Unexplained transactions: Company sues former director for misconduct

The General Division of Singapore's High Court recently dealt with a dispute between a company's director and a former director who served as a nominee director.

The case centred around various claims made by the director against the former nominee director, including allegations of issuing dishonoured cheques, making unexplained withdrawals from the company's bank account, and breaching fiduciary duties.

In this decision, the court delved into the complexities of corporate governance and the role of nominee directors. The ruling shed light on the legal responsibilities and expectations of those serving in such capacities, providing valuable insights for businesses and legal practitioners alike.

Background of the case

The case involved a private limited company incorporated in Singapore that rented industrial machinery. The company had two shareholders: the current director, who held 50% of the shares, and another individual who held the remaining shares.

The former nominee director, who ran a corporate services company providing accountancy and secretarial services, was appointed to ensure compliance with the statutory requirement of having at least one director ordinarily resident in Singapore.

The current director was a shareholder of the company and served as a director for two separate periods. The other shareholder, a Chinese national, held all the shares of the company at the time of its incorporation.

The former nominee director was appointed as a director of the company for several periods, including times when she was the sole director. The current director claimed that the latter was negligent during her tenure.

Claims against the former director

The current director brought forth several claims against the former nominee director, alleging various wrongdoings. These claims included issuing cheques that were later dishonoured, making unexplained withdrawals from the company's bank account, and failing to account for certain transactions and payments.

The director sought orders for the former nominee director to explain and account for these alleged wrongdoings, as well as to produce the company's annual financial records for specific financial years.

In response to the claims, the former nominee director maintained that she served only as a nominee director, exercising little executive function in the company. She asserted that her role was primarily to ensure compliance with the statutory requirements and that she was not involved in the company's day-to-day operations or decision-making processes.

The court noted that it is common practice for companies to appoint a "nominee" director to fulfill the requirement under the Companies Act of having at least one director who is ordinarily resident in Singapore.

Such directors "typically do not play an active or executive role in the company, and their main function is to ensure that the company complies with the statutory requirements of [having a] local resident director".

The former nominee director's testimony was supported by evidence such as WhatsApp exchanges with the current director, emails from her corporate services company requesting information from the company, and invoices for nominee director fees and accounting services provided to the company.

The court’s findings

After examining the evidence presented by both parties, the court found that the former nominee director's testimony was consistent with her role as a nominee director. The court highlighted that the current director had not provided any evidence to show that the former nominee director was anything more than that in the company.

The court also emphasised the importance of the burden of proof, stating that "the burden of proof is on the parties to prove the facts that they assert and rely on, for their claims and counterclaims. This must necessarily be done by way of evidence and not bare assertions."

In light of the lack of evidence supporting the current director's claims, the court dismissed all the claims against the former nominee director. The court found no basis to conclude that she had breached her fiduciary duties or engaged in any wrongdoing during her tenure.

The court also noted that the current director was himself a director of the company for a significant part of the period during which the alleged unexplained withdrawals were made.

However, he provided no evidence that any of these withdrawals were actually made or that the former nominee director was involved in these withdrawals.

Former director’s counterclaim

The former nominee director also brought forth a counterclaim against the company for outstanding fees related to accounting services rendered and additional interest payments on a loan.

However, the court dismissed these counterclaims, finding that they were brought by the wrong party and lacked sufficient evidence to support the claims.

The court noted that the invoices for the outstanding fees were issued by the former nominee director's corporate services company and not by her personally.

Therefore, the counterclaim should have been brought by the corporate services company and not the former nominee director.

Conclusion

In its conclusion, the court reiterated the importance of understanding the role and responsibilities of nominee directors in corporate governance.

The court emphasised that while nominee directors may have limited executive functions, they are still held to a minimum standard required from all directors, including the overriding duty to act in good faith in the interest of the company as a fiduciary of the company.

The court also highlighted the significance of evidence in such disputes, stating that "fundamentally, the claimants have failed to adduce before the court, any evidence that substantiates their allegations or suggest that [the former director] was in breach of her fiduciary or statutory duties as a director."

Furthermore, the court noted that the current director's allegations of wrongdoing, which were raised to the Accounting and Corporate Regulatory Authority (ACRA), did not disclose the commission of wrongdoing under the Companies Act, as per ACRA's response.

This decision serves as a reminder for companies and directors to carefully consider the roles and responsibilities of those who hold executive positions and to ensure that any claims of misconduct are supported by sufficient evidence.

It also underscores the importance of maintaining proper documentation and records to facilitate the resolution of disputes that may arise in corporate settings.