{"id":1957,"date":"2026-07-07T17:16:00","date_gmt":"2026-07-07T09:16:00","guid":{"rendered":"https:\/\/glutenfreepleasure.com\/__proxy_domain\/mlclaw.com.sg\/?p=1957"},"modified":"2026-10-07T17:57:10","modified_gmt":"2026-10-07T09:57:10","slug":"the-business-judgement-rule-its-scope-its-limits-and-what-courts-look-for","status":"publish","type":"post","link":"https:\/\/glutenfreepleasure.com\/__proxy_domain\/mlclaw.com.sg\/cn\/the-business-judgement-rule-its-scope-its-limits-and-what-courts-look-for\/","title":{"rendered":"The Business Judgement Rule: Its Scope, Its Limits, and What Courts Look For"},"content":{"rendered":"\n

The Myth of the Business Judgment Rule in Singapore<\/strong><\/h3>\n\n\n\n

Many directors assume that a “business judgment rule” shields them from personal liability whenever a commercial decision yields a poor outcome. In Singapore, that assumption does not hold. No provision of the CA codifies a “business judgment rule”, and the Singapore courts have instead assessed directors’ conduct against the standards in s 157(1) of the CA. The director who seeks refuge in a formal rule will find none; the lodestar remains s 157(1), applied to the facts at hand.<\/p>\n\n\n\n

In Delaware, the business judgment rule is judge-made and operates as a presumption that directors acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company. Singapore adopts a different framework. Rather than a presumption, the courts apply a statutory standard, measuring conduct against the twin requirements of honesty and reasonable diligence in s 157(1). A director found wanting under either limb cannot point to a rule that presumes in her or his favour.<\/p>\n\n\n\n

That is not to say that the Singapore courts will readily second-guess commercial decisions. The Court of Appeal has made clear that “the court will be slow to interfere with commercial decisions of directors which have been made honestly even if they turn out, on hindsight, to be financially detrimental” (Ho Kang Peng v Scintronix Corp Ltd (formerly known as TTL Holdings Ltd) [2014] SGCA 22 (“Scintronix”) at [37]). That deference, however, has limits. Applying the test in Charterbridge, the court will ask “whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company” (Scintronix at [38]), and where a transaction is not objectively in the company’s interests, the court may infer that the director did not act honestly. The latitude extends to honest judgment; it does not extend to a failure to exercise any judgment at all.<\/p>\n\n\n\n

A Director’s Duty to Act Honestly in Singapore: The First Limb<\/strong><\/h3>\n\n\n\n

Section 157(1) of the CA imposes two distinct limbs on every director: a duty to act honestly and a duty to use reasonable diligence. We address each in turn, beginning with the first.<\/p>\n\n\n\n

The duty to act honestly is not satisfied merely by the absence of fraud. The Court of Appeal has held that to act honestly under s 157 of the CA “means to act bona fide to promote or advance the interests of the company” (Scintronix at [35]). The decision in Park Hotel Management Pte Ltd (in liquidation) and others v Law Ching Hung and others [2025] SGHC 149, which was decided on the director’s fiduciary duties, illustrates what the absence of good faith looks like. The sole director and shareholder of the company, knowing that it was in financial peril, transferred its viable assets and businesses at a gross undervalue to companies connected with him; in the court’s words, “(effectively) to himself” (at [2]). Hri Kumar Nair J stated (at [2]):-<\/p>\n\n\n\n

“Whatever dilemmas a director may face, one rule is sacrosanct \u2013 a director must always act in good faith and never place his or her personal interests above those of the company or its stakeholders.”<\/p>\n\n\n\n

The honesty limb requires a director to act in what she or he genuinely considers to be the best interests of the company. A director who acts with a degree of self-interest that is not disclosed and approved may breach this standard. The duty is owed to the company as a legal entity, not to any individual shareholder. Nominee directors, in particular, must bear in mind that they owe their duties to the company rather than to the shareholder who appointed them.<\/p>\n\n\n\n

Reasonable Diligence Under Section 157 of the Companies Act: The Second Limb<\/strong><\/h3>\n\n\n\n

The second limb of s 157(1) of the CA requires every director to use reasonable diligence in the discharge of her or his duties. The standard is objective. As the Court of Appeal affirmed in Scintronix (at [42]), citing Lim Weng Kee v Public Prosecutor [2002] 2 SLR(R) 848, the question is “whether he has exercised the same degree of care and diligence as a reasonable director found in his position”. That standard “is not fixed but a continuum depending on various factors such as the individual’s role in the company, the type of decision being made, the size and the business of the company”. Importantly, it “will not be lowered to accommodate any inadequacies in the individual’s knowledge or experience”, although it will be raised where a director possesses, or holds herself or himself out as possessing, special knowledge or experience.<\/p>\n\n\n\n

