SOME CURRENT ISSUES IN SINGAPORE CORPORATE LAW

• Author: 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: 2019
• Published date: 01 December 2019
• Date: 01 December 2019

I. Piercing the corporate veil

1 Until recently, Singapore courts (as well as other courts in the common law world) have approached questions of veil piercing in the traditional way, namely through the use of somewhat unhelpful and ambiguous metaphors such as “alter ego”, “sham” and “façade” notwithstanding longstanding criticism of such an approach.1 It has been suggested instead that the separate personality of companies should be disregarded only when there has been improper use of the corporate vehicle or an abuse of the corporate form, and courts should over time provide guidance on what constitutes impropriety or abuse for such purpose.2 Singapore courts have for a long time been resistant to this suggestion. Prior to the important UK Supreme Court decision of Prest v Petrodel3 (“Prest”) the only Singapore decision that endorsed the

idea of abuse as the touchstone for veil piercing was Tjong Very Sumito v Chan Sing En4 where Steven Chong J (as he then was) said:5

Courts will, in exceptional cases, be willing to pierce the corporate veil to impose personal liability on the company's controllers. While there is as yet no single test to determine whether the corporate veil should be pierced in any particular case, there are, in general, two justifications for doing so at common law – first, where the evidence shows that the company is not in fact a separate entity;[6] and second, where the corporate form has been abused to further an improper purpose (Walter Woon on Company Law (Tan Cheng Han, SC gen ed) … at para 2.51–2.52, 2.57). [emphasis in original]

This statement of the law is similar to the approach in Prest, where Lord Sumption expressed the view that the concept of abuse underpinned veil piercing and such abuse was made out by what his Lordship 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).7

2 On appeal from Chong J's decision, the Court of Appeal approached veil piercing in the more traditional manner, saying that the corporate veil could be lifted either on the alter ego ground or the sham/façade ground. Both grounds were distinct and the alter ego ground arose where the company was carrying on the business of its controller.8 The court did not refer to Prest, probably because the decision in Prest was not handed down when the appeal in Alwie Handoyo v Tjong Very Sumito9 was argued.10

3 A number of High Court decisions have since cited Prest without expressing any reservations about abuse being the underlying basis for veil piercing.11 For example, it was observed in Manuchar Steel Hong Kong Ltd v Star Pacific Line Pte Ltd12 that “[t]here is, nevertheless, a general thread that runs through all the authorities in support of the

piercing of the corporate veil: the presence of abuse”.13 And more recently the Court of Appeal in Goh Chan Peng v Beyonics Technology Ltd14 stated that in general “piercing the veil is justified by abuse of the corporate form or if it is necessary for the veil to be lifted to give effect to a legislative provision”.15

4 Although these judicial statements appear to regard abuse as the foundational basis for veil piercing,16 it will be recalled that Alwie Handoyo v Tjong Very Sumito recognised the alter ego ground as a distinct justification for ignoring separate personality. This very point arose in Sun Electric Pte Ltd v Menrva Solutions Pte Ltd17 where Vinodh Coomaraswamy J 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 where no such ground was recognised.18 Accordingly, the idea of abuse in Singapore would appear only to encompass what used to be regarded as the sham and façade ground which Lord Sumption in Prest reformulated as the concealment and evasion principles.19

5 How then should the law in this area be further developed or reconciled? The following is suggested.

6 First, leaving aside piercing in the context of legislation which is a matter of statutory interpretation, the concept of abuse of corporate personality as a judicial means to disregard separate personality is a principled one that should be adopted as a general principle.20

7 Second, where the evasion principle is engaged, there is clearly abuse of a company's separate personality because a person in control of a company is seeking to defeat rights that third parties have against him through the interposition of such company.

8 Third, it is suggested that the alter ego ground under Singapore law is similar to the concealment principle in Prest as well as to what Chong J meant when he made reference to “the evidence show[ing] that

the company is not in fact a separate entity”.21 Any supposed distinction between the Singapore and English approaches is terminological rather than conceptual. The confusion in language has arisen because Lord Sumption in Prest saw the terms “sham” and “façade”, used traditionally as the means to justify veil piercing, as protean terms that describe concealment and evasion cases. Crucially, however, the concealment principle did not in his view really involve piercing the corporate veil at all. This was because interposing a company to conceal the identity of the real actors to a transaction would not deter the courts from identifying them. The court would not be disregarding corporate personality but simply discovering the true state of affairs which the corporate structure is attempting to hide.22 Seen in this light, the concealment principle is similar to the alter ego ground under Singapore law.23 This ground is premised on the company carrying on the business of its controller.24 If a 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.

9 There are a number of examples of this such as Asteroid Maritime Co Ltd v The owners of the ship or vessel “Saudi al Jubail”25 where Lai Kew Chai J found that the company that purportedly owned a ship which had been arrested was a mere corporate name26 that the principal shareholder of the company had abused as a cover for his own trading and ship-owning activities. Accordingly, the ship was rightly arrested even though its corporate owner was not indebted to the arresting party. Trust reasoning was also used because Lai J found additionally that the company, not being the true owner, would merely have held the ship on trust for the real owner. Similarly, in Gencor ACP v Dalby,27 the court found the controller of a company to be the alter ego of that company because the company had no sales force, technical team or other employees capable of carrying on any business. Its only function was to make and receive payments. Given this, it could be said that the company was merely carrying on the business of its controller since it was not able to carry on any business itself.

10 Seen in this light, concealment and alter ego cases are arrived at not because the corporate vehicle has been abused but because the

corporate vehicle is not the true or real party to the underlying transaction. Some analogy can be seen with what Diplock LJ described as sham contracts intended to give the appearance of rights and obligations different from those which the contracting parties actually intend.28 This is contrasted with cases where the intention of the controller is for the corporate vehicle to engage in the transaction because the controller wishes to use the company to get around legal obligations the controller is already under, such as where a controller causes a corporate vehicle to engage in business which the controller could not himself be involved in because of a non-compete clause with his previous employer.29 Accordingly, to the extent that Prest and Alwie Handoyo v Tjong Very Sumito regard concealment and alter ego respectively30 as falling somewhat outside the abuse of corporate personality, they are consistent with each other.31

11 In summary, Singapore law now recognises abuse as the foundational principle for veil piercing of which evasion is an example,32 but the alter ego/concealment ground does not (strictly speaking) fall within veil piercing although the net effect is the same in that a third party may look beyond the company to another person standing behind it.

II. Contractual effect of the corporate constitution

12 Section 39(1) of the Companies Act33 (“the Act”) states that:

… the constitution of a company[34] shall when registered bind the company and the members thereof to the same extent as if it 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 constitution.

This provision is the basis for regarding the corporate constitution as a statutory contract binding on the members inter se as well as between the company and its members.

13 Although s 39(1) literally construed suggests that all the provisions of the corporate constitution should be enforceable by members, the courts have limited its potential breadth by introducing the “qua-member rule” which has been stated thus:35

… that no right purporting to be given by an article to a person, whether a member or not, in a capacity other than that of a member, as for instance, as solicitor, promotor, director, can be enforced against the company; and … that articles regulating the rights and obligations of the members generally as such do create rights and obligations between them and the company respectively.

An example of the operation of the qua-member rule may be found in Browne v La Trinidad36 where prior to the formation of a company the plaintiff entered into an agreement with a trustee for the intended company that the plaintiff would be a director and could not be removed before a...