Company Law Notes PDF

**COMPANY LAW** 1. **[Introduction to Company Law]** **What is Company Law?** The rules that govern and regulate business organisations and the relationships with/amongst stakeholders of these organisations. **Why Study Company Law?** Knowledge of Company Law is required/useful for: - **[C]...

**COMPANY LAW** 1. **[Introduction to Company Law]** **What is Company Law?** The rules that govern and regulate business organisations and the relationships with/amongst stakeholders of these organisations. **Why Study Company Law?** Knowledge of Company Law is required/useful for: - **[C]**orporate work - **[C]**ompany secretarial work - **[C]**orporate litigation - **[D]**oing business - **[I]**nvesting in companies **Sources of Company Law:** 1. Case Law 2. Statutes a. Statutes that govern \*[companies]: - Companies Act 1967 - Insolvency, Restructuring and Dissolution Act 2018 - Securities and Futures Act 2001 - Variable Capital Companies Act 2018 b. Statutes governing business organisations (other than companies): - Business Names Registration Act 2014 - Limited Liability Partnerships Act 2005 - Limited Partnerships Act 2008 - Partnership Act 1890 **Regulatory Authorities** +-----------------------------------------------------------------------+ | [Ministry of Finance (MOF)] | | | | The Ministry formulates regulatory policies with the aim of | | maintaining Singapore's status as a world-class financial and | | business hub. | +-----------------------------------------------------------------------+ +-----------------------------------------------------------------------+ | [Accounting and Corporate Regulatory Authority (ACRA)] | | | | ACRA is the regulator of business organisations in Singapore. It | | administers the Business Names Registration Act 2014, the Companies | | Act 1967, the Limited Liability Partnerships Act 2005, the Limited | | Partnerships Act 2008 and the Variable Capital Companies Act 2018. | | ACRA also runs the online filing and information retrieval system -- | | BizFile^+^, where businesses and companies can complete registration | | and mandatory filing transactions online. | +-----------------------------------------------------------------------+ [**Business entities** (]*legal structure for the conduct of business.)* Types of business organisations: 1. **SOLE PROPRIETORSHIP** -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------  **Auditors** are independent parties engaged to check and review a business' accounting records. Not having to engage auditors would translate into the [saving of some operational costs] for the business entity. -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------  **BizFile^+^** Before a person carries on business in Singapore, the person and the person's business/trade name **must** be registered (see *Section 5(1), Business Names Registration Act 2014*). A sole proprietorship is registered with ACRA through BizFile^+^. The sole proprietor may cease business at any time by filing the appropriate notice via BizFile^+^. \*Each of these business organisations has its own characteristics, to suit different business needs and objectives. **Taxes** are paid to the state and are a compulsory expense of virtually every business organisation. Considering that businesses are usually profit-motivated, the tax treatment of a business organisation is a factor which should be considered when selecting a business organisation. 2. **PARTNERSHIP** **[Characteristics ]** - A partnership can have between 2 -- 20 partners, except where otherwise provided by law, e.g. professions such as lawyers and accountants (see *Section 17(3) and (4), Companies Act 1967*). - The relationship between the partners is governed by a partnership agreement or by conduct. - Assets of the partnership are managed and owned by the partners collectively. - Where one of the partners commits a wrongful act or omission in the ordinary course of business of the partnership which results in loss and/or injury, the partnership (i.e. including all of the other partners of the partnership) is [liable to the same extent] as the partner who committed the wrongful act or omission (see *Section 10, Partnership Act 1890*). - Legal proceedings are commenced in the names of the partners. - Each partner is **jointly and severally liable** [to an unlimited extent] for the debts of the partnership (see *Section 9, Partnership Act 1890*). +-----------------------------------------------------------------------+ | brain What does '**jointly and severally**' mean? | | | | **When partners are jointly and severally liable, each partner is | | individually responsible for the full amount of the partnership\'s | | debts until the entire debt is paid.** | | | | Example: Mr. A and Mr. B are the partners. The partnership owes its | | supplier the sum of \$50,000. In this case, Mr. A and Mr. B will be | | jointly and severally liable to the supplier for the sum of \$50,000. | | | | This means that the supplier can sue [either] Mr. A or | | Mr. B or [both] for the sum of \$50,000. Mr. A and Mr. B | | are each individually responsible for the unpaid monies until the | | entire sum is repaid to the supplier. | +-----------------------------------------------------------------------+ - The profits and losses of the partnership are attributed to/distributed among the partners in accordance with the partnership agreement. - Partners are taxed on the earnings of the partnership at individual/personal income tax rates. - Partnerships are [not required] to audit their accounts. - There is no requirement to lodge accounts of the partnership with ACRA. - Registration of a partnership is done with ACRA via BizFile^+^. - A partnership can be dissolved by agreement of the partners. The partnership can then cease business by filing the appropriate notice via BizFile^+^. Examples of partnerships include **some law firms (e.g. WongPartnership) and accounting firms.**  3. **COMPANY** **[Characteristics ]** - A company is a **separate legal entity** from the people (the members and directors) who own/manage it. - Members of a company may own shares in the company, which give them certain rights in relation to the company. - When a company makes a profit and declares dividends, ordinary members are entitled to a share of the dividends in accordance with their shareholdings. - The board of directors is responsible for the [management] of the company. - A company is akin to an 'artificial person' with its own identity, rights, and obligations. - Any business organisation with [more than 20 **members**] **must** be incorporated as a company -- except for **[partnerships]** of persons carrying on a profession that [may only be practised] by persons **possessing qualifications** set out in some written law (see *Section 17(3) and (4), Companies Act 1967*). Non-compliance with this section results in the organisation being treated as **illegal**, and it may be **incapable of suing or being sued.** - Companies can take different forms. They may be **unlimited** or **limited**, **public,** or **private**. [On and from the date of incorporation, a company: ] - Is a body corporate with all the powers of an incorporated company. - May sue and be sued in its own name. - Has perpetual succession (i.e. continues in existence even if its members no longer exist). - Has the power to hold land (as well as other property and assets); and - The liability of its members may be limited. - In a company [limited by shares,] the liability of a member is limited to the amount (or value) of his shareholding in the company. - As a company has a separate legal personality, the company is liable for its own debts and obligations to the [full extent] of such debts and obligations (i.e. a company's liability for [its own] debts and obligations is [unlimited]). - Creditors of the company should sue the company directly and not the members or directors of the company. +-----------------------------------------------------------------------+ | Example: | | | | If a shareholder invested \$10,000 in a company that later goes | | bankrupt, the most they stand to lose is their \$10,000 investment. | | They cannot be forced to use their personal savings, property, or | | other assets to cover the company's debts. | +-----------------------------------------------------------------------+ In the example above, Mr. Phua is a member and director of the company Phua Chu Kang Pte Ltd. Phua Chu Kang Pte Ltd is treated as a separate legal entity from Mr. Phua. The earnings, debts and liabilities of the company belong to the company and not Mr. Phua. **What is a Company required to do:** - As the earnings of the company belong to the company, the company pays corporate tax on its earnings at the corporate tax rate (**17%**). - Companies are generally required to hold an Annual General Meeting ("AGM") **every year.** - Companies are required to file Annual Returns via BizFile^+^ every year. - Companies are generally required to file their accounts with ACRA. - Companies are generally required to [audit] their accounts. A company is registered upon lodging the requisite documents (e.g. the Constitution, which sets out the powers and regulations of the company) and paying the registration fee to ACRA via BizFile^+^. The company is usually registered within 15 minutes after the registration fee and name application fee are paid. - A company can be 'closed down' via an application to strike off the company or by a more complex process known as 'winding up' or 'liquidation'. 4. **LIMITED LIABILITY PARTNERSHIP (LLP)** **[Characteristics]** - Gives its owners the flexibility of operating as a partnership while having a separate legal identity like a company. - Is a business organisation which exhibits some of the key characteristics of a partnership and of a limited company. - The minimum no. of partners in a LLP is 2 (see *Section 28, Limited Liability Partnerships Act 2005).* - *The mutual rights & duties of the partners of a LLP are governed by the limited liability partnership agreement or the First Schedule of the Limited Liability Partnerships Act 2005 (if there is no agreement).