Directors' "Creditor Duty" in Singapore: Guidance for Creditors

In its recent judgement of Foo Kian Beng v OP3 International Pte. Ltd. [2024] SGCA 10, the Singapore Court of Appeal laid down some key principles regarding the scope of directors' duties to creditors, i.e. the "creditor duty". These principles serve as useful guidance not just for directors to understand how they should discharge their duties but also for creditors seeking to hold directors to account. We set out some practical guidance for creditors on ensuring that directors discharge the "creditor duty".

What does the "creditor duty" of directors encompass?

The "creditor duty" is not a separate duty owed directly by directors to a company's creditors. When directors are acting in the best interests of the company, they must have regard to the interests of various stakeholders of the company, including shareholders and creditors. The "creditor duty" is one aspect of a director's overarching duty to act in the best interests of the company. This duty may be understood as a modification of how the company's interests ought to be considered by the directors in certain circumstances.

How creditors' interests should be regarded depends on the company's financial state. In practice, when a company is solvent, directors can generally treat shareholders' interest as a proxy for the interests of the company, as the shareholders have the primary economic stake in the company. Directors need not separately consider the interests of creditors, as their interests are aligned with those of the shareholders given that the company is solvent and able to pay its debts. However, as the company faces financial distress and approaches insolvency, creditors' interests come to the fore and acquire special significance as the risks of continued trading are borne by them. Creditors, therefore, become the primary stakeholders of the company and their interests take priority over those of shareholders. In these circumstances, the directors of the company must give due regard to creditors' interests while considering the company's best interests. 

What will the court consider when evaluating if a director should be held liable for breach of the "creditor duty"?

To assess if a director should be held liable for a breach of the "creditor duty", the court adopts a three-stage process:

• First, the court conducts an objective assessment of the financial state of the company. The court will consider both the financial state of the company at the time the directors took the action that is being impugned, and what is likely to be the financial state of the company as a result of the relevant action. In conducting such an assessment, the court will engage in a broad assessment of all relevant circumstances including all claims, debts, liabilities and obligations of a company. In its assessment of a company's financial state, the court will not strictly or rigidly apply the "going concern" and "balance sheet" tests. 
• Second, the court considers the subjective intentions of the director and determines if the director acted in what he considered to be in the best interests of the company. While the analysis is directed at the director's subjective intention, the court will consider whether the director's views were objectively credible and reasonable, having regard to the financial state of company. The court will not, however, substitute its business judgement in the place of the director's judgement.
  
  The substance of the "creditor duty" and how directors ought to discharge such a "duty" will depend on the financial state of the company.

• Third, even if the director has breached his "creditor duty", the court may relieve him of liability if he has generally acted honestly and reasonably and it would be fair to relieve him of liability.

Who can bring claims for breach of the "creditor duty" and when?

Since the "creditor duty" is not owed to the creditors directly, but is part of the directors' duty to the company, such claims are only actionable by (or on behalf of) the company  or by a relevant insolvency practitioner (on the company's behalf). 

Claims for breach of the "creditor duty" are usually brought in judicial management or liquidation proceedings by the judicial manger or liquidator (as appropriate). It may be possible to enforce this duty outside of formal restructuring and insolvency proceedings as well; however, there is little guidance in Singapore on the precise circumstances in which that may be done. Nevertheless, any such claims will be subject to scrutiny by the courts as the Court of Appeal has warned in a previous decision (Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd [2010] 4 SLR 1089) that allowing creditors to recover directly from a company's directors "would contravene the collective procedure of insolvency and open a back door for some of them to work around the pari passu rule" apart from being in contravention of the general concept of separate legal personality. 

In practice, the decision on when and whether to bring claims for breach of the "creditor duty" depends on various factors (in addition to the merits of the claim). The most critical factors are usually (i) whether the director has sufficient assets (including proceeds from D&O insurance) to justify incurring the costs of proceeding against him ; and (ii) whether the assets are located in a jurisdiction in which enforcement can be conducted in a timely and cost-effective manner. As regards timing, claims should be brought as soon as practicable and within the applicable time-bar or limitation period, failing which they may be permanently time-barred.

Since a claim for breach of the "creditor duty" can only be brought by the company, how can creditors benefit directly from such a claim? 

Since claims for breach of the "creditor duty" can be brought only by or on behalf of the company, the proceeds of a successful claim will form part of the company's assets. However, creditors can benefit directly from the successful pursuit of such claims in various circumstances. These include:

• All asset security: Where a creditor has a floating charge on all the assets of the company, such a creditor may also claim security over the proceeds of a successful claim for breach of the "creditor duty". 
• Priority funding: If a creditor funds the pursuit of a claim for breach of the "creditor duty" in a liquidation, the court may allow its claim to be paid out from the proceeds in priority to other creditors. If funding is extended during the course of a judicial management or liquidation , the creditor can also secure a return on its funding in accordance with the terms of the funding agreement it enters into with the judicial manager or liquidator. Further, creditors who have obtained leave from either the liquidator or the court would be able to bring claims (through the company) that the liquidator might not be able or prepared to prosecute.

How do claims for breach of the "creditor duty" interact with claims for breach of other directors' duties, improper trading or avoidance of antecedent transactions?

The "creditor duty" is one of the various duties owed by a director to a company, and claims for breach of this duty can be brought regardless of whether claims for breach of other directors' duties, improper trading or avoidance of antecedent transactions are or can be brought. 

However, in practice, it is common to consider bringing various such claims together. The same set of facts may give rise to different types of claims and some elements of these different claims may also overlap including, for example, where the impugned act results in a breach of the company's constitution. If possible, it may be more cost effective for investigations and proceedings for each of these claims to be brought together. Bringing claims together also allows for a unified and harmonious strategy to be applied to the pursuit of the claims. 

More importantly however, if claims that arise from the same set of facts or issues are not brought together, there is a risk that subsequent claims may not be allowed by the court. Under applicable legal doctrines, a party may be barred from bringing any claim in subsequent litigation which they ought properly to have raised in a previous action. Such risks are particularly relevant in a claim for breach of directors' duties given the competing interests between various stakeholders of the company and the starting point that the company is the proper party to bring such claims.  For example, if a group of creditors brings a claim through the company for breach of directors' duties, a separate group of creditors may be debarred from bringing a subsequent claim through the company if the subsequent claim ought to have been brought in the first set of proceedings brought by the first group of creditors on the company's behalf.

This article was co-authored by Rob Child (Partner, Ashurst), Dawn Tan (Managing Director, Ashurst ADTLaw), Tristan Teo (Counsel, Ashurst ADTLaw) and Shreya Prakash (Associate, Ashurst).

_{¹Shareholders, for instance, can bring claims for breach of directors' duty on behalf of the company through derivative actions.}