1. CONSEQUENCES OF INCORPORATION

A. SEPARATE LEGAL ENTITY

1. INTRODUCTION

Company: An instrument or vehicle for transacting a business

Five basic legal characteristics of companies/corporations:I. Legal personalityII. Limited liabilityIII. Transferable sharesIV. Delegated managementV. Investor ownership

Coy must have a register of members- Members are registered SH- There is a difference between a legal/registered member and an equitable member (whose shares

are being held on trust by others)

Two ways coy can raise capital: Debt and Equity- Debt: Coy borrows money from a person in return for a piece of paper promising to return money

back after a certain period of time with a certain rate of interesto Contractual relationshipo Lender has no rights to say how coy is runo 2 types of creditors: secured and unsecured

Secured: Lays a prior claim on an asset should the coy wind up Unsecured: A general promise to be paid back

- Equity: SH gives money to the coy in return for share certificateso Gives SHs 3 main rights:

right to vote, right to obtain dividends if declared, right to the residual after coy winds up

3 Main stakeholder in a coy: Creditors, SHs, Employees

Private coy v. Public coy: Private coy has a ceiling on the number of shareholders and restrictions on the transfer of shares (e.g. pre-emption rights to shares: option for existing SHs to buy out the shares of other SHs first before the shares are released to outsiders)

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2. THE PRINCIPLE OF SEPARATE LEGAL ENTITY

*SALOMON V. SALOMON & CO LTD [1897] A.C. 22 AT 51

Significance: Incorporation of a company creates a separate legal entity

Facts: S was a prosperous manufacturer. He incorporated his business as a LLC and gave 1 share each to his wife and 5 children and took 20,001 shares. The co. also issued a secured debenture to S for the shares he had transferred out. However, he continued to run the business as before. The company soon went into liquidation. The liquidator claimed that S should be personally liable for the company’s debts.

Held: HL – Incorporation of the company created a separate person.

Members are not liable for the company’s obligation Ct. said decision may have been different if there was fraud Even though the business of the company was the same as before and the same persons managed

the business and the same hands received the profits, the company was not an agent or trustee for members.

Members not liable in respect of the company’s obligations. Decision not unfair because it is always open for creditors to protect themselves; law

provides self-help remedies Reduces the perceived inequality o Can request a guarantee from company (e.g. mortgage over plant; security over

equipments); can form collateral contracts where directors provides personal guaranteeso However, involuntary creditors may still not be adequately protected (e.g. victim of a

tortious act); The law in general does not draw a distinction between voluntary or involuntary creditors because the law places a great premium that the company would be recognized as a separate legal personality. However, it is arguable that the ct should be more willing to lift the corporate veil for involuntary creditors

S. 17(1) CA

Subject to the provisions of this Act, any person may, whether alone or together with another person, by subscribing his name or their names to a memorandum and complying with the requirements as to registration, form an incorporated company.

Companies Act: Comes under the purview of Accounting and Corporate Regulatory Authority (ACRA) under Ministry

of Finance Company limited by shares: 1) The amount paid for the shares 2) The amount you owe for

partially paid shares Company limited by guarantee: each member agrees to guarantee a certain amount of the

company’s debt up to a certain amounto Members liable to contribute of company’s assets on winding up only up to amt agreedo Typically used when company is intended to be used as a non-profit organisation

because of the aversion to the profit-making notion of owning shares Unlimited company: each member agrees to be responsible for the full extent of the company’s

debt

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3. THE INCORPORATION OF A COMPANY

3.1 THE OBLIGATION TO INCORPORATE

SS. 17(3)-(4) CA

Any organisation with more than 20 members formed for the purpose of carrying a business must be incorporated as a company

o Does not apply to a partnership of persons carrying on a profession requiring qualifications set out by some law

3.2 THE INCORPORATION PROCESS

S. 19 CA

Company name Registration and lodgement of requisite documents (e.g. memorandum of association)

Historically in England companies could only be formed by royal charter or Act of Parliament. This meant that incorporating a company was either a costly affair or available only to those who were well connected. To allow the benefits of incorporation to be made widely available, the simple process of incorporating a company by registration was introduced in 1844. This is the process that now applies in Singapore and in many other jurisdictions both common law and civil law, e.g. in China, Indonesia and Vietnam.

Incorporation by Registration: Takes away discretion from people who are in charge of the incorporation process Privilege of incorporation: everyone has the right to incorporate a company

3.3 THE IMPLICATIONS OF INCORPORATION (SEPARATE LEGAL PERSONALITY)

S. 19(5) CA

(5) On and from the date of incorporation specified in the notice issued under subsection (4) but subject to this Act, the subscribers to the memorandum together with such other persons as may from time to time become members of the company shall be a body corporate by the name contained in the memorandum capable forthwith of exercising all the functions of an incorporated company and of suing and being sued and having perpetual succession and a common seal with power to hold land but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is provided by this Act.”

Incorporated association has a separate legal personality of its own apart from the persons who comprise it

1. THE COMPANY IS A BODY CORPORATE WITH THE POWERS OF AN INCORPORATED COMPANY;

2. IT MAY SUE AND BE SUED IN ITS OWN NAME;

Foss v. Harbottle (1843)

Significance: “Proper plaintiff rule”/ “Rule in Foss v. Harbottle”: No member can arrogate to himself the coy’s cause of action If a co. has a right against a party under a contract, it is for the co. to sue. If a director has breached his duties to the co., it is for the co. to enforce its rights. The proper organ to commence actions on behalf of coy is the Board of Directors

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* 2 directors own 60% of the shares in a company and were in breach of their fiduciary duties to reap profits for themselves. What can the 40% shareholders do? The wrong was done to the company and not to the s/h. So prima facie, only the co. is the proper plaintiff. But the law will not tolerate such injustice so there are some exceptions in the role of F v H. (Outside the scope of this lecture)

3. IT HAS PERPETUAL SUCCESSION

A co.’s ID persists despite any change in the shareholding of the co. and the co. survives even if all the members and controllers die: Re Noel Tedman Holdings Pty Ltd (Supreme Court, Queensland).