* - *Has perpetual succession (i.e. it continues to exist after the death or bankruptcy of a partner* - Limited liability partnerships are registered with ACRA via BizFile^+^. - Limited liability partnerships are required to lodge an **annual declaration** stating the solvency/insolvency of the limited liability partnership. - They are required to keep accounting records for at least 5 years, but which [need not be lodged] with ACRA. - The limited liability partnership can be terminated by an application to strike off the limited liability partnership or by a more complex process known as 'winding up' or 'liquidation'. **Examples**: Professional bodies such as accounting and law firms; e.g. Rajah & Tann Singapore LLP, KPMG LLP, PricewaterhouseCoopers LLP. **[Advantages of Using a Limited Liability Partnership]** - The limited liability partnership has a separate legal identity. - Partners of a limited liability partnership will not be held personally liable for any business debts incurred by the limited liability partnership (although a partner may be personally liable for claims resulting from his own wrongful acts or omissions). - A limited liability partnership has perpetual succession (unlike a partnership). - There are fewer compliance requirements to be observed as compared to a company. **[Disadvantages of Using a Limited Liability Partnership]** - A partner may still be affected by/liable for another partner's acts, e.g. if the limited liability partnership agreement states so. - The structure of the business entity is less defined and largely left to the partners' agreement in the limited liability partnership agreement. - The partners are taxed on an individual basis at individual/personal income tax rates (as compared to a company where the company is taxed at the corporate tax rate). 5. **LIMITED PARTNERSHIP (LP)** **[Characteristics ]** - This type of business organisation was introduced in SG through the enactment of the Limited Partnerships Act 2008, which came into effect in 2009. It aims to give entrepreneurs & investors more flexibility in structuring their businesses. - Minimum of 2 partners, with at least 1 general partner & at least 1 limited partner (see *Section 3, Limited Partnerships Act 2008*). +-----------------------------------+-----------------------------------+ | **Limited Partner** | **General Partner** | +===================================+===================================+ | - has [limited | - has [unlimited | | liability] for | liability] for | | the satisfaction of the | the satisfaction of the | | limited partnership's debts | limited partnership's debts | | and obligations | and obligations | | | | | - has no management rights | - enjoys management | | | control/management rights | | - **must** be registered as a | | | limited partner under the | - where there is more than one | | Limited Partnerships Act 2008 | general partner, the general | | (otherwise he is deemed to be | partners are [jointly and | | a general partner) | severally liable] | | | for the debts of the limited | | | partnership | +-----------------------------------+-----------------------------------+ - Does not have a separate legal identity from its partners. - Is required to keep accounting and other records which explain its transactions and financial position [for at least 5 years]. (these documents need not be lodged with ACRA) - The limited partnership partners' share of earnings derived from the limited partnership are taxed at individual/personal income tax rates. - A limited partnership is registered with ACRA online via BizFile^+^. - A limited partnership can be dissolved by agreement of the limited partnership's partners and the filing of the appropriate notice via BizFile^+^. **[Advantages of Using a Limited Partnership]** - Flexibility in level of participation in the limited partnership, i.e. choice between being a limited partner or a general partner. - The liability of limited partners is limited to their respective individual contributions to the limited partnership. - There are fewer compliance requirements to be observed as compared to a company. **[Disadvantages of Using a Limited Partnership]** - A limited partnership is not a separate legal entity from its partners. - The general partner has [unlimited liability] for the limited partnership's debts and obligations. - The limited partner does not have any management rights. - The partners are taxed on an individual basis at individual/personal income tax rates (as compared to a company, where the company itself, and not its members, is taxed). 2. **[Types of Companies]** What are the different types of companies: 1. Private Limited Company 2. Exempt Private Company 3. Small Company 4. Public Limited Company (Limited By Shares) 5. Public Limited Company (Limited By Guarantee) 6. Unlimited Company These companies have the following characteristics: **Type of Company** **Private** **Public** **Limited** **Unlimited** ----------------------------------------------- ------------- ------------ -------------------------- --------------- Private Limited Company Limited by Shares Exempt Private Company Limited by Shares Small Company Limited by Shares Public Limited Company (Limited by Shares) Limited by Shares Public Limited Company (Limited by Guarantee) Limited by **Guarantee** Unlimited Company **Characteristics of companies** Private or public? The Companies Act 1967 allows one to incorporate a private company or a public company. If one wishes to incorporate a company, one should first ascertain if going "private" or "public" will best suit the intended business purpose. **Private** +-----------------------------------------------------------------------+ | *Section 18(1), Companies Act 1967* states that a [private | | company] is a company whose Constitution (the key | | document of a company -- formerly referred to as the Memorandum and | | Articles of Association of the company): | | | | - Restricts the rights to transfer its shares; & | | | | - Limits the no. of members to not more than 50 (not counting | | certain categories of persons). | +-----------------------------------------------------------------------+ **[Restrictions on right to transfer shares]** The restriction on the right to transfer shares in a private company usually takes the form of: - A requirement that a share transfer [must] be approved by the [company's board of directors]; or - A requirement that the shares to be transferred must first be offered to the [existing members] of the company (commonly known as a 'pre-emption right' or a 'right of first refusal'). **[Characteristics]** - The minimum no. of members of a **private** company is 1. -- *section 20A Companies Act 1967.* - The maximum no. of members is 50 (not counting certain categories of persons). - Only companies that have a **share capital** may be **private** companies. - **LESS** regulatory requirements than a public company. - A private company has the words "Private" or "Sendirian" or the abbreviations "Pte" or "Sdn" in the name of the company. -- *Section 27(8) & (9), Companies Act 1967.* **Public** -------------------------------------------------------------------------------------------------------------- Section *4, Companies Act 1967* -- a [public company] is a company other than a private company. -------------------------------------------------------------------------------------------------------------- **[Right to transfer shares]** - The law does not require restrictions on the transfer of a public company's shares. - One advantage of a public company is that it can more easily offer shares to the public (subject to certain rules) to [raise financing for the company], thus allowing the company to have more access to funding and therefore, to grow. **[Characteristics]** - The minimum no. of members of a **public** company is 1. - No upper limit on the no. of members of a public company. - Some public companies may also choose to be listed on stock exchange, where their shares can be traded by the public. - Due to their ability to offer their shares to the public & their potentially larger membership, a public company is subject to **MORE** regulatory requirements than a private company. The Companies Act 1967: - Allows for private companies to be converted into public companies. - Allows public companies with a [share capital] to be converted into private companies. +-----------------------------------------------------------------------+ | Where the no. of members of a private company exceeds 50, the | | Registrar may serve a notice on the company specifying that the | | company has ceased to be a private company (and that it shall be | | treated as a public company). | +-----------------------------------------------------------------------+ **[Key distinction between private & public companies:]** **PRIVATE** **PUBLIC** After one decides whether the company should be a private or public company, the next consideration would be to determine whether the company should be a limited or unlimited one. **Limited or unlimited?** In this context, we are referring to the members' liability -- i.e. whether the members' liability to contribute to the company in the event of it being wound up is limited or unlimited. +-----------------------------------------------------------------------+ |  Who are the "**members**" of a company? | | | | Members are persons whose names are in a company's register of | | members. They are essentially the **owners** of a company. They may | | **own shares** in a company, which give them **certain rights** in | | relation to the company (also referred to as 'shareholders' if they | | own such shares). Members [do] [not manage the | | company]; the directors are responsible for the | | management of the company. | +-----------------------------------------------------------------------+ \*the liability of the members is [distinct] from the liability of the company. \*a **company's** liability for its own debts is always [unlimited] as it has its own legal personality. \*but depending on what type of company it is, its members' liability can be limited or unlimited. **Limited** A company can be **limited by shares** or **limited by guarantee**. +-----------------------------------------------------------------------+ | A company [limited by shares:] | | | | - A company where the liability of its members is limited to the | | value of the shares (at the time the member acquired the shares) | | held by them. | | | | - Where shares are fully paid for by a member, the member generally | | does not need to contribute any additional amount in the event of | | a winding up of the company. | | | | - However, if a member's shares are not fully paid for, the member | | is liable to contribute the amount that remains unpaid on his | | shares in the event of a winding up. | +-----------------------------------------------------------------------+ \*Each member of the company is obliged to contribute an amount **equal** to the value of his shares (at the time that he acquired the shares). If the member has fully paid for his shares, he has **no further liability.