BSP1702: Tutorial 3

Question 1
Happening Place is a private company. Tuf Tan holds 45% of the shares in Happening Place Pte Ltd. Advise Tuf Tan
and the directors as to the following:

(a) The directors appoint Payne Soh as the company’s public relations officer (ie an employee). Payne Soh has a
personal conflict with Tuf Tan on one occasion. As a result, at a requisitioned meeting of the members Tuf Tan
manages to get a resolution directing the directors to fire Payne Soh. The directors refuse to obey.
Answer:
I: The issue at hand is whether the directors need to obey the resolution passed by Tuf Tan, who is a shareholder
L: Although shareholders have various rights, they generally cannot take on management decisions, by virtue of section
157A.
A: On the facts, Tuf Tan is a shareholder. Despite him being able to get a resolution directing directors to fire Payne
Soh, he cannot enforce that directors obey the resolution, by virtue of the case of Automatic Self-Cleansing Filter
Syndicate Co Ltd v Cunningham (1906). Directors are conferred the power to make management decisions, and
shareholders should not interfere.
C: Thus his resolution is invalid and the directors can disobey it.

(b) Tuf Tan is also unhappy that one director’s mistress Lolli, has been appointed production manager (ie an
employee) of the company’s factory.
Answer:
I: The issue is whether the director breaches any of his duties by appointing his mistress as an employee.
L: By virtue of case law, and sections 156 and 157 of the Companies Act, director has breached his duties, due to
conflict of interest.
A: On the facts, the personal interest of the director – his desire to give his mistress a job – conflicts with his duty to the
company – ensuring that employees are hired fairly, and that the company hires the best possible candidate. Director
has to disclose material interest (section 156(3)) in the employment of his mistress to the Board (section 156(1)).
Besides, director must act honestly, and use reasonable diligence in the discharge of his duties, by virtue of section
157(1) of the Companies Act. By “act honestly”, it means that director has the duty to act in the best interest of the
company, and not place himself in a position of conflict of interest, which he has, in this case. Assuming that the
mistress may not be capable enough or lack the qualifications required as a production manager, appointing her as the
production manager would clearly lead to a conflict of interest. Furthermore, as a director, he needs to go through the
proper process of hiring employees and failing to do so clearly results in the lack of “reasonable diligence”.
Nonetheless, it might be that his mistress is capable and has the qualifications for the role and went through the proper
employment procedures.
C: Should the director breach any of his duties, Tuf Tan can bring a legal action against the director, and have to pay for
damages to the company for losses incurred.

Question 2
Rain, Snow and Moon are directors of Nature Productions Pte Ltd. Advice them as to whether they can continue as
directors in the following circumstances:

(a) A month ago, Moon was declared a bankrupt by a court in Malaysia where he has property and business dealings.
Moon is still acting as a director of Nature Productions Pte Ltd.
Answer:
I: the issue here is whether Moon can continue as a director as he is declared an undischarged bankrupt in the court of
Malaysia.
L: Disqualification of an undischarged bankrupt is automatic under section 148(1) of the Companies Act.
A: On the facts, Moon was declared bankrupt by court of Malaysia and not Singapore. Unless Nature Productions Pte
Ltd is a Singapore firm, otherwise, Moon can still continue as director of Nature Productions Pte Ltd. Besides, he could
already have been discharged or may have applied for leave of court or written permission of Official Assignee (section
148(2)). Nonetheless, he was only recently declared bankrupt and hence it is unlikely that he is already discharged
C: In this regard,
(b) Rain was also the director of Water Works Pte Ltd which was made insolvent sometime back.
Answer:
I: The issue is whether Rain can continue as director of Nature Productions Pte Ltd given that Water Works Pte Ltd, of
which he was a director, was made insolvent some time back.
L: under section 149 of the Companies Act, a director may be disqualified if he was a director of a company which
became insolvent while he was a director, or within three years of him ceasing to be one, provided the director’s
conduct was such as to make him unfit to be a director.

A: in this case, it must be noted that “sometime back” is rather vague and could be more than or less than three years
ago. Besides, on the facts, Rain was a director of a company which was made insolvent, but there is no evidence as to
whether of his conduct.
C: Thus, the time frame in which Water Works Pte Ltd was made insolvent must first be determined, and also whether
Rain’s conduct was such as to make him unfit to be a director.

(c) Snow is also a director of Flakes Pte Ltd and has been convicted of an offence under section 157(1) in relation to
that company.
Answer:
I: The issue is whether Snow can continue as a director of Nature Productions Pte Ltd, given that he has been convicted
of an offence under section 157(1) in relation to Flakes Pte Ltd, of which he is also a director.
L: On the facts, it is not stated what specific offence Snow has been convicted of under section 157(1). Nonetheless,
there are two possible scenarios in which a director may be disqualified.
 If it is an offence involving fraud or dishonesty, disqualification is automatic, and for five years, as in Lee
Huay Kok v Attorney-General (2001) (section 154(1))
 If offence is technical one and not serious, court may choose not to disqualify director
A/C: in this case, the severity of the offence must be considered in order to determine if Snow can still continue as
director of Nature Productions Pte Ltd.