The concept of transferable shares; as long as shares are transferred, they continue to exist. Shares will never cease to exist. Transferability of shares differs from company to company: private (more restricted), public (more

relaxed)

4. IT MAY OWN LAND

Company is the legal owner of the land even though the shareholders enjoy the commercial benefits of the land.

Bowman v. Secular Society Ltd [1917] A.C. 406

Significance: A company is able to take possession of property bequeathed to them in a will by a testator

Facts: The Secular Society was registered as a company limited by guarantee. The main object of the company, as stated in its memorandum of association, was "to promote ...

the principle that human conduct should be based upon natural knowledge, and not upon super-natural belief, and that human welfare in this world is the proper end of all thought and action

A testator left some of his property to the Secular Society. The appellants, the next of kin of the testator, disputed the validity of the residuary gift to the

respondent society on the ground that the objects of the society were unlawful.

Held: The bequest was valid SS was not illegal such that it rendered the company incapable in law of acquiring property by gift It was also not criminal, inasmuch as the propagation of anti-Christian doctrines did not constitute

the offence of blasphemy

Macaura v. Northern Assurance Co Ltd [1925] A.C. 619

Significance: A company can own property in its own name. The company’s property is its own and not its members. Members have NO insurable interest in

the company’s property. o Even if a person owns all the shares in a company, he does not own the company’s property

and has no legal or equitable interest in the company’s property.

Facts: Macaura owned an estate in Ireland. He sold all the timber on his estate to a company, the Irish

Canadian Sawmills. All the shares in ICS were owned by him or by his nominees. Macaura insured the timber he sold to the company in his own name. Two weeks after effecting the insurance, the timber was destroyed in a fire. The insurance

company refused to pay. Macaura sued

Held: The insurance company was not liable to pay When Macaura sold the timber to the company, he gave up his interest in it and therefore has NO

interest that he could insure.

5. THE LIABILITY OF THE MEMBERS MAY BE LIMITED

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Re Application by Yee Yut Ee [1978-1979] SLR 344

Significance: Directors and officers of a company are generally NOT responsible for its debts unless in cases

of fraud etc In law, the company and its controllers are also separate.

Facts: Yee was the secretary of Trans-Market Research (The Company). The company was a wholly-

owned subsidiary of an American corporation. The company retrenched its staff. A dispute arose as to retrenchment benefits. The dispute was referred to the Industrial Arbitration

Court. The company was not represented and an award was made in the company’s absence. Shortly after this, the company’s MD left Singapore

As there was no other resident director, Yee was appointed director to comply with s.145(2) of the CA. The company subsequently failed to comply with the award

The Industrial Arbitration Court subsequently made an order that Yee had to personally pay the retrenchment benefits.

Yee applied for judicial review of this case

Held: The High Court quashed the IAC’s order for being erroneous in law Except in cases of fraud, breach of warranty of authority or other exceptional circumstances, a

director is NOT liable for the debts of an incorporated company

3.4 PRE-INCORPORATION CONTRACTS

1. POSITION AT COMMON LAW

Kelner v. Baxter (1866) L.R.2.C.P. 174)

Significance: A company has no legal existence before its incorporation. It is incapable of entering into a contract itself and equally incapable of acting through an agent. A person who purports to make a contract on behalf of a proposed company may be personally liable at common law

Facts: K agreed to sell wine to promoters of a yet to be formed co. Directors later met to ratify the purchase. Incorporation took place later part of the month but wound up before K could be paid. K brought an action against promoters personally.

Held: Promoters personally liable because there was no co. in existence at the time of purchase. Hence the agreement would be wholly inoperative unless it was binding on the promoters

personally. P parted with his stock upon the faith of D’s engagement that the price agreed on should be paid

on the day named and not contingent on the formation of the company. The fundamental question in every case must be what the parties intended or must be fairly

understood to have intended.

Newborne v. Sensolid (GB) Ltd [1954] 1 Q.B. 45 (CA)

Significance: A pre-incorporation contract is generally invalid. (BUT see Cosmic Insurance below for the

Singapore position)

Facts: Newborne Ltd entered into a contract for a sale of goods. The contract was undersigned by

Leopold Newborne. On the back of the document were set out the names of Leopold Newborne and M. Newborne as

directors of the company. The market fell and when the goods were tendered to the buyers they refused to take delivery.

Newborne Ltd issued a writ against the buyers claiming damages for breach of contract for failure to accept the goods.

In the midst of the case, it was discovered that at the time when the contract was signed

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the company, Newborne Ltd, was not registered. Subsequently, steps were taken to substitute for the name of the company, as plaintiff, that of Leopold Newborne

Held: As the company was not in existence at the time of the signing, the signature on that document,

and, indeed, the document itself is a complete nullity

2. STATUTORY MODIFICATION

S. 41 CA: Ratification by company of contracts made before incorporation

S. 41(1) allows a company to ratify any contract or other transaction purporting to have been entered into on its behalf before its incorporation. There are two conditions before this can take place:

(1) the contract must purportedly have been entered into by the company or by any person on behalf of the company before its incorporation and (2) the company must ratify the contract after its formation.

Prior to ratification, the person purporting to act on behalf of the company shall be personally bound. Upon ratification, the company becomes bound and entitled to the benefit of the contract as if it had been in existence at the date of the contract.

* Cosmic Insurance Corp Ltd v Khoo Chiang Poh [1981] 1 MLJ 61

Significance: A company can ratify a pre-incorporation contract as provided under CA s. 41(1).

o However, it cannot change the terms of the contract upon ratification.

Facts: Cosmic Insurance was set up by 12 promoters who then offered the job of managing

director to Khoo who himself was one of the promoters. The appointment letter stated that Khoo would be the managing director for life unless he ‘resigns,

dies, or commits an offence under the CA…” A dispute arose between the company and Khoo and the company sought to remove him. Preliminary issue: whether the letter from the promoters was a pre-incorporation

contract, and if so, whether it was ratified by the company

Held (PC): Letter amounted to a pre-incorporation contract They also held that notwithstanding the difference in terms between the resolution and the letter,

the company had ratified the contract.

