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CHAPTER 16
SINGAPORE COMPANY LAW
Section 1
Introduction
Section 2
Incorporation and its Consequences
Section 3
Corporate Governance
Section 4
Enforcement of Corporate Rights
Section 5
Shareholder Remedies
Section 6
Shares
Section 7
Debentures and Charges
Section 8
Companies in Distress
Section 9
Winding up
SECTION 1
INTRODUCTION
16.1.1
InSingapore, companies are principally governed by the Companies Act (Cap 50, 1994 Rev Ed)
(hereinafter
“
the Act
”
). It should be noted though that specific types of companies may, in addition to
the Companies Act, be regulated by other statutes. For example, insurance companies and banks are
also regulated by the Insurance Act (Cap 142, 1994 Rev Ed) and the Banking Act (Cap 20, 1994 Rev Ed)
respectively. Limited liability partnerships, which despite their name are companies, are governed by
the Limited Liability Partnership Act (Act 5 of 2005). Certain provisions in other statutes such as the
Securities and Futures Act (Cap 289, 1994 Rev Ed) are also relevant to companies.
16.1.2
It should also be noted that the statutory provisions governing companies are supplemented
by the common law.
SECTION 2
INCORPORATION AND ITS CONSEQUENCES
Obligation to Incorporate
16.2.1
Under section 17(3) of the Act, a business organization that has more than 20 members must
be incorporated as a company. However, this requirement does not apply to a partnership of persons
carrying on a profession that is formed in pursuance of some other written law inSingapore(section
17(3) of the Act). Thus members of the legal profession who are governed by the Legal Profession Act
(Cap 161, 1994 Rev Ed) may establish partnerships of more than 20 partners.
Registration of a Company
16.2.2 As a general rule, any person may, upon lodgment of the requisite documents and payment
of the prescribed fee, register a company in Singapore. The mandatory documents to be lodged under
section 19(1) of the Act are the memorandum and articles of association. The memorandum and
articles of association are the constitutional documents of the company. Under section 22(1) of the Act,
the memorandum of association must prescribe the name of the company, the amount of its share
capital (if any) and whether the liability of the members of the company is limited or unlimited. The
articles of association are the regulations of the company and contain provisions relating to how the
company is to be governed. Where the memorandum and the articles are in conflict, the former will
prevail.
16.2.3
Once the memorandum of the company is registered, the Registrar will issue a notice of
incorporation stating that the company is, from the date specified in the notice, incorporated and the
type of company it is, i.e. whether it is a limited or unlimited company and where applicable that it is a
private company
–
see section 19(4) of the Act.
Effects of Incorporation
16.2.4
Section 19(5) of the Act sets out the general effect of incorporation which is that the company
is a body corporate with all such powers as flow from such an entity. The company may sue and be
sued in its own name, it has perpetual succession in that it can survive indefinitely until it is wound up,
it may hold land, and the liability of its members is limited in the event the company is wound up.
16.2.5
Cases have established that as a body corporate a company has a distinct personality that is
recognized by law. In other words, a company has an existence and identity separate from that of its
members
–
see Salomon v A Salomon & Co Ltd [1897] AC 22; Lee v Lee
’
s Air Farming Ltd [1961] AC 12.
The most important consequence of this is that the debts and obligations incurred by the company are
its own and its members do not share the company
’
s liabilities. Creditors of the company may only
look to the company for payment of debts owed to them by the company. If the company is insolvent
and cannot pay its debts, the creditors will have to bear the loss however solvent the company
’
s
individual members may be. All that the members of a company are obliged to do is to contribute the
amount that remains unpaid on the shares that the members have subscribed. This obligation is owed
to the company, not the creditors of the company. As such, if the shares were issued on a fully paid
basis, or have already been fully paid, the members have no further liability to the company. Thus,
when speaking of limited liability it is important to note that what is meant is not that the company
’
s
liability is limited but that the members
’
liability to contribute to the company is limited to the share
capital for which the members have agreed to subscribe.
‘
Lifting the Veil
’
of Incorporation
16.2.6
While an incorporated company has a personality separate from that of its members, there
are circumstances when the courts will ignore such separate personality and treat the company and its
members (or officers) as one for limited purposes. Thus, for example, there may be circumstances when
the courts will hold the members of a company liable for debts incurred by the company. When the
courts do so, it is said that the veil of incorporation is lifted or pierced. Generally, the cases of veil lifting
fall into two categories: by statute and at common law.
