Professional Documents
Culture Documents
Courts will not pierce the veil within a group of companies simply on the grounds that
the group constitutes a single economic entity.
o Creditors of a subsidiary might be disadvantaged as a result of the company
becoming a meber of a group of companies. This is because in a group with an
integrated business strategy, business decisions may be taken on the basis of
maximising the welath of the group as a whole or of the parent rather than of the
particular subsidiary of which the claimant is a creditor.
o There are 3 ways by which this phenomenom manifests:
First, the parent may instruct the baord of the subsidiary to do something
that is not in the best interests of the subsidiary, as it would maximise the
benefits of the group.
Secondly, the parent might allocate new business opportunities to the
subsidiary which can maximise the benefit for the group, even though
another subsidiary could develop the opportunity effectively, if less
profitably.
Finally, if a subsidiary falls into insolvency, the parent may refrain from
saving it, even though the group has sufficient funds to do so.
o It is unclear why the decent into insolvency of a properly capitalised subsidiary
which has fuly disclosed the risk of it business should be allowed to threaten the
economic viability of the group. T
o Solution: Is it better to have sophisticated regulation to deal with this particualr
issue of corporate groups or whether it is better based on the extension of
existing creditor-protection rules to deal with this particular situation of group
creditors.
German regulation on Group Corporations: The German statutory regulation
provides two models of regulation, one of which is contractual and thus optional.
o Under the optional provision, in exchange for undertaking an obligation to
indemnify the subsidiary for its annual net losses incurred during the term of the
agreement, the parent acquires the power to instruct the subsidiary to act in the
interests of the group rahter thann its own best interests.
o The second strand of the regime is mandatory and applies to de facto groups.
The core provision is that the parent is liable for the damage to the subsidiary if
the parent causes the subsidiary to enter into a disadvantageous transaction
unless the paretn has compensated the subsidiary for the loss or agreed to do
so.
Weakness: Ther is a difficulty of proof as to what is a de facto group and
also since there is continuing transactional relationship, it would be hard
to show that there is a disadvantageous transaction.
There may be instances in which domestic company law takes account of group
structures, though these instances are ad hoc rather than the result of the application of
a single general principle.
o The best known form is in the area of financial reporting. The group
phenomenom cannot be ignored if a true and fair view of the overall position of
the company is to be presented, and that accordingly when one company
o
o
controls others, the parent company must present group financial staetments as
well as its own individual statements.
There are also prohibitions on financial assistance for the purchase of a
companys own sharesthat extends to dinaincial assistance by any of its
subsidiaries.
There are prohibitions on certain type of transactions between a company and its
directors. In the same vein there are also prohibitions of transactions.
In non-legal and much legal discourse, the expressions parent and holding
company are used interchangeably Similar to Singapore provision in the
Companies Act s5 and s6.
In group situations, it is common for directors to take decisions in the interest of the
group as a whole without considering the interests of the group as a whole wihtout
considering the interests of the particualr company to which they have been appointed.
o In Charterbridge Corp v Llyods Bank, the directors of a company forming part of
a group had considered the benefit of the group as a whole without giving
separate consideration to that of the company alone when they caused the
subsidiary company of which they were directors to give security for a debt owed
by the parent company to a bank.
In situations such as these, an objective test would then help the directors
that are being sued for their breaches of FD since they had not
subjectively taken their company interests into account.
The proper test in the absence of actual separate consideration must be
whether an intelligent and honest man in the position of a director of the
company concerned would have reasonably believed that the
transactions were for the benefit of the company.
APPLICATION: The challenge to the directors decision failed in this case
because the collapse of the parent company would have been a disaster
for the subsidiary.
NOTE: The core duty of loyalty does not recognise a duty to the group,
for it insists that the main focus of the directors should be on the interests
of the subsidiary even if it accepts that the interests of the subsidiary are
in many cases intimately related to the continuing existence of the group.
1. INTRODUCTION
As in the case of UK, the Singapore approach still regards the separateness of
companies within groups
o
o
The theory is still that managers must focus only on the company they are
serving at the moment of decision making
Even though for accounting purposes, groups of companies are treated as one
unit, the courts are reluctant to admit the reality of interrelated companies acting
in any other way than as a number of separate entities tied together by their
relationship as significant shareholders
The governance of groups thus depends on the way the regulatory framework
deal with general company law impact on groups.
