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Company Law Notes 242493541
Company Law Notes 242493541
Consequence of Incorporation
2. Incorporation of a Company
a. Obligation to incorporate
5) Perpetual Succession
o This means that until dissolved or wound up, the company continues
notwithstanding any change of its members. Membership in the company can
be passed on but not directorship (elected).
o Re Noel Tedman Holdings Pty Ltd [1967] QdR 561 (Qld Sup Ct)
The company has only 2 shareholders cum directors, a husband and
wife. Both died in an accident and only an infant child survived. While
all the shareholders and directors are dead, the company still existed.
The articles required the approval of the directors before the shares
could be transferred under the will of a deceased member. There were
no directors. While this issue is normally resolved by the appointment
of new directors via a vote by the members, there were no members as
well.
Held: The Court allowed the personal representatives of the deceased
members to appoint the directors, so that these new directors could
assent to the transfer of the shares to the beneficiary.
d. Advantages and Disadvantages of Incorporation
Advantages:
o Incorporation helps companies to raise capital through shareholder’s
investment.
o Reduce costs of capital.
o Also helps to aggregate supply and demand efficiently.
Disadvantages:
o Incorporation allows separate legal personality and limited liability such that
managers of the company have no stake and can manage it recklessly since
they do not have to be liable to guarantee its debts.
Mitigated somewhat by directors’ (fiduciary) duties!
o Opportunity costs of incorporation include the severe restrictions in the
Companies Act. Companies cannot deviate from the structures and obligations
imposed by the CA.
e. Effect of Incorporation on Contracts
i. Position at Common Law
Contracts before incorporation cannot be made by the company or its agents, since
there is no principal in existence.
A company is not bound by a contract made before its incorporation.
Nor may the company ratify and adopt such a contract.
o Kelner v. Baxter (1866)
Contracted where P sold goods to a company that was not yet incorporated
and was accepted by D, who was a would-be director of the company.
Company collapsed and P sued D for payment.
HELD: D personally liable. There was company for the principle of
separate legal entity to work. Ratification must be done by an existing
person. If company later ratifies, it is considered a new contract.
o Newborne v. Sensolid (GB) Ltd (1954)
P to sell goods to D on behalf of a limited liability company that he was
about to form. D refused goods and P sued for breach of contract.
HELD: No claim. Company was not in existence at the time the contract
was signed. Such contracts cannot be enforced by the company since it
wasn’t formed yet.
ii. Statutory Modification (Present Position)
S. 41, CA: Any contract or other transaction purporting to be entered into by a
company prior to its formation or by any person on behalf of a company prior to its
formation may be ratified by the company after its formation and thereupon the
company shall become bound by and entitled to the benefit thereof as if it had been in
existence at the date of the contract or other transaction and had been a party thereto.
o S. 41(2), CA: Prior to ratification by the company the person or persons who
purported to act in the name or on behalf of the company shall in the absence
of express agreement to the contrary be personally bound by the contract or
other transaction and entitled to the benefit thereof.
**Cosmic Insurance Corp Ltd v. Khoo Chiang Poh (1981)
o Resp sued for breach of contracted because he was supposed to be
appointed as Managing Director of the company for life. App argued that
there was no such contract because the letter was signed prior to the
company’s incorporation.
o HELD: Claim succeeded. Contractual agreement was later ratified by the
company after its incorporation and is binding upon the company.
S. 2, Contracts (Rights of Third Parties) Act
o 3rd parties can enforce a term of a contract if the contract conferred a benefit
on him
3. Principle of Limited Liability
a. Introduction
One of the main advantages of incorporation and the recognition at law that a company is a
person in its own right is that the company’s debts are not those of its members.
The term ‘limited liability’ simply means that the full extent of the member’s loss
should the company be unable to pay its debts is limited to the amount that the member
has paid or must pay for the shares allotted to or purchased by the member.
b. Advantages of Limited Liability
Facilitates the mobilization of capital and savings
o Allows a person to invest with the knowledge that should the company fail he
is not financially ruined because the creditors of the company cannot claim
against his personal assets.
Per VK Rajah in Vita Health Laboratory’s case: a company provides a
vehicle for limited liability and facilitates the assumption and
distribution of commercial risk.
Reduces the cost of capital as well as broadens company’s access to funds
o Without limited liability, investors would require a higher payout to offset the
risk of personal liability and company might rely more on debt financing
(which requires regular interests payment; repayment within period or even ‘on
demand’)
o If the company had to borrow from the banks, they would have to pay interest
regardless of profits and if it gets investment, it need only payout the profits if
there are any.
Reduces cost of monitoring management and other shareholders
o Shareholders would spend more time and money monitoring the management
since the consequences of unlimited liability is severe.
Encourages people to diversify their investments
o Diversification in many different companies (basically not putting all your
eggs into one basket) –reduces commercial risk
4. Piercing the Corporate Veil
Atlas Maritime Co. SA v. Avalon Maritime Ltd (No. 1) [1991] 4 All ER 769 at p779
o “To pierce the corporate veil is an expression that I would reserve for treating
the rights or liabilities or activities of a company as the rights or liabilities or
activities of its shareholders. To lift the corporate veil or look behind it, on the
other hand, should mean to have regard to the shareholding in a company for
some legal purpose”.
a. Statutory Veil Piercing under the Companies Act
Provision Section No.
Signing or issuing without company name
Where a person signs, issues or authorizes the signing or issue of
certain instruments on which the company’s name does not appear s. 144(2)(c)
properly (liable to the holder of the document for the amount due,
unless the company pays upon the instrument)
No reasonable expectation of debts being paid* s. 339(3)
Where debts are contracted when there is no reasonable or probable read with
expectation of debts being paid (liable for the payment of the debt) s. 340(2)
Responsibility for fraudulent trading* s. 340(1)
If the business has been carried out to defraud creditors or a fraudulent
purpose, the court may declare person with such knowledge to be
personally liable.
Paying dividends without available profits*
A director or manager who willfully pays or permits payment of
dividends when there are no available profits is liable to the creditors s. 403(2)(b)
for the amounts of debts due to tem to the extent that the dividends
exceeded the available profits.
False and misleading statements s. 401
Fraudulently inducing persons to invest money s. 404
Frauds by officers s. 406
Note: Duties and liabilities under other legislative and regulatory regimes, e.g., Income Tax Act,
Residential Property Act and Securities & Futures Act
**Residential Property Act – if you are a foreigner, you cannot buy certain classes of
property (apartment that are low lying and landed property). If you form a company in
Singapore, it would be a Singaporean identity and thus can purchase property. But in
this case, the courts will look beyond the corporate structure and look at the
shareholders.
o The law looks at the substance rather than form. Would not allow them to do
things that they wouldn’t have been able to do it anyways.
b. Judicial Veil Piercing (Case Law)
i. Purposive Interpretation of Statutory Provisions
Where in the absence of clear express words, a purposive construction of the statutory provision
(implied purpose) leads to the conclusion that such must have been the intention of Parliament.
Re FG (Films) Ltd (1952)
o P, company wanted to register film as a British film in UK but the company
had no business premise except for its registered office.
o HELD: Registration denied because P did not satisfy s. 25(1) of the required
legislation.
o Company was brought into existence for the sole purpose of being put forward
as an agent to qualify the film as a British film. Company was not maker of the
film thus court can go behind the corporate veil in order to give effect to the
legislative intention of the statute.
Lee v. Lee’s Air Farming Ltd (1961)
o Issue was whether the wife’s deceased husband (who was owner of company)
fell within the purpose of the New Zealand’s Worker’s Compensation Act.
o HELD: Statute did not prohibit the dual capacity of the husband of both the
employer in the company and its only employee.
Re Bugle Press Ltd (1961)
o Majority held 90% of the shares in a company and incorporated a new
company to purchase the shares of the original, so as to invoke s. 209 of the
UK’s Companies Act to force the compulsory buy out of the remaining 10%.
o HELD: Claim denied. Although the strict terms of the statutory provision had
been complied with, the statutory scheme was not envisioned to get rid of
minority shareholders. Hence, lifted the corporate veil, decided that the
company was in fact the majority shareholders, and claim failed.
ii. Agency (Not a true exception)
If the legal relationship of agency exists between 2 persons (the principal and the agent),
the principal is responsible for whatever the agent does within the scope of the agency.
o This “agency” is implicit rather than expressly created.
o It may be inferred from the circumstances of the case – e.g. company was
grossly undercapitalised (no office, no staff, no assets) such that company could
not have run the business independently.
If the company is acting as the agent of a person, then the person will be fully liable for
the whole loss and will not be protected by the principle of limited liability.
o Smith, Stone & Knight Ltd v. Birmingham Corporation (1939)
Waste company was a subsidiary company to P. D tried to compulsory
purchase the company’s land and P sued for compensation. D argued
that P did not actually own the land.
HELD: P entitled to compensation from D because the subsidiary waste
company was his agent.
o **Adams v. Cape Industries plc (1990)
P sued D for personal injuries inflicted by D’s subsidiary companies
through asbestos poisoning.
HELD: No claim. There was no agency in this case. Each subsidiary
was carrying on business on its own even though the group was in fact a
single economic entity. Courts will not lift the corporate veil on the
basis that D validly and legitimately partitioned its legal liabilities
through forming subsidiaries. The corporate structure can be legally
used to minimise legal liability.
iii. Façade, sham or alter ego that conceals the true state of affairs
General Rule: The corporate veil should be lifted on the basis that the company is a sham or
façade only where a person uses a company as an extension of himself and makes no
distinction between the company’s business and his own, i.e. small closely-held private
companies that operate like sole proprietorship/partnership or “one-ship” companies.
**Tjong Very Sumito v Chang Sing Eng (2012) SGHC
o [67] “In general, there are two grounds to lift the corporate veil, (a) improper
use of company (to avoid legal liability), and (b) when the company is in fact
not a separate entity.”
DHN Food Distributors Ltd v. Tower Hamlets London Borough Council (1976)
o Group of companies running grocery business had land acquired by Town
Council. Under the legislation in question, compensation could be obtained for
both the land and disruption of the business. Council refused to pay the
compensation and argued that the subsidiary company did not have interest in
the land.
o HELD: Compensation granted. Whole group was treated as 1 commercial entity
as both coys were both wholly owned and they had no separate business
operations.
o Alternative reason given by Lord Denning MR: the group might be found to be
carrying on the business in partnership with one another.
o CASE DOUBTED: This case was doubted in Woolfson v Strathclyde Regional
Council (1978) SLT 159 (HL); while it is suggested in this case that there is a
general tenancy to ignore the separate legal entities of various companies within
a group and to look at the economic entity of the whole group, there were in fact
"no special circumstances in the facts of [that] case which differentiated it from
the ordinary relationship of parent and fully owned and controlled subsidiary.
Rare indeed is the subsidiary that is allowed to run its own race".
**Case can be distinguished from the group of companies - it was a
case involving interpretation of the statute regarding compensation
for land acquisition. Therefore, the decision can be removed from the
line of authorities regarding group of companies.
Public Prosecutor v. Lew Syn Pau and Another (2006) [SG affirmation of Adam v Cape
(certainty) over DHN (fairness)]
o HELD: Prosecution failed to make case that corporate veil should be lifted and
thus cannot prove that there was financial assistance contravening s. 76, CA.
o The court cited the HL in Woolfson v Strathclyde Regional Council where
Rogers A-JA noted that: “In the result, as the law presently stands, in my view
the proposition advanced by the plaintiff that the corporate veil may be pierced
where one company exercises complete dominion and control over another is
entirely too simplistic. 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. If the test were as absolute as the
submission would suggest, then the corporate veil should have been pierced in
the case of both Industrial Equity and Walker v Wimborne.”
1. Registration of Companies
Minimum of one member
o S. 20A, CA: A company shall have at least one member.
Registration and incorporation
o S. 19(1), CA: A person desiring the incorporation of a company shall —
(a) Submit to the Registrar the memorandum and articles of the
proposed company and such other documents as may be prescribed;
(b) Furnish the Registrar with such information as may be prescribed;
and
(c) Pay the Registrar the prescribed fee.
Notice of incorporation
o S. 19(4), CA: On the registration of the memorandum the Registrar shall issue
in the prescribed manner a notice of incorporation (like a birth cert) in the
prescribed form stating that the company is, on and from the date specified in
the notice, incorporated, and that the company is —
(a) a company limited by shares; (b) company limited by guarantee
(rare but normally used by NGOs); or (c) an unlimited company,
(almost totally non-existent) as the case may be, and where applicable,
that it is a private company.
Effect of incorporation
o S. 19(5), CA: The company shall be a body corporate by the name contained in
the memorandum capable immediately 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.
2. Company’s Constitutional Documents
Nature of Constitutional Documents
MOA takes precedence over AOA (Guiness v Land Corp of Ireland) (CA, Eng)
BUT the AOA can be used to explain ambiguous portions in the MOA (Re Duncan
Gilmour)
a. Memorandum of Association (MOA)
Defn: Basic constitutional document that introduces the company to outside parties
o Guiness v Land Corp of Ireland
“Contains the fundamental conditions upon which alone the company is
allowed to be incorporated. They are conditions introduced for the
benefits of creditors, and the outside public, as well as shareholders”.
General Requirements
o s. 22(1)(a), CA: Name of the coy
o s. 22(1)(d), (e), (f), CA: Whether the liability of members is limited or unlimited
and in the case of a coy limited by guarantee, the max amount that the member
may be called upon individually to contribute in the event of the company’s
winding up – Limitation of Liability
o s. 22(1)(g), CA: Full names, addresses and occupations of the subscribers
o S. 22(1)(h), CA: A clause stating that the subscribers are desirous of being
formed into a coy in pursuance of the MOA and (where the coy is to have share
capital) that the subscribers respectively agree to take the number of shares set
out opposite their respective names (Association Clause & Subscription).
i. Altering the MOA
There is considerably less freedom to amend MOA and AOA because any such amendment is
likely to affect the basis on which parties initially decide to become members of the company.
Special procedures are prescribed and must be complied for the amendments to take effect
S. 26(1), CA: Special resolution required to amend the MOA [see s. 184(1), CA]
o S. 26(1A), CA: Subsection (1) is subject to section 26A [entrenched
provisions] and to any provision included in the memorandum of a company in
accordance with that section.
o S. 26(1B), CA: Notwithstanding subsection (1), a provision contained in the
memorandum of a company immediately before 1st April 2004 [date of
commencement of the Companies (Amendment) Act 2004] and which could not
be altered under the provisions of this Act in force immediately before that date,
may be altered only if all the members of the company agree.
b. Articles of Association
Defn: By-laws that lay the framework for the internal operations of the coy
o Guiness v Land Corp of Ireland
“Internal regulations of the company” – per Bowen LJ
Adoption of Articles
o s. 35(1), CA: There may in the case of a company limited by shares and there
shall in the case of a company limited by guarantee or an unlimited company be
registered with the memorandum, articles signed by the subscribers to the
memorandum prescribing regulations for the company.
o S. 36(2), CA: If a company chooses not to register its own Articles of
Association, a default set of Articles shall apply – Table A in the Fourth
Schedule of the Companies Act.
Table A ipso facto applies to:
[1] Company limited by shares incorporated after 19 th
December 1967, [2] as long as the registered AOA does not
exclude or modify Table A, [c] where AOA is silent on the
issue, Table A fills the gap, [d] where the registered AOA
contradicts with the MOA.
Hence in practice, in the abundance of caution, a company may lodge
and exclude Table A, then stipulate its own terms.
i. Altering the AOA
General Requirement
o S. 37(1), CA: Special resolution required to add to or amend the AOA [see s.
184(1), CA]
Limitations
o S. 26A(1), CA: An entrenching provision cannot be altered except by
unanimous agreement by all members (100%).
o S. 39(3), CA: Amendment requires members to subscribe for more shares and
increase their liability not binding on a member who doesn’t agree in writing.
o If alteration affects a special class of shareholders, then s. 74, CA must be
followed instead (Variation of class rights clause)
Other Rules for Alteration of AOA
a. Bona Fide rule in Allen v Gold Reefs
Allen v. Gold Reefs of West Africa (1900)
HELD: Alteration rights must be exercised, not only in the
manner required by the law, but also bona fide for the benefit
of the company as a whole – as a body corporate, a
commercial entity.
Seems to be unfair that they would be obligated to vote in
the interest of the company when they should only be
expected to serve their own interest.
Evaluation (Gower at pp. 653-654)
o The statement suggests that shareholders are subject at
common law to precisely the same basic principle as
directors.
o This is highly misleading because a shareholder may
exercise in his own selfish interest even if they are
opposed to those of the company.
o **Thus, it is wrong to see the voting powers of
shareholders as being of a fiduciary character.
o BUT – the rule is subject to the principle that the
majority may not oppress or treat the minority
unfairly.
But increasingly, the courts will not interfere with decisions made by
the company and its members, unless the decision is one that no
reasonable persons will make.
Shuttleworth v. Cox Bros & Co Bros (Maidenhead) (1927)
o HELD: The CA upheld the validity of the company’s
action in removing the life director, as there was no
evidence or indication of bad faith.
o The alteration of a company’s AOA shall not stand if it
such that no reasonable men could consider it for the
benefit of the company – whether or not the action of
the shareholders is capable of being considered for the
benefit of the company.
o “It is not the business of the Court to manage the affairs
of the company. That is only for the shareholders and
directors.”
o Criterion used to ascertain the whether the alteration
was in the opinion of the shareholders for the benefit of
the company:
Oppression – the alteration may be so
oppressive as to cast suspicion on the honesty
of the persons responsible for it.
Extravagance – so extravagant that no
reasonable men could really consider it for the
benefit of the company.
Peter’s American Delicacy v Health (1939) 61 CLR 457
o Alteration was made to the AoA to ensure that profits
were given out in proportion to the amount that the
shareholder has paid up on their shares. It was a bona
fide attempt to adopt a methodology that was fair to all
shareholders, and small minority who would lose out
(those who had not fully paid out their share) objected.
o Held: Court upheld the validity of the alteration. Court
found that this action of the majority did not breach the
equitable limitation that should be imposed on the
majority powers. It was viewed instead to be “an honest
attempt on the part of the directors” to correct an
existing unfairness.
o “When the validity of a resolution of shareholders is
challenged, the onus of showing that the power has not
been properly exercised is on the party complaining.
The court will not presume fraud or oppression or other
abuse of power. (Latham CJ at 482)
Also, the courts are willing to allow for the alteration of the AOA that
might result in unfairness to some members where the expropriation is
done to fend off competition.
Sidebottom v. Kershaw, Leese & Co (1920)
o Directors of company held majority of shares. Altered
the AOA to require shareholders competing with the
company’s business to transfer their shares at fair
value. P held minority of shares and was in competition
with the company’s business, argued that the alteration
was an expulsion and invalid.
o HELD: Alteration of AOA valid. Alteration was held to
be bona fide for the benefit of the company as a whole
and expulsion of competitors of the company’s
business was a great benefit of the company.
Furthermore, it was directed at all shareholders who
might be in competition and was not against P.
a. Ultra Vires
S. 25(3), CA: If the unauthorised act sought to be restrained in any proceeding under s.
25(2)(a), CA, the Court may, if all parties to the contract are parties to the proceedings
and if the Court finds it to be just and equitable, set aside and restrain the performance
of the contract and may allow to the company or to the other parties to the contract, as
the case require, compensation for the loss or damange sustained due to the setting
aside and retraining of the performance of the contract,, but anticipated profits are not
to be awarded.
b. Law of Agency
5. Termination of Agency
Upon the death, bankruptcy, insolvency and mental incapacity of the principal.
Results in instances of agents being held in breach of warranty of authority where the
principal passes away without the knowledge of the agent, thus resulting in the agent entering
into such agreements in its own capacity.
How an agency
relationship is
created
Authority is given
Apparent by the principal
Actual Authority*
Authority* restrospectically
by ratification
1. General
The rule is a presumption of regularity.
o Company cannot rely on its internal irregularities to affect the rights of the 3P,
provided that the 3P did not know of the irregularities. Third parties are not
expected to check if there are any irregularities.
o To rely on this rule, there has to be something prima facie gives the impression
that everything is regular, otherwise it exposes companies to unlimited liability.
The actual authority of an agent is a relationship between the principal and the agent and
3rd parties dealing with the agent does not know what the actual authority is nor in most
case can he find out.
o Sometimes it depends on compliance with certain internal formalities.
When it comes to internal procedures, the general rule is that if an agent has apparent
authority to do an act, then the 3rd party contractor dealing with the company is entitled
to assume that all matters of internal management procedures prescribed by the MOA
and AOA have been complied with.
Apparent similarities between indoor management rule and apparent authority
Just like the law of agency, the indoor management rule does not apply where there is
notice of irregularities.
Furthermore, s. 392, CA: A breach of the procedure that constitutes an irregularity does
not make a transaction invalid and must show that the irregularity caused substantial
injustice.
In the modern context, the Indoor Management Rule is a subset of the rules of apparent
authority – in the absence of anything to put the 3 rd party on notice to inquire about the
agent’s authority, 3rd party is entitled to rely on the presumption of regularity.
2. Exceptions to the Indoor Management Rule
[1] If contracting part knows or should have known of the agent’s lack of authority
(Howard v. Patent Ivory Manufacturing Co (1888)).
o Usually when the contracting party is an “insider”.
[2] If an examination of the company’s MOA/AOA would have made it plain that
the agent’s authority was limited (Rolled Steel Product (Holdings) Ltd v. British Steel
Corp (1984)) reversed by s. 25A, CA
o Party cannot plead that he had not actually read the MOA/AOA because
everyone is deemed to have constructive knowledge of these documents.
o **But in Singapore, s. 25A, CA reverses the common law position –
notwithstanding anything in the MOA/AOA, person is not deemed to have
notice or knowledge.
**[3] If the nature of the transaction is such as that to put a 3 rd party on inquiry as
to the agent’s authority.
o When it is circumstances where a reasonable man would be suspicious of the
agent’s authority, then the 3rd party must make reasonable enquiries.
o In the absence of such enquiries, 3 rd party cannot claim the benefit of the
presumption of regularity.
o E.g. when the company does not seem to be making any benefits from the
transaction.
Banque Bruxelle Lambert v. Puvaria Packaging Industries (1994)
o Banque had no actual notice of the fact that the directors of Puvaria had no
authority to borrow money for another company, PAU. Banque loaned
money to Puvaria who then paid off PAU’s debts, which did not come with
consideration in return to Puvaria.
o HELD: Puvaria bound to repay Banque. Banque did not know that the
borrowing of money for PAU was not “for the purpose of the company”. The
limited statement in Puvaria’s MOA/AOA was a vague and non-specific one,
and was just a general direction for its directors. Hence, Banque was not put
on constructive notice.
o Furthermore, the series of transaction “resembled an ordinary business deal
which related companies usually do in the region”.
Northside Developments Pty Ltd v. Registrar-General (1990) [X] (Barclay’s (mtgee)
was put on inquiry)
o P owned land that was purportedly mortgaged to B. Mortgage was given to
secure a loan to another company that was owned by P’s Managing Director,
but which P as a company had no interest in.
o Following default, B sold the land and ND sued and argued that it was not
estopped from denying the validity of the mortgage.
o HELD: P not bound. B was put on notice of the suspicious nature of the
transaction. The transaction benefited the directors and not the company
and B should have done more and inquired as to the authority of the agent .
On the facts, the agent was beyond his apparent authority and P not bound.
o There is no reason why a third party should be entitled to rely on the formal
validity of the instrument and to assume that the seal has been regularly
affixed IF the very nature of the transaction is such as to put him upon
inquiry.
o The mortgagee (Barclays) was put on inquiry by the fact that the mortgage
was given to secure an advance to a third party (MD) without any
indication that the mortgage was for the purposes of the company's business.
o Contrast with Banque Bruxelles Lambert – in both cases the directors were
acting for purposes other than the company’s purposes. Both were in fact
acting for their own benefit.
o The difference between the 2 cases was that in this case, the company did not
seem to be getting any benefit at all from the transaction while in Banque’s
case, the transaction looked like a ordinary business deal among companies
within the same group (that it can be said that the transaction was for the
apparent benefit of all 3 companies involved).
o Competition of policies regarding Indoor Management Rule – Mason
CJ:
o On the one hand, the rule has been developed to protect and
promote business convenience that would be at hazard if persons
dealing with companies were under the necessity of investigating
their internal proceedings in order to satisfy themselves about the
actual authority of officers and the validity of instruments.
o On the other hand, an over-extensive application of the rule may
facilitate the commission of fraud and unjustly favor those who
deal with companies at the expense of innocent creditors and
shareholders who are the victims of unscrupulous persons acting or
purporting to act on behalf of companies.
