Where an Employee Makes Secret Profits: Extending the Net of Persons Liable

Where an employee of a company has made secret profits as a result of his employment with that company, while the company can bring a claim against the employee to account for those profits and sue for breach of the employment contract, it is unlikely that employees will have deep pockets or insurance in order to make full and satisfactory recompense. However, if the employee occupies a position of trust and discretion, the company may have a claim against a wider array of persons. In particular, if the employee has relied on third parties (including any corporate vehicle set up to make the secret profits), the company may have a claim against those third parties. This was the conclusion of the Singapore High Court in the recent case of Sumifru Singapore Pte Ltd v Felix Santos Ishizuka [2022] SGHC 14.

A scheme to channel secret profits to his own companies

Felix Santos Ishizuka was the Shipping Director of the claimant, Sumifru Singapore Pte Ltd (Sumifru). Despite his title, Felix was not a member of the board of directors but an employee. His job was to handle matters relating to the shipping of fruit sourced and sold by Sumifru. While major decisions on shipping were to be approved by the CEO of Sumifru, Felix’s recommendations as to what were the best shipping offers were not cross-checked by the CEO. The Court found on the facts that the CEO relied on Felix to make the best recommendations for Sumifru’s interests.

Felix established two companies, Multiport Maritime Corporation (MMC) and Multiport Maritime Pte Ltd, which he controlled. In summary, he used MMC to provide shipping services to Sumifru by interposing it between Sumifru and the real shippers, and charging Sumifru a rate above what the shippers were charging MMC. The price difference generated a profit for MMC and Sumifru was never informed that the shipping rates could have been obtained for less.

An employee acting in a position of trust may be subject to fiduciary duties

When Sumifru discovered what Felix was doing, it brought a claim against him for an account of the profits. In addition, it argued that it also had a claim against MMC for, among other things, dishonest assistance. A claim of dishonest assistance arises against a third party when that third party assists a fiduciary in carrying out a breach of trust or fiduciary duty knowing that the transaction was irregular. As this claim only arises in respect of a breach of trust or fiduciary duty, Sumifru had to show that Felix was a fiduciary.

The Court noted that ordinarily, an employee is not a fiduciary of their employer unless that employee is also a director of the employer. However, the law recognizes that in some exceptional circumstances an employee may be acting in a fiduciary capacity. This may arise where, as between the employer and employee:

• The employee has scope for the exercise of some discretion or power;
• The employee can unilaterally exercise that power or discretion so as to affect the employer’s legal or practical interests; and
• The employer is particularly vulnerable to or at the mercy of the employee holding the discretion or power.

The High Court found that in the circumstances of Felix’s employment, where he was relied upon wholly by Sumifru to source for and recommend the best shipping quotes, Felix acted in a fiduciary capacity. In this respect, even though formally Felix was required to obtain the approval of the CEO of Sumifru for major shipping transactions, in actual practice his recommendations were not cross-checked and he was trusted to have sourced the best prices for Sumifru.

As MMC was wholly controlled by Felix, the Court held that Felix’s knowledge of the inappropriateness of the transactions could be attributed to MMC. Accordingly, MMC was found liable for dishonest assistance. The secret profits made by Felix could therefore be claimed against both Felix and MMC.

Alternative avenues for claims

Having the ability to go after a third party for the defalcations of an employee widens the pool of targets that a company or an insolvency practitioner appointed at the company (such as a liquidator) can go after for value recovery. An employee may not have the necessary funds to pay the damages awarded. However, the principle set out in this case allows the claimant the ability to claim the damages suffered from more than one source, which makes it more likely that the claimant will be able to obtain full compensation. Where a company is facing financial difficulty, this ability to go after more than one person is an important advantage.

In this case, the Court had also considered a claim for knowing receipt. Such a claim may also be made where a fiduciary has disposed of the beneficiary’s assets. However, on the facts here, the Court found that there had been no disposal of Sumifru’s assets. Accordingly, it held that the claim could not be made out. Such a claim was, however, successfully made recently in the case of Miao Weiguo v Tendcare Medical Group Holdings Pte Ltd & Anor (2021) where a company that had assisted a director of the company to illegally transfer funds out of that company was found liable for knowing receipt. Read our discussion of this case in the update, “SGCA limits rule against recovery of reflective loss” (28 February 2022).

Another avenue that may be considered is to bring a claim for secret profits under section 14 of the Prevention of Corruption Act 1960. The advantage of such a claim is that there is no need to show that the employee is also a fiduciary. For such a claim, however, the employee in question must have induced or been induced by a third party to assist in the profit sharing scheme. So, for example, in PP v Katsutoshi Ishibe & Anor (2018), two employees of a flour mill induced a distributor of flour in Singapore to buy flour for distribution from their employer at an agreed upon profit which was to be shared among three parties, in return for which they would give all the mill’s business to the flour distributor. This was held to amount to corruption.