Company Law

Date01 December 2013
Published date01 December 2013
AuthorDan W PUCHNIAK BA (Manitoba), LLB (Victoria), LLM and LLD (Kyushu); Barrister and Solicitor (Ontario); Associate 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(2013) 14 SAL Ann Rev 179
Lifting the corporate veil

9.1 It is trite law that a company is an entity separate from its shareholders and management. This is to facilitate entrepreneurial activities that underpin market economies. Shareholders can invest in companies, and directors and senior managers can manage companies, without fear that they will by virtue of this alone be held liable for the debts and other obligations of such companies. Not allowing such segregation of risk would dampen the ability of companies to raise capital and cause managers of companies to be overly conservative in business decisions. Accordingly, a company's separate personality is one of the fundamental aspects of the Companies Act (Cap 50, 2006 Rev Ed) (‘the Act’). This being the case, the courts are naturally reluctant to depart from this principle.

9.2 There are exceptional occasions though where the courts at common law have equated the shareholders or directors of a company with the company for limited purposes. This does not mean that the company is not a separate person. It means that because of extraordinary circumstances, certain acts, debts or obligations of the company are also treated as those of some or all of the shareholders or directors of such a company. When this is done, it is usual to say that the corporate veil has been pierced or lifted. A common justification is that the company was a mere sham or façade. Such metaphors unfortunately do not tell us much about the principle underlying such veil piercing or lifting. Accordingly, it has been suggested by the authors in previous editions that the use of such metaphors is unhelpful in explaining why the separate personality of a company is not given effect to. The authors have suggested that when the corporate veil is lifted, the courts do so either because the company has been used for an illegitimate purpose thereby abusing the privilege of incorporation, or the company was never intended to be the real party to the act or transaction in question (eg, where the company was interposed merely as a matter of convenience and was never intended to play a real or substantive role). In the latter situation, the company is sometimes referred to as a mere corporate name, see Asteroid Maritime Co Ltd v The Owners of the Ship or Vessel ‘Saudi Al Jubail[1987] SGHC 71. It has also been suggested that the courts are expressing this idea when they say that the corporate veil should be lifted because the company is the alter ego of a shareholder or director. Such an approach would require courts to explain more clearly why corporate personality was being disregarded without resort to the use of vague terms such as ‘sham’ or ‘façade’.

9.3 In the UK, there has been a recent Supreme Court decision that has steered the law somewhat in this direction. In Prest v Petrodel Resources Ltd[2013] 3 WLR 1, Lord Sumption, delivering the leading judgment, eschewed the use of metaphors such as ‘sham’ or ‘façade’. His Lordship said instead that the corporate veil may be pierced if a company's separate legal personality is being abused for the purpose of some relevant wrongdoing. Two justifications for such veil piercing were identified as the ‘concealment principle’ and the ‘evasion principle’. The former was not considered as a real case of veil lifting because the mere concealment of the real parties to a transaction would not prevent the court from identifying them and this did not involve disregarding the corporate entity. As for the latter, it arose if there was a legal right against the person in control of the company which existed independently of the company's involvement, and a company was interposed so that the separate legal personality of the company would defeat the right or frustrate its enforcement. In such circumstances, the corporate veil could be pierced to prevent the abuse of the separate legal personality of a company and that it may be an abuse to use it to evade the law or to frustrate its enforcement. This was a limited principle of English law which applied when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evaded or enforcement of which he deliberately frustrated by interposing a company under his control.

9.4 This important Supreme Court decision that places abuse of the corporate form as the basis for veil lifting was somewhat foreshadowed by Stephen Chong J (as he then was) in Tjong Very Sumito v Chan Sing En[2012] 3 SLR 953 (‘Tjong Very Sumito’) where his Honour (citing Walter Woon on Company Law (Sweet & Maxwell, 3rd Ed, 2009) at paras 2.51–2.52 and 2.57) said that there are, in general, two justifications for the corporate veil to be pierced at common law. These are that the evidence showed that the company was not in fact a separate entity, and where the corporate form has been abused to further an improper purpose.

9.5 This more principled approach to veil piercing has been applied further in two High Court decisions. The first is Cavenagh Investment Pte Ltd v Kaushik Rajiv[2013] 2 SLR 543. One of the defences in the case was that the plaintiff should be vicariously liable for the deceit perpetrated by the fraudster. As the fraudster was not an employee of the plaintiff but an employee of another company in the group, it was submitted that the corporate veil between the plaintiff and such other company should be lifted such that the fraudster could also be considered an employee of the plaintiff. This argument was rejected as Chan Seng Onn J did not feel that the facts warranted veil piercing. As a starting point, businesspeople are entitled to structure their businesses under distinct corporate entities. Just as ‘one-ship’ companies were well known, there was nothing wrong in the present case of different companies within the group holding different properties. There was nothing prima facie illegal about such arrangements. His Honour said that in the absence of compelling reasons such as the existence of fraud or serious abuse of the corporate form, the courts would be slow to treat companies in the same group as one legal entity merely because it would be convenient for a claimant's claim to do so.

9.6 In the second case, Dynasty Line Ltd v Sia Sukamto[2013] 4 SLR 253, Lai Siu Chiu J also accepted the two justifications for veil piercing that Tjong Very Sumito referred to. Her Honour then declined to lift the corporate veil as she was of the view that there had been no attempt to use the plaintiff company to evade any obligations undertaken by a third party to the defendant. The third party was not using the plaintiff company to evade any existing contractual duty that the third party may owe to the defendant. There was, in other words, no abuse of the corporate form.

Loans to directors, ratification of otherwise wrongful acts and shareholders' entitlement to use their voting rights for their own interests

9.7 Section 162 of the Act sets out a general prohibition against companies (other than an exempt private company) extending loans to directors of such companies or to companies which by virtue of s 6 of the Act are deemed to be related to the lending companies. One of the issues that arose in Raffles Town Club Pte Ltd v Lim Eng Hock Peter[2013] 1 SLR 374 concerned whether, assuming that there was a breach of s 162(1) of the Act, the plaintiff company could recover the profits which its former directors had received from the proceeds of the loan. In principle, the answer should be yes except that in the present case the former directors had in their capacity as members of the company assented to themselves retaining the benefits of the loan. The question was, therefore, whether shareholders of a company could lawfully waive a company's right to recover such profits.

9.8 The basis of the plaintiff's claim was founded on the former directors being constructive trustees of the profits, such profits being the plaintiff's property or derived from the use of the plaintiff's property. In such circumstances, the Court of Appeal saw no reason why the shareholders of the plaintiff at the material time could not waive the recovery of the profits from the former directors. It could not be said that by not causing the plaintiff to commence proceedings against themselves, the shareholders had been negligent in waiving the plaintiff's claim, nor could the shareholders be said to have acted fraudulently vis-à-vis the plaintiff or any creditor given that the plaintiff was solvent at the material time. In deciding as shareholders to waive the plaintiff's rights to recover the profits, the former directors were not trustees for the plaintiff or for one another. They were entitled to make decisions in their own selfish interests, satisfying their own particular wishes and prejudices, and without any personal obligation to consider or act in the best interests of the plaintiff or other shareholders. The court concluded that in the absence of any factor that would disqualify shareholders from ratifying unauthorised or unlawful acts of directors, it saw no reason why a company may not waive any claims it may have against its directors for any kind of liability where the company was solvent. With respect, this approach is clearly correct as shareholders who act as such do not owe fiduciary duties to their companies regardless of whether they are concurrently directors.

9.9 The Court of...

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