The approach of the UK and Singapore courts is that the holding company has no direct
proprietary interests in the assets of the subsidiary company. The acts of a company will
not be imputed to another company within the group. The courts have not developed a
notion of enterprise law
o The only exception is where there is a fraudulent misuse of the corporate veil.
Public Prosecutor v Lew Syn Pau & Anor [2006] SGHC 146
o Singapore listed company BIGL was in financial difficulties. Lews company was
appointed to help raise new equity funds. Lew introduced investor to BIGL.
Investor agreed to pay $6.6 million for 33 million new shares in BIGL. Before
completion of sale, investor requested for short-term bridging loan for the
acquisition. BIGLs executive chairman and director, Wong, ordered a BIGL
subsidiary, CM, incorporated in Mauritius to remit to Lew $4.2m. Lew extended
$4m to investor. Wong did so to complete the BIGL share transfer to achieve
cost-savings and avoid possible litigation. He made CM extend loan to Lew
because he did not know the investor. Wong and Lew were both directors of CM,
together with 3 others. Wong and Lew admitted that they knew the ultimate
purpose of the loan to Lew but not the other directors. The remittance was not
initially authorized by the board but was subsequently ratified by them. Lew and
Tan both repaid their loans. Lew was charged with abetting Wong to cause BIGL
to contravene s76 CA.
o HELD:
(redacted)
Prosecution had to show that financial assistance came some way from
the BIGL in order to establish the charge. Prosecution submitted that:
(1) CMs funds were group funds and thus indirectly BIGLs funds.
(2) Giving of financial assistance by subsidiary company is
equivalent to giving of such assistance by the holding company.
(3) Pierce the corporate veil between BIGL and CM so that the acts
of CM are treated as those of BIGL.
Court rejected all three arguments.
(1) By the doctrine of separate entity, there is no such thing as group
funds. CM had existed for years and its finances organized on the basis of
separate entities. The fact that money returned by Lew was to CM showed
that the companys assets were treated and accounted as belonging to it.
Further, the money loaned was proceeds of trading conducted by CM.
Thus, the resources used in financial assistance were that of CMs and not
of BIGLs.
On a separate note, the word indirect does not assist the prosecutions
case. The holding company only facilitated or induced someone else to
give financial assistance, but did not provide financial assistance itself.
This cannot constitute indirect financial assistance.
The fact that the section will be contravened if such assistance
has been given indirectly means only that there is no need to
demonstrate a single, direct, uninterrupted causal link between
the company and the recipient of the financial assistance; and that
the inquiry is ultimately directed at the substance and not the
form of the transaction. Thus, the section will be contravened as
long as financial assistance is given by the company even though
it is given through numerous intermediaries [170]
(2) The giving of financial assistance by the subsidiary ipso facto did not
constitute the giving of assistance by the holding company, because
(1) there can be no doubt that in the ordinary case the relevant
act of the subsidiary, in this instance the giving of financial
assistance, remains the act of that entity only. This follows firstly,
from the basic doctrine underlying all of company law, that each
company is a legal person separate and distinct from every other
company and this is no less true just because the companies in
question happen to be related in some way [183], and
(2) The Parliament has made its intention clear that the doctrine of
separate legal personality is to apply with full force here by
distinguishing provisions for the company from provisions for its
subsidiary [184], and
(3) If one started from the premise that a foreign subsidiary was
not itself within the prohibition in s76(1)(a)(i)(B), then it would be
illogical to hold that the holding company of such a subsidiary
should somehow be found to have contravened s76(1)(a)(i)(A) by
virtue of an action of its subsidiary that was not prohibited [185].
This was not to say that the financial assistance given by the
subsidiary would NEVER amount to financial assistance by its
holding company [186]:
o (a) where the act of the subsidiary is itself a breach of the
prohibition then to the extent that that breach was
procured by the holding company it would constitute an
offence (quite possibly abetment) [186];
o (b) where the holding company hived down its assets to a
foreign subsidiary in order to enable the asset or its
equivalent to be made available to finance a contemplated
acquisition, there would be the indirect provision of
financial assistance by the parent in contravention of the
prohibition [186];
o (c) where the holding company in procuring the subsidiary
company to provide financial assistance undertook either
an obligation or a liability to pay damages to the subsidiary
as a result may well be found to have contravened the
section [191]
(3) Corporate veil cannot be pierced.
(1) The owner of a company does not own the companys
assets. The company owns its own assets. It follows that
the holding company has no direct proprietary interest in
the assets of its subsidiaries [194];
(2) Each company is a separate legal entity in its own
right. The company and its owner are two separate
One means by which a parent company can exercise control over group companies in
order to implement its strategies and establish channels of communication between
group companies and the parent is through the appointment of nominee directors to
manage each company. See para 3 below.
