Publications & Events
Alert

The construction industry, insolvency and directors’ liabilities

A Singaporean construction company in liquidation has successfully sued one of its former directors for failing to act in the best interests of the company, highlighting the importance of directors being aware of, and protecting against, potential personal liability for breach of duty.

 

Directors' liability – the risk

The construction industry frequently goes through ups and downs, with construction companies vulnerable to insolvency due to various factors, such as cash flow issues, intense competition and inter-dependence between clients, main contractors and suppliers. Even the biggest companies are not immune: witness the collapse of Carillion in early 2018 and the recent administration of Interserve. In the UK alone, government data shows that the construction industry lost more businesses to insolvency than any other industry in 2018 with 2,954 firms becoming insolvent, 62% of which operated in specialised activities such as groundwork, demolition, plumbing or electrical work.1

In many jurisdictions, including England and Wales, a director of a company will have various statutory duties towards that company, including to act in its best interests. In the event of insolvency, a director may therefore be at risk of personal liability if the director fails to comply with these duties.

 

Recent case: director found liable in Singapore

The recent Singapore High Court case of Poh Lian Construction (Pte) Ltd. v Lauw Wisanggeni [2019] SGHC 114 is illustrative of the personal liabilities which directors can face.

Poh Lian Construction (Pte) Ltd was placed into liquidation in October 2014, and, as a plaintiff in liquidation, brought claims against its ex-directors and senior management for various breaches of duty primarily in relation to the management of three construction projects.

Amongst other findings, the Court found that the plaintiff’s former chief operating officer (the second defendant) had breached his duty to act in the best interest of the Company as plaintiff by reason of having been actively involved in the award of a single sub-contract for the development of residences in breach of the main contract, which contained a prohibition against sub-contracting the whole of the design and construction. On discovery of the breach, the developer/employer requested that the plaintiff Company as the contractor terminate the sub-contract. The plaintiff did so, causing delays, disruption and increased use of management resources. As part of the termination, the plaintiff agreed a settlement payment with the sub-contractor of S$2 million, plus an ex gratia payment in compensation for cessation of the execution of the works.

The Court found that by being actively involved in the award of the sub-contract in breach of the main contract, the director had failed to act in the best interests of the plaintiff, and was liable to pay the plaintiff the ex gratia payment of S$498,134.17.

This case demonstrates the risk that the management of a company by the directors prior to insolvency will be carefully scrutinised by liquidators, who themselves have independent duties in favour of the company’s creditors and may bring claims against a director or directors.

 

How can directors protect themselves?

It is therefore vital for directors to understand those duties, and to consider the ways in which they are able to protect themselves under the laws of the relevant jurisdiction both generally and in the event of insolvency. Even if personal liability is not established, allegations of improper or fraudulent actions can of course cause severe reputational damage in any event.

There are a number of ways that directors can protect themselves to a certain extent, including:

  • An indemnity from the company. However, it should be noted that there may be limitations under law as to the extent to which a company can indemnify a director, for example only in relation to third-party claims and such indemnity may have limited use and effect in the case of an insolvency of that company.
  • A company may be allowed to purchase Directors and Officers (D&O) insurance for its directors against liability in connection with negligence, default, breach of duty or breach of trust in relation to the company of which they are a director. Exclusions from coverage under D&O policies vary, but typical examples include fraud and dishonesty, and claims or circumstances notified under a previous policy. Absent the company purchasing such insurance, directors can consider purchasing such insurance themselves.

Given the limitations on such protection, and the high risk of insolvency in the construction industry, it remains essential for directors to be aware of and comply with their duties as a matter of course, with cases such as that highlighted above demonstrating the consequences of a failure to do so.

1 UK Government, Insolvency Service Official Statistics, "Insolvency Statistics – October to December 2018 (Q4 2018)", dated 29 January 2019, part 1 "Summary for 2018". (accessed 14 May 2019)

 

Olivia Franklin, associate at White & Case assisted in the development of this publication.

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2019 White & Case LLP