Company Law
| Author | Dan W PUCHNIAK BA (Manitoba), LLB (Victoria), LLM and LLD (Kyushu); Barrister and Solicitor (Ontario); Assistant Professor, Faculty of Law, National University of Singapore. TAN Cheng Han SC LLB (National University of Singapore), LLM (Cambridge); Advocate and Solicitor (Singapore); Professor, Faculty of Law, National University of Singapore. |
| Citation | (2011) 12 SAL Ann Rev 143 |
| Published date | 01 December 2011 |
| Date | 01 December 2011 |
9.1 The objective of incorporation is well known and broadly accepted. By allowing companies to be incorporated through the mechanism of registration, the law arguably helped to facilitate the entrepreneurial spirit that has underpinned market economies. Through incorporation, companies are regarded as legal entities in their own right, and therefore distinct from their incorporators and shareholders (or members). They can enter into contracts and incur rights and liabilities. These rights and liabilities are not shared with their shareholders, unless the latter choose to assume them personally. This can take place in a number of ways including by the shareholders being a co-contracting party to an agreement into which the company has entered. Shareholders can also enter into separate collateral contracts that mirror the company's obligations, such as where shareholders provide a guarantee to creditors for the company's debts. The advantage of recognising the company as a separate legal entity is that it has allowed individuals to invest in companies without any assumption of responsibility for such company's obligations. Accordingly, a shareholder is able to segregate his or her risk. This would not be possible in a world where shareholders and their companies were regarded as one and the same legal entity. In such a world often regarded as a world without limited liability even a small investment in a company would mean that the shareholder potentially risks his entire fortune should this company become insolvent, as all the shareholders will then be answerable to the company's creditors. This would limit the ability of companies to raise capital by the issue of shares and in turn limit the development and growth of stock exchanges. It may also dampen the entrepreneurial spirit. For such reasons, courts uphold the separate personality of companies unless there is a compelling reason not to do so, such as an abuse of the corporate form to commit fraud or engage in other wrongdoing.
9.2 A case that is illustrative of the courts' approach to the separate personality of companies is NEC Asia Pte Ltd (now known as NEC Asia Pacific Pte Ltd) v Picket & Rail Asia Pacific Pte Ltd[2011] 2 SLR 565. In this case, the plaintiff commenced an action against the first defendant for non-payment of a sum in relation to a contract to supply projectors. An alternative claim was made against the second defendant for payment on a dishonoured cheque. For the purposes of company law, it was the claim against the third defendant that is relevant as the claim against him was that he, being the sole shareholder of the first defendant, should be liable personally as the first defendant was only the alter ego for him in the transaction with the plaintiff. Accordingly, the plaintiff submitted that the third defendant was the true contracting party with the plaintiff.
9.3 Belinda Ang Saw Ean J did not accept this argument. She said that evidence of sole control and ownership of a company without more will not move the court to intervene. With respect, this must be correct. Whether there is one or many shareholders, it cannot be that if one or all the shareholders cause the company to act in a certain way, and this causes the company to incur liabilities, the sole shareholder or all the shareholders will bear personal liability. It is the very purpose of company law as it stands today that the corporation is seen as a conduit for shareholders to pursue an enterprise through a separate entity. Therefore, the mere pursuit of such enterprise should not lead a court to equate the company with the shareholders for purposes of rights or liabilities.
9.4 In any event, her Honour pointed out that, factually, the plaintiff's contention ran counter to its conduct throughout the entire course of events. The plaintiff had always regarded the first defendant, and not the third defendant, as its counterparty in the transaction. For example, the plaintiff had earlier rejected the third defendant's offer of interposing the second defendant in the commercial scheme as it was an inactive company. The plaintiff had also asked the third defendant to provide evidence of the first defendant's financial standing before agreeing to accept the latter as a suitable counterparty in the deal. There were also other occasions where the plaintiff pointed to the first defendant as its counterparty.
