When does a director first come under a duty to consider the interests of creditors (Creditor Duty)? Until recently, directors had to rely on potentially confusing and ambiguous terms such as “financially parlous” and “on the verge of insolvency”. 

Now the Singapore Court of Appeal in Foo Kian Beng v OP3 International Pte Ltd (in liquidation) [2024] SGCA 10 has given important clarification, categorising the three stages of a company's prevailing state and the corresponding directors' duties at each stage as follows.

Category one

A company is, all things considered (including the contemplated transaction), financially solvent and able to discharge its debts. 

At this stage, the Creditor Duty does not arise as a discrete consideration. A director typically does not need to do anything more than acting in the best interests of the shareholders to comply with his fiduciary duty to act in the best interests of the company. 

Category two

A company is imminently likely to be unable to discharge its debts, including cases where a director ought reasonably to apprehend that the contemplated transaction is going to render it imminently likely that the company will not be able to discharge its debts. 

In this intermediate zone, to determine whether the director has breached the Creditor Duty, the court will scrutinise the subjective bona fides of the director, with reference to the potential benefits and risks that the relevant transaction might bring to the company. The court will consider which factors (including the recent financial performance of the company, industry prospects, and relevant geopolitical developments) the director ought reasonably to have taken into account in assessing whether the contemplated transaction would result in imminent corporate insolvency. 

While the director is not obliged to treat creditors’ interests as the primary determining factor at this stage, the court will closely scrutinise transactions that appear to exclusively benefit shareholders or directors, such as the declaration and payment of dividends or the repayment of shareholders’ loans.

Category three

Corporate insolvency proceedings are inevitable 

At this stage, there is a clear shift in the economic interests in the company from the shareholders to the creditors as the main economic stakeholders of the company. The Creditor Duty operates during this interval to prohibit directors from authorising corporate transactions that have the exclusive effect of benefiting shareholders or themselves at the expense of the company’s creditors, such as the payment of dividends. 

In every case the court will assess the company's solvency in a flexible manner, including a consideration of all claims, debts, liability, and obligations of the company, rather than applying a strict and technical application of the “going concern” test or “balance sheet” test. 

The Singapore Court of Appeal's clarifications represent a practical and welcome development for directors, who ought to take careful note of this decision in discharging their duties to act the best interests of the company at each stage of the company’s life cycle.

For more detail on Singapore law principles governing directors’ duties and risks in financially troubled businesses, please see our Practical Law article on “Risks for Transactions and Directors in Financially Distressed Businesses (Singapore)” (published prior to this judgment).