4. Corporate Decision Making / Meetings and Resolutions
a. General Introduction
There is a distribution of the company’s powers between the Board Meetings of
Directors and the General Meeting, comprising of the Shareholders.
Whilst there is a separation of management, ownership and control, there is a contrast
between big and small companies.
o In small companies, especially in the Asian patriarchal context, there is little
distinction between ownership and control. Whoever owns the company
invariably makes decisions for the company.
o In big companies, there is a diverse shareholder base and these investors do
not have much say in the running of the company. Board also tend to play
supervisory role with management delegated to senior executives – here there
is a greater need for procedural rules in the interest of justice and fairness.
a. Common Law
John Shaw & Sons (Salford) Ltd v Shaw, [1935] 2 KB 113
o Pg 134 - “If powers of management are vested in the directors, they and they
alone can exercise these powers. The only way in which the general body of the
shareholders can control the exercise of powers vested by the articles in the
directors is by altering their articles, or if opportunity arises under the articles,
by refusing to re-elect the directors of whose actions they disapprove.”
o This is consistent with the current statutory provisions.
Credit Development Pte Ltd v. IMO Pte Ltd (1993) – not good law (obsolete)
o HELD: The General Meeting, through ordinary resolutions, may exercise some
of the powers of its directors, but if the EGM was held to pass a resolution that
was ultra vires, then the resolution is void.
Note: Interestingly, since s. 25, CA prevents the invalidating of ultra
vires acts, does that mean in Singapore, an EGM can therefore be
convened to pass ultra vires resolutions?
o IMPORTANT: With s. 157A, CA introduced in 2003, this case is no longer
good law (all management powers of business is vested in the board, except
where the Act, AOA or MOA required general meeting approval)
o **However also note that s. 25(2)(a), CA: before the resolution is passed,
shareholders can intervene to restrain and set aside an ultra vires resolution.
o Went beyond the common law rule and allowed the shareholders to go over
and above to direct the board eventually Parliament decided to amend this
rule and revert back to John Shaw.
**Automatic Self-Cleaning Filter Syndicate v. Cuningham (1906) – current law in UK
o Provision in AOA specifically empowered the directors to sell any property of
the company as they think fit. But at a General Meeting, a resolution was passed
directing the Board to sell property to a new company but the directors declined
the sale.
o HELD: Resolution ineffective. The AOA vested power in the Board and thus,
the members had no power by ordinary resolution to give directions to the
Board on issues of management or overrule its business decisions.
o Pg 42 – if they want to alter the powers of the directors, that must be done by
passing an extraordinary resolution that requires a special majority.
**The Singapore position has since been clarified through legislative amendments, where the
statute has confirmed that management is vested in the board of directors. This is now the
default position.
b. Statute
S. 157A, CA: Management powers are vested in the Board of Directors
o (1) Business of a company shall be managed by or under the direction of the
directors.
o (2) Directors may exercise all powers of the company except those that the Act,
MOA or AOA reserved for the General Meeting.
Initiation rights remain with the directors but the shareholders will continue to have veto
rights.
c. Shareholders as an organ of the Company
In the following circumstances specified in the Companies Act, the board cannot act without
the approval of the shareholders in general meeting.
S. 160, CA: Disposal of company’s business – “whole or substantially the whole of the
company’s undertaking or property – (undertaking is business activity)
o Exception: K.J. Kim Company (Pte Ltd) v. Buck & Company (Pte) Ltd (1997)
Wife challenged the sale of the property w/o shareholder’s permission
HELD: Sale was allowed, because in s 160(3) that says that any bona
fide purchaser for value without notice is allowed to retain the property
– can circumvent the requirement for shareholder’s approval
But General Rule: “The object of s. 160(1), CA is to prevent directors
from selling off the whole or a substantial part of the company’s
undertaking or the assets which allow it to carry on such business
without the prior approval of the company’s shareholders.”
“If directors, whose primary function is to manage the company’s
business and assets, wish instead to dispose of such business or assets
rather than manage them, it is only right that they should first get the
approval of the shareholders who presumably became or remained as
shareholders because the company was in business it was in.”
S. 161, CA: When directors exercise any powers to issue shares.
o As it could result in dilution of the shareholder’s share percentage.
S. 168(1), CA: When payment is made to a director upon retirement or resignation.
S. 169, CA: When proposal to improve director’s emoluments.
c. Existence of common law possibility of limited shareholder management
Even where the law does not provide power to the shareholders there are instance where the
court provides certain powers to the shareholders and general meeting – normally out of
convenience.
Where there is no competent board
o E.g., deadlock or inquorate board
Barron v. Potter, [1914] 1 Ch 895
o Refusal of directors to act due to deadlock
o Held: For practical purposes, there was no board at all and thus the shareholders
in general meeting is empowered to take the decision of appointing
additional directors, not the power to manage the company.
o Powers given to the shareholders are still greatly limited as ultimately it is not
for them to be managing the company.
ii. Members (Registered Shareholders) and their Rights
a. Members
Under s. 19(6), CA: Members are:
o (i) Subscribers to the memorandum (initial members); and
o (ii) Any person who agrees to be a member and whose name is entered into the
register. (subsequent members – by buying shares)
Hence, a member need not be a shareholder (e.g. in a company without share capital).
o Distinction between member (registered shareholder) and shareholders
Members of listed companies also have to be:
o S. 130D(1)(b), CA: Persons named in the Depository Register as depositors
(record of shareholders – as shares are no longer held in printed form)
o S. 130(D)(3), CA: A depositor is not entitled to attend any General Meeting of
the company, to speak and vote unless his name appears on the Depository
Register 48 hours before the General Meeting.
b. Rights of a member
Right to attend and vote at General Meetings.
o S. 180(1), CA: All members have the critical right to attend any General
Meeting of the company and to speak and vote on any resolution before the
meeting (unless he hasn’t paid for his shares, or unless AOA/MOA provides
that holders of preference shares shall not be entitled to vote (s. 180(2), CA)).
Right to have the MOA and AOA observed – s. 39, CA statutory contract.
Right to restrain ultra vires acts – s. 25(2)(a), CA, but power is lost if transaction is
wholly executed.
Right to access the company’s records and certain information.
Right to be treated fairly – this includes the Minority Protection measures.
c. How members make decisions
Generally, members act collectively and make decision via voting at the general meeting:
Companies Act, section 180(1)
Evaluation: Even if the articles deny this right to convene a meeting, will the
shareholders still have the power to requisition or call for a meeting, since they are
powers given to the shareholders in the Act. As ss. 176 and 177, CA are not subject to
the articles.
Court’s discretion to call for EGM (s. 182, CA)
There exist an ultimate residual power of the court to call a meeting (s. 182, CA) – if can’t call a
meeting under ss. 176 or 177, CA, court can convene an EGM in unforeseen circumstances.
o Re Noel Tedman Holdings, [1967] Qd R 561 (Australia)
All shareholders, who were also directors had died
Meeting could not be convened in the normal way
Hence, power of the court invoked
Personal reps were allowed to call a meeting and appoint new persons are
directors and then carry on the business
iv. Class Meeting
Regarding the rights of holders of classes of share.
Meetings of different classes of shareholders (preference shares or common shares)
Any variation of such class rights requires a class meeting as subject to the MOA and AOA.
c. Notice of Meetings
S. 180(1), CA: Every member has the right to attend a meeting and speak and vote at the
meetings.
S. 177(4), CA: Notice of every meeting must be served on every member having a right
to attend and vote.
S. 207(8), CA: Company’s auditor also entitled to notice of meetings.
Art. 111, Table A: AOA may also provide that other persons are entitled to receive
notice of meetings.
There has to be sufficiency of [1] time and [2] information.
o If insufficient content or time in the notice, meeting will be invalidated.
o Failure to provide adequate notice may result in unfairness as members may
decide whether to attend the meeting or not based on the information provided
in the notice, or to appoint a proxy.
i. Period of Notice
The Companies Act also provides the minimum period of notices.
s. 177(2), CA: For ordinary resolutions, the minimum is 14 days.
s. 184(1), CA: For special resolutions, at least 14 days for private companies & 21 days
for public companies.
For resolutions requiring special notices, at least 28 days.
o s. 152(2), CA: Removal of director of a public company.
o s. 185, CA read with ss. 152(2), 205(4) and 294(3), CA: Removal of an auditor.
AOA/MOA can provide for a longer (but not shorter) notice periods.
But shortening notice period is possible.
o For an AGM, short notice requires 100% unanimous consent of all members
entitled to vote [s. 177(3)(a), CA]
o For an EGM, short notice requires > 95% of nominal value of voting shares, or
> 95% of total voting rights in a case of a company without a share capital [s.
177(3)(b), CA].
Chow Kwok Ching v. Chow Kwok Chi (2005)
o HELD: Where directors and shareholders are the same, an AGM can be held
without the director-shareholders having to wait 14 days where the matter could
be dealt with in a Board Meeting.
Note: In Singapore however, must take into account the saving provision of s. 392, CA. Defects
in notices are irregularities that can be corrected if no substantial injustice suffered.
ii. Forms of Notice
Usually stipulated in the AOA, if not, Table A applies.
o Written (and served personally or mailed to the member’s registered address,
and notice is effective on day after posting) - Art. 108, Table A
o Electronic communications allowed. [In view of technological advancements,
the Companies (Amendment) Act 2004 introduced these two sections] - Ss.
387A, 387B, CA:
Reform: Steering Committee (2012) suggested relaxation of rules
o e.g.: Instead of members’ written agreement to use of website publication,
allow company articles to provide for use of electronic publication and that
should be starting point.
iii. Content of Notice
There must be sufficiency of notice – the notice must state with sufficient particularity the
proposed matters that are going to be decided at the meeting.
The CA only specifies 2 basic items that must be included in the notices:
o s. 181(2), CA: Statement informing members of the right to appoint a proxy
who need not be from the company; and
o s. 184, CA: the intention to propose a special resolution.
For ordinary business – 14 days, place, date & hour of the meeting (Art 45, Table A).
For special business – in addition to those things required for ordinary business, the
general nature of the business must be given (Art. 46, Table A).
o Art. 46, Table A defines what is “special”.
Everything in an EGM is considered special.
Everything in an AGM is considered special except for those listed out
in Art. 46, Table A
(a) Declaring of a dividend, (b) consideration of the accounts,
balance-sheets and the report of the directors and auditors, (c)
the election of directors in the place of those retiring, and (d)
the appointment and fixing of the remuneration of auditors.
iv. Sufficiency of Notice
Sufficiency of notice depends on the facts.
If there is insufficient notice, the meeting may be invalid, subject to s.392(2), CA
The test is whether the information is enough to enable a prudent member to decide
whether or not he will attend the meeting, send parties in his stead, or is content to let
matters take their own course at the meeting.
Tiessen v. Henderson (1899)
o Meeting called for schemes to reconstruct company and the directors stood to
benefit from the scheme but this fact was not disclosed in the notice.
o HELD: Notice insufficient. The notice did not contain enough information to
enable the recipient to make a informed decision
o Example of the court protecting the absent member: as they should have the
opportunity to consider the matter in light of all the facts.
Lau Ah Lang v. Chan Huang Seng (2002)
o Notice did not set out the important agenda of the removal of management
committee & elect a new one - it prejucided their chance of standing for election
o HELD: Notice insufficient, meeting invalidated.
Hup Seng Co Ltd v. Chin Yin (1962)
o Requisitionists sent out notices of the meeting but did not set out the draft
resolutions to be proposed at the meeting. Merely stated that the “business
before the meeting will be to discuss and vote upon the resolutions set out in the
notice of the resolution”.
o HELD: Notice insufficient, resolutions void. Not even the text of the
resolutions sought to be passed was set out in the notice.
Polybuilding v. Lim Heng Lee (2001)
o Directors deliberately failed to give notice to some members of a written
resolution appointing a corporate representative.
o HELD: Notice insufficient. Such an omission to give notice was made in bad
faith and invalidated the subsequent meeting. Court here did not utilise s. 392.
Even if majority is reached, must give sufficient notice to minority.
Paillart Philippe Marcel v. Eban Stuart Ashley (2007)
o D purported to call an EGM for the purpose of removing Plt from the Board of
Directors. The company did not circulate this resolution to the Plt.
o HELD: Notice insufficient. Non-circulation rendered the resolution ineffective
even though it was validly passed by the majority.
Note: In Singapore however, must take into account the saving provision of s. 392, CA. Defects
in notices are irregularities that can be corrected.
d. Quorum of Meeting
i. General Requirement
Quorum refers to the number of members required to be present to transact the business legally.
The minimum number is usually spelt out by the AOA, if not,
o S. 179(1)(a), CA: 2 members personally present constitute a quorum.
o Art. 47, Table A: 2 members can include persons acting as proxies.
Quorum need only be present at the commencement of a meeting and not throughout.
But the quorum must at all times in time be at the minimum of 2 persons.
o Re Hartley Baird Ltd (1955)
Quorum is to be present only at commencement of meeting.
The subsequent departure of a member reducing the number required
for quorum does not invalidate the meeting.
**Often, where there are groups of shareholders in a company, apart from a numerical
requirement for quorum, there will also be a provision in the shareholders agreement and/or in
the articles of association stating that each group’s representative will have to be present in order
to constitute valid quorum (Chang Benety v Tan Kin Fei [2012])
ii. Lack of Sufficient Quorum
Lack of quorum does not invalidate the meeting, unless court thinks substantial injustice caused.
S. 392(1), CA: a lack of quorum is considered a “procedural irregularity”, thus it does
not automatically invalidate a meeting: see s 392(2)
S. 392(2), CA may save proceedings where the lack of a quorum is of little or no
consequence, and no shareholder’s interests are prejudiced by any decision taken at that
meeting (where it has not caused or may cause substantial injustice)
The provision is inapplicable where the disputed meeting results in decisions being
taken that may disadvantage the absent shareholders.
o Re Goodwealth Trading Pty Ltd (1991)
Board meeting purportedly held without a quorum for a decision of
winding up.
HELD: Meeting invalid. Lack of quorum does not automatically
disqualify the proceedings undertaken at the meeting. It will be subject
to s. 392, CA and claimant must prove “substantial injustice” before it
can be invalidated. If not, irregularity is cured.
iii. Misuse of Quorum Rule
Quorum rule cannot be used as oppression.
Phua Kong Seng v. Song Lim Hua (2005)
o Company had only 2 shareholders with P, 51% and D, 49% shareholding. P
made several attempt to convene EGM with proper service of notice but D
failed to attend, hence there was no compliance with the quorum requirement. P
made an application for a court order for a meeting pursuant to s. 182, CA.
o HELD: Court order made. Where D alleges oppression as a minority
shareholder, he ought to institute separate proceedings instead of not attending
the meeting. Quorum provisions do not confer a form of veto power for a
minority shareholder where a deadlock situation applies.
iv. One-Member Meeting
General rule at UK Common Law is that there must be at least 2 members personally
present to constitute a meeting (but NOT required in Singapore)
o Re Salvage Engineers (1962)
HELD: Meeting invalidated. Needs at least 2 members to be personally
present.
**However, in Singapore, one-member companies are allowed under s. 20A, CA.
o S. 184G, CA: One member company may pass resolution by the member
recording the resolution and signing the record.
e. Voting
i. Who gets to vote?
S. 180(1), CA: All members are entitled to vote (except those who have not paid up for their
shares, preference shares).
ii. Number of votes
S. 179(1)(c)(ii), CA, Art. 54, Table A: Default rule is 1 poll vote per share.
S. 64(i), CA: In publicly listed companies, each equity share carry only 1 vote.
S. 179(1)(d), CA: In companies without share capital, 1 member entitled to 1 vote.
These are subject to provisions in the articles of association
iii. Manner of voting
S. 179, CA: 2 ways of voting, either through a show of hands, or through a written poll.
Show of hand – every member present entitled to 1 vote.
Poll – every member’s vote depends on his holding of shares or voting rights + proxies.
o S. 178(1)(b), CA: Polls can be demanded. Notwithstanding anything in the
AOA, a poll may always be demanded by:
(a) Any 5 or more members (including proxies) having the right to vote.
(b) Member or members representing at least 10% of total voting rights.
(c) A member or members representing at least 10% of the total amount
paid up on all the shares conferring the right to vote.
o S. 184(4)(a), CA: In the case for a special resolution (needing at least > 75% of
those present and voting to pass), the AOA cannot require that more than 5
members are required to demand a poll (more relaxed requirement)
Reform: Report of the Steering Committee for Review of the Companies Act – no change
recommended. However, consider the pros and cons of demanding a mandatory poll: Chapter 2
of Report, para 5.
f. Proxies
S. 181, CA: Member does not have to be physically present to cast vote. All members have the
right to vote by proxy.
S. 181(1), CA: Proxy need not be a member of the company.
S. 181(1)(a), CA: Proxy can only vote if there is a poll (unless the AOA provides
otherwise).
Art. 54, Table A: In a show of hand, members or the proxy can vote, and it counts as 1
vote.
i. Appointment of Proxy: s. 181, CA
A form of agency, where the proxy is the agent and the member is the principal who does not
have to be physically present.
Two-way proxies: s. 181, CA
There must be a 2-way proxy form (form directing the proxy to vote) – Art. 60, Table A
prescribes the form.
S. 181(1)(b): Unless the articles otherwise permit, a member can only appoint at
maximum two proxies to attend and vote. But the member must make clear which
number of votes each proxy has been given to vote with, or it will be void [s. 181(1)(c)]
S. 181(5), CA: It is a criminal offence if the 2-way proxy is not complied with.
Deposit of Proxy Form: s. 178(1)(c), CA & Art 61, Table A
Art. 61, Table A: The proxy forms must be deposited no less than 48 hours of the
conduct of the meeting.
S. 178(1)(c), CA: Articles cannot require a member to appoint a proxy and deposit the
appointment form more than 48 hours before a meeting.
ii. Revocation of the proxy
A proxy’s power to vote on his principal’s behalf can be revoked before the meeting at which
the vote is to be cast.
Art. 62, Table A: Notice of revocation must be given to the company in writing and
received by the company at the registered office before the commencement of the
meeting, or else the vote is valid.
An exception is when the member turns up at the meeting himself.
o Cousins v. International Brick Co Ltd (1931)
P held proxies totalling 102,000 votes, cast against the 96,000 votes on
the other side. Chairman of the meeting held that P lost because
members totalling 11,000 votes turned up and voted himself. Issue is
could they have revoked their powers this way?
HELD: Revoked. Every proxy’s authority is subject to the implied
condition that it should only be used if the principal does not attend
and vote. Although it does not “revoke” the authority per se, it removes
the proxy’s need to cast that proxy vote.
But if the principal attends but does not vote, then the proxy may vote on his behalf.
iii. Votes by proxy against instruction
Tong Keng Meng v. Inno-Pacific Holdings Ltd (2001)
o Instructions were given by the principal to use the proxy votes against the
removal of P, but the proxy agent used it for the removal instead.
o HELD: Votes were spoilt. In proxy voting, if the proxy voted against the
instructions, then the vote is spoilt instead of needing a recounting to take into
account the contrary vote.
Note: However, if principal provides proxy with a blank proxy form and not specify his
instructions in writing, then he retains the option of changing his instructions to the proxy orally.
However, he will run the risk that the proxy will vote contrary to his intentions and this
could be held to be a valid vote.
In Tong Keng Meng v. Inno-Pacific Holdings, the court emphasised that the principal
could have flexibility, or specificity but not both.
**Evaluation: A proxy does not owe a contractual or fiduciary duty to the principal and cannot
be compelled to vote according to the principal’s instruction. Doesn’t this undermine the trust in
the proxy system if the principal cannot compel the proxy to vote in a certain way?
g. Freedom of Voting
When voting, members generally have no duty to the company. It is only natural that when a
person votes, he does so in a manner that will benefit him personally.
However, there are some exceptions:
West Transportation Co Ltd v. Beatty (1887)
o HELD: Directors of a company are precluded from entering into engagements
in which he has a personal interest conflicting, or which possibly may conflict,
with the interests of those whom he is bound by fiduciary duty to protect.
Allen v. Gold Reefs of West Africa (1900) (May not be applicable in Singapore)
o HELD: When voting for the altering the AOA or varying of class rights, voting
has to be bona fide in the interests of the company as a whole.
Clemens v. Clements (1976)
o HELD: Fraud on the minority exception. Freedom of voting is subject to
equitable considerations which may make it unjust to exercise the freedom to
vote in a particular way.
Unfair prejudice and oppression under s. 216, CA.
Powers of the Board are normally not controlled by the Companies Act and only regulated by
the AOA, otherwise Arts. 79 – 90A, Table A applies. It is to allow the Board more flexibility
to respond rapidly and effectively to the fast changing business circumstances in a
competitive world. Unless articles specifically provide, decisions are made by majority and
other principles that apply to board meetings apply to the board of directors.
**When company is small and directors and shareholders are identical, there is
usually no distinction between decisions made by the Board and the General Meeting.
o Jimat bin Awang v. Lai Wee Ngen (1995)
HELD: Court approved of this view. Where directors and shareholders
are similar, a resolution passed by unanimous assent by the directors
can be considered a shareholder’s resolution.
Limits of informal Board decisions?
o Informal decisions must be unanimous unless otherwise provided for in the
articles (just like informal resolutions of the General Meeting) - Runciman v
Walter Runciman plc [1992] BCLC 1084
o If there are dissenting directors, it would be necessary to call for a formal Board
meeting. Proper procedures must be followed to override their dissent and
avoid substantial injustice.
o Notices should still be given out to all directors before the informal Board
decision - there should be transparency and fairness in general.
5. Corporate Governance
Corporate governance is the set of procedures, laws and institutions affecting the way a
corporation is administered. For the purpose of this course, focus is on the issue of
accountability and fiduciary duties owed by the directors to the shareholders and creditors. A
way of looking at it would be controlling the directors either by placing structures on the
Board or imposing duties.
a. Corporate Structure
1. Organisation of a Company
Generally, the Companies Act does not dictate to businessmen how their companies should be
organized. Nonetheless, the Act recognizes two main organs of a company - the Board of
Directors and the General Meeting of Shareholders.
o While these organs may be part of the agency costs problem, they are not agents as such
(in the legal sense), but they are the company (ie the principal) for many purposes.
2. Powers of Directors
S. 157A, CA: Powers of directors
o (1) The business of a company shall be managed by or under the direction of the
directors.
o (2) The directors may exercise all the powers of a company except any power that
this Act or the memorandum and articles of the company require the company to
exercise in general meeting.
Reproduced in Art 73, Table A
o sub-section (1) creates a mandatory rule, by which the power to manage the
business of the company (i.e., decision making) must be vested in the board or
undertaken at the board’s direction;
o sub-section (2) creates a default rule, by which the company’s powers are
presumptively vested in the board, and limits the derogation from that presumption
to powers vested by the company’s constitution in the general meeting
3. Statutory Limitations on Directors
s. 160, CA – Sale of a substantial portion of the company’s undertaking or property
o To ensure that the company does not dispose or sell a large proportion of its
property or undertaking without the permission of the shareholders.
s. 161, CA – Issue of New Shares
o To ensure that new shareholders don’t affect the interest of the shareholders w/o
their knowledge as such actions would necessarily affect the percentage share that
current shareholders enjoy.
o SC Recommendation 1.16: CA should be amended to allow specific shareholders’
approval for a particular issue of shares to continue in force notwithstanding that the
approval is not renewed at the next annual general meeting, provided that the
specific shareholders’ approval specifies a maximum number of shares that can be
issued and expires at the end of two years.
Ss. 162 and 163, CA – Loans to directors and companies linked to a director
o To ensure that they don’t abuse their power or have a conflict of interest to grant
favorable loans to themselves.
o Steering Committee Recommendations
1.16 - The share interest threshold of 20% in s. 163, CA should be retained.
1.17: The following two new exceptions to the prohibition in s.163 should
be introduced:
(a) To allow for loans or security/guarantee to be given to the extent
of the proportionate equity shareholding held in the borrower by the
directors of the lender/security provider;
(b) Where there is prior shareholders’ approval (with the interested
director abstaining from voting) for the loan, guarantee or security
to be given
1.18: The regulatory regime for loans should be extended to quasi-loans,
credit transactions and related arrangements.