S. 2 Contracts (Rights of Third Parties) Act, Cap. 53B

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B. LIMITED LIABILITY

1. THE PRINCIPLE OF LIMITED LIABILITY

Limited liability: Company’s debts are not those of its members.

In truth they have NO liability for the debts of the company, except to the amount that the member has paid or still left owing for the shares allotted to or purchased by the member.

Advantages of limited liability:1. Facilitates the mobilization of capital (i.e. investors will be secure in the knowledge that they will

be rewarded if coy does well, but will not be financially ruined if coy collapses). 2. Provides companies with a means of raising finance other than through borrowings. (i.e. issuing

of shares)3. Facilitates the development of capital markets. A stock exchange is not feasible without limited

liability. 4. Allows for the professionalization of management as investors will be more prepared to allow

the company to be managed by others if they are not made responsible for the consequences of decisions made by management.

EASTERBROOK AND FISCHEL, “LIMITED LIABILITY AND THE CORPORATION” (1985) 52 UNIVERSITY OF CHICAGO LAW REVIEW 89

General advantage: Limited liability facilitates the efficient specialization of function in publicly held corporations

Alternative to Limited Liability model: Insurance If firms could purchase insurance to cover their liabilities to debt investors, the firms' structure

would be much the same as now

Problem of Limited Liability: Externalization of risk, which imposes social cost that is undesirable; incentive to engage in

excessively risky activitieso Because limited liability increases the probability that there will be insufficient assets to

pay creditors' claims, shareholders of a firm reap all of the benefits of risky activities but do not bear all of the costs. These are borne in part by creditors.

o A moral hazard - the incentive created by limited liability to transfer the cost of risky activities to creditors

BUT modifying limited liability has its costs and the moral hazard would still exist without limited liability. The social loss from reducing investment in certain types of projects - a consequence of seriously modifying limited liability - might far exceed the gains from reducing moral hazard.

Judicial solution to problem of limited liability: Piercing the corporate veil in situations where the incentive to engage in excessively risky

activities is the greatest

Other possible solutions: Legislatively imposed minimum-capitalization requirements and mandatory-insurance

requirements are methods to internalise the costs of risk takingo BUT high administrative cost

Impose liability on managers as well as enterprises (i.e. director’s duties) Regulation of inputs (Shares and Debetures)

NOTE: It is still possible for members to contract around limited liability. The most common way is for member-creditors to obtain a guarantee from members or directors of a company before giving credit to the company.

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2. LIFTING THE CORPORATE VEIL

2.1 STATUTORY VEIL PIERCING UNDER THE COMPANIES ACT

Some examples: S340 (responsibility for fraudulent trading); S401 (false and misleading statements); S403 (dividends payable from profits only); S404 CA (fraudulently inducing persons to invest money); S406 (frauds by officers)

2.2 JUDICIAL VEIL PIERCING: CASE LAW

1. STATUTORY PROVISIONS

Rule: Corporate veil can be pierced if a statutory provision provides for it through clear express words OR if a purposive construction of the statutory provision leads to the conclusion that such must have been the intention of Parliament.

The latter basis can often be used to replace the unsatisfactory judicial justification that a coy is a “mere cloak or sham”

Re FG (Films) Ltd [1953] 1 WLR 483

Significance: The court may go behind the corporate veil in order to give effect to the legislative intention

Facts: The Applicant company sought to have film registered as a British Film under Cinematograph

Films Act. The Board of Trade refused application on ground that film in reality was made by a large American company, Film Group Incorporated which provided finance and all facilities required by applicant to make the film.

Applicant company sought declaration that it was the “sole maker” within the meaning of the Acto It was found that the applicant company: o Held a mere 10% share o Had no place of business apart from their registered officeo Did not employ any staff.

Held: The HC refused to register the film. Vaisey J stated that the company’s existence was mainly for the sole purpose of getting the film

to qualify as a British film. It was wrong to regard the co. as a “sole maker” because it was not very much involved in any way

based on the true meaning of the provision in question. As the company was not the maker of the film, it could not be registered.

Lee v. Lee’s Air Farming Ltd [1961] AC 12

Facts: Lee formed company; owned all its shares but one, and was the sole governing director Lee was also employed by company as its chief and only pilot Lee killed while flying for the coy; Wife made claim under NZ workmen’s compensation legislation Issue: Was Lee a worker under the legislation (i.e. person who has entered into a contract of

service with an employer)?

Held: Claim allowed L may have been the controller of the co. in fact. But in law, they were distinct persons. Lee could enter into contract of employment with coy

Re Bugle Press Ltd [1961] Ch 270

Significance:

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Where some statutorily created right is sought to be taken advantage of, the court may consider whether it is within the legislative purpose of the statute to treat the company as being separate from its members.

o Shows a “purposive approach” to lifting the veil

Facts: Bugle Press issued 10,000 shares

o Shaw: 4500o Jackson: 4500o Trelby: 1000

Shaw and Jackson wanted to buy over Trelby’s shares o They thus incorporated a company which offered to purchase all the shares of Bugle

Press. Shaw and Jackson of course accepted. Trelby declined.

o They then relied on s209 of the UK CA which stated that if a company had acquired 90% or more of another company’s shares, it could compulsorily buy out the remaining 10%.

Held: CA declined to allow them to take advantage of s.209. Although the strict terms of the section had been complied with, the scheme would not be

approved as because the section had NOT been used “for the purpose of any scheme contemplated by the section but for the quite different purpose of enabling majority shareholders to evict the minority.’

2. AGENCY

Rule: If the legal relationship of agency exists between two persons, called the principal and the agent, then the principal is responsible for whatever the agent does within the scope of agency.

