Company Law

Citation(2012) 13 SAL Ann Rev 143
Published date01 December 2012
Date01 December 2012
Lifting the corporate veil

9.1 The objective of incorporation is well known. Allowing companies to be incorporated through the mechanism of registration has 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 allows individuals to invest their spare capital in companies without any assumption of responsibility for the investee company's obligations. Accordingly, the investing shareholder is able to segregate his or her risk. Without this ability to partition risk, even a small investment in a company will mean that the shareholder potentially risks his entire fortune as all the shareholder's assets can be claimed by the company's creditors should the company's assets be insufficient to repay its debts. This in turn will limit the ability of companies to raise capital by the issue of shares and also have the consequence of retarding the development and growth of stock exchanges. For such reasons, courts tend to uphold the separate personality of companies.

9.2 There are occasions, though, where the courts 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. This is commonly referred to as lifting or piercing the corporate veil and the courts often justify this by saying that the company was a sham or façade. 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 is also 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.

9.3 From this perspective, the decision of Stephen Chong J in Tjong Very Sumito v Chan Sing En[2012] 3 SLR 953 is to be welcomed as stating clearly the grounds on which the company's personality will be pierced. His Honour said that there are, in general, two justifications for the corporate veil to be pierced under common law: 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. An example of the former would arise where the controller of a company used the company as an extension of himself and made no distinction between the company's business and his own. In such circumstances, the controller could be regarded as the alter ego of the company. Being the controller per se is not sufficient, however, as persons are entitled to create companies even where the companies are effectively one man companies.

Breach of fiduciary duty

9.4 A company's directors and other senior management owe fiduciary duties to the company because a company, not being a true person, is in a vulnerable position vis-à-vis its directors and senior management. Should there be any wrongdoing against the company by its directors and senior management, the company itself is not in any position to protest. Wrongdoing against the company also ultimately affects its shareholders. As a result of the vulnerability of companies, and by extension shareholders, the law places a potentially onerous positive obligation on directors and senior management to act in the best interests of the company. By extension, this positive obligation also imposes obligations not to do certain things, eg, not to enter into a transaction where there may be a conflict of interest between duty to the company and the self-interest of the director or senior manager. Such obligations, known as fiduciary obligations, are imposed to discourage the fiduciary from taking undue advantage of another person who is in a vulnerable position vis-à-vis the fiduciary. The fiduciary must prefer the other person's interests over his or her own which is a departure from the general rule that in commercial matters a person is entitled to be self-interested as long as there is no fraud or illegality involved.

9.5 In Panweld Trading Pte Ltd v Yong Kheng Leong[2012] 2 SLR 672, Stephen Chong J held that a director, who was also a 20% shareholder of the company, was in breach of his fiduciary duty to the company when he procured the company to pay a salary to his wife when she was not an employee of the company. His Honour did not accept that the only other shareholder knew and approved of this arrangement. As such, the principle in Re Duomatic Ltd[1969] 2 Ch 365 did not apply. On appeal, the Court of Appeal upheld Chong J's finding of fact and dismissed the appeal: see Yong Kheng Leong v Panweld Trading Pte Ltd[2013] 1 SLR 173.

9.6 By virtue of the fiduciary obligations imposed on a director or senior manager, they may not obtain a profit in connection with their position without the...

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