A practical guide for business owners under the Companies Act 1967
When running a company, the board of directors plays a central role in decision-making and representing the company to the outside world. But what exactly are their legal powers to bind the company? And what happens when transactions involve directors or their close connections?
Here’s a clear breakdown of the rules under the Companies Act that every entrepreneur should understand.
1. Power of Directors to Bind the Company (Section 25B)
When an outsider deals with your company in good faith, the law assumes that the directors have full authority to act for the company — even if there are internal restrictions in the company’s constitution.
Key Points:
- Good faith protection: A person dealing with the company is not required to check if the directors have internal limits on their powers.
- Presumption of good faith: Unless proven otherwise, dealings are assumed to be in good faith.
- Includes internal restrictions: Any limits set by shareholder resolutions or shareholder agreements are treated as part of “limitations” — but they do not affect outsiders acting in good faith.
⚠ Important:
- Shareholders can still take legal action to stop directors from doing something beyond their powers — but not if it’s fulfilling an existing legal obligation.
- Directors remain personally liable if they act beyond their powers.
2. Transactions with Directors or Their Associates (Section 25C)
While Section 25B protects outsiders, the law adds safeguards when the other party is a director or connected person.
When it applies:
If the company enters into a transaction where one party is:
- A director of the company or its holding company; or
- A person connected to such a director.
Consequences:
- The transaction is voidable by the company.
- Even if not voided, the director (and anyone connected) must:
- Return any gains made from the transaction.
- Indemnify the company for any losses caused.
Exceptions where the transaction cannot be voided:
- The company can’t recover the asset or money involved.
- The company is fully compensated for the loss.
- Third-party rights would be unfairly affected.
- The company has affirmed (approved) the transaction.
3. Who is Considered “Connected” to a Director? (Section 25D)
The law defines “connected persons” broadly to prevent indirect self-dealing. These include:
- Family members: spouse, children (including adopted and stepchildren).
- Companies linked to the director: where the director and connected persons own at least 20% of shares or voting rights.
- Trustees: if the trust can benefit the director or their connected persons.
- Partners: business partners of the director or their connected persons.
- Firms: where the director or connected persons are partners.
4. Practical Takeaways for Business Owners
- Always keep clear board minutes authorising major transactions.
- If a transaction involves a director or their associate, declare the conflict of interest and seek shareholder approval where necessary.
- Train your directors and management team on what “connected persons” means — it’s broader than most expect.
- Remember: Good governance protects both the company and its directors from legal disputes.
Summary Table: Directors’ Powers & Related Party Transactions
Topic | Key Rule | Why It Matters for Entrepreneurs |
Directors’ Authority (25B) | Outsiders dealing in good faith can assume directors have full authority | Builds trust in commercial dealings, reduces friction |
Good Faith Presumption | Outsider not required to check internal limits | Streamlines business transactions |
Related Party Transactions (25C) | Deals with directors or connected persons are voidable | Prevents abuse of power and protects shareholders |
Director’s Liability | Must return gains and compensate losses if acting beyond powers | Promotes accountability |
Exceptions to Voidability | No recovery possible, company compensated, third-party rights affected, or company affirms deal | Avoids unfairness to innocent parties |
Connected Persons (25D) | Includes family, companies, trustees, partners, certain firms | Ensures broad coverage to prevent indirect self-dealing |
Disclaimer: The information in this article is based on the Companies Act 1967 (Singapore) and is provided for general guidance only. It does not constitute legal advice. For specific advice tailored to your business, please consult a qualified legal or corporate professional.
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