Company Law

Citation(2000) 1 SAL Ann Rev 80
Published date01 December 2000
Date01 December 2000
Lifting the veil

It is a well-known principle in Company Law that an incorporated company is a legal entity in its own right (see Salomon v A Salomon and Co[1897] AC 22). Occasionally, however, when a company contracts with another party, and the company is unable to fulfil its obligations, the other party will attempt to bring an action against a third party that is associated with the company. This third party will often be the shareholders or directors of the company. If the action against the third party succeeds, the court is said to “lift” or “pierce” the corporate veil in the sense that the separate personality of the company is disregarded, at least for the purpose of the issues raised in the action. In Win Line (UK) Ltd v Masterpart (Singapore) Pte Ltd[2000] 2 SLR 98, the High Court had occasion to discuss the principles involved where the courts are asked to lift the veil.

In Win Line, the plaintiffs had chartered a vessel to the first defendants, Masterpart (Singapore) Pte Ltd (“Masterpart”). Masterpart subsequently repudiated the charterparty. The plaintiffs sued Masterpart and the second defendants, Donald & Mcarthy Pte Ltd (“D&M”). The suit against D&M was premised on the basis that Masterpart entered into the charterparty as an agent of D&M; that Masterpart was only the nominal charterer and was a mere sham, facade or alter ego of D&M; and Masterpart and D&M were at all times run as a single corporate entity and must therefore be jointly liable for the breach.

Judith Prakash J dismissed the plaintiffs” claim against D&M. In relation to the allegation that Masterpart was an agent of D&M, her Honour found on the evidence that there was no agreement between these parties that Masterpart was to act as D&M”s agent. As a relationship of agency can only arise out of the consent or agreement of the principal and the agent, the absence of such consent or agreement is fatal to a claim based on agency.

As regards the claim that the corporate veil should be lifted so as to make D&M responsible for Masterpart”s liability for breach of the charterparty, her Honour pointed out that even if the veil was lifted this would only lead to the two shareholders of Masterpart and not to D&M which was not a shareholder. To treat D&M and Masterpart as one, a further finding that the two shareholders of Masterpart held their shares on trust for D&M would have to be made. There was insufficient evidence to make such a finding.

Prakash J also pointed out that there were genuine commercial reasons why Masterpart entered into the underlying contract from which Masterpart needed to charter the plaintiffs” vessel. Additionally, the charterparty was not obtained by any dubious practice. These were further matters that persuaded her Honour that the transactions were not shams. It is suggested that this is the proper approach to use when determining whether the corporate veil should be lifted. Where a company is being used for genuine commercial reasons and not to perpetrate a fraudulent or improper purpose, the courts should be very slow to lift the corporate veil unless there are very exceptional reasons founded on public policy to do so (see Tan, “Piercing the Separate Personality of the Company: A Matter of Policy?”[1999] SJLS 531).

On the issue of whether Masterpart and D&M were a single economic unit, her Honour was referred to two English cases that have possibly taken different approaches, namely Adams v Cape Industries plc[1990] Ch 433 and DHN Food Distributors v London Borough of Tower Hamlets[1976] 3 All ER 462. Although Prakash J expressed the view that the law on this issue has not been completely resolved, she said that the principle of treating companies within the same group as one legal entity (if such principle existed) could not be extended to a case where two companies had no common shareholders or directors. There is no doubt that this is correct and it is suggested that even where there are common shareholders or directors, there should be no hesitation in rejecting the DHN approach. Group corporate structures are commonplace and it would be commercially unsatisfactory to treat companies within a group as one legal entity.

In virtually all cases where a party asks the court to lift the veil, the company that the party had contracted with did not have sufficient resources to meet its liabilities to the said party. So it was in the case of Win Line. In effect therefore, parties in such situations are asking the court to improve their position by holding that a third party should be treated as the real party to the contract in place, or together with, the company. While this should not preclude the veil being lifted in appropriate cases, the courts are entitled to observe (as Prakash J did) that parties who contract with companies should be aware of the risks involved if such companies do not have sufficient resources. If parties contracting with companies are not prepared to accept such companies as contracting parties on their own merits, they should obtain a guarantee or security from the companies” directors or shareholders, or from other third parties.

Breach of fiduciary duty

Directors who are in a position of trust and confidence owe fiduciary duties to their companies. Accordingly, directors cannot place themselves in a position where their duties to their companies may conflict with

their own interests, or the interests of another party that they owe competing duties to. Similarly, directors should act in the best interests of their companies and are not allowed to make a secret profit from their office. If directors wish to be released from these obligations, they should make full disclosure to their companies and obtain the consent of their companies to do so. These duties are enshrined in the common law and in the Companies Act (Cap 50, 1994 Ed) (“the Act”), in particular ss 156 and 157.

In Kumagai-Zenecon Construction Pte Ltd v Low Hua Kin[2000] 2 SLR 501, GP Selvam J re-emphasised the high standards imposed on a fiduciary such as a director. His Honour said that it is a fiduciary”s duty to act for someone else”s benefit by sacrificing his own personal interests to that of the other. The office of a fiduciary is founded on selflessness and selfishness is absolutely prohibited. In Kumagai-Zenecon, the defendant director had used the company”s money to purchase shares in another company. This was done to enable the defendant to gain control of the latter company. This was in breach of his fiduciary duty and he was held liable to compensate the company for the losses incurred when the said shares were sold. On appeal, the decision of Selvam J was affirmed (see Low Hua Kin v Kumagai-Zenecon Construction Pte Ltd (in liquidation)[2000] 3 SLR 529).

Section 156 of the Act imposes certain duties of disclosure on directors. Under s 156(1), every director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company shall as soon as practicable after the relevant facts have come to his knowledge declare the nature of his interest at a meeting of the directors of the company. By s 156(5), a director who holds any office or possesses any property whereby, whether directly or indirectly, duties or interests might be created in conflict with his duties or interests as director, shall declare at a meeting of the directors of the company the fact and the nature, character and extent of the conflict. A failure to comply with any of the provisions of s 156 is a criminal offence where conviction will lead to a fine not exceeding $5,000 or to imprisonment for a term not exceeding one year (s 156(10)). These provisions were the subject matter of a criminal prosecution that came before Yong Pung How CJ on appeal in Yeo Geok Seng v PP[2000] 1 SLR 195.

In that case, the appellant was the managing director of a company known as Mcspec Far East Development Pte Ltd (“MFED”). He was also a director of Xiamen Mcspec (S) Pte Ltd (“XMS”) and a director, manager and 50% shareholder of Triple Star Shipping and Trading Co (Pte) Ltd (“Triple Star”). MFED was awarded a contract to build the Tampines West Community Centre (“TWCC”). On behalf of MFED, the appellant entered into a contract with XMS to award the construction of TWCC to XMS. Under the contract, consultation fees were payable to MFED and were to be deducted from XMS”s progress claims. When XMS was

constructing TWCC, Triple Star was supplying building materials to XMS under a supplies agreement. The appellant failed to declare at a meeting of the directors of XMS any interest in the contract with MFED to construct TWCC or in the supplies agreement with Triple Star.

In the district court, the appellant was charged and convicted of two offences. The first conviction was under s 156(5) for failing to declare, at a meeting of the directors of XMS, his interest in the contract with MFED as its managing director. The second conviction was under s 156(1) for failing to declare his interest in the supplies agreement with Triple Star as a director and shareholder of Triple Star. He appealed against both convictions and the Chief Justice dismissed the appeal.

His Honour held that there was clearly a conflict of duty arising from the appellant”s office of managing director of MFED and that of director of XMS. In...

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