Lifting of the corporate veil

lifting-of-the-corporate-veil

Lifting of the corporate veil

Despite the general rule that the company is a separate legal entity from its members, there are circumstances when the courts are sometimes asked to “lift the corporate veil” and allow claims to be made against certain corporate participants as individuals such as decision-makers for the debts or obligations of the company.

Lord Denning aptly stated that the incorporation of a company does not fully “cast a veil over the personality of a limited company through which the Courts cannot see”.

Despite the aforementioned, the courts have been reluctant to pierce the corporate veil and have indicated that they would exercise such a right sparingly.

Statutory lifting of the corporate veil

A company is a creature of statute and by the same token, there are statutory provisions which permit the piercing of the corporate veil.

Some examples include:

  • if a company carries on business without having at least 1 director who is ordinarily resident in Singapore for more than 6 months, any member who knows that the company is carrying on business in such a manner is liable for the payment of all debts of the company contracted during the period that the business is carried on in such manner with the member’s knowledge;
  • a director of a company may be personally required to refund money to an investor who has suffered loss or damages as a result of false or misleading statements in or omission from the prospectus or the profile statement, even if the director (unless otherwise specified) were not involved in the making of the false or misleading statement or the omission themselves;
  • where dividends are paid to the shareholders of a company when there are no available profits out of which to pay them, the director and the CEO who wilfully pays or permits the payment of such dividends shall 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;
  • if in the course of a winding-up it appears that the business of a company has been carried on with the intent to defraud creditors or for any fraudulent purpose, the court, on the application of the liquidator, may declare that any persons who were knowing parties to the fraud are liable to make such contributions (if any) to the company’s assets as the court thinks proper;
  • if in the course of a winding-up, it appears that an officer of a company who was party to the contracting of debt had no reasonable expectation that the company would be able to pay the debt, the court may declare that the officer be liable for the payment of the whole or part of the debt; and
  • where an officer of a company signs or authorizes the signing of any bill of exchange, promissory note, cheque or order for goods on behalf of the company and where the company’s name is not mentioned in legible characters, that officer is personally liable to the holder of the document if the company defaults.

Power of the court in lifting the corporate veil

There are various justifications at common law to lift the corporate veil — for example, the company is in fact not a separate entity (which requires evidence) and the corporate form was abused to further an improper purpose and not for a bona fide transaction.

Where a company is employed to allow a person to evade his/her legal obligations

The courts may ignore the existence of the corporate veil when the corporate form is used to avoid an existing legal duty. 2 classic cases often cited in support of the separate legal entity exception are Gilford Motor Co Ltd v Horne and Jones v Lipman.

In Gilford Motor Co Ltd v Horne, Mr Horne was employed as Managing Director of Gilford Motor.

He had agreed to a non-compete clause in his employment contract which was to prevent him from leaving Gilford Motor and setting up a business in competition with it. Under the contract, he was subject to a contractual agreement not to solicit customers of Gilford Motor.

After his resignation as Managing Director of Gilford Motor, he set up a business in competition with Gilford Motor.

The only shareholders of the new company were Mr Horne’s wife and one of his business associates and Mr Horne ran the company. Gilford Motor argued that the Court should pierce the corporate veil to recognise the person behind the new company and to treat the company and Mr Horne as being bound by the non-compete clause in the contract.

The Court found that the company had been formed for the sole or dominant purpose of avoiding the non-compete clause.

In Jones v Lipman, Mr Lipman entered into a contract to sell land to the plaintiffs. Before the sale was completed, Mr Lipman transferred the land to a company controlled by him to put the land beyond the reach of the purchasers. The purchasers were thus unable to compel Mr Lipman to effect the transfer because the land had been transferred to a third party — the company.

The court pierced the corporate veil and treated the contractual obligation to transfer the land as binding on the company. The court took the view that the company had been used by Mr Lipman as a device to avoid his existing contractual obligations.

Where fraud is committed

Another situation where the courts are likely to pierce the corporate veil is when the corporate form is used to perpetrate fraud or a wrong.

A person will not be permitted to commit a wrong through a company that he controls and then asserts that it is the company and not the controllers that are to bear the responsibility for the wrong.

In Siang Hoa Goldsmith v The Wing On Fire & Marine Insurance Co Ltd, the appellant appealed against the High Court’s decision dismissing the appellant’s claim against the respondent under an insurance policy.

