Handout 01 (2014)

Company Law Handout 1 AY2014‐15, Term 1

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SINGAPORE MANAGEMENT UNIVERSITY

COMPANY LAW LGST 201

Handout 1 ‐ Introduction to the Corporate Structure

Reading – Yeo (4th Ed), Chapter 1 to 4.

Woon (Rev 3rd Ed), Chapters 1 (pp 1 to 22) & 2; Koh (2nd Ed), Chapter 1 Setting the Scene In short, this seminar will attempt to answer certain questions:

What is a ‘company’?

How to incorporate a company?

The effect of incorporation?

The validity of pre‐incorporation contracts? And

Lifting the corporate veil?

Legends: – Very Important. Must know. – For general information.

1. General Themes

o The company is essentially an artificial person created by law. What this

“person” is allowed to do – all its rights and liabilities – are stated in (a) The Companies Act (Cap 50) (the ‘Act’ or CA); as well as (b) case law which either

(i) gives us guidance on how to interpret the provisions of the Companies Act, or (ii) fills in gaps in areas that are not dealt with by the Companies Act.

o The Companies Act is quite long because it is trying to describe all the “do’s” and

“don’ts” of a company and its associated persons in its lifetime. However, the student is not expected to know every provision of the Act, only the more salient and important ones will be examined in class.


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o It is your responsibility to print the texts of the Companies Act. No printed

statute will be provided in the mid‐term and final exams.

o One feature about company law is that it is not limited to the Companies Act (Cap 50). The Act lays down many rules from the birth to the death of a company. Thus, do not assume that the Companies Act is the only source of laws regarding companies.

Q: How do I access the Companies Act? All statutes can be accessed FREE on the internet on Singapore Statutes Online (http://statutes.agc.gov.sg/aol/home.w3p) or Lawnet (www.lawnet.com.sg) via the SMU library database. On Lawnet, you may download the entire Act in a pdf file if you wish to do so.

o Ultimately, of course, the company is a structure that is to be set up for the use and benefit of natural persons like you and I. So the most important issue to understand in each seminar is the relationship between the company and its stakeholders. By “stakeholder”, we mean a person who is interested in the company in one way or another. The most important stakeholders in a company would include:

(a) Shareholders; (b) Directors and executives; (c) Creditors; (d) Gatekeepers (e.g. auditors); (e) Employees; (f) Regulators (e.g. ACRA or MAS).

o As the course develops, you will start to appreciate that the rights and

obligations of some of these “stakeholders” involve difficult concepts. This is why company law is interesting but is also difficult to study. You will do well to test your understanding regularly by applying what you understand to new scenarios and problems which you come across.

2. Company Law Reform


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o Because the company operates in a dynamic environment, the regulation of companies likewise has to keep abreast by modifying the Companies Act to accommodate these fast changing business conditions. For that reason, the reform of company law takes place at fairly close frequency. The last round of major reform took place between 2000 to 2005, and a fresh initiative to reform and rewrite the Companies Act has once again started in 2009. It is likely that the Companies Act will be finally revised by the end of 2014 or in early 2015.

o In 2011, the government published a “Public Consultation on the Review of the Companies Act and the Regulatory Framework for Foreign Entities”, illustrating a steering committee’s recommendations for the current round of company law reform. Students should thus appreciate that the precise content of what he or she is learning may well change over time. However, the foundational ideas, concepts, and policies will always remain relevant. The consultation paper could be found in ACRA’s website or in < http://app.mof.gov.sg/pc_coact_2011.aspx>.

o The Government proposes the Companies (Amendment) Bill in May 2013. However, the bill is not a finalised version and might be revised after collecting public opinions. Nonetheless, the Bill has illustrated key intentions of imminent corporate law reform. You may download the Bill in ACRA’s website: http://www.acra.gov.sg/Publications/Public+Consultation+on+draft+Companies+%28Amendment%29+Bill+2013.htm.

o As the Bill is not final, students are not required to be familiar with the changes made in the Bill. However, key reforms will be mentioned and discussed in relevant seminars.

o In Aug 2011, the ACRA also launched a Guidebook for Directors. The Guidebook does not replace the law. Nonetheless, it may help you to understand some rules. You can find the Guidebook in <http://www.acra.gov.sg/Publications/Guidebook+for+Directors.htm>.