** Examples: 1. Mr. B holds 1,000 shares in Company Y valued at \$1,000. He has not paid for the shares. If the company is wound up, he will have to pay up the \$1,000 to the company. 2. Mr. C also holds 1,000 shares in Company Y, but they are valued at \$500 when he acquires the shares. He has paid \$200 as partial payment for the shares. If the company is wound up, he will have to pay up the remaining \$300 to the company. +-----------------------------------------------------------------------+ | A company limited by guarantee: | | | | - A company where the liability of its members is limited in the | | Constitution to the amounts that they have guaranteed to pay. | | | | - Companies limited by guarantee are usually incorporated for | | nonprofit making purposes (e.g. recreational clubs or charities) | | | | - Each member promises to contribute an amount stated in the | | company's Constitution. If the member has paid up on this | | guaranteed amount, he has no further liability. | +-----------------------------------------------------------------------+ Example: Mr. A is a member of Company X, where members promise to pay \$100 to the company as the guaranteed amount. He has not paid the guaranteed amount. If the company is wound up, he will have to pay the guaranteed sum of \$100 to the company. \*A limited company has the words "Limited" or "Berhad" or the abbreviations "Ltd" or "Bhd" in the company's name. **Unlimited** +-----------------------------------------------------------------------+ | *Section 4, Companies Act 1967*: | | | | An [unlimited company] is a company formed on the | | principle of having no limit placed on the liability of its members. | +-----------------------------------------------------------------------+ - In an **unlimited** company, members of the company must contribute to the assets of the company an amount sufficient to satisfy all its debts. - Unlimited companies are very rare -- they are not popular as there is no protection for members against the debts of the company. 1. **Private Limited Company** A private limited company has the following characteristics: **Type of Company** **Private** **Public** **Limited** **Unlimited** ------------------------- ------------- ------------ ------------------- --------------- Private Limited Company Limited by Shares **[Characteristics: ]** - A company is separate from its members. - Restriction on right to transfer shares. - Minimum of 1 member - Maximum of 50 members - Fewer regulatory requirements compared to a **public** company. - Less access to funding as compared to a **public** company. - Members' liability limited to [shares] held in the company. - Company name has the word "Private" or "Sendirian" or the abbreviations "Pte" or "Sdn"; & - Company name has the word "Limited" or "Berhad" or the abbreviations "Ltd" or "Bhd". 2. **Exempt Private Company** An **exempt private company** ("EPC") is a type of **private company** which falls within the following definition set out in *Section 4, Companies Act 1967* -- an EPC is: - a private company in which no beneficial interest in its shares is held directly or indirectly by any corporation **and** which has not more than 20 members; **[or]** - a private company wholly owned by the Government and gazetted to be an exempt private company. +-----------------------------------------------------------------------+ | brainwhat does "**beneficial** **interest**" mean? | | | | An interest which is different from "legal interest". | | | | For example, even though Mr. A may not have certain shares registered | | in his name (i.e. the legal interest), the shares may have been | | procured for his benefit (e.g. he asks his agent to purchase them for | | him). In such circumstances, Mr. A has "beneficial interest" in the | | shares. | +-----------------------------------------------------------------------+ - Has fewer regulatory requirements as compared to most of the other types of companies. - A **solvent** EPC is exempted from having to file with ACRA its financial statements together with its Annual Returns, as required of most other companies. - The EPC only needs to file a declaration of solvency with ACRA stating that the EPC is **solvent**. - If EPC is **insolvent**, it has to lodge its financial statements with ACRA. +-----------------------------------------------------------------------+ |  | | | | What does "**solvent**" mean? | | | | - When a company is solvent, it can pay its debts when they are | | due. | | | | - When a company is insolvent, it is unable to pay its debts when | | they fall due. | +-----------------------------------------------------------------------+ - An EPC, unlike other companies, is allowed to make loans to its directors and to companies in which its directors together have an **[interest of 20% or more. \*]** - An EPC is a good choice for small businesses due to its relatively **lower** regulatory compliance requirements. - Members cannot be corporations. - There must not be more than 20 members. 3. **Small Company** - A small company is also a type of private company. - They are exempted from having to audit their accounts and from having to file audited accounts with ACRA. In order to qualify as a 'small company' in a financial year, the following criteria have to be met (see the *Thirteenth Schedule, Companies Act 1967*): a. the company is a private company throughout the financial year; and b. it satisfies two (2) of the following criteria in each of the previous two (2) financial years: **Criterion 1** Total annual revenue of not more than S\$10 million. ----------------- ------------------------------------------------------------------------------- **Criterion 2** Total assets of not more than S\$10 million at the end of the financial year. **Criterion 3** The number of employees does not exceed 50 at the end of the financial year. Rationale for introducing the small company category: - to reduce the regulatory burden on small companies; & - to enable Singapore to move further towards a risk-based approach to regulation. \*private limited companies must audit accounts; small companies do not. 4. **Public Limited Company (Limited by Shares/Guarantee)** A public limited company can be limited by shares or limited by guarantee. A public limited company has the following characteristics: **Type of Company** **Private** **Public** **Limited** **Unlimited** ----------------------------------------------- ------------- ------------ ---------------------- --------------- Public Limited Company (Limited by Shares) Limited by Shares Public Limited Company (Limited by Guarantee) Limited by Guarantee **[Characteristics of a Public Limited Company:]** - A company is separate from its members. - No restrictions on the right to transfer shares - Minimum of 1 member - No maximum no. of members - More regulatory requirements compared to a private limited company. - More\* access to funding as compared to a private company. - Limited by shares -- members' liability limited to shares held in the company. - Limited by guarantee -- members' liability limited to the amount they contribute. - Company name has the word "Limited" or "Berhad" or the abbreviations "Ltd" or "Bhd". 5. **Unlimited Company** - **An** unlimited company may be a private company or a public company. **Type of Company** **Private** **Public** **Limited** **Unlimited** --------------------------- ------------- ------------ ------------- --------------- Private Unlimited Company A public unlimited company has the following characteristics: **Type of Company** **Private** **Public** **Limited** **Unlimited** -------------------------- ------------- ------------ ------------- --------------- Public Unlimited Company +-----------------------------------+-----------------------------------+ | Private unlimited company | Public unlimited company | +===================================+===================================+ | - Has characteristics of a | - Has characteristics of a | | private company | public company | | | | | - Members' liability is | - Members' liability is | | unlimited. | unlimited. | +-----------------------------------+-----------------------------------+ 6. **Variable Capital Company (VCC)** - VCCs are a special type of limited purpose company meant to house collective investment schemes. - VCCs were introduced to complement the existing suite of investment fund structures available in Singapore. - VCCs are governed by the Variable Capital Companies Act 2018 as well as the Companies Act 1967. 