Company Law

Citation(2018) 19 SAL Ann Rev 227
Published date01 December 2018
Publication year2018
Date01 December 2018
AuthorDan W PUCHNIAK BA (Manitoba), LLB (Victoria), LLM, 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 and Chairman, Centre for Law and Business, National University of Singapore. Samantha S TANG LLB (National University of Singapore); Advocate and Solicitor (Singapore); Sheridan Fellow, Faculty of Law, National University of Singapore.
Separate personality and veil piercing

9.1 In Jhaveri Darsan Jitendra v Salgaocar Anil Vassudeva1 the High Court had for the first time to definitively deal with the question of reverse piercing of the corporate veil. Typical veil piercing (or “standard veil piercing”, which was the term used by Kannan Ramesh J) takes place when a third party such as a creditor of a company seeks to hold a shareholder or director of that company liable for an obligation owed to such third party by the company. Reverse veil piercing on the other hand involves claims by a third party against a person who is also an insider of a company where such third party seeks relief not only against the insider but also against the company. Such reverse piercing is also known as outsider reverse piercing because it is the third party who is seeking veil piercing.

9.2 Another type of reverse veil piercing is where the insider (shareholder or director) seeks to pierce the veil by arguing that the insider and the company are one so as to allow the insider himself to bring a claim against a third party or obtain some other benefit that would otherwise inure to the company alone. A good example as pointed out by Ramesh J was the case of Macaura v Northern Assurance Co Ltd2 where timber that had been sold by the plaintiff to a company

that he controlled was destroyed in a fire. As the plaintiff had insured the timber in his name after the sale of the timber, he sought to claim under the policy. For the plaintiff to have succeeded, it would have been necessary to identify him with the company so that he could claim under the policy for timber that was not his but the property of the company. As the court dismissed the claim on the basis that the plaintiff did not have an insurable interest in the timber having sold it to the company, any insider reverse piercing that was implicitly sought failed.

9.3 Standard veil piercing and outsider veil piercing share the similar characteristic of being claims brought by third parties against the company and the insider respectively, and it is argued that both the company and the insider are liable even though the obligation is from a strict legal point of view owed by only the company or the insider. Until recently there has been no distinction between both instances. For example, the case of Gilford Motor Co Ltd v Horne3 involved an injunction being granted to both the company and the ex-employee of the plaintiff even though it was only the ex-employee who was subject to the restrictive covenant. The injunction was granted against the company despite the absence of any legal relationship between the plaintiff and the company as the company was being used as a vehicle by the ex-employee to evade his contractual obligation. It is suggested respectfully that caution should be exercised to ensure that the principles relating to such cases do not diverge materially.

9.4 As far as insider reverse piercing is concerned, Ramesh J formed the view that there was little Commonwealth authority to support such type of veil piercing. With respect, his Honour is clearly correct. As a matter of principle, such a notion of veil piercing is also difficult to justify. For instance, it subverts the “proper plaintiff” rule which recognises, as a major exception to the rule, that another person may sue on behalf of the company where there is either a “fraud on the minority” (the common law exception) or where the requirements of s 216A of the Companies Act4 (“the Act”) are met. One of the requirements for both is that the person seeking to sue on behalf of the company must not be in a position to control the company. Insider veil piercing would render this otiose.

9.5 Another significant veil piercing case was Sun Electric Pte Ltd v Menrva Solutions Pte Ltd5 which raised an issue that has not been settled. Although it involved typical outsider piercing, there is in Singapore law an outstanding issue whether in addition to abuse of the

corporate form the law also endorses an independent “alter ego” ground to pierce the corporate veil. This is because the earlier decision of the Court of Appeal in Alwie Handoyo v Tjong Very Sumito6 (“Tj on g Ver y Sumito”) held that the alter ego ground was separate from that based on sham or façade. The latter ground has been superseded by the concept of abuse as Vinodh Coomaraswamy J noted. However, his Honour considered himself bound to recognise alter ego as a separate and independent ground for veil piercing unlike the current position in England as established in Prest v Petrodel7 (“Prest”) where no such ground was recognised.

