1.

Consequence of Incorporation
1. Separate Legal Entity Although the Companies Act does not specifically provides for the creation of a separate legal entity for a registered corporation, nevertheless, the whole scheme of the Act is predicated upon the companys separate existence. **Salomon v. Salomon & Co Ltd [1897] AC 22 [Seminal Case] o Lord Macnagthen at 51: The company is at law a different person altogether from the subscribers; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. o **Also clarifies that the company is neither a trustee nor agent of the shareholders clear distinction between the parties and it owners.

Rationale for the doctrine of separate legal personality a. Facilitates Investment o Certain types of business that required large infusions of capital (eg building of infrastructure or banks) thus there were advantages to allow investors to put in their surplus cash to support this endeavors (and would have no say how this company was managed). o Provides them with the protection that all that they stand to lose is the amount that they invest into the company removes the fear that if the business turns sour, they would be hurt financially. b. Reduces the cost of capital o If liability were unlimited, shareholders would have to spend more time and money monitoring those who manage the company since the consequences of the companys insolvency would be disastrous to shareholders. o Shareholders would also have to do the same with respect to other shareholders who might unfairly dispose of their assets. o Encourages specialized management. This in turn might be good for the company because specialized management runs the company, and the management might be made up of experts.

2. Incorporation of a Company a. Obligation to incorporate S. 17, CA: The obligation to incorporate. o S. 17(3), CA: A business organisation that has more than 20 members must be incorporated as a company. o S. 17(4), CA: But this requirement does not apply to partnership of persons carrying on a profession (e.g. lawyers, accountants) [Exception] as they are regulated by other legislation. Outcome of Contraventio: Contravention of the provision is illegal. o Transactions entered into by the company remains tainted. o Rights of partners inter se will not be enforced by the court. o Soo Hood Beng v. Khoo Chyn Neo as ratified by Tan Teck Hee v. Cheng Tiew Peng.

b. Incorporation Process s. 17, CA: Formation of incorporated company o s. 17(1), CA: Subject to the provisions of this Act, any person may, whether alone or together with another person, by subscribing his name or their names to a memorandum and complying with the requirements as to registration, form an incorporated company. s. 19, CA: Any person may, upon lodgement of the requisite documents and payment of the prescribed fee, register a company in Singapore. o S. 19(1), CA: Mandatory documents to be lodged are the Memorandum of Association and Articles of Association. o S. 19(4), CA: Registrar will issue a notice of incorporation stating that the company is, from the date specified in the notice, incorporated and the type of company it is (limited/unlimited, private/public).

c. Effects of Incorporation s. 19(5), CA: Effects of Incorporation will be able to exercise all functions of an incorporated company: o [1] Capacity to sue and be sued. o [2] Perpetual succession. o [3] Power to hold land and property. o [4] Liability on the part of members to contribute to the assets of the company in the event of winding up.

1) Body Corporate o The actions taken by the company are not binding upon its shareholders as the company is neither the agent or trustee of the shareholder (see Salomon) o The actions of the company are separate from its shareholders. 2) Able to sue and be sued o The Rule in Foss v Harbottle / Proper Plaintiff rule No member can arrogate himself to the companys cause of action o Foss v. Harbottle (1843) 2 shareholders sued the companys directors alleging a misuse of companys funds. HELD: Claim dismissed. Proper plaintiff to commence the action is the company in its corporate character because the company itself suffered the loss. Plt has no authority to sue on the companys behalf unless he was specifically authorised to do so.

3) Ability to own property o Once a person sells or gives property to a company, he has parted interest in the property. No longer has any locus standi with respect to the property. o Holding company has no interest in the property of its subsidiary and cannot bring an action to enforce rights properly belonging to its subsidiary. o Bowman v. Secular Society Ltd (1917) Bequeathed possessions to be held on trust for D. Appellants argued that the incorporated objects in D were against public policy (against Christianity) and hence, Ds incorporation was illegal. HELD: Certificate of registration is conclusive evidence that the organisation was lawfully authorised. Thus a company can fully own property in its own right.

Macaura v. Northern Assurance Co Ltd (1925) Plt (member of company) sold a pile of timber to his company and took up insurance to insure the timber against fire. Timbers burnt down and P claimed the policy. HELD: Claim dismissed. Property of the company belongs to the company and not to its members, even when the member effectively controls the company. Neither a member nor creditor (unless a secured creditor) has an insurable interest in the assets of the company. Only the company can claim the insurance money, not the member.

4) Limited Liability of Members o Directors and members would only be held to be personally responsible in instances of fraud. o Re Application by Yee Yut Ee (1978) liability of members for debt. Company was ordered by the Industrial Arbitration Court to pay retrenchment benefits to the retrenched staff. When the company failed to comply with the order, the court made an order that the companys directors be personally liable to pay the retrenchment benefits. HELD: Courts order quashed. Except in cases of fraud, breaches of warranty of authority and other exceptional circumstances, a director is not liable for the debts of an incorporated company, they are separate at law. No one would ever volunteer to be a director of an incorporated company if he or she was to be held liable in law for the debts of the company. **Vita Health Laboratories Pte Ltd v. Pang Seng Meng (2004) HELD: In cases involving fraud, the liability of the members of the company is not limited, and can extend to directors and members to be personally liable. V K Rajah: A company provides a vehicle for limited liability and facilitates the assumption and distribution of commercial risk. Undue legal interference will dampen, if not stifle, the appetite for commercial risk and entrepreneurship. Rights go hand in hand with responsibilities and ordinary norms of commercial morality must be observed. The lack of commercial probity will attract a variety of consequences both civil and criminal."

5) Perpetual Succession o This means that until dissolved or wound up, the company continues notwithstanding any change of its members. Membership in the company can be passed on but not directorship (elected). o Re Noel Tedman Holdings Pty Ltd [1967] QdR 561 (Qld Sup Ct) The company has only 2 shareholders cum directors, a husband and wife. Both died in an accident and only an infant child survived. While all the shareholders and directors are dead, the company still existed. The articles required the approval of the directors before the shares could be transferred under the will of a deceased member. There were no directors. While this issue is normally resolved by the appointment of new directors via a vote by the members, there were no members as well. Held: The Court allowed the personal representatives of the deceased members to appoint the directors, so that these new directors could assent to the transfer of the shares to the beneficiary.

d. Advantages and Disadvantages of Incorporation Advantages: o Incorporation helps companies to raise capital through shareholders investment. o Reduce costs of capital. o Also helps to aggregate supply and demand efficiently. Disadvantages: o Incorporation allows separate legal personality and limited liability such that managers of the company have no stake and can manage it recklessly since they do not have to be liable to guarantee its debts. Mitigated somewhat by directors (fiduciary) duties! o Opportunity costs of incorporation include the severe restrictions in the Companies Act. Companies cannot deviate from the structures and obligations imposed by the CA. e. Effect of Incorporation on Contracts i. Position at Common Law Contracts before incorporation cannot be made by the company or its agents, since there is no principal in existence. A company is not bound by a contract made before its incorporation. Nor may the company ratify and adopt such a contract. o Kelner v. Baxter (1866) Contracted where P sold goods to a company that was not yet incorporated and was accepted by D, who was a would-be director of the company. Company collapsed and P sued D for payment. HELD: D personally liable. There was company for the principle of separate legal entity to work. Ratification must be done by an existing person. If company later ratifies, it is considered a new contract. Newborne v. Sensolid (GB) Ltd (1954) P to sell goods to D on behalf of a limited liability company that he was about to form. D refused goods and P sued for breach of contract. HELD: No claim. Company was not in existence at the time the contract was signed. Such contracts cannot be enforced by the company since it wasnt formed yet. ii. Statutory Modification (Present Position) S. 41, CA: Any contract or other transaction purporting to be entered into by a company prior to its formation or by any person on behalf of a company prior to its formation may be ratified by the company after its formation and thereupon the company shall become bound by and entitled to the benefit thereof as if it had been in existence at the date of the contract or other transaction and had been a party thereto. o S. 41(2), CA: Prior to ratification by the company the person or persons who purported to act in the name or on behalf of the company shall in the absence of express agreement to the contrary be personally bound by the contract or other transaction and entitled to the benefit thereof. **Cosmic Insurance Corp Ltd v. Khoo Chiang Poh (1981) o Resp sued for breach of contracted because he was supposed to be appointed as Managing Director of the company for life. App argued that there was no such contract because the letter was signed prior to the companys incorporation. o HELD: Claim succeeded. Contractual agreement was later ratified by the company after its incorporation and is binding upon the company. S. 2, Contracts (Rights of Third Parties) Act o 3rd parties can enforce a term of a contract if the contract conferred a benefit on him o

3. Principle of Limited Liability a. Introduction One of the main advantages of incorporation and the recognition at law that a company is a person in its own right is that the companys debts are not those of its members. The term limited liability simply means that the full extent of the members loss should the company be unable to pay its debts is limited to the amount that the member has paid or must pay for the shares allotted to or purchased by the member. b. Advantages of Limited Liability Facilitates the mobilization of capital and savings o Allows a person to invest with the knowledge that should the company fail he is not financially ruined because the creditors of the company cannot claim against his personal assets. Per VK Rajah in Vita Health Laboratorys case: a company provides a vehicle for limited liability and facilitates the assumption and distribution of commercial risk. Reduces the cost of capital as well as broadens companys access to funds o Without limited liability, investors would require a higher payout to offset the risk of personal liability and company might rely more on debt financing (which requires regular interests payment; repayment within period or even on demand) o If the company had to borrow from the banks, they would have to pay interest regardless of profits and if it gets investment, it need only payout the profits if there are any. Reduces cost of monitoring management and other shareholders o Shareholders would spend more time and money monitoring the management since the consequences of unlimited liability is severe. Encourages people to diversify their investments o Diversification in many different companies (basically not putting all your eggs into one basket) reduces commercial risk

4. Piercing the Corporate Veil Atlas Maritime Co. SA v. Avalon Maritime Ltd (No. 1) [1991] 4 All ER 769 at p779 o To pierce the corporate veil is an expression that I would reserve for treating the rights or liabilities or activities of a company as the rights or liabilities or activities of its shareholders. To lift the corporate veil or look behind it, on the other hand, should mean to have regard to the shareholding in a company for some legal purpose. Section No.

a. Statutory Veil Piercing under the Companies Act Provision Signing or issuing without company name Where a person signs, issues or authorizes the signing or issue of certain instruments on which the companys name does not appear properly (liable to the holder of the document for the amount due, unless the company pays upon the instrument) No reasonable expectation of debts being paid* Where debts are contracted when there is no reasonable or probable expectation of debts being paid (liable for the payment of the debt) Responsibility for fraudulent trading* If the business has been carried out to defraud creditors or a fraudulent purpose, the court may declare person with such knowledge to be personally liable.

s. 144(2)(c)

s. 339(3) read with s. 340(2)

s. 340(1)

Paying dividends without available profits* A director or manager who willfully pays or permits payment of dividends when there are no available profits is liable to the creditors for the amounts of debts due to tem to the extent that the dividends exceeded the available profits. False and misleading statements Fraudulently inducing persons to invest money Frauds by officers

s. 403(2)(b)

s. 401 s. 404 s. 406

Note: Duties and liabilities under other legislative and regulatory regimes, e.g., Income Tax Act, Residential Property Act and Securities & Futures Act **Residential Property Act if you are a foreigner, you cannot buy certain classes of property (apartment that are low lying and landed property). If you form a company in Singapore, it would be a Singaporean identity and thus can purchase property. But in this case, the courts will look beyond the corporate structure and look at the shareholders. o The law looks at the substance rather than form. Would not allow them to do things that they wouldnt have been able to do it anyways.

b. Judicial Veil Piercing (Case Law) i. Purposive Interpretation of Statutory Provisions Where in the absence of clear express words, a purposive construction of the statutory provision (implied purpose) leads to the conclusion that such must have been the intention of Parliament. Re FG (Films) Ltd (1952) o P, company wanted to register film as a British film in UK but the company had no business premise except for its registered office. o HELD: Registration denied because P did not satisfy s. 25(1) of the required legislation. o Company was brought into existence for the sole purpose of being put forward as an agent to qualify the film as a British film. Company was not maker of the film thus court can go behind the corporate veil in order to give effect to the legislative intention of the statute. Lee v. Lees Air Farming Ltd (1961) o Issue was whether the wifes deceased husband (who was owner of company) fell within the purpose of the New Zealands Workers Compensation Act. o HELD: Statute did not prohibit the dual capacity of the husband of both the employer in the company and its only employee. Re Bugle Press Ltd (1961) o Majority held 90% of the shares in a company and incorporated a new company to purchase the shares of the original, so as to invoke s. 209 of the UKs Companies Act to force the compulsory buy out of the remaining 10%. o HELD: Claim denied. Although the strict terms of the statutory provision had been complied with, the statutory scheme was not envisioned to get rid of minority shareholders. Hence, lifted the corporate veil, decided that the company was in fact the majority shareholders, and claim failed.

ii. Agency (Not a true exception) If the legal relationship of agency exists between 2 persons (the principal and the agent), the principal is responsible for whatever the agent does within the scope of the agency. o This agency is implicit rather than expressly created. o It may be inferred from the circumstances of the case e.g. company was grossly undercapitalised (no office, no staff, no assets) such that company could not have run the business independently.

If the company is acting as the agent of a person, then the person will be fully liable for the whole loss and will not be protected by the principle of limited liability. o Smith, Stone & Knight Ltd v. Birmingham Corporation (1939) Waste company was a subsidiary company to P. D tried to compulsory purchase the companys land and P sued for compensation. D argued that P did not actually own the land. HELD: P entitled to compensation from D because the subsidiary waste company was his agent. **Adams v. Cape Industries plc (1990) P sued D for personal injuries inflicted by Ds subsidiary companies through asbestos poisoning. HELD: No claim. There was no agency in this case. Each subsidiary was carrying on business on its own even though the group was in fact a single economic entity. Courts will not lift the corporate veil on the basis that D validly and legitimately partitioned its legal liabilities through forming subsidiaries. The corporate structure can be legally used to minimise legal liability.

iii. Faade, sham or alter ego that conceals the true state of affairs General Rule: The corporate veil should be lifted on the basis that the company is a sham or faade only where a person uses a company as an extension of himself and makes no distinction between the companys business and his own, i.e. small closely-held private companies that operate like sole proprietorship/partnership or one-ship companies. **Tjong Very Sumito v Chang Sing Eng (2012) SGHC o [67] In general, there are two grounds to lift the corporate veil, (a) improper use of company (to avoid legal liability), and (b) when the company is in fact not a separate entity. Proper inquiry sham or faade: Whether the company was functional or mere faade/sham to disguise the true nature? o Type of faade 1: Whether the company was used to avoid existing or future liability? Adams v Cape, Kensington Intl (see table below) o Type of faade 2: Whether the company was an extension of self (controlling mind and will)? TV Media, New Line Productions, Saudi Al JuBail (NOT ALLOWED) Suggested test (in Adams) is whether the incorporators had in fact treated the company as separate from themselves if they had been using the company as an extension of themselves, they should not be allowed to convenient hide behind its separate legal personality. The Saudi Al Jubail (1998) [extension of self] o P arrested The Saudi in a sister-ship action against its owners and proved that the charterer of Ps ship was the owner of The Saudi. o HELD: Veil lifted. Owner formed the company to charter the ship and used it as a front for his activities. The owner also did not keep the companies separated from one another or from his own personal affairs did not have bank account or any business meetings by directors or any registered offices. Adams v. Cape Industries plc (1990) o P sued D for personal injuries inflicted by Ds subsidiary companies through asbestos poisoning. o HELD: No claim, veil not lifted. Courts will not lift the corporate veil on the basis that D validly and legitimately partitioned its legal liabilities through forming subsidiaries. o Distinction drawn between using the corporate structure to reduce future liabilities (legal), and to reduce existing liabilities (illegal)

Win Line Ltd v. Masterpart (Singapore) Pte Ltd [2000] [SG affirming Adams] o P sued both D and the 3rd party company (who owned the D as a subsidiary) for repudiating a contract to charter a ship. o HELD: Veil not lifted. Prakash J held that the law in this area had not been completely resolved. o [44] But the principle of treating companies within the same group as 1 legal entity cannot be extended to a case where 2 companies have no common shareholders or directors. o **Evaluation (TCH Article): Where a company is used for genuine commercial purposes and not to perpetuate a fraudulent or improper purpose, the courts should be very slow to lift the corporate veil unless there are very exceptional reasons founded on PP to do so. **Kensington International Ltd v. Republic of Congo and Gelcore Energy UK (2005) [Contrast with Adams] o HELD: Court would pierce the corporate veil where transactions or structures which were purely a sham and a faade and had no legal substance were set up with the intention of defeating the existing claims of creditors. Court would deal with the underlying reality and not the mask or creature that was being put forward with the object of deceit or dishonest concealment, and will treat the sham transaction or structures as lacking validity. o Distinguished from Adams avoidance of existing liability is not allowed: the principle is capable of application to a situation where the transactions in question are sham and the coys are utilised for the avoidance of existing liabilities. Sitt Tatt Bhd v. Goh Tai Hock (2009) 2 SLR(R) 44 o P sued D, who was the sole shareholder and director of the company when the company withdrew from the joint venture agreement for the refund of the $1 million payment invested. HELD: Veil not lifted. It was not appropriate for the court to pierce the corporate veil and hold D personally liable for the companys repudiation of the final joint venture agreement. The company had a separate legal personality and there was no evidence that it had been created as a sham or a faade to shield D from responsibility for nefarious transactions.

Directors were the controlling mind and spirit of the company TV Media Pte Ltd v. De Cruz Andrea Heidi [2004] SGCA 29 at paras 141-145 o P sued D who was also the principal shareholder and director of a health company. o HELD: Veil lifted. D was clearly the controlling mind and spirit of the company. P committed a series of negligent act in his capacity as director of the company and should not be able to escape from his personal liability through the companys separate legal personality. New Line Productions, Inc and another v. Aglow Video Pte Ltd [2005] SGHC 118 o P sued 4 Ds over copyright of 3 films and sought an injunction. o HELD: Veil lifted. The 4 Ds were the controlling mind and spirit of the company and are therefore personally liable for the infringing of the copyrights.

Existing liability Illegitimate use to avoid existing liability: Kensington Intl NOT ALLOWED

Anticipated liability Issue: Company incorporated to avoid foreseen and anticipated liability Distinction between future and anticipated liability: (1) foreseeability and (2) bad faith to regulate liability coheres with policy o Where a facade was alleged, the motive of the perpetrator may be highly material: Adams v Cape. o Where the purpose of the arrangement was to achieve an objective that did not involve fraud or impropriety, the court would not lift the veil: Adams v Cape o Higher social costs creditors sacrificed for mistake of company Counter-arguments: distinction too arbitrary, interferes with business efficacy Conclusion: Where it is highly foreseeable (i.e. specific and identifiable liability but yet to mature) that there might be liability and the corporate structure was relied upon to avoid that liability, corporate veil should be pierced.

Future liability Legitimate use of corporate structure (must be an objective that did not involve fraud or impropriety): Adams v Cape ALLOWED

iv. Fraud and/or abuse of the corporate form Where there has been an abuse of the corporate form, the privilege of incorporation should be lifted aa instead of using the company to bona fide run a business, the companys existence was for fraudulent purposes, that often involves some degree of dishonesty/lack of moral probity. Must be differentiated from persons who act through a company to avoid future legal obligations not a ground for lifting the corporate veil! Abuse of Corporate Form (to evade existing legal obligations) Gilford Motor Co v. Horne (1993) [Back to Salomon] o D was employee of P and entered into a non-compete clause but later incorporated a company to solicit Ps customers and compete with P. o HELD: Veil lifted. Company was used to evade existing legal obligations (restriant of trade) and concealing liabilities (fraud was involved) equated company and person as the same thing. o Although court lifted the corporate veil, judicial attitude swung back strongly in favour of the Salomon doctrine and held that the court is not free to disregard the principle in Salomon v. Salomon merely because it considers fair to do so. Jones v Lipman o A agreed to sell a property to B, but then eventually changed her mind. So A transferred the company to C. Then when B asked for specific performance of the contract, A responded that he no longer had the possession as it had already been transferred. B argued that since A was the majority shareholder in C, the corporate veil should be lifted and thus the property should be transferred. o Held: Court treated company and vendor as one person and therefore issued relief against the individual and the company. Fraud/Abuse of Corporate Form trying to evade existing legal obligations. o The defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity.