Company’s separate legal personality allows it to act as an agent (in the usual sense) of another party “Agency” is not considered a true exception to corporate veil doctrine

Such “agency” is usually implicit rather than expressly created and may be inferred from the circumstances of the case. This must be done carefully lest it materially undermines and de-stabilizes the doctrine of separate personality. Relevant factors considered include:

Whether company is so grossly undercapitalised that it cannot not run the business independently

Whether there is the intention to establish a relationship of agency since consent is crucial to such arrangements

Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116

Significance: A company, like any legal person, may act as an agent for another Principals are liable for the company’s acts on normal agency principles and such liability is not

based on the corporate veil being lifted

Facts: Birmingham Waste Co carried on business as waste paper merchants in certain premises belonging

to Smith, Stone and Knight. o The waste company was a subsidiary of SSK which held 497 out of 502 shares. o The remaining 5 shares were held by directors of SSK, who were also directors of

the waste company. The Birmingham Corporation acquired the premises. Under the relevant legislation, an owner-

occupier was entitled to compensation, but a mere tenant was not. SSK put in a claim for compensation. The Corporation refused, claiming that in law, SSK and

Birmingham Waste were distinct entities. It was found that although the waste company was apparently carrying on the business, the waste

company business was owned by SSK. o There was no agreement of any kind made between the two companies, nor was

anything done to transfer beneficial ownership of the business to the waste company. o The waste company had no staff and the books were maintained by SSK.

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o The waste company never declared dividends and their profits were in fact treated as SSK’s profits.

Held: Corporation ordered to award compensation. Atkinson J held that the mere fact that a person owns all the shares in a particular company

does not make the business carried on by that company his business. o It is a question of fact in every case whether the company is carrying on the business as

an agent of its shareholders. In this case, the waste company was held to be a tool of SSK. Accordingly, the occupation of the

premises amounted to occupation by SSK and the business was SSK’s.

* Adams v Cape Industries plc [1990] Ch 433

Issue: Whether NAAC or CPC was an agent of Cape Industries

Held: Agency argument was rejected A substantial part of NAAC/CPC’s business was in every sense its own business. Strictly defined limits were imposed on the functions which NAAC/CPC was authorized to carry out

or did carry out as the representative of Cape. NAAC/CPC had no authority to bind Cape to any contractual obligation. Hence, the business carried out by NAAC/CPC was exclusively it’s own business.

3. FAÇADE OR SHAM THAT CONCEALS TRUE STATE OF AFFAIRS

Trying to create a false picture, NOT to insulate business people from liability. Undercapitalisation of a coy Strong factor influencing the decision to lift the corporate veil More often cited as an argument in the American jurisdiction

“The Saudi Al Jubail” [1987]

Facts: The Plaintiffs’ claims arose by reason of a charter party entered into with Cargo Carriers Ltd (CCC)

in respect of the plaintiffs’ vessel, the Fidelity. The plaintiffs’ arrested the Saudi Al Jubail in a sistership action. In their action against the Saudi,

they argued that the charterer of The Fidelity was the beneficial owner of the Saudi. The Saudi was owned by Omega Shipping Co (OSC). The plaintiffs’ alleged that both CCC

and OSC were controlled by one Orri.

Held: Orri ran a group of companies that he used as a front for his activities.

o He picked such corporate entities within the group as were suitable for whatever purpose he had in mind.

o He did not keep the companies separate from one another or from his own personal affairs.

Hence the Justice found that the company was just a sham and the plaintiff was entitled to seize the Saudi.

Orri was the beneficial owners of the Saudi, notwithstanding that it was nominally owned by OSC.

* Adams v Cape Industries plc [1990] Ch 433

Significance: It is open to businesses to structure their operations to insulate one part from another It is prima facie permissible for companies to structure their operations across a group of

companies to pre-empt FUTURE liabilities. (Same as in the SG decision of the Skaw Prince below)

o BUT the courts might take a different view if the structure is abused to evade PRESENT liabilities.

o Hence, the motive of the perpetrator may be highly material.

Facts: Cape was an English company. It had a subsidiary in South Africa which mined asbestos and

another subsidiary, North American Asbestos Corporation (NAAC). 10

Subsequently, NAAC was dissolved and the marketing of Cape’s products in the US was taken over by two companies: (1) Associated Mineral Corporation (AMC) and Continental Products Corporation (CPC).

o CPC was not a subsidiary of Cape and instead dealt with Cape through AMC which was actually a shell company.

o Such an arrangement was designed to enable Cape asbestos to continue to be sold into the United States while reducing, if not eliminating, the appearance of any involvement therein of Cape or its subsidiaries

Cape was sued in Texas by a group of plaintiffs who claimed to have been injured by asbestos emissions from a local factory. The plaintiffs obtained default judgement against Cape and sought to enforce it in England.

The trial judge dismissed the enforcement action The plaintiffs appealed

Held: CA refused to lift the veil; judgment against CPC in the US cannot be enforced against Cape in the UK

Court will not lift the veil merely because the corporate structure has been used so as to ensure that the legal liability in respect of particular future activities of the group will fall on another member of the group rather than the company itself.

o Where a façade is alleged, the motive of the perpetrator may be highly material.o Whether or not this is desirable, the right to use a corporate structure in this manner is

inherent in our corporate law From the evidence, court inferred that Cape's intention of setting up AMC and CPC was to enable

sales of asbestos from the South African subsidiaries to continue to be made in the United States while (a) reducing the appearance of any involvement therein of Cape or its subsidiaries, and (b) reducing by any lawful means available to it the risk of any subsidiary or of Cape as parent company being held liable for United States taxation or subject to the jurisdiction of the United States courts, whether state or federal, and the risk of any default judgment by such a court being held to be enforceable in this country.

There was nothing illegal in Cape arranging its affairs so as to attract the minimum publicity to its involvement in the sale of Cape asbestos in the United States of America.

o Whether or not such a course deserves moral approval was irrelevant. Although court also said that AMC was a mere corporate name; had no real commercial

purpose; was merely to interpose Cape and CPC so as to allow Cape to even further distance itself from CPC, it held that this did NOT affect the substance of the case

o This is because CPC was wholly owned by an independent individual and not Cape. The court will not lift the corporate veil as against a defendant company which is the member of a

corporate group merely because the corporate structure has been used so as to ensure that legal liability in respect of particular future activites of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company.

