If a company director is asked to sign off on an audit confirmation request for a customer to confirm that USD132 million is due to the company, what should the director do? Sign and move on?
Based on the Singapore High Court’s decision in Inter-Pacific Petroleum v Goh Jin Hian, published in July, that is what Dr Goh Jin Hian did when he was director of the now-defunct Inter-Pacific Petroleum (IPP), a Singaporean bunker-fuel company.
But that audit confirmation request “was a red flag that should have triggered Dr Goh to investigate IPP’s receivables position,” the court ruled. Had he done so, he would have found that USD82 million was overdue. Goh ignored the implications of other red flags, including the suspension of a key bunkering licence and confirmations of indebtedness to a bank which he signed off on. At no point was he “jolted into action,” relying instead on assumptions and assurances from employees that it was business as usual.
Director and Head
Helmsman
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Only it wasn’t: the receivables were part of a series of sham trades conducted by others overseeing the cargo-trading side of IPP’s business, which accounted for around half of its revenues and which Goh said he knew nothing about as it wasn’t his responsibility.
But Goh’s duty to maintain sufficient knowledge and understanding of the whole business was a continuing obligation. Citing a ruling in an earlier case, Vita Health, the court emphasised “[a] director cannot now be viewed as a mere sentinel who may occasionally doze off at his post.”
The decision in the IPP case dealt with two types of breaches of duty: the duty of skill, care and diligence, and the duty to have regard to the interests of IPP’s creditors as the company approached insolvency.
The latter was analysed on the basis of the framework laid down by the Singapore Court of Appeal in its recent decision in Foo Kian Beng v OP3 International Pte Ltd (in liquidation) [2024].
As for the former, the High Court set out a clear and expansive definition of the minimum duty of care owed by company directors, in a case that may have far reaching consequences.
The judge found that Goh was ignorant of the company’s cargo trading business, which was a “vehicle of fraud” that had “disastrous consequences” for IPP. It was through this line of business that fraudulent transactions were orchestrated, allowing the company to issue invoices for non-existent or sham cargo trades. Goh’s lack of awareness of the cargo trading business was a serious breach of his duty as a director, leading to significant financial losses for the company.
The judge considered that “the fraudsters were only able to run amok in IPP’s cargo trading business because Dr Goh had known nothing of it”. Further, “the mere fact that Dr Goh had not been a perpetrator of the fraud did not mean that he was not responsible for its disastrous consequences on IPP. It was through his combination of misfeasance and nonfeasance, in failing to even be aware of IPP’s cargo trading business, that the fraudsters were able to use IPP’s cargo trading business as a vehicle of fraud in the first place.”
The IPP case emphasises the need for company directors to take an active role in monitoring and supervising the company’s affairs.
Possible implications include:
- The need for more proactive engagement from directors, with an emphasis on a culture of accountability within companies.
- Implementation by companies of measures such as regular training, robust governance frameworks and expert consultation to ensure compliance of director duties.
- Increased investor confidence in Singapore companies as stakeholders feel assured that directors are held to a minimum duty of care.
- An increase (at least in the short term) in claims being brought by stakeholders against directors who fail to meet the minimum duty of care.
- Legislative reforms aimed at enhancing corporate governance standards across Asia.
As the implications of this decision unfold, stakeholders will have to remain vigilant and proactive in navigating the evolving legal framework surrounding director responsibilities.
The IPP case is on appeal.
Una Khng is a director and head of the commercial disputes practice group at Helmsman in Singapore
HELMSMAN21A, Duxton Hill,
Singapore, 089604
Contact details:
T: +65 6011 0898
E: una.khng@helmsmanlaw.com