1. the sole object of a VCC is to be one (1) or more collective investment schemes in the form of a body corporate -- a VCC may not carry on, or enter into any partnership, joint venture or other arrangement with any person to carry on, whether in Singapore or elsewhere, any business that is inconsistent with this object; 2. in addition to having directors and a company secretary, VCCs must be managed by a fund manager licensed under the Securities and Futures Act 2001; 3. unlike other companies, VCCs are not required to disclose the contents of its register of members to the public, but this register must be disclosed to public authorities upon request for supervisory and/or law enforcement purposes; 4. VCCs are companies with a share capital and have a variable capital structure which provides flexibility in the issuance and redemption of their shares -- specifically, a VCC can issue and redeem shares without the need for member/shareholder approval (unlike other companies); 5. unlike other companies, VCCs can pay dividends out of capital, and not only out of profits -- this gives fund managers the flexibility to meet dividend payment obligations to investors; and 6. VCCs can be set up as a single stand-alone fund or an umbrella fund with two (2) or more sub-funds, each holding a portfolio of segregated assets and liabilities. +-----------------------------------+-----------------------------------+ | **Type of Company** | **Uses** | +===================================+===================================+ | Exempt Private Company | Small businesses which wish to | | | operate their businesses using a | | | company structure, but which do | | | not wish to be subject to a high | | | level of regulation. | +-----------------------------------+-----------------------------------+ | Private Limited Company | E.g. Nikon Singapore **Pte Ltd** | +-----------------------------------+-----------------------------------+ | Public Limited Company (Limited | E.g. Creative Technology **Ltd** | | by Shares) | | | | Breadtalk Group **Ltd** | +-----------------------------------+-----------------------------------+ | Public Limited Company (Limited | Primarily used by non-profit | | by Guarantee) | groups which require a corporate | | | status. | +-----------------------------------+-----------------------------------+ | Small Company | Small businesses which wish to | | | operate their businesses using a | | | company structure, but which wish | | | to be exempted from audit | | | requirements. | +-----------------------------------+-----------------------------------+ | Unlimited Company | Rarely used. E.g. some | | | architectural companies. | +-----------------------------------+-----------------------------------+ **[Foreign Companies]** *Section 4, Companies Act 1967* -- a foreign company is: a. a company, corporation, society, association, or other body incorporated outside Singapore; or b. an unincorporated society, association, or other body which under its law of origin, may sue or be sued **or** hold property in the name of the secretary or other officer of the body or association duly appointed for that purpose, **and** which does not have its head office or principal place of business in Singapore. - Every foreign company needs to be registered before it establishes a place of business or commences to carry on business in Singapore. +-----------------------------------------------------------------------+ | **"Carrying on business":** | | | | a. The company carrying on business for which it was incorporated in | | a way which, if persisted in, would produce a substantial profit. | | | | b. The doing of a succession of acts designed to advance some | | enterprise of the company, pursued with a view to pecuniary gain. | | | | c. The establishment of a place from which the business of the | | company is conducted. | | | | d. The employment of an employee to look after the company's | | affairs. | | | | e. The employment of an agent to conduct the company's business. | | | | f. The raising of loans or finance. | | | | g. Collecting information and soliciting business. | | | | h. Trading within the jurisdiction. | +-----------------------------------------------------------------------+ **[When a foreign company]** **[is not to be regarded as carrying on business in Singapore]** Such foreign companies do not have to be registered. A foreign company is **[not]** to be regarded as carrying on business in Singapore [solely] because it: a. is or becomes a party to any action, suit or proceeding, etc., in Singapore; b. holds meetings of its directors or shareholders or carries on other activities concerning its internal affairs in Singapore; c. maintains any bank account in Singapore; d. effects any sale in Singapore through an independent contractor; e. solicits or procures in Singapore any order which becomes a binding contract only if such order is accepted outside Singapore; f. creates evidence of any debt or creates a charge on movable or immovable property in Singapore; g. [secures or collects] any of its debts or enforces its rights in regard to any securities relating to such debts in Singapore; h. conducts in Singapore an isolated transaction that is completed within 31 days, but not being one of a number of similar transactions repeated from time to time; i. invests any of its funds or holds any property in Singapore; j. establishes a share transfer or share registration office in Singapore; k. effects any transaction through its related corporation licensed or approved under any written law by the Monetary Authority of Singapore; or l. carries on such other activity as the Minister (of Finance) may prescribe. +-----------------------------------------------------------------------+ | brainwhat does an "**independent contractor**" mean? | | | | A person or organisation which contracts to do work for the foreign | | company; the contractor is not subject to the foreign company's | | control except for what is specified in a mutually binding agreement | | for the specific work. | +-----------------------------------------------------------------------+  - If a foreign company that carries on business in Singapore is **not registered**, the company and every officer of the company who is in default shall be [guilty of an offence and shall be liable on conviction to a fine and to a default penalty.] - An alternative to registering a foreign company is to incorporate a new business organisation in Singapore. **[Related Companies]** Key terms: - A company may be a **Holding Company** of another company. - A company may be a **Subsidiary** of another company. - A company may be a **Wholly Owned Subsidiary** of another company. - A company may be the **Ultimate Holding Company** of its subsidiaries. - Certain companies may be said to be **Related Companies**. - Some companies may also be considered to be a **Group**. **Holding & Subsidiary Company** Company A is deemed to be a [subsidiary] of Company H if Company H: - controls the composition of the **board of directors** of Company A; or - controls **more than half** of the voting power of Company A; or - is a **holding** company of a holding company of Company A **Wholly Owned Subsidiary** Company A is a wholly owned subsidiary of Company H if: - Company H is the **only** member of Company A; - a **nominee** of Company H is the only member of Company A; - a wholly owned subsidiary of Company H is the [only] member of Company A; or - a nominee of a wholly owned subsidiary of Company H is the [only] member of Company A. +-----------------------------------------------------------------------+ | Description: brainwhat is a "**nominee**"? | | | | A person or organization in whose name an ownership interest is | | registered but where the true ownership belongs to another party. | +-----------------------------------------------------------------------+  In this diagram, Company H is the only member of Company A and controls 100% of the voting rights in Company A. Company A is a **subsidiary** of Company H. It is also a **wholly owned subsidiary** of Company H. Company H is the **holding company** of Company A. **Ultimate Holding Company** A company (Company 1) is the ultimate holding company of another company (Company 2) if: - Company 2 is a **subsidiary** of Company 1; **and** - Company 1 is **not itself a subsidiary of any** **other company.** +-----------------------------------------------------------------------+ | In the diagram above, | | | | Company H controls 65% of the voting rights in Company A. Company H | | is a **holding company** of Company A. Company A is a **subsidiary** | | of Company H. | | | | Company A controls 90% of the voting rights in Company C. Company A | | is a **holding company** of Company C. Company C is a **subsidiary** | | of Company A. This makes Company C a **subsidiary** of Company H as | | well, and Company H is also a **holding company** of Company C. | | | | As Company A and Company C are **subsidiaries** of Company H and | | Company H is not itself a subsidiary of any other company, Company H | | is also the **ultimate holding company** of Company A and Company C. | +-----------------------------------------------------------------------+ **Related Companies** a company is deemed to be related to another company under the Companies Act 1967 if it is: - the **holding** company of the other company; - the **subsidiary** of the other company; or - both companies are subsidiaries of the **same holding company**.  +-----------------------------------------------------------------------+ | In this diagram, | | | | Company A controls 90% of the voting rights in Company C. Company A | | is a **holding company** of Company C. Company C is a **subsidiary** | | of Company A. | | | | Company H controls 65% of the voting rights in Company A. Company H | | is a **holding company** of Company A. Company A is a **subsidiary** | | of Company H. | | | | As Company H is a **holding company** of Company A, which is a | | **holding company** of Company C, Company H is also a **holding | | company** of Company C and Company C is also a **subsidiary** of | | Company H. | | | | Company H, Company A and Company C are **related companies**. | +-----------------------------------------------------------------------+ **Groups of Companies** In the Financial Reporting Standards ("FRS") made pursuant to the Accounting Standards Act 2007: +-----------------------------------------------------------------------+ | - a "group" is defined as "a parent and its subsidiaries". | | | | - a parent refers to "an entity that controls one or more entities" | | while a subsidiary is "an entity that is controlled by another | | entity". | +-----------------------------------------------------------------------+ *Section 201(5), Companies Act* *1967* requires the directors of a parent (i.e. holding) company to present**:** a. consolidated financial statements dealing with the financial position & b. performance of the group of companies of which it is the parent company at its Annual General Meeting. - Each company within a group remains a separate legal entity. - Generally, the holding company cannot be held liable for any of its subsidiaries' debts despite the reference to related companies as a 'group' for accounting purposes. **[Incorporating a Company]** **Fees chargeable** 1. Name approval fee: \$15 2. Registration fee for local company (except variable capital companies): \$300 Payment may be made online. Professional firms commonly have a deposit service account maintained with the Accounting and Corporate Regulatory Authority for their BizFile^+^ transactions. A company is usually incorporated [within 15 minutes after the registration fee is paid] UNLESS the application has to be referred to other authorities for approval, in which case the process may take from 14 to 60 days. However, the processing time for the incorporation of a variable capital company may even in usual circumstances take 14 days or more. 3. **[Consequences of Incorporation]** **Separate legal personality** The persons involved in the formation and operation of a company: -- -- -- -- - Able to exercise control over company's actions: Members & Directors - Take instructions from the company and act on behalf of the company: Employees +-----------------------------------------------------------------------+ | **'The veil of incorporation'** | | | | The incorporation of a company casts a veil over the true controllers | | of the company, a veil which the law will not 'lift' or 'pierce' | | except in certain exceptional circumstances. | +-----------------------------------------------------------------------+ Upon incorporation: - A company assumes a legal personality separate from its members & directors. - Separate legal personality or identity -- company is treated as a legal entity (or a 'legal person') in its own right, separate from the persons who own or manage it. The case which established the principle of the separate legal personality of a company is ***Salomon v A Salomon & Company, Ltd \[1897\] AC 22***. The case affirmed that upon incorporation, a company has a separate legal personality. +-----------------------------------------------------------------------+ | In ***Salomon v A Salomon & Company, Ltd \[1897\] AC 22***, Mr. | | Salomon at first ran a shoe manufacturing business as a sole | | proprietor under the name "A Salomon & Company". He then incorporated | | a company, "A Salomon and Company, Limited", of which he, his wife | | and children were members. The sole proprietorship's business was | | then sold to the company. Mr. Salomon was also a director of the | | company. The company subsequently went into financial difficulties | | and had to be wound up. The liquidator sued Mr. Salomon for the debts | | owed to creditors of the company. | | | | The court found that the company had a separate legal personality | | from Mr. Salomon and that it was liable for its own debts. The | | members and directors were not personally liable for the company's | | debts. The liquidator was not successful in claiming the company's | | debts against Mr. Salomon. | +-----------------------------------------------------------------------+ **Effects of Incorporation under Section 19(5), Companies Act 1967** *Section 19(5), Companies Act* *1967* sets out 5 effects of incorporation (i.e. the effects of a company having a separate legal personality): a. the company is a body corporate with all the powers and functions of an incorporated company; b. the company may sue and be sued in its own name; c. the company has perpetual succession; d. the company has power to hold land; and e. the liability of the members in the event of the winding up of the company may be limited or unlimited, depending on the type of company incorporated. **Powers and Functions of an Incorporated Company** Upon incorporation, a company: - has all the powers, and - may exercise all the functions, of an incorporated company as prescribed under the law. Just as natural persons (i.e. human beings) have rights, obligations and the capacity to act, a company, upon incorporation, also has certain rights, obligations, and the capacity to act as an entity on its own. **Ability to Sue and be Sued in Its Own Name** One of the consequences of having a separate legal personality is that a company must **sue in its own name**. The members of a company generally cannot sue on the company\'s behalf. "**Proper Plaintiff rule**" -- "*If a director has breached his duties to the company, it is up to the company to enforce its rights. No member can arrogate to himself the company's cause of action."* ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ In ***Foss v Harbottle (1843) 2 Hare 461***, two (2) members of a company brought an action against the company's directors alleging that the directors had used the company's assets improperly for their personal benefit. The court found that the loss was caused to the company. As the company and its members were separate entities, the members could not bring an action against the directors for loss caused to the company. The company had to sue the directors in its own name. ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------  Similarly, the members of a company may not be sued for the liabilities of the company. If the company breaches its contracts or incurs legal liability, **it is the company which must be sued**. **The Company has Perpetual Succession** - The company continues to exist until it is properly wound up or struck off the register, notwithstanding any change in the ownership or directorship of the company. - The death of all the members and directors of a company does not put an end to the company itself. - This was illustrated in the case of ***Re Noel Tedman Holdings Pty Ltd \[1967\] Qd R 561.*** --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- In ***Re Noel Tedman Holdings Pty Ltd \[1967\] Qd R 561***, the company's members died in a traffic accident. They were also the directors of the company. The court held that even though the members and directors were no longer in existence, the company itself continued to exist as it had a separate legal personality. --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **Ability to Own Property** - Even though *Section 19(5), Companies Act* *1967* only mentions the ability of a company to own land, there is no doubt in law that a company can also own other kinds of property. - The property owned by a company belongs to the company and not to its members. - This is so even if only one (1) person owns all the shares in the company or where there is only one (1) member. - In the case of ***Macaura v Northern Assurance Company, Ltd \[1925\] AC 619,*** it was held that a member of a company does not have an interest in the company's property.  Likewise, a holding company does not own the property of its wholly owned subsidiary company -- ***The Gramophone and Typewriter, Limited v Stanley \[1908\] 2 KB 89*** **Liability of the Members and Officers for the Debts and Obligations of the Company** As the company is a separate legal entity from its members, the creditors of a company have no direct claim against the members of the company -- see ***Salomon v A Salomon & Company, Ltd \[1897\] AC 22.*** In the event of the winding up of a company, the members' liability which is owed to the company is as follows: a. For a company limited by **guarantee**, a member is liable to contribute to the company\'s assets up to the amount that he agreed to guarantee. b. For a company limited by **shares**, a member need only contribute the unpaid value (if any) of his shares and not anymore. c. For an unlimited company, even though the members' liability to contribute to the company's assets is **unlimited**, creditors still do not have a direct cause of action against the members. The creditors' action still lies against the company due to the separate legal personality of the company. The company then has to claim from its members the amount [which it is unable to pay to its creditors.] The directors and other officers of a company (i.e. certain people who hold senior positions within the company -- e.g. the company secretary) are also not responsible for the debts of the company **unless** there has been fraud, breach of warranty of authority or other exceptional circumstances. See the case of ***Re Application by Yee Yut Ee \[1978\] 2 MLJ 142.*** **[Indoor Management Rule]** Although a company exists as a separate legal entity, it can **only act through the people managing and representing it.** Members: - Members are akin to the 'owners' of the company. - They are not involved in the day-to-day management of the company. - Members will appoint directors to manage the company. Directors: - Directors' powers are generally set out in the company's key document -- its Constitution (formerly known as the Memorandum and Articles of Association). - For certain important matters, the Companies Act 1967 requires members to be involved in the decision-making process. - Sometimes, the authority of a director or officer to act depends on certain formalities being satisfied within the company -- e.g. the passing of a resolution by the board. +-----------------------------------------------------------------------+ | what does a "**resolution by the board**" mean? | | | | A decision made by the board of directors, usually recorded in | | writing. | +-----------------------------------------------------------------------+ A party outside of the company may have no means of knowing if these formalities have been satisfied, and the law does not require the outsider to have this knowledge. If it appears that a director, officer, or agent of a company had the authority to act, then the outsider is entitled to assume that **all the internal formalities of the company have been met.