In line with foreign jurisdictions that recognize quasi-loans.
o Firstlink Energy Pte Ltd v Creanovate Pte Ltd [2007] 4 SLR 780
In Singapore the meaning of a loan has a very narrow meaning (would have
to entail literally taking out cash and giving it to the director).
But in reality, the company can give loans in many other ways in order to
pay out this loan (eg. selling an asset without taking anything in exchange
or dealing on credit).
CA Held: Judge cannot read too much into the word ‘loan’ – as the
common law already has a meaning that cannot be expanded to much.
At present the court has to use fiduciary duties in order to cover the gap of
not being able to penalize the wrongdoing director who receive quasi loans.
If the coy sells something cheaply to the director, they cannot catch them
under s. 162 or 163, but they have to go back to s. 157 in order to penalize
them for their wrongdoing (to cover the gap in our legislation)
4. Duties and liability of Directors
S. 157, CA: As to the duty and liability of officers
o (1) A director shall at all times act honestly and use reasonable diligence in the
discharge of the duties of his office.
This is is more about imposing a duty upon directors. This imposes on to them some
general duties in respect to what they should do (positive duties) and what they should
not (negative duties).
SC Recommendation 1.26 - The duty to act honestly and use reasonable diligence in s.
157(1) should be extended to the Chief Executive Officer of a company.
i. Type of Directors
1. General Requirements
S. 4, CA: “Director” includes any person operating/occupying the position of directors, by
whatever name called, and includes a person in accordance with those directions or
instructions the directors are accustomed to act and an alternate or substitute director.
Why distinguish directors? As the expectations of director’s duties may vary depending
on the type of director he is.
o AWA Ltd v. Daniels (1992)
HELD: In contrast to managing directors, non-executive directors are
not bound to give continuous attention to the affairs of the corporation.
Their duties are intermittent in nature and performed periodically when
they need to do it (e.g. when they are appointed to meetings or
committees).
a. Executive Director
Executive directors work for a company on a mostly full time basis [SPP Ltd v. Chew
Beng Gim (1993)], possibly under a contract of service.
In smaller and informally-run companies, all the directors may be executive directors to
a certain extent because they participate in day-to-day management of the company.
Managing Director
Managing director is the most senior executive of the company and is usually entrusted
with the management of the daily affairs.
AOA usually gives power to the Board to appoint one of themselves as the managing
director, subject to the overriding authority of the Board.
Outsiders generally assume that the managing director has the authority to act on behalf
of the company – there is apparent/ostensible authority at the very least.
In small companies, the managing director has extensive powers.
IN large companies, the managing director is the link between management and the
Board.
b. Non-executive Director
Director who does not work in the company in full capacity.
Normally sits on the Board to offer objectivity, prestige, external perspectives and
independent judgement of the company’s management.
Only has 1 formal requirement under s. 201B, CA:
o Every publicly listed company must have an audit committee, the majority of
which must be composed of non-executive directors (and 1/3 must be
independent directors).
Generally, may not be held to the same standards of care as a normal director.
o Personal Automation Mart v. Tan Swee Sang (2000)
HELD: Non-executive directors held to a lower duty of care when
compared to executive directors. (but there is an objective minimum
standard to which they are held to)
o AWA Ltd v. Daniels (1992)
HELD: In contrast to managing directors, non-executive directors are
not bound to give continuous attention to the affairs of the corporation.
Their duties are intermittent in nature and performed periodically when
they need to do it (e.g. when they are appointed to meetings or
committees).
c. Independent Director
Definition in the Singapore’s Code of Corporate Governance: It means a director that does not
have a relationship with the company or its management that could interference his judgement
to the best interests of the company.
What can disqualify the “independence”?
o Employed by the company or its affiliates within the past 3 years.
o Accepted compensation from the company or its affiliates within past 3 years.
o Immediate family (spouse, parent, brother, sister, son or daughter) of an
individual employed by the company or its affiliates within the past 3 years.
o Directors being a partner or a significant shareholder with > 5% of shares or an
executive officer of any for-profit organisations to which the company made
significant payments within the past 3 years (> $200,000).
Audit Committee of a company
o s. 201B, CA: Requirements regarding the company’s Audit Committee
o But the Code of Corporate Governance goes further as it requires an even
greater level of independence as part of the audit committee to ensure that the
business of the company is managed by individuals that are truly independent.
However, unlike the the statutory provisions, the Code is not binding on
companies, and does not impose any sanctions upon companies that fail
to comply with the provisions.
The Code acts more as a guidance to companies, and where companies
cannot follow the provisions, they are just required to disclose the
“infringements” in their annual report.
Code of
s. 201B, CA
Corporate Governance
Non-Executive Director Majority Entire Commitee
General Requirements
S. 145, CA: All companies are required to have at least 1 director who is ordinarily
resident in Singapore.
o Ordinarily resident means residing in Singapore at least 183 days a year.
S. 201, CA: Listed companies are required to have at least 3 directors because listed
companies need an audit committee consisting of at least 3 directors.
S. 150(1), CA: The Companies Act does not prescribe manner of appointment and it is
usually left to the AOA. This provision mandates that in public companies, directors
must be appointed individually by a single resolution unless prior resolution (by
unanimous consent) agreed to allow 2 or more to be appointed as directors together.
o Raffles Hotel v. Malayan Banking (No. 2) (1966)
HELD: AOA/MOA can prescribe that a certain person/body (apart from
the AGM) can appoint the directors.
o Goh Kim Hai Edward v. Pacific Can Investment Holdings Ltd (1996)
HELD: Directors can full up vacancies in the Board themselves or
appoint additional directors. But this is a fiduciary duty and must be
exercised in the company’s best interests. Appointment is also valid
only until the next AGM.
S. 146, CA: Person appointed as director must consent to the appointment himself –
must be willingly subject to director duties.
S. 151, CA: Acts done by a director is valid notwithstanding any defects that may
afterwards be discovered in his appointment or qualification. Such procedural
irregularity does not affect the validity of his acts De facto Directors
General Requirements
There is no requirement that a director have any education, business experience or any
other skills.
Substantive requirements:
a. S. 145(2), CA: Be a human (and not a company).
b. S. 145(2), CA: Be of full age and mental capacity.
c. S. 145(1), CA: At least 1 director must be ordinarily resident in Singapore.
d. No director above the age of 70 may be appointed to a public company and to its
subsidiaries unless s. 153, CA is complied with (ordinary resolution passed at the AGM).
Procedural requirements:
a. S. 146, CA: Must file a declaration of consent and statement saying that he is
not disqualified.
Where MOA/AOA stipulates that the director needs to obtain a certain amount of shares
(Art. 71, Table A), then he has to obtain it within 2 months and file the necessary
documents as per s. 147(1), CA or else he must resign as per s. 147(3), CA.
a. Disqualification of Directors
Disqualification can come in 2 types – automatic disqualification, or disqualification
subject to court order.
i. Automatic Disqualification
Duration of
Section Circumstances giving rise to disqualification
disqualification
Undischarged bankrupt, whether adjudicated as
148(1), CA Duration of bankruptcy.
bankrupt in Singapore or elsewhere.
Convicted of offence involving fraud or
Up to 5 years from date of
154(1), CA dishonesty punishable with imprisonment for 3
court order.
months or more.
5 years from date of latest
Persistent default in complying with the relevant
155, CA conviction or order unless
requirements of the Companies Act.
leave of court obtained.
Disqualification under the LLP Act also leads Until person cases to be
155A, CA to automatic disqualification under the Companies under such a
Act. disqualification.
PP v. Allan Ng Poh Meng (1990)
o Issue was whether fraud and dishonesty had to be a necessary ingredient of the
offence, or is it sufficient that the fraud and dishonesty was proven even if the
offence does not require it?
o HELD: Automatic disqualification. Conviction under s. 103, Securities
Industries Act carries with it a disqualification because fraud and dishonesty
was proven even though the section does not require it.
ii. Disqualification subject to a Court Order
Duration of
Section Circumstances giving rise to disqualification
disqualification
Director of a company that went into insolvent
Up to 5 years from date of
149, CA liquidation AND was found by the court to be
court order.
unfit to act as a director.
Up to 5 years from date of
154(2)(a), Convicted of any offence in connection with the
conviction or from date of
CA formation or management of a company or
release from prison.
s. 157, CA (duty to act with care and skill) and Up to 5 years from date of
154(2)(b),
s. 339, CA (not to enter into debts that the conviction or from date of
CA
company would not be able to repay) release from prison.
Director of a company that has been wound up on
Up to 3 years from the date
149A, CA the ground that it was being used for purposes
of the winding up order.
against national security or interest.
Quek Leng Chye v. Attorney General (1984)
o AP devised scheme to set up a country club and sell membership but failed to
disclose material information about the company.
o HELD: Court ordered disqualification of AP. The offence is “in connection with
the formation of a company” under s. 154(2), CA, enough to trigger
disqualification by the court
b. Effects of Disqualification
When disqualified, the person does not cease to be a director automatically, but the onus
is on him to vacate his office or be liable for an offence subject to a fine and/or
imprisonment.
However, most companies have stipulation for the automatic vacation of the offence
when there is a disqualification.
o E.g. Art. 72, Table A.
S. 151, CA: Disqualification does not make the acts of the director void and acts are still
binding on the company.
o This is because, as a result of the Indoor Management Rule, external parties
need not check whether the directors were properly appointed or qualified, and
can assume that transactions with him will be binding.
S. 409A, CA: Allows members (or any other interested person) to prevent disqualified
directors from acting as such.
c. Application for leave by disqualifed person to be director
Disqualified persons may apply to the court for leave to be allowed to be a director or participate
in the management of the company. The onus is on the applicant to convince the court of his
commercial integrity.
Lim Teck Cheng v. Attorney General (1995)
o HELD: The leave is only granted in exceptional circumstances, balancing a
number of factors – nature of the offence, nature of the applicant’s involvement
in offence, general character of the offender, structure and nature of the
company, and interests and risks to the public and other stakeholders.
a. Vacation of Office
Death – the Companies Act does not prohibit a director from dying in office, nor is any period
of notice prescribed before this can be done.
Resignation – manner of resignation usually prescribed by the AOA, if not, then Art. 72(f),
Table A.
Glossop v. Glossop (1907)
o A director’s resignation with proper notice does not need to be accepted by the
company before it is effective (unless the director’s contract or the AOA
requires it).
Proof of time of resignation may be crucial because s. 145(5), CA will invalidate the
resignation if it will leave the company without any director or any director that is
ordinarily resident in Singapore.
Effectiveness of a director’s resignation shall not be conditional upon the company’s
acceptance.
Retirement – AOA usually provides for the retirement of directors in rotation, if not, then Arts.
63 – 66, Table A: in which case, the director vacates upon the happening of a specific event.
S. 145(5), CA prohibits the retirement of the last director or the last director who is
ordinarily resident in Singapore.
Automatic Vacation – AOA can provide that the office of the director becomes vacant upon the
happening of some event, if not, then Art. 72, Table A subject to s. 145(5), CA (as always).
AOA/Art. 82, Table A: Alternate director automatically vacates office when his
principal does so.
S. 153(2), CA: Only automatic vacation clause in the Companies Act relating to when a
director in a public company or its subsidiary turns 70 years old.
b. Removal of Directors
i. Private Company
Mode of removal normally provided in the MOA/AOA, if not then,
Art. 69, Table A: Power to remove director is vested in the General Meeting by an
ordinary resolution before the expiration of his period of office.
Samuel Tak Lee v. Chou Wen Hsien (1984)
o HELD: MOA/AOA may allow the removal of the directors by the Board, but
this is a fiduciary duty and the power must be exercised in the interests of the
company.
If the directors are under a contract of service: It is a breach of contract if the director is
removed before the expiry of his term of office. The removal of the director would still take
effect, but the director would be able to claim compensation for breach of contract.
Southern Foundries v. Shirlaw (1940):
o HELD: Aggrieved director can claim damages even if the removal is in
compliance with the CA/MOA/AOA because the removal remained a breach of
contract.
Alexander Proudfoot Productivity v. Sim Hua Ngee (1993)
o HELD: Measure of damages would be the salary that the director would have
received during the period of notice before his removal.
It is possible to remove a director while leaving him as an employee (and this may not constitute
a breach of the contact of service – e.g. removing him as a managing director while leaving him
on the Board).
ii. Public Company
S. 152(8), CA: Board cannot remove a director of a public company, regardless of what
is in the MOA/AOA right is reserved for shareholders in General Meeting.
S. 152(1), CA: Directors are always removable via an ordinary resolution in the General
Meeting.
o Soliappan v. Lim Yoke Fan (1968)
HELD: If the MOA/AOA provides for a removal process, the director
may be removed in accordance with the MOA/AOA rather than s. 152,
CA. s. 152, CA provides a “ceiling” but not a “floor” on how difficult it
is to remove a director in a public company.
S. 185, CA: Special notice of 28 days must be provided to the company of the intention
to bring the motion.
S. 152(3), CA: Director to be removed is entitled to make representations to the
company, and has a right to speak at the General Meeting in his own defence.
o Hence, reading it together = person seeking to remove a director must give 28
days notice to the company but the company can decide to hold the meeting
earlier as long as it provides 14 days notice to the members (ordinary
resolution). Effectively, the meeting can be held from the 15 th day onwards from
the day of the person giving notice to the company and it doesn’t invalidate his
notice.
**Even when a director, subject to a contract, is appointed for life, it is an implied term
that he shall continue in office as long as he performs his duties satisfactorily and in the
interests of the company and its members.
o Khoo Chiang Poh v. Cosmic Insurance Corporation Ltd (No. 2) (1974)
P appointed as managing director for life in a pre-incorporation contract
but was subsequently removed from directorship via s. 152, CA.
HELD: Removal justified because P had run the company in his own
interests and breached his fiduciary duties. Court held that P’s
suspension and removal were justified and his action for damages was
dismissed.
MOF Recommendation 1.13: That s. 152 should expressly include private company as well,
and not leave it to the articles. Suggest that we are not happy with it being as a default position
in Table A, but want to include it in the Act itself.
v. Compensation for loss of office (Statutory Duty)
General Provision
Payment to a director as compensation for loss of office as either a director or officer is prima
facie prohibited.
S. 168(1)(a), CA: Prohibits the Board from making payment to a director as
compensation for loss of office as an officer of the company, or as consideration for,
or in connection with his retirement from any such office
o Very wide because “loss of office as an officer” and not “director”.
Effect of Contravention: s. 168(1), CA: When there is a breach of s. 168(1)(a), the
directors receiving the payment holds the money in trust for the company
Evaluation: But courts appears to be willing to constrain the impact of s. 168(1), CA.
o Courts have distinguished that “deferred remuneration” and “employment
benefits” are different from compensation/ consideration/ connection, and can
be claimed.
o Thus, a certain amount of remuneration payable on successful completion of a
contract may be allowed – but must be careful that no provision is designed to
make it expensive for a company to get rid of a director.
o Hence, s. 168, CA can be circumvented by structuring the payments differently.
Grinsted v. Britannia Brands (Holdings) Pte Ltd (1996)
o Contract provided that the director would be paid his contractual remuneration
for 2 years after the termination of his contract of service.
o HELD: Remuneration payable. Not caught under s. 168, CA because they were
“part and parcel of the remuneration package and not intended to be paid for the
object of compensation or in consideration for his retirement.”
o Note: But court seemed to have left out “in connection with”. Wouldn’t the
severance package be in connection with his retirement?
a. Statutory Exception to s. 168(1)(a)
S. 168(1), CA: Disclosure of particulars of the payment and its approval by ordinary
resolution in the General Meeting.
S. 168(5)(b), CA: Payment made under a general agreement previously disclosed to the
General Meeting and approved by special resolution.
S. 168(5)(c), CA: Bona fide payment of damages for breach of contract of service.
S. 168(5)(d), CA: Bona fide payment by lump sum, or gratuity for past services
rendered.
S. 168(5)(e), CA: Payment is agreed upon before the person became director as a
consideration for his agreeing to serve as a director.
b. Evaluation
SC Recommendation 1.14: The requirement in s. 168, CA for shareholders’ approval for
payment of compensation to directors for loss of office should be retained.
SC Recommendation 1.15: A new exception should be introduced in the Companies Act
to obviate the need for shareholders’ approval where the payment of compensation to an
executive director for termination of employment is of an amount not exceeding his
base salary for the 3 years immediately preceding his termination of employment. For
such payment, disclosure to shareholders would still be necessary.
vi. Director’s Remuneration (Statutory Duty)
General Provisions
Directors are compensated in 2 ways:
o Directors’ fees paid to the director for his role as a director (All directors)
o A salary or fee paid to a director who is an employee or who provides some
other non-directorial service to the company (Executive Directors only)
S. 169(1), CA: Without a resolution solely for the purpose, a company cannot provide or
improve emoluments for a director in respect of his office.
o But this provision only applies to directors’ fees and not to the employee’s
salary. This includes an Executive Director who is an employee of the company.
Salary of an Executive Director is usually approved by the Board, not
the General Meeting.
In the absence of express stipulation in the AOA/MOA, the mere holding of the office
of director without more (e.g. also as a lawyer) does not entitle the director to
remuneration.
o Guinness plc v. Saunders (1990)
HELD: For salary, must be clear who the approving authority is. For
salary of Executive Directors, it is decided by the Board. But an entire
and properly constituted Board must approve the payment of these
salaries – all Board Members need be consulted.
In this case, the payment of £5.2 million to the CEO (an Exective
Director of the company) was made by a subcommittee of the Board,
that left out one of the Board members, thus held to be void.
o Heap Huat Rubber Company v. Kong Choot Sian (2004)
HELD: Special remuneration not granted. Court approves of the rule n
Guinness v. Saunders. The strict rules of equity can only be relaxed if
the Board (in this case) approves of it as per the AOA. On the facts, the
director did not obtain such a grant, and is thus, inconsistent with the
express relaxation as contained in the AOA. Equity cannot intervene.
vii. Relationship between Shareholders and Directors
a. Trustee-Beneficiary
People often try to analogize the Board of Directors as trustees to the shareholders, but this
relationship is different and it is hard to see the similarities.
• Although it would seem logical to think of directors as trustees of the property that they
are managing with the shareholders being the beneficiary, as the shareholders are the
ones that ultimately derive the profits, they do not owe the same fiduciary duty that a
trustee owes his beneficiary in a traditional trustee-beneficiary relationship.
• Perhaps the best way to think of the directors is to think of them as trustees in the sense
of holders of the powers vested in them, but not as trustee of the company’s property on
behalf of the shareholders.
Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378
o “Directors of a limited company occupy a position peculiar to themselves. In
some respects they resemble trustees, in others they do not. In some respects
they resemble agents, in others they do not. In some respects they resemble
managing partners, in others they do not.”
b. Principal-Agent
Directors of a company are not agents of shareholders, as they do not derive their authority from
the principal. They are vested their power by virtue of their position on the Board, not from their
principal.
• This is valid even in cases of nominated directors that are only sitting on the Board
because they have been nominated by the majority shareholders.
• Because under the eyes of the law, it recognizes that the only duty owed by the
Directors is that to the company, and not a principal-agent responsibility to the majority
shareholders.
• However, in reality, this may not always be the case, as the nominee director would
instinctively take into consideration the interest of the principal or major shareholders
that had nominated him/her to the Board.
Kuwait Asia Bank v National Mutual Life Nominees Ltd [1991] 1 AC 187 at 222
o “In the performance of their duties as directors…(the nominee directors) were
bound to ignore the interests and wishes of their employer, the bank. They could
not plead any instruction from the bank as an excuse for breach of their duties to
AICS.”
c. Directors’ Other Relationship with or to the Company
1. An employee of the company with a contract of service (like a CEO or MD)
2. A shareholder in the company (like in Salomon v Salomon)
3. A creditor of the company; (like in Salomon v Salomon)
4. On particular facts, jointly or severally liable with the company (where the Director
assumes personal liability for his action or where he has acted without actual authority
and the principal refuses to ratify his or her acts (eg TV Media v Andrea D’cruz)
b. Directors Duties
i. Statutory Duties
CRITICISM by Walter Woon: Suppose a director attends all meetings and reads all
the board papers diligently – there is no question about his diligence. Suppose further
that he carelessly fails to spot an obvious sign that the CEO is involved in a conflict of
interest situation (negligent). Can he be prosecuted for negligence?
o Must remember that s. 157(1), CA is an offence-creating statute and it would
arguably be inappropriate to convict the director on this basis since he is
negligent and not un-diligent.
o If the legislative intent had been to criminalise negligence, clear words should
have been used.
o Hence, argues that Lim Weng Kee is wrongly decided in conflating the statutory
duties with the common law duties.
o **Nonetheless, this decision carries the weight of authority, therefore the
position in Lim Weng Kee will be the position the courts take.
MOF Recommendation 1.26: The duty to act honestly and use reasonable diligence in
section 157(1) should be extended to the Chief Executive Officer of a company.
This is general provision that provides that directors who have a personal interest in a
transaction or property that the company is involved in must make disclosure of this
interest to the Board of Directors “as soon as practicable”.
o However, this duty does not seem to be crafted in the same way as ordinary
fiduciary duties as it provides for a positive duty to disclose, rather than a
negative duty (view followed in UK and Australia). But this is recognised in
Singapore as a fiduciary duty to disclose (Townsing Henry & Lim Suat Hua v
Singapore Health Partners)
Group of Companies
Recent case law suggests that, with regard to group companies, an objective standard could
be considered, of whether an honest and intelligent man in the position of the director could
reasonably believe that his actions were in the best interests of the company.
Intraco Ltd v. Multi-pak Singapore Pte Ltd (1995)
o Intraco was a creditor of City Carton and Box Pak. These 2 companies were
controlled by a group of individuals who also controlled Multi-pak. Because
City Carton and Box Pak could not repay the debts, Multi-pak purchased the
$2.3 million debts in return for Intraco buying Multi-pak shares and proving a
$300,000 loan. Receivers of Multi-pak later argued that the directors of Multi-
pak breached their fiduciary duty to act bona fide in the best interests of Multi-
pak because in reality, the debts were only worth a fraction of that $2.3 million.
o HELD: Court found that there was no breach of duty. Court said to look to the
benefit of the group as a whole, and not just the individual company.
o Test: whether “an honest and intelligent man in the position of the directors,
taking an objective view, could reasonably have concluded that the transactions
were in the interests of the respondents” – an objective test.
o Multi-pak benefitted from the deal because the strategic alliance with Intraco (a
government-linked company) allowed it access to marketing and supply links.
i. Business Judgment Rule
This rule is a presumption that if a director follows his business judgment but it is eventually
realized that he had made an error, he would be safe from negligence liability. This rule is
applicable in US, Australia, and most recently, Malaysia.
• The business judgment rule is a presumption that works in favour of Directors if:
a. If the directors is not acting in a position of a conflict
b. Board must have been well informed
c. They must act rationally or reasonably (must be on the face of it, having acted
rationally)
This is a strong rule compared to statements from cases about not second guessing
directors (eg Howard Smith, ECRC Land, Vita Health)
o But the problem is, that we alr do this in the area of negligence liability.
o And the courts will analyse whether those actions are what a reasonable director
would do. And more skill will be expected from those with greater
skills/training.
What are the advantages and the dangers of such a rule?
• Advantages
• In US, there is a fear of being sued for negligence thus this provides them with
protection against unnecessary litigation!
• Disadvantage/Dangers
• Becomes a very formalistic defence
• Directors may not direct their minds towards acting in the best interest
of the company and thinking about whether it was reasonable to act in a
certain way, but rather, they will just follow the steps and ensure that
they are safe from liability for a breach of their duties.
• They will ignore the underlying point reason for having the rule in the
first place – it will merely become a means to protect themselves.
• In Re The Walt Disney Company Derivative Litigation, 825 A2d 275
• Where one of the senior employees (Chairman of the Board) was given
$140 mil as a severance package after working for just 14 months.
• Shareholders tried to explore the means of suing the board for the
breach of their duties via a derivative action.
• Held: Board fulfilled the presumption of the business judgment rule, as
(a) the directors did not have a conflict of interest as they were not
getting any benefits, (b) they were well informed: they had a HR
consultant that said the 140million was reasonable given the state of
CEO pay at that time and the decision (c) was a rational one.
UK Position
Adopts a very pragmatic and realistic approach in that the courts or the government cannot
enforce or force these directors to act in the best interest, but they can only stop them from
acting in a way that would prejudice the interest of the company.
