As a result, OP3 was found to be liable to Smile Inc for the sum of $534,189.19.

7 Between 2015 and 2017, and whilst Suit 498 was ongoing, Mr Foo caused OP3 to pay him dividends and repay him loans that he had earlier extended to the company (the “Payments”):

Mr Foo argues that the dividends of $500,000 OP3 recorded as having been paid to Mr Foo on 27 December 2016 (S/N 4 in the table above) (“Disputed Dividend”) was included in the payment of the sum of $682,394 he received from OP3 in 2017 (S/N 6 in the table above) (“Disputed Payment”) (collectively, the “Disputed Transactions”).

8 On 10 February 2021, OP3’s liquidator commenced Suit 152, an action in OP3’s name against Mr Foo. By Suit 152, OP3 sought to recover sums equivalent to the Payments from Mr Foo on the principal basis that in authorising these Payments to himself, Mr Foo acted in breach of his director’s duty to act in the best interests of the company under the common law and/or his duty to act honestly under s 157(1) of the Companies Act (Cap 50, 2006 Rev Ed) (“CA”). Central to OP3’s case in Suit 152 was its claim that a director is under a duty to consider the interests of the creditors as part of his duty to act in the best interests of the company at a time when the company is financially parlous.

9 The Judge found in favour of OP3 that the duty to consider the interests of the creditors is first engaged when a company is “financially parlous” and that this is a state of affairs less severe than being “on the verge of insolvency”.

10 On the facts of the case, the Judge found that OP3’s potential liability in Suit 498 was reasonably likely to materialise when Smile Inc served the statement of claim on OP3 on 25 May 2015. Based on the facts and circumstances known to Mr Foo at this date, he could not reasonably have believed that OP3 would not face any liability in Suit 498. The Judge held that the value to be ascribed to Suit 498 as a contingent liability ranged between $441,000 and $514,000. The result was that OP3’s contingent liability to Smile Inc in Suit 498 rendered it balance sheet insolvent as at 31 December 2016 and 31 December 2017, such that Mr Foo was obliged to consider the interests of creditors in making decisions for OP3 at these times. The Judge found that Mr Foo failed to do so, in breach of the Creditor Duty, when he authorised the payment of the Disputed Dividend and Disputed Payment – which were distinct transactions – to himself in December 2016 and in 2017 respectively.

11 In CA 47, Mr Foo appeals against the Judge’s findings that: (a) OP3 paid him the Disputed Dividend in December 2016 as distinct from the Disputed Payment it paid him in January 2017; and (b) he had breached the Creditor Duty by authorising the payment of the Disputed Transactions to himself.

12 The court dismisses the appeal.

13 The court refers to the director’s duty to consider the interests of creditors in certain circumstances as the “Creditor Duty” even though it is an integral part of his duty to act in the best interests of the company: at [4].

14 The Creditor Duty is a fiduciary duty that directors owe to the company. This duty is not one that directors owe directly to creditors and creditors therefore cannot sue directors for breach of the Creditor Duty. Rather, the proper plaintiff in an action for breach of the Creditor Duty is presumptively the company: at [60].

15 Flowing from the fact that the Creditor Duty is a duty that directors owe to the company, the Creditor Duty is best understood in terms that in certain circumstances, that duty modifies how the company’s interests ought to be understood when a director considers his duty to act in the best interests of the company. The Creditor Duty essentially underscores the fact that the interests of creditors acquire discrete significance and require separate consideration at a certain stage in a company’s life cycle: at [69].

16 It is not the case that the interests of creditors only become relevant when the Creditor Duty is engaged or that those interests are otherwise immaterial. The predicate duty is a duty to act in the best interests of the company, and this enjoins directors to have regard to the interests of different stakeholders, including creditors, at all times. It is simply that when the company is financially healthy, directors would be justified in treating the interests of shareholders as a proxy for the interests of the company and in according commensurately less or even no discrete weight to the interests of creditors: at [70].

17 The rationale that underlies the Creditor Duty lies in the shift in who may be said to be the main economic stakeholder of the company as the company approaches insolvency and the asymmetry in corporate governance. Whereas shareholders are the primary bearers of the risk of loss arising from the manner in which directors exercise their powers when the company is solvent, creditors displace them from this position when the company is insolvent because an insolvent company effectively trades and conducts its business with its creditors’ money. And even as creditors bear the risks of continued corporate trading in such a situation, they generally have no control over the conduct of the company’s business. There is consequently a need to constrain directors from externalising the risks of continued trading onto creditors, bearing in mind that shareholders usually have nothing to lose and everything to gain, and creditors, contrastingly, have everything to lose and nothing to gain by the continued trading of a company which is on the cusp of insolvency: at [72].