(d) Assuming Moon, Rain and Snow are disqualified from acting as directors on the grounds stated in (a), (b) and (c)
respectively, can they continue to run another business organisation which is not a company (ie: SP, P, LP or LLP)?
Answer:
I: The issue is whether Moon, Rain and Snow can continue to run another business organisation which is not a
company, assuming they have been disqualified from acting as directors of Nature Productions Pte Ltd
L: For Moon, he is an undischarged bankrupt under the Bankruptcy Act, not Companies Act while Rain and Snow are
disqualified under the Companies Act.
A/C: on the facts, since Moon is disqualified under the bankruptcy act, he is prohibited from taking part in the
management of all types of business organisations. Conversely, since Rain and Snow are disqualified under the
Companies Act, they are still able to carry on running another business organisation that is not a company. Nonetheless,
for LLPs, they are similar to companies as they are a separate legal entity and hence there is likely to be a provision in
LLP Act that is similar to CA, restricting Rain and Snow from running an LLP.

Question 3
Trust, Ernest and Honest are directors of No Problems Ltd, a public listed company. Advice No Problems Ltd and
the directors in the following circumstances:

(a) No Problems Ltd, enters into a contract for the purchase of 1000 tons of iron from another company. Trust is the
majority shareholder in that other company.
I: The issue is whether Trust must declare the nature of his interest given that No Problems is entering into a contract
for the purchase of 1000 tons of share from another company that Trust is a majority shareholder of.
L/A: under section 156 of the Companies Act, when a company enters into a contract that the director has a material
interest in, he must disclose it to the Board. on the facts, Trust has material interest in the company that No Problems is
entering into a contract with as he is the majority shareholder in that company. Besides, under case law, owes fiduciary
duties to the company, and so should not place himself in a position whereby his duties to the company and his personal
interest conflict. There is likely to be a conflict of interest in that No Problems would want the best price for the iron
and hence would want to consider a range of alternatives, but Trust would want to help the company that he is a major
shareholder of. As such, Trust may not use ‘reasonable diligence in the discharge of his duties’ in obtaining multiple
quotations for the iron, and hence potentially breach section 157(1).
C: Trust must declare material interest to the Board.
(b) At a board meeting in which Honest is present, it is revealed that the company is going to lose the company’s
biggest client. Honest on hearing this, sells off his shares in No Problems Ltd, a few days later.
I: The issue is whether Honest is guilty of an offence and/or faces liability for selling his shares in No Problems Ltd
after hearing that the company is going to lose its biggest client
L: Duties imposed by the Securities and Futures Act must be considered.
A: Honest is a director who possessed information concerning the company that is not generally available (revealed
during board meeting), and the information that the company will be losing biggest client is such that a reasonable
person would expect it to have material effect on the price or value of securities of that corporation, and he ought to
reasonably know that the info is not generally available and might have material effect on price or value of those
securities and hence should not sell such securities (section 218(2)). On the facts, he has clearly done so, and engaged in
insider trading, a few days later. As such, he has breached section 218 and would criminal liability (section 221), or a
civil penalty by MAS. Nonetheless, another perspective must be considered. There could be insufficient information.
“after a few days” could mean that info was already disclosed to the public, which would mean that there is no breach
of section 218.

(c) Would any of your answers definitely be different if the director involved was a non-executive/independent director
(search the web).
I: The issue is whether the answers to (a) and (b) would definitely be different if the director involved was a non-
executive or independent director.
L: In terms of owing duties, the law generally does not make distinction between the different categories of directors.
However, court still has ultimate discretion as to extent of duties owed by directors.
A/C: : it is likely that duties of non-executive directors are less severe than those of executive directors.

(d) What are some principles of company law that you have learnt that are based on ethical considerations (the idea
being, even if you forget the law, if your ethical compass is set right, there is less likelihood of a breach of the law)?

4. As can be seen a director can face a lot of potential liabilities. From a practical/business viewpoint, what can you do
to reduce the risk? For instance, can you buy insurance to cover the risks? Search the web. If so, does it mean directors
can slacken in their duties? (see notes)

5. Read the case of Lim Weng Kee v Public Prosecutor [2002] 2 SLR (R) 848 (via Lawnet) to get a brief outline. The
case deals with a breach of director’s duties and concerns a director of a pawn shop who released pawned items without
making proper checks.
(a) Did the facts give rise to criminal proceedings or civil proceedings or both?
(b) What section of the Companies Act was breached and why was it breached?
(c) Would there have been a civil proceeding or criminal prosecution if it was an ordinary partnership instead of a
company? Why?

Note: the purpose of reading an actual case is to highlight the fact that what you are studying is not something just
theoretical but arises in real life.