*Singapore Position
However, in Singapore, the courts are unlikely to follow the view taken by the courts in
Australia or UK. In the SGCA case of Townsing Henry, the court found that one facet of duty of
good faith is the duty of loyalty preventing a conflict of interest, thus both positive and negative
duties would be considered fiduciary duties!
Furthermore, in the recent case of Lim Suat Hua v Singapore Health Partners [2012] SGHC 63
at [92] and [93], the court found that there is a fiduciary duty of disclosure owed by directors
and that this duty could be ratified by the members of the company.
*Academics still say that there is a difference between positive duties and negative duties and
whether both of them should be classified as fiduciary duties.
• **They suggest that it is easier to say that any duty that attaches itself to the office of a
fiduciary to be considered a fiduciary duty.
a. Self Dealing and Fair Dealing
Self Dealing
If a director attempts to represent the interest of both the company and himself in a transaction,
there is an obvious conflict of interest and his duty Self Dealing
It is likely that most cases involving a director and the company are of self-dealing since
the director cannot be expected to have regard to both his own personl interest and that
of the company as he also represents the company.
A party cannot be both the buyer and seller of transaction and still be said not to have a
conflict of interest.
Tito v Waddell (No 2) [1977] Ch 106, 241
o “The self-dealing rule is … that if a trustee sells the trust property to himself,
the sale is voidable by any beneficiary ex debito justitiae, however fair the
transaction.”
Although it is the company’s property (due to the principle of separate legal entity), but
directors are still seen as a trustee of the company (not in the legal sense), much like the
custodians of the company’s property.
So any time they deal with the company (receiving high director’s fees, buying
company’s property), it would be seen as a form of self-dealing as it is seen as them
entering into such transactions to benefit themselves.
s. 156(1), CA Seems to cover self-dealing
o Every director of a company who is in any way, whether directly or indirectly,
interested in a transaction or proposed transaction with the company shall
declare the nature of his interest at a meeting of the directors of the company
s. 156(5), CA Difference between self-dealing and general conflict of interest
o Every director of a company who holds any office or possesses any property or
interests might be in conflict with his duties or interest as director shall declare
the fact and the nature, character and extent of the conflict.
Fair Dealing
However, it is different if a director buys shares from the shareholders as in Percival v Wright as
opposed to buying the company’s business, this could be considered fair-dealing instead.
- Tito v Waddell (No 2) [1977] Ch 106, 241
- “The fair-dealing rule is … that if a trustee purchases the beneficial interest of
any of his beneficiaries, the transaction is not voidable ex debito justitiae, but
can be set aside by the beneficiary unless the trustee can show that he has taken
no advantage of his position and has made full disclosure to the beneficiary, and
that the transaction is fair and honest.”
- Director can say that this is fair and not the same as self-dealing and thus would
seem to fall under 156(5) instead.
- Percival v Wright [1902] 2 Ch 421
- Where Directors bought shares from the shareholders without disclosing reason.
- Here shareholders selling their own beneficial interest, but the conflict is not as
intense as buying the company’s property - quite a pro-director decision
- Today insider-trading law would cover this “breach”, but from a company law
POV, the directors had not done anything wrong.
- “The directors of a company are not trustee for individual shareholders, and
may purchase their shares without disclosing pending negotiations for the sale
of the company’s undertaking.”
b. No Profit Rule
A director, even though acting outside the scope of his directorship, cannot retain any profit he
made through actual misuse of his representative position.
This is because the director occupies a fiduciary office and this duty of loyalty, to
which every fiduciary is subject, obliges a director not to place himself in a position
where his duty and his interest conflict.
This rule is related to the rule that a director must act in the interest of the company; the
two often overlap, for when a director makes his interest paramount, invariably he will
not be acting in the best interest of his company.
o Unless he has provided full disclosure and obtained the informal consent of
the company, a director who acquires benefit in connection with his office
is accountable to the company for that benefit.
Furs Ltd v Tomkies (1936) 54 CLR 583
o “No director shall obtain for himself a profit by means of a transaction in which
is concerned on behalf of the company unless all the material facts are disclosed
to the shareholders and by resolution a general meeting approves of his doing
so, or all the shareholders acquiesce.
o The director cannot take advantage of his position and get a profit, even if the
company is in no position to exploit the business opportunity.
Regal (Hastings) Ltd. v Gulliver [1942] 1 All ER 378
o Company was trying to acquire a lease of two other cinemas, through a
subsidiary (Amalgamated), but the landlord required Amalgamated to have
£5000 worth of paid up capital. But Regal was only able to raise £2000 itself,
thus the directors, the company solicitor and some outsiders contributed the
remaining amount. The deal to acquire the cinemas eventually fell through.
o The directors eventually sold their shares in Amalgamated and had made a
profit and Regal was eventually sold and a new Board was elected. This new
Board brought a claim alleging a breach of fiduciary duties by the original
directors for obtaining a profit despite the conflict in interest.
o HL Held: Whilst the defendants were found to have acted honestly, they were
found to be liable to account for their profits made on the sale of the
Amalgamated shares, as the opportunity for profit came to them in their
capacity as fiduciaries of the company, and therefore had to disclose the profits
to the shareholders if they wanted to get approval, which they did not do.
c. No Conflict Rule
A director is under an obligation not place himself in a position where the interest of the
company whom he is bound to protect comes into conflict with his personal interest (duty-
interest conflict) or the interest of a third party (duty-duty conflict) for which he acts. This
rule is so strict that it does not even taken into consideration whether or not the transaction is a
fair one; it will be set aside regardless.
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461, 471 (149 RR 32)
o “it is a rule of universal application, that no one having [fiduciary] duties to
discharge, shall be allowed to enter into engagements in which he has, or can
have, a personal interest conflicting, or which possibly may conflict, with the
interests of those whom he is bound to protect. So strictly is this principle
adhered to, that no question is allowed to be raised as to the fairness or
unfairness of a contract so entered into.”
**The authorities seem to suggest that originally, when the concept of fiduciary duties was
being developed, the courts took a very strict rule regarding the breach of fiduciary duties.
Initially, a “mere possibility” of conflict was sufficient for breach of fiduciary duties.
• But in the modern context, it can be said not to be so strictly implemented, in which the
courts require a “real and sensible possibility” of conflict in order for there to be liability
• But the courts will once in awhile go back to this strict language when required.
i. Duty to Company-Director’s Interest Conflict
The old case law in the UK and Singapore seem to suggest that a strict approach to a conflict of
interest should be taken – where there is the “mere possibility” of conflict, the director would be
found to be in breach of his fiduciaries duties.
Industrial Development Consultants Ltd v. Cooley (1972)
o Company attempted to contract with 3 rd party who refused. 3rd party then offer
the contract to the director, Cooley who resigned without disclosing the offer.
o Hehld: Breach of duty to avoid conflict. Cooley had to account for the profits
made on the contract even though the company could not have made the profit.
The fact that the company could not itself have succeeded in getting the
property/business opportunity is irrelevant.
o Evaluation: Very strict on the facts, as the company only had a 10% chance of
getting the contract, and the Dft was not a director, only a senior employee!
Followed in Singapore by Hytech Builders Pte Ltd v Tan Eng Leng [1995]
o Director diverted corporate opportunity to another coy in which he was a
director when Hytech was deemed unsuitable to bid for the contract
o Held: Even if a company could never have gotten the profits for itself, that is
irrelevant, a director cannot act for his own personal gain when it is in conflict
with duty that he owes to the company.
o A director therefore cannot take advantage of a coy’s inability to secure the
business and use it for his or another company’s profit.
Regal (Hastings) Ltd. v Gulliver [1942] 1 All ER 378
o Here the directors were held to be liable for a breach of director duties in
making a profit from the sale of their shares in the subsidiary company, as there
was a conflict of interest between their own personal interest and the interest of
the company.
o Richard Nolan suggest that there is clear conflict of interest as the court could
not say for certain that there was no other way for Regal to obtain financing in
order to raise the required money.
If you really were focused on your job as a director, you would need to
do the best for the company by finding alternate sources of financing
and not immediately offering to raise the money by themselves.
And what the law does is that it stops you from straying and taking
advantage of your position at the expense of the company as the profits
would have accrued to them rather than the directors
o Court fell back to the true essence of the fiduciary duties which is the no profit,
no conflict rule.
Boardman v Phipps [1967] 2 AC 67
o Confidential information acquired by fiduciary in the course of a fiduciary
relationship (trustee-beneficiary situation) and used this information.
o Held: Director found to have breached his fiduciary duty (3-2 majority)
o Majority found that the Dft had acquired the information and opportunity while
representing the interest of the trust and thus there was potential conflict of
interest between his duties to the company and his own person interest –
adopted an approach that required just the “mere possibility” of conflict.
o **But the minority found that his fiduciary duty ended before the conflict had
arisen and thus he should not be held to have breached his duties to the
company – they required the need for there to be a “real and sensible”
possibility of conflict.
Canada
The Canadian case of Canadian Aero Services v O’Malley suggest that several factors
can be used to test if should be taken into account when determining if that has been a
breach of fiduciary duties. This suggests that the court is attempting a balancing of
factors, but these factors are not 100% accurate, and would ultimately depend on the
precise facts of the cases.
• Canadian Aero Services v O’Malley (1973) 40 DLR (3d) 371 per Laskin J
o “The general standards of loyalty, good faith and avoidance of conflict of duty
and self-interest to which the conduct of a director or senior officer must
conform, must be tested in each case by many factors which it would be
reckless to attempt to enumerate exhaustively.”
Position or office held (director v employee),
The nature of the corporate opportunity (what type of opportunity was
it, is it related to the coy’s business),
Tts ripeness and its specificness (what stage of the negotiation)
The director’s or managerial officer’s relation to it,
The amount of knowledge possessed,
The circumstances in which it was obtained and whether it was special
or, indeed, even private,
The factor of time in the continuation of fiduciary duty where the
alleged breach occurs after termination of the relationship with the
company (whether the FD extends beyond his resignation), and
The circumstances under which the relationship was terminated, that is
whether by retirement or resignation or discharge.”
Peso Silver Mines Ltd (NPL) v Cropper (1966)
o Company received an offer of several mining claims that were adjacent to the
company’s property. The offer was considered by the entire Board, but was
subsequently rejected. After the offer was rejected, the Dft formed a new
company that acquired the mining claims.
o Subsequently, the Dft left Peso and Peso sued the Dft for the shares in the new
company, claiming that it was being held in trust for them, as he was a fiduciary
of the company when he acquired the shares.
o HELD: No breach of duty. Decision of Peso’s Board to reject the corporate
opportunity had been taken in good faith and for sound business reasons in the
interests of the company. Thus, the rejected opportunity ceased to be a corporate
opportunity, and cannot be said then to have come to the director by reason of
his position as a director.
Singapore courts still adopt a strict and high threshold with respect to conflict of interests
Ng Eng Ghee and others [2009] SGCA 14 (the “Horizon Towers case”)
o En bloc sale, members on the sales committee bought additional houses in
development in order to be able to increase the number of votes in order for the
en bloc sale to pass
o VK Rajah took the view that a “mere possibility” was sufficient to find that
there was a conflict of interest by the MC when they failed to disclose the
actions to the rest of the “shareholders” (ie other homeowners)
Required a very high standard from the Management Committee as the
court analogized their duty to a trustee standard (like in Boardman).
Should this trustee standard (mere possibility) or the director standard
(real and sensible possibility) more appropriate in Singapore?
ii. Duty to Company-Other Duty Conflict
In other situations, the conflict of interest arises not between the interest of the company and the
director’s duty to the company, but between the duty that the director owes to to the company
and with his fiduciary duty owed to another company.
This normally arises in the cases of nominee directors who have been nominated to sit
on the Board of subsidiary companies and might be conflicted between the duties owed
to the holding principal and to the company.
Overseas Chinese Banking Corp Ltd v. Justlogin Pte Ltd (2004)
o HELD: Nominee directors may take into account his principal’s interest if it
does not conflict with the company’s interest but it cannot be at the expense of
the company’s interests.
o Otherwise, a nominee director should exercise his judgement in the best
interests of the company and should not be bound to act in accordance with the
direction or instruction of his principal appointed and must not put the
appointer’s interest before the company’s.
Townsing Henry George v Jenton Overseas Investment Pte Ltd [2007] 2 SLR 597
o [64] Appellant director A was appointed to Jenton’s board by Normandy which
had invested in the Newman’s Group (comprising initially of Jenton and its
wholly owned subsidiary NQF but with the money invested in a new company
NGH, which became the group holding company, as a loan, not shares)
o Charges were issued to secure NGH’s debt to Normandy but these were
deficient and the directors of the three companies refused to rectify the charges.
In the meantime NQF sold its assets and had disputed cash.
o Normandy appointed receivers and managers of NGH and these removed all
Jenton’s directors except for A. A was then appointed by Jenton as
representative to NQF where he also became its sole director. A then transferred
disputed cash from NQF to Normandy.
o Jenton’s liquidators discovered what happened and sued A for breach of
fiduciary duty.
o Held: Court held that Normandy did not have valid charge over the disputed
cash as Jenton and NQF did not owe it any money, it was NGH’s debt.
Court found that paying over to Normandy was a breach of fiduciary
duty to NQF (not action here) as well as Jenton, as Normandy had no
existing claim whether as chargee or unsecured creditor.
o CA noted that holding company may have different interest from wholly owned
subsidiary but that was not the case here nor was that the relevant conflict, and
“not for us to speculate why Jenton, rather than NQF, has sued the appellant” at
[56]).
o Court proposed a further sub-categorization of the no-conflict rule
Double employment rule prohibiting a fiduciary from acting for two
principals. But this is usually overcome if both principals consent to it.
But consent may not cure the other categories of fiduciary duties below.
Duty of good faith where the fiduciary must actively serve the interest
of the principal.
The no inhibition rule where the fiduciary is inhibited or subjectively
believes he is inhibited from carrying out his duties fully in favour of
the principal.
The actual conflict rule where he cannot help but damage the interest
of one principal as against the other.
o They found that in this case, both the 2 nd and 4th categories were breached by A
as he had clearly favored the interest of his principal, Normandy, over the
interest of Jenton when the disputed cash was paid over to Normandy.
o Further question: What if A had gotten the consent of Jenton; and if he wanted
to get this approval, would this be approved by the Board of Directors or
Shareholders in General Meeting?
• But see now Sinclair Investments v Versailles Trade Finance [2011] EWCA Civ 347
preferring personal duty to account rather than constructive trust for secret profits.
• Courts in UK (HC and CA only as they are bound by precedent cases) prefer to
find that a wrongdoing director would only owe a personal duty to account for
profits, rather than the creation of a constructive trust
• This distinction is important in cases of liquidation, where a company
would only have an in personam claim, which puts them in the position
of an unsecured creditor.
• In this case, the court found that even if there was a proprietary right created,
the banks were bona fide purchasers thus they would not be held accountable in
any case.
• Thus far, UK does not follow the decision made by the Privy Council as they
still follow the Court of Appeal decisions in Metropolitan Bank v Heiron (1879-
80) LR 5 Ex D 319 and Lister & Co v Stubbs (that a trustee had an equitable
duty to account, but there was no proprietary interest)
3. Use Powers Only for their Proper Purposes (not explicitly provided for in CA)
Directors are obliged to exercise powers given and to use the company’s assets for the purpose
they were intended
It is no defence to assert that the director’s actions were bona fide interests of the
company or was ignorant of the law if the actions were for an “improper purpose”
(Hogg v Cramphorn Ltd)
Although this duty has always been there, it is rarely invoked to show that there has
been a breach of directors duties as the other 3 fiduciary duties are normally sufficient to
determine whether or not a director was in breach of his fiduciary duty.
**This duty normally comes up in situations where directors are involved in the issuance of new
shares. Whilst they are expected to get the approval of shareholders prior to the issuance of these
shares (s. 161, CA), these directors are also expected to act properly and carry out their duties.
This duty arises in such situations because often it is hard to see or determine if the
directors are acting in the best interest of the company, as it is unaffected when the new
shares are being given out. From the company’s POV, it’s interest may not be affected
as it only benefits from the raising of capital.
However, the conflict only arises when you look at the interest of the shareholders of
the company, as the issuance of new shares affects the balance of power within the
company as well as their relative shareholding within the country.
*Therefore, thus duty can be used to catch instances where the directors f ail to act
properly or where they prefer the interest of some shareholders compared to others.
o Mills v Mills (1938) 60 C.L.R. 150 at p. 164, per Latham C.J.
“The question which arises is sometimes not a question of the interests
of the company at all, but a question of what is fair between different
classes of shareholder. Where such a case arises some test other than
‘the interests of the company’ must be applied...”
Here the court recognizes that when deciding if there has been a breach
of a FD, the court should also direct its mind to the interest of the
shareholders and its various classes à seems to be the fairest outcome
Singapore Position
Singapore may not have developed this duty fully yet, but the CJ was instinctively applying
such a test in Singapore in the case of Townsing.
Tokuhon (Pte) Ltd v Seow Kang Hong (No 2) [2003] SGHC 65
o Local decision confirming that where members inter se would be affected
differently by the decision of the directors, the test of acting in the best
interests of the company would be inappropriate and inapplicable.
o In such cases, the issue of whether the directors have breached their duty of
good faith should be in reference to what is fair as between different classes of
shareholders. This suggest there needs to be a balancing of interests required
and from here, the proper purpose rule can be inferred.
Townsing Henry George v Jenton Overseas Investment Pte Ltd [2007] 2 SLR 597
o CA found that the proper purpose rule not relevant as appellant director paid
disputed cash in exercise of his powers as director of NQF and no question of
improper purpose in respect of Jenton arose.
Shows that there is such a rule, but it was just not relevant in this case.
o Here the liquidators were suing A, and the court found that there was a clear
conflict of interest. But here, the proper purpose rule was not breached, as the
shareholders of Jenton were actually NGH (who were the ones who took out the
loan from Normandy in the first place) thus no shareholders could be said to
have been wronged.
o Hans suggest that the proper purposes rule: about bringing justice and fairness
c. Authorisation and Ratification
At general law, a director must, if he is a counter party to the transaction with the company,
make full disclosure of all information relevant to the transaction.
This obligation to disclose does not apply where the director’s interest consist ‘only
of [his] being a member or creditor of a corporation which is interested in the
transaction’ and if the interest of the director ‘may properly be regarded as not being
a material interest’.
Under s. 156, CA, the following must be disclosed
o The nature of the director’s interest (whether direct or indirect, and including
an interest of a member of the director’s family) in any contract or proposed
contract with the company
o The nature, character and extent of any conflict that might arise by virtue of a
director holding any office or owning any property
**But as a basic, general principle, mere breaches of disabilities or duties, such as self-
dealing, or dealing to the exclusion of the company can be authorized (in advance) or
ratified (after the event) by an ordinary resolution of the general meeting after the director
has made full and frank disclosure.
However, the issues that arise are whether (a) whether a full and frank disclosure to
the Board of Directors would constitute sufficient disclosure for approval and (b) if
all breaches by a director can be ratified or if there are “unratifiable wrongs”.
1. Authorization
The company can authorize, in advance, some actions made by a director that would ordinarily
be in breach of his fiduciary duties owed to the company, if the director makes disclosure about
a conflict of interest or if he has a certain interest in a transaction. The issue arising is from
whom should the director get this approval from, Board of Directors or Shareholders in general
meeting?
Statutory Provision Only for Criminal Liability
o s. 156, CA allows a director to go the Board and make full disclose about any
wrongdoing or any action that would be in breach of his fiduciary duties owed.
Hans Tjio: This is a good provision as it channels directors to give
disclosure of their actions, and at the same time does not preclude the
Articles of Association for providing that the Board be the approving
body for breaches of fiduciary duty. However, he suggests that in such
situations, the conflicted director should not be allowed to vote or to
influence the vote of the other directors to ensure fairness.
Common Law Civil Liability
o At common law, the general rule is that shareholders are required to give
approval for actions by the directors that are in breach of their fiduciary duties.
Ideally, this should be even more clearly defined as “independent
shareholders” but the courts realize that this is an impossible task.
Thus this reference to independent shareholders is rarely referred to in
judgments, and is normally only referred to in soft law
o Dayco Products v Ong Cheng Aik [2004] SGHC 192 at [14], suggest that
disclosure can be made to the Board for their approval of an action that would
normally be in breach of their fiduciary duty if it is included in its Articles of
Association.
i. Does the approval of breaches of fiduciary duties breach s. 172, CA?
In the case of Dayco, the court suggested that in order to circumvent the need for a shareholder
resolution for the approval of a breach of a directors’ duties, the Board can make this approval
provided that it is included in it’s Articles of Association.
However, the court did not discuss was how such an approach could be accommodated
in the light of s 172, CA, which renders clauses excluding or exempting directors from
liability void (except in the case of indemnity or director/officer insurance).
o Does it not seem that providing for a provision in the articles that allows you to
get authorisation from the Board to shield and exclude liability for breach of
duty would contravene s. 172(1), CA?
s. 172, CA: Provisions indemnifying directors and officers
o (1) Any provision, whether in the articles or in any contract with a company or
otherwise, for exempting any officer or auditor of the company from, or
indemnifying him against, any liability which by law would otherwise
attach to him in respect of any negligence, default, breach of duty or breach of
trust of which he may be guilty in relation to the company, shall be void.
o (2) This section shall not prevent a company —
(a) From purchasing and maintaining for any such officer insurance
against any liability referred to in subsection (1); or
(b) From indemnifying such officer or auditor against any liability
incurred by him, in defending any proceedings (civil or criminal)
against him or in any application in which relief is granted to him (eg
under s. 391)
UK and Australia are the only ones that say that fiduciary duties must be negative in nature (ie
only the no profit, no conflict would be true fiduciary duties) and other directors duties like
acting in good faith or acting for the proper purposes may not be fiduciary duties.
**However, in Singapore, this is unlikely to be the position, as we consider both positive and
negative duties as part of the fiduciary duties that directors owe.
2. Ratification
After the breach has already been committed, the issue is whether the company can forgive
the director for the breach of his fiduciary duties.
Forgiveness seems to require the shareholders in general meeting as the company
does not seem to trust the Board to be able to ratify and still remain impartial especially
when the breach was committed by one of its members.
And ideally, not just any shareholder, it should be independent shareholders.
In 2006, the UK amended its Companies Act to provide a provision that seemed to
regulate which parties could ratify such actions.
o s. 239, UK CA: Ratification of acts of directors
s. 239(4), UK CA - Where the resolution is proposed at a meeting, it is
passed only if the necessary majority is obtained disregarding votes in
favor of the resolution by the director (if a member of the company)
and any member connected with him.
o But the legislation did want to override 150 years of case law because the
codification of this rule would suggest drawing a line and that the law is
determined by just looking solely at the statute. Thus a further provision was
mentioned that s. 239(4), UKCA does not override existing case law that prescribes
for certain acts that cannot be ratified.
S 239(7), UK CA: This section does not affect any other enactment or
rule of law imposing additional requirements for valid ratification or
any rule of law as to acts that are incapable of being ratified by the
company.
i. What breaches can be ratified, and which breaches are unratifiable?
Ratifiable Breaches
1. Breach of the Proper Purpose Rule (eg directors issuing shares which results in the
dilution of shareholding by certain shareholders)
o Such a breach would arise where the directors know that some shareholders
cannot raise the money to buy new shares thus their shareholding would be
reduced.
o Bamford v Bamford [1970] Ch 212
Court suggests that it can be cured by ratification by the company at
general meeting.
But academics have argued that this shouldn’t be the case because it
seems unfair to minority shareholders As their interest could be
overruled if the majority passes an ordinary resolution to absolve/ratify
the actions of directors.
o Lim Suat Hua v Singapore HealthPartners Pte Ltd [2012] SGHC 63 at [93]
2. Negligence by the Director (with respect to his duty of care and skill)
o The company is the one who is owed this duty of care and skill, thus it is for the
company to forgive the breach thus would seem to be ratifiable.
Daniels v Daniels [1978] Ch 406
Court found that mere negligence is ratifiable.
Multinational Gas & Petroleum Co v Multinational Gas &
Petrochemical Services Ltd [1983] Ch 258
However, where there is a “fraud on the minority”, the minority shareholders can force the
company to bring the action against the director instead of ratifying or forgiving the breach.
Here, the minority would be able to bring a derivative action that would force the
company to bring the action against these errant directors.
Unratifable breaches
1. Once the company is in liquidation, the shareholders cannot ratify a breach of a
director since the value that remains in the company “belongs” to the creditors.
o Here arise the conflict between creditor and shareholder’s interest.
o If the company has a cause of action against a director, it should be preserved,
as the money should be recovered, as the money would actually go to the
creditors. But shareholders have no incentive to do the right thing in such
situations and thus cannot be trusted with making the right decision.