Statutory Exceptions to the Separate Personality Doctrine
16.2.7
It is open to Parliament to limit the effects of incorporation by a suitably worded statutory
provision. One of the more important statutory limitations on the separate personality doctrine arises
under sections 339(3) and 340(2) of the Act. The combined effect of those provisions is that, where
debts are contracted without any reasonable or probable expectation that the company would be able
to pay the debts, any officer of the company who was a party to the contracting of such debts is guilty
of an offence and may, after conviction, be made personally liable by the court for the payment of the
whole or any part of such debts.
16.2.8
Another important exception is found in section 340(1) of the Act. Where it appears in the
course of the winding up of a company that any business of the company has been carried on with
intent to defraud creditors of the company or creditors of any other person or for any fraudulent
purpose, the court may declare that any person who was knowingly a party to the carrying on of the
business in such a manner shall be personally liable for all or any of the debts or liabilities of the
company as the court may direct.
16.2.9
A third important exception arises where dividends are paid even though there are no
available profits out of which to pay such dividends
–
see section 403(2)(b) of the Act. Since dividends
may only be paid where there are profits so as not to unduly prejudice creditors of the company, a
director or manager of a company who wilfully pays or permits the payment of a dividend in the
absence of profits will be liable to the creditors of the company for the amount of the debts due to
them to the extent by which the dividends exceed the available profits.
Common Law Exceptions to the Separate Personality Doctrine
16.2.10 Persons incorporate companies for various reasons but, undoubtedly, one of the reasons is to
insulate themselves from personal liability should the business fail. Accordingly, the mere fact that
members or officers of a company utilize the corporate vehicle to shield themselves from personal
liability is no -reason to disregard the company
’
s separate personality
–
see Adams v Cape Industries
plc [1990] 1 Ch 433. However, the position is different where the members or officers of a company
abuse the corporate form for improper means.
16.2.11 Thus, if an individual already has existing legal obligations, but attempts to use the corporate
vehicle to evade such obligations, the courts will ignore the company
’
s separate personality. For
example, it has been held that a person who has agreed to sell a house cannot avoid his contractual
obligations by transferring the house to a company. Both he and the company were ordered to
specifically perform the contract even though the company was not a party to the contract
–
see Jones
v Lipman [1962] 1 WLR 832.
16.2.12
Similarly, if a company is used to perpetrate a fraudulent act, the courts will treat the
company and those behind it as one and the same. Thus, if a company has been incorporated to
defraud innocent investors, the court may hold the promoter of the company liable even though the
promoter and company are separate persons
–
see Re Darby [1911] 1 KB 95.
SECTION 3
CORPORATE GOVERNANCE
Separation of Ownership and Management
16.3.1
Section 157A of the Act states that the business of the company shall be managed by or
under the direction of the directors. The directors may exercise all the powers of a company except any
power that the Act or the memorandum and articles of the company require the company to exercise
in general meeting. This reflects one of the features of company law, namely, that it can facilitate a
separation of ownership and management. The members or shareholders who own the company need
not necessarily be involved in its management as directors. While in some companies, particularly small
ones, the members of the company may also be involved in its management - either as directors or in
some other executive capacity - in many other companies, the members are not involved in
management. Instead, such companies are managed by boards of directors in which many of the
directors are not members of the company. Even when the directors are members of the company,
their shareholdings in the company may be relatively small. It should also be noted that, in such
companies, even this management by the board may often be notional as the majority of the members
of the board may not be full-time directors but are non-executive directors. In such companies, the
day-to-day management of the company will be in the hands of the senior executive officers of the
company, some of whom may be board members. The role of boards in such companies is then to
exercise a general oversight but not to be involved in executive matters.
Statutory Duties
16.3.2
Under common law, directors are regarded as fiduciaries and therefore owe fiduciary duties
to their companies. At the same time, the Act also prescribes certain duties on directors which mirror
their general duties under the common law. One important provision is section 157(1) of the Act which
prescribes that a director shall at all times act honestly and use reasonable diligence in the discharge of
the duties of his office. Section 157(2) of the Act goes on to state that an officer or agent of a company
shall not make improper use of any information acquired by virtue of his position as an officer or agent
of the company to gain, directly or indirectly, an advantage for himself or for any other person, or to
cause detriment to the company.
