Company Law

• Author: Alan K KOH LLB (National University of Singapore), LLM (Boston), Dr jur (Frankfurt); Advocate and Solicitor (Singapore); Assistant Professor of Law, Division of Business Law, Nanyang Business School, Nanyang Technological University, Singapore. Dan W PUCHNIAK BA (Manitoba), LLB (Victoria), LLM, LLD (Kyushu); Barrister and Solicitor (Ontario); Professor, Yong Pung How School of Law, Singapore Management University. TAN Cheng Han SC LLB (National University of Singapore), LLM (Cambridge); Advocate and Solicitor (Singapore); Dean and Chair Professor of Commercial Law, City University of Hong Kong.
• Publication year: 2021
• Date: 01 December 2021

I. Corporate veil

9.1 It is trite law that while a company is a legal person and therefore separate from its shareholders and directors, the court may in exceptional circumstances pierce the corporate veil and treat a company's shareholders and/or directors as being one and the same with the company for limited purposes. The company does not in such cases lose its legal personality but in relation to particular transactions or facts, the company and its shareholders and/or directors are treated as being equivalent.

9.2 It has been remarked on numerous occasions that this area of company law is bedevilled with the use of metaphors that have made it difficult to understand the true rationale behind veil piercing.1 In more recent years some Commonwealth courts have provided guidance on the proper approach to be taken.2 Further useful guidance can now also be obtained from Mohamed Shiyam v Tuff Offshore Engineering Services Pte Ltd3

(“Tuff Offshore”). The plaintiff had applied to amend his statement of claim and join persons who were, at various material times, the shareholders and directors of the defendant (“the proposed defendants”). One of the grounds for the application was that the defendant's corporate veil should be lifted as the defendant was the alter ego of the proposed defendants, the defendant was a sham or façade, or the defendant was used for improper purposes.

9.3 Whether a company is a sham or façade, or has been used for improper purposes such that there has been abuse of the corporate form, are now fairly well established and need little discussion. The court found that the proposed pleadings did not sufficiently disclose any basis for the corporate veil to be lifted on these grounds. There was no abuse of the corporate form simply because the controllers of a company extracted funds wrongly to the detriment of creditors. This would undoubtedly be a wrong against the company to which the company could bring a claim either through a derivative action by minority shareholders or through a liquidator should the company become insolvent, but it was not an abuse of the corporate form in the sense of the company being used as an instrument to further an improper purpose. Similarly, whether a company was the true contracting party with another person or merely a sham or façade to conceal who the real contracting party was, for example, a shareholder of the company, had nothing to do with diversion of a company's assets. If the company was the true contracting party in a transaction, the fact that its controllers subsequently diverted its assets wrongly did not render the company's involvement in the transaction a sham or façade.

9.4 This leaves the alter ego ground for discussion because, as the Court of Appeal in Sun Electric Pte Ltd v Menrva Solutions Pte Ltd4 said, while this ground is not recognised in English law, it is presently a separate ground in itself in Singapore and a definitive view of whether the English position ought to be adopted should be expressed only when it is directly in issue before the Court of Appeal.5

9.5 While this is understandable, Tuff Offshore6 illustrates the difficulty of recognising alter ego as a ground in itself for veil-piercing purposes. As Roger Giles IJ pointed out, in Alwie Handoyo v Tjong Very Sumito7 (“Alwie Handoyo”) the Court of Appeal said that the key question

in relation to such ground was whether the company was carrying on the business of its controller. In Alwie Handoyo, Alwie had treated the company's moneys as his own and the Court of Appeal observed that “it is evident that Alwie made no distinction between himself and [the company.] Therefore, we agree with the Judge's decision to pierce [the company's] corporate veil”.8 In Tuff Offshore, Giles IJ was of the view that as the company was the real contracting party, no issue of veil piercing could arise under the alter ego ground.