Fraud Trustor AB v. Smallbone (No. 3) (2001) o P sued D, who had incorporated a company to hide funds. o HELD: Veil lifted. Company was used as a device or faade to conceal the true facts thereby avoiding or concealing liabilities of the individual. Gerhard Hendrik Gispen & ors v. Ling Lee Soon Alex & anor (2001) o P sued Ds personally when Ds shell company failed to make payment on goods. o HELD: Veil not lifted. Court upheld the Salomon principle (principle of separate legal entity). There must be fraud or impropriety to make Ds personally liable. On the facts, P knew that the company was a shell company and Ds did not deceive P to the nature of the company.

v. Single Economic Unit and Group of Companies In some cases, separate personalities of companies in a group may be ignored. Most of these cases are dealing with statutory provisions, where the lumping them together as one entity is justified on the basis that it was within the legislative purpose of the respective statutes to treat the group as one entity. There must be functional unity within the group with [1] unity of ownership and [2] unity of control. Hence, either it was necessary to give effect to legislative provisions or otherwise, group entity concept should not be taken too far and it would seem that for the corporate veil to be lifted for group companies, some abuse or impropriety must have been present. Adams v. Cape Industries plc (1990) o P sued D for personal injuries inflicted by Ds subsidiary companies through asbestos poisoning. o HELD: No claim, veil not lifted. Although companies were 1 economic unit, courts will not lift the corporate veil on the basis that D validly and legitimately partitioned its legal liabilities through forming subsidiaries. Win Line (UK) Ltd v. Masterpart (Singapore) Pte Ltd (2000) o P sued both D and the 3rd party parent company for repudiating a contract to charter a ship. o HELD: Veil not lifted. Prakash J held that the law in this area had not been completely resolved. But the principle of treating companies within the same group as 1 legal entity cannot be extended to a case where 2 companies have no common shareholders or directors. o **[45] Furthermore, there was no evidence that D&M (parent company) were a single economic unit, given that there was no evidence of corporate financial control of one over the other. The only thing that the parent company provided was financial backing. DHN Food Distributors Ltd v. Tower Hamlets London Borough Council (1976) o Group of companies running grocery business had land acquired by Town Council. Under the legislation in question, compensation could be obtained for both the land and disruption of the business. Council refused to pay the compensation and argued that the subsidiary company did not have interest in the land. o HELD: Compensation granted. Whole group was treated as 1 commercial entity as both coys were both wholly owned and they had no separate business operations. o Alternative reason given by Lord Denning MR: the group might be found to be carrying on the business in partnership with one another.

CASE DOUBTED: This case was doubted in Woolfson v Strathclyde Regional Council (1978) SLT 159 (HL); while it is suggested in this case that there is a general tenancy to ignore the separate legal entities of various companies within a group and to look at the economic entity of the whole group, there were in fact "no special circumstances in the facts of [that] case which differentiated it from the ordinary relationship of parent and fully owned and controlled subsidiary. Rare indeed is the subsidiary that is allowed to run its own race". **Case can be distinguished from the group of companies - it was a case involving interpretation of the statute regarding compensation for land acquisition. Therefore, the decision can be removed from the line of authorities regarding group of companies.

Public Prosecutor v. Lew Syn Pau and Another (2006) [SG affirmation of Adam v Cape (certainty) over DHN (fairness)] o HELD: Prosecution failed to make case that corporate veil should be lifted and thus cannot prove that there was financial assistance contravening s. 76, CA. o The court cited the HL in Woolfson v Strathclyde Regional Council where Rogers A-JA noted that: In the result, as the law presently stands, in my view the proposition advanced by the plaintiff that the corporate veil may be pierced where one company exercises complete dominion and control over another is entirely too simplistic. The law pays scant regard to the commercial reality that every holding company has the potential and, more often than not, in fact, does, exercise complete control over a subsidiary. If the test were as absolute as the submission would suggest, then the corporate veil should have been pierced in the case of both Industrial Equity and Walker v Wimborne.

vi. Interest of Justice The courts may exercise an equitable discretion to ignore the separate personality of a company if it is just in the circumstances to do so. **Current SG position unclear; but submitted that the interest of justice is too vague a concept to be used. A better approach is not to use this as a basis for the corporate veil to be lifted. Better to rely on sham or faade and fraud which tends to carry more substance than interest of justice Re a Company (1985) o D sued by P for breach of fiduciary duty and deceit but D had organised his assets into a company to conceal his true interests once he knew that P, companies were insolvent. o HELD: Veil lifted to achieve justice irrespective of the legal efficacy of the corporate structure under consideration because the use of the corporate veil to shield a wrongdoers assets from being taken in satisfaction of a judgement is impermissible. (Such a strong view! Overturned in Gilford v. Home). *Adams v. Cape Industries plc (1990) restriction of the unfettered equitable discretion. o P sued D for personal injuries inflicted by Ds subsidiary companies through asbestos poisoning. o HELD: No claim. Save in regard of cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v. Salomon merely because it considers that justice so requires.

2. Corporate Constitution
1. Registration of Companies Minimum of one member o S. 20A, CA: A company shall have at least one member. Registration and incorporation o S. 19(1), CA: A person desiring the incorporation of a company shall (a) Submit to the Registrar the memorandum and articles of the proposed company and such other documents as may be prescribed; (b) Furnish the Registrar with such information as may be prescribed; and (c) Pay the Registrar the prescribed fee. Notice of incorporation o S. 19(4), CA: On the registration of the memorandum the Registrar shall issue in the prescribed manner a notice of incorporation (like a birth cert) in the prescribed form stating that the company is, on and from the date specified in the notice, incorporated, and that the company is (a) a company limited by shares; (b) company limited by guarantee (rare but normally used by NGOs); or (c) an unlimited company, (almost totally non-existent) as the case may be, and where applicable, that it is a private company. Effect of incorporation o S. 19(5), CA: The company shall be a body corporate by the name contained in the memorandum capable immediately of exercising all the functions of an incorporated company and of suing and being sued and having perpetual succession and a common seal with power to hold land but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is provided by this Act.

2. Companys Constitutional Documents Nature of Constitutional Documents MOA takes precedence over AOA (Guiness v Land Corp of Ireland) (CA, Eng) BUT the AOA can be used to explain ambiguous portions in the MOA ( Re Duncan Gilmour) a. Memorandum of Association (MOA) Defn: Basic constitutional document that introduces the company to outside parties o Guiness v Land Corp of Ireland Contains the fundamental conditions upon which alone the company is allowed to be incorporated. They are conditions introduced for the benefits of creditors, and the outside public, as well as shareholders. General Requirements o s. 22(1)(a), CA: Name of the coy o s. 22(1)(d), (e), (f), CA: Whether the liability of members is limited or unlimited and in the case of a coy limited by guarantee, the max amount that the member may be called upon individually to contribute in the event of the companys winding up Limitation of Liability o s. 22(1)(g), CA: Full names, addresses and occupations of the subscribers o S. 22(1)(h), CA: A clause stating that the subscribers are desirous of being formed into a coy in pursuance of the MOA and (where the coy is to have share capital) that the subscribers respectively agree to take the number of shares set out opposite their respective names (Association Clause & Subscription).

i. Altering the MOA There is considerably less freedom to amend MOA and AOA because any such amendment is likely to affect the basis on which parties initially decide to become members of the company. Special procedures are prescribed and must be complied for the amendments to take effect S. 26(1), CA: Special resolution required to amend the MOA [see s. 184(1), CA] o S. 26(1A), CA: Subsection (1) is subject to section 26A [entrenched provisions] and to any provision included in the memorandum of a company in accordance with that section. o S. 26(1B), CA: Notwithstanding subsection (1), a provision contained in the memorandum of a company immediately before 1st April 2004 [date of commencement of the Companies (Amendment) Act 2004] and which could not be altered under the provisions of this Act in force immediately before that date, may be altered only if all the members of the company agree. Alteration of other clauses of the MOA o S. 28, CA: Change of Name o S. 30, CA: Conversion from unlimited coy to a limited coy and vice versa o S. 31, CA: Change from a public to a private company and vice versa o S. 71, CA: Alteration of share capital

b. Articles of Association Defn: By-laws that lay the framework for the internal operations of the coy o Guiness v Land Corp of Ireland Internal regulations of the company per Bowen LJ Adoption of Articles o s. 35(1), CA: There may in the case of a company limited by shares and there shall in the case of a company limited by guarantee or an unlimited company be registered with the memorandum, articles signed by the subscribers to the memorandum prescribing regulations for the company. o S. 36(2), CA: If a company chooses not to register its own Articles of Association, a default set of Articles shall apply Table A in the Fourth Schedule of the Companies Act. Table A ipso facto applies to: [1] Company limited by shares incorporated after 19th December 1967, [2] as long as the registered AOA does not exclude or modify Table A, [c] where AOA is silent on the issue, Table A fills the gap, [d] where the registered AOA contradicts with the MOA. Hence in practice, in the abundance of caution, a company may lodge and exclude Table A, then stipulate its own terms.

i. Altering the AOA General Requirement o S. 37(1), CA: Special resolution required to add to or amend the AOA [see s. 184(1), CA] Limitations o S. 26A(1), CA: An entrenching provision cannot be altered except by unanimous agreement by all members (100%). o S. 39(3), CA: Amendment requires members to subscribe for more shares and increase their liability not binding on a member who doesnt agree in writing. o If alteration affects a special class of shareholders, then s. 74, CA must be followed instead (Variation of class rights clause)

Other Rules for Alteration of AOA a. Bona Fide rule in Allen v Gold Reefs Allen v. Gold Reefs of West Africa (1900) HELD: Alteration rights must be exercised, not only in the manner required by the law, but also bona fide for the benefit of the company as a whole as a body corporate, a commercial entity. Seems to be unfair that they would be obligated to vote in the interest of the company when they should only be expected to serve their own interest. Evaluation (Gower at pp. 653-654) o The statement suggests that shareholders are subject at common law to precisely the same basic principle as directors. o This is highly misleading because a shareholder may exercise in his own selfish interest even if they are opposed to those of the company. o **Thus, it is wrong to see the voting powers of shareholders as being of a fiduciary character. o BUT the rule is subject to the principle that the majority may not oppress or treat the minority unfairly. But increasingly, the courts will not interfere with decisions made by the company and its members, unless the decision is one that no reasonable persons will make. Shuttleworth v. Cox Bros & Co Bros (Maidenhead) (1927) o HELD: The CA upheld the validity of the companys action in removing the life director, as there was no evidence or indication of bad faith. o The alteration of a companys AOA shall not stand if it such that no reasonable men could consider it for the benefit of the company whether or not the action of the shareholders is capable of being considered for the benefit of the company. o It is not the business of the Court to manage the affairs of the company. That is only for the shareholders and directors. o Criterion used to ascertain the whether the alteration was in the opinion of the shareholders for the benefit of the company: Oppression the alteration may be so oppressive as to cast suspicion on the honesty of the persons responsible for it. Extravagance so extravagant that no reasonable men could really consider it for the benefit of the company. Peters American Delicacy v Health (1939) 61 CLR 457 o Alteration was made to the AoA to ensure that profits were given out in proportion to the amount that the shareholder has paid up on their shares. It was a bona fide attempt to adopt a methodology that was fair to all shareholders, and small minority who would lose out (those who had not fully paid out their share) objected.

Held: Court upheld the validity of the alteration. Court found that this action of the majority did not breach the equitable limitation that should be imposed on the majority powers. It was viewed instead to be an honest attempt on the part of the directors to correct an existing unfairness. When the validity of a resolution of shareholders is challenged, the onus of showing that the power has not been properly exercised is on the party complaining. The court will not presume fraud or oppression or other abuse of power. (Latham CJ at 482)

Also, the courts are willing to allow for the alteration of the AOA that might result in unfairness to some members where the expropriation is done to fend off competition. Sidebottom v. Kershaw, Leese & Co (1920) o Directors of company held majority of shares. Altered the AOA to require shareholders competing with the companys business to transfer their shares at fair value. P held minority of shares and was in competition with the companys business, argued that the alteration was an expulsion and invalid. o HELD: Alteration of AOA valid. Alteration was held to be bona fide for the benefit of the company as a whole and expulsion of competitors of the companys business was a great benefit of the company. Furthermore, it was directed at all shareholders who might be in competition and was not against P.

b. Proper Purposes Test in Gambotto: A minority-friendly approach in Australia, not binding in Singapore but UK has explicitly rejected it. It is even when objectively, the alteration of the AOA is to the benefit of the company it will be disallowed if the powers of alteration were used for an improper purpose in a certain manner. Benefit to the company is irrelevant if power is used wrongfully the ends do not justify the means. Gambotto v. WCP Ltd (1995) [HCA] Alteration NOT allowed Company amended its AOA to give the holder of 99.7% of the shares a right to compulsorily purchase the remainder of the shares so that the company will be a wholly owned subsidiary and obtain tax advantages and administrative savings. HELD: Alteration of AOA invalid. Court criticized the benefit of the company as a whole test because this case would have passed it (there were > $4 million in savings!). Test should be whether the amendment of the AOA was [1] beyond any purpose contemplated by the AOA or [2] oppressive, as that expression is understood in company law. o Proposed an objective test, which had to be applied even if the price was fair and the majority had acted in good faith the proper purposes test. o **This meant that expropriation of shares could ONLY be used to save the company from significant detriment or harm

The HCA was not prepared to accept the propriety of the expropriation no matter how significant the financial benefits to the company. There are indications that this test is unlikely to be adopted in the UK (Citco Banking Corp NV v Pussers Ltd). **It remains to be seen how Singapore courts will treat this issue Evaluation: Is this a fair decision? The company would have benefitted greatly and the other minority shareholders had also supported the alteration. Minority shareholders know what they are buying into and can always have a clear exit by selling. o C.f. en-bloc sale in Singapore?

3. Other provisions a. Object Clauses General Rule: Currently, the Companies Act does not require a company to include a objects clause into its MOA, but a company may choose to include the objects of the company. S. 23(1), CA: Subject to the provisions of this Act and any other written law and its memorandum or articles of association, a company has o (a) Full capacity to carry on or undertake any business or activity, do any act or enter into any transaction; and o (b) For the purposes of paragraph (a), full rights, powers and privileges. S. 23(1A), CA: A company may have the objects of the company included in its memorandum. S. 23(1B), CA: The memorandum or articles of association of a company may contain a provision restricting its capacity, rights, powers or privileges. Alteration of objects in MOA S. 33(1), CA: A company can amend its objects clauses by passing a special resolution o S. 33(11), CA: for the avoidance of doubt, a reference in this section to the alteration of any provision of the memorandum of a company or the alteration of the objects of a company includes the removal of that provision or of all or any of those objects. b. Doctrine of Ultra Vires The CA now does not require the object(s) of the company to be stated in the MOA, this was the case in the past, as s. 22(1)(b) required it. The objects clauses circumscribed the companys legal capacity. But MOA may contain a provision restricting the companys capacity, rights, powers and privileges [s. 23(1B), CA] the main purpose of which is to confer rights on members against the coy or its officers. But for companies that have been incorporated prior to the 2004 amendments, s. 25(1), CA is applicable. Ultra vires transactions General Rule: S. 25(1), CA: No act or purported act of a company and no conveyance or transfer of property, whether real or personal, to or by a company shall be invalid by reason only of the fact that the company was without capacity or power to do such act or to execute or take such conveyance or transfer. o Effectively abolished the ultra vires doctrine Exceptions: s. 25(2), CA: Any such lack of capacity or power may be asserted or relied upon only in: a. Proceedings against the company by any member of the company or, where the company has issued debentures secured by a floating charge over all or any of the companys property, by the holder of any of those debentures or the trustee for the holders of those debentures to restrain the doing of any act or acts or the conveyance or transfer of any property to or by the company (personal actions against the company); b. Any proceedings by the company or by any member of the company against the present or former officers of the company (personal actions against directors/officers); or c. Any application by the Minister to wind up the company.

c. Entrenched Provision An entreched provision is one that an entrenching provision has been applied upon thus specifiying specific conditions that need to be met in order for the entreched provision to be altered, despite other conditions that have been specified by the Companies Act. Eg. S. 26(1B): Provides that to alter entrenched provisions, all the members must agree. d. Entrenching Provision General Rule s. 26A(4), CA: An entrenching provisions is a provision which stipulates that other specified provisions of the MOA or the AOA may not be altered in the manner provided by the CA, or may not be altered except by a resolution passed by a specified majority greater than 75% (the minimum majority required for a special resolution), or where other specified conditions are met. Inclusion of a Entrenching Provision s. 26A(1), CA: An entrenching provision may (a) be included in the MOA or AOA with which a company is formed or (b) at any time be inserted in the MOA or AOA only if all the members agree. Removal or Alteration of an Entrenching Provision s. 26A(2), CA: An entrenching provision may be removed or altered only if all the members agree. 4. Shareholders Agreements Apart from the Companys Constitutional documents, a company may enter into a shareholder agreement with a member or director of the company. Nature: This agreement is governed by the law of contract, and binds only present shareholders (Russell v Northern Bank Development) Uses: (a) to confer rights which would not otherwise be enforceable if contained in the articles, (b) to regulate special relationships arising between shareholders, (c) to place the company under an obligation to recognise certain rights and obligations of shareholders or (d) to confer class rights. 5. Contractual Effect of the MOA and AOA The Memorandum of Association and the Articles of Association when registered, act as a statutory contract between (a) the company and members, and (b) between members inter se. However, there is (c) no contractual effect between the company and outsiders. S. 39(1), CA: Subject to this Act, the memorandum and articles shall when registered bind the company and the members thereof to the same extent as if they 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 memorandum and of the articles. a. Between company and members General Rule: MOA and AOA are a statutory contract b/w the coy and its members. o Hickman v Kent or Romney Marsh Sheepbreeders Assoc (1915) Although the actual wording of s. 39, CA do not specifically refer to the coy as having covenanted with the members to observe the provisions of the constitution, it is clear that the coy is itself bound to observe the provisions of the statutory contract. o Applicability in Singapore unsure as citing of case in Raffles Hotel Ltd was in obiter only, thus applicability in Singapore is unclear. A member of the company can only enforce rights that have been conferred upon him in his capacity as a member (qua member) o Eley v Positive Government Security Life Assurance Co Ltd Right to remain the companys solicitor was not a right conferred in his capacity as a member, thus the right is no enforceable.

A member may obtain an injunction to prevent a company acting in a way inconsistent with a non-membership provision of the articles (Salmon v Quin and Axtens Ltd) b. Between members inter se General Rule: A member can only enforce provisions in the AOA or MOA in ones capacity as a member. A member cannot rely on an article that confers rights common to all members, if he is relying upon it in some other capacity and not in his capacity as a member (Rayfields v Hands).

c. Between the company and outsiders Privity rule was established in Hickman and adopted with approval in Raffles Hotel Ltd v Malayan Banking Bhd (No.2). Amendment of the articles cannot affect an existing relationship with an outsider and might lead to the company being sued the amendment cannot bind an outsider as a corollary of the rule.

