In Singapore, directors must start weighing creditors’ interests before the company is formally insolvent. In Foo Kian Beng v OP3 International Pte Ltd (in liquidation) [2024] SGCA 10, the Court of Appeal held that this “creditor duty” is part of the ordinary duty to act in the company’s best interests. It becomes a real constraint once the company is imminently likely to be unable to pay its debts, or a proposed transaction would put it there. From that point, dividends, loan repayments to directors and other payments that mainly benefit insiders will be closely scrutinised.
This guide is for directors and owner-shareholders of Singapore companies facing cash pressure, a large disputed claim or a decision to pay money out to themselves.
What is the creditor duty, in plain terms?
Every director owes the company a fiduciary duty (a duty of loyalty) to act in what they honestly consider to be its best interests. While the company is comfortably solvent, that mostly means the interests of the shareholders as a group. As finances deteriorate, creditors carry more of the risk, so the content of the same duty shifts towards protecting them.
The Court of Appeal in OP3 stressed three points:
- The creditor duty is owed to the company, not directly to individual creditors. A creditor cannot normally sue a director for breach of it; the claim belongs to the company, and in practice is usually brought by a liquidator.
- It is not a separate duty. It is an aspect of the duty to act in the company’s best interests.
- Complying with it does not excuse breaches of other duties, such as the duty to use reasonable diligence.
When is the creditor duty triggered?
The court first decides, objectively, which of three financial states the company was in at the time of the transaction, or would be in because of it. It does not apply the technical insolvency tests rigidly. Instead it looks broadly at all claims, debts, liabilities and obligations, building on its earlier decision in Dynasty Line Ltd (in liquidation) v Sukamto Sia [2014] 3 SLR 277.
| Financial state | What the court expects of directors | Transactions most at risk |
|---|---|---|
| 1. Solvent and able to pay its debts, taking the proposed transaction into account | Act in the interests of the shareholders as a whole. The creditor duty does not arise as a separate consideration, though acts to defraud creditors are still a breach. | Fraudulent schemes only |
| 2. Imminently likely to be unable to pay its debts, including where the transaction would make that imminent | Honest commercial decisions to rescue the business are respected. Transactions that mainly benefit shareholders or directors attract heightened scrutiny. | Dividends, repayment of shareholder or director loans, insider payments |
| 3. Insolvency proceedings are inevitable | Creditors are the main economic stakeholders. Directors must not authorise transactions that benefit shareholders or themselves at creditors’ expense. | Any payment that benefits insiders over creditors |
Category two is where most owner-managers get caught. The court said a director cannot escape by claiming not to have appreciated how bad things were if they ought reasonably to have done so. It listed factors a director should consider, including recent financial performance and whether it is improving or deteriorating, the prospects of the industry, and external developments that may affect the business.
You can read the full judgment on eLitigation.
What happened in OP3, and why it matters for SMEs
Mr Foo was the sole director and shareholder of OP3. While the company was facing a lawsuit over a defective drainage system it had designed and installed for a client, he authorised a dividend and the repayment of a loan to himself. The company later went into liquidation, and the liquidator sued him.
The Court of Appeal upheld the finding that the creditor duty was engaged when he authorised the payments, and that he breached it because the payments benefited him at the expense of creditors. It also refused to relieve him under section 391 of the Companies Act 1967, which lets a court excuse a director who acted honestly and reasonably. The court said it expects such relief in creditor duty cases to be rare.
The lesson for small companies is simple. A large claim that is disputed but has real merit can be enough to engage the duty, even if day-to-day trading looks healthy. Being the only shareholder does not help; the payments were still made at creditors’ expense.
Which warning signs should make directors pause?
- A lawsuit, arbitration or warranty claim large enough to sink the company if it succeeds, especially where your own lawyers think it has some merit.
- Revenue or margins falling over several periods, or the loss of a major customer.
- Paying suppliers late, stretching CPF or tax payments, or relying on shareholder top-ups to make payroll.
- Breaching bank covenants or a lender asking for more security.
- Management accounts showing liabilities, including contingent ones, approaching or exceeding assets.
- A proposal to pay a dividend, repay a director or shareholder loan, pay a bonus to insiders or move assets to a related company.
When one or more of these appear together with a proposed payment to insiders, treat it as a category two question until you have evidence otherwise.
How is the creditor duty different from wrongful trading and clawback claims?