Whether this is desirable is not the concern of the court, as the right to use a corporate structure in this manner is inherent in our corporate law.

WALTER WOON ON COMPANY LAW

Distinction between EXISTING and FUTURE liabilities: In cases where the veil of incorporation was lifted, the companies were used to evade existing duties and liabilities; such conduct is improper insofar as it serves no reasonable purpose save to give effect to improper conduct; whereas in Cape Industries the corporate structure was set up with a view to minimising future liabilities.

* Win Line (UK) Ltd v Masterpart (Singapore) Pte Ltd [2000] 2 SLR 98

Significance: Court will be reluctant to lift the corporate veil:

o When the 2 companies have NO common shareholders or directors (officers), or o On the mere premise that the companies are a single economic unit, oro When there is NO corporate financial control by one party over another, and are

economically separate businesses A relationship of agency will NOT arise in the absence of consent or agreement between the

parties Courts often hold that there is NO sham or façade where there are genuine reasons for the

company to enter into the contract and there was NO dishonesty involved.

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Facts: The Plaintiffs owned a cargo vessel chartered by Masterpart Masterpart subsequently informed the Plaintiffs that they were no longer interested in the

vessel. The plaintiffs accepted this as repudiation of the charter contract and looked for alternative employment, which they were able to secure within two weeks.

o However, plaintiffs subsequently suffered loss from detention of vessel & breach of contract.

They brought an action against Masterpart AND D&M, whom plaintiffs alleged should be responsible for Masterpart’s default as Masterpart was only an alter ego of D&M.

o Masterpart was run by 2 employees of D&M. o The two companies had also entered into a “parallel supply” agreement whereby

Masterpart did business with D & M’s financial backing and also business which D & M could not do.

Plaintiff claimed that both companies were run as a single corporate entity that must be jointly liable, D&M being an undisclosed principal in the transaction

Held:Distinction between façade and agent argument:

Relationship of agency depends on the existence of two separate legal entities. If Masterport was a façade, it is not a legal entity and hence cannot be an agent to D&M.

Agency argument: D&M had a clear use for Masterpart, but that does not itself lead to an agency relationship.

o Main reason why Masterpart was set up was because D&M considered that Masterpart would assist it in gaining access to markets and business from which D&M would have otherwise been excluded by reason of its exclusive arrangements with third parties.

o Thus, D&M was willing to allow two of its employees to own and run a company from its own premises even though that company would be dealing in a similar line of trade to D&M.

Conduct of both parties showed that there was NO agency relationship but were independent parties. D&M’s role was a mere financier

o NO intention by D&M to have an agency r/s. D&M would not want to open itself up to such liability.

o Masterpart also accepted liability for all its transactions without looking to D&M to bail it out. o With relation to the specific contract, D&M had also tendered for it. No need to do so if

Masterpart was an agent. D & M was not the beneficial owner of Masterpart. Masterpart had more than a nominal paid-up

capital and had independent shareholders and officers who were capable of being traders and conducting business in their own right, even though they were employees of D & M. 

Façade/Sham argument: The alter ego argument was rejected as the 2 companies have no connection with each other

in terms of officers or shareholders. o For court to lift the veil, it must be established that the corporate structure or

transactions were a sham in that the acts done or documents executed by the parties were intended to appear to third parties that legal rights and obligations were created which were not the actual legal rights and obligations the parties intended to create.

Court also reluctant to lift the veil on premise of a single economic unit. o Expressed the uncertainty of the law in this area & how it cannot be applied here towards 2

companies with no common shareholders or directors. o Also no evidence of corporate financial control by D&M. Both companies had a

mutually beneficial, but economically separate business r/s

Kensington International Ltd v Republic of Congo (Defendant) and Glencore Energy UK Ltd & Ors (Third Parties) 2005 EWHC 2684 (Comm)

Significance: Court would pierce the corporate veil where transactions or structures which were purely a

sham and a façade and had no legal substance were set up with the intention of defeating the existing claims of creditors

Facts:

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The Claimant, Kensington, had obtained 4 judgments against defendant Congo for various loans and credit agreements.

Glencore purchased USD $39M worth of oil from Congo. K sought to intercept this amount to satisfy the debts owed by Congo.

The oil consignment was sold to Glencore through a chain of subsidiary companies, who acted as intermediaries between Glencore and Cogno. K argued that these subsidiary companies were a façade concealing the true fact that the money was due to be paid to Congo.

Held: Judgment for the claimant Court would deal with the underlying reality and not the mask or creature that was being put

forward with the object of deceit or dishonest concealment. The sham transactions or structures would thus be treated as lacking validity.

The transactions were: o Orchestrated such that they prevented the attachment of Congo's assets by

judgment creditors. o An artificial scheme of sales and purchases between supposedly independent

companies weo A sham devised to hide the reality of a sale by Congo to Glencoreo Used to evade enforcement of existing liabilities against the Congo. That involved

dishonesty on the part of those who created and used the structure.

TORTIOUS WRONGS:

TV Media at [117], [118] and [144]; Affirmed in New Line Productions at [104]:

A fundamental tenet of company law is that a company is a separate legal entity from its members or shareholders (Salomon)

By extension of this principle, courts have held that proof of the commission of a tort by a company does not automatically prove that the directors who manage its affairs are also guilty of the tort. (Gabriel Peter)

However the law has carved out an exception to this principle: where directors order an act by the company which amounts to a tort by the company, they may be liable as joint tortfeasors on the basis that they have ‘procured or directed’ the wrong to be done.

