Company Law

• Author: TAN CHENG HAN LLB (NUS), LLM (Cantab), Advocate & Solicitor (Singapore), Associate Professor, Faculty of Law, National University of Singapore
• Date: 01 December 2001
• Citation: (2001) 2 SAL Ann Rev 88
• Published date: 01 December 2001

Lifting the veil

7.1 In Sri Jaya (Sendirian) Berhad v RHB Bank Berhad[2001] 1 SLR 486, a rather unusual submission to lift the corporate veil was made in the High Court before S Rajendran J. In Sri Jaya, the plaintiffs were the owners of a piece of property which they had mortgaged to the defendants, RHB Bank Berhad, in return for a loan to finance the construction of two blocks of flats on the property. When the plaintiffs breached the terms of the mortgage, RHB Bank sued the plaintiffs and obtained judgment for the sum of $2.8 million and an order for the mortgaged property to be sold.

7.2 The officer of RHB Bank who oversaw the sale, one Mr Ong, did not advertise the sale of the property. The only step he took to publicise the sale was to inform RHB Bank”s local branches about it. Nonetheless, RHB Bank began receiving offers to purchase the property from around the end of 1993. In December 1993, one Mr KC Ng, a shareholder of Chip Hua Contractors Pte Ltd (“Chip Hua”), the plaintiffs” sub-contractor for the construction of the blocks of flats on the subject property, made an offer of $6.3 million through one of Mr Ng”s family companies to purchase the property. This offer was made to the plaintiffs. Later in early 1994, Mr Ng instructed his solicitors to make an offer of $6.3 million to RHB Bank”s solicitor. On 24 May 1994, Mr Ng got his nominee, one Mr Chua, to make another offer of $6.5 million. This was the highest bid received by RHB Bank at that time. RHB Bank then informed its next highest bidder, Housing Development Pte Ltd (“HDPL”), that it had received a higher bid and consequently, HDPL increased its bid to $6.5 million. On 31 May 1994, without responding to Mr Chua”s offer, RHB Bank sold the flats on an “as-is, en bloc” basis to the nominee of HDPL. Mr Ong had recommended HDPL as they were financially sound and had shown themselves to be serious bidders. Mr Ong had also been eager to close the deal quickly as he was afraid that the property was in some danger of repossession and that it was time to close the bidding process since the bidding had been going on for some months. Within three months of the sale, the property was re-sold to a Mr Lim for $14 million. On the same day, Mr Lim re-sold the property to a company owned by Mr Ng”s family, Hillwood Development Pte Ltd, for $27 million.

7.3 It should be noted that the plaintiffs were also indebted to Chip Hua for the costs of constructing the blocks of flats on the subject property.

Chip Hua had obtained judgment against the plaintiffs and such judgment remained unsatisfied. Eventually, in April 1998, the shares in the plaintiffs were transferred to the Ng family without further consideration.

7.4 Mr Ng felt that the property had been sold to HDPL”s nominee below its true value and was aggrieved that he had not been given the opportunity to better his bid. He instructed valuers to do a retrospective valuation of the property. The evidence from Knight Frank, a firm of valuers and estate agents, was that the open market value of the property as at 31 May 1994 on an “encumbered” basis was $25.5 million, based on its “highest and best use” as a residential redevelopment site. Another valuation report from Jones Lang Wootton showed that the property as a redevelopment site on an “encumbered” basis as at 31 May 1994 had a value ranging from $19.475 million to $24.75 million, depending on the plot density ratio used. In 1993, RHB Bank had asked Richard Ellis to value the property and it was valued on an “en bloc vacant possession” basis at $5.85 million.

7.5 The plaintiffs (now under the control of the Ng family) sued RHB Bank, claiming that the bank had been negligent in failing to obtain a proper valuation of the property based on its true market value on a “redevelopment basis” and that the bank should not have relied only on a valuation based on an “en bloc existing use” basis. It was further alleged that RHB Bank failed to reasonably publicise the sale of the property to reach a wider market, and that they failed to take reasonable precautions to obtain the best price possible in rushing to conclude the sale at $6.5 million. RHB Bank pleaded that they had taken all reasonable steps to obtain the true market value of the property and that they had conducted themselves properly in the sale. They also argued that the plaintiffs should be estopped from alleging negligence as they had previously consented to a sale at $6.3 million to their nominated purchasers. Finally, it was contended that it was in fact Chip Hua that was making use of the plaintiffs” name to conduct a mala fide claim against RHB Bank and that the court should lift the corporate veil and find that the actual party to the action was Chip Hua instead.

