May 15 2000
A recent case, Yeo Geok Seng v Public Prosecutor  1 SLR 195, illustrates the principles that govern the duties of directors as they relate to disclosure of interests.
In the Yeo Geok Seng Case, the appellant was the managing director of Mcspec Far East Development Pte Ltd (MFED) and a director of Xiamen Mcspec (S) Pte Ltd (XMS). He was also a director and 50% shareholder of Triple Star Shipping and Trading Co (Pte) Ltd (Triple Star). In 1992, MFED was awarded a contract to build Tampines West Community Centre. The appellant, on behalf of MFED, entered into a contract with XMS for the construction of the centre, under which consultation fees were payable to MFED. Triple Star supplied the building materials to XMS under a supplies agreement. The appellant failed to declare at a meeting of the directors of XMS any interest in the contract with MFED, nor in the supplies agreement with Triple Star.
The appellant was charged and convicted in the district court of two offences, under Sections 156(1) and 156(5) of the Companies Act. Section 156(1) provides that:
"Subject to this section, every director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company shall as soon as practicable after the relevant facts have come to his knowledge declare the nature of his interest at a meeting of the directors of the company."
Section 156(5) further provides that:
"Every director of a company who holds any office or possesses any property whereby whether directly or indirectly duties or interests might be created in conflict with his duties or interests as director shall declare at a meeting of the directors of the company the fact and the nature, character and extent of the conflict."
Any director who fails to comply with the above provisions will be guilty of an offence and liable to a fine not exceeding S$5,000 or imprisonment for a term not exceeding one year.
The conviction under Section 156(5) was for failing to declare at a meeting of the directors of XMS an interest in the contract with MFED, given that the appellant was the managing director of MFED. The conviction under Section 156(1) was for failing to declare an interest in the supplies agreement with Triple Star, as director and shareholder of Triple Star.
The High Court dismissed the appeal against conviction and sentence on both charges. Chief Justice Yong Pung How stated that as long as there was a potential conflict of duty arising from a director holding directorships in two companies, Section 156(5) imposed a duty of disclosure on him/her. The Chief Justice stressed that a director did not need to have a personal interest that in fact gave rise to a conflict. In cases where a person holds multiple directorships, the question was rather whether, by being a director of two or more companies, a conflict of duty might potentially arise. In these cases, a duty to disclose would depend on relevant circumstances, including the relationship between the companies.
Contract for construction
There was clearly a conflict of interest with respect to the contract for construction, arising from the appellant's role as both managing director of MFED and director of XMS. The appellant owed a duty to MFED to secure the highest possible commission from XMS and he owed a duty to XMS to ensure that the commission paid by XMS was as low as possible. The court also considered that the appellant would be in a position of conflict of duty and interest if a dispute should arise between MFED and XMS in relation to the contract.
This conflict imposed the duty of disclosure under Section 156(5) of the act on the appellant. Similarly, Section 156(1) of the act applied to any situation in which the director was 'directly or indirectly interested' in a contract with his company, not just where he had a personal interest in the contract.
Regarding the supplies agreement, the court considered that the appellant's 50% shareholding in Triple Star constituted a material interest under Section 156(2) of the act. The exception in Section 156(2) did not apply to the appellant as his interest did not merely consist of him being "'a member or creditor of a corporation which is interested in a contract". The appellant was in fact director, manager and 50% shareholder of Triple Star. He was thus interested in Triple Star's profits, which put him clearly in conflict with the interests of XMS under the supplies agreement. Hence, the appellant had a duty under Section 156(1) to disclose his interest in the supplies agreement at a meeting of the directors of XMS.
Section 156 of the Companies Act exists for the benefit and protection of companies, ensuring that boards of directors may make informed decisions in the light of declarations of interest by individual directors. Yong Pung How CJ emphasized that a wide interpretation of Section 156 is therefore necessary to give effect to its purpose. He recognized however that a wide interpretation of the section could mean that even innocent failures to disclose, with no proven loss to the relevant company, could bring about the conviction of the director involved.
This may seem harsh, but directors must be prepared to take on the onerous
duty of fiduciaries, entrusted with the responsibility of managing their company's
business and making corporate decisions to secure maximum benefit for the company.
Persons undertaking duties as a director should therefore familiarize themselves
with the various rules of disclosure and other statutory duties under the act.
For further information on this topic please contact Evelyn Wee or Loretta
Yuen at Drew & Napier by telephone (+65 531 2260 or +65 531 2216) or by fax (+65
535 4906) or by email (firstname.lastname@example.org
The Drew & Napier web site can be accessed at www.drewnapier.com .
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