Clarifying independent directors' obligations

New Straits Times

4 days ago

Independent directors are not full-time directors like executive directors. Independent directors run the risk of having incomplete and insufficient information. Due to this, their risks are higher. The Singapore appeal case Goh Jin Hian v Inter-Pacific Petroleum (IPP) both lays down and reaffirms some of the principles on independent directors' liability. Decisions made by Commonwealth countries have a persuasive effect on Malaysian court decisions, as Malaysia too is a Commonwealth country. What's more, the other commonwealth country is just across the causeway and once shared the same DNA as Malaysia.
One can discern six principles as laid down by the Singapore Appellate Division.
Duty of Skill, Care, and Diligence: Scope and Threshold
A director must act with reasonable care and skill, considering their position and involvement in the company's affairs. A non-executive director' duty is less onerous than that of executive directors. This makes sense, as executive directors are involved full-time in management compared to non-executive directors, who are not involved in management.
The Appellate Division reaffirmed this standard: a director is "a sentinel, but not a forensic investigator or sleuth" unless clear warning signs emerge.
Notably, directors cannot be held to detect every fraud—they are not expected to conduct forensic-level scrutiny in the absence of explicit red flags.
The duty of care principle's implication is that directors must be reasonably informed but are not investigative by default.
Awareness of Business Activities: Directors Must Understand What They Are Guarding
A director must be sufficiently informed about a company's significant operations to oversee and fulfil their duties properly.
On the facts of the case, the court concluded that the director had breached this duty because Goh was unaware of a major business line used as a fraud vehicle.
The High Court described his ignorance as "striking at the very heart of his duty of skill, care, and diligence."
The principle of knowledge requirement implies being unaware of key business lines breaches the duty. Sheer honesty, integrity, and intelligence are not substitutes for knowledge of business.
Red Flags and Triggering a Duty to Inquire
Whether identified events constitute red flags warranting further inquiry or whether these did not amount to clear warning signs of fraud was for the courts to decide.
A director's obligation to investigate arises only when distinct and immediate signs point to wrongdoing—not merely when unusual corporate events occur.
The red flags principle's implication is that only clear, specific indicators of wrongdoing would trigger the need for further inquiry.
Causation: Linking Breach to Loss Is the Claimant's Burden
Even where a breach of duty is found (as with a director's ignorance of the business), there must be a causal link to the loss suffered.
It must be shown to the courts, on evidence, that the director's awareness—or subsequent actions—would have identified the fraud and averted the loss.
An independent director could not be faulted for not acting upon red flags, but more critically, the defendant failed to prove that his breach directly caused the loss.
This confirms that in director-duty cases, establishing causation is essential before damages can follow.
There must be causation—the breach must be directly linked to the preventable harm for damages to follow.
Creditor Duty: When the Company Is Insolvent
A director's duty may extend to creditors when the company becomes insolvent or is nearing insolvency.
While the High Court initially held that Goh breached his creditor duty by allowing drawdowns during near-insolvency, the Appellate Division rejected this, noting two points.
Firstly, IPP failed to prove the fraud would have been discovered or the loss avoided had Goh acted differently.
Secondly, though knowledge of cargo trading was lacking, no clear wrongdoing could be attributed to Goh regarding approval of these drawdowns.
Thus, without proven causation, even breaches of creditor duty do not automatically give rise to liability.
Creditor duty applies in insolvency but still requires causal proof.
Practical and Commercial Realities in Director Oversight
The court stressed its recognition of practical and commercial limits, acknowledging that directors—especially non-executives—cannot be held liable for deep-seated, well-concealed frauds without tell-tale signs.
The Singapore Institute of Directors called the judgement "welcome clarity" on the true scope of directors' duties, reassuring directors that oversight does not require forensic-level diligence in the absence of warning signs.
Nonetheless, the decision does not absolve directors from responsibility; ignorance and inattention—in the face of evident wrongdoing—still carry liability.
There are practical limits—directors aren't expected to perform audits or detective work when there are no warning signs.