Directors often confuse four separate regimes. A single decision can engage more than one.
| Regime | What it targets | Who brings it |
|---|---|---|
| Creditor duty (common law fiduciary duty) | A director’s decision that fails to give proper weight to creditors when the company is in difficulty | The company, usually through its liquidator |
| Wrongful trading, section 239 of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) | A company incurring debts when insolvent without reasonable prospect of paying them in full, or incurring debts that make it insolvent | Judicial manager, liquidator, Official Receiver, or a creditor or contributory with permission |
| Unfair preference, section 225 IRDA | A payment that puts a creditor in a better position than others, within the look-back period | Judicial manager or liquidator |
| Transaction at an undervalue, section 224 IRDA | Gifts or deals for significantly less than value, within the look-back period | Judicial manager or liquidator |
Under section 226 of the IRDA, the look-back period is 3 years for an undervalue transaction, 2 years for an unfair preference to a connected person and 1 year for other unfair preferences, and the company must have been unable to pay its debts at the time or as a result. Separately, section 403 of the Companies Act prohibits dividends except out of profits. The creditor duty is wider: as OP3 shows, a dividend can breach it even where the narrower statutory rules are argued not to apply.
For the statutory side, see our guides on insolvent trading and directors’ personal liability, unfair preference payments, selling company assets at an undervalue and unlawful dividends and when directors must repay them.
How should the board handle a risky payment decision?
- Pause the payment. Do not pay any dividend, insider loan repayment or related-party transfer until the board has looked at the full picture.
- Prepare a current solvency picture. Up-to-date management accounts, a cash-flow forecast for at least the next few months and a list of all liabilities, including disputed and contingent claims.
- Assess the big claims honestly. Ask the company’s lawyers for a realistic view of exposure, not a best-case one, and record what they said.
- Test the payment. Ask whether the company would still be able to pay its debts as they fall due after making it, and whether it benefits the company or only insiders.
- Consider alternatives. Defer the dividend, convert a loan repayment into a later or conditional arrangement, or keep a reserve for the disputed claim.
- Declare interests. A director receiving the payment should declare that interest and, where the constitution requires, not vote on it.
- Minute the reasoning. Record the information considered, the advice received, the alternatives discussed and why the board decided as it did.
- Get advice early. If the company may be in category two or three, speak to a lawyer and a licensed insolvency practitioner before acting. Note the court’s warning that directors must still apply their own judgment to advice received.
Example: This is a hypothetical. A renovation company has steady monthly profits and S$300,000 in the bank. A former client sues for S$450,000 over water damage, and the company’s lawyers say the defence is arguable but uncertain. The two shareholder-directors want to declare a S$200,000 dividend before the financial year closes. On these facts the claim, if it succeeds, would leave the company unable to pay its debts, and the dividend would make that more likely. A prudent board would defer the dividend, keep funds in reserve and minute that decision, revisiting it once the claim is resolved.
Board record checklist
- Management accounts and balance sheet at the decision date
- Cash-flow forecast with assumptions
- Schedule of creditors, tax and CPF liabilities, and contingent or disputed claims
- Legal assessment of any major claim
- Board paper describing the proposed payment and alternatives
- Declarations of interest by any director who benefits
- Signed minutes recording the reasons for the decision
Frequently asked questions
Does the creditor duty mean we must stop trading?
No. In category two, the court will not second-guess honest, good-faith decisions aimed at saving the business. What it scrutinises are transactions that benefit insiders at creditors’ expense.
Can a creditor sue me personally for breaching the creditor duty?
Generally not. The duty is owed to the company, so the claim is the company’s. Creditors may have other routes, such as applying with permission under section 239 of the IRDA in a winding up.
I am the only shareholder. Whose money am I protecting?
The creditors’. Once the company is in difficulty, money paid out to you reduces what is available for them, which is exactly what happened in OP3.
Can I still repay a genuine loan I made to the company?
In category two or three, repaying yourself ahead of other creditors is likely to be scrutinised as a breach of the creditor duty and may also be an unfair preference. Take advice before repaying.
Will relying on our accountant’s advice protect us?
It helps show good faith, but it is not a complete answer. The court expects each director to weigh advice with their own judgment.
Need help with directors’ duties when the company is under financial pressure?
If your company, or you as a director or shareholder, is dealing with a decision to pay money out while the company is under financial pressure, contact the Raffles Corporate Services team at [email protected] or on WhatsApp at +65 8501 7133 or +65 9018 0072. We will help you understand the documents and deadlines. Where your matter needs a lawyer, we will refer you to a firm on our panel of Singapore law firms that regularly handles directors’ duties and insolvency. Raffles Corporate Services is a corporate services provider, not a law firm, and this article is general information, not legal advice.
Willie Tan, Raffles Corporate Services