3. Companies and Business Organisations

Read Woon, 1 – 14 o To look at the big picture, you may consider the following questions from the

point of view of a businessman: − Why do people form a company to conduct business? Why don’t they

merely use contracts to acquire necessary capital or services? − What are available business forms/organisations and the laws applicable

to these forms in Singapore?


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− What are the key characteristics of a company? Why do businesses choose the corporate form over others?

o We will explore the key characteristics of a ‘company’ later in this seminar.

However, a company is not necessary superior to other forms of business organizations. Consider the table below:

Company Partnership Limited

Partnership Limited Liability Partnership

Limited Liability

Separate Entity

Flexibility in Operation

Set‐up and Maintenance Costs

Public fund raising

Tax

o Question: Can you form a partnership of 30 partners? (CA s 17(3) & (4))

o One major difference between a company and a general partnership (or a general partner of a limited partnership) is the liability of a member/shareholder and a partner. With regard to partnership, can you distinguish the following concepts?

− ‘jointly liable’; − ‘severally liable’ (e.g. in Partnership Act (Cap 391) s 9); or − ‘jointly and severally liable’ (e.g. Partnership Act s 12).

o While this course only focuses on ‘companies’, you should be aware that some of

the problems discussed throughout the course (e.g corporate governance, management and control, etc.) are common (to a certain degree) to other unincorporated business entities, including even charities.

4. Types of Companies

Woon, pp 17 – 22 The following are all basic concepts you need to understand. We will revisit these concepts in subsequent seminars. a. Registered companies:


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− Most companies are ‘incorporated’ and ‘registered’ pursuant to the Companies Act (Cap 50).

b. Limited & Unlimited – s 17(2) CA

− A company may be incorporated with limited or unlimited liability. Can you tell the difference?

− A limited company can be further classified into two categories: limited by shares (the most common type) and limited by guarantee. Can you distinguish the two? Can you find any example of a company limited by guarantee?

c. Public and Private

− Companies are divided into two groups: ‘public company’ and ‘private company’. In Singapore, the logic is simple: a company is a public company unless it is registered and incorporated as a private company. Therefore, all private companies must bear the term ‘private’ or ‘Pte’ in the company’s name.

− What are the features of a private company? ‐ see CA s 18(1).

o Can its members freely transfer their shares? o Has no more than ____ members; and o Is it allowed to raise funds from the public?

− Private companies could be further divided into two forms: ‘exempt private companies’ and ‘non‐exempt private companies’.

o What are the features of an exempt private company? See CA s 4(1) − no ___________ member − no more than ____ members

− What is the significance of being an exempt private company?

See CA ss 162, 163 and 205C.

Ss 162 – 163: not prohibited from making loans to _________

8th Schedule: not required to file _______________________ with Annual Returns

s 205C: exempt from audit requirement if annual revenue < $_____

− In the Companies (Amendment) Bill 2013, the exemption from auditing requirement in CA s 205C will be greatly revised. The new requirement (if eventually passed by the Parliament) will be defined by a ‘small company’. Details will be further elaborated by ACRA. See section 148 of the Amendment Bill, revising CA s 205C.


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− A public company can be further divided into two groups: listed or unlisted.

o A listed company means the company’s shares are listed for trading in _____ .

o Details about how to list shares of a company in a stock exchange (i.e. SGX) are not part of this course. Students who are interested in the subject should consult materials about securities law and the Securities and Futures Act (Cap 289) as well as exchange rules.

d. Holding, Subsidiary & Related Companies

‐ Holding company and subsidiaries – CA s 5 (as of August 2013)

There are four situations in which Co B is a subsidiary of Co A:

(a) Co A controls ______________________________________ of Co B; (b) Co A controls ______________________________________ of Co B; (c) Co A controls ______________________________________ of Co B; (d) Co B is a subsidiary of Co C, which is a ________________ of Co A.