2. Misappropriation of company property to the benefit of directors
o Belief that such an action is so wrong that even if the whole (100%) shareholder
approve of the ratification, the shareholders cannot even ratify such a breach.
o Seen as a theft from the company, looking more and more like a criminal
offence, thus it seems to be a unratifiable wrong, a wrong that cannot be ratified
no matter who ratifies it
d. Relief from Breach of Duties
For breaches of directors duties like negligence or breach of fiduciary duties that the court finds
falls within s 391, the court can grant relief for wholly or partly the whole liability that is
incurred by the director, if they find that he has acted honestly and reasonably and that, having
regard to all the circumstances of the case including those connected with his appointment, he
ought fairly to be excused from any liability.
s. 391, CA: Power to grant relief
o s. 391(1), CA - If in any proceedings for negligence, default, breach of duty or
breach of trust against a person to whom this section applies it appears to the
court before which the proceedings are taken that he is or may be liable in
respect thereof but that he has acted honestly and reasonably and that, having
regard to all the circumstances of the case including those connected with his
appointment, he ought fairly to be excused for the negligence, default or
breach the court may relieve him either wholly or partly from his liability
on such terms as the court thinks fit.
However, it does seem strange that a director could have acted “honestly and reasonably” if it
has been found that the director had acted negligently or was in breach of his fiduciary duties.
The Australian equivalent of this provision only requires that the director act “honestly”
in order to get around such confusion.
JSI Shipping v Teofoongwonglcloong [2007] SGCA 40
o Suggest that the standard of reasonability in s. 391, CA is not the same as the
negligence standard.
o [164] Relying on this body of established case law, the court in Barings opined
at [1133] that s 727 of the UK Companies Act could be relied on if the auditors
had acted “honestly and reasonably”, and observed that the auditors may have
acted reasonably for the purposes of the section, even though they were found to
have acted negligently, if they had acted in good faith and if their negligence
had been technical or minor in character, and not "pervasive and
compelling” à application of s. 391
- Re D’Jan of London Ltd [1993] BCC 646 at 649.
- Shows how such relief can be granted for directors who have been negligent,
that a truly an objective standard is applied.
The difficult balance that exists is the issue of when the court should intervene to protect
minority shareholders from majority rule?
Policy
Majority Rule Protection of Minority
Considerations
Minority shareholders freely choose to be In closely held companies minority
minorities (and are free to exit) shareholders may be unable to exit
Minority shareholders invest/risk less than (members therefore have “legitimate
majority shareholders expectations” of being treated fairly)
Contractual
Bargain The contractual bargain in company law is Enforcing the “contractual bargain”
based on the notion of economic efficiency, (section 39), which includes minority
not about individual equality (unlike a rights, promotes certainty, investor trust
constitutional democracy) and ultimately increases investment.
The majority has the greatest incentive to Tyranny of the majority can destroy
maximize profits corporate value
Economic Business decisions made by a
Efficiency Majority rule is more administratively “disinterested” court may be more efficient
efficient than business decisions by a majority with a
conflict of interest
The exceptions to the rule in Foss attempt to maintain the benefits of the rule while
reducing the costs that such a strict rule imposes.
i. Underlying Principles of Foss v Harbottle
General Exceptions
The exceptions to the rule in Foss attempt to maintain the benefits of the rule while reducing
the costs that such a strict rule imposes.
At its core, the rule in Foss is a procedural rule that is concerned with locus standi.
Unless a member can demonstrate that the proceedings fall within an exception to Foss
the member will have no standing to bring a claim.
The four “exceptions” to the rule in Foss v Harbottle
1. Personal claims
2. Ultra vires transactions
3. Transactions requiring a special majority
4. Cases of “fraud on the minority” (i.e., the common law derivative action)
Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (UKCA)
o “There is no room for the operation of the rule if [2] the alleged wrong is ultra
vires the corporation, because the majority of members cannot confirm the
transaction. There is also no room for the operation of the rule if [3] the
transaction complained of could be validly done or sanctioned only by a special
resolution or the like, because a simple majority cannot confirm a transaction
which requires the concurrence of a greater majority. There is an exception to
the rule where what has been done [4] amounts to fraud and the wrongdoers are
themselves in control of the company (fraud on the minority).”
To establish that the wrongdoer directors have control, the minority must show either that the
wrongdoers:
Hold a majority of the voting power; or
Exercised de facto control by their influence to control a majority of the voting power .
There is no need to show a formal application to the company to instigate proceedings was
rejected—particularly where the wrongdoer holds a majority of voting power.
Evaluation: Wee Meng Seng & Dan W. Puchniak, Derivative Actions in Singapore: Mundanely
Non-Asian, intriguingly Non-American and at The Forefront of The Commonwealth in “The
Derivative Action in Asia: A Comparative and Functional Approach”, 353-54
o Response: “It is interesting to note that the rhetoric of Asian values has even
crept into the cases on minority protection. In Ting Sing Ning v. Ting Chek
Swee, as stated earlier, one of the reasons the Court of Appeal gave for
aggregating the shareholding of the sister to that of her defendant director
brother was that the influence of family on business decisions could not be
discounted in an ‘Asian family’, which still tended to be ‘rather clan-like’,
especially when the ties were through blood rather than marriage – very much a
reference to Asian values. With all respect to the court, the invocation of Asian
values is questionable, and could lead to difficulties in the future (e.g., will
the shares of two German brothers be considered separate under the wrongdoer
control test because they are not Asian?)
o Since 1987, there have been approximately seventy reported and unreported
decisions involving shareholder litigation - 40% of these decisions have
occurred in the last five years and 23% of shareholder remedy cases in
Singapore involve disputes among family members
o Several of the leading cases in Singapore run directly against what one
would consider “Asian family values” (e.g., Low Peng Boon v Low Janie;
Thio Keng Poon v Thio Syn Pyn; Sim Yong Kim v Evenstar Investments Ltd)
o This should not surprise as family disputes in closely held companies have
formed a substantial amount of jurisprudence in the UK, Australia and Canada
that are the jurisdictions from which Singapore draws much of its inspiration.
Exception: The common law derivative action may not be allowed when it is brought by a
minority shareholder but is opposed by a majority of the minority or a committee of
independent directors
Smith v Croft (No 2) [1988] Ch 114
o Minority shareholders pursued a derivative action against the directors for sums
which had been paid away in transactions that were ultra vires.
o Minority shareholders had 14% of the voting rights; the defendant directors had
63%; and other shareholders had 21%. The 21% minority did not support the
derivative action.
o Held: Court held in obiter that the plaintiffs may have had no right to pursue a
derivative action because a majority of the shareholders who were independent
of the defendants did not want the action to continue.
o However, with respect to the ultra vires transaction of the directors it was not
necessary to establish wrongdoer control (ie ultra vires is an exception to Foss)
Ting Sing Ning v Ting Chek Swee [2008] 1 SLR 197
o At an EGM a resolution against continuing the plaintiff minority-member’s
derivative action was unanimously passed by independent shareholders.
o The court found that the independent shareholders had not been informed about
the “nature of the allegations of fraud” against the defendants. Therefore, the
court did not consider whether an independent body of shareholders voting
against the action was enough to prevent it from proceeding.
o “It would therefore appear that the shareholders voted not to support the
appellant’s action against Ting, Sia and Binti for the benefit of Havilland
without being told about the nature of the allegations of fraud against them. It
would appear that both Ting and the solicitors for Havilland did not take the
trouble to explain to the shareholders what the claims were really about, nor did
they let the shareholders read the expert’s affidavit or the exhibit”.
**In a case in which both shareholders hold 50% of the shares, the court will likely
determine control by examining whether the wrongdoer was able to prevent the company’s
action from being brought against her.
Sinwa SS (HK) Co Ltd v Morten Innhaug [2010] 4 SLR 1
o “In my view, while shareholding (including shares that the errant
director/shareholder may be able to garner outside of his own shares) would be
an obvious way of determining control, it should not be the sole determinant. In
reality, controllers of companies often exercise control without resort to voting
power. The crucial question, to my mind, is not whether the defendant had the
requisite shareholding but whether the defendant was able to prevent an action
from being brought against him”
o As such, I would incline towards the “substance over form” approach adopted
by Vinelott J. After all, the crux of the matter is whether the errant director
was able to suppress an action against himself qua director. This was also
the approach adopted by the English Court of Appeal in Barrett v Duckett
[1995] BCC 243 (“Barrett”). In that case, like the present, both the plaintiff and
the first defendant held 50% shares in the company. Although the plaintiff’s
attempt to bring a derivative action was eventually struck out, Peter Gibson LJ
held, on the issue of control, as follows (at 250): Although Mrs Barrett [the
plaintiff] is not a minority shareholder but a person holding the same number of
shares as the other shareholder, Christopher [the first defendant], in the
circumstances of this case she can be treated as being under the same disability
as a minority shareholder in that as a practical matter it would not have been
possible for her to set the company in motion to bring the action”.
Exception 5: “Justice of the case” dictate that the minority be allowed to commence an action
This exception has neither been accepted nor rejected in Singapore, thus might be an alternative
grounds on which a minority can bring a cause of action, but UK has rejected (Prudential)
Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1993) 11 ACLC 1082 (Australia)
o Equity is concerned with substance and not form, and it seems to me to be
contrary to principle to require wronged minority shareholders to bring
themselves within the boundaries of the well-recognised exceptions and to deny
jurisdiction to a court of equity even where an unjust or unconscionable result
may otherwise ensue. The circumstances of modern commercial life are very
different to those which existed when Foss v Harbottle was decided. The body
of shareholders of a public company is ordinarily far greater in number, and the
controlling minds of individual shareholders are far more difficult to identify
than was the case with the relatively small corporations that existed 150 years
ago. These developments and the complexities and sophistication of modern
shareholding make it often very difficult to bring derivative claims within the
established exceptions.
o “To the extent that policy may be relevant in determining whether a fifth and
general exception to the rule should be recognized, I consider it to be desirable
to allow a minority shareholder to bring a derivative claim where the justice of
the case clearly demands that such a claim be brought, irrespective of
whether the claim falls within the confines of the established exceptions”.
Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[1982] Ch 204
o The English Court of Appeal explicitly rejected the “just of the case” exception
**Ting Sing Ning v Ting Chek Swee [2008] 1 SLR 197
o The court found that the appellant established the “fraud on the minority”
exception and therefore did not need to consider whether the “justice of the
case” exception was applicable under Singapore law.
1. Since the power to permit a shareholder the right to pursue a common law derivative action
resides in equity, a minority shareholder may be disqualified if she does not have “clean
hands” or delays pursuing the action.
Nurcombe v Nurcombe [1985] 1 WLR 370
o Minority shareholder wife had commenced a derivative action alleging that her
director husband had wrongfully diverted profits from the company.
o In earlier matrimonial proceedings, the wife had treated the profits allegedly
diverted from the company as the assets of her husband and, on that basis, was
awarded a portion of that money in the divorce.
o Held: CA rejected the wife’s claim to be entitled to bring a derivative action
because she did not have “clean hands”.
o “A particular plaintiff may not be a proper person because his conduct is tainted
in some way which under the rules of equity may bar relief. He may not have
come with ‘clean hands’ or he may have been guilty of delay…In Gower,
Modern Company Law…the law is stated in my opinion correctly: The right to
bring a derivative [claim] is afforded the individual member as a matter of
grace. Hence the conduct of a shareholder may be regarded by a court of equity
as disqualifying him from appearing as [claimant] on the company’s behalf.
This will be the case for example, if he participated in the wrong of which he
complains”.
Ting Sing Ning v Ting Chek Swee [2008] 1 SLR 197
o The Court of Appeal considered the plaintiff-member’s delay in pursuing the
common law derivative action as a legitimate factor to be considered but held
that in this case the plaintiff-member was not responsible for the delay.
**Sinwa SS (HK) Co Ltd v Morten Innhaug [2010] 4 SLR 1
o Justice Ang found that the plaintiff was not acting bona fide in the best interest
of the company by attempting to bring a derivative action.
He based his finding on the fact that the plaintiff had “not laid all of his
cards on the table” and “might not have disclosed the real motive for
bringing a derivative action in the name of [the Company]”.
Justice Ang further found that the plaintiff appeared “to be throwing
everything but the kitchen sink at the defendant” as a result of being
unhappy with a dispute that arose in the plaintiff’s business dealings.
o This unhappiness, and not the best interest for the company, appeared to be
what may have been behind the plaintiff bringing the derivative action—
although, Justice Ang held that it was not for him “to speculate on the real
motive behind the plaintiff’s actions” and confined his finding to the fact that
“the application was not bona fide in the interest of [the company]”
o “Finally, it must be remembered that the derivative action is an equitable
device, used to alleviate the harshness which on occasion may result from a
strict application of the rule in Foss v Harbottle. Accordingly, the maxim “he
who comes to equity must come with clean hands” applies. It follows that he
who seeks to use a derivative action must do so in the best interests of the
company and not for some ulterior purpose.”
o “Since the procedural device has evolved so that justice can be done for the
benefit of the company, whoever comes forward to start the proceedings must
be doing so for the benefit of the company and not for some other purpose. It
follows that the court has to satisfy itself that the person coming forward is a
proper person to do so.”
2. The mere availability of an alternative remedy will not preclude the court from
granting leave to pursue a derivative action—especially when the alternative remedy is
not a better remedy (e.g., it may cause delay).
Ting Sing Ning v Ting Chek Swee [2008] 1 SLR 197 (CA)
o “As regards the second alternative of an action for oppression under the Hong
Kong equivalent of s 216, the respondents have not shown us why it affords the
best solution to the dispute or that it is a better remedy for the appellant. To
begin with, the appellant is not alleging that he has been oppressed, but that the
respondents have used Havilland’s funds in breach of their duty as directors.
Furthermore, an oppression action will require the appellant to start all over
again…resulting in even more delay to the resolution of the present dispute.
Delay is one of the grounds on which the respondents have argued that this
court should not give leave to the appellant to commence the derivative action.
o Followed in Tam Tak Chuen v Eden Aesthetics [2010] (HC): “…it should be
noted that the CA made it clear in that Pang Yong Hock was not authority for
the proposition that, as long as the alternative of winding up the company was
available, leave would be refused, however meritorious the proposed claim may
be… What I had to determine was whether in this particular case the remedy of
winding up was more beneficial”.
Sinwa SS (HK) Co Ltd v Morten Innhaug [2010] 4 SLR 1 (HC)
o Although in obiter Ang J discusses extensively the “fraud on the minority” test,
he dismissed the plaintiff’s claim for leave to bring a CLDA because “another
adequate remedy” (arbitration clause under the shareholders agreement) was
available which made the derivative action unnecessary.
Puchniak & Tan CH, Company Law in “SAcL Annual Review”, 211-212
o “In Sinwa SS (HK) Co Ltd v Morten Innhaug [2010] 4 SLR 1…the High Court
dismissed the plaintiff’s claim for leave to bring a common law derivative action. In
arriving at this decision, Justice Andrew Ang spent a significant amount of time
discussing the “fraud on the minority test”. However, this entire discussion was obiter
as Justice Ang ultimately found that, regardless of the outcome of the “fraud on the
minority test”, leave had to be denied because “another adequate remedy” was available
which made the derivative action unnecessary. The general principle that the
availability of an alternative remedy may effectively foreclose the court from
granting leave for a derivative action is on one level straightforward and on another
level vexing. We respectfully agree with Justice Ang’s finding that the fundamental
reason why the derivative action is necessary is that without such an extraordinary
remedy “justice would not be done”. Therefore, it logically follows that the “necessity
of a derivative action” must be established before leave for this extraordinary remedy
can be granted. This much is straightforward.”
o “What is vexing is whether the mere availability of another remedy ( eg, an action
for oppression or just and equitable winding up) axiomatically makes the
derivative action unnecessary. In other words, will leave for a derivative action only
be granted if there are no other available remedies? In this case, Justice Ang seems to
agree with the Court of Appeal’s finding in Ting Sing Ning v Ting Chek Swee that the
mere availability of another remedy is insufficient to foreclose the court from granting
leave for a derivative action. However, the CA in Ting Sing Ning appeared to go one
step further than Justice Ang by requiring that the available alternative to a
derivative action must be “a better remedy” or “the best solution” before the court
would be foreclosed from granting leave to bring a derivative action. While Justice
Ang acknowledged that “at first blush” Ting Sing Ning appears to require an alternative
remedy to provide “the best solution” or “a better remedy”, he goes on to find that the
language used by the Court of Appeal was “purely rhetorical”. As such, in this case,
Justice Ang found that an alternative remedy needs to merely provide “a real
option” (not “the best solution” or “a better remedy”) to the plaintiff-shareholder for it
to effectively foreclose the court from granting leave for a derivative action. We
respectfully prefer the stricter standard that the Court of Appeal suggests in Ting
Sing Ning over Justice Ang’s approach. In our opinion, courts should not be
foreclosed from choosing “the best solution” – which is the logical implication of
Justice Ang’s suggested approach. This holds true even when “the best solution” is an
extraordinary remedy like the derivative action. Justice Ang’s finding that a shareholder
seeking leave to bring a derivative action does so “at little or no risk to himself” (Sinwa
at [22]) suggests that the derivative action is uniquely at risk for minority shareholder
abuse. Indeed, if minority shareholders could bring derivative actions “at little or no
risk” to themselves, we would agree that derivative actions would be uniquely open to
minority abuse – which may justify limiting them whenever another adequate remedy is
available (even if the other available remedy was not the best remedy). However, we
respectfully suggest that minority shareholders who bring derivative actions do so with
risk to themselves. As such, we are of the view that derivative actions do not
necessarily present any greater risk for abuse than other shareholders’ remedies
and therefore should not be foreclosed from being granted unless a better remedy
is available. There are two primary reasons why shareholders who pursue derivative
actions face substantial risk. First, minority shareholders who pursue a derivative action
are prima facie responsible for their own legal fees and are potentially liable for a
substantial portion of the legal fees of the defendant if they are unsuccessful in the leave
application or derivative action (which was precisely what happened in this case).
Second, even if the derivative action succeeds, any financial reward is paid to the
company – not the minority shareholder who pursued the action. The only way that
minority shareholders can benefit from a derivative action is if the award to the
company causes a pro-rata increase in the value of their shares (which econometric
evidence has shown is highly uncertain in listed companies). We suspect that the
substantial risk that minority shareholders face when pursuing derivative actions is the
reason why it is extremely rare for shareholders to pursue derivative actions in almost
all jurisdictions. It also suggests that the court should only be foreclosed from granting
them when there is a better remedy available.”
Evaluation of Common Law Derivative Action
Limitations:
The implementation of the more efficient statutory derivative action (s. 216A, CA)
means that for practical purposes, a common law derivative action will only be an
option in cases where the company is a foreign incorporated company or a company
listed on the Singapore Exchange ( s. 216A, CA only applies to Singapore incorporated
companies that are not listed on the Singapore Exchange).
Both the common law and statutory derivative actions do not result in a direct personal
benefit to minority shareholders. All damages recovered as a result of a derivative
action are paid to the company. This normally makes the derivative action a less
attractive option for minority shareholders than the oppression remedy (s. 216, CA)
which provides flexible remedies that directly benefit minority shareholders (e.g., the
purchase of an oppressed minority’s shares or a division of assets on winding up)
The wide scope and flexible remedies of the oppression remedy (s. 216, CA) has also
made other common law personal shareholder rights less important (e.g., in the case of a
breach of the articles or improper removal of a director) and s. 392, CA has rendered the
common law jurisprudence on irregularities moot.
Advantages:
Ting Sing Ning v Ting Chek Swee [2008] 1 SLR 197 (CA) and Sinwa SS (HK) Co Ltd v
Morten Innhaug [2010] 4 SLR 1 (HC) illustrates that the common law derivative action
is still alive in Singapore.
The oppression remedy is meant to mainly address personal (and not purely corporate)
wrongs. Therefore, in situations where there is purely a corporate wrong, which does
not amount to oppression (e.g., in a one-off breach of a director’s duty), a derivative
action may be the most appropriate way for a minority shareholder to seek redress. This
is particularly the case where the shareholder wants to maintain their interest in the
company.
In addition, the derivative action may be used as a tactic to force a settlement because
once leave is granted to pursue a derivative action, the company will normally be
required to indemnify the plaintiff which means that the defendant must pay her lawyer
while the plaintiff-shareholder can proceed to trial “using the company’s funds”.
When a company is a foreign incorporated company or is listed on the Singapore
Exchange the common law derivative action (and not s. 216A, CA) will be the only
option for carrying out this strategy.
Procedure for a Common Law Derivative Action
The applicant for leave to pursue a CLDA has to be a member of the company.
There is no particular procedure prescribed in the Rules of Court.
The action should be commenced as an action on behalf of all the shareholders (i.e.,
as a representative action) except for the defendants. The company should be added as
a co-defendant to ensure that it is bound by the judgement.
If the “wrong procedure” is followed it will not necessarily be detrimental to an
applicant’s derivative action if the procedural error is an irregularity flowing from a
bona fide mistake which can be cured without prejudice to the defendant .
The applicant should be able to show that she attempted to persuade the company to commence
the action prior to bringing the application to pursue the action derivatively.
The issue of standing should be decided as a preliminary issue prior to trial
o Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[1982] Ch 204
“He ought to have determined as a preliminary issue whether the
plaintiffs were entitled to sue on behalf of [the company] by bringing a
derivative action… Such an approach defeats the whole purpose of the
rule in Foss v Harbottle and sanctions the very mischief that the rule is
designed to protect”.
At the preliminary stage, the plaintiff member must establish her case on a prima facie
basis—but is not required to prove her case.
o Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[1982] Ch 204
“In our view, whatever may be the properly defined boundaries of the
exception to the rule, the plaintiff ought at least to be required before
proceeding with his action to establish a prima facie case (i) that the
company is entitled to the relief claimed and (ii) that the action falls
within the proper boundaries to the exception to the rule in Foss v
Harbottle”.
The costs are borne by the plaintiff member and any proceeds recovered are awarded to the
corporation.
The court has the discretion to order the plaintiff-member’s costs in pursuing a common
law derivative action to be paid by the company, even where the action proves to be
unsuccessful.
o Wallersteiner v Moir (No 2) [1975] 1 QB 373
“But what if the action fails? Assuming that the minority shareholder
had reasonable grounds for bringing the action – that it was a
reasonable and prudent course to take in the interests of the company –
he should not himself be liable to pay the costs of the other side, but the
company itself should be liable, because he was acting for it and not for
himself. In addition, he should himself be indemnified by the company
in respect of his own costs even if the action fails. It is a well know
maxim of law that he who would take the benefit of a venture if it
succeeds ought also to bear the burden if it fails”.
o Smith v Croft (No 2) [1988] Ch 114
Walton J held that a claimant would have to show that the indemnity is
genuinely needed in the sense that the claimant did “not have sufficient
resources to finance the action in the meantime”.
o **The defendant has the onus of demonstrating that any ratification by the
majority was independent before the court will consider whether such a ratification
demonstrates that bringing the action is not in the interests of the company (s. 216B).
Margaret Chew, Minority Shareholders’ Rights and Remedies, 299-300
o “Section 216B(1) of the Companies Act was clearly included by the
draughtsman to remove the common law barrier to a minority
shareholder action posed by the possibility that majority shareholders
may ratify breaches of directors’ fiduciary duty…Where the allegedly
wrongdoing directors do not hold the majority of shares, or where
they do not have any control or influence over the majority of
shareholders, there is little justification for the courts to disregard the
voice of the majority. The difference, however, between the common
law procedure and the statutory derivative action appears to be that
under the common law, the minority shareholder had to show that the
wrongdoers were in control of the majority shareholders to establish a
‘fraud on the minority’ before the court would disregard the views of
the majority shareholders. Section 216B appears to reverse the
burden of proof such that the onus is on the allegedly wrongdoing
directors to convince the courts that any shareholders’ resolutions
absolving them of breaches of duty was a result of independent
voting. If it is clearly shown that the directors did not have any
influence or control over an independent majority of shareholders,
who chose to approve the directors’ breaches of duty, the court may,
as expressly provided for in section 216B(1), take evidence of this
approval by the members into account”
3. Advantages and Disadvatages of the s. 216A, CA Statutory Derivate Action
Advantages of s. 216A, CA compared to the common law derivative action
o It is clear that standing will be addressed as a preliminary issue [s. 216A(2)].
o It is clear that a plaintiff, may be able to obtain an order that reasonable fees and
disbursements will be indemnified by the company [s. 216A(5)(c)].
o The court may make any order “it thinks fit” to help facilitate the action—which may
include giving the complainant access to important evidence [s. 216A(5)].
