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Legal Nature of Companies

Legal Nature of Companies

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Published by Sashidar
Title: Legal Nature of Companies

The information below provides a guide to the basics of incorporation of a company and the relevant requirements in the Companies Act (Cap 50). It should be read with the relevant legislation1. Always seek legal advice if you are unsure of any matters.

1. OVERVIEW 1.1 You have decided to start a business and you want to incorporate a company.

But wait! There are some essential things you would need to know before you decide to incorporate a company in Singapor
Title: Legal Nature of Companies

The information below provides a guide to the basics of incorporation of a company and the relevant requirements in the Companies Act (Cap 50). It should be read with the relevant legislation1. Always seek legal advice if you are unsure of any matters.

1. OVERVIEW 1.1 You have decided to start a business and you want to incorporate a company.

But wait! There are some essential things you would need to know before you decide to incorporate a company in Singapor

More info:

Published by: Sashidar on Apr 03, 2012
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03/07/2015

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Title: Legal Nature of Companies

The information below provides a guide to the basics of incorporation of a company and the relevant requirements in the Companies Act (Cap 50). It should be read with the relevant legislation1. Always seek legal advice if you are unsure of any matters.

1. OVERVIEW 1.1 You have decided to start a business and you want to incorporate a company.

But wait! There are some essential things you would need to know before you decide to incorporate a company in Singapore. The purpose of this write-up is to let you know what the essential pre-incorporation matters are before you embark on your entrepreneur journey. 1.2 This write-up provides information on:

1) 2) 3) 4) 5) 6)

what is a company; the different types of company; what is limited liability; the rule of separate legal personality; exception to the rule of separate legal personality; and contracts that circumvent limited liability;

2. WHAT IS A COMPANY 2.1 A company is a business entity registered under the Companies Act (Cap 50).

It is a legal entity with a separate identity from those who own or operate it. Therefore it can be considered as an artificial person created by the law. The Companies Act2defines “company” to mean companies incorporated pursuant to the Act. We usually refer to such companies as “Singapore registered companies” or “local companies”.
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The Companies Act and the Regulations can be viewed from http://www.acra.gov.sg/Legislation/Companies+Act.htm 2 Section 4 of the Companies Act

1

3. a) Private Company3 This is a locally incorporated company where the maximum number of shareholders is limited to 504.4 Companies limited by guarantee are companies formed on the principle of having the liability of its members limited to the respective amounts that the members guarantee to contribute to the property of the company if it is wound up. 3.2 Most companies in Singapore are limited liability companies which mean the liability of the members is limited by shares or by guarantee. if any. 3 Section 4(1) of the Companies Act defines a private company as (a) any company which immediately prior to 29th December 1967 was a private company under the provisions of the repeals written laws.1 The Companies Act provides for the incorporation of different types of companies. unpaid on their shares.3. we will only touch on local companies incorporated under the Companies Act. company has a share capital and the liability of each member is limited to the amount. 2 . classified by reference to the basis and extent of the members’ liability and according to whether they are private or public companies.5 Below are the types of companies incorporated in Singapore. 3. For the purpose of this write-up.3 Companies limited by shares are the most common form of company in This type of Singapore. 3. (b) any company incorporated as a private company by virtue of section 18. This type of company does not have a share capital and its members are guarantors rather than shareholders. They are suitable for most general business activities. Some companies are unlimited companies which means the members have unlimited liability. being a company which has not ceased to be a private company under section 31 or 32. THE DIFFERENT TYPES OF COMPANY 3. 4 Section 18(1)(b) mandates that a private company limits the maximum number of shareholders to 50 in its memorandum or articles. or any company converted into a private company pursuant to section 31(1).

then the member’s liability is limited to the unpaid amount. declares by notification in the Gazette to be an exempt private company5. If the amount has not been fully paid. science or charity etc. The liability of the members is limited to the amount that they each agreed to contribute as capital to the company.1 Limited liability in this context means the company's debts are its own and members are protected from personal liability unless they are negligent or gave personal guarantees. WHAT IS LIMITED LIABILITY 4.b) Exempt Private Company This is a private company:  which has not more than 20 shareholders. A public company must register a prospectus with the Monetary Authority of Singapore before making any public offer of shares and debentures. c) Public Company limited by shares A public company limited by shares is a locally incorporated company in which the number of shareholders can be more than 50. The Minister may approve the registration of the company without the addition of the word “Limited” or “Berhad” to its name. 5 Section 4(1). then the member need not contribute any more towards the company’s debts. such as for promoting art. 4. If this amount has already been fully paid to the company. Companies Act 3 . in the national interest. d) Public Company limited by guarantee A public company limited by guarantee is usually not a trading company but one which carries out non-profit making activities that have some basis of national or public interest. and none of the shareholders is a corporation holding direct or indirect beneficial interest in the shares. or  which is wholly owned by the Government and which the Minister.