16.3.3 Section 157 of the Act does not purport to be an exhaustive statement of the law relating to
the duties that directors owe to their companies. In this regard, section 157(4) provides that the section
is in addition to and not in derogation, of any other rule of law relating to the duty or liability of
directors or officers of a company. The effect of section 157 is to render those duties mandatory while
the duties at common law are capable of exclusion by agreement between the company and its
directors, assuming that the company has made such a decision independently of the interested
directors. Under section 157(3) of the Act, a breach of sections 157(1) and 157(2) renders the officer or
agent liable to the company for any profit made or any damage suffered by the company as a result of
the breach. At the same time, a breach of these sections is an offence, and the officer or agent shall be
liable upon conviction to a fine not exceeding $$5,000 or to imprisonment for a term not exceeding one
year.
Duty at Common Law to Act in the Best Interests of the Company
16.3.4 In the exercise of their duties, directors must act bona fide in what they consider is in the best
interests of the company. When the acts of directors are challenged, the courts do not substitute their
own judgment for that of the directors
–
see ECRC Land Pte Ltd v Wing On Ho Christopher [2004] 1
SLR 105; Vita Health Laboratories Pte Ltd v Pang Seng Meng [2004] 4 SLR 162. All that the courts are
concerned about is whether the directors have acted honestly in what they (and not the courts)
considered to be in the company
’
s best interests. Of course, if the decision is one that no reasonable
board would have arrived at, this casts serious doubt on the bona fides of the directors.
16.3.5 It should be noted though that, while the directors
’
overriding duty is to the company,
section 159 of the Act provides that in exercising their powers, directors are entitled to have regard to
the interests of the company
’
s employees generally, as well as the interests of its members. That
directors may have regard to the interests of its members is also the position at common law since the
members collectively do in a sense comprise the company notwithstanding the company
’
s separate
personality
–
see Peters American Delicacy Co Ltd v Heath (1939) 61 CLR 457; Greenhalgh v Arderne
Cinemas Ltd [1951] Ch 286. The entitlement to have regard to the interests of employees is also a
sensible one since advancing the interests of employees will often be in the best interests of the
company.
16.3.6 There are also circumstances where directors must have regard to the interests of creditors.
Generally speaking, creditors have no interest in the company
’
s assets. A creditor who wishes to
enforce the debt owing to him from the company must bring a claim against the company. In the
absence of an interest in the company
’
s assets, the directors of a company do not have to take the
interests of creditors into account when making corporate decisions. However, when a company is
unable to pay its debts, and is thereby effectively insolvent, the interests of its creditors must be taken
into account. This is because creditors of an insolvent company are entitled to appoint a liquidator to
get in the assets of the company to which the creditors have a prior claim before the members of the
company. Accordingly, in such circumstances, directors must ensure that the affairs of the company are
properly administered and that its property is not dissipated or exploited to the prejudice of the
creditors
–
see Winkworth v Edward Baron Development Co Ltd [1987] 1 All ER 114.
Duty at Common Law to Avoid Conflicts of Interest
16.3.7 As a fiduciary, a duty of loyalty is imposed on a director vis-
à
-vis the company. As a result, a
director is obliged not to place himself in a position where his duty to the company may conflict with
his own interests
–
see Chew Kong Huat v Ricwil (Singapore) Pte Ltd [2000] 1 SLR 385;
Kumagai- Zenecon Construction Pte Ltd v Low Hua Kin [2000] 2 SLR 501. One particular application of
this duty is that a director is not permitted, without the fully informed consent of the company, to
make a profit in connection with the director
’
s position. Thus, if the director comes across a business
opportunity while discharging his role as a director, he cannot personally take advantage of such an
opportunity unless the company has, with full knowledge of the facts, permitted him to do so. This
permission may be given by the rest of the board (assuming the other board members giving approval
do not stand to benefit personally) or by the members in general meeting.
Duty at Common Law to Act for Proper Purposes
16.3.8 The management of a company is generally vested in the board of directors and the board
will often have other more specific powers such as the power to issue shares under section 161 of the
Act, provided that the directors have obtained a specific or general mandate to do so. Such powers
must be exercised for proper purposes. Even if directors have acted in good faith in what they believe is
in the best interests of the company, they may have exercised certain powers in an improper manner.
For example, it has been held that, where the power to issue shares was used to facilitate a takeover bid
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