9.6 In Prest, Lord Sumption expressed the view that the concept of abuse underpinned veil piercing and that such abuse was made out by what he referred to as the principles of “evasion” and “concealment” (even if Lord Sumption did not think that concealment was a true case of veil piercing). Tjong Very Sumito was a case decided after Prest and although the Singapore Court of Appeal has since accepted the idea of abuse as a basis for veil piercing (for example, see Goh Chan Peng v Beyonics Technology Ltd),8 it has not commented on the relationship between the alter ego ground and abuse.

9.7 It has been suggested that “concealment” includes alter ego.9 As accepted by Coomaraswamy J, “alter ego” in the Singapore context is made out where the company is carrying on the business of its controller. On this basis, it is consistent with Lord Sumption's concealment principle. If indeed the company is carrying on the business of its controller, the controller is the true party to the transaction and the apparent involvement of the company is merely concealing such fact. Accordingly, it is suggested respectfully that Singapore courts should simply accept abuse of the corporate form as the foundational principle behind veil piercing which may be shown by particular acts such as evasion and concealment.

Appointment of directors

9.8 It was pointed out in The Wellness Group Pte Ltd v Paris Investment Pte Ltd10 that it is commonplace for shareholders' and joint venture agreements to contain a provision entitling a shareholder to

nominate or appoint a person to the company's board of directors. In that case there was an implied term in the shareholders' agreement that the majority shareholders could appoint two persons to the board while the minority shareholder could appoint one. A dispute arose over the appointment of the person that the minority shareholder wished to appoint to the board. The Court of Appeal held that the minority shareholder's right to determine who its representative on the board would be was subject to two important caveats: namely, where the necessary elements for a valid appointment were not met (such as the nominee being under a disqualification from acting as a director); and when it is obvious that the nominee is not fit for office or that his appointment would be injurious to the company. It was for the board – to whom the power to appoint was given under the corporate constitution in question – to prove such unsuitability. In the absence of these caveats, there would be no basis for the board to reject the nomination.

9.9 Importantly, the Court of Appeal did not consider the enforcement of such a clause as amounting to a usurpation of the power of the board to appoint directors as given by the corporate constitution. This was, according to Steven Chong JA, because the board was still the appointing body even if it could not appoint whoever it wished if this was inconsistent with a valid nomination. Furthermore, in the shareholders' agreement it had been agreed that the terms of the agreement should prevail over the corporate constitution and the shareholders were obliged to remove any such conflict. Given that the agreement expressed the unanimous will of all the shareholders, there was no reason why it should not be given effect. In addition, such provisions can be specifically enforced. The authors welcome this practical and robust approach. Given that the shareholders' agreement was one entered into by all shareholders, it can be said that their unanimous agreement to the terms operate as a continuing informal resolution to alter the terms of the constitution where there is any inconsistency.

Shadow and de facto directors

9.10 In Parakou Investment Holdings Pte Ltd v Parakou Shipping Pte Ltd,11 the Court of Appeal affirmed the decision of the High Court12 that the test used to determine if persons not formally appointed to a board should be regarded as shadow directors was whether there was a discernible pattern of compliance with the shadow directors'

instructions, and occasional departures from the pattern would not detract from this. To the argument that the said shadow director was merely a patriarch the court said that there was no reason why this and being a shadow director should be mutually exclusive. Indeed, the fact that the appellant in question was a patriarch suggested that he had the necessary influence that a shadow director requires.

9.11 On the issue of whether the president and vice-president of the plaintiff were de facto directors by virtue of the substantial authority they held in the company's affairs, the Court of Appeal also affirmed the High Court's decision that they were not. Although they were given wide authority to deal with the company's affairs, this came about because the board had passed resolutions to such effect. As their mandate flowed from an act of the board, this was indicative that they did not stand on the same footing as a director. With respect, it is suggested that this is plainly correct. If the plaintiff's argument had been accepted, almost every CEO and many other senior executive officers will by this fact alone be regarded as directors although not formally appointed to the board.

9.12 The touchstone of whether a person who has not been validly appointed to the board of a...

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