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Company Lecture 1: The Consequence of Incorporation

1.1. The principle of separate legal entity

ss. 17 – Formation of company


ss. 19 – Registration and incorporation

1.2. The principle of limited liability


1.3. Lifting the Corporate Veil
1.3.1. Statutory veil piercing the CA
1.3.2. Judicial veil piercing

S 19 (5) CA
• The company is a body corporate with the powers of an incorporated
company;
• It may sue and be sued in its own name;
• It has perpetual succession;
• It may own land;
• The liability of the members may be limited

An incorporated association has a legal personality of its own apart from the
persons who comprise it

Advantage of incorporation:

• The company is a distinct legal entity with rights and duties independent of
those possessed by its SH, D and employees – it is a legal person
• Business conducted in the name of the registered company is separate from
the personal affairs of the human beings who act for the company, and
separate from the affairs of any other business that those human beings may
conduct on behalf of any other company

Salomon v Salomon & Co. Ltd [1897]

Facts
• Salomon converted his existing, successful business into a limited company
of which he was the MD.
• S valued his business at 39,000 pounds (an honest but optimistic evaluation)
and received from the company, in discharge of this sum, a debenture ( an
acknowledgement of debt) and 20,001 1 pounds shares out of the issued
capital of 20,0007.
• S’s wife and 5 children each held one of the remaining issued shares as his
nominee ( 7 being the minimum number of SH at that time)
• The company went into insolvent liquidation within a year with no assets to
pay off the secured creditors.

Issue
• Was S was liable for the company’s unpaid debts?
Judgment
• CA
o Held he was liable to indemnify the company against its losses

• HL: Reversed CA’s decision


o Held that the company had been properly formed and was a legal
person in its own right, separate from S, notwithstanding his dominant
position within the company.
 ‘The company is at law a different person altogether from the
subscribers to the memorandum and the company is not in law
the agent of the subscribers or trustee for them’
o Incorporation of the company created a separate legal person.
o Even though the business of the company was the same as before
and the same persons managed the business and the same hands
received the profits, the company was not an agent or trustee for the
members. The members were not liable in respect of the company’s
obligations.
o The company was not an agent or trustee for the members. The
members were not liable in respect of the company’s liability. S’s
liability was to be determined solely be reference to the CA

Basis of decision
• Lord Halsbury LC: A company is a creature of statute and what was done by
S was within the intention of the legislature as manifested by the statute.
• Thus, while organizationally and operationally the business was solely
managed by S, in law he and the company were separate persons. This
separateness is an incident of the incorporation of a company, even if one
person effectively owns and controls it.

Foss v Harbottle (1843)

Macaura v Northern Assurance Co Ltd [1925]

Facts
• Macaura owned an estate in Ireland. He sold all the timber on the estate to a
company, Irish Canadian Sawmilll Ltd.
• All the shares in the company were owned by him or by his nominees. He
was also a substantial creditor of the company.
• M insured the timber that he sold to the company in his own name. 2 weeks
after effecting the insurance, the timber was destroyed in a fire.
• M put in a claim and the insurance company refused to pay.

Judgment
• HL supported the insurance company
o When M sold the timber to the company, he gave up his interests in it.
He had no interest that he could insure.
o The insurance was thus void for want of an insurable interests and the
insurance company had no obligation to pay.
Basis of decision
• Once a person sells or gives property to a company, he has parted with his
interest in that property. The property becomes the company’s, not his any
longer.
Re Application by Yee Yut Ee

Vita Health Laboratories Pte Ltd v Pang Seng Meng

Pre-Incorporation contracts
• The position at common law has been replaced by ss. 41 CA.

Statutory modification : ss. 41 CA

Ratification by company of contracts made before incorporation


41. —(1) Any contract or other transaction purporting to be entered into by a
company prior to its formation or by any person on behalf of a company prior
to its formation may be ratified by the company after its formation and
thereupon the company shall become bound by and entitled to the benefit
thereof as if it had been in existence at the date of the contract or other
transaction and had been a party thereto.
[10/74;13/87]

(2) Prior to ratification by the company the person or persons who purported
to act in the name or on behalf of the company shall in the absence of
express agreement to the contrary be personally bound by the contract or
other transaction and entitled to the benefit thereof.