To do this, the court must look at the level of the director’s involvement in the company in order to determine the extent to which he is the company’s alter ego (Gabriel Peter)

*TV Media Pte Ltd v De Cruz Andrea Heidi and another appeal [2004] SGCA 29

Significance: Where directors order an act by the company which amounts to a tort by the company, they

may be liable as joint tortfeasors on the basis that they have “procured or directed” the wrong to be done

o Otherwise courts have generally held that proof of the commission of a tort by a company does not automatically prove that the directors who manage its affairs are also guilty of the tort

Whether the veil can be lifted or not depends on the factual extent to which the tortfeasor is the alter ego of the company and the level of his involvement in the company

Facts: The respondent, Andrea Heidi de Cruz brought an action against five defendants for her liver

damage, allegedly caused by her consumption of a slimming drug, “Slim 10”. The second defendant, Health Biz Pte Ltd, was a Singaporean company that imported and sold Slim

10. However, the company was insolvent and did not have sufficient funds to play Andrea. Hence, she brought charges to the third defendant, Semon Liu, was the director and principal shareholder of Health Biz.

The trial judge found Health Biz and TV Media liable for Andrea’s liver failure. He also found Semon personally liable for authorising, directing and/or procuring Health Biz’s negligent acts of importing and selling Slim 10.

TV Media appealed. Semon associated himself with TV Media’s appeal on liability. He further argued that the judge had erred in finding him personally liable for authorising, directing and/or procuring Health Biz’s negligence and that there were no circumstances that justified the lifting of the corporate veil.

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Held: Lifting of the veil was justified The dilemma: On the one hand, there is the principle that a company is separate and distinct in law

from its shareholders and directors, and that there is a commercial interest in allowing companies to enjoy the benefits of limited liability which are offered by incorporation.

o On the other hand, directors of companies should not be allowed to escape personal liability to third parties for torts that they personally committed merely because they committed the torts in the course of carrying out their duties as directors of the company.

On the facts, Semon was Health Biz’s alter-ego due to his deep involvement in Health Biz He owed 99% of the company’s shares. He was effectively in control of the company and admitted that the company’s vice president was

his ‘personal assistant’. He acted in his own capacity (by presenting his own portfolio) when he introduced the slimming

pills to the Respondent (Andrea) He was the only person in contact with the Chinese manufacturer; hence he was the only person

who could have instructed the Chinese manufacturer to adhere to a proper system of batching so that the pills would not have been imported in such a haphazard manner.

TCH: Problems with this reasoning

o A person can only be liable for procuring a tort if he owes a duty to the victim. o For a person to indirectly be responsible for the tort of negligence, it is necessary to first

establish that the person owes a duty of care to the third party. o However the Court of Appeal in TV Media did not make this enquiry.

In addition, if a duty is found, the mere fact that a person procured the commission of the tort makes him liable.

o There does not need to be a lifting of the corporate veil to make the person liable.

*New Line Productions, Inc and another v Aglow Video Pte Ltd [2005] SGHC 118

Significance: Where a director is clearly the controlling mind and spirit of the company in question, courts

may have sufficient reason to lift the corporate veil and find the director personally liable for authorising and directing the company’s acts.

o The court must look at the level of his involvement in the company in order to determine the extent to which he is the company’s alter ego. It would not be sufficient to hold a director liable on the ground of his indifference or inaction alone.

Court applied the holding in TV Media v. Andrea De Cruz that where directors order an act by the company which amounts to a tort by the company, they may be liable as joint tortfeasors on the basis that they have “procured or directed” the wrong to be done

Facts: The first plaintiff owned the copyright to three films. The second plaintiff was the exclusive licensee

in Singapore in respect of replication and sale of the three films in video format, including DVD and VCD formats.

Aglow imported VCDs into Singapore and distributed them for sale through “TS Group”. These VCDs were said to have originated from Mangpong in Thailand which was sub-licensed to distribute them. However, Mangpong had notified the video trade that the VCDs did not originate from it. The plaintiffs sued Aglow and two companies under the TS Group and obtained an interim injunction prohibiting the defendants from dealing with the infringing VCDs.

Subsequently, the TS Group obtain another 7,000 VCDs through a general wholesale trader (“Speedy Video”).

The plaintiffs sued the corporate defendants (Aglow and TS Group) for copyright infringement. It transpired that

o the companies (which formed the TS Group) were essentially under “four directing minds”

o Zakir, a director of Aglow, was the directing mind of the company.

Held: Court found that Aglow, the TS Group and their Thailand counterparts were working in collaboration

to bring in infringing products under the guise of legitimate parallel imports.

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o Tay Yong Kwang J: The companies in the TS Group were really little pieces of mosaic forming complete mural, glued together by the four directing minds behind the group who were common directors, officers and shareholders. As such, it was just to lift the corporate veil.

The four directing minds were the controlling mind and spirit of the TS Group, and were therefore personally liable for the infringing activities committed by the corporate defendants.

Zakir was the alter ego of Aglow and that he was its directing mind. Accordingly, only Zakir was personally liable as a director of Aglow. The other directors were not implicated.

4. FRAUD AND/OR EVASION OF EXISTING LEGAL OBLIGATIONS

Re a Company [1985] BCLC 333

Significance: The use of the corporate veil to shield a wrongdoer’s assets from being taken to satisfy a

judgment (or potential judgment) is impermissible Court could use its powers to pierce the corporate veil if it is “necessary to achieve justice”,

irrespective of the legal efficacy of the corporate structure under considerationo (This has been doubted in Trustor v. Smallbone (below))

Facts: The plaintiff companies, which were in liquidation, sued the defendant alleging deceit and

breach of trust. There was evidence that the defendant, once he realised that the plaintiff companies were

insolvent, arranged for his personal assets to be held by a network of interlocking companies and trusts so that his true beneficial interests were concealed.

o The network of corporations was used as a device to prevent the plaintiffs from realizing the fruits of the proceedings, which proceedings the defendants had anticipated.