The ACRA plans to make a little change to the definitions of a holding company in CA s 5(1)(a). Look for section 4 of the Companies (Amendment) Bill 2013 for the answer. Can you explain why ACRA wants to make the change?

– Ultimate holding company – CA s 5A CA; – Wholly‐owned subsidiaries – CA s 5B CA – Related companies – CA s 6 CA

Consider the following questions:


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Based on the corporate structure shown in Fig 1.1 above: (1) Which of the following are related companies?

Holdco and Co (i) A, (ii) B and (iii) C?

Co A & Co B?

Co B & C?

Holdco & Co D?

Holdco & Co G? (2) Which company is the ultimate holding company? (3) Can Co B buys 10% of the shares of Hold Co?

– One important reason to determine the relationship of holding companies and subsidiary is because the restrictions on cross‐holdings of shares (CA s 21).

– This issue will be revisited in Week 10 or so when we discuss issues about capital protection.

5. The Incorporation Process

a. The life of a company starts with the incorporation process. In general, there are

three stages in the incorporation process:

Register company name;

File incorporation papers, including the Memorandum and Articles of Association (See next week), a statement to consent to the Companies Act, and the return on allotment of shares, etc.

Register with the ACRA and the issue of the Certificate of Incorporation.

Holdco

Co A Co B Co C

Co F

45% 70%35% + Bd Control

60%

Co D Co E

Co G

40% + voting control 30% 70%30%

Fig 1.1


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b. The first step in the incorporation of a company is actually ‘finding a suitable name’. It is apparent from section 27 of the Companies Act (Cap 50) that “undesirable” names or names that are identical of another company or business are not allowed. Whether a particular name is ‘undesirable’ is should be considered against the social context of Singapore.

c. Consider the following names, if you want to incorporate a company as a fashion

retailer in Singapore: o (1) Mango; o (2) Dior SG o (3) FxxK o (4) Temasek Design House.

d. Another problem from corporate name is the differences between section 27(1)

and 378(1), the latter of which is applicable to foreign companies while the former applies to domestic companies. One issue raised in Drilex Systems Pte Ltd v Registrar of Companies [1993] 1 SLR(R) 513 was whether the new name of an Indonesian company, which was almost identical to a Singaporean company, should be considered as ‘undesirable’ when the foreign company tried to registered the new name with the ACRA. The Court of Appeal decided that the missing of ‘identical’ in section 378(1) suggest that the term ‘undesirable’ should have the same meaning throughout the Companies Act. The conclusion may be odd, but it is sensible in terms of statutory construction. Nonetheless, this decision did not repel any doubt regarding confusion of a domestic company and a foreign company. Do you agree with the judge’s interpretation?

e. What is the minimum number of persons needed to form a company? – CA s 17(1) and s 20A

f. What is the minimum number of directors which a company must have? – CA s

145(1).

g. General information on the cost and procedure of incorporation are available on the website of the ACRA (http://www.acra.gov.sg).

6. Promoters

Woon, pp 48 – 54 a. Who are ‘promoters’?


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In general, a promoter is one who undertakes to form a company with reference to a given project, and set it going, and who takes the necessary steps to accomplish that purpose.

b. What duties do promoters owe to the company? Following the judgment of

Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 (Sealy, § 2.24 ), a promoter was held to be subject to fiduciary duties (which we will discuss in more details in a few more weeks) so that the promoter should disclose his/her personal interests if there is conflict with the company’s.

c. What are the remedies for the breach a promoter’s duty?

– If a promoter contracts with the company without full disclosure, the contract is voidable at the instance of the company.

– A promoter must account to the company for any secret profits arising from a transaction entered into in breach of his fiduciary duty.

– Exception: an account of profits is not available where the promoter did not acquire the property with a view to sell it to the company.

7. Separate Legal Personality

Read Woon, 54 – 61 a. Saloman v Saloman & Co Ltd [1897] AC 22

Who were the owners the shares of the company in this case?

What does this case tell you about the company’s “separate personality”?

Who is/are the company separate from?