3. Corporate Capacity and Liability a. Ultra Vires

Common Law Position (in UK) Previously and at common law, a companys powers must be defined and cannot do anything that is not authorised by the objects clauses in its MOA such transactions will be void ab initio and the company will not be bind by it. Note: This is the common law position, Singapore has s. 25(1), CA! Objects clauses are no longer mandatory to be added in the MOA in Singapore, but most company adds them. Theres a distinction between objects clauses and powers clauses. o Power is the legal ability to do something, while object is the purpose for which a company exists. Powers are means to the object end. o Powers can only be exercised for the benefit of the company. An act that misuses the power not authorised be the powers clauses may still be intra vires but the act may be a breach of the directors duty. Ashburn Railway Carriage & Iron Co v. Riche (1875) o HELD: An ultra vires transaction that is void ab initio cannot be ratified even through the unanimous asset of corporators (only acts in breach of directors duties may be validated). Under Common Law (prior to CA amendment)
Wide View The act entered to must be in furtherance of the purpose or benefit of the company as stipulated in the objects clauses in the companys MOA. Narrow View An act is not ultra vires just because it was done for purposes not authorised by the companys constitution. It is only ultra vires when it is clearly outside the objects of the company. **Position adopted in Singapore.

**Rolled Steel Products (Holdings) Ltd v. British Steel Corporation (1984) rejection of wide view (adoption of narrow view) o Clause in the companys MOA empowered the company to give guarantees. RSP guaranteed the obligation of its subsidiary associate company, SSS to BSC and gave BSC security over its property that did not benefit or advantage RSP, but benefitted 1 of its directors who owned SSS. Both RSP and BSC knew of this irregularity and particular arrangement. o HELD: No ultra vires. The transactions were unenforceable on other grounds but it was not ultra vires. o An improper purpose does not affect the companys capacity. An act which comes within the power conferred expressly or impliedly by the MOA will not be beyond the companys capacity by reason of the fact that the directors entered it for some improper purpose the act is valid but the director would have breached duties. o The limits in the MOA were limiting the directors authority and not the companys capacity. Banque Bruxelles Lambert v. Puvaria Packaging Industries (Pte) Ltd (1994) o HELD: Transaction that was entered into otherwise than for the proper corporate purposes is not ultra vires. o Court applied Rolled Steel v. British Steels narrow view in Singapore.

Singapores current position post CA revision (No Doctrine of Ultra Vires) In Singapore, the doctrine of ultra vires is much diminished by s. 25(1), CA. S. 25(1), CA: Ultra vires transaction. o No act or purported act of a company shall be invalid by reason only of the fact that the company was without capacity or power to do such an act. Even when companies have objects clauses and an act has exceeded the objects clauses, the act is no longer invalid by reason of s. 25(1), CA, thus overriding the doctrine of ultra vires. This is consistent with the abolishing of the constructive notice doctrine in s. 25A, reversing the common law position that the MOA and AOA puts a 3 rd party on notice (that that agents authority was limited). The rationale behind these legislative amendments is to prevent the abuse of the doctrine of ultra vires to get out of bad bargains. ** s. 25(2), CA: The doctrine is only retained in minor portions: o (a) Members and Debenture holders can restrain the company, (see below) o (b) Officers (directors) transacting ultra vires can be liable for breach of (director) duties or restrained from acting against the objects clauses and o (c) Ministers ability to wind up the company. S. 25(3), CA: If the unauthorised act sought to be restrained in any proceeding under s. 25(2)(a), CA, the Court may, if all parties to the contract are parties to the proceedings and if the Court finds it to be just and equitable, set aside and restrain the performance of the contract and may allow to the company or to the other parties to the contract, as the case require, compensation for the loss or damange sustained due to the setting aside and retraining of the performance of the contract,, but anticipated profits are not to be awarded.

b. Law of Agency
1. Nature of the Agency Relationship a. Introduction For business efficacy some authority has to be granted to an individual to make certain decisions for the company. Business decisions cannot always be taken by a committee. It is uneconomical and time consuming or inconvenient. Ultimately, the individuals decision must be traceable to that of the companys organs. b. What is Agency? What is an Agent? An agent is a person who, being given the authority to do so by his principal, acts on behalf of and for the benefit of the principal. The agent may thereby acquire power to do acts that alter his principals legal position, in respect of strangers to the relationship by the making of contracts or the disposition of property (Fridmans Law of Agency). In a typical case where the agent is authorized to contract with a 3P on behalf of his principal, the resulting contract binds the principal and the 3P but not the agent. An agent can sometime act gratuitously (without consideration) and if the agent acts and enters into agreements negligently, the principal cannot sue for breach of contract as there is not existing contract, but could possibly sue the agent for a breach of a fiduciary duty. Creation of a Principal-Agent Relationship (Consent Requirement) The relationship of principal and agent can only be established by the consent of the principal and the agent. It must, however, have been given by each of them either expressly or by implication from their words and conduct. Garnac Grain Co Inc v. Faure & Fairclough (1967) o HELD: The existence of an agency relationship is premised on the facts as they objectively stand and this is regardless of what the parties profess. They will be held to have consented even if they do not recognise it themselves and even if they have professed to disclaim it. o Consent does not require a contractual agreement and there is no need for consideration.

Liability of the Agent Liability falls upon the agent personally only if he acts outside the scope of the authority given to him. If the agent acts within his authority, he is not bound by the concluded contract between the principal and the 3P the agent drops out of the picture. The 3P has recourse only against the principal. The Rationale for Agency The company resorts to agents because it is much more efficacious and convenient to act through a duly authorized agent than to call for meetings for the collective decisions otherwise necessary. Common Examples of Agents Managing Director/CEO Independent Contractors (but not all, depending on the scope of authority granted) Distinguishing agency from other relationships (not an intermediary legally defined) Trustee/Beneficiary, Servant/Employee, Independent Contractor, Buyer/Seller

2. Creation of Agency An agent is a person who has the power to affect his principals legal relations, usually by entering into a transaction that is binding on the principal. When is the principal bound by the acts of his agents? o Usually, when the agent acts within their actual authority. o Exceptionally, principal is estopped from denying that the act was outside of the agents authority if the agent had apparent authority.

**To determine if a principal bound by its agents actions: o [1] Was the transaction within the actual authority of the agent? Arising out of consent of both parties. Either expressed in general terms, or implied from circumstances. If so, company is bound. o [2] Was the transaction within the apparent or ostensible authority of the agent? If so, company is bound. o [3] Was there anything to put the 3rd party on notice of the agents lack of authority? If so, company is not bound (TCHs eg of DBS). If not, company will be bound on the basis that it is estopped from denying the authority of its agents. An agents unauthorised acts may be ratified by the company. o Provided that the agent must have purported to act on the companys behalf. o Retrospectively clothes the agent with the authority. Actual Express Authority Authority that is expressly conferred upon the agent either orally or in writing. Can be conferred through: o Statute s. 57(4), CPC: Appointment of managers if company is charged with an offence. Rare. o MOA and AOA fairly rare. o General Meeting/Board of Directors effected by passing a resolution. o Delegation to sub-agents Board rarely gets involved in contractual negotiations unless it is significant. o Sometimes, provided for in some contract e.g. appointment by creditors. Actual Implied Authority Impractical for express authority to cover everything an agent is actually authorised to do in the smallest detail. Hence, existence of an agency relationship can be implied, either by the conduct or the relationship of the parties (like being appointed to a certain position, eg. CEO or Managing Director) Implied authority may be restricted by express authority. Implied authority has 3 forms [1] incidental authority, [2] usual authority and [3] acquiescence of his superiors. *Hely Hutchinson v Brayhead Ltd [1967] 3 All ER 98 o Chairman entered into a guarantee on behalf of the company. o HELD: Company bound. Although typically a Chairman does not have the executive authority to enter into a binding contract for the company, in this case, the Chairman acted as though he was the Managing Director and the rest of the Board knew and acquiesced to it. Thus he had the de facto executive authority through implied authority from acquiescence to enter into such a guarantee. o Note: No longer good law because of s. 157A, CA? Default position now is that managing power lies with the Board of directors.

(a)

(b)

c. Apparent/Ostensible Authority In general, a principal is only bound by the acts of his agents if they were acting within their actual authority. o Chew Hock San v. Connaught Housing Development Sdn Bhd (1985) P agreed to purchase shop houses from D, paid a deposit and Ds clerk issued receipt. D refused to honour the contract purportedly made by the clerk. HELD: Company not bound. Clerk had no actual authority to do what he did. It is not normally expected that the clerk would have implied authority to transact such a business. And there was no representation from the company that the clerk was so authorised.

However, a principal may be precluded from raising the agents lack of authority by the doctrine of estoppel if the agent acts within the scope of his ostensible or apparent authority (even if this is outside his actual authority). What is apparent authority? o It is the authority that the agent appears to have to the outside world because of the representation made by or on behalf of the agent by the principal. It can be express oral or written statement to the 3rd party. It can be by usual authority what is an agent in that position usually expected to do? It can be by acquiescence by superiors what have the agents superiors allowed him to do? **Differences between actual and apparent authority: o The 2 co-exists and coincide but are independent. Actual authority is a legal consensus relationship (made by agreement). Apparent authority is a legal relationship created by a representation made by the principal to a 3rd party, intended to be, and in fact was acted upon by the 3rd party. The agent in this case is a stranger and need not be aware of the representation. This representation, when acted upon by the 3rd party contractor by entering into the contract with the agent, operates as an estoppel, preventing the principal from later asserting that he was not bound because the agent had no actual authority. Onus on proving apparent authority is on the 3rd party contractor. o Skandinaviska Enskilda Banken v. APB (Singapore) Pte Ltd [2009] Chia was employed by D, forged documents to obtain credit for the company and then claimed to have acted on behalf of D. HELD: D not liable. Since the seal and signatures are forged, then the document is fully forged and it was a nullity and cannot bind the company. However if parts of the document was forged, but the seal and the signature were genuinely made by a person of actual authority, then Turquands Rule will apply and D will be bound. Hence, a principal can be bound in appropriate circumstances notwithstanding that the agents acts were fraudulent. **Court also held that the onus of proving apparent authority is on the 3rd party contractor.

3 Requirements of Apparent Authority [1] A representation that the agent had authority to enter, on behalf of the company, into a contract that the contract that the contractor is trying to enforce. Principal may by his conduct or words over a period of time impliedly represent that the agent is authorised to contract on his behalf. Conduct can be seen by the appointment of a person to a certain position (overlap with usual authority) o Freeman & Lockyer v. Buckhurt Park Properties (Mangal) Ltd (1964) K and H were directors of the company. H spent time abroad and left management of the company to K who acted as the Managing Director even though he was never appointed as such. K entered into the contract with P and D, company refused to pay, argued that K had no authority to contract with P. HELD: Company bound. Even though K did not actual authority (express or implied), he was within his ostensible/apparent authority because the Board knew, acquiesced, and thus their conduct over a period of time was a representation that he had authority to enter into such a contract

[2] Representation must be made by a person who has actual authority (e.g. while managing the companys business) to make such representation on behalf of the company. A representation made by the agent himself as to his own authority is valueless and does not bind the principal. Only unique exception is where the principals representation gives the 3 rd party contractor the impression that the agent himself can make representations as to his own authority. o First Energy v. Hungarian International Bank (1993) FE wants to borrow money from HIB. FE begins negotiation with branch manager of Manch office but senior manager in charge of the Manchester office of the bank had no actual authority to sanction a credit facility for Plt. FE knew that the manager had no authority to do apporove either. Manager said that head office approved loan. The bank later went on to say that manager had acted without authority. HELD: Bank bound. By his position, the senior manager was clothed with ostensible apparent authority to convey/communicate the offer on behalf of the bank (to inform P that the approval for the credit facility had been given) by virtue of his position. The idea of usual authority is used in two senses. First, it sometimes means that the agent had implied actual authority to perform acts necessarily incidental to the performance of the agency. [ACTUAL implied from position] Secondly, it sometimes means that the principal's conduct in clothing the agent with the trappings of authority was such as to induce a third party to rely on the existence of the agency. [APPARENT implied from position] Court drew a distinction between (a) having no authority to approve and (b) having an authority nonetheless to communicate the fact of the approval. Bank had made representation that the manager could have in fact made representation as to his own authority. EVALUATION: Fine distinction/line between (i) approval (entering into a transaction) and (ii) mere communication of approval (making representation of fact)

One explanation is that this applies only within banking context where the banking officer is usually the conduit to communicate the banks approval of the loan (usual practice) and thus you can trace what he did back ultimately to the bank itself (due to his position). **TCH Evaluation Disagrees with the decision. Saying that the agent has authority to communicate the head offices approval is the same as saying that the agent has authority to approve the deal. It is the agents words that ultimately bind the contract. Seems like a very fine-grained decision. Instance of a hard case making bad law **Compare to recent CA case of Skandinaviska Enskilda Banken AB v Asia Pacific Breweries (Singapore) Pte Ltd [2011] SGCA 22 that casts doubts over whether the decision in First Energy would still make good law needs to be looked at carefully.

[3] Contractor was induced by the representation and relied and entered into the contract with the agent. If contractor did not know of the representation at the time he acted, no reliance. If contractor knew of the agents lack of authority, no reliance. If contract ought to have known or was put on notice of lack of authority, no reliance. **Under English law, since estoppel can only be used as a shield, the third party is not in any way estopped from saying that the agent did not have authority. Thus the principal cannot sue the 3P if it wishes to get out of the contract, and use estoppel as a sword. d. Ratification Impt Pre-condition agent must have purported to have acted on behalf of the principal it must be clear to the third party that he was acting for somebody else. o Keighley Maxtead v. Durant (1901) HELD: There can be no ratification of a contract by a person sought to be made liable as a principal unless the person who made the contract professed to be acting on behalf of the other at the time. What amounts to ratification? o Ratification may be express or implied (through conduct etc) but must be an unequivocal affirmation it need not even be informed to the 3rd party as long as the principal had appears to ratify the agreement by his conduct. S. 41(1), CA: Ratification by company of contracts made before incorporation. o Company can subsequently ratify such contracts and be bound as though it has been in existence at the date of the contract. Limitations/Exceptions: o Principal can ratify only if the act relates to something that the principal could have done at the ratification. o If theres a fixed time limit for the act, then ratification cant take place after. Presentaciones Musicales v. Secunda (1993) HELD: Ratification cannot extend the time fixed for doing an act, whether by statute or agreement. Ratification also cannot adversely affect any rights which had arised since the contract was first formed between the agent and the 3rd party. o Even if not, principal must ratify within a reasonable time. McEvoy v. Belfast Banking Co (1935) HELD: Principal must ratify within a reasonable time. Principal cannot ratify after he has (by words or conduct) intimated to the 3rd party that he does not intend to ratify.

i. Effects of Ratification Ratification will retrospectively clothe the agent with the authority to act from the outset, even if the 3rd party has communicated his own withdrawal from the agreement. o Bolton Partners v. Lambert (1888) Agent without authority purported to buy a house for his principal from D. D later repudiated the contract but the principal then ratified. HELD: D bound. Although his repudiation happened before the ratification, it is ineffective because the ratification related back to the time of the agents unauthorised purchase and clothes the agents act with actual authority. **CRITICISED (TCH): It puts the 3rd party at the mercy of the principal who is free to ratify or not as he pleases But perhaps over-exaggerated? If principal does not ratify, first party has remedy against the agent for breach of implied warranty of authority. If principal does ratify, it is precisely what he had wanted in the first place, cannot complain. Only hardship is the waiting time, hence, principal must ratify within a reasonable time. Principal cannot ratify after he has (by words or conduct) intimated to the 3rd party that he does not intend to ratify. Remaining silent after 3rd partys notice to withdraw prevents ratification. 3. Effects of Agency The agency relationship (Where a principal appoints an agent, or where an agent purports to act for a principal) affects [1] the principal and the 3rd party, [2] the agent and the principal and [3] the agent and the 3rd party. In particular, there is an implied warranty of authority on the part of the agent, whereby the agent is personally liable if he does acts that an agent was unauthorised to do. But if there is ratification, there is no longer a breach of warranty of authority. Fong Maun Yee v. Yoong Weng Ho Robert (1997) o HELD: Principal will be liable for the 3rd partys loss due to the implied warranty of authority if the agent had made the representation and the 3rd party relied, even if the agent had acted in good faith or mistaken belief.

4. Undisclosed Agency When the 3rd party contract with the agent, he may or may not realise that the agent is acting for the principal and may think that the agent was acting for himself. The undisclosed principal is entitled to enforce the contract if: o The agent must always have had actual authority to contract for the principal, AND o Identity of the contracting party is not crucial to the performance of the contract. **Siu Yin Kwan v. Eastern Insurance Co (1994) o Insurers denied liability to pay out the insurance premiums to P because they argued that the employers were the unnamed and undisclosed principals of the agents, seamen, who obtained the insurance. o HELD: D bound. Terms of the contract may exclude the principals right to enforce the contract. But courts are generally reluctant to exclude the right to sue because it defeats the commercial convenience which the doctrine of undisclosed agency is based.

F Drughorn v. Rederiaktiebolaget Transatlantic (1919) o AP contracted with agent for a ship charter but later breached the contract. Agent died and RP, undisclosed principal sued for damages. AP argued that the undisclosed agency contradicts the written contract. o HELD: AP bound. It is within the commercial practice and common sense that the charterers will be able to contract with agents of undisclosed principals who could later claim benefit of the charter party. o Where you have the description of a person as the owner of property, and it is a term of the contract that he should contract as owner of that property, you can adduce evidence to show that another person is the real owner. Doctrine of undisclosed agency is sometimes still regarded as anomalous and some aspects may still need to be worked out. o Family Food Court v. Seah Book Lock (2008) RP, duck rice stall owners sued the AP, food court for repudiation is held to be liable. Issue is whether an undisclosed principal of the RP can claim the damages. HELD: Narrow ground not applicable because the contracting party would not have known of the undisclosed principals existence. Broad ground civil procedure will hinder the claim and the undisclosed principle needed to join the suit as a co-plaintiff.

5. Termination of Agency Upon the death, bankruptcy, insolvency and mental incapacity of the principal. Results in instances of agents being held in breach of warranty of authority where the principal passes away without the knowledge of the agent, thus resulting in the agent entering into such agreements in its own capacity.

How an agency relationship is created

Actual Authority*

Apparent Authority*

Authority is given by the principal restrospectically by ratification

Express Authority

Implied Authority

Incidental Authority

Usual Authority

Implied Authority by Acquiesence

c. Indoor Management Rule

1. General The rule is a presumption of regularity. o Company cannot rely on its internal irregularities to affect the rights of the 3P, provided that the 3P did not know of the irregularities. Third parties are not expected to check if there are any irregularities. o To rely on this rule, there has to be something prima facie gives the impression that everything is regular, otherwise it exposes companies to unlimited liability. The actual authority of an agent is a relationship between the principal and the agent and 3rd parties dealing with the agent does not know what the actual authority is nor in most case can he find out. o Sometimes it depends on compliance with certain internal formalities. When it comes to internal procedures, the general rule is that if an agent has apparent authority to do an act, then the 3rd party contractor dealing with the company is entitled to assume that all matters of internal management procedures prescribed by the MOA and AOA have been complied with. Apparent similarities between indoor management rule and apparent authority Just like the law of agency, the indoor management rule does not apply where there is notice of irregularities.
o Royal British Bank v. Turquand (1856) the rule in Turquands case. Company could only borrow money when authorised by a general resolution of the company. When sued, company argued that a proper resolution had not been passed, and thus, was not bound to pay. HELD: Company bound. 3rd party is dealing with the company is entitled to presume that all procedural requirements have been complied with. Persons dealing with the company only need to acquaint themselves with the statute and deed of settlement of the company and need not do more. Mahony v. East Holyford Co Ltd (1875) RP sued bank, arguing that bank paid money from their account without due authorisation. Bank produced a letter signed by the director and secretary, but both of whom were never properly appointed. HELD: Company bound. The bank was entitled to presume internal regularity since they could not have had knowledge of it. The company should have had all the powers and authorities it appears to possess. Irregularities are internal management issues of their own.

