05.03.2020

„De facto“ Directorship in Singapur

Singapore law recognises that person who is not officially registered as director of the company’s Board of Directors with the commercial register may be considered a “de facto” director. In its judgement “Cheng Tim Jin v Alvamar Capital Pte Ltd [2019] SGHC 220”, the High Court of Singapore recently summarised the indications under which a de facto directorship may be assumed.

As part of the Board of Directors, which constitutes the governing body of the company, a director of a company in Singapore has numerous rights, but also duties and responsibilities in performing his role (for more information on this topic, please refer to my previous article "The Director of a company limited by shares in Singapore").

Under certain circumstances, a person may be considered a director of a Singapore company even though he or she is not officially registered as director of such company with the commercial register, and may therefore be subject to certain rights or obligations associated with such office.

The former director of a company (the “Former Director”) transferred the full 50% shareholding in the company held by him and his wife to the only other shareholder of the company to act as nominee shareholder[1] (the “Shareholder”) in regards to this amount of shares. Subsequently, the Former Director resigned from the Board of Directors of the company as director, so that the Shareholder remained the sole formally appointed director on the Board of Directors, as reflected in the commercial register.

However, following his resignation as director of the Board of Directors, the Former Director was appointed as (executive) marketing director of the company and continued to play an active role in the financial and operational matters of the company until the Shareholder excluded the Former Director of the affairs of the company.

Thereupon, the Former Director sought a declaration issued by court that he is a “de facto” director of the company and therefore was to be granted access to the accounts of the company for investigating into suspected wrongdoings or mismanagement by the Shareholder.

[1] A person who holds shares on behalf of the shareholder, i.e. the person who is registered in the commercial register as a shareholder but who is not to be granted beneficial ownership.

Whether a person can be regarded as a “de facto” director primarily depends on the facts of each individual case, but, according to the High Court in Cheng Tim Jin v Alvamar Capital Pte Ltd [2019] SGHC 220, the following principles and indications established in the past by the courts in Singapore should be considered in order to determine de facto directorship:

Did the person undertake functions in relation to the company which could properly be discharged only by a director?
Is the person held out as director by the company?
Did the person participate in directing the affairs of the company on an equal footing with the other directors and not in a subordinate role?
Did the person assume the status and functions of a company director and did he or she exercise “real influence” in the corporate governance of the company?

If it cannot be clearly determined whether the person is a de facto director or not, the benefit of the doubt will be in favour of the person concerned.

It was found by the High Court that the Former Director was a de facto director because he was still held out as (marketing) director of the company and continued to participate in the management of the affairs of the company on equal footing with the formally registered director in respect to the company’s finances, banking, human resource and even business dealings (including vis-à-vis clients). Thus, for example, an employee was hired on the basis of a collective decision of both the Former Director and the Shareholder and this employee always sought approval of both before executing a task. The court also took into consideration that the Shareholder was willing to formally appoint the Former Director upon request as equal co-director at any time and that the Former Director did indeed have access to the unaudited accounts of the company before the Shareholder excluded him and hence has been actively involved into the financial management of the company up to that point.

The case outlined shows that the role of the director is far from being fully discharged simply by disappearing from the commercial register’s listing. Also, even though the Former Director benefitted in the particular case from the de facto directorship status, the concept of de facto directorship is typically used to constitute liability of the person in question.

Especially directors who have formally retired but wish to continue to be involved in the operations of the company, or directors who leave Singapore and, for example, for reasons of liability or company policy, should no longer be entered in the register as part of the board of directors but are to continue to act in an executive capacity, must be aware of the fact that under certain circumstances the decision-making power may, maintain their liability. In this case, it must then be examined whether this risk can be accepted or whether the decision-making power must be transferred entirely to a restructured board of directors.