Based on the principle in Saloman case: o A company has a separate personality from its members with its own

assets, liabilities, and contracts. o In contrast, a member/shareholder owns only the shares of the company

(not the company’s assets) and is not liable for the company’s debt. He can also be the company’s director, employee or creditor at the same time.

b. Consequences of separate legal personality

CA s 19(5) On and from the date of incorporation specified in the notice issued under subsection (4) but subject to this Act, the subscribers to the memorandum together with such other persons as may from time to time become members of the company shall be a body corporate by the name


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contained in the memorandum capable forthwith of exercising all the functions of an incorporated company and of suing and being sued and having perpetual succession and a common seal with power to hold land but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is provided by this Act. Consider also CA s 23(1).

c. Cases illustrating the consequences of incorporation:‐

− Lee v Lee’s Air Farming Ltd [1961] AC 12

o Can a company enter into a contract with its member? − Macaura v Northern Assurance Co Ltd [1925] AC 619

o Can a member sell or insure the property that belongs to the company?

− Foss v Harbottle (1843) 2 Hare 461 o If a company suffers a wrong, who is entitled to bring a law suit in respect

of that wrong?

− Re Noel Tedman Holdings Pty Ltd [1967] QdR 561 o Does the company come to an end when its members die?

8. Lifting the Corporate Veil

Read Woon, 62 – 81 a. “Lifting (or piercing) the corporate veil” is a metaphorical description of the

process of disregarding the separate personality of the company and ascribing responsibility for acts done by the company to the members or shareholders of the company. Under the concept of separate legal personality of a company, a member is in principle not liable to the company’s debts and obligations. However, under some circumstances the law (including case law and statutes) makes a company’s members liable to a third party. This is where we call “lifting (or piercing) the corporate veil” (of separate legal personality).

b. The effect of lifting the corporate veil is that a member will be personally liable.

c. Then the question is: In what situations would the corporate veil be lifted? There are two sources: common law and statutes.

d. Lifting the corporate veil in common law


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– Consider the following dicta of Rogers AJA in Briggs v James Hardie & Co Pty Ltd [1989] 16 NSWLR 549:

“The threshold problem arises from the fact that there is no common, unifying principle, which underlies the occasional decision of courts to pierce the corporate veil. Although ad hoc explanation may be offered by a court which so decides, there is no principled approach to be derived from the authorities …”

There is no unified principle for lifting corporate veil in common law. Thus, it is decided on a case‐by‐case basis. In general, the corporate veil will be lifted to prevent the abuse of corporate structure. Thus, it is natural that the veil is lifted if a corporate form is used as a vehicle of fraud, evasion of legal obligation, or a sham. From this view, it is also natural to render a member liable if the company is acting as the agent of the member. However, the biggest challenge is in the case of a corporate group. The question is whether it is appropriate to treat different companies in the same group as a ‘single economic unit’. – Some established exceptions You should be aware that many cases regarding lifting the corporate veil should be put in the special context of relevant statues (e.g. Re FG (Films) Ltd [1953] 1 WLR 483). Thus, it is too far to derive a general doctrine from a given judgment and apply to all future cases. Consider what the parties did in the following cases:

i. Fraud

Re Darby [1911] 1 KB 95

ii. Evasion of Legal Obligation

Jones v Lipman [1962] 1 WLR 832

Hoffmann‐La Roche & Co AG v Sieczko [1968] RPC 460 ii. Sham or Façade

The Saudi A1 Jubail Admiralty in Rem No. 399 of 1984 (High Court, Singapore) unreported.

iii. Agency

Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116


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o What is the most important consideration in deciding whether there is an agency relationship between the company and its controllers?

Is the agency argument a true case of lifting the veil?

iv. Groups

DHN Food Distributors Ltd v Tower Hamlets Borough Council [1976] 3 All ER 462 (Sealy & Worthington, pp 64 – 65) − The DHN case, in short, was about whether a company can claim

compensation from the council for acquisition of the land where DHN run its business with two other subsidiaries. The council refused to compensate because DHN was not the owner of the land (but owned by DHN’s subsidiary). The Court of Appeal held for DHN.