Furthermore, s. 392, CA: A breach of the procedure that constitutes an irregularity does not make a transaction invalid and must show that the irregularity caused substantial injustice. In the modern context, the Indoor Management Rule is a subset of the rules of apparent authority in the absence of anything to put the 3rd party on notice to inquire about the agents authority, 3rd party is entitled to rely on the presumption of regularity.

2. Exceptions to the Indoor Management Rule [1] If contracting part knows or should have known of the agents lack of authority (Howard v. Patent Ivory Manufacturing Co (1888)). o Usually when the contracting party is an insider. [2] If an examination of the companys MOA/AOA would have made it plain that the agents authority was limited (Rolled Steel Product (Holdings) Ltd v. British Steel Corp (1984)) reversed by s. 25A, CA o Party cannot plead that he had not actually read the MOA/AOA because everyone is deemed to have constructive knowledge of these documents. o **But in Singapore, s. 25A, CA reverses the common law position notwithstanding anything in the MOA/AOA, person is not deemed to have notice or knowledge. **[3] If the nature of the transaction is such as that to put a 3rd party on inquiry as to the agents authority. o When it is circumstances where a reasonable man would be suspicious of the agents authority, then the 3rd party must make reasonable enquiries. o In the absence of such enquiries, 3rd party cannot claim the benefit of the presumption of regularity. o E.g. when the company does not seem to be making any benefits from the transaction. Banque Bruxelle Lambert v. Puvaria Packaging Industries (1994) o Banque had no actual notice of the fact that the directors of Puvaria had no authority to borrow money for another company, PAU. Banque loaned money to Puvaria who then paid off PAUs debts, which did not come with consideration in return to Puvaria. o HELD: Puvaria bound to repay Banque. Banque did not know that the borrowing of money for PAU was not for the purpose of the company. The limited statement in Puvarias MOA/AOA was a vague and non-specific one, and was just a general direction for its directors. Hence, Banque was not put on constructive notice. o Furthermore, the series of transaction resembled an ordinary business deal which related companies usually do in the region. Northside Developments Pty Ltd v. Registrar-General (1990) [X] (Barclays (mtgee) was put on inquiry) o P owned land that was purportedly mortgaged to B. Mortgage was given to secure a loan to another company that was owned by Ps Managing Director, but which P as a company had no interest in. o Following default, B sold the land and ND sued and argued that it was not estopped from denying the validity of the mortgage. o HELD: P not bound. B was put on notice of the suspicious nature of the transaction. The transaction benefited the directors and not the company and B should have done more and inquired as to the authority of the agent. On the facts, the agent was beyond his apparent authority and P not bound. o There is no reason why a third party should be entitled to rely on the formal validity of the instrument and to assume that the seal has been regularly affixed IF the very nature of the transaction is such as to put him upon inquiry. o The mortgagee (Barclays) was put on inquiry by the fact that the mortgage was given to secure an advance to a third party ( MD) without any indication that the mortgage was for the purposes of the company's business. o Contrast with Banque Bruxelles Lambert in both cases the directors were acting for purposes other than the companys purposes. Both were in fact acting for their own benefit.

The difference between the 2 cases was that in this case, the company did not seem to be getting any benefit at all from the transaction while in Banques case, the transaction looked like a ordinary business deal among companies within the same group (that it can be said that the transaction was for the apparent benefit of all 3 companies involved). Competition of policies regarding Indoor Management Rule Mason CJ: o On the one hand, the rule has been developed to protect and promote business convenience that would be at hazard if persons dealing with companies were under the necessity of investigating their internal proceedings in order to satisfy themselves about the actual authority of officers and the validity of instruments. o On the other hand, an over-extensive application of the rule may facilitate the commission of fraud and unjustly favor those who deal with companies at the expense of innocent creditors and shareholders who are the victims of unscrupulous persons acting or purporting to act on behalf of companies.

4. Corporate Decision Making / Meetings and Resolutions a. General Introduction

There is a distribution of the companys powers between the Board Meetings of Directors and the General Meeting, comprising of the Shareholders. Whilst there is a separation of management, ownership and control, there is a contrast between big and small companies. o In small companies, especially in the Asian patriarchal context, there is little distinction between ownership and control. Whoever owns the company invariably makes decisions for the company. o In big companies, there is a diverse shareholder base and these investors do not have much say in the running of the company. Board also tend to play supervisory role with management delegated to senior executives here there is a greater need for procedural rules in the interest of justice and fairness. Board Meeting (Directors)

General Meeting (Shareholders)

Board meetings are not governed by the General Meetings are governed by the Companies Act, but are sometimes governed by Companies Act, MOA and AOA. the MOA and AOA. It is strict as to notice, voting rights and procedures. Meetings are held rarely (usually It is less formal so that the directors can respond once a year as an AGM) because they are quickly and effectively to the fast changing expensive. Hence, they have to be business world. Tend to be self governing. procedurally accurate.

b. Distribution of Power within the Company

a. Common Law John Shaw & Sons (Salford) Ltd v Shaw, [1935] 2 KB 113 o Pg 134 - If powers of management are vested in the directors, they and they alone can exercise these powers. The only way in which the general body of the shareholders can control the exercise of powers vested by the articles in the directors is by altering their articles, or if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove. o This is consistent with the current statutory provisions. Credit Development Pte Ltd v. IMO Pte Ltd (1993) not good law (obsolete) o HELD: The General Meeting, through ordinary resolutions, may exercise some of the powers of its directors, but if the EGM was held to pass a resolution that was ultra vires, then the resolution is void. Note: Interestingly, since s. 25, CA prevents the invalidating of ultra vires acts, does that mean in Singapore, an EGM can therefore be convened to pass ultra vires resolutions? o IMPORTANT: With s. 157A, CA introduced in 2003, this case is no longer good law (all management powers of business is vested in the board, except where the Act, AOA or MOA required general meeting approval) o **However also note that s. 25(2)(a), CA: before the resolution is passed, shareholders can intervene to restrain and set aside an ultra vires resolution. o Went beyond the common law rule and allowed the shareholders to go over and above to direct the board eventually Parliament decided to amend this rule and revert back to John Shaw.

**Automatic Self-Cleaning Filter Syndicate v. Cuningham (1906) current law in UK o Provision in AOA specifically empowered the directors to sell any property of the company as they think fit. But at a General Meeting, a resolution was passed directing the Board to sell property to a new company but the directors declined the sale. o HELD: Resolution ineffective. The AOA vested power in the Board and thus, the members had no power by ordinary resolution to give directions to the Board on issues of management or overrule its business decisions. o Pg 42 if they want to alter the powers of the directors, that must be done by passing an extraordinary resolution that requires a special majority.

**The Singapore position has since been clarified through legislative amendments, where the statute has confirmed that management is vested in the board of directors. This is now the default position. b. Statute S. 157A, CA: Management powers are vested in the Board of Directors o (1) Business of a company shall be managed by or under the direction of the directors. o (2) Directors may exercise all powers of the company except those that the Act, MOA or AOA reserved for the General Meeting. Reproduced in Article 73, Table A. o 73. (1) The business of a company shall be managed by or under the direction of the directors. (2) The directors may exercise all the powers of a company except any power that this Act or the memorandum and articles of the company require the company to exercise in general meeting. Initiation rights remain with the directors but the shareholders will continue to have veto rights.

c. Shareholders as an organ of the Company i. Powers of the Shareholders in General Meeting

a. Powers to be exercised by the General Meeting These are stipulated in section 157A as powers either conferred on the general meeting by the Companies Act, or by the memorandum and articles of the company. b. Examples of instances when power is delegated to general meeting In the following circumstances specified in the Companies Act, the board cannot act without the approval of the shareholders in general meeting. S. 160, CA: Disposal of companys business whole or substantially the whole of the companys undertaking or property (undertaking is business activity) o Exception: K.J. Kim Company (Pte Ltd) v. Buck & Company (Pte) Ltd (1997) Wife challenged the sale of the property w/o shareholders permission HELD: Sale was allowed, because in s 160(3) that says that any bona fide purchaser for value without notice is allowed to retain the property can circumvent the requirement for shareholders approval But General Rule: The object of s. 160(1), CA is to prevent directors from selling off the whole or a substantial part of the companys undertaking or the assets which allow it to carry on such business without the prior approval of the companys shareholders. If directors, whose primary function is to manage the companys business and assets, wish instead to dispose of such business or assets rather than manage them, it is only right that they should first get the approval of the shareholders who presumably became or remained as shareholders because the company was in business it was in.

S. 161, CA: When directors exercise any powers to issue shares. o As it could result in dilution of the shareholders share percentage. S. 168(1), CA: When payment is made to a director upon retirement or resignation. S. 169, CA: When proposal to improve directors emoluments.

c. Existence of common law possibility of limited shareholder management Even where the law does not provide power to the shareholders there are instance where the court provides certain powers to the shareholders and general meeting normally out of convenience. Where there is no competent board o E.g., deadlock or inquorate board

Barron v. Potter, [1914] 1 Ch 895 o Refusal of directors to act due to deadlock o Held: For practical purposes, there was no board at all and thus the shareholders in general meeting is empowered to take the decision of appointing additional directors, not the power to manage the company. o Powers given to the shareholders are still greatly limited as ultimately it is not for them to be managing the company.

ii. Members (Registered Shareholders) and their Rights

a. Members Under s. 19(6), CA: Members are: o (i) Subscribers to the memorandum (initial members); and o (ii) Any person who agrees to be a member and whose name is entered into the register. (subsequent members by buying shares) Hence, a member need not be a shareholder (e.g. in a company without share capital). o Distinction between member (registered shareholder) and shareholders Members of listed companies also have to be: o S. 130D(1)(b), CA: Persons named in the Depository Register as depositors (record of shareholders as shares are no longer held in printed form) o S. 130(D)(3), CA: A depositor is not entitled to attend any General Meeting of the company, to speak and vote unless his name appears on the Depository Register 48 hours before the General Meeting.

b. Rights of a member Right to attend and vote at General Meetings. o S. 180(1), CA: All members have the critical right to attend any General Meeting of the company and to speak and vote on any resolution before the meeting (unless he hasnt paid for his shares, or unless AOA/MOA provides that holders of preference shares shall not be entitled to vote (s. 180(2), CA)). Right to have the MOA and AOA observed s. 39, CA statutory contract. Right to restrain ultra vires acts s. 25(2)(a), CA, but power is lost if transaction is wholly executed. Right to access the companys records and certain information. Right to be treated fairly this includes the Minority Protection measures.

c. How members make decisions Generally, members act collectively and make decision via voting at the general meeting: Companies Act, section 180(1)

iii. Members Meetings and Requirements

a. What constitutes a meeting? There is a need to take into account the advent of new technologies now just need audio-visual links. o Byng v. London Life (1990) HELD: Not essential for all members to be present in 1 room coming face to face to constitute a meeting, provided that proper audio-visual links were in place to enable everyone present to see and hear what was going on and participate in the proceedings and can facilitate a two way communication Chow Kwok Ching v Chow Kwok Chi [2008] 4 SLR(R) 577, at 652 Directors may meet via teleconference as long as there is nothing to the contrary in the AOA. However, in the above case, it was also found that the persistent use of this mode of meeting in the face of objections by one of the parties thereto could be regarded as an indication that they did not want [that party] to attend the meetings or, at the least, that they did not want to meet him at the meetings and have a face-to-face discussion with him. If it were not used to legitimate uses (to discriminate), then the court would not allow the persistent use of electronic means.

b. Types of Meetings i. Statutory Meeting: s. 174, CA Purpose: Meeting discusses matters relating to the formation of the company or arising out of the statutory report. Only public companies limited by shares need to hold a statutory meeting. It is held once only at the beginning of the companys life. S. 174(1), CA: It must be held not less than 1 month and not more than 3 month after the date the company is entitled to commence business. S. 174(10), CA: Failure to hold the statutory meeting by the director is an offence. S. 254(1)(b), CA: Failure to hold the statutory meeting or lodge the statutory report is a ground upon which a petition to wind up the company may be presented.

ii. Annual General Meeting (AGM): s. 175, CA S. 175(1), CA: Every company must hold an AGM once every calendar year. S. 175(2), CA: Not more than 15 months may elapse between general meetings, subject to Registrars power to extend. Responsibility of convening the AGM usually rests with the directors. o S. 175(4)(b), CA: Court may order the AGM to be called upon the application of any member (but only if they control substantial fraction of votes to call an EGM). Private companies may dispense with holding AGM: o S. 175A(1), CA: If a resolution is passed by all members (100%) supporting not having the AGM. o Many small companies may find the formality of holding an AGM unnecessary. Ordinary matters/business that must be done at the AGM: o S. 201(1), CA: Accounts of company must be laid before the members. o S. 205(2), CA: Appointment of statutory auditors. o Other recurring business that might be transacted by public companies: S. 153(6), CA: Reappointment of directors over 70 years old. S. 161, CA: General approval for issue of shares Arts. 63-72, Table A: Retirement and election of directors. Declaration of dividends. Fixing of auditors remuneration.

iii. Extraordinary General Meeting (EGM) Art. 43, Table A: Any other general meeting other than the AGM is an EGM. All business at an EGM is considered to be special business Meetings can be convened by [1] the board (Art. 44, Table A), [2] the members directly calling [s. 177(1), CA] or requisitioning [s. 176(1), CA] or [3] the court (s. 182, CA). (1) Board initiating meeting [Art 44, Table A)

Directors can call for EGM if the AOA provides, and if not excluded, Art. 44, Table A allows it. Requires a majority in the Board of Directors. (2) Calling a meeting [S. 177(1), CA] s. 177(1), CA: 2 or more members holding more than 10% of the companys issued share capital, can hold the meeting by themselves. Usual notice requirements apply. If company has no share capital, than require > 5% of all the members. Cost is borne by the person calling for the EGM. However, some members may have no money or ability to get the list of members to send notices to (hence a requisition preferred)

(3) Requisition a meeting [S. 176(1), CA] S. 176(1): A member holding at least 10% of voting rights can requisition a meeting Requisition is a written notice to the directors requiring that an EGM be called. Must be signed by all the requisitionists. Must state the objects of the meeting (even if its to remove the Directors) S. 176(2), CA: Must be deposited at the registered office of the company.

Convening an EGM by Requisition S. 176(3), CA: Convening of the meeting has to be done within 21 days but the actual meeting can be held within the 3 months. If the directors do not hold it, and as long as the requisitionists have 50% of votes of all the requisitionists (not 50% of all votes in the company), then they can hold it themselves. S. 176(4), CA: Any reasonable expenses incurred by the requisitonists can be claimed against the company. Hence, requisition is usually the preferred method because members seldom have the means or inclination to call for the EGM. Power to requisition EGM Power of requisitioning or calling a meeting sacrosanct. They apply unless the articles explicitly exclude the power of the shareholders to requisition an EGM. o Indian Corridor v. Golden Plus, [2008] 3 MLJ 653 These powers cannot be denied unless the articles excluded it. Directors must convene an EGM when requisitioned by members as articles did not exclude the right of members.

Evaluation: Even if the articles deny this right to convene a meeting, will the shareholders still have the power to requisition or call for a meeting, since they are powers given to the shareholders in the Act. As ss. 176 and 177, CA are not subject to the articles.

Courts discretion to call for EGM (s. 182, CA) There exist an ultimate residual power of the court to call a meeting (s. 182, CA) if cant call a meeting under ss. 176 or 177, CA, court can convene an EGM in unforeseen circumstances. o Re Noel Tedman Holdings, [1967] Qd R 561 (Australia) All shareholders, who were also directors had died Meeting could not be convened in the normal way Hence, power of the court invoked Personal reps were allowed to call a meeting and appoint new persons are directors and then carry on the business

iv. Class Meeting Regarding the rights of holders of classes of share. Meetings of different classes of shareholders (preference shares or common shares) Any variation of such class rights requires a class meeting as subject to the MOA and AOA.

c. Notice of Meetings S. 180(1), CA: Every member has the right to attend a meeting and speak and vote at the meetings. S. 177(4), CA: Notice of every meeting must be served on every member having a right to attend and vote. S. 207(8), CA: Companys auditor also entitled to notice of meetings. Art. 111, Table A: AOA may also provide that other persons are entitled to receive notice of meetings. There has to be sufficiency of [1] time and [2] information. o If insufficient content or time in the notice, meeting will be invalidated. o Failure to provide adequate notice may result in unfairness as members may decide whether to attend the meeting or not based on the information provided in the notice, or to appoint a proxy.

i. Period of Notice The Companies Act also provides the minimum period of notices. s. 177(2), CA: For ordinary resolutions, the minimum is 14 days. s. 184(1), CA: For special resolutions, at least 14 days for private companies & 21 days for public companies. For resolutions requiring special notices, at least 28 days. o s. 152(2), CA: Removal of director of a public company. o s. 185, CA read with ss. 152(2), 205(4) and 294(3), CA: Removal of an auditor. AOA/MOA can provide for a longer (but not shorter) notice periods. But shortening notice period is possible. o For an AGM, short notice requires 100% unanimous consent of all members entitled to vote [s. 177(3)(a), CA] o For an EGM, short notice requires > 95% of nominal value of voting shares, or > 95% of total voting rights in a case of a company without a share capital [s. 177(3)(b), CA]. Chow Kwok Ching v. Chow Kwok Chi (2005) o HELD: Where directors and shareholders are the same, an AGM can be held without the director-shareholders having to wait 14 days where the matter could be dealt with in a Board Meeting. Note: In Singapore however, must take into account the saving provision of s. 392, CA. Defects in notices are irregularities that can be corrected if no substantial injustice suffered. ii. Forms of Notice Usually stipulated in the AOA, if not, Table A applies. o Written (and served personally or mailed to the members registered address, and notice is effective on day after posting) - Art. 108, Table A o Electronic communications allowed. [In view of technological advancements, the Companies (Amendment) Act 2004 introduced these two sections] - Ss. 387A, 387B, CA: Reform: Steering Committee (2012) suggested relaxation of rules o e.g.: Instead of members written agreement to use of website publication, allow company articles to provide for use of electronic publication and that should be starting point. iii. Content of Notice There must be sufficiency of notice the notice must state with sufficient particularity the proposed matters that are going to be decided at the meeting. The CA only specifies 2 basic items that must be included in the notices: o s. 181(2), CA: Statement informing members of the right to appoint a proxy who need not be from the company; and o s. 184, CA: the intention to propose a special resolution.