3 The legal rules that separate the company from its participants are commonly referred to as the “corporate veil”. f) g) 5. the participants (including the shareholders and directors) of a company are not personally accountable for the debts and losses of the company.2 The company as its own legal person. THE RULE OF SEPARATE LEGAL PERSONALITY 5. d) can enter into contracts with its members. to meet the debts of the company. 6 Generally. will continue in law with its own identity regardless of changes in its membership. the company as its own legal entity. beyond the subscription price of their shares. c) has perpetual succession. 5. 4 .4. b) can sue or be sued in its own name. directors or employees. the company’s obligations and liabilities are its own and not those of its participants6.2 The effect of limited liability is that a member of a company limited by shares is generally not required to contribute amounts from their personal asset. e) can enter into contracts with suppliers and customers.1 Connected to the concept of limited liability of shareholders of a company. This is the doctrine of separate legal personality. the law treats a company as being a separate person from its members and those who manage its operations. and the company’s rights are its own and not those of its participants. has the following characteristics: a) has rights to own properties. 5.

1 Although the general rule is that a company and its participants must be treated as separate legal entities. at the time the debt was contracted.4 The corporate veil may be lifted or pierced in the following situations: a) the corporate form is used to avoid an existing legal duty or obligation. there are circumstances where the courts will be asked to “lift the corporate veil” and ignore the separate personality of the company. of the company at the time of the company being able to pay the debt. the officer shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $2. the wrongful or fraudulent trading provisions under section 340(1)7 and section 339(3)8 of the Companies Act operate 7 Section 340(1) . the court will deem it appropriate to look through the veil of incorporation to discover the identity of the participants in the company and impose liability upon them. who may want the major shareholders or directors to be held liable for the company’s debt.2 This request will normally come from a creditor of the company. for all or any of the debts or other liabilities of the company as the Court directs. on the application of the liquidator or any creditor or contributory of the company.000 or to imprisonment for a term not exceeding 3 months. after taking into consideration the other liabilities. In some circumstances.If.3 In some cases. in the course of the winding up of a company or in any proceedings against a company. or d) other situations as the courts deem fit. the Court. in the course of the winding up of a company or in any proceedings against a company. 8 Section 339(3) . may. the courts will lift the corporate veil and treat the company and one or more of its participants as the same person.6. EXCEPTION TO THE RULE OF SEPARATE LEGAL PERSONALITY 6.5 Besides the above-named situations. it appears 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. 6. declare that any person who was knowingly a party to the carrying on of the business in that manner shall be personally responsible. 5 . no reasonable or probable ground of expectation. 6.If. c) the company is acting as the agent or partner of the controller. b) the company is being used to perpetrate a fraud. if it thinks proper to do so. 6. it appears that an officer of the company who was knowingly a party to the contracting of a debt had. 6. if any. without any limitation of liability.

CONTRACTS THAT CIRCUMVENT LIMITED LIABILITY 7. Companies Act 6 . The Companies Act also permit the piercing of the corporate veil and allows claims to be made against specified corporate participants for the debts and obligations of the company9. 144(2) and 403(2). This will be a contract between that member and the creditor.to lift the corporate veil in some circumstances. A common situation is that a major creditor such as a bank may ask the members of the company to provide a guarantee to the bank of the amount loaned to the company. 7. 7. 9 Sections 145(10).2 The effect of such agreement is to negate the benefits of limited liability for the members of the company in respect of the debt that forms the subject of the agreement.1 There are certain situations whereby a member of a limited company may agree separately with a creditor to be personally responsible for a company’s debts. This would mean the members of the company agree with the bank to pay the company’s debt if the company is unable to do so.

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