NOMINEE DIRECTORSHIPS
They are directors but in the performance of their office, act in accordance with some
understanding, arrangement or status which gives rise to an obligation to the appointer.
o They represent a particular sectional interest in performing their duties as
directors.
In the corporate group context, the appointment of nominee directors generates
particular legal problems: defining their fiduciary duties, particularly the extent to which
they may actively promote the interests of the enterprise) and identifying whether they
can legitimately communicate information to the parent.
No conflict rule:
Nominee directors are prohibited from subordinating the interests of the company where
those interests actually conflict with the appointers interests
o No director shall obtain for himself a profit by means of a transaction in which he
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: Furs Ltd v Tomkies
An undisclosed profit which a director so derives from the execution of his
fiduciary duties belong in equity to the company
It is no answer to the application of the rule that the profit is of a kind
which the company could not itself have obtained, or that no loss is
caused to the company by the gain of the director
Nor is it an answer for the director to assert that his action was bona fide
thought to be, or was, in the interests of the company: Howard Smith Ltd
v Ampol Petroleum Ltd
o A director is under an obligation not to place himself in a position where the
interests of the company whom he is bound to protect comes into conflict with
either his personal interest (Creanovate Pte Ltd v Firstlink) or the interest of a
third party for whom he acts (Chew Kong Huat v Ricvil (Singapore) Pte Ltd)
If a fiduciary assumes a duty to another which is inconsistent with his
duty to the principal, the principal may claim compensation for loss
resulting from the agents inability, due to the conflict of duties, fully to
discharge his duty to that principal: North & South Co v Berkeley
Preference for interest of interested company over the plaintiff company:
Chew Kong Huat v Ricwil (Singapore) Pte Ltd
Preference for personal interest over interest of plaintiff company:
Kumagai-Zenecon-Construction Pte Ltd v Low Hua Kin
o The duty to avoid conflicts of interest has broad ramifications
Where the director is a counter-party to a transaction that the company
enters into, the company has the option whether or not to avoid the
contract
That the director has sold an asset at fair market value does not
prevent the company from seeking rescission of the contract, a
remedy it might desire should there be a decline in the market
value of the asset
The company may seek disgorgement of any profits the director receives
from the transaction, or compensation for any loss arising from his breach
of his duty of loyalty: Mahesan v Malaysian Government Officers Cooperative Housing Society
Where a commission is otherwise due from the company, the
agents right to the commission may be forfeited: Andrews v
Ramsay & Co
English approach suggest that the fiduciary obligation imposed on directors is not
affected by their status as nominees: Scottish Co-operative Society v Meyer
o Facts: The holding company created a subsidiary that dabbled in a particular
business of making rayon cloth. The subsidiary made substantial profits. The
holding company then decided to use its majority of votes to transfer all the
business to a branch of the holding company. This then caused the subsidiarys
shares to be valueless.
o Held: (HL) There was oppression of the minority shareholders. The 3 nominee
directors breached their fiduciary duties owed to P by putting the interests of D
ahead of P. The inaction of the 3 nominee directors amounted to a breach of their
duties to their nominated companies.
However, if the directors have in fact (OBJECTIVELY and this is seen where there is an
objective benefit to the company even if their interests were not considered) acted in
the best interest of that company, the fact that they actually considered the
interests of the group as a whole would not put them in breach of duty:
Charterbridge Corp v Lloyds Bank Ltd
o A reasonable person would still have considered the decision to be in the interest
of the company -> A benefit to the company must exist for any reasonable
person to believe the decision to be in the interest of the company
Australian approach is more pragmatic: Re Broadcasting Station 2B Pty Ltd
Coincidence of interests test
o Facts: Fairfax acquired controlling interest in the company and sought to take
control of the board by requiring the resignation of its existing directors and
replacing them with its own appointees. One of the incumbent directors refused
to resign, alleged affairs of company were conducted in an oppressive manner
o Jacobs J Nominee directors may actively promote Fairfaxs interests, provided
that they believe that this is also in the interests of the company
o TEST: The nominees conduct was proper so long as they bona fide believed that
the Fairfax companies would act in the interests of the company as a whole. The
words quoted suggest that nominee directors will breach their duty only if they
knowingly sacrifice company interests for those of their appointor.
