Company Law

Citation(2017) 18 SAL Ann Rev 247
Date01 December 2017
Published date01 December 2017
Publication year2017
AuthorDan W PUCHNIAK BA (Manitoba), LLB (Victoria), LLM and LLD (Kyushu); Barrister and Solicitor (Ontario); Associate Professor and Director, Centre for Asian Legal Studies, National University of Singapore. TAN Cheng Han SC LLB (National University of Singapore), LLM (Cambridge); Advocate and Solicitor (Singapore); Professor and Chairman, E W Barker 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 It is trite law that a company has a legal personality distinct from that of its shareholders, including other companies in a corporate group. This was reiterated in Goh Chan Peng v Beyonics Technology Ltd1 (“Goh Chan Peng”), where the Court of Appeal held that a holding company could not claim for the loss suffered by its subsidiary even if consolidated accounts were prepared for the whole group. The court reiterated that the single economic entity concept was not recognised in Singapore company law. It was difficult to reconcile this concept with the restrictive approach to veil-piercing, which is justified by abuse of the corporate form or to give effect to a legislative provision. This latter statement is very significant as it appears to be the first time the Court of Appeal has endorsed the principle of abuse of the corporate form as the basis for not giving effect to corporate personality.2 This approach is to be warmly welcomed in contrast to the unhelpful reliance in earlier cases on metaphors such as “sham” and “alter ego”, and it remains to be seen how the courts will now develop the veil-piercing doctrine.

Shadow and de facto directors

9.2 In Parakou Shipping Pte Ltd v Liu Cheng Chan,3 Chua Lee Ming J reiterated the tests used to determine if persons not formally appointed to a board should be regarded as directors because they were either shadow or de facto directors. The former relates to a person on whose instructions the directors or a majority of the directors of a corporation are accustomed to act. There must be a discernible pattern of compliance with the shadow director's instructions; occasional departures from the pattern will not affect the finding of shadow directorship. There is no requirement that the shadow director's directions or instructions must extend over the whole field of the company's corporate activities. On this basis, a director who had formally resigned from the board was found to be a shadow director because he continued to be a key decision-maker whose directions were sought.

9.3 A de facto director is one who is not formally appointed as a director but in fact acts as a director by exercising the powers and discharging the functions of a director. It was alleged that the president and vice-president were de facto directors by virtue of the substantial authority they held in the company's affairs. The court, with respect, rightly held that this was not sufficient to establish that they were directors given that as senior executives, they were responsible for the day-to-day management and operations of the company. What they had done appeared to fall within the authority of such senior executives.

9.4 A similar approach was taken in Sakae Holdings Ltd v Gryphon Real Estate Investment Corp Pte Ltd4 (“Sakae Holdings”), where it was alleged that two of the defendants had remained directors – either shadow or de facto – following their resignation. Judith Prakash JA found that one of the defendants could, and did exercise, unilateral control over key areas of decision-making in the company, and that the company's sole remaining director relied heavily on his directions. Her Honour thus rightly held that “this was a classic case of shadow directorship”.5 As to the other defendant, Prakash JA found that there was insufficient evidence to make a prima facie case that the defendant had exerted sufficient control over the company's affairs to establish that he was a de facto or shadow director after his formal resignation as director.

Directors' duties

9.5 Fiduciary obligations are imposed on persons such as directors to deter such persons from taking advantage of potentially vulnerable third parties who rely on these fiduciaries. Companies, who are artificial persons wholly reliant on their human agents, fall into this class of vulnerable persons. Yet, notwithstanding the prophylactic intent behind fiduciary obligations, cases involving breaches of fiduciary duty on the part of directors are legion and a number of such cases came before the courts in 2017.

