Can shareholders of a company apply to court to stop a company from paying exorbitant remuneration to directors and senior managers when the company is in fact losing money?

There are two different forms of directors’ remuneration. First, directors’ fees paid to a director in his capacity as a director, and second, salary or fees paid to a director who is also an employee of the company. The former form of remuneration is one which is paid to the director “in respect of his office” and is required to be approved by the company under Section 169(1) of the Companies Act (Cap. 50) Singapore (the “Act”). That is, it must be subject to the affirmative vote of shareholders of the company at a general meeting. In such instances, exorbitant remuneration in this form will need to be approved by a majority of the shareholders. We will refer to this form of remuneration as “Office Holder Fees”.

In contrast, it is the board of directors that decides what salary or fees are due to an employee, whether or not the employee is also a director or senior manager. The board of directors normally does not need specific approval from shareholders. We will refer to these payments as “Employment Benefits”.

Insofar as the company paying exorbitant Employment Benefits to directors and senior managers, the company’s directors should bear in mind their fiduciary duty to act in the best interests of the company. This includes a duty to act honestly and fairly and also not to place themselves in a conflict of interest. Where a company is in a dire financial position, the directors need to consider if they are contractually bound to pay the Employment Benefits or if they have a discretion as to the level of the benefits, or part of the benefits. In the event that control of the company subsequently falls out of the hands of the directors, a liquidator or judicial manager is likely to look closely at the payment of Employment Benefits during the period of financial difficulties.

Shareholders of a private company may consider seeking leave from the High Court to bring an action in the name and on behalf of the company against the directors to restrain or recover the payment of unjustifiable Employment Benefits. This is rare as the cost of such applications for leave have, in different contexts of breaches of fiduciary duties, proven to be high and unaffordable for the average shareholder.

Turning to Office Holder Fees, where the directors form the majority of the shareholders or where the majority of the shareholders have appointed the directors, the minority shareholders may feel aggrieved by the passing of a resolution approving the payment of the fees. The minority shareholders have the option of seeking relief for minority oppression but this is not without challenges. The payment needs to be shown to be oppressive to the shareholders or in disregard of their interests as shareholders and this is challenging where the payment impacts all shareholders equally. There are also practical challenges for a small shareholder as the expense of such proceedings against the majority shareholders can be prohibitive.