Company Law

• Published date: 01 December 2010
• Author: Dan W PUCHNIAK BA (Manitoba), LLB (Victoria), LLM, 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 and Dean, Faculty of Law, National University of Singapore.
• Date: 01 December 2010

Lifting the corporate veil

9.1 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. This development has been adopted in many parts of the world and even in ‘socialist market’ economies like China and Vietnam. Through the mechanism of registration, companies are recognised as separate legal entities capable of entering into contracts in their own names and assuming rights and liabilities separate from their members. This has allowed individuals to invest in companies without risking their entire fortunes and this in turn has facilitated fund raising from members of the public and the development of stock exchanges. For such reasons, courts are reluctant to ignore the separate personality of companies unless there is a compelling reason to do so such as an abuse of the corporate form to commit fraud or engage in other wrongdoing.

9.2 Yet the nature of the wrongdoing must be borne in mind. It may be that the directors of a delivery company are aware that its employees occasionally park the company“s vehicles illegally when making deliveries. If an accident ensues as a result of a vehicle that was parked illegally, is the separate personality of the company to be ignored because of such wrongdoing with the consequence that the directors of the company are held personally liable for any loss or damage to the injured party? Arguably this goes too far as the company was not principally engaged in a fraudulent or wrongful cause of conduct that was a material end in itself. It is not unknown for business enterprises to fall foul of the law and it would be a significant inroad into the doctrine of separate personality for the corporate veil to be lifted simply on this basis. Something more is necessary. In many cases where the company“s separate personality was ignored because of fraudulent or other wrongful acts, the acts in question have been the substantive object to which the company was engaged. This is not to say that this is the only

instance in which the veil can be lifted where fraud or wrongdoing are involved. A particular statute may, for example, expressly provide for separate personality to be ignored whatever the circumstances of the contravention. It is fair to say though that this is a very relevant factor to take into consideration.

9.3 Such an approach is consistent with Zim Integrated Shipping Services Ltd v Dafni Igal [2010] 2 SLR 426 (‘Zim Integrated Shipping Services’) where Lai Siu Chiu J refused to ignore the companies“ separate personality because of alleged false declarations to various statutory agencies that gave the impression that one of the defendants was being paid for consultancy work, or because of a wrong statement as to the date when the freight forwarding business commenced. If these matters were indications of the companies being used to perpetrate fraud or other wrongdoings on third parties, the conclusion may have been different but her Honour did not find this so on the facts.

Breach of fiduciary duty

9.4 Although a company is regarded as a person in its own right, this is, in truth, a legal fiction that is intended to serve the policy objective of providing a business vehicle capable of insulating members of the company from personal liability. The ‘person’ that is the company is one that is not capable of thinking or doing anything for itself. It can only act through others. As such, a company is an extremely vulnerable entity that requires protection from persons who may be in a position to take advantage of the company“s vulnerability. The law relating to fiduciaries is the principal way in which companies are so protected. Fiduciary obligations are imposed to discourage the fiduciary from taking undue advantage of another person who is in a vulnerable position vis-�-vis the fiduciary. The fiduciary is obliged to act in the best interests of the person she owes the duty to. The fiduciary must prefer the other person“s interests over her own which is a departure from the general rule that in commercial matters a person is entitled to be selfinterested as long as there is no fraud or illegality involved.

9.5 In so far as companies are concerned, the paradigm fiduciary is the company director as the management of companies is typically vested in the board as a whole. Beyond the directors of the company, other officers or employees of the company who have agency powers to bind the company are also fiduciaries by virtue of the relationship between the agent-officer/employee and the corporate principal. In addition, regardless of whether officers or employees have agency powers, if they have substantial authority within the company to direct its operations, such employees may also be regarded as fiduciaries by virtue of the responsibilities entrusted to them.

9.6 In Tan Hup Thye v Refco (Singapore) Pte Ltd [2010] 3 SLR 426, Judith Prakash J held that a resolution passed by the defendant company“s board approving bonus payments to the defendant“s employees totalling $6,485,094 (including $1,412,759 to the plaintiff who was a director of the defendant and was party to the passing of the resolution) should be invalidated. In arriving at this decision, Prakash J had regard to Art 83 of the company“s articles which stated that a director ‘shall not vote in respect of any contract or proposed contract with the company in which he is interested, or any matter arising thereout, and if he does so vote his vote shall not be counted’. Her Honour said that, as the plaintiff was interested in the matter being voted upon, he was prohibited from voting on his bonus pursuant to Art 83 of the company“s articles and, since in the event he did vote, that vote should not have been counted. As a quorum of two directors was necessary and the plaintiff “s vote could not be counted, the resolution was invalid given that only one other director attended the meeting that passed the resolution.

9.7 In addition to reliance on Art 83, Prakash J also held that the resolution was substantively not in the best interests of the company. Her Honour agreed that a resolution in favour of the payment of bonuses to employees could be in the best interests of the company, especially where the employees had a contractual right to bonuses, or to retain employees, but felt that in the circumstances of the present case the plaintiff could not be said to have acted for the good of the company. In arriving at this view, she took into consideration that the defendant company“s shareholders had expressly instructed the plaintiff not to make any payment of bonus and that there was no room to discuss the issue as the defendant company“s ultimate shareholder would not approve the payment. There were at the time steps being taken for the sale of the defendant company“s business and a clause in the acquisition agreement provided that each of the parties would not ‘make any commitments to pay on or after the Closing Date any bonuses or other benefits to employees of the Business other than in the ordinary course of business’. The defendant was thereby under a contractual obligation not to pay bonuses to its employees except in the ordinary course of business. The resolution in question was not passed in the ordinary course of business as the general policy of the defendant was to declare and pay bonuses only after the end of its financial year. At the time of the resolution, the financial year had not ended yet. Thus, the passing of the resolution, if it created an obligation to pay bonuses to the employees of the defendant, would cause the defendant to be in breach of the acquisition agreement. Accordingly, by procuring the passing of the resolution, the plaintiff was not acting in the interests of the defendant.

9.8 The principles relating to the need for directors to act in the best interests of the company are also illustrated in Swiss Butchery Pte Ltd v Huber Ernst [2010] 3 SLR 813 (‘Swiss Butchery’). In that case, Woo Bih Li J reiterated that the courts will not interfere with management decisions that are arrived at bona fide even if the decisions turned out to be bad ones commercially. However, a director should not place himself in a position where his duty and his interest may conflict. Summarising the position, his Honour said (Swiss Butchery at [12]):

It is thus clear that while the court will not question a management decision which was exercised in a bona fide manner, anyone who owes a fiduciary duty is not allowed to enter into transactions in which he has a personal interest conflicting with the interest of those whom he is bound to protect. More particularly, a director is not allowed to make use of information obtained while he was a director of the company in question or to exploit a maturing business opportunity of the company for his own personal purposes and profit. Any profit so obtained will be subject to a constructive trust in favour of the company.

9.9 Woo J held that the duty was breached in the instant case because the former director and another former senior employee had diverted the company“s wholesale and production operations to another company that they had established. It is clear that where a director or other fiduciary diverts business opportunities to himself that should have been the province of the party the duty is owed to, the director or other fiduciary is in breach of duty. Where the directors of a company have wrongfully diverted business belonging to the company to another company, the latter company will be liable to account for the profits to the first company. Accordingly, the business vehicles used for the usurpation of business from the plaintiff company were liable to account for the profits they had made to the plaintiff.

Meetings

9.10 The articles of association of a company regulate the internal procedures of the...