Goh Jin Hian judgement clarifies scope of directors' duties, notes observers as ruling says directors should be a ‘sentinel', not a ‘sleuth'
[SINGAPORE] Former Inter-Pacific Petroleum (IPP) non-executive director Goh Jin Hian's recent win in his appeal in the Appellate Division of the High Court has given 'welcome relief' to other company directors with its clarification of the scope of directors' duties.
The High Court in a judgement on Jun 5 overturned a previous ruling requiring Goh to pay damages of US$156 million to the insolvent marine fuel supplier after IPP's liquidators had accused him of 'sleepwalking through his time as a director'.
'Welcome relief'
Adrian Chan, first vice-chair at the Singapore Institute of Directors (SID) and head of corporate at Lee & Lee, said the successful appeal was a 'welcome relief' as it clarifies the boundaries of a director's responsibilities and what qualifies as actionable 'red flags'.
The judgment, he added, offers practical guidance by narrowing the scope of when a director should be held liable for inaction.
Had the lower court's judgment stood, Chan believes directors could face liability even when unaware of fraud committed by peers or when financial reports show no warning signs.
Kelvin Law, associate professor of accounting at Nanyang Technological University's Nanyang Business School, said that the case demonstrated that correlation does not equal causation – a mere link is insufficient.
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He said: 'This case is a powerful reminder that a link isn't enough as a plaintiff must prove that the director's specific failure was the direct cause of the financial loss. To obtain damages, (the) plaintiff has to show that there's a causal relationship between negligence and damage.'
Boey Swee Siang, partner at law firm RPC, pointed out that while Goh's failure to be aware of the cargo trading business constituted a breach of his duty of care, the court clarified that the 'red flags' identified by the company's liquidators were insufficient to trigger an inquiry into its financials.
In Goh's case, he was only required to satisfy himself within reasonable limits regarding the company's financial position.
'The non-executive director is not required to make exhaustive inquiries into individual transactions or events, so long as these transactions or events were not, on their face, of such a nature as would raise immediate concerns,' added Boey.
Yee Chia Hsing, an independent director at several SGX-listed companies, agreed with the judgment, saying directors cannot be expected to be better than auditors and there is a right to presume no fraud unless clear warning signs exist.
'If (there is a) need to presume fraud, a lot of resources and effort would be wasted across the entire system as directors would need to be commissioning forensic investigations from auditors on a regular basis specifically to detect fraud,' he told BT.
The court ruled that although Goh breached his duty of care by failing to stay informed about IPP's cargo trading operations, this breach was not due to ignoring red flags within the company.
'Get their hands dirty'
Still, SID's Chan emphasised that directors, including non-executive ones, have a duty to guide and monitor management, going beyond mere compliance.
He said: 'They have to ask tough questions, roll up their sleeves and get their hands dirty. Rather than playing the role of a mere sentinel, sleuth, investigator or watchdog... a director should more appropriately look upon himself or herself as an active steward – sometimes being called upon to play all these roles and more, as the circumstances and director duties demand it.'
The judgment's reference to '(a) director may be a sentinel, but he is not a forensics investigator or a sleuth' resonated with Chan, who stressed that directors cannot simply stand watch passively.
'There really is no such thing as a 'sleeping director' as a director's duty to act in the best interest of the company is an active one that doesn't ever go to sleep,' he added.
RPC's Boey believes this decision serves as a reminder to independent directors of listed companies that 'they do owe a duty of care to their companies, but also sets the standard of care to a reasonable one'.
Directors and officers liability insurance
Beyond training, Nanyang Business School's Prof Law highlighted the importance of having directors and officers liability insurance.
'It provides the financial resources to defend themselves – which, as this case shows, can be a long and expensive process even if they are ultimately successful,' he added.
Chan also advised directors to read 'the fine print, exclusions, coverage, territory, and ensure that the scope and size of the sum assured is appropriate for the size of the business'.
He pointed to several high-profile cases involving non-executive directors under investigation or charged for failing to disclose material, price-sensitive information – including Hyflux, Eagle Hospitality Trust, Raffles Education and Cordlife.
'The outcomes of these cases will bring further clarity to the role of directors on listed boards, and will help shape corporate governance in Singapore,' he added.
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