Company Law
| Citation | (2014) 15 SAL Ann Rev 168 |
| Published date | 01 December 2014 |
| Author | Lawrence 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. |
| Date | 01 December 2014 |
9.1 In Manuchar Steel Hong Kong Ltd v Star Pacific Line Pte Ltd[2014] 4 SLR 832, the issue of corporate veil piercing was raised in the context of a discovery application. The plaintiff had obtained an arbitral award against another company but enforcement proceedings against this company were ineffectual. The plaintiff then wished to commence proceedings against the defendant on the basis that the defendant and the other company were part of a single economic entity. The plaintiff sought pre-action discovery against the defendant to enable the plaintiff to formulate its claim.
9.2 The application was dismissed. Lee Kim Shin JC considered the application to be unviable. On the single economic entity issue, his Honour said that he was not persuaded that a concept of single economic entity existed at common law, or at any rate under Singapore law. With respect, this must be correct. Groups of companies are only too common and in the absence of exceptional circumstances, there is no justification for denying the benefits of incorporation to companies that wish to operate through subsidiaries.
9.3 As to what exceptional circumstances might justify a departure from the general principle that each company is a separate entity, the court followed the approach in Prest v Petrodel Resources Ltd[2013] 2 AC 415 and identified abuse of the corporate personality as the underlying basis for the corporate veil to be lifted. Such an approach is to be welcomed as courts have traditionally invoked metaphors such as sham or faade to justify veil piercing. It has been argued that the use of metaphors is unhelpful as it does not provide sufficient clarity when courts depart from the general principle or a principled basis that can be used as a starting point for analysis; and that the proper basis for disregarding separate personality must lie in the abuse of the corporate form: see Tan Cheng Han, Piercing the Separate Personality of the Company: A Matter of Policy? [1999] Sing JLS 531 and Tan Cheng Han, Veil Piercing: A Fresh Start[2015] JBL 20. In this case, there was no allegation of abuse or impropriety against the defendant or the other company; therefore, the court came to the view that veil lifting would not be appropriate.
9.4 At law a company is an entity separate from its shareholders and management. Nevertheless, while a company is accorded legal status, it is an artificial construct that must depend on human individuals to function. Similarly, where it is necessary to ascribe a state of mind to a company, for example, in the context of criminal law, the question that arises is which individual or group of individuals' knowledge or intent is to be attributed to the company.
9.5 The starting point in any such inquiry is to look at the primary rules of attribution which are generally to be found in the corporate constitution or implied by company law. Thus, s 157A(1) of the Companies Act (Cap 50, 2006 Rev Ed) (the Act) provides that the business of a company shall be managed by or under the direction of the directors. A similar clause is also usually found in constitutions of Singapore incorporated companies. This being the case, if the board of directors of a company is aware of certain acts being performed by employees or agents of such company, knowledge of such acts will almost inevitably be attributed to the company.
9.6 In addition to these primary rules of attribution, there are general rules of attribution that apply not only to companies but to other business organisations and individuals. These are the rules of agency, which include the doctrine of apparent authority that is founded on estoppel, and vicarious liability. Through these general rules of attribution, the acts and knowledge of a distinct person the agent or employee can be attributed to a company (or other principal or employer) with resultant legal consequences.
9.7 The law may also need to fashion special rules of attribution where, although the primary and general rules are inapplicable, the courts are of the view that a substantive rule of law is applicable to companies. In such a case, it is a matter of interpretation or construction of the relevant rule which person's act, knowledge, or state of mind was, for the purpose of the rule, to be attributed to the company. These rules of attribution were set out by Lord Hoffmann in the Privy Council decision of Meridian Global Funds Management Asia Ltd v Securities Commission[1995] 2 AC 500 and adopted by the Court of Appeal in Ho Kang Pang v Scintronix Corp Ltd[2014] 3 SLR 329 (Ho Kang Pang).