18 Creditors ought to be understood as a class for the purpose of the Creditor Duty: at [73].

19 In an action for breach of the Creditor Duty, the relevant question is whether the director exercised his discretion in good faith in what he considered (and not what the court considers) 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. Although the duty is a subjective one in that sense, the court will assess a director’s claim objectively, by asking whether the view the director claims to have formed was one that is credible or was reasonably open to him, given the information available at the time. In so doing, the court may very well draw an inference that a director was not acting honestly where the transaction is objectively not one in the interests of the company: at [74].

20 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. The two inquiries serve different purposes, embody different standards, and the question of whether the Creditor Duty is engaged on the facts is logically anterior to the issue of breach: at [93]–[95].

21 The court should objectively determine which of three financial stages the company was in at the time the transaction was entered into or that was likely to arise as a result of the company entering into the said transaction: at [105].

a. Category one: Where all things, including the contemplated transaction, having been considered, the company is solvent and able to discharge its debts.

b. Category two: Where a company is imminently likely to be unable to discharge its debts. This category encompasses cases where a director ought reasonably to apprehend that the contemplated transaction is going to render it imminently likely that the company will not be able to discharge its debts. The court should assume the vantage point of that director and consider which factors he ought reasonably to have then taken into account in assessing whether the contemplated transaction would result in imminent corporate insolvency.

c. Category three: Where corporate insolvency proceedings are inevitable. It is not only the onset of liquidation itself that converts creditors into the main economic stakeholders of the company; rather, a clear shift in the economic interests in the company (from the shareholders to the creditors as the main economic stakeholders of the company) would occur where insolvent liquidation or administration (or judicial management under Singapore law) is inevitable. Even at this relatively earlier stage, the shift in who may be said to be the main economic stakeholder of the company would be apparent.

22 Having ascertained the financial state of the company at the material time, the court should then examine the subjective intentions of the director and determine whether he acted in what he considered to be the best interests of the company. The financial state of the company provides a useful analytical yardstick against which the subjective bona fides of the director may be tested: at [106].

a. Category one: Where a company is, all things considered, financially solvent and able to discharge its debts, a director typically does not need to do anything more than act in the best interests of the shareholders to comply with his fiduciary duty to act in the best interests of the company. In short, the Creditor Duty does not arise as a discrete consideration in these circumstances.

b. Category two: In this intermediate zone, the court will scrutinise the subjective bona fides of the director with reference to the potential benefits and risks that the relevant transaction might bring to the company. The court will be slow to second-guess the honest, good faith commercial decisions made by a director to afford the company the best possible chances of revitalising its fortunes. Transactions undertaken at this time which appear to exclusively benefit shareholders or directors will attract heightened scrutiny. The greater the extent to which the transaction is one which exclusively benefits shareholders or directors (and does not benefit the company as an entity), the more closely a court will scrutinise the decision of the director to determine whether he had breached the Creditor Duty.

c. Category three: Lastly, where corporate insolvency proceedings are inevitable, there is a clear shift in the economic interests in the company (from the shareholders to the creditors as the main economic stakeholders of the company) because the assets of the company at this stage would be insufficient to satisfy the claims of creditors. In the context of liquidation, shareholders as residual claimants will stand to recover little or nothing. Consequently, the Creditor Duty operates during this interval to prohibit directors from authorising corporate transactions that have the exclusive effect of benefiting shareholders or themselves at the expense of the company’s creditors, such as the payment of dividends.

23 Should the court find that a director had acted in breach of the Creditor Duty, it should lastly consider whether it is appropriate to relieve him of liability under s 391 of the CA. The court retains the discretion to so relieve a director on the cumulative account of him having acted honestly and reasonably, and in so far as it is fair for the court to excuse him for his default: at [107].

24 It is true that a claim for breach of the Creditor Duty predicated on the wrongful payment of dividends overlaps to some extent with a claim for breach of s 403(1) of the CA. However, it would be wrong to infer from any such overlap that s 403(1) of the CA was intended as the exclusive legal regime that regulates the position whenever a director authorises the payment of a dividend. The Creditor Duty and s 403(1) of the CA operate as distinct, albeit overlapping and mutually reinforcing, legal regimes. The court rejects the assertion that OP3’s claim for repayment of the Disputed Dividend is in substance a claim under s 403(1) of the CA. OP3’s claim in this regard is premised on a distinct cause of action which it clearly had standing to pursue: at [110]–[111], [113]–[114].