Form of contract
(3) Contracts on behalf of a corporation may be made as follows:

(a) a contract which if made between private persons would by law be


required to be in writing under seal may be made on behalf of the corporation
in writing under the common seal of the corporation;

(b) a contract which if made between private persons would by law be


required to be in writing signed by the parties to be charged therewith may be
made on behalf of the corporation in writing signed by any person acting
under its authority, express or implied;

(c) a contract which if made between private persons would by law be valid
although made by parol only (and not reduced into writing) may be made by
parol on behalf of the corporation by any person acting under its authority,
express or implied,

and any contract so made shall be effectual in law and shall bind the
corporation and its successors and all other parties thereto and may be
varied or discharged in the manner in which it is authorised to be made.
Judicial veil piercing
1. Giving effect to legislative purpose behind a statute
2. Company employed as agent nominee of its controllers (Agency)
3. Façade or sham that conceals true state of affairs
4. Fraud and or evasion of legal obligations
5. “Single economic units”/ Group companies
6. Interest of others
7. A consistent principle

1. Consistent with statutory provisions

Because statutes are drafted with individuals interests (and not


corporations) in mind, doubt usually arises as to whether a
corporation is entitled to benefit from certain rights or should be
subject to certain liabilities. Courts may go behind corporate veil to
give effect to legislative intention

Re FG(Films) Ltd (High Court, England)

Facts:
• 90% shares  A, an American
• 10% sgares  B, a Briton
• The company had no business premises apart from its registered office, no
employees. Company made a film called ‘Monsoon’. By an agreement
between the company and an FGI (an American company), FGI was to
provide finance and all the facilities necessary to make the film. The company
then sought to register ‘Monsoon’ as a British film under Cinematograph Film
Act 1938-48.

Judgment:
• Board of Trade  Declined to register the film as British because FGI was in
reality, the maker of the film
• High Court  Affirmed BT’s refusal.
• Vaisey J: The Company were not the makers of the film, and that it
was not a British film. The company’s intervention in the matter was
purely colourable. They were brought into existence for the sole
purpose of being put forward as having undertaken the very elaborate
arrangements necessary for the film to qualify as a British film.

Lee v Lee’s Air Farming

Judgment
• A widow received compensation for the death of her husband as an
employee of the company, ( although her was sole governing director and
held 2,000 of the 3,000 shares)

Courts may also consider whether it is within the legislative purpose of the statute to
treat the company as being separate from its members  the ‘purposive approach’
• It is only necessary for the court to find that the legislative purpose requires
the separateness of the company to be ignored to the extent required by
legislative intent.

Re Bugle Press Ltd ( CA, England)

Facts:
• Bugle Press total shares: 10,000
o Shaw – 4,500 shares
o Jackson – 4,500 shares
o Trelby – 1,000 shares
• Shaw and Jackson wanted to buy over Trelby’s shares  they incorporated a
company called Jackson & Shaw Holdings. Holdings made an offer to
purchase all the shares of Bugle Press.
o Shaw and Jackson of course accepted. Trelby declined.
• Holdings purported to invoke ss. 209 UK Companies Act 1948 to acquire
Trelby’s holdings.
o ss.209 : provided that if a company had acquired 90% or more of the
shares of another company, it could compulsory buy out the remaining
10%.
Judgment:
• CA  Declined to allow Holdings to take advantage of the section to
expropriate Trelby’s shares.
o Lord Evershed MR: Although the strict terms of the section had been
complied with, nevertheless the scheme would not be approved as the
section had been used ‘not for the purpose of any scheme…
contemplated by the section, but for the quite different purpose of
enabling minority SHs to expropriate or evict the minority.’

2. Agency

A company may act as an agent for another. When the company acts as an agent for
its members/controller, the principals are liable for the company’s acts on normal
agency principles. Such liability is not based on lifting of the corporate veil.

