Saturday, May 28, 2011

Singapore Court of Appeal Says Statutory Duty on Company to Maintain Internal Accounting Controls Not for Benefit of Third Parties

A statutory duty imposed on a company to maintain internal accounting controls was enacted to safeguard the assets of the company and, hence, was enacted for the company’s benefit, and not for the benefit of any third party who might deal with the company’s officers and employees, ruled the Singapore Court of Appeal. Thus, the statutory duty to maintain internal controls did not create a common law duty on behalf of a company to an unlimited class of third-party banks. Skandinaviska Enskilda Banken AB (Publ), Singapore Branch v Asia Pacific Breweries (Singapore) Pte Ltd, Civil Appeals Nos 121 and 122, Court of Appeals, May 19, 2011.’

The opinion was delivered by Chief Justice Chan Sek Keong. The Court of Appeal hears appeals against the decisions of High Court Judges in both civil and criminal matters. It became Singapore's final court of appeal in April of 1994 when appeals to the Judicial Committee of the Privy Council were abolished.

Section 199 (2A) of the Singapore Companies Act requires public companies to devise and maintain a system of internal accounting controls sufficient to provide a reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition; and transactions are properly authorized and recorded as necessary to permit the preparation of true and fair profit and loss accounts and balance-sheets and to maintain accountability of assets.

The court said that the company did not assume any responsibility to the bank in relation to the company’s internal controls. The company, reasoned the appeals court, could not have reasonably foreseen that as a consequence of alleged failures in its internal controls, an unknown bank in the unknown future would grant in the company’s name an unauthorized credit facility based on a forged board resolution and false representations from a company finance manager with limited financial authority. The case told a cautionary tale of how foreign banks in their eagerness to secure a banking relationship with the a prominent local blue-chip company failed to exercise due diligence and extended substantial credit facilities to the company relying merely and almost entirely on false representations made by the company’s finance manager at the material time.