Often it is hard for the complainant to get information regarding the company
especially where the majority has control.
o No requirement to establish “fraud on the minority,” and in particular “wrongdoers
control,” to have standing to bring a derivative action.
o Under common law, the minority shareholder had to show that the
wrongdoers were in control of the majority shareholders to establish a “fraud
on the minority” before the courts would disregard the views of the majority
shareholders.
Under s. 216B(1), the burden of proof is reversed as the onus is on the alleged
wrongdoing directors to convince the court that any shareholder resolution
absolving the directors was the result of an independent vote.
o The complainant can intervene in an existing action (s. 216A) that the company does
not carry out properly.
In the case where a company bring a claim half-heartedly with no intention of
properly following through with it, the complainnant can intervene and take
over the cause of action.
o The statutory derivative action may be used as a tactic to force a settlement.
Because once leave is granted to pursue a derivative action the company will
normally be required to indemnify the plaintiff which means that the
defendant must pay her lawyer while the plaintiff-shareholder can proceed to
trial “using the company’s funds”.
Specific Circumstances
1. Legitimate expectations based on informal understandings must have been explicity
communicated between the parties
o Thio Keng Poon v Thio Syn Pyn [2010] 3 SLR 143 (Malaysia Dairy)
The appellant was the founderof a successful group of dairy companies.
The appellant transferred his shares to his wife and six children for no
consideration, effectively giving them control of the companies. The issue
arose when revealed that the appellant had been “double-claiming” for
business related travel expenses. Without any notice to the appellant, the
appellant’s oldest son called a board meeting to remove the Appellant from
his management positions—the decisions were then ratified at the AGMs.
The appellant claimed his removal amounted to oppression under s. 216 as it
breached the informal understanding, which gave rise to a “legitimate
expectation” that he would retain his management positions.
SGCA Held: Found that there was no evidence of any such understanding
between the appellant and his family members.
“The [appellant’s] understanding was unspoken and therefore, there was no
way his family members could have known about it”.
o Dan W. Puchniak & Tan Cheng Han, Company Law in “Singapore Academy of Law’s
Annual Review”, 206-207
“Based on the trial judge’s findings, the Court of Appeal held that “the
[appellant’s] understanding was unspoken and therefore, there was no way his
family members could have known about it” …We submit that merely
because a shareholder’s understanding is “unspoken” does not axiomatically
mean that it cannot be known to (or shared by) the other shareholders. In fact,
considering business and cultural norms in Singapore, it seems plausible that
when a founding patriarch gifts his shares to his family, out of respect for the
patriarch, there is an understanding that he will maintain a management
position in the company. One could reasonably argue that such an
understanding would exist even if it was not specifically articulated to his
family members at the time of the share transfer. If such a general unspoken
understanding indeed exists in Singapore, then there may have been a
legitimate expectation that the appellant not be removed from his management
positions.”
“However, even if the court would have found such an unspoken legitimate
expectation, it may not have changed the outcome of this case because the
appellant’s double-claiming behavior may have ultimately fallen beyond the
scope of protection provided by the unspoken legitimate expectation.”
Thus although he might have had the “legitimate expectation” not to
be removed, it was based on an understanding that this was contingent
on him not doing anything wrong.
2. Legitimate expectations based on informal understandings will unlikely arise where the
parties have sought professional advice and negotiated the terms of the articles.
o Over & Over Ltd. v Bonvest Holdings Ltd [2010] SGCA 7
“Where, however, the acquisition of shares in a company is one of the results of a
complex set of formal written agreements it is a question of construction of those
agreements whether any such superimposed legitimate expectations can arise. In
Re a company, ex parte Schwarcz (No 2) [1989] BCLC 427, Peter Gibson J
expressed similar sentiments. He noted…that the parties had spelt out in detailed
agreements all matters which were to govern their relationship, and thus rejected
the petitioners’ claim that their legitimate expectations were not limited to their
rights under a written service agreement. In the facts before me, the parties dealing
at arms’ length had entered into the Agreement, which comprehensively laid down
the rights of each shareholder. To my mind, it is difficult to find that any legitimate
expectations apart from those contained in the Agreement were created”.
Overall Evaluation
Dan W. Puchniak & Tan Cheng Han, Company Law in “Singapore Academy of Law’s Annual
Review”, 206-207
o “We respectfully submit that the Court of Appeal’s decision [in Thio Keng Poon v
Thio Syn Pyn [2010] 3 SLR 143] to limit the scope of legitimate expectations to
understandings between all of the shareholders in a company makes sense . Expanding
the scope of legitimate expectations to include the unilateral beliefs of individual
shareholders would open a Pandora’s Box for the oppression remedy in Singapore –
even if those unilateral beliefs were reasonable. Such an expansion would allow an
individual shareholder to use s 216 to effectively enforce “secretly held terms” on all
other shareholders (ie, terms which the other shareholders neither agreed to nor were
unaware of). This would introduce a significant amount of uncertainty into
shareholder relationships in Singapore which would discourage equity investment. In
addition, creating a situation where the enforceable relationship between shareholders
is based on what exists solely in the minds of individual shareholders would create an
evidentiary nightmare in s 216 oppression cases.”
ii. Legitimate expectations based on implied understandings
Implied understandings arise based on the nature and commercial purpose of the corporate structure
It allows courts to find “legitimate expectations” which are not specifically provided for in the
written documents but nevertheless reflect the shareholders’ interests and expectations in the
corporate relationship.
Examples of implied understandings:
The constitution and Companies Act would be complied with, to the best of the abilities of the
management and the administration, with leeway given for the occasional lapse (but not when
substantial injustice is caused)
Corporate participants in directorial positions would not use their position to defraud other
participants, contrary to their directors’ duties.
o Low Peng Boon v Low Janie [1999] 1 SLR 761
The majority shareholder-director caused the company to pay low dividends
to increase the company’s profits. The majority shareholder-director benefited
personally from this because his annual bonus was based on the amount of
profits of the company. The majority-director was also alleged to have used
the company’s funds for personal expenses.
Held: The court found that the actions of the majority amounted to unfair
oppression under s. 216, CA.
o Re Gee Hoe Chan Trading Co Pte [1991] 3 MLJ
The majority shareholder directors (holding 60%) had been paying themselves
directors’ fees and salaries but not declaring any dividends. The minority
shareholders (40%) were aggrieved because not only did the majority exclude
the minority from directorial positions, the majority also voted themselves
onto the board and paid themselves generous salaries, and did not affect any
declaration of dividends.
Held: The court held that it was grossly inequitable that the majority
shareholders should make use of their controlling power in both the general
meeting and the director’s meeting to adopt a policy which benefited only
themselves and gave hardly any benefit to the minority shareholders, thus
amounting to oppression under s. 216, CA.
Evaluation
It is extremely difficult to establish unfairness based on “legitimate expectations” in a listed company.
Section 216, CA applies to listed and unlisted companies. However, it remains to be seen
whether it is useful for shareholders in listed companies.
o The expectations of shareholders in listed companies are different from unlisted
companies. This be attributable to the fact that:
Shares in listed companies are liquid which allow for easy exit when a
shareholder is displeased with management.
Listed companies are more heavily regulated as a result of securities’ laws and
listing requirements which provides another layer of shareholder protection.
Listed companies involve a greater number of dispersed investors which
necessitates that the company’s constitution and applicable laws are the
totality of shareholder rights vis-à-vis internal corporate affairs.
o Any legitimate expectation in a listed company will therefore likely be based on an
implied (rather than an informal) understanding.
O’Neill v Phillips [1999] 1 WLR 1092
o “So I agree with Jonathan Parker J. when he said in In re Astec (B.S.R.) Plc. [1998] 2
BCLC 556: ‘in order to give rise to an equitable constraint based on 'legitimate
expectation' what is required is a personal relationship or personal dealings of some
kind between the party seeking to exercise the legal right and the party seeking to
restrain such exercise, such as will affect the conscience of the former’”
The mere disagreement of the minority with a business decision of the majority will not support a s.
216, CA oppression action.
Where mismanagement is merely unfortunate commercial judgment by the company’s
controllers, it is not actionable under s. 216, CA.
There is arguably an implied “legitimate expectation” that the majority directors will not use
their powers in a manner that breaches their duty of care, skill and diligence; and if they do, it
may amount to “commercial unfairness”.
o The court may be more willing to grant a claim based on mismanagement under s. 216
where the controllers have acted in a manner that is self-serving (although self-serving
conduct is not a prerequisite).
In a quasi-partnership, the controllers may have a positive duty to explain business decisions
to minority shareholders in cases where the decisions do not ostensibly further the interests of
the company
When the court finds commercial unfairness based in whole or in part on claims of inadequate
dividends it is normally in cases where:
1. The minority had an informal “legitimate expectation” that profits would be distributed to all
of the shareholders but in fact profits were only distributed to the majority shareholder
directors as directors fees; and/or
2. There was a significant gap between the financial benefits received by the majority and
minority - which is normally contrary to an implied “legitimate expectation” of a relatively
equal sharing of profits (especially in a quasi-partnership).
1. Procedural Requirements
s. 254(1), CA likely would only apply to Singapore incorporated companies and not “foreign
incorporated” corporations—as the section uses the term “company” and not “corporation”
throughout
o However, s 351(1)(c)(iii), CA appears to provide a “just and equitable” winding-up
remedy for members in “foreign incorporated” corporations.
The persons who may apply for a company to be wound up under s. 254(1), CA are set out in
s. 253(1), CA:
o s. 253(1), CA includes a number of people that may make an application for a
winding-up under s. 254(1), CA including the (a) company, (b) creditors and (c)
contributory, and (d) liquidator, amongst others.
o s. 253(1)(c), CA provides that a “contributory” --which is defined in s. 4(1) and has
been interpreted to include all members–-may apply for a winding-up if:
The shares were originally allotted to the member, or
The shares are held by the member for at least six months of the 18 month
period before making the application, or
The person is holding the shares as a result of them being transferred through
death or bankruptcy of the former holder [s. 253(2)(a)(ii), CA].
o A person with an interest in the shares of a company, but who is not a registered
member, will also likely be considered to be a “contributory” and can bring an action
under s. 254(1) as a result of falling under s. 253(1)(c).
Miharja Development Sdn Bhd v Tan Sri Datuk Loy Hean Heong [1995] 1
MLJ 101
Note: Theoretically past members may qualify as contributories but for practical purposes will never
be able to receive a just and equitable winding-up
2. Why bring a claim for a “just and equitable” winding up?
The most common reason a company is wound up is because it is unable to pay its debts.
Members may also choose to wind up a company voluntarily because they believe the
company no longer serves a purpose.
S. 254 deals generally with circumstances under which a company may be wound up by the
court.
Typically, minority shareholders do not have the voting power to secure a special resolution to effect a
voluntary winding-up [s. 254(1)(a) and s. 290(1)(b)].
However, minority shareholders can seek a winding-up on “just and equitable” grounds under
s. 254(1)(i), CA.
The “just and equitable grounds” test provides the court with extremely wide discretion (but an
extremely limited remedy).
3. Consequences for bringing a claim for a ‘just and equitable’ winding up
The advertisement of a winding-up petition normally results in the company’s credit drying
up, as banks will freeze the company’s account and creditors will deal only on cash terms. In
addition, the presentation of a winding-up petition against the company is often an event of
default in loan agreements and guarantees.
o However, since an application under s. 216 is not a winding-up petition, it does not
have to be advertised and thus does not have the negative effects of commencing a s.
254(1)(i) winding-up.
Therefore, particular care should be taken before commencing an application under s. 254(1)
(i), CA due to the negative consequences and implications of this remedy.
d. Relationship between s. 254(1)(i), CA and s. 216(2)(f), CA winding up
The courts have traditionally taken a restrictive view of their discretion to wind-up a solvent
company because of the potential hardship for various stakeholders .
The reluctance of courts to exercise their discretion for a “just and equitable” winding-up led
to the development of the oppression remedy.
There is an overlap between a (i) s. 254(1)(i), CA winding-up based on “just and equitable” grounds
and a (ii) s. 216(2)(f), CA winding-up as a remedy for an oppression claim as they both provide the
court with jurisdiction to remedy any form of unfair conduct against a minority shareholders
**However, a CA decision of Sim Yong Kim v Evenstar Investments Pte Ltd [2006] 3 SLR 827 made
clear that the circumstances in which a minority may succeed in an application for winding-up under s.
216(2)(f), CA and s. 254(1)(i), CA are distinct. Therefore, the two minority remedies should be
considered independently.
A successful oppression action may not result in the court granting a winding-up—as a
winding-up order under s. 216 is seen as a remedy of last resort.
On the other hand, it may be “just and equitable” to wind-up a company even where there is
no oppression or commercial unfairness - especially in a irretrievable breakdown of a quasi-
partnership.
e. Strategic Considerations when choosing between ss. 254(1)(i) and 216(2)(f), CA
Especially in the case of a successful company or where the “non-complaining” minority shareholders
may suffer losses from a winding-up, the flexibility of a s. 216, CA, winding-up may make it easier for
an aggrieved minority to receive some remedy.
Indeed, the court may reject a s. 254(1)(i), CA petition if it is seen as an attempt to bypass the
more appropriate and moderate remedies under s. 216, CA
However, a s. 254(1)(i) petition may be more appropriate in cases where an aggrieved minority is
intent on winding-up the company and/or the facts point to a “fault neutral” breakdown of a quasi-
partnership (which may lack oppression).
Where there is the possibility of both actions succeeding, an aggrieved minority may choose to
concurrently pursue an application under ss. 216(2)(f) and 254(1)(i), CA.
An important consideration when deciding to commence a s. 254(1)(i) application is that it has
potentially crippling effects on the company (which is not the case in a s. 216(2)(f), CA
application). The courts do not (See below) look kindly on a minority who uses this power for
the purpose of improving their bargaining position.
Sim Yong Kim v Evenstar Investments Pte Ltd [2006] 3 SLR 827
o The company, Evenstar was a quasi-partnership in which two brothers held all of the
shares. The petitioner, who was a minority shareholder, entered into the company
pursuant to his brother’s promise that he would buyout the petitioner’s shares should
the petitioner exit the company, thus he had a legitimate expectation of being bought
out by the OB on reasonable terms.
o The Court of Appeal held that this amounted to a “legitimate expectation” which was
breached when the majority brother refused to purchase the petitioner’s shares for a
reasonable price. The Court ordered a just and equitable winding up under section
254(1)(i).
o The court even used ss. 257(1) and 254(1)(i) together, CA to defer the winding up by
30 days to allow parties an adequate opportunity to reach a compromise.
o “[T]he provisions of our [Company Act] do not support any suggestion that the ‘just
and equitable’ jurisdiction under section 254(1)(i) is necessarily a subset of the
“oppression” jurisdiction under section 216… One might wonder whether the state of
the law would allow a malicious shareholder to try to wind up his company under
section 254(1)(i) and to bypass the more appropriate and moderate remedies available
under section 216. In our view, a shareholder who prefers a section 254(1)(i) remedy
to harass the company will risk having his application struck out as being vexatious.”
f. Test for s. 254(1)(i), CA winding up
“Fairness” is the primary litmus test that the court uses to decide whether to grant a just and
equitable winding-up under s. 254(1)(i), CA.
The court will balance the unfairness caused to the aggrieved minority as a result of the failure
to order a winding-up with the unfairness caused to the other corporate stakeholders as a result
of ordering a winding-up.
Unfairness will be determined objectively and the facts and circumstances supporting such a
claim must still be present at the time when the winding-up order is made.
The court will normally not see it as “fair” to allow the minority to create conductions that
justify the company being wound-up and then to use those same self-induced conditions as a
justification for a s. 254(1)(i) winding-up.
In determining what is “fair”, the court will consider “legitimate expectations” of the members -
similar to those considered under s. 216, CA (Oppression Remedy)
Even in a small private or quasi-partnership company, mere disagreements between
shareholders will not be sufficient to establish grounds for just and equitable winding-up
Sim Yong Kim v Evenstar Investments Pte Ltd [2006] 3 SLR 827
o Section 254(1)(i), CA calls for the application of equitable principles to determine
whether a winding-up order should be made in the circumstances of each case. There
are two aspects to this jurisdiction: first, whether there is sufficient cause to order a
“just and equitable” winding up, and second, whether the winding-up order resulting
in the destruction of the company is just and equitable: in other words, whether the
cure is worse than the illness, as the winding up might result in loss for all parties
...We accept that the notion of unfairness lie at the heart of the “just and equitable”
jurisdiction in s 254(1)(i), CA and that that section does not allow a member to “exit at
will”, as is plain in its express terms. Nor does it apply to a case where the loss of trust
and confidence in the other members is self-induced.
Chow Kwok Chuen v Chow Kwok Chi [2008] 4 SLR(R) 362
o The appellant and respondent were brothers, who along with a third brother were co-
directors of three family companies set up by their late father.
o After the father’s death the Companies continued their usual business of leasing out
commercial properties with three management staff.
o The brothers’ relationship became increasingly acrimonious and they were unable to
agree on how to manage the Companies. The respondent successfully brought
applications to wind up the Companies under s. 254(1)(i) and one brother appealed
o The Court of Appeal upheld the decision of the High Court that the Companies should
be wound up under s. 254(1)(i).
o The CA found that there was no need to be a technical deadlock (ie two directors each
holding 50% and no casting vote), but a functional deadlock (ie where parties could
not agree on how to manage and run the company) was sufficient to bring about a
winding-up.
o “First, the character of a company being small or private is not of itself sufficient to
constitute a “just and equitable” basis to wind up a company. Something more must be
present…Caution must therefore be exercised before a winding-up order is made. In
each instance where a winding-up order is sought, there must be sufficient grounds
before the court makes the order as that would have the effect of dispensing the
petitioner from complying with the scheme of things provided in the memorandum
and articles of association”.
The discretion of the court under s. 254(1)(i), CA is extremely wide and therefore (as in the case of
s. 216, CA) it is improper to suggest that particular facts will result in a successful claim for a s. 254(1)
(i), CA winding-up.
However, it is instructive to consider some types of cases in which a s. 254(1)(i), CA winding-
up have been successful.
o Chow Kwok Chuen v Chow Kwok Chi [2008] 4 SLR(R) 362
" Section 254(1)(i) of the Act merely provides that the court “may order the
winding up if the Court is of opinion that it is just and equitable that the
company be wound up”. The Act does not define or set any parameters for
determining what would constitute “just and equitable”. However, in In re
Blériot Manufacturing Aircraft Company (Limited) (1916) 32 TLR 253,
Neville J said at 255: “The words ‘just and equitable’ are words of the widest
significance, and do not limit the jurisdiction of the Court to any case. It is a
question of fact, and each case must depend on its own circumstances” While
case law has established that certain grounds would be sufficient to
constitute ‘just and equitable’, such grounds are not a closed list. As Lord
Wilberforce stated unequivocally in Ebrahimi v Westbourne Galleries Ltd
[1973] AC 360 (“Ebrahimi”) at 374–375: “[T]here has been a tendency to
create categories or headings under which cases must be brought if the clause
is to apply. This is wrong. Illustrations may be used, but general words
should remain general and not be reduced to the sum of particular
instances…the concept of “just and equitable” is a dynamic one and we
should not circumscribe its scope by reference to case law when the cases
themselves do not seek to do more than just apply the concept of “just and
equitable” to the circumstances of each case.”
Irretrievable Breakdown
o In the case of a private closely held company or a quasi-partnership, a just and
equitable winding-up may be ordered where there is an irretrievable breakdown in the
relationship between the director-shareholders, even though oppressive conduct
cannot be squarely pinned on one party.
o However, a complainant cannot succeed in a s. 254(1)(i) application where he/she is
the cause of the irretrievable breakdown.
Loss of Substratum
o Where a company has a main or primary objective, and it can no longer be achieved, it
may be just and equitable to wind up the company—even when there is no issue of
oppression.
o Summit Co (S) Pte Ltd v Pacific Biosciences Pte Ltd [2007] 1 SLR 46
“The additional or alternative ground relied upon by Summit that winding up
is just and equitable is the loss of substratum of the Company…I find the
assertion that the non-transfer of the Spirig lines was a loss of the substratum
of the Company to be untenable. It was to me yet another complaint dragged
into issue to bolster the petition. The petitioner has to show that the
substratum of the business of the Company has gone or, in the words of Lord
Justice Baggallay in In re German Date Coffee Company (1882) 20 Ch D 169
at 188, that there is an impossibility in carrying on the business of the
company as at the date of the petition. It is, in my view, difficult to see how it
can be said on the evidence before me that at the date of the petition it was
impossible for the business to continue.”
o Ng Sing King v PSA International Pte Ltd [2005] 2 SLR 56
Court found that it had another grounds to find that a s. 254(1)(i), CA winding
up was appropriate as the company’s primary business purpose had been
undermined, and was no longer a viable business opportunity.
“This is an additional ground to fortify my conclusion that winding up is just
and equitable. I believe that the company is no longer viable and it would thus
be pointless for the shareholders to continue flogging a dead horse.”
Fradulent Inception or Purpose of the Company
o A company which was fraudulent at its inception may be wound up on just and
equitable grounds.
o Re Thomas Edward Brinsmead & Sons [1897] 1 Ch 406
The Company had been formed to carry out the business of manufacturing
pianos to pass off as the products of another firm (fraud). The company had
little capital and offered shares to the public to raise capital. Many
shareholders who had subscribed for shares had brought actions to remove
their name’s from the company’s register and to have their money returned,
upon the ground that they had been defrauded into becoming shareholders of
the company by fraudulent misstatements in the prospectus.
Held: The Court of Appeal ordered a just and equitable winding-up].
“If ever there was a case in which it was just and equitable that a company
should be wound up by the court, we cannot doubt that that case is this case”.
g. Deferring a s. 254(1)(i) winding up order
The court can use its discretion under s. 257(1), CA to defer the winding-up to provide the
parties with the opportunity to reach a compromise.
**This is a way in which the court can “soften” the harshness of a winding-up order and
facilitate the contractual freedom of the parties.
o Sim Yong Kim v Evenstar Investments Pte Ltd [2006] 3 SLR 827
“Apart from directing how the winding up should be conducted, we are also of
the view that the court's power under s 257(1) also allows it to defer the
winding up until parties have been given adequate opportunity to reach a
compromise. This practice of staying a winding-up order to allow parties to
reach an alternative arrangement is one which is well-established in
jurisdictions such as Australia: see Re Cumberland Holdings Ltd (1976) 1
ACLR 361 at 380; Bernhardt v Beau Rivage Pty Ltd (1989) 15 ACLR 160 at
166”.
o Chow Kwok Chuen v Chow Kwok Chi [2008] 4 SLR(R) 362
“In Evenstar…this court exercised its power to wind up the company on the
facts of that case. But it also left the door open for the parties to reach a
mutually acceptable solution to their dispute, which they eventually did. In the
present case, we propose to do the same. We affirm the Judge’s order to wind
up the Companies but will suspend it from taking effect for one month to
allow the parties to come to an amicable settlement to preserve the legacy of
Mr Chow that one or more of the sons desired. If no settlement is reached on
the expiry of suspension, the winding-up order will take effect immediately
7. Shares and Debentures
a. Introduction
A company may raise money for its business in two main ways – (1) equity financing and (2)
debt financing.
In equity financing, the company issues shares to an investor for a sum of money or
other consideration, and the investor becomes a shareholder of the company.
In debt financing, the company borrows money from an investor who becomes a
creditor of the company.
The capital raised by a company enables it to acquire its assets and to carry on
business.
o Assets of the company = Equity capital + debt capital
Equity Financing
o The main instrument in equity financing is the share.
The financier provides the company with money and in exchange
obtains a share, which entitles him to certain rights in the company.
It is important to note that in small companies, the purpose of issuing
shares is usually not meant to raise capital, but to give the
shareholders control over the company.
Financing for the company will come from elsewhere,
including shareholder loan, bank loan and overdraft facilities
secured on the controllers’ personal assets, which are forms
of debt financing.
