Company Law

Citation(2016) 17 SAL Ann Rev 235
Publication year2016
AuthorDan W PUCHNIAK BA (Manitoba), LLB (Victoria), LLM & LLD (Kyushu); Barrister & Solicitor (Ontario); Associate Professor, Faculty of Law, National University of Singapore. TAN Cheng Han SC LLB (National University of Singapore), LLM (Cantab); Advocate and Solicitor (Singapore); Professor and Chairman, Centre for Law and Business, National University of Singapore.
Date01 December 2016
Published date01 December 2016
Lifting the corporate veil

9.1 The authors have in previous editions of this work commented on the unsatisfactory state of the law in this area. While the courts' discretion to ignore the separate personality of a corporate vehicle for limited purposes in exceptional circumstances is well-established, the use of metaphors such as “façade” and “sham” in this context has led to a lack of clarity over when such an exercise should take place. In Prest v Petrodel Resources Ltd1 (“Prest”), the UK Supreme Court analysed the issue in some detail. Lord Sumption, who delivered the leading judgment, concluded that veil-lifting is justified where a company's separate legal personality is being abused for the purpose of some relevant wrongdoing. Having framed the principle, thus, his Lordship stated that there are two further distinct principles that are at play when considering veil-lifting, namely, the “concealment principle” and the “evasion principle”. The former is not a true case of veil-lifting as the courts are only identifying the real parties to a transaction. As such, Lord Sumption concluded that the only real case of corporate personality being disregarded arises where the evasion principle applies, namely, if there is a legal right against a person in control of a company, and a company is interposed with the goal of defeating such right or frustrating its enforcement.

9.2 It seems somewhat contradictory that the broad basis for veil-lifting premised on abuse of the corporate form is ultimately reduced to the narrow category of “evasion” cases. Accordingly, the majority of the judges in Prest declined to foreclose other possible situations that may justify veil-lifting. One of the authors has welcomed the principle of

abuse as the underlying basis for lifting the corporate veil though not the restrictive manner in which Lord Sumption sought to apply it.2

9.3 In Simgood Pte Ltd v MLC Shipbuilding Sdn Bhd,3 Vinodh Coomaraswamy J said it was unnecessary for him to decide if Lord Sumption's position should represent the law in Singapore as no such arguments were canvassed before him. On the facts, he found that there was no concealment of the real actors to the transactions in question. It is completely legitimate for business people to organise companies such that any liability incurred by the company will rest only with the company and not with its owners. The companies in the group were small companies with few directors. The people in charge of the companies were substantially the same. To expect a clear demarcation between companies in all matters will be unrealistic and does not mean that the companies are operated as one single entity so as to be able to treat all the companies as if they are one and the same.

9.4 In relation to the allegation that there was an abuse of the corporate form, his Honour held that changing the number of a vessel's hull, which allowed one of the companies to postpone its repayment obligations of the DBS loan, did not mean there was a relevant abuse. Such an act did not relate to the way in which the companies were incorporated, managed, or operated. There was no suggestion that the companies in the group were incorporated purely for the purpose of perpetrating the sham or to change the number of the vessel's hull in order to postpone one of the group company's repayment obligation under the DBS loan facility. With respect, this is clearly correct. It is not every wrongdoing that will give rise to veil-lifting. If this was the case, the protection offered by the corporate structure would be significantly diminished. Where abuse of the corporate form is relied upon, the wrongdoing must be a substantial reason for the incorporation of the company or the company must have been used substantially for the purpose of perpetrating a wrong or an act that is against public policy.

9.5 An appeal to the Court of Appeal was dismissed.4

Memorandum of association

9.6 Section 39(1) of the Companies Act5 (“Act”) used to provide that subject to the Act:

[T]he [memorandum and articles] shall when registered bind the company and the members thereof to the same extent as if [they] respectively had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the [memorandum and of the articles].