For ordinary business 14 days, place, date & hour of the meeting (Art 45, Table A). For special business in addition to those things required for ordinary business, the general nature of the business must be given (Art. 46, Table A). o Art. 46, Table A defines what is special. Everything in an EGM is considered special. Everything in an AGM is considered special except for those listed out in Art. 46, Table A (a) Declaring of a dividend, (b) consideration of the accounts, balance-sheets and the report of the directors and auditors, (c) the election of directors in the place of those retiring, and (d) the appointment and fixing of the remuneration of auditors. iv. Sufficiency of Notice Sufficiency of notice depends on the facts. If there is insufficient notice, the meeting may be invalid, subject to s.392(2), CA The test is whether the information is enough to enable a prudent member to decide whether or not he will attend the meeting, send parties in his stead, or is content to let matters take their own course at the meeting. Tiessen v. Henderson (1899) o Meeting called for schemes to reconstruct company and the directors stood to benefit from the scheme but this fact was not disclosed in the notice. o HELD: Notice insufficient. The notice did not contain enough information to enable the recipient to make a informed decision o Example of the court protecting the absent member: as they should have the opportunity to consider the matter in light of all the facts. Lau Ah Lang v. Chan Huang Seng (2002) o Notice did not set out the important agenda of the removal of management committee & elect a new one - it prejucided their chance of standing for election o HELD: Notice insufficient, meeting invalidated. Hup Seng Co Ltd v. Chin Yin (1962) o Requisitionists sent out notices of the meeting but did not set out the draft resolutions to be proposed at the meeting. Merely stated that the business before the meeting will be to discuss and vote upon the resolutions set out in the notice of the resolution. o HELD: Notice insufficient, resolutions void. Not even the text of the resolutions sought to be passed was set out in the notice. Polybuilding v. Lim Heng Lee (2001) o Directors deliberately failed to give notice to some members of a written resolution appointing a corporate representative. o HELD: Notice insufficient. Such an omission to give notice was made in bad faith and invalidated the subsequent meeting. Court here did not utilise s. 392. Even if majority is reached, must give sufficient notice to minority. Paillart Philippe Marcel v. Eban Stuart Ashley (2007) o D purported to call an EGM for the purpose of removing Plt from the Board of Directors. The company did not circulate this resolution to the Plt. o HELD: Notice insufficient. Non-circulation rendered the resolution ineffective even though it was validly passed by the majority.

Note: In Singapore however, must take into account the saving provision of s. 392, CA. Defects in notices are irregularities that can be corrected.

d. Quorum of Meeting i. General Requirement Quorum refers to the number of members required to be present to transact the business legally. The minimum number is usually spelt out by the AOA, if not, o S. 179(1)(a), CA: 2 members personally present constitute a quorum. o Art. 47, Table A: 2 members can include persons acting as proxies. Quorum need only be present at the commencement of a meeting and not throughout. But the quorum must at all times in time be at the minimum of 2 persons. o Re Hartley Baird Ltd (1955) Quorum is to be present only at commencement of meeting. The subsequent departure of a member reducing the number required for quorum does not invalidate the meeting.

**Often, where there are groups of shareholders in a company, apart from a numerical requirement for quorum, there will also be a provision in the shareholders agreement and/or in the articles of association stating that each groups representative will have to be present in order to constitute valid quorum (Chang Benety v Tan Kin Fei [2012]) ii. Lack of Sufficient Quorum Lack of quorum does not invalidate the meeting, unless court thinks substantial injustice caused. S. 392(1), CA: a lack of quorum is considered a procedural irregularity, thus it does not automatically invalidate a meeting: see s 392(2) S. 392(2), CA may save proceedings where the lack of a quorum is of little or no consequence, and no shareholders interests are prejudiced by any decision taken at that meeting (where it has not caused or may cause substantial injustice) The provision is inapplicable where the disputed meeting results in decisions being taken that may disadvantage the absent shareholders. Re Goodwealth Trading Pty Ltd (1991) Board meeting purportedly held without a quorum for a decision of winding up. HELD: Meeting invalid. Lack of quorum does not automatically disqualify the proceedings undertaken at the meeting. It will be subject to s. 392, CA and claimant must prove substantial injustice before it can be invalidated. If not, irregularity is cured. iii. Misuse of Quorum Rule Quorum rule cannot be used as oppression. Phua Kong Seng v. Song Lim Hua (2005) o Company had only 2 shareholders with P, 51% and D, 49% shareholding. P made several attempt to convene EGM with proper service of notice but D failed to attend, hence there was no compliance with the quorum requirement. P made an application for a court order for a meeting pursuant to s. 182, CA. o HELD: Court order made. Where D alleges oppression as a minority shareholder, he ought to institute separate proceedings instead of not attending the meeting. Quorum provisions do not confer a form of veto power for a minority shareholder where a deadlock situation applies. iv. One-Member Meeting General rule at UK Common Law is that there must be at least 2 members personally present to constitute a meeting (but NOT required in Singapore) o Re Salvage Engineers (1962) HELD: Meeting invalidated. Needs at least 2 members to be personally present. **However, in Singapore, one-member companies are allowed under s. 20A, CA. o S. 184G, CA: One member company may pass resolution by the member recording the resolution and signing the record. o

e. Voting i. Who gets to vote? S. 180(1), CA: All members are entitled to vote (except those who have not paid up for their shares, preference shares). ii. Number of votes S. 179(1)(c)(ii), CA, Art. 54, Table A: Default rule is 1 poll vote per share. S. 64(i), CA: In publicly listed companies, each equity share carry only 1 vote. S. 179(1)(d), CA: In companies without share capital, 1 member entitled to 1 vote. These are subject to provisions in the articles of association iii. Manner of voting S. 179, CA: 2 ways of voting, either through a show of hands, or through a written poll. Show of hand every member present entitled to 1 vote. Poll every members vote depends on his holding of shares or voting rights + proxies. o S. 178(1)(b), CA: Polls can be demanded. Notwithstanding anything in the AOA, a poll may always be demanded by: (a) Any 5 or more members (including proxies) having the right to vote. (b) Member or members representing at least 10% of total voting rights. (c) A member or members representing at least 10% of the total amount paid up on all the shares conferring the right to vote. o S. 184(4)(a), CA: In the case for a special resolution (needing at least > 75% of those present and voting to pass), the AOA cannot require that more than 5 members are required to demand a poll (more relaxed requirement) Reform: Report of the Steering Committee for Review of the Companies Act no change recommended. However, consider the pros and cons of demanding a mandatory poll: Chapter 2 of Report, para 5. f. Proxies S. 181, CA: Member does not have to be physically present to cast vote. All members have the right to vote by proxy. S. 181(1), CA: Proxy need not be a member of the company. S. 181(1)(a), CA: Proxy can only vote if there is a poll (unless the AOA provides otherwise). Art. 54, Table A: In a show of hand, members or the proxy can vote, and it counts as 1 vote. i. Appointment of Proxy: s. 181, CA A form of agency, where the proxy is the agent and the member is the principal who does not have to be physically present. Two-way proxies: s. 181, CA There must be a 2-way proxy form (form directing the proxy to vote) Art. 60, Table A prescribes the form. S. 181(1)(b): Unless the articles otherwise permit, a member can only appoint at maximum two proxies to attend and vote. But the member must make clear which number of votes each proxy has been given to vote with, or it will be void [s. 181(1)(c)] S. 181(5), CA: It is a criminal offence if the 2-way proxy is not complied with. Deposit of Proxy Form: s. 178(1)(c), CA & Art 61, Table A Art. 61, Table A: The proxy forms must be deposited no less than 48 hours of the conduct of the meeting. S. 178(1)(c), CA: Articles cannot require a member to appoint a proxy and deposit the appointment form more than 48 hours before a meeting.

ii. Revocation of the proxy A proxys power to vote on his principals behalf can be revoked before the meeting at which the vote is to be cast. Art. 62, Table A: Notice of revocation must be given to the company in writing and received by the company at the registered office before the commencement of the meeting, or else the vote is valid. An exception is when the member turns up at the meeting himself. o Cousins v. International Brick Co Ltd (1931) P held proxies totalling 102,000 votes, cast against the 96,000 votes on the other side. Chairman of the meeting held that P lost because members totalling 11,000 votes turned up and voted himself. Issue is could they have revoked their powers this way? HELD: Revoked. Every proxys authority is subject to the implied condition that it should only be used if the principal does not attend and vote. Although it does not revoke the authority per se, it removes the proxys need to cast that proxy vote. But if the principal attends but does not vote, then the proxy may vote on his behalf. iii. Votes by proxy against instruction Tong Keng Meng v. Inno-Pacific Holdings Ltd (2001) o Instructions were given by the principal to use the proxy votes against the removal of P, but the proxy agent used it for the removal instead. o HELD: Votes were spoilt. In proxy voting, if the proxy voted against the instructions, then the vote is spoilt instead of needing a recounting to take into account the contrary vote. Note: However, if principal provides proxy with a blank proxy form and not specify his instructions in writing, then he retains the option of changing his instructions to the proxy orally. However, he will run the risk that the proxy will vote contrary to his intentions and this could be held to be a valid vote. In Tong Keng Meng v. Inno-Pacific Holdings, the court emphasised that the principal could have flexibility, or specificity but not both. **Evaluation: A proxy does not owe a contractual or fiduciary duty to the principal and cannot be compelled to vote according to the principals instruction. Doesnt this undermine the trust in the proxy system if the principal cannot compel the proxy to vote in a certain way? g. Freedom of Voting When voting, members generally have no duty to the company. It is only natural that when a person votes, he does so in a manner that will benefit him personally. However, there are some exceptions: West Transportation Co Ltd v. Beatty (1887) o HELD: Directors of a company are precluded from entering into engagements in which he has a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound by fiduciary duty to protect. Allen v. Gold Reefs of West Africa (1900) (May not be applicable in Singapore) o HELD: When voting for the altering the AOA or varying of class rights, voting has to be bona fide in the interests of the company as a whole. Clemens v. Clements (1976) o HELD: Fraud on the minority exception. Freedom of voting is subject to equitable considerations which may make it unjust to exercise the freedom to vote in a particular way. Unfair prejudice and oppression under s. 216, CA.

h. Procedural Irregularities (Saving provision of s. 392, CA) A members right to insist on full procedural compliance is circumscribed by the courts power to correct the irregularities under the saving provision of s. 392, CA. o Onus is on the member who challenges the meeting to show a substantive irregularity. However, s. 392, CA is relevant only in face of procedural and not substantive irregularity. Not statutorily defined, but there is an inclusive definition: o Absence of a quorum o Defect, irregularity or deficiency of notice or time o Accidental omission to give notice of the meeting to any member. o Golden Harvest Films v. Golden Village held that the list under s. 392, CA is not exhaustive.

i. Distinction between Procedural Irregularity and Substantial Injustice i. Procedural Irregularity/Injustice To determine whether non-compliance was of a procedural or substantive nature, one had to assiduously examine the aim or object of the requirements that were not complied with. Where the notice is one that affects the choice or decision of others, it is not procedural. Irregularity in respect to the quorum required Sum Hong Kum v Li Pin Furniture [1996] 1 SLR(R) 529, at 538 (where there was a lack of quorum on account of the plaintiffs non-participation in the meetings) o Held: Lack of quorum in a meeting, amounts to procedural irregularity. o Proceeding with the meeting denies deadlock provisions in the articles to the person absent, thus found that this also caused substantial injustice. Golden Harvest Films Distribution v. Golden Village Multiplex Pte Ltd (2007) o Board meeting conducted via teleconferencing. P director hung up and the remaining directors passed a resolution to appoint the Chairman. P alleged that the appointment was irregular. o HELD: No substantial injustice, s. 392, CA applicable to cure. o Court found that there was substantial injustice pepetrated by the 3 directors who had repeatedly walked out and caused deadlocks. Mere irregularity per se will not suffice and there was no substantial injustice in this case.

Substantial injustice is more than just ordinary prejudice. Thio Keng Poon v. Thio Syn Pyn (2009) SGHC o Man sued family and 4 companies the family owned for removing him from office, alleging non-compliance with the AOA. o HELD: Court found that there was substantive injustice. Failure to give notice of removal is no longer merely a procedural irregularity and it deprives the incumbent a defense. And on this grounds, found that there was a substantial irregularity. **Chang Benety v. Tang Kin Fei, [2012] 1 SLR 274 o Lack of quorum on several resolutions o CA Held: Found that there was substantive injustice although the lack of quorum per se is a procedural irregularity as established by cases in Singapore. However, this does not automatically validate the resolutions. o **The lack of quorum for important resolutions requiring the various groups to be present and voting made the seemingly procedural irregularity to result in substantial injustice.

ii. Substantive Injustice There must be a direct link between the procedural irregularity and the injustice suffered Injustice must be substantial in nature (Not merely theoretical or fanciful) There may have been a different result if not for the procedural irregularity Burden of Proof: Burden of proving the substantial injustice falls on the person attacking the validity of the proceedings. It is determined by the holistic weighing and balancing of the various interests of all relevant parties not just 1 party but all the parties involved. o The Oriental Insurance Co Ltd v. Reliance National Asia (2008) HELD: Test is the holistic weighing and balancing of the various interests of all relevant parties.

There must be a nexus between the irregularity and the injustice that has occurred. E.g. if proper notice was given, would have brought lawyers or proxies, etc. **Sum Hong Kum v. Li Pin Furniture (1996) o 3 needed to form a quorum but only 2 present. Resolution passed by them to remove the absent person from directorship. o HELD: Substantial injustice, thus s. 392, CA not applicable to cure the irregularity. o Lack of quorum does not automatically invalidate a meeting unless the court opines that substantial injustice had been caused.

Failure to give notice Usually 3 scenarios: [1] Intentional omission of giving notice. [consider this in light of Thio Keng Poon] o Not a procedural irregularity curable by s. 392, CA does not come under ss. 392(2), s. 392(3), CA. o Resolutions will be void even if the AOA provides for it. o Party needs to apply to the court to void it, and is subject to the courts power to validate the meeing under s. 392(4). [2] Accidental omission fault neutral deficiency in giving notice. o Cured by s. 392, CA (since it is a procedural irregularity) o It is prima facie valid unless claimant can show substantial injustice. [3] Notice delivered by recipient failed to deal with it. o Meeting valid because notice was properly given. Welch v. Brittania Industries Pte Ltd (1993) o P director did not attend the AGM because they were not informed about the meeting. o HELD: No substantial injustice. Under s. 392, CA, a meeting will not be invalidated by a failure to issue notice unless it has caused substantial injustice. o **A deliberate omission can lead to a invalidation of the meeting but must be pleaded. The court will not void it on its own initiate absent of the pleading. Polybuilding v. Lim Heng Lee (2001) o 2nd D argued that the resolution to remove him from office was invalid because he had no notice. Companys AOA provides that the resolutions can be validated if signed by the majority of its directors. o HELD: Substantial injustice. It was a selfish act lacking good faith. Notice of a proposed resolution must be issued to all directors. A deliberate move to omit the giving of notice would render the resolutions void even if the AOA provides for its validity

iv. Members Resolutions

j. Types of Members Resolution i. Ordinary Resolution Not defined by statutes but case/common law has some directions. Passed by a majority (50% + 1) of those voting and present in person, or if a poll is taken (rather than a show of hands), those present in person and voting or by proxy. ii. Special Resolution (s. 184, CA) Defined in s. 184(1), CA: o Requiring 21 days notice in the case of public companies or 14 days in the case of private companies. o Passed by > 75% of those who are voting and present in person, or if a poll is taken (rather than a show of hands) those voting and present in person or by proxy.

Situations requiring special resolutions: o Amendments to MOA/AOA under ss. 33, 37, CA. o Resolution to reduce the capital of the company under s. 78, CA. o Resolution to wind up the company under s. 290, CA. o Resolution to remove a director under s. 152, CA. iii. Informal Resolution/Decisions All members acting unanimously (100%) may assent to a decision which will be regarded as a valid resolution without the need to pass it at a general meeting all shareholders must know and approve Applies to Ordinary Resolutions It is an alternative to having a formal general meetings, and is particularly useful for small companies - A rule of convenience But this seems to contradict the requirements for quorums and AGMs to pass resolution Re Express Engineering Works Ltd (1920) o HELD: Where there is unanimity amongst all members, a corporate decision otherwise needing an ordinary resolution, can be made without the formalities. Re Duomatic Ltd (1969) o HELD: Although no formal meeting had been held, the remuneration decision had been made with the knowledge and consent of all holders of voting share. Irrelevant if the non-voting member did not know. However, even if 1 member dissents, then it becomes necessary for a formal meeting to pass the resolutions. Jimat bin Awang v. Lai Wee Ngen (1995) Singapore o HELD: Needs unanimous assent of all members who are entitled to vote, the consent of members not entitled to vote is not required. Hup Huat Food Industries v. Liang Cheng Heng (2003) o At AGM, resolution not formally made but a decision to close down the company was made and agreed upon by all the shareholders. o HELD: Valid informal decision. No shareholders were absent at the AGM. Business in this case had also always been run informally and they all never voted formally on any issues, thus sufficient that nobody voiced any opposition.

Can a Special Resolution be passed by informal assent? Not decided, but unlikely in Singapore In the UK, special resolutions (such as alteration of the AOA) can be passed by informal decisions as per Cane v. Jones (1980). In Singapore, it may not be sufficient because s. 184(1), CA requires that a 21 day written notice of a special resolution to be given, hence informal assent is insufficient However, can shareholders then use s. 392, CA as a sword to affirm the special resolution passed by informal assent, arguing that it was a procedural irregularity that caused no substantial injustice?

iv. Written Resolutions (without meeting) s. 184A, CA The rationale behind such resolutions are to facilitate decision-making by private companies S. 184A(1), CA lays down the general principle that a private company may pass resolutions by written means (in accordance with ss. 184B to 184F, CA) o Provides a more flexible regime for decision making. Ss. 184A(3) and (4) removes the requirement of unanimous consent (required for informal resolutions) and provide that a written resolution is passed if agreed upon by a simple majority (ordinary resolutions) or a 75% majority (special resolutions). S. 184A(2), CA: Written resolutions not applicable for: o Resolutions requiring special notice (eg changing of directors or auditors) o Resolution pursuant to s. 175A which dispenses with holding an AGM for a private company. Minority protection safeguard available o S. 184D, CA: If holder of >5% of voting rights gives notice to directors requiring that a general meeting be convened instead of proceeding with a written resolution, then it is mandatory for directors to hold it.

d. Board of Directors as an organ of the Company

Powers of the Board are normally not controlled by the Companies Act and only regulated by the AOA, otherwise Arts. 79 90A, Table A applies. It is to allow the Board more flexibility to respond rapidly and effectively to the fast changing business circumstances in a competitive world. Unless articles specifically provide, decisions are made by majority and other principles that apply to board meetings apply to the board of directors. a. Failure to give notice of board meetings Aik Ming (M) Sdn Bhd v. Chang Ching Chuen (1995) o HELD: Failure to give notice of a Board meeting may invalidate it. o If notice is given out but does not reach the directors, it is a procedural irregularity that can be validated. Application for validation can be made under s. 392, CA although in this case, the application was refused. Re Goodwealth Trading Pte Ltd (1991) o HELD: The real test, as per s. 392, CA, is whether the failure to give notice resulted in or may result in substantial injustice. Previously, every company had to have at least 2 directors, one who had to be ordinarily resident in Singapore. S. 145(1), CA: Single director companies are now allowed, but residency requirement remains. S. 157B, CA: Director declarations where company has 1 director. o Directors can simply record the declaration and sign on it. o This is consistent with Art. 90A, Table A. Neptune Vehicle v Fitzgerald [1995] 3 All ER 811 Unless 3rd parties require formal resolutions, in practice most Board make decisions informally. To force formalities will result in massive slowing down of the decision-making process, hence most companies AOA allow directors to simply circulate their resolutions. **When company is small and directors and shareholders are identical, there is usually no distinction between decisions made by the Board and the General Meeting. o Jimat bin Awang v. Lai Wee Ngen (1995) HELD: Court approved of this view. Where directors and shareholders are similar, a resolution passed by unanimous assent by the directors can be considered a shareholders resolution. Limits of informal Board decisions? o Informal decisions must be unanimous unless otherwise provided for in the articles (just like informal resolutions of the General Meeting) - Runciman v Walter Runciman plc [1992] BCLC 1084 o If there are dissenting directors, it would be necessary to call for a formal Board meeting. Proper procedures must be followed to override their dissent and avoid substantial injustice. o Notices should still be given out to all directors before the informal Board decision - there should be transparency and fairness in general.