9.5 The only contention that the authors may have with her Honour is in her characterisation of the circumstances in which the court will ignore the separate personality of the company by lifting the corporate veil. However, this critique can be made of the approach of courts in other common law jurisdictions as well, as it has, at its root, the tendency of courts in this area to use metaphors such as the corporate veil being lifted because the corporation is a sham or faade or mask to take some well-known examples. The problem with such metaphors is that they provide catchphrases that sometimes allow judges though not in the present case to arrive at a conclusion without properly articulating in detail the reasons behind such a conclusion. The metaphors are therefore understandably vague.
9.6 In the present case, the learned judge said that the alter ego argument was different from the sham or faade exception to the doctrine of separate personality. Her Honour seemed to regard the latter as a basis for lifting the veil based on fraudulent acts by a company's controller. The alter ego doctrine, on the other hand, arose when the company was used to carry on the business of the controller. Although her Honour did say that this would essentially involve a question of fact, in one sense the issue as framed is correct and vague at the same time because in all cases it can be said that a corporate vehicle is used to carry on the business of its' controller(s). The question is always identifying the tipping point at which it becomes unacceptable as a manner of legal principle.
9.7 The authors suggest that, as fraud will typically be frowned upon, and cases involving fraud have been the classic cases where the corporate veil has been lifted, recourse to fraud as a basis for lifting the corporate veil should be recognised for what it is and reliance on metaphors is neither useful nor desirable. Where persons, whether shareholders or directors, have used a corporate vehicle as a conduit for fraudulent acts, the law should have no hesitation in looking beyond the corporate form as the company would have been used for an illegitimate purpose and this is an abuse of the privilege of incorporation. Public policy therefore leans in favour of an exception to corporate personality.
9.8 The sham or faade ground should be understood in a sense analogous to that of sham contracts. A contract is a sham where the parties entering into it do not intend the contract to embody the true agreement between them. As Diplock LJ put it in Snook v London and West Riding Investments LtdELR[1967] 2 QB 786 at 802, the pejorative word sham means acts done, or documents executed, by the parties to the sham which are intended by them to give to third parties, or to the court, the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intended to create. Similarly, the company is a sham or faade if it was never the intention of the shareholder(s) that the company should be the real contracting party and this may exist independently of whether there is fraud or not. A good example of such a sham company, though one where the court felt that the motive of the controller was dubious, is the case of Asteroid Maritime Co Ltd v The Owners of the Ship or Vessel Saudi al Jubail[1987] SGHC 71 (Saudi al Jubail) where the late Lai Kew Chai J found that the companies in question were being used as mere corporate names as a cover for the controller's own trading and ship owning activities.
9.9 The authors suggest that the alter ego ground is really another means of expressing the idea that the interposition of the corporate vehicle was merely a sham and the company was not intended to be the true contracting party with the counterparty. The ratio for Smith Stone and Knight Ltd v Lord Mayor Alderman and Citizens of the City of BirminghamUNK[1939] 4 All ER 116 cited by Ang J is a good example of this and one which did not involve any fraud or dubious practice. The parent company had purchased a waste business from a partnership. The parent company subsequently incorporated a subsidiary company and purported to use the subsidiary company to carry on the waste business. However, the said business was never transferred to the subsidiary. The subsidiary had no staff, the books and accounts were kept by the parent and the subsidiary had none of its own and the profit made was allocated to the parent and treated by the parent as having been made by it rather than through the subsidiary by the payment of a dividend from the subsidiary to the parent. Therefore, the court decided that the subsidiary was merely an agent and the waste business belonged to the parent. An alternative explanation is that the actions of the parent company demonstrated that it did not recognise its subsidiary company as being engaged in the waste business. As such, there was no proper segregation of the subsidiary's profits and it did not even notionally have its own staff or governance processes. It was therefore, to quote Saudi al Jubail, a mere corporate name or sham.
9.10 It is clear that a company's directors and other senior management owe fiduciary duties to the company. This is because a company, not being a true person, is in a vulnerable position vis--vis its directors and senior management. Should there be any wrongdoing against the company by its directors and senior management...
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