Forum: Hold directors personally liable if prepayments taken during financial distress

I refer to the report “True Fitness and True Yoga to shutter; customers report losses of more than $609,000” (Sept 11) and the subsequent Forum letters on Sept 15.

While shareholders of limited liability companies enjoy protected liability, executive directors who actively manage daily operations bear a clear fiduciary duty to act responsibly, especially when a company faces severe financial distress.

When a business encounters financial difficulties, directors must evaluate whether it is able to continue to operate and meet its financial obligations, or in accounting terms, it remains a going concern. Where significant uncertainty exists, this must be disclosed in the Directors’ Statement within the company’s financial statements, regardless of whether the business is subject to or exempt from statutory audits.

To protect consumers from sudden closures, the Companies Act should be amended to explicitly address operations during going-concern crises. Specifically, legislation should prohibit companies experiencing such uncertainties from collecting upfront prepayments or long-term package subscriptions.

If executive directors continue to take customer prepayments under such conditions and the business halts operations within a specified timeframe, those directors should face personal financial liability to compensate affected consumers.

Imposing personal accountability on directors will prevent distressed businesses from using customer prepayments as short-term working capital to prop up failing operations, fostering greater integrity across
consumer-facing industries.

Cheong Wing Kiat