Smith, Stone & Knight Ltd v Birmingham Corporation (High Court, England)

Facts:
• Birmingham Waste Co. (The waste company) carried on business as waste
paper merchants in certain premises belonging to Smith, Stone and Knight
Ltd (Smith)
• The waste company was a subsidiary of Smith that held 497 of 502 shares,
the remainder 5 shares were held by directors of Smith who were also
directors of the waste company.
• Birmingham Corporation subsequently acquired the premises.
• Under relevant legislation, an owner-occupier was entitled to compensation,
but a mere tenant was not  Smith put in compensation claim.
o Birmingham Corporation refused to grant compensation, claimed that
in law Smith and the waste company were distinct entities.
• Transpired  although waste company was apparently carrying on business,
the business was owned by Smith. There was no agreement made between
the 2 companies, nor was anything done to transfer beneficial ownership of
the business to the waste company.
o Waste company had no staff. Books were maintained by Smith
• Waste company never declared dividends and their profits were treated as a
part of Smith’s profits.

Judgment:
• The subsidiary carrying on business on property of a holding company was
held to be the holding company’s agent  entitling it to compensation.
• Atkinson J: It was well settled that the mere fact that a person owns all the
shares in a particular company does not make the business carried on by that
company his business.
o He was satisfied that on the facts the waste company was a ‘tool or
simulacrum’ of Smith; accordingly held that the occupation of the
premises by the waste company amounted to occupation by Smith,
and that the business was Smith’s.

Implicit agency
• Important to remember that if the company running the business is so grossly
undercapitalized that it could not run the business independently ( i.e. no
staff, no office, or assets)  courts can draw an inference that it is acting as
an agent or nominee for its controller when it enters into a contract.
• Because a relationship of agency can only arise out of consent or agreement
of the principle/agent  the absence of such consent or agreements is fatal
to a claim of agency
o The intention of the company and its alleged agent is therefore crucial

3. Façade or Sham that conceals true state of affairs

The Saudi Al Jubail Admiralty

Facts
• The Plaintiff entered into a charterparty with Cargo Carriers Ltd (CCC) in
respect of the plaintiff’s vessel (The Fidelity)
o Charterparty: A written contract between the owner of a vessel and the one (the
charterer) desiring to empty the vessel setting forth the terms of the arrangement, i.e.,
freight rate and ports involved in the contemplated trip.
• The plaintiffs arrested The Saudi Al Jubail in a sister-ship action. To
succeed, Plaintiffs had to show that the charterer of The Fidelity was the
beneficial owner of The Saudi Al Jubail.
o Sister-ship action: the arrests of another ship belonging to the same owner.
• The Saudi Al Jubail was apparently owned by Omega Shipping Co Ltd (OSC)
• The plaintiffs alleged that both CCC and OSC were controlled by one Orri.
• However as it transpired, CCC did not actually exist

Judgment
• Lai J: Orri ran a group of companies which he used as a front for his
activities. He picked such corporate entities within the group as were suitable
for whatever purpose he had in mind. He did not keep the companies
separate from one another or from his own personal affairs.
o Orri was therefore the beneficial owner of The Saudi Al Jubail,
notwithstanding that it was nominally owned by OSC.

Win Line (UK) Ltd v Masterpart (Singapore) Pte Ltd

Adams v Cape Industries


• The interposition of a company known as AMC between Cape and CPC was
clearly a façade
o AMC was no more than a corporate name used on invoices, with no
employees on its own
o Cape had no intention of engaging in transactions with AMC, which
had been interposed only to allow Cape’s involvement to be removed.
• This did not affect the lifting of the corporate veil vis-à-vis Cape and CPC
o Test: Whether the corporators have in fact treated the company as
separate from themselves.
 If they have been using the company as an extension of
themselves, it should not be open to them to hide behind its
separate legal personality when that is convenient to them.

