Ruling on section 391 of the Companies Act

31 January 2013

Marcus Chow

The recent High court decision arising from Long Say Ting Daniel v Merukh Nunik Elizabeth (personal representative of the estate of Merukh Jusuf, deceased)(Motor-Way Credit Pte Ltd, intervener) [2012] SGHC 250 provided guidance on the scope of section 391 of the Companies Act. Directors should take note that pursuant to this decision, directors may only apply for relief under section 391(2) of the Companies Act Cap 50, 2006 Rev Ed) (“the Act”) against potential claims brought by the Company or on the Company’s behalf. An application for relief under section 391(2) of the Act is not available for proceedings brought by persons other than the Company as such an application falls outside the ambit of section 391.

Facts

The plaintiff and the deceased were the two directors of the Merukh Singapore Properties Pte Ltd (“the Company”). The deceased was the sole shareholder of the company. The defendant, is the daughter of the deceased, and defends in her capacity as the personal representative of her father’s estate (“the Estate”).

After the deceased passed away, the plaintiff conducted property sales of three properties on behalf of the Company in his capacity as director. The Company had fallen behind on payment of installments for the three properties and the mortgagee bank had threatened the plaintiff with legal action. The Estate threatened to commence legal action against the plaintiff due to the sale of the properties. The legal threats from the Estate caused the plaintiff to apply to the court for prospective relief under section 391(2) of the Companies Act.

Issues considered

First the court considered whether section 391 of the Act was wide enough to provide relief against proceedings brought by persons other than the Company.

Second the court went further and considered whether the plaintiff should be granted relief against potential claims by the Company based on the evidence submitted to the court.

Relief against third parties

There is limited local jurisprudence on the scope of section 391 of the Act and hence the court examined the equivalent English and Australian jurisprudence. The corresponding relieving provisions in the respective English and Australian legislation are similarly worded to section 391 of the Act.

The English position is that the scope of the relieving provision does not allow relief to be granted as against third parties [1]. Conversely, the Australian courts have interpreted the relieving provisions widely to allow granting relief against claims by both the company and third parties [2].

The court noted that section 391 was placed in the section within Part XII, Division 1 of the Companies Act entitled “Enforcement of this Act”. This suggests that within the legislative scheme of the Act, the section is confined to regulating the duties owed by persons listed under section 391(3) to the company. The court also considered legislative history to understand the rationale of the relieving provisions.

The court preferred the narrower English approach because they felt that it accorded with the rationale of section 391 as a balancing mechanism within the context of a company’s relationship with its officers. This, coupled with the absence of specific Parliamentary debate on the ambit of section 391 of the Act, led the court to conclude that Parliament had no intention to depart from the English origins of the provision.

Interestingly the court went on to add that even if section 391 of the Act was interpreted more widely in the interest of promoting commercial risk-taking, the present facts would not give rise to the court granting relief to the director against the defendant’s potential claim. The Company was a passive investment vehicle and there was “negligible commercial risk-taking and entrepreneurial activity taking place.”

Relief as against the company

The court went further and considered if the plaintiff should be granted relief had the potential claims been brought by the Company. In order to be eligible for relief under section 391(1) of the Act, the plaintiff bore the burden of proving three elements. First, that he acted honestly; secondly, that he acted reasonably; and thirdly, that it was fair to excuse him having regard to all the circumstances of the case. Considering the facts of the case, the court found that the plaintiff had acted honestly and reasonably in selling the 3 properties of the Company. The plaintiff had sold the properties in order to avert significant losses to the Company which would have been caused by the potential recovery action and forced sales by the mortgagee bank. Before the sale, the plaintiff had appealed for funds from the deceased’s son but such request was met with silence. Further the plaintiff had sent several emails to the deceased’s son asking for the board resolution approving the sale of the 3 properties to be signed. Since the consequences of the sales were not severe, the court also found that it was fair to excuse the plaintiff having regard to all the circumstances of the case and granted the plaintiff prospective relief against any potential claims by the Company.

[1]: This position is elucidated by the well-established case of Hedon Alpha.

[2]: Daniels and Others (formerly practicing as Deloitte Haskins & Sells) v Anderson and Others [1995] 37 NSWLR 438 (“Daniels”)

For more details or any inquiries, please contact:

Marcus Chow's photo

Marcus Chow
Partner
T: +65 6428 9425
marcus.chow@twobirds.com

Other articles in the Pulse Newsletter for February 2013:


> Kyoto Protocol post-2012

> Summary of Changes to the Computer Misuse Act (Cap. 50A, 2007 Ed.)

> Amendments under the new Securities and Futures (Disclosure of Interests) Regulations 2012

 

Authors

Chow-Marcus

Marcus Chow

Partner
Singapore

Call me on: +65 6534 5266