FINANCIAL ASSISTANCE: THE CASE FOR RE-EXAMINING SECTION 76 OF THE COMPANIES ACT

• Citation: (2007) 19 SAcLJ 80
• Published date: 01 December 2007
• Date: 01 December 2007

Public Prosecutor v Lew Syn Pau [2006] 4 SLR 210

Wu Yang Construction Group v Zhejiang Jinyi Group Co, Ltd [2006] 4 SLR 451

Section 76 of the Companies Act prohibits the giving by a company of financial assistance for the purpose of or in connection with the acquisition of its own shares. This penal provision is highly controversial in view of its breadth and uncertainty in its application. In the recent criminal prosecution of PP v Lew Syn Pau and in the recent civil litigation of Wu Yang Construction Group v Zhejiang Jinyi Group Co, Ltd, the Singapore High Court had to determine the scope of the prohibition under s 76 of the Companies Act. This case comment examines the two Singapore decisions and suggests that there appears to be a divergence in the views on the underlying rationale behind the prohibition. The article also seeks to evaluate the possible impact of these decisions on certain issues that often arise in mergers and acquisitions transactions in Singapore.

I. Introduction

1 Section 76 of the Companies Act,1 which contains the prohibition on a Singapore company giving financial assistance for the purpose of or in connection with the acquisition of its own shares, is one of the most controversial provisions in the Companies Act. The scope of the prohibition is often uncertain and this is compounded by the fact that

financial assistance issues often potentially arise in any corporate transaction involving an acquisition of shares of a Singapore company (including a reorganisation, refinancing, restructuring or structured finance transaction). The cases interpreting s 76 in Singapore and its statutory equivalent in overseas jurisdictions are often highly fact-specific and it is difficult to obtain guidance as to whether a particular assistance under consideration falls within the prohibition. Compliance with s 76 is taken very seriously as the contravention of s 76 would render the officers of the relevant company guilty of an offence,2 and in addition each transaction or contract that contravenes s 76 may be void or voidable under s 76A.3

2 Reform proposals on s 76 had been considered by the Company Legislation and Regulatory Framework Committee (“CLRFC”)4 as recently as 2002. Despite acknowledging the criticism that the prohibition in s 76 is “fraught with uncertainty and amenable to reform”,5 the CLRFC declined to overhaul s 76 but instead recommended, inter alia, the amendment of the scope of the existing exceptions and the introduction of new exceptions, to s 76.6 These recommendations were implemented via the Companies (Amendment) Act 2005. The introduction of new

exceptions only mitigates but does not eliminate the thorny issue of determining whether there has been financial assistance rendered which is prohibited under s 76 in the first place. This is particularly important in situations where it may be impractical to rely on the exceptions in view of the lead time that is required7 or the administrative burden that is involved.8

3 The scope of the prohibition on the provision of financial assistance is considered in the two recent decisions of the High Court in PP v Lew Syn Pau9 (“Lew Syn Pau”) and Wu Yang Construction Group v Zhejiang Jinyi Group Co, Ltd10 (“Wu Yang Construction”). In Lew Syn Pau, Menon JC in the High Court considered the question of whether a Singapore parent company has provided indirect financial assistance, in contravention of s 76, where its foreign subsidiary has provided direct financial assistance for the acquisition of the shares of its parent company. The decision clarified a fundamental issue of when assistance rendered would be regarded as “financial” within the prohibition set out in s 76. In Wu Yang Construction, Andrew Phang Boon Leong J in the High Court addressed the issue of whether the assistance was for one of the proscribed purposes in s 76 and the relationship between ss 76(3) and 76(4) was subject to careful examination.

4 These two decisions are important in illustrating the judicial attitudes towards the scope of the prohibition on financial assistance. While both decisions emphasise the importance of taking a commercial view in determining whether a transaction falls within the prohibition, there appears to be a divergence of views on what should be the rationale underlying s 76. Lew Syn Pau affirms the traditional view that the prohibition on financial assistance is a rule relating to the capital maintenance of a company but in Wu Yang Construction, there appears to be a shift towards viewing the prohibition as rules supplementing directors’ fiduciary duties. This note discusses the two decisions and seeks to evaluate their possible impact on certain issues that often arise in mergers and acquisitions transactions, particularly the provision of

representations, warranties and indemnities by target companies and the payment of dividend at the conclusion of take-over transactions.