** This is known as the "**indoor management rule**" or "**Turquand's rule**". This was established in ***Royal British Bank v Turquand (1856) 6 E&B 327**.* To better understand some of the concepts described above, read the following cases, which have been uploaded on TP LMS: ***Salomon v A Salomon & Company, Ltd \[1897\] AC 22*** ***Macaura v Northern Assurance Company, Limited \[1925\] AC 619*** ***The Gramophone and Typewriter, Limited v Stanley \[1908\] 2 KB 89*** ***Re Application by Yee Yut Ee \[1978\] 2 MLJ 142*** 4. **[Lifting the corporate veil]** **\"Lifting/piercing the Corporate Veil\"** - When a company is incorporated, it acquires a separate legal personality, and a "**veil**" is said to be cast over the true controllers of the company. - In certain exceptional situations, a court will ignore the separate legal personality of a company and look to the members or the controllers of the company. -- "***lifting the corporate veil***". - In such situations, the members and/or controllers of the company may be **made responsible** for the acts or omissions of the company. 2 broad categories of exceptional cases where the \"corporate veil\" may be lifted: 1. Statutory 2. Judicial **Statutory exceptions** These statutory provisions ***look beyond the separate legal identity*** of the company to **find the relevant officer of the company (or any other relevant person acting on behalf of the company)** [responsible] for the act or omission in question. **The company may or may not be held liable for the same act or omission**. **Companies Act 1967** The courts will ignore the separate legal personality of the company under the following (non-exhaustive) provisions of the Companies Act 1967. a. ***Section 144(2)(a)*** -- where an officer of a company or any person on behalf of the company [uses or authorises the use of any seal] purporting to be a seal of the company where the company's name **does not appear**, he shall be guilty of an offence. +-----------------------------------------------------------------------+ | who is an "**officer**" of the company? | | | | s.4 of the Companies Act 1967: | | | | An "officer", in relation to a corporation, includes --- | | | | a. any director or secretary of the corporation or a person employed | | in an executive capacity by the corporation; | | | | b. a receiver and manager of any part of the undertaking of the | | corporation appointed under a power contained in any instrument; | | and | | | | c. any liquidator of a company appointed in a voluntary winding up, | | | | but does not include --- | | | | d. any receiver who is not also a manager; | | | | e. any receiver and manager appointed by the Court; | | | | f. any liquidator appointed by the Court or by the creditors; or | | | | g. a judicial manager appointed under Part 7 of the Insolvency, | | Restructuring and Dissolution Act 2018; | +-----------------------------------------------------------------------+ b. ***Section 144(2)(b)*** -- where an officer of a company or any person on behalf of the company [issues or authorises] the issue of any \[business letter, statement of account, invoice or official notice or publication\] of the company wherein the company's name is not mentioned, he shall be guilty of an offence. c. ***Section 144(2)(c)*** -- where an officer of a company or any person on behalf of the company [signs, issues or authorises to be signed or issued] on behalf of the company \[any bill of exchange, promissory note, cheque or other negotiable instrument or any indorsement, order, receipt or letter of credit\] wherein its name is not mentioned, he shall be guilty of an offence **and** shall be liable to the holder of the instrument or order for the amount due unless it is paid by the company.  d. ***Section 401(2)*** -- any person who in \[any return, report, certificate, balance-sheet, financial statement or other document required by or for the purposes of the Companies Act 1967\] [wilfully makes or authorises the making of a statement false or misleading] in any **material** particularly **knowing** it to be [false or misleading or wilfully omits or authorises the omission] of any matter or thing [without] which the [document is misleading] in a material respect shall be guilty of an offence. e. ***Section 403(2)*** -- every director or chief executive officer of a company [who wilfully pays or permits to be paid any dividend] in contravention of Section 403 (i.e. no dividend shall be paid except out of the profits of the company) shall be guilty of an offence and shall also be liable to the creditors of the company for the amount of the debts due by the company to them respectively to the extent by which the dividends so paid have exceeded the profits. **Example**: If the company has \$10,000 in profits but the director pays \$15,000 in dividends, the director or CEO could be held responsible for the extra \$5,000 and may need to repay this amount to creditors. +-----------------------------------------------------------------------+ | what is a "**dividend**"? | | | | A distribution of a portion of a company's profits to | | members/shareholders of the company. | +-----------------------------------------------------------------------+ Using a company seal without the company's name ---------------------------------------------------------- Issuing documents without the company's name Signing financial instruments without the company's name Making false statements in the company's documents Illegally paying dividends **Other Statutes** a. **Insolvency, Restructuring and Dissolution Act 2018** ***Section 238(1)*** -- where it appears in the course of the judicial management or winding up of a company or in any proceedings against the company, that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court, if it thinks proper to do so, may declare that any person who was **knowingly** a party to the carrying on of the business in that manner shall be personally responsible, [without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.] ***Section 238(4)*** -- where any business of a company is carried on with the intent or for the purpose mentioned in Section 238(1), every person who was **knowingly a party** to the carrying on of the business with that intent or purpose shall be guilty of an offence. ***Section 239(1)*** -- in the course of the judicial management or winding up of a company or in any proceedings against the company, where it is found that a person knew, or an officer of the company knew or, ought, in all the circumstances, to have known that the company was trading wrongfully, the court, if it thinks proper to do so, may declare that any such person or officer who was a party to the company trading in that manner shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct. ***Section 239(6)*** -- where a company has traded wrongfully, every person who was a **party** to the wrongful trading and who **knew** that the company was trading wrongfully; **or**, if an officer of the company, ought, in all the circumstances, **to have known that the company was trading wrongfully**, shall be guilty of an offence. ***Section 239(12)*** -- a company trades wrongfully if the company, when insolvent, incurs debts or other liabilities without reasonable prospect of meeting them in full; **or** the company incurs debts or other liabilities that it has no reasonable prospect of meeting in full and this results in the company becoming insolvent. b. **Income Tax Act 1947** **S*ection 33*** -- the Controller of Income Tax has a wide discretion to disregard arrangements which are artificial or fictitious and may ignore the separate legal personality of a company if it is used to obtain a tax advantage. c. **Residential Property Act 1976** ***Sections 10**,* read with ***Section 2*** -- the nationalities of the members and directors of a company affect its ability to own residential property in Singapore; a company with members or directors who are not Singapore citizens may not own residential property (other than non-restricted residential property) in Singapore without approval. **Judicial Exceptions** Sometimes, companies may be used as a means to avoid certain liabilities; some people may attempt to leverage on the separate legal personality of the company to avoid personal liability. Justice would sometimes necessitate a \"lifting of the corporate veil\" in such circumstances. Some instances where the courts have \"[lifted the corporate veil]\" are: 1. When there is some attribution to some physical/mental state or character to the company. 2. When the company is used to evade legal obligations or commit fraud 3. When the company is acting as an agent/alter ego of its controllers/members. 