b. One-director companies

c. Informal Board Decisions

5. Corporate Governance
Corporate governance is the set of procedures, laws and institutions affecting the way a corporation is administered. For the purpose of this course, focus is on the issue of accountability and fiduciary duties owed by the directors to the shareholders and creditors. A way of looking at it would be controlling the directors either by placing structures on the Board or imposing duties. 1. Different Constituent of the Company When you talk about a company, we are not looking at the shell of the company, but we are talking about everything that lies within. The various constituencies that make up the company like the (a) Board of Directors, (b) Shareholders, (c) Employees and even the (d) Creditors. 2. Most important constituent? 1. Board of Directors These directors have an interest in seeing how the company is managed and making sure its done properly. But this may not always be a positive thing; they could make agreements that favor themselves or to benefit their own interest. Paramount duty is ultimately still to the company (Singapore & UK) 2. Shareholder Econ Perspective: Seems to be the most important party because when the creditors are paid off, employees paid, the margins/profits eventually go to them. Legal Perspective: They are also the ones that enforce the rights of the company against the directors when they breach their fiduciary duties. Thus shareholders often have the greatest interest in ensuring that the directors act only within their power and not to abuse their powers. We will see that shareholders will have a say in electing the directors, but would have limited to no powers in actually directing them to make certain actions. o Seen in the division of powers between the Board and Shareholders in General Meeting. 3. Possible Conflicts There will often be conflicts within the company mostly between Shareholders and the Board The usual underlying reason for the conflict is the fear that the Board of Directors will abuse their powers or undermine or damage the interest of the shareholders. **But in Singapore and UK, we dont say that, we just say that the directors owe their duty to the company a. Agency Cost (Board vs Shareholders) Agency cost is the cost incurred by an organisation that is associated with problems such as divergent management-shareholder objectives and information asymmetry. We need to link this to the fact that those running the company (directors) may cheat the constituents (eg. shareholders). The problem is because of the disjoint and divergence between the interest of the principal (Shareholders) and the agent (Board). This is the main Corporate Governance problem in the West (in countries like UK and USA). As there are huge companies, with very small shareholders, each holding a very small and seemingly insignificant share of the overall company. But this is not problem so much in Asia as it is not rly prevalent here. Why? As we have a few huge shareholders in most of the companies that exist, who tend to be able to exercise control over the Board (eg. Temasek Holdings) Also, there are a lot of family run companies where the management/ shareholders are often those running the company.

b. Minority Oppression (Majority vs Minority Shareholders) There is also the potential for conflict between the majority and minority shareholders. Often, the interest of the majority and the minority are conflicting and thus as a result, the interest of the minority might be sidelined for that of the majority Hence why a large portion of remedies talks about how a minority shareholder can sue a majority shareholder for oppression using a derivative action (s. 216, CA) c. Conflicts with Creditors (Company vs Creditors) When a company is near insolvency, there could be a potential conflict of interest between the directors and shareholders against the creditors of the company. When a company is near insolvency, there could be a situation where the directors are inclined to act out of line as they having nothing to lose as the company is already on the verge of insolvency. On the other hand, the creditors will not be so happy if the directors take huge risk and lose the entire assets of the company, as this affects their investment/lending.

a. Corporate Structure
1. Organisation of a Company Generally, the Companies Act does not dictate to businessmen how their companies should be organized. Nonetheless, the Act recognizes two main organs of a company - the Board of Directors and the General Meeting of Shareholders. o While these organs may be part of the agency costs problem, they are not agents as such (in the legal sense), but they are the company (ie the principal) for many purposes. 2. Powers of Directors

S. 157A, CA: Powers of directors o (1) The business of a company shall be managed by or under the direction of the directors. o (2) The directors may exercise all the powers of a company except any power that this Act or the memorandum and articles of the company require the company to exercise in general meeting.

Reproduced in Art 73, Table A o sub-section (1) creates a mandatory rule, by which the power to manage the business of the company (i.e., decision making) must be vested in the board or undertaken at the boards direction; o sub-section (2) creates a default rule, by which the companys powers are presumptively vested in the board, and limits the derogation from that presumption to powers vested by the companys constitution in the general meeting 3. Statutory Limitations on Directors s. 160, CA Sale of a substantial portion of the companys undertaking or property o To ensure that the company does not dispose or sell a large proportion of its property or undertaking without the permission of the shareholders. s. 161, CA Issue of New Shares o To ensure that new shareholders dont affect the interest of the shareholders w/o their knowledge as such actions would necessarily affect the percentage share that current shareholders enjoy. o SC Recommendation 1.16: CA should be amended to allow specific shareholders approval for a particular issue of shares to continue in force notwithstanding that the approval is not renewed at the next annual general meeting, provided that the specific shareholders approval specifies a maximum number of sha res that can be issued and expires at the end of two years.

Ss. 162 and 163, CA Loans to directors and companies linked to a director o To ensure that they dont abuse their power or have a conflict of interest to grant favorable loans to themselves. o Steering Committee Recommendations 1.16 - The share interest threshold of 20% in s. 163, CA should be retained. 1.17: The following two new exceptions to the prohibition in s.163 should be introduced: (a) To allow for loans or security/guarantee to be given to the extent of the proportionate equity shareholding held in the borrower by the directors of the lender/security provider; (b) Where there is prior shareholders approval (with the interested director abstaining from voting) for the loan, guarantee or security to be given 1.18: The regulatory regime for loans should be extended to quasi-loans, credit transactions and related arrangements. In line with foreign jurisdictions that recognize quasi-loans.

Firstlink Energy Pte Ltd v Creanovate Pte Ltd [2007] 4 SLR 780 In Singapore the meaning of a loan has a very narrow meaning (would have to entail literally taking out cash and giving it to the director). But in reality, the company can give loans in many other ways in order to pay out this loan (eg. selling an asset without taking anything in exchange or dealing on credit). CA Held: Judge cannot read too much into the word loan as the common law already has a meaning that cannot be expanded to much. At present the court has to use fiduciary duties in order to cover the gap of not being able to penalize the wrongdoing director who receive quasi loans. If the coy sells something cheaply to the director, they cannot catch them under s. 162 or 163, but they have to go back to s. 157 in order to penalize them for their wrongdoing (to cover the gap in our legislation)

4. Duties and liability of Directors S. 157, CA: As to the duty and liability of officers o (1) A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office. This is is more about imposing a duty upon directors. This imposes on to them some general duties in respect to what they should do (positive duties) and what they should not (negative duties). SC Recommendation 1.26 - The duty to act honestly and use reasonable diligence in s. 157(1) should be extended to the Chief Executive Officer of a company.

i. Type of Directors
1. General Requirements S. 4, CA: Director includes any person operating/occupying the position of directors, by whatever name called, and includes a person in accordance with those directions or instructions the directors are accustomed to act and an alternate or substitute director. Why distinguish directors? As the expectations of directors duties may vary depending on the type of director he is. o AWA Ltd v. Daniels (1992) HELD: In contrast to managing directors, non-executive directors are not bound to give continuous attention to the affairs of the corporation. Their duties are intermittent in nature and performed periodically when they need to do it (e.g. when they are appointed to meetings or committees).

a. Executive Director Executive directors work for a company on a mostly full time basis [SPP Ltd v. Chew Beng Gim (1993)], possibly under a contract of service. In smaller and informally-run companies, all the directors may be executive directors to a certain extent because they participate in day-to-day management of the company.

Managing Director Managing director is the most senior executive of the company and is usually entrusted with the management of the daily affairs. AOA usually gives power to the Board to appoint one of themselves as the managing director, subject to the overriding authority of the Board. Outsiders generally assume that the managing director has the authority to act on behalf of the company there is apparent/ostensible authority at the very least. In small companies, the managing director has extensive powers. IN large companies, the managing director is the link between management and the Board. b. Non-executive Director Director who does not work in the company in full capacity. Normally sits on the Board to offer objectivity, prestige, external perspectives and independent judgement of the companys management. Only has 1 formal requirement under s. 201B, CA: o Every publicly listed company must have an audit committee, the majority of which must be composed of non-executive directors (and 1/3 must be independent directors). Generally, may not be held to the same standards of care as a normal director. o Personal Automation Mart v. Tan Swee Sang (2000) HELD: Non-executive directors held to a lower duty of care when compared to executive directors. (but there is an objective minimum standard to which they are held to) AWA Ltd v. Daniels (1992) HELD: In contrast to managing directors, non-executive directors are not bound to give continuous attention to the affairs of the corporation. Their duties are intermittent in nature and performed periodically when they need to do it (e.g. when they are appointed to meetings or committees).

c. Independent Director Definition in the Singapores Code of Corporate Governance: It means a director that does not have a relationship with the company or its management that could interference his judgement to the best interests of the company. What can disqualify the independence? o Employed by the company or its affiliates within the past 3 years. o Accepted compensation from the company or its affiliates within past 3 years. o Immediate family (spouse, parent, brother, sister, son or daughter) of an individual employed by the company or its affiliates within the past 3 years. o Directors being a partner or a significant shareholder with > 5% of shares or an executive officer of any for-profit organisations to which the company made significant payments within the past 3 years (> $200,000). Audit Committee of a company o s. 201B, CA: Requirements regarding the companys Audit Committee o But the Code of Corporate Governance goes further as it requires an even greater level of independence as part of the audit committee to ensure that the business of the company is managed by individuals that are truly independent. However, unlike the the statutory provisions, the Code is not binding on companies, and does not impose any sanctions upon companies that fail to comply with the provisions. The Code acts more as a guidance to companies, and where companies cannot follow the provisions, they are just required to disclose the infringements in their annual report.
s. 201B, CA Non-Executive Director Independent Director Majority Majority Code of Corporate Governance Entire Commitee Majority, including Chairman

d. De Facto Director / Informal Director Person who acts as a director even though not formally appointed as such. This person will be a director in fact and wlll, and as such, will be subject to the usual duties incumbent on a director S. 4(1), CA includes such a person by whatever name called. Label is not important it is not what the person is called, but what he does. He must perform functions that only a director can perform if task can be performed by someone of a lower corporate level, then not considered a director. attending Board meetings etc Re Hydrodam (Corby) Ltd (1994) HELD: Must be proven that [1] he undertook functions only a director can properly discharge and it is insufficient if he managed a companys affairs if it can be performed by a lower level manager and [2] have to look at what the director did and the governance structure of the MOA and AOA. E.g. directing others compendiously, committing company to major obligations and taking part in Board level decisions. Primlake Ltd v Matthews Associates [2007] 1 BCLC 666 at 723 It is not disputed that a de facto director owes the same fiduciary duty as a de jure director. Hence, de facto directors would owe direct duties to the company rather than liability as an accessory to other directors breaches (Statek v Alford [2008]) Revenue and Customs Commissioners v Holland [2010] UKSC 51 There must be some kind of conscious undertaking or assumption of responsibility for the person to be considered a director of a company.

e. Shadow Director A person not named as a director can fall under s. 4(1), CA because they direct the actions of the named/actual directors behind the scene. Director includes any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the directors of a corporation are accustomed to act **They are prima facie subject to all statutory duties and liabilities of a director as well as their common law duties (but not duty of care and skill) o Since the CA does include them under its definition of directors under s. 4(1), they would seem to be subject to at least statutory duties. o They also would seem to be subject to common law fiduciary duties. In other jurisdictions, this shadow director tends to take the form of a shadow company but this is not applicable in Singapore since directors must be humans. The mere fact that he is a shadow director does not impute duties unless it can be shown that there was a fiduciary relationship. But the idea behind the recognition of shadow directors is not to call them real directors, but rather in order to impose liability upon them. o Heap Huat Rubber Company v. Kong Choot Sian (2003) To establish a shadow director, must prove: [1] Who are the directors of the company (de facto and de jure), [2] That Dft directed those directors of the company on how to act in relation to the company or that he was one of the persons who did so, [3] That the directors acted in accordance with the directions, [4] And that they were accustomed to so act. To prove accustomed to so act: o Ultraframe v. Fielding (2005) HELD: Must show that a consistent/governing majority of the Board has been accustomed to act on the directions of the shadow director. If the board usually took his advice, it is immaterial if that 1 time, they exercised their own discretion. Who are not shadow directors? o Professional advisors o Creditor/customer/funder a position of strong influence is not necessarily a fiduciary position.

**Difference is that shadow directors and de facto director is that the shadow director does not claim to be a director while the de facto director claims to be one even without formal appointment. But they are not mutually exclusive: Both are not de jure directors but have exercised real influence in the corporate governance of the company. Also possible for a person to be both de facto director and shadow director if done in succession and because the purpose of identification is different ( Re Mea Corp Ltd [2007]) o Shadow Director: to impose liability upon them for their influence and actions o De Facto Director: To recognize directors that are in fact so but just not yet recognized officially due to a failure to make the necessary registration.

f. Nominee Director Director appointed by a majority stakeholder to keep a close eye on the management of the company to safeguard the majority stakeholders interest. The right to appoint a nominee director is usually within the AOA. A fiduciary relationship exists between the nominee and the principal. Hence, potential situation of conflict duty owed to the coy vs. duty to the principal. It is a thin balancing act as a nominee director in Singapore has the same duties as an ordinary director [W & P Piling Pte Ltd v. Chew Yin What (2007)] The nominee director is expected to always be acting for the companys interest. o Bennetts v. Board of Fire Commissioners of New South Wales (1967) HELD: A nominee director has a foremost duty to serve the interests of the Board before serving the interests of those who appointed him. But in cases of groups of companies/family-run companies, there could be situations where the nominee director can take into account the interests of the principal (eg holding company/shareholder of principal company) if it does not conflict with the interests of the subsidiary company. o Levin v. Clark (1962) HELD: Prioritising interests of the principal allowed when it is in the companys best interest that the Board includes various viewpoints from different shareholders. The nominee director must have honestly believed that the interests of his principal and the coy are identical. Charterbridge Corporation Ltd v. Llyods Bank (1970) Company C gave a charge to guarantee the debts of associated companies in the same group (all controlled by the Principal). Held: Possible to allow such transactions if we take a more generous and broader approach to considering the best interest of the company However, it is also a thin balancing act courts have allowed taking a broader concept of the companys interest but ultimately it is still the companys interest that must be considered, NOT the groups interest. Intraco Ltd v. Multi-pak Singapore Pte Ltd (1995) HELD: Prioritising interests of the principal allowed if the nominee director believed that the transaction was for the benefit of the company as well and that the 2 interests are the same. Allowed as long as they do not sacrifice the interest of any company within the group and the transactions must be commercially defensible on a group basis while not being detrimental to the individual company.

However, the nominee director is not entitled to sacrifice the interest of the company in favour of the person that nominated him to the Board. o Overseas Chinese Banking Corp Ltd v. Justlogin Pte Ltd (2004) HELD: Nominee directors can take into account the principals interest if it does not conflict with the companys interest but it cannot be at the expense of the companys interests. The nominee director should not be bound to act in accordance with the direction or instruction of his principal appointed and must not put the appointers interest before the companys. S. 158, CA - transmitting information upwards to the nominating shareholder (holding company) allowed where director declares this to Board and receives authorization and the transfer of information is not likely to prejudice the companys interest. o MOF Recommendation: to widen this further, and giving a general mandate to transmit non-sensitive information as a matter of practice.

g. Other Directors? Chairman of the Board chairs the directors meetings and signs the minutes of the meeting. o He has a casting vote if there is a deadlock. o He has the same general duties and liabilities as all other directors. Non-director managers are officers under s. 4(1), CA and are employed to put into effect the decisions of the Board. o He does not have the same liabilities and duties as directors (although he may share some). Alternate Directors o Can be seen as the Director equivalent of a proxy for shareholders in general meetings, as they replace directors who may not be able to attend a Board Meeting. o But how are they different? o Unlike a proxy, an alternate director is NOT an agent of the shareholder and is a director in his own right and thus would not be subject to the direction of the director that he is replacing.

ii. Appointment of Directors

General Requirements S. 145, CA: All companies are required to have at least 1 director who is ordinarily resident in Singapore. o Ordinarily resident means residing in Singapore at least 183 days a year. S. 201, CA: Listed companies are required to have at least 3 directors because listed companies need an audit committee consisting of at least 3 directors. S. 150(1), CA: The Companies Act does not prescribe manner of appointment and it is usually left to the AOA. This provision mandates that in public companies, directors must be appointed individually by a single resolution unless prior resolution (by unanimous consent) agreed to allow 2 or more to be appointed as directors together. o Raffles Hotel v. Malayan Banking (No. 2) (1966) HELD: AOA/MOA can prescribe that a certain person/body (apart from the AGM) can appoint the directors. Goh Kim Hai Edward v. Pacific Can Investment Holdings Ltd (1996) HELD: Directors can full up vacancies in the Board themselves or appoint additional directors. But this is a fiduciary duty and must be exercised in the companys best interests. Appointment is also valid only until the next AGM.

S. 146, CA: Person appointed as director must consent to the appointment himself must be willingly subject to director duties. S. 151, CA: Acts done by a director is valid notwithstanding any defects that may afterwards be discovered in his appointment or qualification. Such procedural irregularity does not affect the validity of his acts De facto Directors

iii. Qualification of Directors

General Requirements a. b. c. d. There is no requirement that a director have any education, business experience or any other skills. Substantive requirements: S. 145(2), CA: Be a human (and not a company). S. 145(2), CA: Be of full age and mental capacity. S. 145(1), CA: At least 1 director must be ordinarily resident in Singapore. No director above the age of 70 may be appointed to a public company and to its subsidiaries unless s. 153, CA is complied with (ordinary resolution passed at the AGM). Procedural requirements: a. S. 146, CA: Must file a declaration of consent and statement saying that he is not disqualified. Where MOA/AOA stipulates that the director needs to obtain a certain amount of shares (Art. 71, Table A), then he has to obtain it within 2 months and file the necessary documents as per s. 147(1), CA or else he must resign as per s. 147(3), CA.

a. Disqualification of Directors Disqualification can come in 2 types automatic disqualification, or disqualification subject to court order. Duration of disqualification

i. Automatic Disqualification Section 148(1), CA 154(1), CA Circumstances giving rise to disqualification

Undischarged bankrupt, whether adjudicated as Duration of bankruptcy. bankrupt in Singapore or elsewhere. Convicted of offence involving fraud or Up to 5 years from date of dishonesty punishable with imprisonment for 3 court order. months or more. 5 years from date of latest Persistent default in complying with the relevant conviction or order unless requirements of the Companies Act. leave of court obtained. Disqualification under the LLP Act also leads Until person cases to be to automatic disqualification under the Companies under such a Act. disqualification.

155, CA

155A, CA

PP v. Allan Ng Poh Meng (1990) o Issue was whether fraud and dishonesty had to be a necessary ingredient of the offence, or is it sufficient that the fraud and dishonesty was proven even if the offence does not require it? o HELD: Automatic disqualification. Conviction under s. 103, Securities Industries Act carries with it a disqualification because fraud and dishonesty was proven even though the section does not require it. Duration of disqualification

ii. Disqualification subject to a Court Order Section 149, CA 154(2)(a), CA 154(2)(b), CA 149A, CA Circumstances giving rise to disqualification

Director of a company that went into insolvent Up to 5 years from date of liquidation AND was found by the court to be court order. unfit to act as a director. Up to 5 years from date of Convicted of any offence in connection with the conviction or from date of formation or management of a company or release from prison. s. 157, CA (duty to act with care and skill) and Up to 5 years from date of s. 339, CA (not to enter into debts that the conviction or from date of company would not be able to repay) release from prison. Director of a company that has been wound up on Up to 3 years from the date the ground that it was being used for purposes of the winding up order. against national security or interest.