Rationale: To require a higher standard of nominee loyalty would be to
ignore the realities of company organisation and make the position of a
nominee director an impossibility.
Where it is obviously not in the best interests of the company: Thanakharn Kasikorn
Thai Chamkat (Manachon) v Akai Holdings
o Where a company takes on the debt of another company that is hopelessly
insolvent and that other company is not its subsidiary nor affiliate
This is so even though the insolvent company is a supplier
o Majority number of shareholders in the parent company had no interest in the
insolvent company
Takeaway points:
1) Directors can be appointed to company boards to represent sectional interests and do not,
by reason only of their nominee status, infringe the fiduciary duty of undivided loyalty.
2) Nominee directors are prohibited from subordinating the interests of the company where
those interests actually conflict with the appointers interests
3) Can nominee directors promote the interests of their appointer where this does NOT harm
the companys interests? Position is not so clear-cut (Re Broadcasting as long as you
make sure you make sure that the group companies that benefit have interests
that coincide with the nominated directors company VERSUS Charterbridge Corp
which states that there needs to be a fiduciary duty
Issue: Are nominee directors free to disclose inofrmaiton to their appointer? The
problem here is that the nominee may have access to confidential information and the
disclosure of which may be harmful to the company.
o S 158 of the Companies Act deals with this issue, and is operated to the
exclusion of the common law position.
A director of a company may disclose information which he has in his capacity as a
director or an employee of a company, being information that would not otherwise be
available to him, to the persons specified in subsection (2) if such disclosur is not likely
to prejudice the company and is made with the authorisation of the board of directors. s
158(1)
The director declares at a meeting of the directors of the company the name and
office or position held by the person to whom the information is to be disclosed
and the particulars of such information
4. MINORITY SHAREHOLDERS
Where a subsidiary is partly owned, additional legal restraints apply in order to protect
the interests of the minority shareholders. Although the integration of group activities
may be the most efficient use of the groups resources, this can harm the interests of
the minority shareholders in group companies who do not share in the profits of the
group enterprise.
o MINORITY DOES NOT BENEFIT: Group controllers want to undertake
transactions that impose costs on subsidiary but which are more than offset by
the benefits to the enterprise as a whole. Minority shareholders do not enjoy
these benefits because their interest is confined to the activities of the subsidiary
Solution 1: Oppression issues may arise under s 216 if the company acts
in a manner that prefers the interests of the parent company (or
controllers) rather than the company.
Solution 2: For listed subsidiary companies, additional controls under
Chapter 9 of the Listing Manual.
LISTED COMPANIES RELATED PARTY TRANSACTION: Where the subsidiary is
listed, most stock exchanges have stringent rules for dealing with related party
transactions, in view of the potential for abuse by directors and controlling shareholders.
The listing manual of Singapore Exchange (Listing Manual) does not only govern
transactions between directors and the listed company but also between certain
shareholders and the listed company. These are known as interested person
transactions under the Listing Manual.
Where a subsidiary is partly owned, additional legal restraints apply in order to protect
the interests of the minority shareholders
Minority shareholders of a partly-owned subsidiary are vulnerable
o Group controllers want to undertake transactions that imposes costs on
subsidiary but which are more than offset by the benefits to the enterprise as a
whole
o Minority shareholders do not enjoy these benefits because their interest is
confined to the activities of the subsidiary
Oppression issues may arise under s 216 if the company acts in a manner that prefers
the interests of the parent company (or controllers) rather than the company
Procedure for unlisted company: Disclosure to board, interested director abstains
from voting
Where the subsidiary is listed, most stock exchanges have stringent rules for dealing
with related party transactions, in view of the potential for abuse by directors and
controlling shareholders
Any transaction between an entity at risk and an interested person: Rule 904
o Rule 904(2): Entity at risk
(a) Listed issuer
(b) A listed issuer's subsidiary, which is not listed on a foreign/local stock
exchange
Covers subsidiary of subsidiary -> All the way down the chain of
subsidiaries
(c) A listed issuer's associated company ("target associated company")
provided that
The listed group, or the listed group and its interested person, is
the largest shareholder; and
It is not listed on a foreign/local stock exchange
o 904(4)(a): In the case of a company, "interested person" means
(i) A director, chief executive officer, or substantial shareholder, of the
listed issuer
A substantial shareholder either
Holds directly or indirectly 15% or more the voting shares of the
company; or
In fact exercises control over the company
(ii) An associate of any such director, chief executive officer, or
substantial shareholder.
o Rule 904(5): interested person transaction means a transaction between an
entity at risk and an interested persons
o
Rule 909: the value of a transaction is the amount at risk to the issuer. This is
illustrated by the following examples:
(1) In the case of a partly owned subsidiary or associated company, the value of
the transaction is the issuer's effective interest in that transaction;
(2) In the case of a joint venture, the value of the transaction includes the equity
participation, shareholders' loans and guarantees given by the entity at risk; and
(3) In the case of borrowing of funds from an interested person, the value of the
transaction is the interest payable on the borrowing. In the case of lending of
funds to an interested person, the value of the transaction is the interest payable
on the loan and the value of the loan.