II. The judgments in Lew Syn Pau and Wu Yang Construction

A. Lew Syn Pau—the facts in summary and decision

5 The facts in Lew Syn Pau were largely not disputed. The first accused, L, was a friend and business associate of the second accused, W. W was a director and the single largest shareholder of Broadway Industrial Group Ltd (“BIGL”), a Singapore company listed on Singapore Exchange. BIGL is the direct parent company of Compart Holdings (S) Pte Ltd (“Compart Holdings”), which is in turn a direct parent company of Compart Asia Pte Ltd (“Compart Singapore”). Both Compart Holdings and Compart Singapore are Singapore companies. Compart Singapore held all the shares of Compart Asia Pacific Limited (“Compart Mauritius”), a Mauritius company. W and L each held directorships of Compart Holdings, Compart Singapore and Compart Mauritius. L was not a director of BIGL.

6 BIGL had entered into a share placement agreement with Silver Touch Holding Pte Ltd (“Silver Touch”) pursuant to which Silver Touch would subscribe for 33 million new ordinary shares of BIGL in two tranches. Upon the completion of the share placement, Silver Touch and W would hold 22% and 14.63% of BIGL respectively and Silver Touch would replace W as the single largest shareholder of BIGL. Prior to the scheduled date of completion of the placement, it appeared that Silver Touch was unable to complete the placement due to lack of funds. W was concerned because if the placement did not take place, there were adverse financial consequences to BIGL. In order to put Silver Touch in funds, it was agreed that Compart Mauritius (which had the funds) would give a temporary loan to L who would in turn loan the amount (and at an interest rate of 1% per month) to T, who controlled Silver Touch. Silver Touch would then complete the placement in respect of the first tranche. Under Mauritius law, there was no prohibition against a Mauritius company (such as Compart Mauritius) extending a loan to its director so long as the board of directors authorised such a loan. It was not disputed that W and L knew that the moneys belonging to Compart Mauritius were used to enable Silver Touch to acquire the shares in BIGL.

7 W and L were each charged under s 76(1)(a)(i)(A) of the Companies Act; W was charged with knowingly and wilfully authorising BIGL to indirectly give financial assistance to T by authorising a loan

from Compart Mauritius to L for the latter to use the money as a loan to T, for the purpose of enabling Silver Touch to acquire the shares of BIGL. L was charged with abetting, by intentionally aiding, W to knowingly and wilfully authorising BIGL to indirectly give financial assistance to T. The crucial issue in the case was whether any financial assistance was provided to T by BIGL and whether such assistance was prohibited under s 76. The Prosecution had conceded that the funds advanced to L belonged to Compart Mauritius (and did not originate from BIGL). Instead, the Prosecution had argued that the funds used to provide financial assistance to T were funds belonging to the “BIGL group”.

8 At the end of the Prosecution’s case, counsel for W and L submitted that there was no case to answer on the basis that with the facts presented by the Prosecution, W and L had not committed the offences as charged. The court held that the Prosecution failed to make out the case that there was financial assistance given by BIGL in contravention of s 76(1)(a)(i)(A) and W and L were acquitted. The Prosecution has not appealed against the decision.11

(1) Financial assistance

9 Menon JC in Lew Syn Pau held that the scheme of the Companies Act was that assistance by a company in order to facilitate the acquisition of its shares was not prohibited generally; what was prohibited was the giving of assistance that was “financial” in nature. For assistance to be “financial” in nature, there must have been diminution or depletion of the company’s assets; actual depletion was not required so long as “the assets have been placed at risk and there is a potential for future depletion to take place by virtue of an undertaking or obligation entered into by the company at the time of and in connection with the acquisition of its shares.”12 The test is viewed from the company’s perspective and not from the perspective of the intending purchaser.

10 The court reached the conclusion based on the following: (a) the Australian cases, starting from Burton v Palmer,13 have held that a company had provided financial assistance for an acquisition only if its assets were either being used or were at risk of being depleted in connection with that acquisition and this was being done otherwise than in the ordinary course of business, (b) the legislative purpose of s 76 was

to preserve the company’s capital and to prevent the use of its assets in connection with an intended acquisition of its shares, and (c) the test relating to the depletion of assets was applied in the Malaysian High Court decision in Simmah Timber...