4. When the company is a sham. 5. When a group of companies act as a functional whole. a. **when there is an attribution of some physical or mental state or character to a company** +-----------------------------------------------------------------------+ | ***[De Beers Consolidated Mines Ltd v Howe \[1906\] 1 AC | | 455]*** | | | | The company was incorporated and registered in South Africa. Its head | | office was in South Africa, but it also had an office in the United | | Kingdom. The company owned diamond mines in South Africa. However, | | central management and control of the business operations were | | performed in the United Kingdom. | | | | The question before the court was whether the company was residing in | | the United Kingdom (for tax assessment purposes); if so, the company | | would have had to pay tax in the United Kingdom. | | | | The court held that a company was resident where the "real business" | | was carried on and that "... the real business is carried on where | | the central management and control actually abides". | | | | The corporate veil was therefore lifted, and the company was found to | | be resident in the United Kingdom even though it was incorporated in | | South Africa. | +-----------------------------------------------------------------------+ b. **when a company is used to evade legal obligations or to commit fraud** +-----------------------------------------------------------------------+ | ***[Gilford Motor Co v Horne \[1933\] 1 Ch 935]*** | | | | Horne was a former employee of Gilford Motor Co. In his employment | | contract with Gilford Motor Co, he was subject to a restrictive | | covenant which prevented him from engaging in a similar type of | | business after he left the employ of Gilford Motor Co. In order to | | avoid the effect of the covenant, Horne formed a company and sought | | to transact his business through it. | | | | The court found that the company was set up by Horne to evade his | | legal obligations owed to Gilford Motor Co. | | | | *Lord Hanworth MR* said: "*Of course, in law the Defendant Company is | | a separate entity from the Defendant Horne but I cannot help feeling | | quite convinced that at any rate one of the reasons for the creation | | of the company was the fear of Horne that he might commit breaches of | | covenant... and that he might possibly avoid that liability if he | | did it through the Defendant Company... I am quite satisfied that | | this company was formed as a device, a stratagem, in order to mask | | the effective carrying on of the business of Horne. The purpose of it | | was to try to enable him under what is a cloak or a sham, to engage | | in business which, on consideration of the agreement which had been | | sent to him before the company was incorporated, was a business in | | respect of which he had a fear that the Plaintiffs might intervene | | and object*." | +-----------------------------------------------------------------------+  +-----------------------------------------------------------------------+ | ***[Jones v Lipman \[1962\] 1 WLR 832]*** | | | | The Defendant had contracted to sell his land to the Plaintiff. | | However, he changed his mind about doing so. | | | | The Defendant then formed a company of which he was owner and | | director and transferred the land to the company. | | | | He then refused to complete the sale of the land to the Plaintiff, | | claiming that the land no longer belonged to him. The Plaintiff | | sought relief. | | | | An order for specific performance was made against both the director | | (i.e. the Defendant) and the company. The court held that the company | | could not escape from or divest itself of its knowledge gained | | through the director. | | | | The company was: "*A creature of \[the controlling director\], a | | device and a sham, a mask which he holds before his face in an | | attempt to avoid recognition by the eye of equity*." | +-----------------------------------------------------------------------+ c. **when a company is acting as an agent or alter ego of its members/controllers.** +-----------------------------------------------------------------------+ | ***[Smith, Stone & Knight Ltd v Lord Mayor, Aldermen and Citizens of | | the City of Birmingham \[1939\] 4 All ER 116]*** | | | | A company acquired a business (in the form of a company) and made it | | its subsidiary. The parent company held all the shares of the | | subsidiary except for 5 shares, which its directors held in their | | respective names in trust for the parent company. | | | | The profits of the subsidiary were treated as profits of the parent | | company. The Defendant corporation compulsorily acquired the premises | | upon which the business of the subsidiary was carried on, and the | | parent company claimed compensation in respect of removal and | | disturbance. The Defendant corporation contended that the proper | | claimants were the subsidiary as it was a separate legal entity from | | its parent company. | | | | **The court found that** as the subsidiary was not operating on its | | own behalf but on behalf of the parent company, the parent company | | was the rightful party to claim compensation. | +-----------------------------------------------------------------------+ +-----------------------------------------------------------------------+ | ***[Tengku Abdullah ibni Sultan Abu Bakar v Mohd Latiff bin Shah | | \[1996\] 2 MLJ 265]*** | | | | In some cases, the knowledge, and actions of the controllers of a | | company can be imputed to the company. In this case, undue influence | | was alleged against the controllers, and was successfully imputed to | | the company. | | | | The first and second appellants collectively held the majority of the | | shares in two (2) companies: Raintree Development Sdn Bhd ("RDB") and | | Allied Capital Sdn Bhd ("Allied"). They were also appointed as | | directors of the two (2) companies. These companies were acquired or | | incorporated as part of a proposal to establish a proprietary club in | | Malaysia. As part of the overall scheme, RDB's shares (most of which | | were owned by the first and second appellants) were sold to Allied. | | In turn, the first and second appellants were authorised to enter | | into an agreement on behalf of the club under which the entire issued | | and paid-up capital of RDB was to be purchased by the club from | | Allied for RM47 million. The RDB shares were to be eventually resold | | to applicants for club membership. | | | | Subsequently, the club\`s members were informed that the total cost | | of acquiring RDB from Allied was much more than RM47 million, due to | | certain additional costs. Dissatisfied, at the club\`s first annual | | general meeting, members of the club appointed an *ad hoc* committee | | to study the share acquisition agreement. The committee produced a | | report which was highly critical of the appellants. | | | | The members of the club (the "respondents") brought a representative | | action against the appellants in the High Court for damages for | | breach of fiduciary duty as promoters of the club in respect of the | | share acquisition agreement. | | | | Meanwhile, Allied brought a separate action against the club to | | recover what it said was due to it under the share acquisition | | agreement, which amounted to more than RM8 million, plus interest. In | | their defence, the respondents resisted Allied's action on the ground | | that the agreement had been procured by undue influence, as the first | | and second appellants were the major shareholders of Allied and RDB | | at all material times. The respondents counterclaimed and asked for a | | refund from Allied of the difference between RM47 million and the sum | | which they claimed as being the fair value of the shares. | | | | The High Court concluded that Allied had obtained an advantage | | through undue influence. In particular, the judge found that the | | first and second appellants had abused the confidence reposed in them | | as fiduciaries, and that this could be equated to an abuse of | | confidence by Allied. The relationship between the first and second | | appellants and Allied was such that their knowledge may be safely | | said to be that of Allied. The first and second appellants were also | | Allied\`s alter ego, so that the corporate facade may be pierced to | | reveal the true picture. This was affirmed by the Court of Appeal. | +-----------------------------------------------------------------------+ d. **where the company is a sham** +-----------------------------------------------------------------------+ | In ***Win Line (UK) Ltd v Masterpart (Singapore) Pte Ltd \[1999\] 2 | | SLR(R) 24,*** the Singapore courts did not find that the company in | | question was a sham. The corporate veil was thus not lifted. But the | | court discussed the basic principles upon which it would pierce the | | corporate veil. | | | | ***[Win Line (UK) Ltd v Masterpart (Singapore) Pte Ltd \[1999\] 2 | | SLR(R) 2]******* | | | | Action was commenced against Masterpart and the second defendant, | | Donald & Mcarthy Pte Ltd ("D&M"), on the basis that Masterpart and | | D&M were run as a single corporate entity, and that they should | | therefore be jointly liable for a breach of contract suffered by the | | Plaintiffs. | | | | D&M and Masterpart had different directors and shareholders, although | | Masterpart had 2 directors and shareholders who were employees of | | D&M. Masterpart had a separate registered address from D&M but did | | not have a separate office. Masterpart had no staff apart from its | | directors and had no independent facsimile or telephone number. | | Masterpart used D&M\'s address and facsimile numbers for its | | correspondence. Masterpart maintained its own bank accounts, although | | there was never much money or activity in the accounts. | | | | The court found that the companies were separate entities and | | reiterated the basic principle that it would only pierce the | | corporate veil where the corporate structure was merely a device, | | facade or sham that concealed the true facts. Although most of | | Masterpart\'s business consisted of transactions derived from D&M, | | this did not constitute evidence that the company was not run by its | | own directors or that they were not the persons making decisions on | | its behalf. | +-----------------------------------------------------------------------+ While the court ultimately did not pierce the veil in this case, it clarified the principle that it would do so if the corporate structure was being used to deceive or misrepresent the reality of the situation. e. **where a group of companies act as a functional whole** In certain situations, a group of companies may be treated as a single corporate entity, although the general rule is that each company within a group is a distinct and separate legal entity. +-----------------------------------------------------------------------+ | ***[Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant | | Workers \[1980\] 1 MLJ 109]*** | | | | In this case, a number of workers employed by Jaya Puri Chinese | | Garden Restaurant Sdn Bhd (the "Restaurant Company") were retrenched | | by the Restaurant Company when the business was closed owing to | | losses. The restaurant carried on business in premises belonging to | | Hotel Jaya Puri Bhd (the "Hotel Company"), and both the Hotel Company | | and the Restaurant Company had the same managing director. | | | | A dispute arose between the workers' union and the Restaurant | | Company, and the dispute was referred to the Industrial Court. The | | union sought