In interlocutory proceedings, the HC imposed a Mareva injunction on the defendant. The defendant appealed arguing, inter alia,

o He had no interest in the assets of the corporations. o Court could pierce the corporate veil only if the network of corporations was a

complete sham

Held: Court rejected Df’s submissions The defendant had created a network of companies and trusts through which he would dispose of

his English assets. In these circumstances the court would pierce the corporate veil in order to achieve justice.

Gilford Motor Co v Horne [1933] Ch 935

Significance: Courts have the discretion to lift the corporate veil so as to discover any illegal or improper

purpose, such as the evasion of an existing statutory or contractual duty

Facts: Horne was the former MD of the plaintiff company. He covenanted not to solicit customers of

the company after the termination of his employment. However, when he left the plaintiff’s employ, he set up his own company and did what he

promised not to do. The plaintiff sued

Held: Injunction was granted He cannot evade his obligation by using his coy as a cloak for his activities

ALTERNATIVE APPROACHES: WALTER WOON ON COMPANY LAW PG 70

If a person is trying to circumvent a personal restrictive covenant through his company, what alternative is there to lifting the corporate veil?

Can be argued that company has committed the tort of inducing a breach of contract

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In Gilford, to the extent that the defendant set up JM Horne & Co. Ltd, through which he solicited the plaintiff’s customers, the company could have been regarded as the defendant’s agent and therefore justify the grant of an injunction against the company and the defendant.

If a person transfers his property to his company to evade personal creditors, what alternative is there to lifting the corporate veil in order to go after the vendor?

Ask whether the company paid for the property If no consideration, then the company may simply be holding the property on trust for the vendor, who will then still be the beneficial owner of the property

Trustor AB v Smallbone (No. 3) [2001] 1 WLR 1177

Significance: Court declined to follow Re A Company – Corporate veil could NOT be pierced merely on the

grounds that it was necessary to do so in the “interests of justice” OR that there was some impropriety involved

BUT if the company had been used as a device or facade to conceal the true facts, thereby avoiding or concealing any liability of its controller, the court is entitled to pierce the corporate veil, and recognise that the receipt of a company as that of the individual

Facts: The respondent was managing director of the appellant company. He breached his duties by signing payouts from the company’s funds.

o These funds were paid into a corporation in which he wholly owned and was in turned controlled by a Liechtenstein trust of which he was the sole beneficiary.

The appellant company appealed to the court to ‘lift the corporate veil’ and make summary judgment against Smallbone.

* Gerhard Hendrik Gispen & ors v Ling Lee Soon Alex & anor [2001] SGHC 350

Significance: Court will lift the veil of incorporation if a company is a cloak or a sham to avoid the legal

obligations of a party to the claimants BUT court would NOT lift the veil if NO legal obligation was involved and was merely the purpose of

the arrangement was merely to achieve an objective that did not involve fraud or impropriety.

Facts: 3rd Plaintiff was an incorporated Dutch public company. It entered liquidation and appointed the 1st Plaintiff and another as receivers. One of its

assets was a timber concession run by a wholly owned subsidiary DTL. The receivers agreed to sell DTL to Concorde. The agreement was signed by Concorde’s

proxy-holder (2nd Defendant). However, Concorde reneged on their instalment payments, causing the receivers to rescind the

agreement of sale. The Netherlands Arbitration Institute ordered Concorde to pay damages, but Concorde did not

comply. Concorde entered liquidation. Plaintiffs sought to lift the corporate veil and make the Dfs personally liable for the liabilities of

Concorde o Pfs alleged that Concorde’s negotiation was a sham

Held: Pf’s claim dismissed with costs Court found that the Dfs’ group was able to provide the financing The interposition of Concorde was not for the purpose of escaping any existing obligations of the

Defendants to the Plaintiffs nor to anyone else but to limit the liabilities of the other players, which include Southseas and Polynesia.

If the Pf had been concerned that Concorde was not a substantial company, it was open to him to express those concerns and ask for some form of guarantee. This would require the Defendants to make a conscious decision on the issue. 

Prima facie Concorde was the party to the contract and if the Pf wanted anything more, the onus ought to be on him in the circumstances to request that it be put in writing. 

Rule in Salomon on the institution of limited liability has served a very important economic function and cannot be undermined.

On the facts, the court found no reason for lifting the corporate veil

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5. “SINGLE ECONOMIC UNITS”; GROUP COMPANIES

In certain cases, the separate personalities of companies in a group of companies may be ignored.

WALTER WOON ON COMPANY LAW PG 78

Important point to note: For companies to be treated as a single economic unit, there must be functional unity among the companies with the group. It is suggested that there are two aspects to this: unity of ownership and unity of control.

* Win Line (UK) Ltd v Masterpart (Singapore) Pte Ltd [2000] 2 SLR 98

Significance: If it can be shown that the group is managed as a functional whole, a lifting of the veil may occur. Court stated that the law with regards to group companies is uncertain

o Where 2 companies have NO common shareholders or directors, it will be difficult to construe them to be one single economic unit.

Facts: The Plaintiffs owned a cargo vessel chartered by Masterpart Masterpart subsequently informed the Plaintiffs that they were no longer interested in the

vessel. The plaintiffs accepted this as repudiation of the charter contract and looked for alternative employment, which they were able to secure within two weeks.

o However, plaintiffs subsequently suffered loss from detention of vessel & breach of contract.

They brought an action against Masterpart AND D&M, whom plaintiffs alleged should be responsible for Masterpart’s default as Masterpart was only an alter ego of D&M.

o Masterpart was run by 2 employees of D&M. o The two companies had also entered into a “parallel supply” agreement whereby

Masterpart did business with D & M’s financial backing and also business which D & M could not do.

Plaintiff claimed that both companies were run as a single corporate entity that must be jointly liable, D&M being an undisclosed principal in the transaction

Held: The Court was reluctant to lift the veil to consider Masterpart and D&M to be a single economic

unit. On the fact, there was also no evidence of corporate financial control by D&M. Both

companies had a mutually beneficial, but economically separate business r/s.