Quek Leng Chye v. Attorney General (1984) o AP devised scheme to set up a country club and sell membership but failed to disclose material information about the company. o HELD: Court ordered disqualification of AP. The offence is in connection with the formation of a company under s. 154(2), CA, enough to trigger disqualification by the court

b. Effects of Disqualification When disqualified, the person does not cease to be a director automatically, but the onus is on him to vacate his office or be liable for an offence subject to a fine and/or imprisonment. However, most companies have stipulation for the automatic vacation of the offence when there is a disqualification. o E.g. Art. 72, Table A. S. 151, CA: Disqualification does not make the acts of the director void and acts are still binding on the company. o This is because, as a result of the Indoor Management Rule, external parties need not check whether the directors were properly appointed or qualified, and can assume that transactions with him will be binding. S. 409A, CA: Allows members (or any other interested person) to prevent disqualified directors from acting as such. c. Application for leave by disqualifed person to be director Disqualified persons may apply to the court for leave to be allowed to be a director or participate in the management of the company. The onus is on the applicant to convince the court of his commercial integrity. Lim Teck Cheng v. Attorney General (1995) o HELD: The leave is only granted in exceptional circumstances, balancing a number of factors nature of the offence, nature of the applicants involvement in offence, general character of the offender, structure and nature of the company, and interests and risks to the public and other stakeholders.

However, in the case of disqualification under s. 154(1), CA (automatic disqualification after conviction of offences involving fraud or dishonesty with > 3 months imprisonment), the court has no jurisdiction to grant an application for leave. Lee Huay Kok v. Attorney General (2001) o Applicant was convicted of corruption, was automatically disqualified under s. 154(1), CA and applied for leave. o HELD: Leave not granted. S. 154(6), CA stipulated that leave can only be made if a disqualification order had been made, and hence, courts have no jurisdiction to grant leave because the disqualification was automatic and not by court order.

iv. Vacation of Office and Removal of Directors

a. Vacation of Office Death the Companies Act does not prohibit a director from dying in office, nor is any period of notice prescribed before this can be done. Resignation manner of resignation usually prescribed by the AOA, if not, then Art. 72(f), Table A. Glossop v. Glossop (1907) o A directors resignation with proper notice does not need to be accepted by the company before it is effective (unless the directors contract or the AOA requires it). Proof of time of resignation may be crucial because s. 145(5), CA will invalidate the resignation if it will leave the company without any director or any director that is ordinarily resident in Singapore. Effectiveness of a directors resignation shall not be conditional upon the companys acceptance.

Retirement AOA usually provides for the retirement of directors in rotation, if not, then Arts. 63 66, Table A: in which case, the director vacates upon the happening of a specific event. S. 145(5), CA prohibits the retirement of the last director or the last director who is ordinarily resident in Singapore. Automatic Vacation AOA can provide that the office of the director becomes vacant upon the happening of some event, if not, then Art. 72, Table A subject to s. 145(5), CA (as always). AOA/Art. 82, Table A: Alternate director automatically vacates office when his principal does so. S. 153(2), CA: Only automatic vacation clause in the Companies Act relating to when a director in a public company or its subsidiary turns 70 years old. b. Removal of Directors i. Private Company Mode of removal normally provided in the MOA/AOA, if not then, Art. 69, Table A: Power to remove director is vested in the General Meeting by an ordinary resolution before the expiration of his period of office. Samuel Tak Lee v. Chou Wen Hsien (1984) o HELD: MOA/AOA may allow the removal of the directors by the Board, but this is a fiduciary duty and the power must be exercised in the interests of the company.

If the directors are under a contract of service: It is a breach of contract if the director is removed before the expiry of his term of office. The removal of the director would still take effect, but the director would be able to claim compensation for breach of contract. Southern Foundries v. Shirlaw (1940): o HELD: Aggrieved director can claim damages even if the removal is in compliance with the CA/MOA/AOA because the removal remained a breach of contract. Alexander Proudfoot Productivity v. Sim Hua Ngee (1993) o HELD: Measure of damages would be the salary that the director would have received during the period of notice before his removal.

It is possible to remove a director while leaving him as an employee (and this may not constitute a breach of the contact of service e.g. removing him as a managing director while leaving him on the Board).

ii. Public Company S. 152(8), CA: Board cannot remove a director of a public company, regardless of what is in the MOA/AOA right is reserved for shareholders in General Meeting. S. 152(1), CA: Directors are always removable via an ordinary resolution in the General Meeting. o Soliappan v. Lim Yoke Fan (1968) HELD: If the MOA/AOA provides for a removal process, the director may be removed in accordance with the MOA/AOA rather than s. 152, CA. s. 152, CA provides a ceiling but not a floor on how difficult it is to remove a director in a public company. S. 185, CA: Special notice of 28 days must be provided to the company of the intention to bring the motion. S. 152(3), CA: Director to be removed is entitled to make representations to the company, and has a right to speak at the General Meeting in his own defence. o Hence, reading it together = person seeking to remove a director must give 28 days notice to the company but the company can decide to hold the meeting earlier as long as it provides 14 days notice to the members (ordinary resolution). Effectively, the meeting can be held from the 15th day onwards from the day of the person giving notice to the company and it doesnt invalidate his notice. **Even when a director, subject to a contract, is appointed for life, it is an implied term that he shall continue in office as long as he performs his duties satisfactorily and in the interests of the company and its members. o Khoo Chiang Poh v. Cosmic Insurance Corporation Ltd (No. 2) (1974) P appointed as managing director for life in a pre-incorporation contract but was subsequently removed from directorship via s. 152, CA. HELD: Removal justified because P had run the company in his own interests and breached his fiduciary duties. Court held that Ps suspension and removal were justified and his action for damages was dismissed.

MOF Recommendation 1.13: That s. 152 should expressly include private company as well, and not leave it to the articles. Suggest that we are not happy with it being as a default position in Table A, but want to include it in the Act itself.

v. Compensation for loss of office (Statutory Duty)

General Provision Payment to a director as compensation for loss of office as either a director or officer is prima facie prohibited. S. 168(1)(a), CA: Prohibits the Board from making payment to a director as compensation for loss of office as an officer of the company, or as consideration for, or in connection with his retirement from any such office o Very wide because loss of office as an officer and not director. Effect of Contravention: s. 168(1), CA: When there is a breach of s. 168(1)(a), the directors receiving the payment holds the money in trust for the company Evaluation: But courts appears to be willing to constrain the impact of s. 168(1), CA. o Courts have distinguished that deferred remuneration and employment benefits are different from compensation/ consideration/ connection, and can be claimed. o Thus, a certain amount of remuneration payable on successful completion of a contract may be allowed but must be careful that no provision is designed to make it expensive for a company to get rid of a director. o Hence, s. 168, CA can be circumvented by structuring the payments differently. Grinsted v. Britannia Brands (Holdings) Pte Ltd (1996) o Contract provided that the director would be paid his contractual remuneration for 2 years after the termination of his contract of service. o HELD: Remuneration payable. Not caught under s. 168, CA because they were part and parcel of the remuneration package and not intended to be paid for the object of compensation or in consideration for his retirement. o Note: But court seemed to have left out in connection with. Wouldnt the severance package be in connection with his retirement?

a. Statutory Exception to s. 168(1)(a) S. 168(1), CA: Disclosure of particulars of the payment and its approval by ordinary resolution in the General Meeting. S. 168(5)(b), CA: Payment made under a general agreement previously disclosed to the General Meeting and approved by special resolution. S. 168(5)(c), CA: Bona fide payment of damages for breach of contract of service. S. 168(5)(d), CA: Bona fide payment by lump sum, or gratuity for past services rendered. S. 168(5)(e), CA: Payment is agreed upon before the person became director as a consideration for his agreeing to serve as a director. SC Recommendation 1.14: The requirement in s. 168, CA for shareholders approval for payment of compensation to directors for loss of office should be retained. SC Recommendation 1.15: A new exception should be introduced in the Companies Act to obviate the need for shareholders approval where the payment of compensation to an executive director for termination of employment is of an amount not exceeding his base salary for the 3 years immediately preceding his termination of employment. For such payment, disclosure to shareholders would still be necessary.

b. Evaluation

vi. Directors Remuneration (Statutory Duty)

General Provisions Directors are compensated in 2 ways: o Directors fees paid to the director for his role as a director (All directors) o A salary or fee paid to a director who is an employee or who provides some other non-directorial service to the company (Executive Directors only) S. 169(1), CA: Without a resolution solely for the purpose, a company cannot provide or improve emoluments for a director in respect of his office. o But this provision only applies to directors fees and not to the employees salary. This includes an Executive Director who is an employee of the company. Salary of an Executive Director is usually approved by the Board, not the General Meeting. In the absence of express stipulation in the AOA/MOA, the mere holding of the office of director without more (e.g. also as a lawyer) does not entitle the director to remuneration. o Guinness plc v. Saunders (1990) HELD: For salary, must be clear who the approving authority is. For salary of Executive Directors, it is decided by the Board. But an entire and properly constituted Board must approve the payment of these salaries all Board Members need be consulted. In this case, the payment of 5.2 million to the CEO (an Exective Director of the company) was made by a subcommittee of the Board, that left out one of the Board members, thus held to be void. Heap Huat Rubber Company v. Kong Choot Sian (2004) HELD: Special remuneration not granted. Court approves of the rule n Guinness v. Saunders. The strict rules of equity can only be relaxed if the Board (in this case) approves of it as per the AOA. On the facts, the director did not obtain such a grant, and is thus, inconsistent with the express relaxation as contained in the AOA. Equity cannot intervene.

vii. Relationship between Shareholders and Directors

a. Trustee-Beneficiary People often try to analogize the Board of Directors as trustees to the shareholders, but this relationship is different and it is hard to see the similarities. Although it would seem logical to think of directors as trustees of the property that they are managing with the shareholders being the beneficiary, as the shareholders are the ones that ultimately derive the profits, they do not owe the same fiduciary duty that a trustee owes his beneficiary in a traditional trustee-beneficiary relationship. Perhaps the best way to think of the directors is to think of them as trustees in the sense of holders of the powers vested in them, but not as trustee of the companys property on behalf of the shareholders.

Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 o Directors of a limited company occupy a position peculiar to themselves. In some respects they resemble trustees, in others they do not. In some respects they resemble agents, in others they do not. In some respects they resemble managing partners, in others they do not.

b. Principal-Agent Directors of a company are not agents of shareholders, as they do not derive their authority from the principal. They are vested their power by virtue of their position on the Board, not from their principal. This is valid even in cases of nominated directors that are only sitting on the Board because they have been nominated by the majority shareholders. Because under the eyes of the law, it recognizes that the only duty owed by the Directors is that to the company, and not a principal-agent responsibility to the majority shareholders. However, in reality, this may not always be the case, as the nominee director would instinctively take into consideration the interest of the principal or major shareholders that had nominated him/her to the Board. Kuwait Asia Bank v National Mutual Life Nominees Ltd [1991] 1 AC 187 at 222 o In the performance of their duties as directors(the nominee directors) were bound to ignore the interests and wishes of their employer, the bank. They could not plead any instruction from the bank as an excuse for breach of their duties to AICS.

c. Directors Other Relationship with or to the Company 1. 2. 3. 4. An employee of the company with a contract of service (like a CEO or MD) A shareholder in the company (like in Salomon v Salomon) A creditor of the company; (like in Salomon v Salomon) On particular facts, jointly or severally liable with the company (where the Director assumes personal liability for his action or where he has acted without actual authority and the principal refuses to ratify his or her acts (eg TV Media v Andrea Dcruz)

b. Directors Duties
i. Statutory Duties 1. Duty to act honestly and use reasonable diligence s. 157(1) General Rule: S. 157(1), CA: As to the duty and liability of officers. o (1) A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office. o Delineates the general duty that a director owes to the company To act honestly duty not to act in bad faith. To use reasonable diligence to make all the necessary preventive measures.

Lim Weng Kee v. PP (2002) o P, managing director of a pawnshop charged under s. 157(3)(b), CA for failing his duty under s. 157(1), CA to exercise reasonable diligence in the discharge of his office, by permitting the release of pawned items before the cheques presented for repayment were cleared. Cheques were subsequently dishonoured and company suffered substantial losses of millions of dollars. o HELD: Reasonable diligence embodies the common law duties of care (in a composite tortious sense, which seems to imply negligence instead). The standard is objective like the common law duties and thus, directors in breach can be liable both criminally and civilly. o Act honestly embodies the common law fiduciary duties, and mirrors those general fiduciary duties as per Cheam Tat Pang v. PP (1996) held to cover a multitude of obligations: [1] Must act bona fide in the interests of the company. [2] Must avoid conflicts of interest (with personal interests, with principle interests etc). [3] Must employ powers and act for a proper purpose and not for any collateral purpose. Hence, s. 157(1), CA merely codifies the general law duties. o This is the statutory equivalent of the duty to act bona fide at common law. CRITICISM by Walter Woon: Suppose a director attends all meetings and reads all the board papers diligently there is no question about his diligence. Suppose further that he carelessly fails to spot an obvious sign that the CEO is involved in a conflict of interest situation (negligent). Can he be prosecuted for negligence? o Must remember that s. 157(1), CA is an offence-creating statute and it would arguably be inappropriate to convict the director on this basis since he is negligent and not un-diligent. o If the legislative intent had been to criminalise negligence, clear words should have been used. o Hence, argues that Lim Weng Kee is wrongly decided in conflating the statutory duties with the common law duties. o **Nonetheless, this decision carries the weight of authority, therefore the position in Lim Weng Kee will be the position the courts take. MOF Recommendation 1.26: The duty to act honestly and use reasonable diligence in section 157(1) should be extended to the Chief Executive Officer of a company. MOF Recommendation 1.23: Pending ACRAs review, a breach of the duties in section 157 should still render an officer or agent of a company criminally liable.

2. Duty to not make improper use of any information s. 157(2) s. 157(2), CA - An officer or agent of a company shall not make improper use of any information acquired by virtue of his position as an officer or agent of the company to gain, directly or indirectly, an advantage for himself or for any other person or to cause detriment to the company. o This provision was initially used to target insider trading, but there is now specific insider trading provisions thus now covers a general case of conflict of interests. SC Recommendation 1.24: The prohibition in section 157(2) should be extended to cover improper use by an officer or agent of a company of his position to gain an advantage for himself or for any other person or to cause detriment to the company.

3. Duty to Disclose (interest in transactions, property etc) s. 156 The Companies Act requires directors to disclose certain information regarding their personal interest in any transactions or property to the company. Disclosure of potential conflicts is mandated by s 156. Timely disclosure is required by the Act as part of the commercial morality expected of a director. a. Disclosure of Interest in Transaction s. 156(1) s. 156(1), CA: Disclosure of Interests in transactions. o Subject to this section, every director of a company who is in any way, whether directly or indirectly, interested in a transaction or proposed transaction with the company shall as soon as practicable after the relevant facts have come to his knowledge declare the nature of his interest at a meeting of the directors of the company.... This is general provision that provides that directors who have a personal interest in a transaction or property that the company is involved in must make disclosure of this interest to the Board of Directors as soon as practicable. o However, this duty does not seem to be crafted in the same way as ordinary fiduciary duties as it provides for a positive duty to disclose, rather than a negative duty (view followed in UK and Australia). But this is recognised in Singapore as a fiduciary duty to disclose (Townsing Henry & Lim Suat Hua v Singapore Health Partners) Compare this provision to s. 177, UK CA: Seems to be very similar in nature o s. 177, UK CA: Duty to declare interest in proposed transaction or arrangement (1) If a director of company is in any way, directly or indirectly, interests in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.

b. Disclosure of conflict arising from holding other offices and property s. 156(5) s. 156(5), CA: Disclosure of Interests in property o Every director of a company who holds any office or possesses any property whereby whether directly or indirectly duties or interests might be created in conflict with his duties or interests as director shall declare at a meeting of the directors of the company the fact and the nature, character and extent of the conflict.

ii. Common Law Negligence Duties (Duty of Care, Skill and Diligence)
Common Law - Duty of Care and Skill A directors duty of care and skill is about competence of the director. This duty is very much similar to tortuous duties of care (negligence duty). Thus this duty is often lumped together under the general rubric of negligence. But conceptually, the duty to be skilful is distinct from the duty to be careful and distinct from the duty to be diligent. a. Standard of Care, Skill and Diligence Traditional Standard Traditionally, these are viewed as a single component based on a purely subjective standard. Directors only had to merely display such competence as they were capable of the honest fool argument A reflection of the fact that directors were commonly seen as mere figureheads of the company o Re Cardiff Savings Bank (1892) HELD: No breach. Director held not have fallen below the required standard of care even though he had only attended 1 Board meeting. To hold him guilty of neglect or omission in respect of this duty would be to fix him with liability for the neglect and omission of others rather than his own. Re City Equitable Fire Insurance Co Ltd (1925) HELD: A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.

Current Standard Minimum Objective Standard Presently, the duties are normally treated as 3 distinct components and based on a minimum objective standard. **Standard will be made more stringent (but not lowered) based on the directors particular expertise or position in the company (eg Executive Directors involved in the day-to-day running of the company or Solicitors/Auditors with specialised skills, will be held to a higher standard compared to NEDs) o Daniels v. Anderson (1995) HELD: A director is not an ornament, but an essential component of corporate governance. Consequently, a director cannot protect himself behind a paper shield bearing the motto dummy director. The Board simply did not know what the manager was doing with the companys $$ but due to their refusal to take proper measures, Board found to have breach this duty of care and skill. If the director does not have sufficient business experience, he must acquire knowledge by inquiry or refuse to act as a director. Lim Weng Kee v. PP (2002) HELD: Singapore approved of the obligations on directors as set out in Daniels v. Anderson. The minimum objective standard is not fixed but a continuum, depending on factors like: The individuals role in the company. The type of decision being made. The size and the business of the company. But ultimately, they are still only expected to be reasonably diligent and will be held to a standard of a reasonable director found in that position/situation (objective test/assessement).

