Singapore: Directors' Right to Inspect Company Accounts clarified

Last Updated: 8 February 2012
Article by Ana Limgenco and Lisa Theng

In Hau Tau Khang v Sanur Indonesian Restaurant Pte Ltd and another (Hau Tau Thong, non-party) and another matter [2011] SGHC 97, the Singapore High Court clarified the ambit of a director's right to inspect company accounting records under Section 199(3) of the Companies Act (Cap 50) of Singapore ("Companies Act"). In particular, the Court held that the exercise of such a right to defend against a derivative action would not fall within the scope of the restrictions established by earlier cases.

Brief facts

The case concerned two brothers, Hau Tau Thong (the "appellant") and Hau Tau Khang (the "respondent"), who were co-directors of the companies Sanur Indonesian Restaurant Pte Ltd ("SIRPL") and Sanur Holding Pte Ltd ("SHPL") (collectively, " the Companies"). The Companies ran a chain of restaurants under the trade name of "Sanur", and the appellant at all times assumed the position of Managing Director. Despite a winding-up agreement made in relation to the Companies in 2006 followed by the cessation of operations of all "Sanur" restaurants by 2009, both brothers remained as directors of the Companies. In 2010, the respondent commenced a derivative action against the appellant, alleging that the latter had breached his fiduciary duties in relation to, inter alia, SIRPL's accounts.

In response, the appellant commenced a separate action where he sought to rely on his right to inspect SIRPL's accounts under Section 199(3) of the Companies Act. His claim was dismissed by the Assistant Registrar, who held that such a right was restricted to enabling a director to carry out his duties, and was not for the purpose of defending against a potential derivative action.

Issues in the appeal

The respondent contended that the appellant could not exercise his right under Section 199(3) of the Companies Act as it fell within the scope of the restrictions established by earlier cases. In particular, the respondent alleged that:

  1. The right had to be exercised for the performance of directors' duties pertaining to the accounts of the company.
  2. The right should only be exercised for present and prospective directors' duties and could not be used to justify past conduct or performance of directors' duties.
  3. The exercise of the right for a purpose other than the discharge of directors' duties was improper and would displace the "absolute" right of inspection.

The appellant, on the other hand, argued that his right of inspection could not be curtailed unless the respondent could prove that the exercise of such right was "injurious" to the Companies (a restriction on the right previously affirmed by the Court of Appeal in Wuu Khek Chiang George v ECRC Land Pte Ltd [1999] 2 SLR(R) 352).

Salient rulings of the Court

The High Court allowed the appeal. In its judgment, it made the following observations:

The right of inspection extends to a director's other duties, not just his duties pertaining to the company accounts

  1. The High Court ruled that the right of inspection under Section 199(3) of the Companies Act was not explicitly restricted by the wording of the provision and placement thereof under Part IV of the Companies Act. Referring to earlier cases, the High Court also stated that the exercise of such right by a director should extend to the discharge of "all his statutory duties, including but not limited to those in relation to accounts", as such right is a "concomitant of the fiduciary duties of good faith, care, skill and diligence which a director owes to the company".

The right of inspection is not restricted to the performance of present and future directors'

  1. The High Court rejected the respondent's submission that the right of a director to inspect a company's records could only arise in relation to present and future duties, ruling that the timing of the application or request to inspect the accounts is not particularly relevant, "as long as the applicant is still a director at the material time". The right is also not withheld from a director of a dormant company because such director continues to be liable for the discharge of his statutory duties.
  2. The High Court agreed with the appellant's submission that allowing the appellant to inspect the accounts was in the Companies' interests, instead of constituting a "personal" purpose, because if the accounts proved that the appellant did not breach his fiduciary duties, the Companies' resources would not be wasted on futile litigation. The Court also expressed the view that "there appears to be no principled reason why a company's accounts cannot be inspected to answer allegations against a director of alleged misconduct in the performance of his duties as a director".

The right of inspection can be curtailed if the purpose for which is it used is wholly unconnected to the discharge of a director's duties

  1. The High Court ruled that a restriction on the right under Section 199(3) should not be confined to where the director exercises it in a way that is "injurious" to the company but should also be curtailed "if the director intends to use it for any purposes unconnected to the discharge of his director's duties". This is because "the right to inspect was conferred on directors (whether at common law or by statute or both) to facilitate the discharge of all director's duties in the (Companies Act)."

There is no need for a director to provide reasons for the exercise of a right of inspection

  1. Finally, the High Court ruled that it must be assumed that a director will exercise the right of inspection for the benefit of the company, unless the contrary is proven. The party asserting that the exercise of the right is for an improper purpose has the burden of proving it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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