*DHN Food Distributors Ltd [1976] 1 WLR 852

Facts and Holding: A group of three companies runs a grocery business: the business was owned by DHN itself. The

premises which the business was conducted was owned by Bronze Investments Ltd, a subsidiary of DHN, while the vehicles were owned by the third company in the group, DHN Food transport Ltd.

The council acquired the land. Under the legislation in question, compensation could be obtained both for the land and for disruption of business. But the council refused to pay compensation to DHN or its transport subsidiary on the basis that they did not have any interest in the land.

Court rejected this and treated the whole group as one commercial entity. o Lord Denning: You can treat the entire group as one commercial entity if there is a single

functional unity/single economic entity between them. TCH: Personally doubts that there is such a category as groups of companies often have this

economic synergy between them.

Analysis: The case should NOT be regarded as standing for the proposition that the corporate veil can be

lifted so long as the businesses of a group of companies are integrated (i.e. treating the group of companies as a single entity)

o This is because the companies under a group will always have some form of relations in their operations

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There is a lot of scepticism on this type of single entity argument because this is an widespread practice in the business world in order to insulate different companies in a group from each others’ liability

o Treating every coy in the group as a single entity should require some special circumstance and should not be treated as the starting point

DHN was also doubted in Woolfson v. Strathclyde Regional Council. DHN can hence be better explained based on statutory interpretation because the statutory

provision in the case also allowed compensation for disruption of business. Hence the other two companies could also be rightly compensated without requiring any lifting of the corporate veil.

WALTER WOON ON COMPANY LAW PG 79

Notwithstanding these cases, it is submitted that the better view is that groups of companies should not be treated differently from other shareholders and that for the veil to be lifted, some abuse of the corporate form must have occurred or that it was necessary to give effect to a legislative provision.

o See PP v. Lew Syn Pau (Below) In New Line Production, the veil was lifted as the case involved allegations of copyright

infringement. It is also noteworthy that DHN was doubted in Woolfson v. Strathclyde Regional Council. In Win Line, Prakash J expressed the view that while the law in this area had not been completely

resolved, the principle of treating companies within the same group as on legal entity could not be extended to a case where two companies had no common shareholders or directors.

PP v. Lew Syn Pau [2006] 4 SLR 210 Significance: The doctrine of separate legal personality is not displaced simply by virtue of the fact that the companies in question are organised as a single economic unit. Held: Court refused to lift the corporate veil.

It is clear that reliance upon the fact of control and of consolidation of group accounts is misplaced if it is thereby sought to be suggested that the doctrine of separate legal personality is something displaced in a group setting.

o Compart Mauritius was a bona fide company established years before the transaction for perfectly valid and legitimate tax reasons.

o There was no doubt that Compart Mauritius was not a sham or façade. o It was not even a wholly- owned subsidiary of BIGL.o The fact that the loan was given at the request or even following strong pressure from BIGL

was not sufficient to ignore the separation of legal personalities Quoting and agreeing with Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549:

o ‘The view that the corporate veil may be pierced where one company exercises complete dominion and control over another is entirely too simplistic.’

o ‘The law pays scant regard to the commercial reality that every holding company has the potential and, more often than not, in fact, does, exercise complete control over a subsidiary.’

6. INTERESTS OF JUSTICE

Some cases have held that courts may exercise an equitable discretion to ignore the separate personality of a company if it is just in the circumstances to do so, e.g.:

Re a Company [1985] BCLC 333: “the court will use its powers to pierce the corporate veil if it is necessary to achieve justice”

BUT…

*Adams v. Cape Industries plc [1990] Ch 433: “… save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v A. Salomon and Co Ltd [1897] AC 22 merely because it considers that justice so requires.”

With Adams, courts are now taking a more restrictive approach towards lifting the veil under ‘interests of justice’.

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Furthermore, in Trustor AB v. Smallbone [2001], the court declined to follow the ‘interests of justice’ justification to lift the corporate veil and doubted Re A Company

7. OTHERS – A CONSISTENT PRINCIPLE?

Glazer v. Commission on Ethics for Public Employees , 431 So 2d 752 (La 1983)

Significance: Courts should ultimately engage in a weighing exercise: Does the refusal to lift the corporate veil

causes such an extreme undesirable result that it outweighs the advantage of conferring a separate legal personality on the company

TAN CH, “PIERCING THE SEPARATE PERSONALITY OF THE COMPANY: A MATTER OF POLICY?” [1999] SJLS 531

1. Availability of these alternative causes of action means that there was no real need for the courts in those cases to characterise the companies in question as shams or facades to limit the effect of the companies’ separate personalities.

The same result could have been achieved even with the full recognition of the company as a separate entity

The reliance on the ‘sham’ or ‘façade’ concept adds an unnecessary layer of legal analysis.

2. Present state of the law on lifting the corporate veil is unsatisfactory because the court have, through the use of metaphors, masked the true issues.

While the courts have in general been unwilling to express this, issues of public policy have been at the root of those decisions where the corporate veil has been lifted and this should be recognised as the underlying principle which causes the courts to disregard the separate personality of the company.

3. The adoption of the suggested underlying principle will mean that the courts will be required to articulate cogent reasons for their decisions and this will be to the benefit of all businessmen and lawyers.

Where alternative causes of action which may lead to the same result as veil piercing are available, they should be relied upon without the need for any veil piercing.

4. Where the terms ‘façade’ or ‘sham’ are to be used, it is suggested that they should be used only in the manner defined by Diplock LJ in Snook v London and West Riding Investments Ltd.

“I apprehend that, if [the word ‘sham’] has any meaning in law, it means acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create ... that for acts or documents to be a ‘sham’ ... all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of giving.”

In Re Securitibank Ltd (No 2) [1978] 2 NZLR 136, 159, Richmond P said: “It may be, as Lord Denning said in Littlewoods Mail Order Stores Ltd v McGregor that the doctrine laid down in Salomon v Salomon & Co Ltd is to be watched very carefully. But that can only be so if a strict application of the principle of corporate entity would lead to a result so unsatisfactory as to warrant some departure from the normal rule.”

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