9.6 In Goh Chan Peng, the Court of Appeal affirmed the decision of the High Court below that the company's former chief executive officer (“CEO”) and director had breached his fiduciary duty to the company by, inter alia, diverting business to a competitor. In determining if a director had not acted in the best interests of the company, the court would adopt both a subjective and objective test. The subjective test depended on whether the director had acted in what he (and not what the court) thought was in the best interests of the company. The objective test related to the court's assessment of whether an intelligent and honest man could have reasonably believed that the transactions were for the benefit of the company. The subjective belief of the director was therefore not wholly determinative and had to be assessed against the objective test. Given the diversion of the company's business and the receipt of payments by the former CEO for this, it could not be said that there was any objective basis for thinking that he was acting in the best interests of the company. A director who places himself in such a position of conflict6 cannot be permitted to assert that his actions were bona fide or thought to be in the best interests of the company. The payments to him also constituted bribes or secret commissions and were also in breach of the no-profit rule relating to fiduciaries. Given the circumstances, it was clear the former CEO had not acted honestly or reasonably, or that it would be fair that he be excused for his breaches under s 391 of the Companies Act.7

9.7 The interplay between the subjective and objective tests to determine if there has been a breach of fiduciary duty is sometimes confusing given that the test as formulated appears to lean towards the subjective element while its application in practice may veer towards the objective. This judgment is therefore a most valuable one as the Court of Appeal has indicated that it would favour a more objective approach. Even then, it should be noted that the objective test is not a wide one but contemplates a situation where no reasonable or intelligent person could have reasonably believed that the acts were for the benefit of the company. Thus, in Von Roll Asia Pte Ltd v Goh Boon Gay,8 Chan Seng Onn J said he could not see how a director who had engaged in a conspiracy against his company could be said to have acted honestly in the interest of such company. The director had also made improper use of his position to gain a benefit contrary to s 157(2) of the Companies Act, which had not been disclosed to the company in breach of s 156(1) of the Act. Accordingly, an account of profits was ordered in relation to the secret commission received by the director.

9.8 In Ong Bee Chew v Ong Shu Lin9 (“Ong Bee Chew”), Vinodh Coomaraswamy J made some welcome observations on the subjective– objective tests in determining whether there has been a breach of fiduciary duty, two of which deserve elaboration. First, a director who crosses the objective line will be held to have breached his duty to the company and found responsible for the result or potential result of his acts without regard to his subjective intention. Second, part of the justification for this is that the law on directors' duties is also intended to serve a public interest in holding directors to minimum standards of commercial morality in directing a company's affairs even if this minimum standard is a very low baseline in order to avoid unnecessary interference with the central role of the enterprise and of risk-taking in wealth creation. These observations highlight the importance of ensuring that company law does not inadvertently encourage a lowering of standards of governance that will encourage behaviour at odds with the social purpose behind allowing incorporation to increase overall welfare. Too great an emphasis on the subjective aspect of the fiduciary test will only encourage activities that may not be in the public interest.

9.9 No breach of fiduciary duty will arise where a company is incapable, because of legal reasons, of taking advantage of the opportunity in question. This was so decided by Prakash JA in Sakae Holdings. The inability, for practical reasons, of a company to take up a corporate opportunity would not exonerate a director who took it for himself. But where there were legal restrictions on what the company

could do, there would be no breach of fiduciary duty on the part of the directors who engaged in an activity which fell within those restrictions. This was because the activity could not be within the scope of the company's affairs, and no relevant conflict of interest on the part of the directors would have arisen. The sort of legal restrictions included constitutional documents, partnership agreements and shareholders' agreements. Accordingly, where the company's memorandum stated that its main object was to own certain specific properties, and additionally the company was a joint venture that included a partner whose principal business was property investment, it could not have been contemplated that the directors of the company from this partner should in future cease their business or direct all such business to the company.

9.10 In addition to fiduciary obligations, directors owe common law duties to their companies to act with sufficient care, skill and diligence in the discharge of their office. Directors cannot as a general rule abdicate this responsibility by leaving all matters to others without turning their minds adequately to the company's affairs. Of course, what is adequate will depend on all the circumstances (within reasonable limits) it is permissible for directors to delegate specific decision-making and supervision to others. In Prima Bulkship Pte Ltd v Lim Say Wan,10 it was argued that...

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