7.6 Rajendran J allowed the claim. As regards the argument relating to the lifting of the veil, his Honour said that the power of the courts to lift the corporate veil was exercised sparingly and in limited circumstances. Although the ambit of exceptions to the separate personality of the company was not closed, the case law authorities as to when the courts have in fact lifted the corporate veil could be broadly classified into two groups — firstly, cases where the corporate entity was being used to evade legal obligations (see Gilford Motor Co Ltd v Horne[1933] Ch 935) and secondly, cases where the corporate entity was used to perpetrate a fraud (Re Darby[1911] 1 KB 95). Mr Ng”s actions and motives in assuming control of the plaintiffs, even if it was with the view to commencing proceedings against

RHB Bank, could not be characterised as fraudulent, nor were the plaintiffs being used to evade any legal obligations or to perpetrate a fraud. There were thus no compelling reasons to lift the corporate veil.

7.7 It is submitted respectfully that his Honour was correct in coming to this conclusion. RHB Bank”s submission on the corporate veil issue was an unusual one as it was premised on the notion that a claim by a company can be dismissed where there was mala fides on the part of a shareholder of the said company. Such an argument is untenable. Either the company has a good claim or it does not. If it does not have a good claim, the claim will be dismissed. Where there exists a good claim, it is hard to envisage how the motives or intentions of any shareholder of the company can be a relevant consideration. The existence of fraud in such a context is likely to give rise to a substantive defence to the claim rather than be a basis for the veil to be lifted. If the argument put forward by RHB Bank had succeeded, it would radically transform the nature of corporate personality as it is understood today. Where the corporate veil is lifted, whether it is because the corporate entity has been used to evade existing legal obligations, or to perpetrate a fraud, or for some other good reason, the underlying basis is probably the court”s view that the company has been used for an illegitimate purpose, a purpose that is contrary to public policy (see Tan, “Piercing the Separate Personality of the Company: A Matter of Policy?”[1999] SJLS 531). Clearly there was no basis in Sri Jaya to say that the plaintiffs were being used in a manner contrary to public policy if the plaintiffs were simply bringing a valid claim.

Directors

7.8 In Polybuilding (S) Pte Ltd v Lim Heng Lee[2001] 3 SLR 184, G P Selvam J held that a directors” circular resolution that was signed by a majority of directors was invalid if notice of the said resolution had not been given to all the directors. Although the relevant article of association of the company stipulated that a resolution in writing signed by a majority of directors shall be as valid and effectual as if it had been passed at a meeting of the directors duly called and constituted, his Honour was of the view that the validity of such resolutions was premised on every board member being entitled to have the resolution in question circulated to him or her. Accordingly, as the circular resolution was passed without giving notice to one of the directors, the resolution was ineffective.

7.9 In Lee Huay Kok v Attorney-General[2001] 4 SLR 248, the issue before the court was whether it had any jurisdiction, where a person had been disqualified from acting as a director under s 154(3) of the Companies Act (Cap 50, 1994 Ed) (“the Act”), to grant leave pursuant to s 154(6) of the Act for such person to act as a director, or to take part in the management of the company, where the basis for the disqualification arose under

s 154(1) and not s 154(2) of the Act. Section 154(1) applies to cases where a person is convicted of an offence involving fraud or dishonesty punishable with imprisonment for 3 months or more. Section 154(2) applies to cases where a person is convicted of an offence in connection with the formation or the management of a company, or any offence under s 157 or s 339 of the Act. Unlike s 154(1) where disqualification applies automatically upon conviction, disqualification arises under s 154(2) only where the court makes a disqualification order.

7.10 In the present case, the applicant was convicted in December 1998 after pleading guilty to two charges of corruption under the Prevention of Corruption Act (Cap 241, 1993 Ed). Six other charges were taken into account. The offences were each punishable with a fine of up to $100,000 and imprisonment for a term of up to five years. However, the appellant was only fined a total of $13,000. Consequently, he was disqualified under s 154(3) of the Act from acting as a director of a company and from taking part in the management of a company for a period of five years. About two years and nine months after his conviction and disqualification he applied to the High Court for leave to act as a director, or alternatively, to take part in the management of his personal company, HK Hardware And Engineering Pte Ltd. His application was made under s 154(6)...