The decision of the High Court in PP v Zheng Jia [2025] SGHC 76 shows how seriously the courts now treat a wholesale failure of oversight. The respondent, a chartered accountant, operated a business of incorporating companies in Singapore for foreign clients and registering himself as their locally resident director (some 384 companies in all), while exercising “no control or supervision over the companies’ affairs whatsoever” (at [1]). After the proceeds of scams perpetrated abroad were routed through the bank accounts of two such companies, he pleaded guilty to two charges under s 157(1) of the CA, one of them as an abettor. The District Judge imposed fines. On the Prosecution’s appeal, a three-judge panel of the High Court, with Sundaresh Menon CJ delivering the grounds of decision, substituted an aggregate sentence of ten (10) months’ imprisonment and laid down a sentencing framework for such cases. The respondent was also disqualified from acting as a director for five (5) years.<\/p>\n\n\n\n

Critically, the court held (at [54]) that “the custodial threshold will be presumptively crossed for offences of the present category \u2026 and the onus will be on the director to explain why that should not operate in his or her case”. The “present category” is, however, a specific one: “professional directors whose business models were premised on providing no or inadequate oversight over the affairs of the companies” (at [50]). The court expressly recognised that “in certain circumstances, a director who commits an isolated negligent breach of his duties as a director should not be punished with a term of imprisonment” (at [44]).<\/p>\n\n\n\n

A director cannot discharge her or his obligation under this limb by remaining passive. The duty requires active engagement: attending board meetings, reading board papers, raising questions where matters appear unclear, and monitoring management where circumstances call for it. Both executive and non-executive directors are subject to the same statutory standard, although, as noted above, what reasonable diligence requires of a particular director will vary with her or his role in the company.<\/p>\n\n\n\n

The Paper Trail: What a Director Should Keep<\/strong><\/h3>\n\n\n\n

A director who faces a challenge to her or his conduct will be better placed if she or he can point to contemporaneous records showing the basis on which decisions were made. We recommend that directors maintain, as a matter of course:-<\/p>\n\n\n\n

(a) board minutes recording the information considered and the reasons for each material decision;<\/p>\n\n\n\n

(b) independent professional advice obtained before major transactions, including legal, financial, and technical opinions as appropriate;<\/p>\n\n\n\n

(c) declarations of interest made at board level, together with the relevant board resolution noting the disclosure;<\/p>\n\n\n\n

(d) records of due diligence conducted on significant counterparties or assets; and<\/p>\n\n\n\n

(e) correspondence evidencing the director’s active engagement with the company’s affairs.<\/p>\n\n\n\n

The absence of such records does not itself prove a breach of s 157(1) of the CA. However, it leaves a director with little to place before the court when her or his conduct is challenged. Courts draw inferences from what is absent as much as from what is present.<\/p>\n\n\n\n

A separate, though related, question arises where a director believes that she or he acted honestly and reasonably and that, having regard to all the circumstances, it would be fair to excuse her or him from liability. The CA provides a mechanism for the court to grant such relief, and we have addressed it in our earlier article, Power to Grant Relief \u2013 Directors’ Liability; Section 391 (CA), to which the reader is invited to refer. That article addresses relief in civil proceedings brought by or on behalf of the company.<\/p>\n\n\n\n

The Consequences of a Breach<\/strong><\/h3>\n\n\n\n

A breach of s 157(1) of the CA may give rise to consequences across three distinct dimensions.<\/p>\n\n\n\n

First, civil liability. A director who breaches this provision may be personally liable to the company for any profit made or any damage suffered as a result of the breach. The company may bring a claim directly, or, in appropriate circumstances, a shareholder may seek leave to bring a statutory derivative action on the company’s behalf under s 216A of the CA.<\/p>\n\n\n\n

Second, criminal liability. A breach of s 157(1) of the CA is a criminal offence. The penalty on conviction is a fine of up to twenty thousand dollars (S$20,000) or imprisonment of up to twelve (12) months, or both. The maximum fine was increased from S$5,000 by the Corporate and Accounting Laws (Amendment) Act 2025, with effect from 6 May 2026.<\/p>\n\n\n\n