Debt Financing
o It is sometimes necessary for a company to borrow money to finance its
expansion, to meet cash flow needs or for other business reasons, and this is
called debt financing.
o Credit is an integral part of the modern economy. A reason why the 2008
financial crisis caused so much damage was because banks refused to extend
credit, making it difficult or impossible for companies or individuals to raise
the requisite finance to meet their obligations.
b. Equity Finance
1. Share Capital
a. Meaning of Capital
Basically, capital is the total price of the shares that have been issued by the company.
It is a measure of value and is the consideration which the shareholders have provided to
the company in exchange for their shares.
i. Authorised Capital (before 30 Jan 2006)
It is the pre-set maximum capital the company is authorised to raise, based on the total
sum of the par values.
Originally for allowing shareholders’ control – as any increase in authorised capital
requires shareholder’s resolution.
Abolished because it is a largely useless concept, that was liable to mislead.
o Lian Hwee Choo Phoebe v. Maxz Universal Development Group Pte Ltd (2009)
Transitional problem after abolishing authorised capital. Although
concept is now obsolete, the company’s AOA and Art. 40(a), Table A
still refers to it. Claimant claimed that the due to a version of Art 40,
CA in the company’s articles, a resolution to issue new shares was
invalid as it did not state the number of shares to be issued, as the term
“capital” in the section must now refer to “issued capital”.
CA Held: Words must be construed in the context it was entered into,
and thus shareholders under s. 161, CA could give blanket consent
without stating the number of shares to be issues. CA found that the
concept of “authorised capital” was abolished, ‘capital’ in Art 40(a),
CA still referred to “authorised capital”, not “issued capital”.
ii. Issued Capital
It is the aggregate capital that the company has raised or will raise by the issuance of shares.
There is no minimum capital requirement in Singapore law except in very limited
situations (e.g. banking institutions), thus the existence of “$2 companies”.
Issued Capital = Paid-up Capital + Uncalled Capital
iii. Paid-up Capital & Uncalled Capital
The “paid-up” capital is the amount that is paid up on the shares that have been issued.
However, shares that have been issued may not be fully paid up (uncalled capital).
o Call up – the unpaid portions of the share may be called up during its existence
of upon liquidation in s. 65(2), CA.
S. 123(1)(c), CA: Share certificate must state the amount that remains unpaid.
However, this is an obsolete concept since most shares nowadays are fully paid up upon
issuance.
b. Par value (before 30 Jan 2006)
Under the old law, a share must have a nominal or face value.
It is a convenient value chosen by the company to be the minimum price at which shares
can generally be issued.
Company is allowed to issue shares above their par value (at a premium) but cannot
issue shares below par value.
o Ooregum Gold Mining Co of India v. Roper (1892)
HELD: Company generally cannot issue shares below their nominal par
value on terms that the shareholders have no further obligation to pay
the difference. Company can issue shares at a premium, but the
premium must be accounted for by creating a share premium account.
Reason for par value is that it protects the interests of the creditors – company cannot raise new
funds when the market value of its shares has fallen below par value.
Another reason for par value is that it protects the interests of the shareholders – reduces
the possible dilution of their fraction of ownership.
Not convincing. Par value does not have anything to do with the inherent value of the
company and serves no useful purpose. It is purely arbitrary! It diverts attention away
from real issues, and is liable to mislead unsophisticated investors into thinking it has
some economic relevance.
Ho & Lan, The Par Value of Shares: An Irrelevant Concept in Modern Company Law
[1999] SJLS 552
o 2 functions of par value:
1. The par value of shares “fixed the maximum amount that a shareholder
in a company limited by shares would have to pay by way of statutory
liability”. However, the shareholder may be liable under contract for
any additional sum payable by way of premium
2. The share capital is fixed and certain and every creditor of the company
is entitled to look at that capital as his security.
o Implication from function of par value:
1. The creditor is entitled to ascertain how much of the liability on the
shares remains undischarged. Hence, the company is generally
disallowed from reducing its share capital (w/o proper authorisation).
2. It will be a fraud against shareholders and creditors if the shares are
issued at a discount except in specifically provided circumstances. This
has the effect of lowering the statutory liability of the new shareholders.
o Shortcomings:
o Meaningless – the nominal amount of the capital, which was intended
to represent the actual amount of capital invested by the shareholders or
net asset value of the company, rarely indicates the amount of the actual
(cause it varies) or original contribution (which may be arbitrarily set if
contribution was in property) and thus should be abolished.
o Misleading – it may mislead investors to perceive that it represents the
monetary value of the corporation’s capital.
o Illusory protection to shareholders and creditors – if shares are offered
above par but below market value, the shareholders are disadvantaged
even though with reference to the par value of the shares they are
“protected”.
o Financial inflexibility – company cannot issue shares at below par value
(without court approval) when the market is bad and the company is in
need of quick financing.
o No par value system – benefits:
o Truthful representations – shares without par value will have the
cardinal principle of accuracy. The cost of shares will reflect the true
market value.
o Principle of caveat emptor – therefore, without a par value, the
responsibility of finding out the true worth of the company lies with
potential investors and creditors.
o Flexibility in financing – the only concern would be that shares may be
issued at very low prices which may result in share dilution.
o Simplicity – there would be no different kinds of shares with different
par values etc.
o Pareto optimality – it will only make some people better off without
making anyone worse off. Therefore, it is more desirable since it
increases the total net welfare.
2. Shares
a. Definition of Shares
S. 4, CA: “Share” means a share in the share capital of a corporation and includes stock
except where a distinction between stocks and shares is expressed or implied.
S. 121, CA: “Shares’ shall be movable and transferable property. It is intangible and has
no physical existence.
Borland’s Trustee v. Steel Brothers & Co Ltd (1901) [X]
o HELD: A share is the [1] interest of a shareholder in the company [2] measured
by a sum of money [3] for the purpose of liability in the first place (obsolete
concept since a fully paid up share has no more liability) and of interest in the
second but also [4] consisting of a series of mutual covenants entered into all
the shareholders inter se in accordance with s. 39(1), CA.
S. 39(1), CA: Memorandum and Articles constitute a contract between
shareholder and the company, and between the shareholders inter se.
Prudential Assurance Co v Newman Industries (No 2)
o “Shares are ‘a right of participation in the company on the terms of the
articles of association’”.
However, this definition is deficient because it only refers to the contractual aspect of the shares,
but not to the proprietary aspect? See Cambridge Gas.
**Cambridge Gas Transportation Corporation v. Official Committee of Unsecured
Creditors of Navigator Holdings (2006)
o HELD: “A share is [1] a measure of the shareholder’s interest in the company, a
bundle of rights against the company and the other shareholders. [2] As
against the outside world, that bundle of right is an item of property, a chose
in action. [3] But as between the shareholder and the company itself, the
shareholder’s rights may be varied or extinguished by the mechanisms provided
by the AOA or the Companies Act.”
Shares are not just contractual, also an element of property. And the
nature of this property can be amended/varied depending on the articles
or the CA.
An improvement from before as it discusses both the internal and
external aspect of a share.
Professor Pennington, (1989) 10 Company Lawyer 140
o “It may be disappointing to conclude that the most that may be said of shares in
a registered company by way of definition is that they are a species of intangible
movable property which comprise a collection of rights and obligations relating
to an interest in a company of an economic and proprietary character, but not
constituting a debt. For a lawyer's purposes, however, that suffices”.
Evaluation: Idea seems to be that the contract constituted by the Articles of Association defines
the nature of the rights, which are not purely personal rights, but instead confer some sort of
proprietary interest in the company though not in its property.
b. Rights of Shareholders
Fundamental in company law is that shareholders do not have interests (neither legal nor
beneficial) in the property of the company, as it is a separate legal entity, and the owner of the
shares is only conferred legal rights, broadly classifiable into 3 groups:
[1] Rights in relation to the payment of dividends (Income rights)
[2] Rights of voting at company meetings (Voting rights)
o Unless the shares don’t carry voting rights (eg some Preference Shares)
[3] Rights to recieve the return of capital on an authorised reduction of capital, or on a
winding up of the company (Capital rights)
What about Creditors?
o They are entitled to two rights: To be paid back their principal amount (Capital Rights)
and/or interest for their lending (Income Rights).
o However, they do not get voting rights; this is the defining difference between
shareholders or creditors. But creditor might bargain to be able to appoint a director.
Doctrinal basis of the rights of shareholder – shareholder has an interest in the company itself.
Shareholder has rights in the company as well as against it – an insider.
Debenture holders has rights against the company, and if debenture is secured, in its
property, but never in the company itself – an outsider.
Evaluation: Ross Grantham, “The Doctrinal Basis of the Rights of Company Shareholders”
Submits that it is still appropriate to consider shareholder as an owner of company, and
that income and capital rights are not unique to shareholders as the distinguishing
feature (from the Creditor) is the voting right.
“What distinguished the shareholder is that the shares also afford rights in the company.
By virtue of his ownership of the share, the holder is entitled to a voice in both the
structure and management of the company, rights not normally granted to other
creditors.”
o Argument against: But shares in listed companies are usually for financial
investment and merely for occupation, shareholders do not have expectation to
have a voting say in the running of the company.
o Also, dilution of ownership nowadays by the courts also implies that powers
enjoyed by shareholders no longer necessarily amounts to ownership of the
company.
c. Types of Shares
Types of shares generally not regulated under the Companies Act, but the varying rights given
to each type of share must be expressly included in the AoA or Terms of Issue.
What are the reasons for creating different classes of shares?
o To distribute benefits in different ways (eg class rights)
o To attract investors by issuing shares with preferential rights.
o To allow Government to control privatised company with a “golden share”.
o To confine control for those with weighted votes (Bushell v Faith)
However, where the terms of issue make no express distinction between the rights of
different categories of shareholders, the presumption is that all shares rank equally.
Bushell v. Faith (1970) Shares with weighted votes
o HELD: In private companies, shares can have weighted votes. In UK, this also
applies to public companies and circumvents s. 152, CA (that notwithstanding
the MOA/AOA, directors in a public company can be removed by ordinary
resolution).
Evaluation: The rule in Bushell v. Faith does not apply to public companies in Singapore
because s. 64, CA requires that in a public coy, 1 share have 1 vote only (except golden shares).
But with MOF has accepted Recommendation 3.4 in Oct 2012 to also allow public
companies to issue shares with multiple votes.
i. Preference Shares
Defn: Refers to shares that enjoys priority for dividends or capital over an ordinary equity share.
But it is strangely defined in s. 4(1), CA as a share that carries no voting rights, dividend
rights or capital rights beyond the specified amount – this definition is contradictory
with conventional commercial practices.
o In Singapore, companies may still issue “preference shares” with full voting and
particapation right, but are referred to as ordinary equity shares.
Also, definition in s. 4, CA also does not apply to s. 75, CA, where rights attached to
preference shares must be set out in the MOA and AOA.
o This implies that company may issue preference shares that are not those
defined in s. 4, CA.
o So in reality, 2 types of preference shares? New Companies Act will delete this
confusing definition (Recommendation 3.1 accepted by MOF on 3 Oct 2012)
3 basic principles governing the nature and extent of class rights of a preference shareholder:
[1] Source of preferential share rights – it is a construction of the relevant provisions of
the company’s constitutions, resolutions passed under the AOA and Terms of Issue.
[2] Exhaustive statement of rights – all special rights attached to share must be
expressly specified, otherwise they will not be conferred.
o Entitlement in 1 financial aspect of shareholding does not mean a preferential
right for other aspects (Priority is confined to where it is expressly provided for)
[3] Presumption of equality – in the absence of specific provisions, rights of all
shareholders are deemed equal.
o Birch v. Cooper (1889)
HELD: The MOA and AOA are exhaustive statement of rights, and
hence in the absence of specific provisions, all rights of shareholders
are presumed to be equal.
o Re Hume Industries (FE) Ltd (1974)
HELD: Court rearticulated the 3 principles governing the extent and
nature of the shareholder’s rights. If the rights are not set out expressly,
they do not exist.
S. 75(1), CA: Rights attached to preference shares should be set out in the MOA/AOA
o Prof Woon argues that s. 75(1), CA does not preclude additional rights that
were conferred by the Terms of Issue of the preference shares. He submits that
although prima facie no rights exist, but onus would be on the preference
shareholders to prove that the additional rights are valid.
CRITICISM by A/P Wee Meng Seng: But this will render s. 75(1), CA nugatory. At common
law, the preference shareholder already bears the onus of proving that he is entitled to a
particular right, and should be restricted to this. Non-compliance with the express setting out in
the MOA or AOA should render transaction void for illegality.
ii. Equity Shares (or Ordinary Shares)
S. 4(1), CA: ‘Ordinary shares” are any share which is not a preference share”.
S. 64, CA: All equity shares in public companies carry 1 vote unless it is the “golden
share” in newspaper companies.
Equity share is the residuary class in which is vested everything after the special rights of
preference shares, if any, have been satisfied.
They bear the most risks, but enjoy the most if the company does well.
o Risk as they get their return of capital only after the preference shareholders.
o But where the company receives huge profits, preference shareholders will only
get a fixed amount of dividends, and cannot share in the huge profits of the
company (unless provided for in the articles).
iii. Deferred Shares
Shares that have their right to dividends deferred to those of ordinary shareholders.
iv. Golden Shares
Special rights can be attached to particular shares for so long as those shares are held by a
named individual.
Such share exist usually in the case of privatised companies that were transferred from
the state to private ownership.
S. 10, Newspaper and Printing Presses Act creates a special type of shares called
management shares – entitles holder either on a poll or by a show of hands to 200 votes
for certain matters.
o This provision is an exception to the mandatory rule in s. 64, CA that an
ordinary share in a public company is entitled to only 1 vote.
3. Class Rights
A class right is a right attached to a particular class of shares.
• Eg. Priority to dividends in a preference share.
• But what if the right is enjoyed by a shareholder but not referable to a particular share?
– Held in Cumbrian Newspapers Group Ltd to be a class right as well.
• Eg the right to 3 votes in Bushell v Faith.
To protect class rights, the MOA/AOA may include a variation of rights clause.
Class rights are not to be altered without satisfying certain pre-requisites as specified in
the MOA/AOA (if any)
o Eg Special resolution (75%) of the members of that class at a separate meeting.
o May provide for other procedure or require consent by certain individuals.
Also, s. 74(1), CA provides that shareholder holding of 5% of the company’s shares can
apply to the court to have any variation or abrogation of class rights cancelled.
o S. 74(4), CA: The court must be satisfied, having regard to all the circumstances
of the case, that the variation or abrogation would unfairly prejudice the
shareholders of the class represented by the applicant before disallowing the
variation or abrogation.
s. 74(8), CA: The claimant is not limited from also claiming under s. 216, CA.
However, where the there is no “modification of rights clause” in the MOA/AOA, an aggrieved
shareholder may only be able to claim that it has been unfairly prejudiced under s. 216, CA
(Oppression Remedy).
a. Variation of Class Rights
i. What amounts to a variation of class right?
Distinction is drawn between (1) rights on the one hand and (2) the result/consequences of the
exercise of or the enjoyment of those rights on the other.
• **White v Bristol Aeroplane Co Ltd (1953)
o Company had both preference & ordinary shares, and proposed to issue these
shares to its existing ordinary shareholders only. Preference shareholder applied
for an injunction, relying on Art 88 (Procedure Clause).
o Held: The rights of the existing preference shareholders were not altered; even
though the effect was that their class’ voting power was diluted.
o Romer LJ at pg 82: “The rights, as such, are conferred by resolution or by the
articles, and they cannot be affected except with the sanction of the members on
whom those rights are conferred; but the results of exercising those rights are
not the subject of any assurance or guarantee under the constitution of the
company, and are not protected in any way.”
ii. Procedure Clause
Where the MOA/AOA may prescribe a special procedure to be followed when class rights are
varied.
Eg. 75% majority is required to approve the resolution varying class rights at a separate
class meeting.
Where such a procedure clause (or modification of rights clause) is present, it seems that
the special procedure has to be complied with for a resolution varying class rights to be
valid. There is however no Singapore authority on this point yet.
iii. Ignoring Procedure Clause
When amending a class right, does it suffice to only pass a special resolution at a general
meeting, and ignore the procedure clause?
• Conflicting Australian authorities, but the better view is that it is insufficient to allow
the company to simply ignore the procedure clause.
• The procedure prescribed by the procedure clause must be followed for the resolution to
be valid, otherwise the procedure clause is useless/nugatory.
iv. Deleting Procedure clause
Two arguments that support the view that the procedure must be followed (ie cannot merely
pass a special resolution in general meeting and ignore the procedure clause)
1. s. 74(7), CA: For the purposes of this section, alteration of the clause is deemed to be a
variation of class rights.
o But Woon on Company Law argues that the provision operates only for the
purpose of the section, ie triggering the protection of the court under s 74(4).
o Argument has some force, but ultimately it is an issue of construction; by
determining if the procedure clause itself should be considered a class right.
2. A procedure clause is also an entrenching provision, under s. 26A, CA, and cannot be
removed except with a unanimous decision.
o s. 26A(4), CA: An entrenching provision is a provision which stipulates that
other specified provisions (a) may not be altered in the manner provided by the
Companies Act, or (b) may not be altered except (i) with a greater than 75%
majority, or (ii) where other specified conditions are met.
o s. 26A(2), CA: Provides that an entrenching provision may be removed or
altered only if all the members of the company agree.
v. Limit on Voting to Modify Class Rights
Shareholders do not enjoy unlimited freedom when they vote on a resolution to amend the
company’s articles of association.
• Allen v Gold Reefs of West Africa Ltd
• Court found that shareholders must vote bona fide in the interests of the
company as a whole when voting on a resolution to amend the articles.
• British America Nickel Corp v O’Brien Ltd [1927] AC 369
• A company issued mortgage bonds secured by a trust deed, which provided that
only a 75% majority could modify the rights of the bondholders.
• Company subsequently faced financial difficulty, and provided that the
mortgage bonds could be exchanged for income bonds, but this was prejudicial
to the mortgage bondholders.
• Held: Modification of class rights held to be invalid. Where a majority is given
the power to bind the minority, it exercise must be exercised for the purpose of
benefitting the class as a whole, and not merely individual members only.
• Although the right to vote is a right of property (a right to advance his own
interest), a vote on a resolution to modify class rights must be exercised for the
purpose, or dominant purpose, of benefiting the class as a whole.
• **An adoption of Allen v Gold Reefs in the case of class rights – where
the individual must act in the interest of the class as a whole, and cannot
act for his own interest.
4. Issue of Shares
Involves a 3 steps procedure.
1. Company must decide to make an offer of shares, public or non-public, and set the
terms of the offer.
o s. 161, CA: Directors shall not exercise power to issue shares without prior
approval of shareholders in general meeting.
Mandatory requirement. Approval may be specific or general. Usually
general mandate is given at company’s annual general meeting.
Any issue of shares made without shareholder approval is void.
o s. 157A, CA: Power to issue shares is governed by company’s constitution,
which is usually vested in the Board of Directors
Howard Smith v Ampol Petroleum: However this power must be
exercised for a proper purpose or they will breach their fiduciary duties.
2. Purchaser must agree with the company to subscribe to the shares, and the company will
enter into a contract with the purchasers (this contract is specifically enforceable)
o Formality: In private companies, there is little formality, whilst in listed
companies the allocation is a formal process. Contract is constituted in the form
of a letter of allotment.
3. Completion takes place when the company allocates the shares to the subscribers.
o The share certificates are issued and the subscriber is registered as member of
the company in the Register of Members; legal title of the shares vested in him.
5. Ownership of Shares
S. 121, CA: A share is a movable, transferable property.
a. Legal Ownership/Interest
S. 190, CA: Legal ownership is manifested by registration in the company’s register of
members.
o The person registered inside the Register of Members is the legal owner.
However, the legal owner may not always be the beneficial owner; where the legal owner vest
the benefits of the shares in a nominee – original owner recieves the benefits through nominee.
b. Equitable Interest
Arises in the same way as for any other type of property (e.g. sale of shares straightaway gives
the purchaser equitable interest, before the transfer of legal ownership).
And where there are competing claims, it is resolved using property rules; (1) Only legal
owner or authorised persons can transfer title (nemo dat rule), (2) where there are
competing equitable titles, the first in time prevails (Hawks v McArthur) or (3) an earlier
equitable interest may be defeated by a later legal interest of a bona fide purchaser for
value without notice (Equity’s Darling exception).
Equitable ownership rights are generally non-registerable
S. 195(4), CA: No notice of any trust, express, implied or constructive shall be entered
into the company’s register of members.
o Reason: This is to simplify things for the company – company deals with the
registered owner in his own right and not in a representative capacity, and thus
treats the person registered as the absolute owner.
o Look Chun Heng v. Asia Insurance Co Ltd (1952)
HELD: Company need not take notice of trusts and does not have to
give effect to trusts of its shares.
However, the CA provides for some exceptions to s, 195(4), CA:
o Ss. 195(1),(2), CA: Personal representative of the deceased/bankrupt person
may be registered as such.
o S. 195(3), CA: Shares marked on the Central Depository System as being held
on trust.
But this does not mean that the law does not recognise the interests of the beneficial owner
Where a share is not registered in the name of the owner, equitable ownership can still
arise through trust, sale, mortgage etc. The equitable owner still has the beneficial title
(beneficiary) and the registered owner may be deemed as a trustee.
Hawks v. McArthur (1951) “First in time prevails”
o Registered owner, M, sold shares to purchasers who did not register themselves
as members. Subsequently, the Plt obtained judgment against M and a charging
order on the shares. Now there was conflicting claims for the same shares.
o HELD: Even though the requirements of the AOA with respect to the transfer of
shares (pre-emption rights) had not been complied with, the sale of the shares to
the purchasers vested in them the beneficial interests (equitable ownership) of
those shares. Purchaser prevailed as their interest arose earlier in time.
EG Tan & Co (Pte) Ltd v. Lim & Tan (Pte) Ltd (1987) Bona Fide purchaser
o Dft obtained share certificate from a fraudster, who took it from P based on a
fraud, and D argued that he was a bona fide purchaser for value without notice.
o HELD: No valid claim. D was not a bona fide purchaser (not purchaser -
payment was for a debt) and does not take priority (as he did not register) over
P who had the earlier equitable title.
However, there are situations where the beneficial owner may not be able to recover the shares
if the motive for the non-registration is against public policy (eg. illegality/improper purposes)
Suntoso Jacob v. Kong Miao Ming (1986)
o P, an Indonesian, transferred his shares to D on trust to give the appearance that
the company was owned by Singaporeans so that the company can register the
tug boat under Singapore. They had a falling out and subsequently tried to claim
that he was a beneficial owner,
o HELD: Illegal. Although it is legal for shares to be registered in the name of
nominees, P had practised a deception on the public administration, which is an
improper purpose and beneficial owner cannot enforce the trust in his favour.
c. Effects of Non-Registration
If purchaser does not register, he will remain as an equitable owner.
o He will keep the share certificate and the blank transfer form until such time
when he sells the shares or decides to register himself or his nominee.
Pros: Prior to the availability of scripless trading, you would be able to transfer title
quickly without needing to go through the procedures.
Cons: But if he does not register, equitable owner will not get the dividends – it will go
to the legal owner.
6. Transfer of Shares
a. Types of Share Transfers
i. Transfers involving Share Certificate
S. 123(1), CA: A share certificate is prima facie evidence of title.
o Share Certificate Estoppel – person relying on share certificate when
purchasing shares can sue the company when it turns out that the person named
therein is not the true owner, and he had relied on such representation for the
purchase.
o Re Bahia & San Francisco Railway Co (1868)
T owned shares and SG procured the transfer of her shares by forgery.
Company issued a new share certificate to SG who later sold it to BG
who paid for it in full.
HELD: BG awarded damages. If a 3 rd party bona fide purchaser relied
on the share certificate in buying the shares to his detriment, the
company is estopped from denying that the person is entitled to the
shares referred to.
It will be considered a negligent misstatement.
S. 126, CA: Transfer of shares, not on the stock exchange, is effected by a lodgement of
an executed transfer form and the share certificate.
o The lodgement carries an implied warranty that the form is genuine.
o Only registered (not beneficial) owners can execute the transfer form.
Yeung Kai Yung v. HSBC (1981)
Rogue obtained and lodged a transfer form through a
stockbroker, obtained a new share certificate and sold the
certificate to Plt.
HELD: HSBC liable. Although the stockbroker was innocent,
but if HSBC had checked, they would have realised that the
signature was wrong.
The lodging of the transfer form carries an implied warranty
that the form is genuine and this is an undertaking that
indemnifies from any losses suffered by reason of such
registration.
