Company Law

Citation(2004) 5 SAL Ann Rev 125
Publication Date01 December 2004
AuthorTAN Cheng Han SC LLB (Hons) (National University of Singapore), LLM (Cambridge); Advocate and Solicitor (Singapore); Professor and Dean, Faculty of Law, National University of Singapore.
Date01 December 2004
Separate personality and limited liability

7.1 In Vita Health Laboratories Pte Ltd v Pang Seng Meng[2004] 4 SLR 162 (also discussed below at paras 7.21—7.32), V K Rajah JC (as he then was) made some useful observations on the separate personality of a company. His Honour said that a company provided a vehicle for limited liability and facilitated the assumption and distribution of commercial risk. Corporate law and economics scholars would certainly agree with this observation. Scholars in this mould would say that one advantage of limited liability is that it facilitates the mobilisation of capital and savings. People with excess money can invest in a company secure in the knowledge that, should the company succeed, the investment will be well rewarded. Should the company fail, the investor is not financially ruined because it is excess capital that was invested and the creditors of the company cannot claim against the other assets of the investor. It allows the investor to segregate the assets he is prepared to invest from the rest of his assets. This in turn allows the investor to spread his investments among many different companies to achieve a ‘balanced’ portfolio of share investments in a spread of companies, some of which may be more risky but offer potentially higher returns, and others which may be more conservative.

7.2 In this sense, limited liability potentially reduces the cost of capital as well as broadens a company”s access to funds. Without limited liability, people will only invest in companies if the return to them is so high that it offsets the risk of the rest of their assets being seized should the company fail to repay its debts. Alternatively, the company will have to rely more on borrowings which could sometimes be less optimal as debt requires regular interest payments and can generally be called back or must be repaid within a period of time or even ‘on demand’. In addition, lenders may price in the likelihood of failure of the business which could lead to high interest costs that will further increase the danger of failure: see Richard A Posner, Economic Analysis of Law (Little, Brown and Company, 4th Ed, 1992) at pp 392—397. At the same time, new and riskier companies can potentially attract equity investors since such investors can spread their investments over a range of companies with different risk profiles.

7.3 Limited liability also reduces the costs of monitoring management and other shareholders. If liability were unlimited, shareholders would have to spend more time and money monitoring those who manage the company since the consequences of the company becoming insolvent could be disastrous on shareholders. Shareholders would also have to monitor other shareholders to ensure that such shareholders do not unfairly dispose of their assets to others thereby placing a greater burden on the other shareholders in the event of the corporation”s insolvency: see F H Easterbrook and D R Fischel, ‘Limited Liability and the Corporation’(1985) 52 U Chicago L Rev 89 at 94—95.

7.4 Rajah JC Vita Health Laboratories Pte Ltd v Pang Seng Meng (supra para 7.1) also said that limited liability immunity could not be divorced from legal responsibility imposed on directors in their dealings with third parties and their conduct while exercising corporate powers. Rights go hand in hand with responsibilities. Ordinary norms of commercial morality must be observed. In appropriate cases, the cloak of corporate immunity would be readily lifted by the court. This expresses very nicely the balance between the need to protect and encourage entrepreneurial activities on the one hand, and the need to restrain improper use of a corporate vehicle. It has been argued elsewhere by this author that at the heart of the cases where the corporate veil has been lifted, the courts have felt that the corporate form has been abused to further an improper purpose and not for a bona fide commercial transaction: see Tan Cheng Han, ‘Piercing the Separate Personality of the Company: A Matter of Policy?’[1999] SJLS 531.

7.5 In TV Media Pte Ltd v De Cruz Andrea Heidi[2004] 3 SLR 543, it was held that a company had acted negligently in distributing slimming pills that were consumed by the plaintiff/respondent. It was further held that a director of the company, who was characterised as the controlling mind and spirit of the company, was liable for the company”s negligent acts. The Court of Appeal expressed the view that a court could only find a director personally liable for authorising, directing or procuring a company”s tort if it had first lifted the company”s corporate veil which otherwise protected a director from being found liable for the said tortious acts. The court then held that, on the facts, the corporate veil should be lifted in view of the extent of the director”s involvement in authorising, directing and/or procuring the company”s negligent acts.