25 Pursuant to regulation 9 of the Companies (Application of Bankruptcy Provisions) Regulations, the unfair preference provisions prevailing at the time Mr Foo authorised the Disputed Transactions apply “without prejudice to the availability of any other remedy”: at [116].

26 In any case, the statutory unfair preference regime does not operate as a fetter on a company’s ability to bring a claim for breach of the Creditor Duty: at [117].

27 There is no reason to circumscribe a claim for breach of the Creditor Duty with reference to the clawback periods that pertain to a claim for unfair preferences. The statutory clawback periods governing the unfair preference regime serve an entirely different purpose, namely the interest of finality of transactions in view of third parties potentially acquiring proprietary rights in the assets disposed of. The law’s interest in upholding the finality of transactions is, however, not germane where an action for breach of the Creditor Duty is at issue. The latter claim is one brought against a director personally, and directors may be liable for breach of the Creditor Duty without any concomitant impact on the finality of commercial transactions: at [118].

28 The court upholds the Judge’s finding that the Creditor Duty was engaged at the time Mr Foo authorised the Disputed Transactions: at [124].

29 The court does not accept Mr Foo’s submission that the Disputed Dividend was paid to him as part of the Disputed Payment. OP3’s Statements of Cash Flow for the financial years ending 2016 and 2017 reflect that OP3 had paid the Disputed Dividend to Mr Foo in 2016. The general ledgers reflecting changes in the amounts due from and to Mr Foo in 2016 and 2017 do not indicate that the Disputed Dividend was paid to Mr Foo as part of the Disputed Payment: at [125]–[130].

30 The court is satisfied that the Disputed Dividend was a transaction distinct from the Disputed Payment, and OP3 paid Mr Foo $1,182,394 between December 2016 and January 2017: at [133].

31 The court affirms the Judge’s finding that OP3’s contingent liability in Suit 498 was reasonably likely to materialise and therefore had to be taken into account in assessing OP3’s solvency at the times the Disputed Transactions were paid out to Mr Foo: at [134].

32 Little weight could be placed on the legal advice Mr Foo received from Parwani Law on the merits of Smile Inc’s claim in Suit 498. The legal advice that Parwani Law provided Mr Foo was extremely cursory, given orally, and in respect of which no written notes of those conversations exist. Parwani’s E-mail confirms that Mr Parwani had advised Mr Foo that OP3 “ha[d] a strong defence” in Suit 498, but again, this is bereft of any details. Parwani’s E-mail is, in any event, inadmissible hearsay. Mr Parwani did not testify as a witness in Suit 152: at [135], [137].

33 The mere fact that legal advice was taken does not mean that a defendant-director will inevitably be found to have acted bona fide in undertaking a certain course of action. It is imperative that the court be provided sufficient information about the circumstances under which such advice was provided so as to be able to evaluate the extent to which an individual can fairly rely on the fact of legal advice: at [136].

34 If no discount or only a limited discount was to be accorded to Smile Inc’s claim against OP3 in Suit 498, this would add up to a potential liability of around $1,470,000. If an amount of this order had been taken into account as a contingent liability, it would have become clear at once that OP3 was imminently likely to be unable to discharge its debts. The financial statements of OP3 also paint a picture of a rapidly deteriorating operating environment for OP3. The Creditor Duty was therefore engaged at the times Mr Foo authorised the payment of the Disputed Transactions to himself: at [148]–[152].

35 Mr Foo failed to consider the interests of OP3’s creditors and acted in breach of the Creditor Duty by authorising the payment of the Disputed Transactions to himself. OP3’s creditors stood to gain nothing from the Disputed Transactions. This was not a case where Mr Foo took a strategic commercial decision to revitalise the fortunes of the company. Rather, the Disputed Transactions singularly enriched Mr Foo at the expense of OP3’s creditors: at [153]–[154].

36 The court declines to grant Mr Foo relief under s 391 of the CA. Mr Foo did not act honestly and reasonably, and it is not fair to excuse him from liability. He enriched himself at the expense of OP3’s creditors. He did so knowing that there was some merit to Suit 498 and at a time when OP3’s business was on a steep decline: at [156]–[159].