Xiamen International Bank v. Sing Eng Pte Ltd (1993)
Legal owners gave bank shares as an equitable mortgage and
the bank could not register because they were beneficial owner
only – only the legal owners could execure the transfer form.
HELD: Succeeded eventually. Bank executed the transfer form
in the capacity as attorney of the legal owner of the shares.
S. 130, CA: Unless there are share transfer restrictions, upon receipt of the transfer form
and the share certificate, a company must effect the transfer of the shares within 1
month.
ii. Scripless Trading
Transfer forms are no longer necessary for stocks traded on the stock exchange.
S. 130I, CA: Scripless trading and the creation of the Central Depository Pte Ltd has
resulted in transfers being done electronically with the CDP only obliged to send a
confirmation note to the buyer and seller.
S. 130J, CA: Any transfers so effected and thus registered with the CDP are deemed to
be conclusive and cannot be rectified.
b. Restrictions on Transferability
Shares are freely transferrable subject to restrictions that may be imposed by (a) the MOA, AOA
or (b) by an agreement between the company and the shareholder.
However, the freedom to transfer should be given a broad interpretation and the
restrictions should be read narrowly (Pacrim Investments v Tan Mui Keow Claire)
Restrictions have commercial sense – especially in companies where the identities of
the members are important, or in small companies running a family business. Might also
be concerned with the dilution of share value.
Private Companies
S. 18(1)(a), CA: Private companies must restrict a right to transfer its shares.
o One of the conditions before a company may be incorporated as a private
company is that its MOA or AOA must restrict the right to transfer its shares.
Examples of restrictions – (1) Pre-emptive rights: Giving other members the right to buy
shares first before it can be transferred to an outsider, or (2) providing that the transfer
may only take place with the Board’s approval.
o Sing Eng (Pte) Ltd v. PIC Property Ltd
HELD: Directors may decline to register an application for registration.
Public Companies
Unlike private companies, not mandatory to have share transfer restrictions.
For Public Listed Companies, the general rule is that restrictions are not allowed.
o In order to create a vibrant secondary market for the trading of shares.
o But shareholder may agree with the company not to sell shares within a certain
moratorium period by contractual agreement
Pacrim Investments Pte Ltd v. Tan Mui Keow Claire (2008)
Poh held shares in MSL and signed agreement not to sell,
assign or dispose of the shares for 1 year. Poh then pledged
those shares to Pacrim as a mortgage for a loan. After the
agreement had ended after 1 year, Pacrim sought to register the
share but MSL refused. MSL claimed that the pledging of the
shares for a mortgage went against the moratorium.
CA Held: Agreement did not extend to restricting the
shareholder from using the shares as security for loans, as the
share restriction should be intepreted strictly, and found that it
was not sold, thus was not in breach.
S. 7, CA: The Companies Act provides for a definition of “interest” beyond what we
normally understand as legal or beneficial interests.
o Sets out the circumstances when a person is deemed to have an interest in a
share for the purposes of, inter alia, determining substantial shareholdings,
directors’ general duty of disclosure etc.
o Interest in shares include:
s. 7(6)(d), CA: Equitable interests
Beneficiaries, persons with contract to purchase shares etc.
s. 7(6)(c), CA: Control over rights attached to a share
Persons entitled to control right attached to shares (except
proxy)
s. 7(6)(a), CA: Right to acquire a share;
ss. 7(4),(4A), CA: Interest through bodies corporate
Allows controller to have interest in the shares held by the
company i.e. X (with 50% share in Y) Y (with 20% shares in
Z) Z. In such a case, X has interests in the 20% share in Z.
o S. 7(9), CA: What is not deemed as interest
S. 7(9)(a), CA: Interest of a bare trustee
S. 7(9)(b), CA: Interest of person whose ordinary business is the
lending of money and who holds share as security in the ordinary
course of business
S. 7(9)(c), CA: Interest of person holding share in prescribed office
S. 7(9)(ca), CA: Interest of company in share buyback
c. Debt Finance
1. Debentures
S. 4(1), CA:
o “Debenture” includes debenture stock, bonds, notes and other securities of a
corporation whether constituting a charge on the assets of the corp or not, but
excludes certain other instruments like a cheque, letter of credit etc.
o This definition is generally not useful, but the terms “whether constituting a
charge on the asset of the corporation or not” suggest that it applies to both
secured and unsecured debts
o Furthermore, the list is not exhaustive and court must still interpret the ambit of
the term.
Levy v. Abercorris Slate & Slab Co (1887)
o HELD: “Debenture” is not a strictly technical, legal or commercial term. It
means a “document that either creates a debt or acknowledges the debt”.
a. Creation of a Debenture
Clear case: Where the company creates a series of securities acknowledging indebtedness of the
company, and offers them to the public and lists them for trading on a public market.
How about a bank loan?
o Generally accepted that a bank loan is NOT a debenture
o Cf Knightsbridge Estates Ltd v Byrne, where a loan secured by mortgage over
houses and shops was held to be a debenture for the purposes of s. 95, CA.
These developments are consistent with recent practice of securitizing loan investments
Bensa Sdn Bhd v. Malayan Banking Bhd (1993)
o **HELD: Definition of “debenture” must catch up with the modern day
commerce where sphere of business has increased substantially due to
technological and communication advancements and hence, ambit should
include any “obligations, covenants, undertakings or guarantees to pay or any
acknowledgement thereof”.
b. Issue of Debenture
There is minimal regulation in the issue of debenture, except in a public offer.
s. 94, CA: A contract with a company to take up and pay for any debentures of the
company may be enforced by an order for specific performance.
o Overrides normal contractual rule that lender is liable only in damages.
Default rule is that consent from shareholders or existing debenture holders is not
required for the issue of new debentures (contrast with s. 161, CA for issue of shares)
Company is required to keep a register of debenture holders.
c. Transfer of Debentures
Bearer Form: Unlike shares, debentures can be issued in bearer form – title may be
transferred by delivery of the instrument alone, but if the form is misplaced, then no
way to recover the debenture. It is recognised as a negotiable instrument.
Registered Form: s. 93(1), CA allows debentures to also be issued in registered form,
in which case they are transferred in the same manner as shares.
Note: If the debentures are listed on the stock exchange, rules on scripless trading of shares
apply mutatis mutandis (almost identically) here.
d. Redemption of Debentures
Unlike share capital, there are no capital maintanence rules that apply.
S. 95, CA: Unlike shares, debentures can be redeemed unless they are
perpetual/irredeemable debentures.
o Redemption can be made at the option of the company or the lender, or at a
fixed date.
o How can a perpetual debenture holder recover the principal amount? By selling
the perpetual debenture on the securities exchange.
S. 100(1), CA: The security for perpetual debentures may be enforced by court order on
application of the holder of the debentures if the conditions are met.
e. Reissue of Debentures
S. 96, CA: Provided that there are no contrary provisions in the MOA and AOA,
debentures that have been redeemed can be reissued as if they were never redeemed in
the first place.
o This allows the revival of the original transactions and not the creation of new
ones.
In some cases, it is difficult to distinguish a charge from a sale and buy-back agreement.
Thai Chee Ken v. Banque Paribas (1993)
o Transaction was a sale and buy-back agreement that was structured differently
because a negative pledge prevented a straightforward pledge of shares.
Liquidator argued that it was not a sale and buy-back agreement but a mortgage
that should be void for failure to register.
o HELD: Court found that it was a genuine sale and buy-back agreement, and that
the document was NOT a sham designed to conceal the true agreement between
parties.
External route – Examination of the documents: whether the
transaction may be struck down as a sham or disguise. If found to be a
sham, the court will need to look beyond the documents to determine
the nature of the agreement.
o Therefore, the court must consider the construction of the agreement – although
it was originally intended to be created as security, it was ultimately structured
differently.
Internal route – Proper characterisation of the transaction as a matter
of construction of the documents: the nature of the rights intended by
the parties is to be ascertained from the terms of their agreement, while
the characterisation of such rights is a matter of law to be determined by
the courts.
Lee Eng Beng, “Invisible & Springing Security Interests in Corporate Insolvency Law”
o Argued that the High Court’s judgment was better (because s. 4, CA sees an
agreement for a charge to be a “charge”, but is there really an agreement?),
Court of Appeal’s decision was right but reasoning was wrong, and with
potentially serious ramifications.
o Court of Appeal seems to have implicitly acknowledged that it is conceptually
possible for a contract to provide for a creditor to acquire increased security
rights upon default of the debtor.
Court gave an example that if the bank happened to have in its
possession, P’s funds or movable assets, then bank can appropriate
them as security for the outstanding debt.
Such “springing” security interests create an invisible security over
the assets and unfair to other creditors if the Bank could have
elevated itself to a secured creditor – this is anathema to insolvency law
and the provision (as constructed by the Court of Appeal) evades the
fundamental pari passu principle of insolvency law.
o CRITICISM: But the only one disadvantaged is the unsecured creditor and
unsecured creditor always bear the risks of a future secured creditor beating
them in priority.
c. Registration of Charges
In addition to the company’s obligation to maintain its own register of charges under s. 138(2),
CA, certain types of charges created have to be registered under ss. 131 – 133, CA.
S. 131(1), CA: Registration must be within 30 days of its creation.
S. 131(3)(g), CA: All floating charges are registerable (must be registered).
S. 131(3), CA: Fixed charges need to be registerable only if they fall within 1 of the
categories listed (see actual provision for all categories):
o S. 131(3)(a), CA - A charge to secure an issue of a debenture.
o S. 131(3)(e), CA - A charge on land or any interest in land.
o S. 131(3)(f), CA - A charge on book debts
S. 137, CA: Court has the power under certain conditions (by accidence or
inadvertance) to extend the time within which a charge may be registered.
What is the rationale for the registration requirement?
o Smith v. Bridgend Borough County Council (2002)
HELD: It was intended for the protection of the creditors of a company.
Registration will give the creditors the opportunity to discover whether
the assets were burdened by floating/fixed charges that will thus reduce
the amount available for unsecured creditors upon liquidation.
i. Effect of Registration of Charges
Registration does not confer priority – priority is still governed by the common law rules of
priority of competing securities (e.g. nemo dat principle).
Priority is not affected by the registration (unlike LTA), and the creation date of the
charge is the definitive factor for priority.
Once a charge is registered, a certificate of registration will be issued.
o S. 134(2), CA: This certificate is conclusive evidence that the charge was
indeed registered and cannot be attacked for late registration (e.g. if the
certificate was negligently issued even if you register late).
o But conclusiveness of the certificate only relates to the registration and is
not conclusive as to the validity of the charge (unlike LTA’s indefeasibility)
Asiatic Enterprises (Pte) Ltd v. UOB (1999) (CA reversing High Court)
HELD: There was no creation of a charge when there is just an
agreement to a charge on a contingency. Hence, even if a
certificate of registration is gotten, it does not operate to confer
validity on a charge which was invalid for other reasons.
Registration of a charge gives constructive notice to the world of the existence of the
charge but not notice as to its precise terms.
o Wilson v. Kelland (1910)
Presence of a negative pledge clause prohibiting company from dealing
with the charged asset. P knew of the charge but went to loan company
for a mortgage and D argued that P had notice.
HELD: No proper notice to the precise term of the charge. P did know
of the charge, but did not know of the specific restrictions and hence
entitled to claim the charged assets over D.
**Modern practice is usually to register the particulars of important clauses (like a
negative pledge) in the charge specifically, thus giving proper and actual notice.
o **Kay Hian & Co v. Jon Phua Ooi Yong (1988)
HELD: Registration of the particulars of the debentures was held to be
paramount. Hence, chargees of subsequent charges seeking priority
over the registered floating charge needs to prove that they had no
knowledge of the negative pledge clause. Burden of proof is on the
subsequent chargee to show lack of notice.
ii. Effect of Non-Registration of charge
S. 131(1), CA: Failure to register a charge within the stipulated period will render the
charge void as against the liquidator and any creditor of the company
o This causes a secured creditor to become unsecured. Charge not valid against
third parties (ie non-contracting parties).
S. 131(2), CA: But charge remains valid between the company and the chargee
(company still has obligation to pay back the money) – but it is now merely a personal
right only.
o Registration is merely a perfection requirement so that charge may be asserted
against third parties.
d. Types of Charges
Company can create fixed or floating charges and there is no particular form of words required
to create the different types of charge.
It is ultimately a question of interpretation of the particular loan instrument to determine
whether the security created is a fixed or floating charge.
o Fixed Charge – attaches itself to specific asset/property right from the
beginning and follows it wherever it goes.
Fixed charge prohibits dealing with charged assets without consent of
chargee. Not suitable for non-fixed assets like raw material or inventory
Rights persist even if sold, except against Equity’s Darling.
o Floating Charge – floats over the charged assets until it “crystallises”, thus
useful as a security over a changing class of property (e.g. inventory, raw
materials that will be used up in the course of business).
Is a proprietary interest.
Ss. 226(1A)(1), 328(5), CA: “Floating charge” means charge which, as
created, was a floating charge.
i. Characterization of Charges
To determine whether a fixed or floating charge has been created, a 2-stage process is used.
• Agnew v CIR (2000) [implicitly followed in Re Spectrum Plus]
o First, document is interpreted to ascertain the intention of the parties.
o Purpose is to ascertain the nature of the rights and obligations that the
parties intended to create through the charge.
o Secondly, once the rights are ascertained, the law is applied to categorize the
security created.
o This does not depend on the parties’ intentions, or the label they used.
In characterizing the charge, there are several overriding policy considerations:
Public interest in ensuring that preferential creditors obtain the protection which
Parliament intends them to have.
o The courts will be slow to undermine the rights of the “preferential creditors”
(employees & revenue authorities), when characterising the charges.
Documents will be construed in their commercial contexts.
o Courts will take in to account the fact that they had negotiated at arms’ length.
ii. Characteristics of a Floating Charge
Re Yorkshire Woolcombers Association Ltd (1903) No longer applicable
o HELD: Romer LJ, 3 characteristics of a floating charge :
[1] Charge is on a class of assets of a company present and future.
[2] Class of assets is one which, in the ordinary course of business of
the company, would be changing from time to time (eg inventory or
raw materials)
**[3] Until some future step is taken by or on behalf of those interested
in the charge, the company may carry on its business in the ordinary
way as far as concerns the particular class of assets.
Singapore’s Position
Dresdner Bank AG v. Ho Mun-Tuke Don (1992)
o Security document by bank prohibited company from dealing with the charged
shares, although in practice, company dealt with the shares freely everyday and
did not actually deliver the share certificate to the bank. Instead, bank only
asked for a daily list of shares that were charged.
o HELD: Floating charge. Court held that [2] and [3] most important. Shares
charged to the bank changes from time to time in ordinary course of business.
Until certain steps were taken by bank to enforce the charge, company was at
liberty to carry on business in the ordinary way with the shares.
UK’s Position
Agnew v. CIR (2000)
o HELD: Lord Millett - Criteria [3] is most important and serves to distinguish a
fixed charge from a floating charge. The first 2 features are dispensable. The
most important feature is whether the company could have free use of the
charged asset – control, manage and withdrawal from it without the bank’s
consent.
**Re Spectrum Plus Ltd (2005)
o HELD: Lord Scott at [111] – Agreed with Agnew that the essential
characteristic of the floating charge is [3], that the “asset subject to the charge is
not fully appropriated as a security for the payment of the debt until the
occurrence of a future event. In the meantime, the chargor is left free to use the
charged asset and to remove it from the security.”
As a fixed charge can have the characterisitics of [1] and [2].
o [106], [107] - Also found that if a security had [3], it would qualify as a floating
charge, and cannot be a fixed charge, whatever its other characteristics may be.
o **Essentially, the freedom to deal with the charged asset is the important
element in determining if it is a floating charge.
Lee Eng Beng, “Surviving Spectrum Plus: Fixing Charges over Debts”
o If Singapore follows Spectrum Plus, banks can no longer take fixed charge over
a borrower’s debts if banks allow the proceeds of the debts to be paid into the
borrower’s account and be used by him without restriction.
o Hence, an alternative method (if you want unrestricted linking) is that bank will
offset by interest earned on the credit balance in the blocked account, hence
deducting it from the debts of the borrower.
Borrower still has no right to utilise the proceeds of the charged
receivables, and thus, this arrangement appears to satisfy the control test
in Spectrum Plus – bank has absolute discretion whether to apply the
moneys in the blocked account and borrower has no right to expect that
the bank will always apply the moneys to reduce the outstanding sums
under the facility, thus allowing him to draw more sums under the
facility.
iv. Crystallisation of a Floating Charge
Until a floating charge crystallises, it remains ambulatory and shifting and the chargor is at
liberty to use the assets charged in the ordinary course of business.
Crystallisation of a floating charge converts it into a “fixed charge” (this fixed charge is
not a fixed charge, especially in the context of priorities) over whatever assets are within
the class at the time of crystallisation.
Usually, charge documents stipulate “events of default” upon the happening of which
the chargee may crystallise the charge. In the absence of such stipulations, the charge
may also be crystallised when the creditor takes steps to take possession of the security,
or generally upon the winding up of a company or its business.
o Dresdner Bank AG v. Ho Mun-Tuke Don (1992)
Bank obtained the possession of the shares before the company went
into liquidation. There was no provisions of “events of default” that
provides for crystallisation in their letters of hypothecation because the
security documents purported to create fixed charges.
HELD: Floating charge void.
Crystallisation is a process in the enforcement of a floating charge and
does not retrospective change the nature of the security. Original
floating charge was void for failure to comply with the registration
requirements under s. 131, CA, and the voiding still applies after
crystallisation into a “fixed charge”.
*Upon crystallization, the floating charge fastens on the assets subject
to the charge, and thenceforth the company is not at liberty to deal with
the assets, whether in the course of business or otherwise.
*It is true that at that stage the charge has become a fixed charge, but
the resulting fixed charge arose from the original floating charge and is
in effect the same security affecting the same assets. There is no ‘new’
charge created on those assets.
g. Priorities
Among fixed charges:
o Legal charge > Equitable charge unless the equitable charge comes first and the
subsequent legal charge has knowledge of the equitable charge.
o Among equitable fixed charges, “where equities are equal, the first in time
prevails”.
Floating charges:
o Only crystallises after its creation, but “once a floating charge, always a floating
charge” and will always rank behind a fixed charge even if the fixed charge is
created/crystalized later.
That is why nowadays, most chargee uses negative pledge to prohibit
the chargor company from taking up new securities.
o New security (even if fixed charge) with knowledge will take a lower priority.
Kay Hian & Co v. Jon Phua Ooi Yong (1988)
HELD: Chargee of specific charges seeking priority over the
registered floating charge has to prove that they have no
knowledge of the negative pledge clause.
Nonetheless, the opposite view is frequently suggested, in the
words of Gore-Browne: In order to give greater protection to
floating charges, the practice has developed, which the
Registrar has accepted, of including the prohibition in the trust
deed among the registered particulars of the charge. It is
widely assumed that this will give constructive notice of the
prohibition, but this has not yet been tested in the courts.
Preferred creditors:
o S. 328(5), CA: When company is would up, certain preferred creditors take
higher priority than the holders of floating charges.
Ss. 328(1)(b),(c)(e)(f), CA: Employee’s claim to unpaid wages
retrenchment benefits, CPF contributions, Employee’s remuneration
Ss. 328(1)(g), CA: All amount of tax assessed and all GST tax due
o S. 226, CA: When receivers are engaged by a creditor to secure a floating
charge (when the company is not winding up), certain preferred creditors take
higher priority that the holders of floating charges.
o These provisions reverse the common law priority ranking by preferring
unsecured creditors (preferential creditors – like employees and revenue
authorities over secured creditors of floating charges.
e. Scripless Trading
The normal rules for charging shares and debentures do not apply to scripless securities and no
security interests may be created in such securities except as provided by in ss. 130N and 130P,
CA.
S. 130N(2), CA: Security interests in scripless security may be created by way of an
assignment or a charge.
o Provisio to s. 130N(2), CA: Once so created, assignor or chargor may not create
any other security interest with respect to that lot of scripless securities.
Equivalent to a “negative pledge”
8. Capital Maintenance and Financial Assistance
1. Prohibition
S. 76(1)(c), CA: Company cannot lend money on the security of its shares or the shares
of its holding company.
o Because, if the loan is not repaid, the company will end up holding its own
shares contravening the doctrine of capital maintenance.
o S. 21(1), CA: also, the company will end up holding the shares of its holding
company, which contravenes this provision preventing a corporation from being
a member of its holding company.
2. Effects of Contravention
Transaction is void under s. 76A(1)(b), CA.
d. Prohibition of Financial Assistance [s. 76(1)(a)]
1. Historical Background
Traditionally regarded as a rule of capital maintenance – people who want to acquire shares
should do so from their own resources and not with help from the company.
PP v. Lew Syn Pau (2006)
o HELD: “The legislative purpose of enacting s. 76, CA is to ensure that the
capital of the company is preserved intact. (Sundaresh Menon JC)”
Wu Yang Construction Group Ltd v. Mao Yong Hui (2007)
o HELD: “The provision was enacted to prevent abuse in the form of persons
using the funds of the company to acquire control of the company by first
borrowing to purchase the company, then using the company’s funds to pay off
the loan. (Chan Sek Keong CJ)”
o This will deplete the company’s assets and offend the doctrine of capital
maintenance.
2. General Prohibition and Elements
General Prohibition: S. 76(1)(a), CA: Company is not allowed to give any (a) financial
assistance for the (b) purpose of, or in connection to any person for the acquisition or
proposed acquisition of shares in the company or in a holding company of the company,
either directly or indirectly.
o Note: Only applicable to Singapore incorporated companies (See Lew Syn Pau
at [181] – as the provision applies only to a “company”, not a “corporation”)
Exceptions: ss. 76(8) and 76(9), CA provide for instances where it will not be
considered financial assistance.
Authorised Financial Assistance: ss. 76(9A), (9B), (10)
Elements: Charterhouse Investment Trust Ltd v. Tempest Diesels Ltd (1986), followed
in Singapore by Intraco & Wu Yang Construction
o HELD: 2 elements in the prohibition.
[1] The giving of financial assistance; AND (conjunctively)
[2] The financial assistance was given for the purposes of or in
connection with an acquisition of shares.
a. Prohibited Financial Assistance
4. Exceptions (Excepted Transactions) – Those that does not amount to Financial Assistance
S. 76(8), CA identifies specific transactions that are not treated as being prohibited:
o (a) Payment of a dividend in good faith and in the ordinary course of dealing.
o (b) Payments made by company pursuant to a capital reduction exercise
o Etc etc etc, the list goes on and is not exhaustive.
S. 76(9), CA identifies exempt companies that deal in the business of lending money, as
well as arrangement which are designed to facilitate employee share schemes.
o Eg Banks/Financial Institutions
3. Future Reforms
A/P Wee M S, “Reforming Capital Maintenance Law: The Companies (Amendment) Act 2005”
The 2005 reform raises the issue of whether the solvency tests cohere satisfactorily with
the traditional framework of the doctrine of capital maintenance.
Should the solvency test approach be the remaining approach and the capital
maintenance doctrine be abolished (like New Zealand)? Solvency test are not part of the
capital maintenance framework as they are doctrinal difference, and capital maintenance
should be abolished in favour of solvency tests because:
o It imposes costs and restrictions on company management without any
countervailing benefit.
o Creditors nowadays also don’t care about the amount of the company’s issued
capital so much.
o Fund of capital represented by share capital does not indicate how much money
is in the company.
Should the prohibition of the financial assistance on the acquisition of shares be
abolished and should we rely on the law of director’s duties or wrongful trading and
market abuse provisions to control any improper use of directorial discretion?
o In the UK, no more prohibition on giving financial assistance by private
company because inappropriate for companies to carry the cost of complying
with the rules of financial assistance.
The clearest theme of the 2005 Amendment Act is the objective of reducing regulation
and improving the flexibility of conducting the affairs of a company in Singapore,
enhancing competitiveness of our company law in the global economy.
Possible that its full impact may extend beyond the realm of company law – e.g. ease of
capital return may lessen the need for alternative business vehicles that were thought to
be needed partly because of the cumbersome capital maintenance rules of company law.
Further development needed for the solvency tests to ensure the balance between the
conflicting needs of protecting creditors and not imposing impossible or unwarranted
demand on a director (who faces the prospect of criminal liability if he is negligent).
o Only then can the solvency based reforms reach their logical conclusion so as to
discard the long venerated doctrine of capital maintenance.
2012 Reforms by Steering Committee for Review of the Companies Act