(3) The rationale for, and benefit to, the entity at risk.
(4)
(a) A statement:
(i) whether or not the audit committee of the issuer is of the view that the
transaction is on normal commercial terms, and is not prejudicial to the
interests of the issuer and its minority shareholders; or
(ii) that the audit committee is obtaining an opinion from an independent
financial adviser before forming its view, which will be announced
subsequently.
(b) Transactions that satisfy Rule 916(1), (2) and (3) are not required to comply
with Rule 917(4)(a).
(5) The current total for the financial year of all transactions with the particular
interested person whose transaction is the subject of the announcement and the
current total of all interested person transactions for the same financial year.
(6) Where the issuer accepts a profit guarantee or a profit forecast (or any covenant
which quantifies the anticipated level of future profits) from the vendor of
businesses/assets, the information required in Rule 1013(1). The issuer must also
comply with Rule 1013(3).
Thanakharn Kasikorn Thai Chamkat (Manachon) v Akai Holdings, FACV No. 16 of 2009
and FACV No. 9 of 2010, 8 November 2010
o Corporate benefit:
Mr Ting clearly owed a fiduciary duty to Akai, which he equally plainly
breached when he intentionally, indeed dishonestly, purported to
commit Akai to the Switch Transaction, without its authority or knowledge,
for the benefit of Singer NV
The effect of the Switch Transaction was, at least on the face of it, as
follows
Akai took on a liability to the Bank for US$ 30m, which it had to
repay with interest in a years time, which liability was secured by
the pledging of a large proportion of the shares in Akais chief
operating subsidiary
In return, Akai got nothing: the US$ 30m was immediately used to
pay off the liabilities of another company, Singer NV, which
(whether directly or indirectly) neither owned nor was owned
by Akai, albeit that they shared the same parent: the two
companies were neither subsidiaries nor affiliates
The transaction was of obvious and very substantial benefit to
Singer NV (even on the assumption that Akai became subrogated
to Singer NVs liability to the Bank)
It was also of obvious and very substantial benefit to the Bank: for
no cost to itself, it gained an apparently financially strong borrower
and excellent security in place of a weak borrower, already in
default, with security of almost negligible value
Although the largest shareholder in both Akai and Singer NV was STC
Canada, the majority of the shareholders in Akai (and, if it is relevant,
which I doubt, half of the shareholders in Singer NV) were members of
the public, who had no apparent interest in using a substantial
amount of Akais money to prop up the ailing Singer NV
That is not only significant in itself, but (as was stated in
the Akai Credit Application) Akai was listed on the Hong Kong
Stock Exchange, and its Rules required the Switch Transaction
to be disclosed to the Stock Exchange authorities, as it was an
arrangement between connected persons, and the Stock
Exchange would probably have required shareholder approval,
as well as main Board approval, so far as Akai was concerned
In addition, the very person who was purporting to represent Akai, Mr
Ting, was in an obvious position of conflict, given his very substantial
interest in STC Canada and his management responsibilities for both
Singer NV and Akai
To appreciate this conflict did not require any nuanced
understanding of Akais bye-laws or of company law Mr Tings
conflict must have been obvious to any banker reviewing
the Akai Credit Application
But, over and above this, arts 103 and 104 of Akais bye-laws,
which the Bank had obtained in connection with the
transaction, made it clear that he should not have been
involved with the decision to enter into the Switch Transaction,
owing to his conflicted position.
3. ATTEMPTS AT REFORMS
UK has looked at the issue relating to whether it is feasible to replace the current regime
with a separate regime governing corporate groups. However it was ultimately rejected.
o Company Law Review Steering Group, Modern Company Law for a Competitive
Economy: Final Report of the Company Law Review Steering Group (DTI, URN
01/942 and 01/943, July 27, 2001), paras 8.23-8.28.