Since January 2016, the memorandum and articles (“M&A”) have been replaced by the corporate “constitution”. Cases involving this provision are rare because non-trivial breaches of the M&A or constitution may either be presumptively validated under s 392(2) of the Act, or ratified by the board or the shareholders in a general meeting. Serious breaches are likely to give rise to actions for oppression or lead to derivative actions, which will usually be more effective in addressing the underlying issues.

9.7 In Independent State of Papua New Guinea v PNG Sustainable Development Program Ltd,6 the plaintiff, which was not a member of the company, sought to enforce the M&A against the company. This was an unusual application given the language of s 39(1) of the Act, which clearly applies only to the company and its members. Indeed, in jurisdictions such as the UK, the courts have construed equivalent provisions narrowly such that even in relation to a member, the provision in the memorandum and articles must relate to a right that the member is seeking to enforce qua member. In other words, provisions that do not affect a member in his capacity as a member cannot be enforced by such member, for instance, a provision in the corporate constitution that A shall be appointed as the company's solicitor.

9.8 It was, therefore, unsurprising that Judith Prakash J (as she then was) dismissed this aspect of the plaintiff's claim (although the plaintiff succeeded on another basis). Her Honour was not persuaded that a distinction should be drawn between companies limited by guarantee (as the defendant company was) and companies with a share capital.

9.9 What is interesting is the following dictum from Prakash J,7 referring to some outflanking of the “qua member” requirement that “these cases may now be explained on the basis that a member has a

right to require the company to act in accordance with its M&A even if the result would be indirectly to protect a right given to him in another capacity”. This represents a school of thought that although a member cannot directly enforce a provision that does not affect members in their capacity as members, they may require the company to act in accordance with its constitution, this being a member's right. This, of course, completely undermines the “qua member” requirement as it means that a member may potentially, through injunctive relief, cause a company to act in accordance with the entirety of its constitutional provisions whether they affect the member in such capacity or not. The authors are not averse to this as such interpretation could be said to accord better with the literal language of s 39(1) and enhances shareholder rights.

9.10 Having said this, there is an intermediate approach. Such an approach will take into account the context behind the constitutional provision in determining if, on the facts, they give rise to a “qua member” right. In other words, a particular provision may have been inserted as an incident of membership or to induce a person to become a member of the company. Such provisions are common and include rights of representation on the board and deadlock rights. The exercise of such rights has been upheld8 even though they may involve matters of management rather than matters that affect a member in such capacity unless “qua member” is understood more broadly.


9.11 In Living the Link Pte Ltd v Tan Lay Tin Tina,9 Steven Chong J held that the defendants had engaged in activities that amounted to an undue preference. Having come to this finding, his Honour concluded that the defendant director was also in breach of her fiduciary duty to ensure that the company's assets were not misapplied to the prejudice of creditors' interests. This was because when a company is insolvent, or even in a parlous financial position, directors have a fiduciary duty to take into account the interests of the company's creditors when managing the company. This fiduciary duty requires directors to ensure that the company's assets are not dissipated or exploited for their own benefit so as to prejudice creditors. The purpose of this duty mirrors that of the statutory avoidance provisions, although there may be exceptional circumstances where a director may be found to have acted

bona fide in the best interests of the company despite having procured an undue preference.

9.12 On the submission that the defendant director should be excused under s 391 of the Act, Chong J said that there was insufficient material to show that she had acted honestly and reasonably in procuring the transactions which were found to be undue preferences. The payment of the rental to the former landlord was late, incomplete, and unrelated to the wrongful transfers. The fact that she had ensured that the claims of the company's other creditors were satisfied was also immaterial, particularly as these were mostly secured creditors who had recourse against her, her husband, and her mother under their personal guarantees and were only paid after exercising their security rights under the respective credit facilities. Finally, his Honour said that the personal losses suffered by the director did not indicate that her actions were honest and reasonable, especially in view of the finding that the transactions were influenced by a desire to prefer the associate companies of which she was a director and the sole shareholder.

9.13 Beyonics Technology Ltd v Goh Chan Peng10 is another case involving an application for relief under s 391 of the Act. The defendant, who had been found in breach of his...

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