Singapore Court of Appeal settles law on approach to equitable compensation for non-custodial breaches of fiduciary duty

29 June 2020

Sim Poh Ping v Winsta Holding Pte Ltd and another and other appeals [2020] SGCA 35

An important issue that arises in a claim for breach of fiduciary duty is whether causation for loss must be proved and, if so, how. In Sim Poh Ping v Winsta Holding Pte Ltd, the Singapore Court of Appeal provided guidance on the role of causation for claims involving non-custodial breaches of fiduciary duty (i.e. breaches of fiduciary duty that do not involve damage to or loss of property in the custody of the fiduciary).

Background

Winsta Holding Pte Ltd (“Winsta Holding”) and its 51% shareholder, M Development Ltd (“M Development”) (collectively, “Winsta Companies”), commenced proceedings in the Singapore High Court against three directors of Winsta Holding and various corporate vehicles owned by the three directors (“Corporate Defendants”). The three directors were members of the Sim family (“Sims”). Winsta Holding had seven subsidiaries (“Winsta Subsidiaries”) which ran hostel and serviced apartment businesses.

The Winsta Companies alleged that the Sims had breached their fiduciary duties by diverting opportunities away from Winsta Holding and the Winsta Subsidiaries (collectively, “Winsta Group”) to the Corporate Defendants and by entering into interested party transactions between the Winsta Group and the Corporate Defendants. Directors nominated by M Development subsequently decided to place the Winsta Subsidiaries under creditors’ voluntary liquidation. The Winsta Companies alleged that this had been necessitated by the Winsta Subsidiaries having been run to the ground by the Sims’ conduct.

The High Court Judge held that the Sims had committed a large number of breaches of fiduciary duty against the Winsta Group. Most of these concerned interested party transactions where the Sims stood on both sides of the transaction. However, the Judge went on to find that the burden fell on the Winsta Companies to establish “but-for” causation of the losses in respect of which equitable compensation was sought, rejecting the rule in the Privy Council decision of Brickenden v London Loan & Savings Co et al [1934] 3 DLR 465 (“Brickenden”). The Brickenden rule places the burden on the wrongdoers to prove that the loss would have been suffered in any event. The Winsta Companies were unable to prove “but-for” causation for most of their claims.

The Winsta Companies appealed, amongst other things, against the Judge’s finding that they had to establish “but-for” causation.

Decision of the Court of Appeal

The following issues arose for determination by the Court of Appeal:

  • What are the principles of causation applicable to claims of equitable compensation for breaches of fiduciary duties? 
  • Applying the above principles, what is the appropriate equitable compensation to be ordered?

The Court of Appeal observed that at least three different approaches had been adopted in various High Court decisions:

  • Approach 1: Causation is not relevant once a breach of fiduciary duty has been established. 
  • Approach 2: The plaintiff must always establish “but-for” causation.
  • Approach 3: A hybrid approach which reverses the burden of proof by requiring the defendant to prove that the damage suffered by the plaintiff would have occurred in any event. 

Following a survey of the state of the law in various Commonwealth jurisdictions and academic commentary, the Court of Appeal held that Approach 3 should be adopted in Singapore.

The following principles apply in a claim involving a non-custodial breach of the duty of no-conflict or no-profit or the duty to act in good faith:

(a)  The plaintiff must prove that the fiduciary breached the duty and that he suffered loss.

(b)  If the plaintiff can establish the above, there will be a rebuttable presumption that the fiduciary’s breach caused the loss. The burden shifts to the wrongdoing fiduciary to rebut the presumption by proving that the plaintiff would have suffered the loss in spite of the breach.

(c)  Where the fiduciary is able to show that the loss would have occurred without the breach, no equitable compensation can be claimed in respect of that loss.

(d)  Where the fiduciary is unable to show that the loss would have occurred without the breach, the upper limit of equitable compensation is to be assessed by reference to the position the plaintiff would have been in had there been no breach.

Applying these principles to the two categories of losses claimed by the Winsta Group:

(a)  The Court of Appeal upheld the High Court’s dismissal of the claims for post-liquidation losses. The High Court Judge found that the Winsta Subsidiaries had to be liquidated for commercial reasons, and these findings rebutted the presumption of a causative link between the breaches and these losses. The Winsta Group would have been in the same financial predicament after liquidation even if the Sims had not breached their fiduciary duties. 

(b) As regards pre-liquidation losses, the Court of Appeal allowed the claims in respect of the diversion of opportunities to run a homestay business and a cafeteria business to the Corporate Defendants. The Sims were unable to disprove causation of loss, but the equitable compensation would not extend to loss of profit for opportunities that the Winsta Group could not have taken advantage of in any case.

Comment

The Court of Appeal’s decision provides welcome clarity on how parties should frame, and prove, claims for breaches of “core” fiduciary duties, such as the no-profit and no-conflict rules, and the duty to act in good faith. The remaining pieces of the puzzle - the principles applicable to custodial breaches in the context of trust or fiduciary duty - will no doubt also be determined on a future occasion.

Reference materials

The Court of Appeal judgment is available on the Supreme Court website www.supremecourt.gov.sg or by clicking here.