Why a business owner had to return $1.2m to his company to pay its debt

As the firm's director, he had failed in his obligation to act in its best interests, court rules

- Tan Ooi Boon

The trouble with debts is that you have to repay them at some point, no matter how tricky your footwork, as a business owner here discovered to his immense cost.

His game plan to dodge paying a substantial compensation after his construction firm botched a renovation job looked pretty clever on paper, but it could not withstand the blowtorch turned on it by Singapore's highest court.

In a landmark ruling, the Court of Appeal ruled that business owners could no longer hide from their creditors if they are found to have deliberately siphoned money from their companies to avoid paying their debts.

The businessman, who was the firm's sole owner and director, thought he could escape having to compensate the disgruntled client by emptying his company accounts first.

He did this by paying himself $500,000 in dividends and another $680,000 as "debt" that he claimed was owed to him. The money was withdrawn from his firm before it could pay an outstanding compensation of over $500,000 after losing a lawsuit from a dental company.

The client had sued the renovation firm for sub-standard work that caused "flooding" and mould at one of its clinics.

The renovation company was wound up as it could not compensate the dental chain but, in an unusual twist, the liquidators sued the owner to recover the money he had earlier taken from the firm.

The owner argued that he was entitled to take the money because he owed no personal obligation to the creditors.

Although this might be strictly true, the High Court still ordered him to return $1.18 million to his own firm because as a director, his obligation was to act in the best interests of the company, and he had failed to do this.