to have the Hotel Company joined as a party, alleging | | that the workers were the employees of the Hotel Company and that | | they were dismissed and not retrenched as alleged by the Restaurant | | Company. | | | | The court found that the Hotel Company and the Restaurant Company | | were one enterprise as functionally, the companies were in fact an | | integral whole, and that management-wise, they also constituted a | | single unit. Also, several senior officers such as the Secretary, | | Personnel Manager and Assistant Manager were common to both | | companies. Hence, the Restaurant Company and the Hotel Company should | | be treated as one single entity. As such, the workers were found to | | be employees of the Hotel Company. | +-----------------------------------------------------------------------+ 5. **[Constitutional Documents of a Company]** **Background** Before the Companies (Amendment) Act 2014 was passed, a company's structure and aims would be set out in a key constitutional document known as the **Memorandum of Association**. The Memorandum of Association defined the face that the company presented to the [outside] world -- i.e. it set out the company's structure and its aims. Another key constitutional document was the **Articles of Association** of the company, which set out the [internal] regulations of the company -- i.e. rules which regulated the internal processes of the company. The Articles of Association contained the rules which had to be followed or observed for various internal company processes -- e.g. decision-making processes by the directors of the company, processes to appoint directors, processes to increase the number of shares, procedures for the transfer of shares, etc. With the coming into effect of the Companies (Amendment) Act 2014, the Memorandum of Association and Articles of Association have been **merged** into a single document called the "Constitution". For companies incorporated [**before** 3 January 2016] (which was the effective date of the relevant Companies (Amendment) Act 2014 amendments), their existing Memoranda and Articles of Association were deemed to have been **merged** **on** **3 January 2016,** and these documents are now [collectively] known as the **Constitution.** **[The Contents of the Constitution]** As mentioned above, before 3 January 2016, the key constitutional documents of a company: 1. Memorandum of Association 2. Articles of Association of the company. +-----------------------------------+-----------------------------------+ | **The Memorandum of Association** | **Articles of Association** | +===================================+===================================+ | - sets out the company\'s | - sets out the rules and | | structure and aims (i.e. the | regulations by which the | | purpose(s) of its existence). | company's internal processes | | | were governed. | +-----------------------------------+-----------------------------------+ As explained above, pursuant to the Companies (Amendment) Act 2014, the Memorandum of Association and Articles of Association were merged into a single document known as the Constitution. A company's Constitution is governed by the Companies Act 1967 and cannot contain clauses contrary to the Companies Act 1967. - There is no need for companies incorporated before 3 January 2016 to replace their existing Memoranda and Articles of Association with a Constitution. - The Memoranda of Association and Articles of Association of existing companies which were in force immediately **before** 3 January 2016 are deemed to have been merged and are collectively to be treated as those companies' Constitutions. - A company may amend its Constitution from time to time in the manner provided under the Companies Act 1967. The Minister may prescribe model constitutions for **[private companies and companies limited by guarantee]** -- *Section 36(1), Companies Act 1967*. These model constitutions have been made available by way of subsidiary legislation (see the *Companies (Model Constitutions) Regulations 2015*). Companies are allowed to adopt the model constitutions in whole or in part -- *Section 37(1), Companies Act 1967*. Where a company wishes to adopt the whole model constitution, it can do so by referencing the title of the model constitution of the type of company it belongs to -- *Section 37(2), Companies Act 1967* (i.e. there is no need to lodge the entire document with ACRA). The company may choose to adopt the model constitution in force at the [time of adoption] or it may adopt the model constitution as may be in force [from time to time] (i.e. as amended by the Minister from time to time) -- *Section 37(3), Companies Act 1967*. However, a copy of the Constitution of the company must be submitted to ACRA where the company: a. adopts **only part of the model constitution** for the type of company to which it belongs; b. includes **provisions additional** to those in the model constitution; or c. includes **object clauses** as part of its Constitution *Section 37(4), Companies Act 1967*. *Section 22(1), Companies Act 1967* provides that the Constitution must state: a. the name of the company; b. if the company is a company limited by shares, that the liability of the members is limited; c. if the company is a company limited by guarantee, that the liability of the members is limited and that each member undertakes to contribute to the assets of the company, in the event of it being wound up while he is a member or within one (1) year after he ceases to be a member, such amount as may be required but not exceeding a specified amount (i.e. the "guaranteed" amount); d. if the company is an unlimited company, that the liability of the members is unlimited; e. if the company is an unlimited company or a company limited by guarantee, the **number** of members with which the company is applying to be registered; f. the full names, addresses and occupations of the subscribers to the Constitution of the company; and g. that the subscribers are desirous of being formed into a company in pursuance of the Constitution and (where the company is to have a share capital) respectively agree to take the number of shares in the capital of the company set out opposite their respective names. +-----------------------------------------------------------------------+ |  Who is a "**subscriber**"? | | | | A party named in the Constitution of a new company who agrees to form | | the company, and where the company has a share capital, who agrees to | | acquire the number of shares written against his name. | | | | \*Subscribers are essentially the initial members of the company. | +-----------------------------------------------------------------------+ The matters set out above are the minimum requirements. Other regulations may also be included in the Constitution, depending on the requirements of the company. For example, *Section 35(1), Companies Act 1967* states that a company's Constitution "*must contain the regulations for the company*". However, *Section 35(1), Companies Act 1967* does not state [what] regulations are to be included. Once included, the provisions may not be amended except in accordance with the Companies Act 1967. Some typical regulations which may be found in a Constitution may cover: a. share capital (where applicable); b. (general) meetings; c. directors; d. the secretary; e. the common seal; f. accounts (or financial statements); g. dividends, reserves, and bonus issues; and h. winding up. **Effect of the Constitution** Between the company and its members a. *Section 39(1), Companies Act 1967* -- Subject to the Companies Act 1967, the Constitution of a company, when registered, binds the company and its members (as if it were a contract between the company and its members). In the case of ***Salmon v Quin & Axtens Ltd \[1909\] 1 Ch 311 (Court of Appeal) (affirmed by the House of Lords in \[1909\] AC 442)***, Salmon (who was a member of the company) succeeded in his action to restrain the company and its directors from acting on a resolution which was inconsistent with the Articles of the company. +-----------------------------------------------------------------------+ | brain What is a "**resolution**"? | | | | A binding decision made on behalf of a company, commonly in the form | | of a written statement. | +-----------------------------------------------------------------------+ ***Section 39(2), Companies Act 1967* -- All money payable by any member to the company under the Constitution is a debt due from him to the company.** - A member\'s right to enforce the Constitution against the company is **limited** to an enforcement of the member\'s rights [in his capacity as a member] only. - Outsiders (or members relying on capacities other than their capacity as members) **cannot rely** on the Articles to **sue** the company. --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- In the case of ***Eley v The Positive Government Security Life Assurance Company, Limited (1876) 1 Ex D 88***, the company\'s Articles of Association provided that Eley should be the company\'s solicitor and that he should transact all its legal business. Eley was not a member of the company when the Articles were prepared, but later became a member. The company subsequently stopped employing him as its solicitor. Eley failed in his suit for breach of contract because he could not rely on the Articles to give him the right to be the company\'s solicitor: he was attempting to enforce his rights in his capacity as a solicitor and not as a member of the company. --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **Between members of the company *inter se*** a. *Section 39(1), Companies Act 1967* -- Subject to the Companies Act 1967, the Constitution of a company, when registered, binds the company and the members thereof to the same extent as if it respectively had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the Constitution. Every member therefore has the right to ensure that the clauses in the Constitution are observed by other members of the company. In the case of ***Rayfield v Hands \[1960\] Ch 1***, the Articles of Association of a priv