Clarifications from the Singapore Court of Appeal – Directors’ Duties, Causation and Abuse of Process

The Singapore Court of Appeal’s decision in Beyonics Asia Pacific v Goh Chan Peng [2021] SGCA(I) 2 (‘2021 CA’) arose after a quintet of cases between a company and its former director for breach of his fiduciary duties. In a paper (co-written with Muhammad Bin K M A Jahabar Sathik), which was recently published in the Singapore Academy of Law Journal, we explore the Court of Appeal’s decision in greater detail.

Amongst other things, the case has ramifications for the litigation strategies of multi-jurisdictional corporate groups  intending to sue their directors. The case is also one of the first to apply the causation test for breaches of fiduciary duties first adopted by the Singapore Court of Appeal in Sim Poh Ping v Winsta Holdings Pte Ltd [2020] 1 SLR 1199 (‘Winsta Holdings’). The case also concerns the separate legal entity doctrine for subsidiary companies and the res judicata doctrine for new litigation by foreign incorporated subsidiaries against errant directors.

Key facts

In order to understand the latest decision by the Court of Appeal, readers should also consider the earlier Court of Appeal decision in Goh Chan Peng v Beyonics Technology Ltd [2017] 2 SLR 592 (‘2017 CA’).

The Beyonics Group consisted of a number of entities, including (i) Beyonics Technology Ltd (‘BTL’), the parent company of the Beyonics Group, (ii) Beyonics Technology Electronic (Changsu) Co., Ltd (‘BTEC’), the entity controlling the manufacturing facility in China, (iii) Beyonics Precision (Malaysia) Sdn Bhd (‘BPM’), the entity controlling the manufacturing facility in Malaysia, and (iv) Beyonics Asia Pacific Limited (‘BAP’), the entity responsible for the sales of baseplates manufactured by BTEC and BPM. On the other side of the fence was Goh Chan Peng (‘Goh’), the former sole director of the Beyonics Group.

In the first suit, which resulted in 2017 CA, BTL sued Goh for breach of the directors’ duties owed to BTL, claiming that he had diverted business to a competitor and caused the loss of a key customer. At first instance, the High Court ruled in favour of BTL: the bribes had to be disgorged and BTL was awarded sums for the loss of profit from the diversion (‘Diversion Loss’) and the loss of future profit (‘Total Loss’) suffered by BTL. The Court of Appeal partially allowed the appeal that the bribes had to be disgorged and that Goh had breached his duties to BTL. However, claims for the Diversion Loss and Total Loss were disallowed on the basis that these losses were suffered by BAP and not BTL, since BAP was the entity that sold the baseplates.

Following 2017 CA, BAP (and in the alternative BTEC and BPM)  then sued Goh before the Singapore International Commercial Court to claim the Diversion Loss and the Total Loss, a procedure that gave rise to 2021 CA. Goh claimed that the latter suit now brought by BAP ought to be struck out for being an abuse of process as this was an attempt by BAP to relitigate the earlier suit. The trial judge struck out the latter suit for being an abuse of process. However, the appeal by BAP was partially allowed in 2021 CA. Among other things, the Court of Appeal held that the latter suit by BAP was not an abuse of process and should not be struck out.

Implications

In our paper, we discuss the decision in greater detail. Major highlights include the effect of the Court of Appeal’s decision in 2021 CA on the separate legal entity doctrine, the Henderson v Henderson (1843) 3 Hare 100 (‘Henderson’) doctrine, and the test for causation in cases involving breaches of fiduciary duties.

While the decision of the Court of Appeal reinforces the separate legal entity doctrine, especially that the doctrine ought not to be displaced for companies that are structured as subsidiaries or are related to each other, we argue that there should be a limited exception, especially on the facts of the case. We propose an analogy with the decision in HRH Emere Godwin v Royal Dutch Shell Plc [2021] UKSC 3 (‘Okpabi’), where the UK Supreme Court appears to suggest that there may be situations where a strict approach to the separateness doctrine should not be applied, by making it clear that companies may not rely on the separate corporate form alone to limit risks associated with the operations of corporate affiliates. We argue that a similar exception to that in Okpabi could be adopted, but in a different context. We suggest that even though the director signs an employment contract only with the parent company, if this key employee and director is tasked with overseeing the operations of various subsidiaries (as established through evidence from the organisation charts), courts should allow the subsidiary companies to bring an action against this de facto director for a breach of director’s duty notwithstanding the no-reflective loss principle. We suggest that this ‘modified Okpabi approach’ would enable a more equitable outcome by allowing large organisations with multiple subsidiaries to contemplate legal action against directors for egregious breaches of director’s duties.

Moreover, we agree with the Court of Appeal’s application of the Henderson doctrine to the facts of the case. While Goh (as defendant) was unsuccessful in striking out BAP’s claim based on the Henderson doctrine, 2021 CA serves as a reminder to claimants that all claims brought by various entities (be it a parent company or a subsidiary) should be grouped in one action. If claimants fail to bring an action at the initial suit and commence another suit subsequently, there is a high probability that the counterparty would raise the Henderson doctrine to argue that the claimants have no standing because such claims could have been raised and settled at the initial proceedings. We also agree with the Court of Appeal that the threshold for establishing an abuse of process should remain high in Singapore so as not to shut out a genuine cause of action. The key takeaway is that multi-jurisdictional groups that intend to sue directors should ensure that all relevant subsidiaries are added as claimants. It would be very costly to any claimant if subsequent claims are stuck out for being an abuse of process, even though the subsidiary company did have a cause of action against the errant director for breach of its director’s duties.

Furthermore, we commend the Court of Appeal for its consistency in applying its Winsta Holdings test, which is the current test for causation in the context of equitable compensation for breaches of fiduciary duties in Singapore. But it remains to be seen if the recognition of a more lenient test, as opposed to the approach in Brickenden v London Loan & Savings Co [1934] 3 DLR 465 that equitable compensation should succeed insofar as the principal shows that the fiduciary’s breach was ‘in some way connected’ to the loss, would fare well given Singapore’s strict approach towards breaches of duties owed by fiduciaries to a company. In this case, Goh (as defendant) was able to demonstrate that his breaches were not the cause of the losses suffered by the subsidiary companies. This outcome shows that a breach of fiduciary duty does not automatically allow the principal to recover equitable compensation for the losses suffered, as the current doctrine leaves a narrow escape route to directors, who can rebut the presumption and prove the absence of causation, as a concession to practicality.

Ben Chester Cheong is Lecturer at the School of Law, Singapore University of Social Sciences