9.8 One issue that has troubled the courts is the appropriate application of these rules of attribution when the company has itself been the victim of fraudulent activity by a person whose knowledge would under these rules have been attributed to the company. Where the fraudster is being sued by the company as a result of the fraudster's acts, it would be inequitable to allow the fraudster to rely on the rules of attribution to deny the company's claim on the basis that the company knew all along and consented to the fraudulent acts, or that the ex turpi causa rule applied to disentitle the company to bring a claim as the company's claim was founded on an immoral or illegal act.
9.9 This issue arose in Ho Kang Pang. The appellant, who was a former director and chief executive officer of the company, submitted that the company was precluded from claiming against him for alleged breaches of fiduciary duty, namely the payment of bribes to a third party to secure business for the company, because his acts were authorised by the company or because the principle of ex turpi causa non oritur actio was engaged. This argument was rightly rejected. The court found that the payments were not authorised and, following the approach in England, expressed the view that where the company was itself the victim of an agent's or employee's dishonesty it would not generally be sensible or realistic to attribute knowledge to the company concerned, if attribution would have the effect of defeating the right of the company to recover from a dishonest agent or employee.
9.10 The position might be different if the case involved a claim by a third party against the company. As against such a third party, the company cannot be seen as merely a victim but will be regarded as a perpetrator if the rules of attribution apply. Thus, the rules of attribution would operate differently depending on the factual matrix. A company defendant being sued by the victim of a fraud perpetrated by the board of the defendant company would not be allowed to disclaim the board's acts, but would be able to if the company was the plaintiff in a claim against its former errant directors.
9.11 The court went on to say that the case in question did not involve a one-shareholder company but a publicly listed one. This was probably a reference to the UK Supreme Court decision of Stone & Rolls Ltd v Moore Stephens[2009] AC 1391 (Stone & Rolls). The issue before the court was whether the insolvent company could bring a claim against its auditors for negligence in failing to detect the controller's dishonest activities. The defendant auditors argued that as the controller's fraudulent acts should be attributed to the company, the defendants could rely on the ex turpi causa principle to defeat the claim as the company would have to rely on its wrongdoing to establish its claim. The company's response to this was that it was a victim of the fraudulent acts of its controller and it would not be logical to attribute such acts to a company where the company was itself the victim of the controller's fraud. The rules of attribution did not apply in such situations.
9.12 On the facts of the case, a majority of the Supreme Court held that no exception to attribution was made out. The real victims of the fraud were the creditor banks that had been induced to pay large sums to the company. Lords Walker and Brown based their decision on the fact that the claimant was a one-man company. Where the controller was the embodiment of the company it could not be said that the company was not the fraudster but only a secondary victim. Being a one-man company, there was no one else who could, if he or she knew of the fraud, have taken steps to prevent it. Since the only person who could have been told about the fraud, or from whom the fraud could be concealed, already knew about it, there was no one else to whom disclosure or concealment could take place. There was, therefore, no reason for the normal rules of attribution not to apply.
9.13 The Court of Appeal, therefore, seems to have endorsed the idea that where a company is essentially controlled by a single person, and such company subsequently brings a claim against a third party, the controller's fraud will be attributed to the company such that the company is also treated as a fraudster. While this may be an acceptable approach in some cases, its proper application depends on whether the issue in question has been properly characterised. This is illustrated by the Stone & Rolls decision itself. In all likelihood, the true question before the Supreme Court did not involve attribution at all but instead raised the question of the duty of care owed by auditors to creditors of a company.
9.14 In Stone & Rolls, all three judges in the majority made reference (rightly or wrongly) to the duty of care owed by auditors to their clients and not to third parties, such as creditors or potential investors, and this no doubt affected their view of how the rules of attribution should be applied in an ex turpi causa situation. The crux of the issue was, therefore, not attribution but the scope of the duty. Where the only ultimate beneficiaries of a claim by the company against its auditors would be parties that the auditors owed no duty of care to, thereby precluding a direct...
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