− What is the ‘single economic entity’ argument? − Do you think the corporate veil should be pierced on such ground?

Adams v Cape Industries plc [1990] Ch 433 (Sealy & Worthington, pp 66 – 69) o The case was about whether a claimant could enforce a US

judgment (against a US subsidiary) against the parent company in the UK (Cape). The underlying dispute was about asbestos compensation. The case turns on the issue of lifting the corporate veil.

o In this case, the Court of Appeal was more reluctant to grant the lifting of corporate veil because the DHN case was a case concerning statutory interpretation and that Cape did not have enough control over its US subsidiary.

o Per Slade LJ: ‘Our law, for better or worse, recognizes the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate entities with all the rights and liabilities which would normally attach to separate legal entities.’

o Another interesting bit of this case was that the court recognized the use of corporate form to control future liability. − How can you distinguish controlling future liability from

evading an existing legal obligation?

Singapore position: see Win Line (UK) Ltd v Masterpart [1999] 2 SLR(R) 24; [1999] SGHC 94.


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o You are encouraged to read this case in full. It is a very useful illustration of how the different arguments for lifting the corporate veil may apply. See Appendix below.

In a recent case of Alwie Handoyo v Tjong Very Sumito [2013] 4 SLR 308, [2013] SGCA 44, the Court of Appeal had to deal with a specific issue of whether the doctrine of alter ego is different from a sham or façade. In this case, VK Rajah JA opined that ‘the ground of alter ego is distinct from that based on façade or sham, and the key question that must be asked whenever an argument of alter ego is raised is whether the company is carrying on the business of its controller.’ (At para [96]) o In this case, Alwie actively procured payment for a company

called OAFL, and Alwie controlled the bank account of OAFL. The court had no difficulty finding that OAFL was actually an alter ego of Alwie. Thus, lifting corporate veil was allowed.

o Does the case make the doctrine of lifting corporate veil even more confusing? What is the key difference between alter ego and sham or façade?

Policy concerns behind the lifting of corporate veil in the group context:

o Arguments for lifting: Commercial reality Protection of creditors

o Arguments against: Difficulty in defining ‘group’ Creditors have assumed risk of subsidiary’s insolvency Dampening effect on entrepreuniaral activities

v. Where the justice of the case requires or where the court exercises equitable or analogous discretion. – This view seemed to be rejected by the Court of Appeal in Adams v

Cape Industries. – Doubtful if such discretion should exist as it would lead to substantial

uncertainty. – Note the following opinion from Quentin Loh JC in Lim Chee Twang v

Chan Shuk Kuen Helina [2010] 2 SLR(R) 209, [2009] SGHC 382 at [96]: The categories of cases where the corporate veil would be pierced were not closed but the courts should be slow to create new ones. Furthermore, the line of thinking that a court should be able to pierce the corporate veil where the “justice of the case” demanded it should


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not be followed. It was inherently vague to be a concept of much guidance and would be akin to equity being measured by the length of the Lord Chancellor’s foot.”

Q (1): Generally, do you get the impression that the courts are (a) eager or (b) reluctant to lift the corporate veil? Why? Q (2): Do you think limited liability is a good thing? Or do you think the corporate veil should be lifted more often? In what circumstances should they be lifted?

e. Statutory exceptions

i. Where company trades for more than 6 months without a director resident in Singapore – s 145(10) CA;

ii. Wrongful trading – s 339(3) CA

iii. Fraudulent trading – s 340 CA

iv. Failure to indicate company’s name on certain instruments – s 144(2) CA

v. Wrongful dividends – s 403(2)(b)

9. Corporate Liability for Crimes and Torts

Woon, pp 118 – 124

− For example, can a company commit ‘theft’ or ‘murder’? Can a company

commit an offence which requires the proof of fraud or dishonesty?

How can a company be “dishonest”?

The main difficult is to determine a company’s ‘intention’ to commit a crime.

Indeed, as a company is a legal person, it is difficult to argue what a company contemplates in the company’s ‘brain’. Thus, the second best argument is to deem a guilty person’s intention as the company’s intention.