Under the policy, the respondent agreed to indemnify the appellant for loss or damage arising from any cause whatsoever except those caused by fraud, dishonesty or dishonest deception committed by inter alia, any of the appellant’s customers or any customer of the appellant’s broker.

The respondent granted an extension of the policy to include a one-off overseas sending of one carton of jewellery to Miami by British Airways under an air waybill. British Airways released the goods against a forged letter of indemnity purportedly issued by Capital bank.

The goods were acknowledged and received by one Samuel Lustig who ordered them from the insured.

The goods were not paid and Capital bank returned all original shipping documents to the appellant’s bankers in Singapore. The Court of Appeal held that the exclusion clause was clear and unambiguous — fraud committed by a customer of the appellant was not covered within the policy.

The High Court judge was right in concluding that there was no difference between Samuel Lustig and Italgold, as Samuel Lustig operated Italgold alone and it was appropriate to lift the corporate veil — “… we thought it was appropriate to lift the corporate veil. It was trite that fraud unravelled all, and we could not allow Italgold to be used as a mask to protect Samuel Lustig for all of his dishonest activities.”

Where the company is a sham or façade

The court will also lift the corporate veil where it is shown that the company is being used to enter into what amounts to a “sham transaction” or “façade”.

In Children’s Media Ltd and others v Singapore Tourism Board, the Singapore Tourism Board (STB) entered into a contract with a UK company, Children’s Media Ltd (CM) to stage a mega event and paid CM a total of S$6,155,250 for this purpose.

CM was a wholly-owned subsidiary of another company, ML which was in turn solely owned by an individual, AH. AH was at all times a material director and CEO of both CM and ML.

The court held that AH had no intention to stage the event in Singapore when he entered into the relevant agreement in the name of CM.

The court was also satisfied that AH more than fully appreciated that the moneys paid to CM were for a very specific purpose and that there was an unequivocal obligation to refund the moneys in full to STB if the event was not staged.

Furthermore, the court found that AH had dealt with the company’s assets as his own and the company was a mere puppet.

As such, the Court of Appeal held that AH should be liable to refund the sums to CM.

Where the company is the alter ego of the controller of the company

There have been several Singapore cases where the court has been asked to lift the corporate veil because it is alleged that the company is being used as its controllers’ alter ego to conduct business.

In Alwie Handoyo v Tjong Very Sumito and another and another appeal, the court lifted the corporate veil and held that the sole shareholder and director of a company, Alwie, was personally liable to repay sums which the company OAFL was held to be liable for on the grounds that Alwie was OAFL’s alter ego.

Whether the corporate veil should be pierced because the controllers are a company’s alter ego depends on whether or not the company is carrying on the business of its controllers. Strong evidence of this would be where the controllers do not make any distinction between the company and themselves in relation to the business being carried on.

Matters such as the purpose for which the company was set up, whether or not there was proper separation of funds and accounts between the company and its controller and the degree to which the controller controlled the business of the company would be relevant considerations.

However, the mere fact that a person controls a company is not sufficient to make the company an agent of the person.

Where companies in a group are run as a functional whole

Although the general rule is that each company in a group is a separate entity, it is arguable that in certain situations, a group of companies may be considered as a single unit.

In the High Court case of Simgood Pte Ltd v MLC Shipbuilding Sdn Bhd and Ors (Simgood Pte Ltd), it was argued by the Plaintiff that the “functional unity” between the MLC companies justified piercing the corporate veil.

On the facts of the case, the court held that the evidence relied on by the Plaintiff was insufficient to show “functional unity” and therefore did not pierce the corporate veil. However, the court did not expressly reject the idea of regarding the group of companies as a single unit.

The fact that the court in Simgood Pte Ltd neither acknowledged nor denied this notion suggests that it may lift the corporate veil if it can be shown that there is functional unity among the companies within the group, such as unity of ownership and unity of control.

Where it is necessary to give effect to the legislative purpose of a statute

The courts have lifted the corporate veil to look at the underlying commercial reality in order to prevent evasion of taxing statutes, or social or administrative legislation, or to identify enemy shareholders wearing the corporate mask.

The court will use its powers “to pierce the corporate veil if it is necessary to achieve justice irrespective of the legal efficacy of the corporate structure under consideration” (per Cumming-Bruce LJ in Re a Company).

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