7.6 In arriving at its decision, the Court of Appeal said that it recognised that the issue of a director”s personal liability for his company”s torts involved the consideration of difficult policy questions. On the one hand, there was

the principle that a company was separate and distinct in law from its shareholders and directors, and that there was a commercial interest in allowing companies to enjoy the benefits of limited liability which were offered by incorporation. On the other hand, directors of companies should not be allowed to escape personal liability to third parties for torts that they personally committed merely because they committed the torts in the course of carrying out their duties as directors of the company. Previous courts had weighed these considerations in the balance and arrived at the conclusion that whether or not a director was personally liable for a tort committed by his company depended on the factual situation at hand. The court must look at the level of his involvement in the company in order to determine the extent to which he was the company”s alter ego.

7.7 The Court of Appeal accepted that on the totality of the evidence, it was clear that the director, and he alone, had absolute control of the company. It stood to reason that the director was the person who directed its negligent acts or omissions. The court found no reason to overturn the trial judge”s finding that nothing was done without the director”s knowledge and that his involvement in the negligence of the company was not merely very great, but was total. As such, the corporate veil should be lifted so as to make the director personally liable for the company”s torts.

7.8 On the basis that the director in question had authorised, directed or procured the tortious acts of the company, there is ample authority to support the conclusion that the director should be made personally liable for the company”s acts. It was probably not necessary, though, to lift the corporate veil to reach such a result, although the effect is the same. A director who specifically authorises, directs or procures his company to perform a tortious act is a joint tortfeasor regardless of whether he knew that the acts were of a tortious nature or not. The corporate veil does not need to be lifted to make such a director a joint tortfeasor. One policy reason for holding directors personally liable in such circumstances is because a subordinate officer of a company who performs the tortious act is probably liable for it and the director, who occupies a more senior position and who has authorised, directed or procured the act, should not be in a better position. Another possible reason is that such a position at law will increase the probability that directors will be more conscious of their actions and, in particular, what amounts to civil wrongdoing when exercising their management responsibilities.

Directors

7.9 In the current year under review, there were a number of cases dealing with the duties of directors. Some of these cases are also discussed in an insightful article by Assoc Prof Hans Tjio, ‘The Rationalisation of Directors” Duties in Singapore’(2005) 17 SAcLJ 52.

7.10 In ECRC Land Pte Ltd v Ho Wing On Christopher[2004] 1 SLR 105, the plaintiff was incorporated in 1994 as the vehicle for an intended joint venture to redevelop the East Coast Recreation Centre (‘the centre’) into an amusement theme park. One of the joint venture parties was Grande Leisure Management Pte Ltd, which, together with the fifth to tenth defendants, was part of the Grande group of companies (‘Grande’). The first to fourth defendants were variously directors of the plaintiff and the fifth to tenth defendants at the material times.

7.11 The plaintiff took over management of the centre in 1995. The plaintiff”s day-to-day management was left to Grande. The joint venture encountered various difficulties, and the plaintiff was eventually ordered to be wound up in 1999. The plaintiff”s claims against the defendants were based on fraud, breaches of fiduciary duty, constructive trust and conspiracy. The plaintiff alleged that there had been wrongful draw-downs or use of the plaintiff”s banking facilities for interior renovation and/or fitting out works of others; that wrongful charges had been borne by the plaintiff for miscellaneous expenses including interest expenses, consultancy fees, operating/administrative expenses; and that there had been wrongful transactions relating to the plaintiff”s business operations and/or tenancies. It was also alleged that Grande treated the plaintiff as if it were one of its subsidiaries.

7.12 In view of the difficulties encountered in the development of the centre, Tay Yong Kwang J felt that the defendants had acted reasonably and properly. In his Honour”s view, the court should be slow to interfere with commercial decisions taken by directors. It should not, with the advantage of hindsight, substitute its own decisions in place of those made by directors in the...

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