Sri Jaya
Kensington International v Republic of Congo
TV Media Pte Ltd v De Cruz Andrea Cruz (para 141 – 145)
New Line Productions, Inc and another v Aglow Video Pte Ltd and others
( para 98-112)

4. Fraud and evasion of legal obligations

Re a Company

Gilford Motor Co v Home

Adams v Cape
Facts:
• Until 1979, Cape Industries, (English company) mined and marketed
asbestos. Its worldwide marketing subsidiary was Capasco (another English
company). It also had a US marketing subsidiary, NAAC (incorporated in
Illinois)
• In 1974, people sued Cape, Capasco, NAAC and others in Texas for
personal injuries arising from the installations of asbestos in a factory.
• Cape protested that the Texas court had no jurisdiction over it but settled the
action in the end.
• In 1978, NAAC was closed down by Cape, and other subsidiaries were
formed with the express purpose of reorganizing the business in USA to
minimize Cape’s presence there for taxation and other liability issues.
• In 1979, Cape sold its asbestos mining and marketing business and therefore
had no assets in USA.
• The C sought to enforce the judgments in England where Cape had most of
its assets. Issue  Whether Cape was present in US jurisdiction by virtue of
its US subsidiary.
• Although Cape itself had no presence in USA, C claimed that it was present
through its subsidiary NAAC. It was found that NAAC was carrying on its own
business and that not of Cape ( even though it was wholly-owned subsidiary)
• Issue: Whether Cape Industries could be regarded as falling under the
jurisdiction of a US court and therefore be subject to its judgment

Judgment
CA:
• Rejected submission that Cape and NAAC formed a single economic
entity
• Declined to lift corporate veil:
o *Quoted with approval* Lord Keith in Woolfson v Strathclyde
Regional Council described this exception as “the principle that it
is appropriate to pierce the corporate veil only where special
circumstance exist indicating that it is a mere façade concealing
true facts.”
o Court looked at the motives of Cape in structuring its US business
through its various subsidiaries  held that although Cape’s
motives were to try to minimize its presence in the USA for tax and
other liabilities, there was nothing wrong with this.
• Slade LJ: ‘We do not accept as a matter of law that the court is entitled to
lift the corporate veil as against a D company which is the member of a
corporate group merely because the corporate structure has been used
so as to ensure that the legal liability in respect of particular future
activities of the group will fall on another member of the group rather than
the D company. Whether or not that is desirable, the right to use a
corporate structure in this manner is inherent in our corporate law.
Basis:
• The principle that a holding company may set up subsidaries in order to
minimize its liabilities has been accepted by SGCA in The Andres Bonifacio
 The legitimacy of setting up ‘one-ship’ companies in order to minimize the
risk of sister-ship actions has been repeatedly affirmed in Spore.

Distinction between Adam v Cape Industries and other cases


Guilford Motor Co v Home
Re A Company
Re Darby
Tiu Shi Kian v Red Rose Restaurant

• in these cases where the veil of incorporation was lifted, the companies were
used to evade existing duties and liabilities and is of improper conduct.
• In Cape Industries case, the corporate structure was set up with a view of
minimizing future liabilities nothing legally wrong!

5. “Single economic units”; group companies

Adams v Cape Industries


Facts
• The case involved a claim in respect of employees of an American subsidiary
of cape Industries to enforce a judgment against the subsidiary in respect of
damages for exposure of asbestos against the UK parent.
• The Claimants made 3 submissions in respect of piercing the corporate veil
between the subsidiary and the parent:
1. The companies were a “single economic unit”
2. The American subsidiary was a façade related to allow the parent to
escape liability
3. The subsidiary was the agent of the parent.

Judgment
• Slade LJ rejected the submissions, submitted  ‘Neither in this class of case
nor in any other class of case is it open to this court to disregard the principle
of Salomon v A Salomon and Co Ltd merely because it considers it just to do
so.’
• ** Groups are able to organize heir affairs so that future or contingent
liabilities will fall on another member of the group rather than the parent.
• This reflected a move away from Re A Company (CA  ‘ In our view… he
cases show that the court will use its power to pierce the corporate veil if it is
necessary to achieve justice’)

DHN Ltd v Tower Hamlets London Borough Council
Facts:
• A group of 3 companies of which only DHN, the parent, carried on a business
as cash and carry on premises owned by a wholly-owned subsidiary. A
second subsidiary ownerd the lorries and vans used by the parent.
• Tower Hamlets London Borough council compulsorily acquired the premises
and denied liability to compensate the parent company for the loss of its
business since the parent only operated under a license as opposed to a
lease.
Judgment
• Lord Denning: The companies should be treated as one and compensation
was payable.