Third, disqualification. Where a director is convicted of an offence under s 157 of the CA, the court may, in addition to any other sentence, make an order under s 154(2) of the CA disqualifying her or him from acting as a director or taking part in the management of a company. The disqualification runs for five (5) years from conviction (or such shorter period as the court may order) or, where a sentence of imprisonment is imposed, for five (5) years after release from prison. The respondent in Zheng Jia was disqualified for five (5) years.<\/p>\n\n\n\n

The gravity of these consequences should not be underestimated. For professional or nominal directors who lend their names to companies but exercise no oversight of them, Zheng Jia establishes that imprisonment, rather than a fine, is the presumptive outcome. A director who has assumed that a nominal or passive directorship carries only civil risk may find that assumption to be mistaken.<\/p>\n\n\n\n

Frequently Asked Questions<\/strong><\/h3>\n\n\n\n

Is there a business judgment rule in Singapore?<\/strong><\/p>\n\n\n\n

There is no codified “business judgment rule” in Singapore. No provision of the CA creates a formal presumption in a director’s favour when commercial decisions are challenged. Singapore courts instead assess a director’s conduct against the twin standards of honesty and reasonable diligence under s 157(1) of the CA, applied to the specific facts at hand. The director who seeks the comfort of a formal rule will not find one in Singapore law. That said, the courts will be slow to interfere with commercial decisions made honestly, even if they turn out, on hindsight, to be financially detrimental.<\/p>\n\n\n\n

What is a director’s duty to act honestly in Singapore?<\/strong><\/p>\n\n\n\n

A director’s duty to act honestly under s 157(1) of the CA requires her or him to act in what she or he genuinely considers to be the best interests of the company. The duty goes beyond the absence of deliberate dishonesty. A director who acts with a degree of self-interest that has not been properly disclosed and approved may be found in breach of this limb, even if no fraud was intended. The duty is owed to the company as a legal entity, not to individual shareholders.<\/p>\n\n\n\n

What does reasonable diligence mean under section 157 of the Companies Act?<\/strong><\/p>\n\n\n\n

Reasonable diligence under s 157(1) of the CA is an objective standard. It asks whether the director exercised the same degree of care and diligence as a reasonable director in her or his position. What that requires varies with the director’s role and the size and business of the company, but the standard will not be lowered for a director who lacks the relevant knowledge or experience. A director cannot meet this standard simply by attending meetings. She or he must engage actively with the company’s affairs, ask questions where circumstances call for it, and exercise oversight of management. Both executive and non-executive directors are bound by this standard.<\/p>\n\n\n\n

What are the consequences for directors who breach s 157 of the Companies Act in Singapore?<\/strong><\/p>\n\n\n\n

A breach of s 157(1) of the CA may result in civil liability, criminal prosecution, or disqualification. On the civil side, a director may be personally liable to the company for any profit made or any damage suffered as a result of the breach. On the criminal side, the penalty is a fine of up to S$20,000 or imprisonment of up to twelve (12) months, or both. Following PP v Zheng Jia, imprisonment is the presumptive outcome for professional directors who lend their names to companies but exercise no oversight of them. On conviction, a court may also make a disqualification order under s 154 of the CA.<\/p>\n\n\n\n

Can a company protect its directors from personal liability?<\/strong><\/p>\n\n\n\n

Only to a limited extent. Under s 172 of the CA, any provision that purports to exempt a director from liability in connection with any negligence, default, breach of duty or breach of trust in relation to the company is void, as is any provision by which the company indemnifies a director against such liability, except as permitted by ss 172A and 172B. Directors’ and Officers’ (“D&O”) liability insurance is, subject to its terms and conditions, generally regarded as permissible. D&O insurance and the limits on company indemnities will be addressed in a subsequent article.<\/p>\n\n\n\n

What is a derivative action and when can it be used against a director?<\/strong><\/p>\n\n\n\n

A derivative action is a legal mechanism by which a shareholder brings a claim on behalf of the company, typically where the company itself has failed to act. Under s 216A of the CA, a shareholder may apply to court for leave to bring or defend legal proceedings in the name of the company. The court will consider whether the action appears to be in the interests of the company before granting leave. A derivative action may be used where a director’s breach of duty has caused loss to the company and those in control of the company are unwilling to pursue a claim.<\/p>\n\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

The Myth of the Business Judgment Rule in Singapore Many directors assume that a “business judgment rule” shields them from personal liability whenever a commercial decision yields a poor outcome. In Singapore, that assumption does not hold. 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