9.6 This illustrates the significant overlap between the sham and façade ground, also referred to as the concealment principle in Prest v Petrodel Resources Ltd,9 and the alter ego ground. Where the company is in fact carrying on the business of the controller, the facts as a whole may indicate that the real contracting party is the controller. However, while the controller having treated the company's moneys as his own may be an indication of this, it should not be decisive in itself because diversion of corporate assets per se does not mean that corporate personality should be disregarded. Alternatively, if the parties to the contract are the company and the counterparty, the fact of the controller treating the company's assets as the controller's own can give rise to claims by the company against the controller for misappropriation of corporate assets such that a constructive trust may be imposed against the controller. Depending on the facts, it may also be the case that the company is a trustee of its assets in favour of the controller.10 This may allow creditors of the company in a liquidation to sue the controller to recover assets that belong to the company, or allow creditors of the controller to proceed against assets held by the company on trust for the controller. In neither of these cases is there veil piercing. Accordingly, it is not clear that a separate alter ego ground is necessary, and it is suggested that when the opportunity arises, the courts should do away with such ground as a basis for veil piercing.

II. De facto directors

9.7 In AIX Engineering & Construction Pte Ltd v Yeong Wai Teck,11 Lai Siu Chiu SJ found that the third defendant, who was a representative of the plaintiff company, was also a de facto director of the plaintiff. Her Honour did so on the basis that the third defendant exercised real influence in the corporate governance of the plaintiff, and participated in its affairs on an equal footing with the plaintiff's sole director on record, one Gan Kim

Hui. Theirs was a relationship of equals. The plaintiff company had also held the third defendant out as a director of the plaintiff. Taking this and the other relevant circumstances into consideration, the court found that the third defendant had the requisite authority to enter into various setoff agreements on behalf of the plaintiff.

III. Directors' duties

9.8 An interesting perspective on the scope of s 157 of the Companies Act 196712 (“the Act”) was provided in Prime Cars Leasing Pte Ltd v Zenith Automobile Pte Ltd13 (“Prime Cars”). A claim having been brought against a director of the company for breach of fiduciary duty, counsel for the company argued that if the director wanted to do something that was not in the company's interests, the director should have sought the majority shareholders' consent but did not do so. The learned judge said that this was an unfeasible argument as an illegal act by a director was not capable of release by the majority of shareholders. Where directors commit an illegal act, shareholders cannot release the directors from their fiduciary duties pertaining to that act by prior agreement or subsequent ratification. Reliance was placed on the statutory duty found in s 157(1) of the Act that a director “must at all times act honestly and use reasonable diligence in the discharge of the duties of his or her office” together with s 157(3) of the Act that renders a breach of any provision of s 157 a criminal offence.

9.9 It is suggested that this may be reading too much into s 157 of the Act. While it is true that in general shareholders cannot, even when acting unanimously, cure an act of a director (or other officer) that is illegal (since what is criminal is a matter for the State to define), s 157(4) of the Act provides that s 157 “is in addition to and not in derogation of any other written law or rule of law relating to the duty or liability of directors or officers of a company”. Accordingly, it is submitted that the better interpretation is that where a company through its shareholders ratifies an act that is a breach of fiduciary duty per se, this cures the breach in accordance with general law such that no illegal act exists any longer since ratification confers authority retrospectively. The alternative interpretation is harsh. It would mean that where a director exceeds authority, thereby committing a breach of fiduciary duty, such director has committed a criminal offence even if the company is prepared to ratify the transaction because it considers the terms to be favourable (and especially if those were the best terms available commercially). It

would also mean that even when a company grants authority to a director to negotiate a deal in which such director may also obtain a personal benefit, this is no less a criminal act since the court in Prime Cars also proscribed releases of fiduciary obligations by prior agreement (as well as by ratification).14 Such a reading of s 157 should be avoided unless there is clear language to support it. With s 157(4), there is not only an absence of this but also language to the contrary.

IV. Director disqualification

9.10 A useful exposition of the factors that should be taken into consideration when a court is asked to exercise its discretion under s 155A(3) of the Act to allow a person subject to a disqualification order under s 155A(1) to act as a director or be involved in the management of a company was set out in Re Haeusler, Thomas.15

9.11 Section 155A provides for the conditions upon which a person may be disqualified from acting as a director where, within a five-year period, not less than three companies that such person was a director of had been struck off the register under s 344 of the Act. As s 344 of the Act is to allow the Registrar to strike a defunct company off the register on the Registrar's initiative, Vinodh Coomaraswamy J said that the statutory objective of s 155A of the Act was to deter a director of a defunct company from leaving it to the Registrar...