Can a Company Director Take Legal Action Against Another Director?

Last updated on February 16, 2024

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As a director of a company, you are granted powers to manage the company. What happens if a fellow director breaches their fiduciary duties and causes harm to the company?

This article will explore the potential remedies available to a director who wishes to correct the wrongdoings committed against a company by a fellow director. It will cover:

Why Might a Company Director Take Legal Action Against Another Director?

A company director is a fiduciary of the company. A fiduciary is broadly defined as a person who holds a legal or ethical relationship of trust with one or more parties. In the context of a company relationship, a fiduciary carries the responsibility of taking care of someone else’s money, in this case, the company’s, in a suitable way.

As a trusted fellow of the company, a company director is therefore expected to act in the best interests of the company. Broadly speaking, a company director must act in good faith and with reasonable care and diligence.

Directors owe various statutory duties (listed in the Companies Act (CA)) as well as common law duties to the company. These include:

1. Duty to act in the interests of the company

The company’s interests are paramount. However, incorrect commercial decisions will not be censured if these are bona fide (i.e. in good faith) commercial decisions taken by directors.

An example of a breached duty is when the directors of Company A, who also manage another Company B, decide for Company A to loan money to Company B without interest or security. The directors of Company A have breached their fiduciary duties as they have failed to only consider Company A’s interests. They had also only considered Company B’s interests when loaning money without interest or security.

2. Duty to avoid conflicts of interest

– Directors cannot place themselves in a position where they currently have potentially have personal interests which may be in conflict with their fiduciary duties towards the company.

A straightforward example would be the case of a director making or acquiring a personal profit, gain or benefit from his position via insider trading. Another example would be a director causing their company, A, to purchase shares in company B so that they can obtain a directorship in B. A had to obtain a bank loan to purchase the shares, and when the value of the shares declined, A had to sell the shares at a loss to repay the bank loan. Even if the transaction is fair to the company, i.e. good terms and favourable price, there would still be a real and sensible possibility of conflict of interests as both sides want different things – the director would want the shares to be priced as low as possible for purchase whilst the company would want the opposite. So, any direct dealings between the director and the company are disallowed.

3. Duty to use powers for the proper purpose

Typically, a company’s constitution would confer powers relating to shares, transfer of company funds and dividends. These include the power to allot shares, to refuse to register transfers of shares, to make calls on shares, to forfeit shares, to pay interim dividends, as well as to borrow and to make donations from company funds. If such powers are exercised for any other purpose, then the company can choose to void the decision and to make the director compensate the company for any loss it suffers as a result of this decision.

An example would be regarding a payment made to an ex-director as compensation for loss of office. If this was not disclosed to shareholders as required by law, the directors who authorised the payment would be liable for misapplication of the company funds even though they had acted honestly and in ignorance of the law.

For a more detailed discussion, you can refer to our other article on directors’ duties.

What are the Legal Remedies Available to a Company Director?

A company director can avail the company of various legal remedies such as rescission of the contract, equitable compensation, or an account of profits.

However, these remedies may not be available if the offending party is also a director of the company. This is because the powers to commence legal action are typically vested in the board which makes management decisions, including whether to sue an errant company director or not. It is also worth remembering that the proper plaintiff is the company itself (against whom the wrongdoing has been committed).

Further, these remedies are retrospective in nature, i.e. correction of the wrongdoing, and there is no prevention of any wrongdoing which may possibly cause irreversible damage to the company.

To circumvent these issues, we can consider:

1. Injunctive action against a director 

The CA empowers any person affected by a contravention of the CA to apply to the court for either a prohibitory injunction to restrain non-compliance or a mandatory injunction to compel compliance.

Injunctions are interim in nature, and final legal issues are not determined at the stage of applying for an injunction. Therefore, an injunction will be granted to preserve the status quo pending trial if:

  1. There is a serious question to be tried, and
  2. The balance of convenience lies in favour of granting the injunction.

In doing so, the court is choosing to adopt whichever course appears to carry a lower risk of injustice should the decision turn out to be wrong at the conclusion of the legal trial.

However, this general test only applies to prohibitory injunctions. This is because a mandatory injunction is a more invasive remedy, i.e. compelling a positive action as opposed to preventing a particular action from taking place, and may therefore lead to irreversible prejudice to the defendant as the status quo may be changed by the positive action. As it is a very exceptional discretionary remedy, the threshold for granting a mandatory injunction is much higher.

Further, when the offending party is about to breach or has already breached a negative covenant in a contract (a promise not to do something), an interim prohibitory injunction will be readily granted to possibly stop any further breaches. The rationale being that there can hardly be any hardship suffered by an order to observe the contract since this would be something both parties had agreed on when finalising the contract. For example, an interim prohibitory injunction may be granted against a director who may have already sold assets to another company he has a personal interest in, and is planning to continue doing so. The injunction will then stop the director from pursuing this wrongful activity, thus observing the terms of the contract.

Given the urgent nature of injunctions, these are usually granted based on an assessment of affidavit evidence only. You will need to prepare and file a summons in accordance with official court forms setting out the directions or orders you wish to obtain from the court, and an affidavit containing facts in support of this application. Official fees of S$100 are chargeable for filing the summons, and S$1 per page subject to a minimum fee of S$10 per affidavit for filing the affidavit.

2. Derivative action by the company against the director 

A derivative action, i.e. right derived from the company, is undertaken by shareholders of a company against wrongdoers of the company who have caused the company to suffer a loss. It is typically used as a solution against an unwilling or uncooperative Board of Directors.

The remedy of a statutory derivative action is found in section 216A of the CA and is premised on the principle that the proper plaintiff is, as a matter of fact, the company itself. This section therefore provides an exception to this rule.

Permission from the courts is required to pursue a derivative action. Prior to filing the derivative action, the applicant must first give notice (14 days) to the directors of the company so that the directors are given an opportunity to decide if they wish to correct the wrongdoing. The applicant must prove that notwithstanding the notice provided, it is probable that the directors would not right the wrongdoing, including commencing applicable legal proceedings. The courts must also be satisfied that the plaintiff is acting in good faith, and that the application is in the interests of the company.

The application is done either through a Writ of Summons or Originating Summons. The latter is more suitable for claims where the facts are not disputed by the parties concerned. You will need to prepare the summons containing either a statement of the questions which you wish to be determined or a concise statement of the relief or remedy for, and a supporting affidavit (i.e. the statement of facts).

Costs differ depending on the court in which you should bring your action. As a reference, the costs for filing an originating summons are S$500, and S$2 per page, subject to a minimum fee of S$50 per affidavit for each affidavit filed for claims under S$1 million at the High Court. You will also need to pay process fees for service of these documents.

For a statutory derivative action, the court may order the company to pay reasonable legal fees and disbursements incurred by the applicant.

For a more detailed overview, please refer to our other article on statutory derivative actions.

It is certainly comforting to note that even when a person in management commits wrongdoing against a company, the law still offers remedies. Interim remedies like injunctions can be sought in time to prevent any irreversible damage, and a derivative action can be pursued to circumvent any refusal or reluctance of the company management to commence an appropriate action.

As these are highly complex actions to pursue, typically involving issues and questions of law, we would encourage you to seek further guidance or advice from a litigation lawyer, who can advise you on the risks, procedures and costs involved so you can better arrive at a decision.

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