− What is the “alter ego” doctrine?


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This theory runs on the basis that the intention of the company’s alter ego or directing mind and will is attributed to the company. Thus, the intention of the company’s alter ego will be deemed as the company’s own intention.

BUT the alter ego doctrine does not prevent a company from suing its officer for breach or fraud.

− In the case of civil liability for torts:

A company is ‘vicariously liable’ for its employee’s tortious conduct as long as the conduct performed is within the scope of his employment. This has long been established in the law of torts.

− In the converse situation, if it is clear that the company has committed a tort

or a crime, does it mean that the member or director of the company would also be liable for the crime or tort? (If so, this is an instance of “lifting the corporate veil”.)

This issue arose in the “Slim 10” case. In TV Media Pte Ltd v De Cruz Andrea Heidi [2004] 3 SLR(R) 543, the Singapore Court of Appeal held that a director could be personally liable in tort if the director has ‘directed, procured or authorised’ the commission of the tort.


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Appendix Win Line (UK) Ltd v Masterpart (Singapore) Pte Ltd [1999] 2 SLR(R) 24, [2000] 2 SLR 98

Facts

A “charterparty” is essentially a contract for the lease (or charter) of a ship, it is therefore a particular type of contract. Consider the following as you read the facts:‐ ● Identify the parties to the action: (see Headnote)

~ Plaintiffs ~ 1st defendants ~ 2nd defendants

● How are Masterpart and D&M related? (see paras [6] – [8]) (Note: You may find it

helpful to draw a diagram to show how the companies, their directors, and shareholders, if applicable, relate to each other)

● Win Line and Masterpart are the parties to the charterparty (contract). Masterpart

admits that it has breached the charterparty (see Headnote). Why is Win Line also suing D&M? (see Headnote)

● Why did Masterpart need to hire a ship? (see paras 12 – 15) ● One very significant piece of evidence is the profit sharing arrangement between

Masterpart and D&M. What are the terms of this arrangement? (see para 11) ● Eventually, Masterpart’s supply contract fell through because CWE (the buyer)

disputed the quality of the cargo. Hence Masterpart defaulted on the charterparty. Masterpart eventually settled with CWE at US$50,000, which was paid by D&M on Masterpart’s behalf. VK, ultimate owner of D&M, bore ultimate responsibility for the related banking facilities (performance bond).

Arguments & Decisions on Lifting the Corporate Veil

1. Agency


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(a) What were Win Line’s arguments? (see paras [20] – [21])

(b) In paragraph 22, how did the judge distinguish between a true agency and a

sham/façade?

(c) In paragraph 23, what did the judge identify as the true test for determining whether an agency relationship exists?

(d) In paragraphs 24 – 29, the judge explained why the agency argument failed.

i. What were the true reasons for setting up Masterpart? (see para 25)

ii. Does that mean that Masterpart was an agent of D&M? (see paras 26 & 27)

Please identify some reasons.

2. Alter Ego / Sham / Façade

(a) If this argument is distinguished from the agency argument, then it could only be understood in the sense that Masterpart and D&M are actually “one and the same”, and so D&M should be responsible for Masterpart’s liabilities. (see para 34)

(b) In paragraph 36, the judge found that the true beneficial owners of Masterpart

are Syed Aljunied and Mr Lim, not VK. How does this fact impact the argument to lift the corporate veil?

(c) The effect of arguing that a company is a “sham”, or a “façade” is to say that the

company is intended as a mere appearance that hides the actual legal rights and obligations (see pg 117 paras B – C).

(d) In paragraph 40, the judge rejected the sham / façade arguments. What were

her reasons? 3. Single Economic Unit

(a) Based on paragraphs 43 – 44, what is your impression of the judge’s attitude towards this argument? Do you think she preferred the position in the DHN case, or that in Adam v Cape Industries? (see also pg 113, para I)

(b) The judge then said that even if we accept the single economic unit argument, it will not succeed on the facts of this case. Why? (para 45)

Documents

Handout 01 (2014)