Company Law

Date01 December 2008
AuthorTAN Cheng Han SC LLB (National University of Singapore), LLM (Cambridge); Advocate and Solicitor (Singapore); Professor and Dean, Faculty of Law, National University of Singapore.
Published date01 December 2008
Citation(2008) 9 SAL Ann Rev 175
Lifting the corporate veil

8.1 In Singapore Tourism Board v Children”s Media Ltd[2008] 3 SLR 981, the plaintiff entered into a series of agreements with the first defendant that related to a musical event known as ‘Listen Live’ which was to be staged in Singapore. The purpose of the event was to raise funds for disadvantaged children. In reality, the first defendant was merely the conduit to receive the sponsorship sums. It was made to bear all the expenses and liabilities of the second defendant, which was a shareholder of the first defendant, as well as those of third parties, but it obtained none of the benefits for being the organiser of ‘Listen Live’. Instead, where liabilities were to be incurred, the contract was entered into by the first defendant. In relation to income, such contracts were entered into by the second defendant. As between the first and second defendants, there were no internal procedures for the control of movement of funds, their bank accounts were effectively commingled, and there was a dearth of documents in relation to bank accounts, liabilities and obligations between them. Although it was said that there was a defined contractual relationship between the first and second defendants in relation to the staging of ‘Listen Live’, there were no written documents to support this claim.

8.2 Control of the first defendant”s bank account rested in the hands of the third defendant who was a director and the chief executive officer of the first and second defendants as well as the sole shareholder of the second defendant. The third defendant used the first defendant”s bank account to make payments to himself, the second defendant, his friends and third parties. It could be said that the third defendant was essentially the controlling mind and the sole beneficiary of the profits of the second defendant, being the only person within the second defendant who decided to whom payments were to be made.

8.3 Although the plaintiff provided the first defendant with a sum of money as agreed under the first agreement with the first defendant, and several extensions of time to stage ‘Listen Live’ were granted, the event was not eventually held as the third defendant claimed that the first defendant had not been able to fulfil its obligations under the first agreement. By this time, the first agreement had been superseded by a

third agreement and a side letter. The latter provided that all prior agreements between the parties were deemed terminated; neither party had any further obligations arising from the prior agreements; and both parties waived their right to claims arising from the prior agreements.

8.4 The plaintiff claimed against the defendants for return of moneys paid to the first defendant and damages for breach of contract. Justice Lai Siu Chiu held that the third agreement and side letter should be rescinded because of fraudulent misrepresentations made to the plaintiff. That being the case, any claim against the first defendant for return of moneys and damages for contract would be straightforward as the first defendant had not fulfilled its contractual obligations. However, the facts rendered it likely that the first defendant would not be able to satisfy any judgment against it and thus the plaintiff sought to include the second and third defendants on the basis that the corporate veil should be lifted. This should only be done in exceptional circumstances, where there has been abuse of the corporate vehicle and the company has been used for an illegitimate purpose. (Generally, see Tan Cheng Han, ‘Piercing the Separate Personality of the Company: A Matter of Policy’(1999) Sing JLS 531.)

8.5 Lai Siu Chiu J listed some of the facts that the court would take into consideration in determining whether a company has been used for an illegitimate purpose: Singapore Tourism Board v Children”s Media Ltd[2008] 3 SLR 981 at [98]. On the facts, the learned judge had no hesitation in lifting the corporate veil and equating the second and third defendants with the first defendant for the purposes of the claim against them: the separate existence that was claimed between the first and second defendants was compromised by the fact that their accounts were commingled and there did not appear to be a proper separation of affairs. It goes without saying that where a party seeks to rely on the separate personality of a company, this will be weakened where the facts show that the affairs of the said company have not been managed as if it was an entity in its own right. On this basis, the learned judge”s decision cannot be impeached. However, in so far as she also felt that the veil could be lifted because the first defendant had been used by the third defendant as a means to evade his legal obligations (Singapore Tourism Board v Children”s Media Ltd[2008] 3 SLR 981 at [154]—[155]), this may be debatable. It is not wrong for a company to be incorporated because the incorporators do not wish to assume personal liability; the right to distance oneself from a corporate vehicle”s liability is the rationale for making incorporation widely available. What is impermissible is how the corporate vehicle is used in the pursuit of the business or other endeavour. Typically, where the veil is lifted because it has been used to evade a legal obligation, this obligation pre-dates the use of the corporate vehicle. A typical example arises where an owner of property enters into a binding contract to sell the said property but subsequently

transfers it to a company to avoid having to specifically perform the contract of sale. The law will not allow such an existing obligation to be evaded simply through the use of a corporate vehicle (see, eg, Jones v Lipman[1962] 1 WLR 832).

8.6 Similarly, if the corporate vehicle has been incorporated because the shareholders intend for it to be used to perpetrate a fraud on third parties and wish to insulate themselves from such fraudulent activity, this provides the classic example of where the veil will be lifted as this is clearly an instance of a company being used for an illegitimate purpose. The ‘fraud exception’ to the recognition of the company”s separate personality is a well-known one. On the facts, it could be said that at some point (if not right from the outset) the first defendant became an instrument to perpetrate a fraud on the...

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