Re Barings plc (No 5) [1999] 1 BCLC 433 Director was trading on Nikkei Futures index (high risk investments), and this was creating risk that eventually brought the downfall of the company. Fellow directors were not competent enough to understand or evaluate the risk profile of his investment and transactions Held: Three other directors found to have breached their directors duty to act with care and skill, and thus were disqualified as directors. Court found that each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them. Directors were expected to know about the dealings of the company and can no longer plead ignorance. Idea behind raising the bar is that if you dont understand the dealings, you shouldnt be sitting on board. **Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the companys business to enable them properly to discharge their duties as directors. Applied locally in Vita Health Laboratories v Pang Seng Meng [2004] Whilst promotion of entrepreneurship is good, there is a standard of commercial morality that must be maintained.

b. Can a directors duties be delegated? Whilst there are provisions in the companies act that provide for allowances to allow directors to get external advice and information, they are still expected to supervise and determine for themselves if the advice and information is reliable, thus the duties that they owe to the company are non-delegable and the ultimate responsibility for these duties lie solely with the directors.

s. 157C, CA - Use of information and advice o (1) Subject to subsection (2), a director of a company may, when exercising powers or performing duties as a director, rely on reports, statements, financial data and other information prepared or supplied, and on professional or expert advice given o (2) Subsection (1) shall apply to a director only if the director (a) Acts in good faith; (b) Makes proper inquiry where the need for inquiry is indicated by the circumstances; and (c) Has no knowledge that such reliance is unwarranted. Vita Health Laboratories v Pang Seng Meng [2004] 4 SLR 162 o [14] The obligation to act in the companys interest is regardless of whether the director is executive/ non-executive. o [21] A director who delegates duties still retains the duty to supervise their discharge. **Is it too onerous a duty to impose on directors, particularly in more highly litigious societies (like US) as this could lead to directors being excessively liable for any breaches o Hence the courts have come up with possible ways to reduce the liability of directors through the business judgment rule This rule is applicable in US and Malaysia, but not in Singapore.

c. The issue of causation Since the duty of care and skill is akin to that of negligence liability, the issue of causation might arise in respect to the breach of directors duties. - Ie A non-executive director may argue that even if they had tried to prevent a fellow director from breaching his duties of care, he wouldnt have been able to stop them from being negligent, hence by causation rules, such a director should not be held liable. - However the UKCA case of Lexi Holdings suggest that these non-executive directors cannot escape liability by pleading that their actions would not have stopped the breach from occurring. Lexi Holdings (in admin) v Luqman [2009] EWCA Civ 117 - HC seemed to see it that the NEDs were not liable due to their inactivity in the running of the company. - Ie. The court was satisfied that if you had tried your best and the breach would still have happened, they would not impose liability. - But CA overruled this decision and found that causation rules are to be applied in the same way and that the non-executive directors were expected to carry out their duties of care and skill to the best of their abilities. - Even though you are an NED, you would still be required to ask uncomfortable questions such as to force them to disclose this information. Can no longer claim to be an inactive director and thus limit their liability for the fraud of fellow directors.

d. Do directors duties extend even after he has left the company? The duty of care or skill does not carry on Does not make sense to expect the directors to exercise care and skill when he is no longer part of the company. However, other fiduciary duties (like the no profit, no conflict rules) seems possible to carry on even after the directors has left the office United Kingdom (Statutory Provisions) s. 170, UK CA: Scope and nature of general duties o s. 170(2), UK CA: A person who ceases to be a director continues to be subject to (a) the duties in s. 175 (duty to avoid conflicts of interest) and (b) to the duty in s. 176 (duty not to accept benefits from third parties) o Seems like a logical thing to do as directors may use the excuse that they have left the company already in order to avoid liability. o They might engineer or plan the transfer of asset or the conclusion of agreement to coincide with when they are no longer part of the company Singapore (Common Law) Locally, the courts have the discretion to asses if there is sufficient evidence to bring about a conclusion that a director the use a fact-based analysis o But some cases still suggest that fiduciary obligations end with resignation: Mona Computer Systems v Chandran [2010] SGHC 275 - But this person was not a director, but was only a senior employee was thus imposed with a fiduciary duty though he was not a director. - Accepted that he would not have controlled things as much as director could, thus would not held to owe any fiduciary duties after his resignation.

iii. Fiduciary Duties under General Law

1. Act Bona Fide in the Companys Interest (s 157)

Require a director to have a subjective honest belief that he is acting in the bona fide best interest of the company. This requirement is quite subjective in that it merely requires a director not to act in bad faith, but does not go as far as to require the director to always do good. A director who fails to comply to his duties will be imposed with both civil and criminal liability Requires a director not to take advantage of the information that they have received as part of their position as a director and subsequently use it for profit (no profit rule). Provides that if you comply with s. 156(5), you will not face criminal liability o Can still face civil liability Provides that a director cannot do certain things without making a disclosure. o Merely provides for a negative duty (ie what a director should not do).

2. Avoid Conflict of Interest (s 156, CA but disclosure only?) 156(5)

3. Use Powers Only for their Proper Purposes (not explicitly provided for in CA) Directors are obligated to exercise the powers that they are given and to use the companys assets for the purpose they were intended. o It is no defence for a director to assert that she acted bona fide in the interests of the company or was ignorant of the law if her actions were for an improper purpose Most commonly arises in a hostile takeover situation in which directors via the M&A have been given a wide scope of authority to issue shares.

4. Duty not to fetter discretion

As fiduciaries, directors are required to actively exercise their discretion before coming to a decision that they can honestly say is in the companys interests. Therefore, directors cannot bind or fetter themselves to decide in any particular manner . o E.g., agreeing to vote at board meetings in accordance with the direction of some other person. This duty is most relevant in the case of nominee directors . S. 158, CA provides conditions for nominee or multiple directors to disclose to his principle or other company information obtained by reason of his position as a director. Where there is a breach of a fiduciary duty, the damages that are provided is more than just a normal breach of reasonable care a higher standard is required. Can take more than just damages, can possibly also award the disgorgement of profits and tracing of all profits

Evaluation of the Classification of Fiduciary Duties

1. Act Bona Fide in the Companys Best Interest (s. 157, CA) Requires the director to have a subjective honest belief that he is acting in the interests of the company subjective dihonesty is required in order for there to be bad faith on the part of the director (unlike the more positive obligations imposed on directors to exercise their powers for proper purposes) Objective or Subjective test? - It is what the director himself subjectively believes and not what the court may consider (with the benefit of retrospection or hindsight) o ECRC Land Pte Ltd v Wing On Ho [2004] 1 SLR 105 a court should not, with the advantage of hindsight, substitute its own decisions in place of those made by directors in the honest and reasonable belief that they were for the best interests of the company, even if those decisions turned out subsequently to be money-losing ones. Howard Smith v Ampol Petroleum [1974] AC 821 at 832 There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.

It is said that the directors must exercise their discretion bona fide in what they consider (not what a court may consider) is the interest of the company. The courts do not sit as courts of appeal over decisions of management or is it there to exercise a supervisory role. Vita Health Laboratories v. Pang Seng Meng (2004) o HELD: Court approved of ECRC Land Pte Ltd v. Wing On Ho, and held that the court should be slow to interfere with commercial decisions taken by directors. o Company structure provides for limited liability and assumes the distribution of risks. Undue interference of the court will dampen and stifle appetite for commercial risks and entrepreneurship. Just because a director makes a wrong decision does not mean that he has breached his fiduciary duty to the company. However, the fact that the directors alleged belief appears to be unreasonable may suggest that the belief was not honestly held, but not conclusive until the court finds as a fact that the director acted with a lack of bona fides. Group of Companies Recent case law suggests that, with regard to group companies, an objective standard could be considered, of whether an honest and intelligent man in the position of the director could reasonably believe that his actions were in the best interests of the company. Intraco Ltd v. Multi-pak Singapore Pte Ltd (1995) o Intraco was a creditor of City Carton and Box Pak. These 2 companies were controlled by a group of individuals who also controlled Multi-pak. Because City Carton and Box Pak could not repay the debts, Multi-pak purchased the $2.3 million debts in return for Intraco buying Multi-pak shares and proving a $300,000 loan. Receivers of Multi-pak later argued that the directors of Multipak breached their fiduciary duty to act bona fide in the best interests of Multipak because in reality, the debts were only worth a fraction of that $2.3 million. o HELD: Court found that there was no breach of duty. Court said to look to the benefit of the group as a whole, and not just the individual company. o Test: whether an honest and intelligent man in the position of the directors, taking an objective view, could reasonably have concluded that the transactions were in the interests of the respondents an objective test. o Multi-pak benefitted from the deal because the strategic alliance with Intraco (a government-linked company) allowed it access to marketing and supply links.

i. Business Judgment Rule This rule is a presumption that if a director follows his business judgment but it is eventually realized that he had made an error, he would be safe from negligence liability. This rule is applicable in US, Australia, and most recently, Malaysia. The business judgment rule is a presumption that works in favour of Directors if: a. If the directors is not acting in a position of a conflict b. Board must have been well informed c. They must act rationally or reasonably (must be on the face of it, having acted rationally) This is a strong rule compared to statements from cases about not second guessing directors (eg Howard Smith, ECRC Land, Vita Health) o But the problem is, that we alr do this in the area of negligence liability. o And the courts will analyse whether those actions are what a reasonable director would do. And more skill will be expected from those with greater skills/training.

What are the advantages and the dangers of such a rule? Advantages In US, there is a fear of being sued for negligence thus this provides them with protection against unnecessary litigation! Disadvantage/Dangers Becomes a very formalistic defence Directors may not direct their minds towards acting in the best interest of the company and thinking about whether it was reasonable to act in a certain way, but rather, they will just follow the steps and ensure that they are safe from liability for a breach of their duties. They will ignore the underlying point reason for having the rule in the first place it will merely become a means to protect themselves. In Re The Walt Disney Company Derivative Litigation, 825 A2d 275 Where one of the senior employees (Chairman of the Board) was given $140 mil as a severance package after working for just 14 months. Shareholders tried to explore the means of suing the board for the breach of their duties via a derivative action. Held: Board fulfilled the presumption of the business judgment rule, as (a) the directors did not have a conflict of interest as they were not getting any benefits, (b) they were well informed: they had a HR consultant that said the 140million was reasonable given the state of CEO pay at that time and the decision (c) was a rational one.

Malaysias Business Judgment Rule in Companies (Amendment) Act 2007 New s. 132(1B) provides a form of immunity in that a director would be deemed to have fulfilled his duty of care and skill required under s 132(1A) if the decision was made in good faith and for proper purposes and the directors had no material personal interest in the outcome of the decision. Evaluation: Should we have something like this in Singapore?

2. Avoid Conflict of Interest (Duty to Disclose) s. 156(5) s. 156(5), CA Disclosure of conflict of interest o Every director of a company who holds any office or possesses any property whereby whether directly or indirectly duties or interests might be created in conflict with his duties or interests as director shall declare at a meeting of the directors of the company the fact and the nature, character and extent of the conflict. This provision seems to create a duty of disclosure for directors who are conflicted between their own personal interest and their duties owed to the company. o However, this does not seem to be specify a particular duty because the underlying duty that this provision is trying to support is the no conflict, no profit duty. And this duty to disclose is a means to which a director could ensure that he does not breach this duty. Compare this provision to s. 175, UK CA: This seems to be much clearer as a duty that is owed by the directors, and the requirement for disclosure only comes after (s. 177) o s. 175, UK CA: Duty to avoid conflicts of interest (1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or many possibly conflict, with the interest of the company. Hence, it might be argued that this may not necessarily be an independent fiduciary duty, and that the actual duty is not the no profit, no conflict rule. o And thus disclosure can be seen as a solution or a way out to cure the problem of the conflict of interest, existing to supplement the other existing and recognised duties. o It is a clear channeling provision to point directors towards making full disclosure rather than making a specific direction of what they should be doing. **Furthermore, s. 156, CA is fairly narrow in its scope as it only protects the directors from a criminal liability but not civil liability (which is still governed by case law)

i. Sufficiency of Disclosure *Sufficiency of disclosure will depend on the intelligence and sophistication of the person to whom disclosure is required to be made: see Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 at [107] o At the end of the day, it is the decision of the principal to make with respect to waiving the conflict. As long as there are guidelines to force directors to obtain approval, and they have done so, the courts will not step in to interfere. Guinness v Saunders [1990] 2 A.C. 663 o Issue arising in this case was whether Ward could keep the 5.2 million fee for giving some professional advice in the takeover of Distillers o Held that trustee and fiduciaries cannot profit from their position this was a clear case of self-dealing. o Court found that the whole board did not sanction payment as one of the members of the Board was not present, and the articles of association required that the whole Board give approval and also, s. 317, UK CA required disclosure of interest to the Board, thus the contract was set aside. o He did manage to get a quantum meruit to remunerate him for his services, but much less than the initial amount o Conclusion: If you want to make disclosure, make sure that It is done to the correct parties and that it is in accordance with the articles and the Act.

ii. Is this duty really a fiduciary duty? Australian Position - Only those negative duties can be considered to be fiduciary duties, and not the duty to disclose P & V Industries Pty Ltd v Porto [2006] VSC 131 at [23] - This means that the no conflict and no profit rules encompass the whole content of fiduciary obligations and the duty of loyalty imposed on a fiduciary is promoted by prohibiting disloyalty rather than by prescribing some positive duty. - Seems to be seen as enforcing the negative stuff, thus stopping you from straying or taking advantage of your position.

UK Position Adopts a very pragmatic and realistic approach in that the courts or the government cannot enforce or force these directors to act in the best interest, but they can only stop them from acting in a way that would prejudice the interest of the company. Attorney-General v Blake [1998] Ch 439, 455 (CA) equity is proscriptive, not prescriptive It tells the fiduciary what he must not do. It does not tell him what he ought to do.

*Singapore Position However, in Singapore, the courts are unlikely to follow the view taken by the courts in Australia or UK. In the SGCA case of Townsing Henry, the court found that one facet of duty of good faith is the duty of loyalty preventing a conflict of interest, thus both positive and negative duties would be considered fiduciary duties! Furthermore, in the recent case of Lim Suat Hua v Singapore Health Partners [2012] SGHC 63 at [92] and [93], the court found that there is a fiduciary duty of disclosure owed by directors and that this duty could be ratified by the members of the company. *Academics still say that there is a difference between positive duties and negative duties and whether both of them should be classified as fiduciary duties. **They suggest that it is easier to say that any duty that attaches itself to the office of a fiduciary to be considered a fiduciary duty.

a. Self Dealing and Fair Dealing Self Dealing If a director attempts to represent the interest of both the company and himself in a transaction, there is an obvious conflict of interest and his duty Self Dealing It is likely that most cases involving a director and the company are of self-dealing since the director cannot be expected to have regard to both his own personl interest and that of the company as he also represents the company. A party cannot be both the buyer and seller of transaction and still be said not to have a conflict of interest.

Tito v Waddell (No 2) [1977] Ch 106, 241 o The self-dealing rule is that if a trustee sells the trust property to himself, the sale is voidable by any beneficiary ex debito justitiae, however fair the transaction.

Although it is the companys property (due to the principle of separate legal entity), but directors are still seen as a trustee of the company (not in the legal sense), much like the custodians of the companys property. So any time they deal with the company (receiving high directors fees, buying companys property), it would be seen as a form of self-dealing as it is seen as them entering into such transactions to benefit themselves. s. 156(1), CA Seems to cover self-dealing o Every director of a company who is in any way, whether directly or indirectly, interested in a transaction or proposed transaction with the company shall declare the nature of his interest at a meeting of the directors of the company s. 156(5), CA Difference between self-dealing and general conflict of interest o Every director of a company who holds any office or possesses any property or interests might be in conflict with his duties or interest as director shall declare the fact and the nature, character and extent of the conflict.

Fair Dealing However, it is different if a director buys shares from the shareholders as in Percival v Wright as opposed to buying the companys business, this could be considered fair-dealing instead. Tito v Waddell (No 2) [1977] Ch 106, 241 - The fair-dealing rule is that if a trustee purchases the beneficial interest of any of his beneficiaries, the transaction is not voidable ex debito justitiae, but can be set aside by the beneficiary unless the trustee can show that he has taken no advantage of his position and has made full disclosure to the beneficiary, and that the transaction is fair and honest. - Director can say that this is fair and not the same as self-dealing and thus would seem to fall under 156(5) instead. Percival v Wright [1902] 2 Ch 421 - Where Directors bought shares from the shareholders without disclosing reason. - Here shareholders selling their own beneficial interest, but the conflict is not as intense as buying the companys property - quite a pro-director decision - Today insider-trading law would cover this breach, but from a company law POV, the directors had not done anything wrong. - The directors of a company are not trustee for individual shareholders, and may purchase their shares without disclosing pending negotiations for the sale of the companys undertaking.

b. No Profit Rule A director, even though acting outside the scope of his directorship, cannot retain any profit he made through actual misuse of his representative position. This is because the director occupies a fiduciary office and this duty of loyalty, to which every fiduciary is subject, obliges a director not to place himself in a position where his duty and his interest conflict. This rule is related to the rule that a director must act in the interest of the company; the two often overlap, for when a director makes his interest paramount, invariably he will not be acting in the best interest of his company. o Unless he has provided full disclosure and obtained the informal consent of the company, a director who acquires benefit in connection with his office is accountable to the company for that benefit. Furs Ltd v Tomkies (1936) 54 CLR 583 o No director shall obtain for himself a profit by means of a transaction in which is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and by resolution a general meeting approves of his doing so, or all the shareholders acquiesce. o The director cannot take advantage of his position and get a profit, even if the company is in no position to exploit the business opportunity. Regal (Hastings) Ltd. v Gulliver [1942] 1 All ER 378 o Company was trying to acquire a lease of two other cinemas, through a subsidiary (Amalgamated), but the landlord required Amalgamated to have 5000 worth of paid up capital. But Regal was only able to raise 2000 itself, thus the directors, the company solicitor and some outsiders contributed the remaining amount. The deal to acquire the cinemas eventually fell through. o The directors eventually sold their shares in Amalgamated and had made a profit and Regal was eventually sold and a new Board was elected. This new Board brought a claim alleging a breach of fiduciary duties by the original directors for obtaining a profit despite the conflict in interest. o HL Held: Whilst the defendants were found to have acted honestly, they were found to be liable to account for their profits made on the sale of the Amalgamated shares, as the opportunity for profit came to them in their capacity as fiduciaries of the company, and therefore had to disclose the profits to the shareholders if they wanted to get approval, which they did not do. **Evaluation: No-profit rule can be seen as extension of no-conflict rule, or separately o If it were an extension of the no-conflict rule, then as long as the profit is not derived from a position of conflict with the company, then it would be allowed. o However, if the rules were separate, the rule would be very strict because it suggests that parties cannot make a profit nor can they act in a situation where there is a conflict between their duties to the company and their own personal interest.

There are many situations where a party can gain benefit not directly from the company, but from a third party. For example, where a director of a company has privileged information and then a third party offers to the director of a company a bribe, and the director then exploits the information that he has to get a profit. o Is this as strict as the no self-dealing rule? - Here there is no loss to the company, but merely the director taking advantage of his privileged information for his own profit. - How strict must the rule be - must it be a real and sensible possibility of conflict, or does the mere existence of conflict sufficient?

Mahesan v Malaysian Government Officers Co-operative Housing Society (1978) o Plt was a director and employee of the society, and in connection with a transaction involving the purchase of the land, the Plt received a bribe from a third party. o Held: Since the bribe had caused the society to pay more for the land than it was actually valued at, the society was entitled to recover the amount of the bribe or alternatively the damages for the Plts breach of duty. Since the loss to the company was greater than the amount of the bribe, the Plt was ordered to pay damages to the society. Attorney General for Hong Kong v Reid (1993) o Privy Council held that where a fiduciary receives the bribe from a third party, he becomes a debtor in equity to the principal/company for the amount of the bribe. Concurrently, he is the constructive trustee of any property that he acquires with the bribe. Thus, the company can sue for the amount of the bribe or for the property.

c. No Conflict Rule A director is under an obligation not place himself in a position where the interest of the company whom he is bound to protect comes into conflict with his personal interest (dutyinterest conflict) or the interest of a third party (duty-duty conflict) for which he acts. This rule is so strict that it does not even taken into consideration whether or not the transaction is a fair one; it will be set aside regardless. Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461, 471 (149 RR 32) o it is a rule of universal application, that no one having [fiduciary] duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into.

**The authorities seem to suggest that originally, when the concept of fiduciary duties was being developed, the courts took a very strict rule regarding the breach of fiduciary duties. Initially, a mere possibility of conflict was sufficient for breach of fiduciary duties. But in the modern context, it can be said not to be so strictly implemented, in which the courts require a real and sensible possibility of conflict in order for there to be liability But the courts will once in awhile go back to this strict language when required. i. Duty to Company-Directors Interest Conflict The old case law in the UK and Singapore seem to suggest that a strict approach to a conflict of interest should be taken where there is the mere possibility of conflict, the director would be found to be in breach of his fiduciaries duties. Industrial Development Consultants Ltd v. Cooley (1972) o Company attempted to contract with 3rd party who refused. 3rd party then offer the contract to the director, Cooley who resigned without disclosing the offer. o Hehld: Breach of duty to avoid conflict. Cooley had to account for the profits made on the contract even though the company could not have made the profit. The fact that the company could not itself have succeeded in getting the property/business opportunity is irrelevant. o Evaluation: Very strict on the facts, as the company only had a 10% chance of getting the contract, and the Dft was not a director, only a senior employee!

Followed in Singapore by Hytech Builders Pte Ltd v Tan Eng Leng [1995] o Director diverted corporate opportunity to another coy in which he was a director when Hytech was deemed unsuitable to bid for the contract o Held: Even if a company could never have gotten the profits for itself, that is irrelevant, a director cannot act for his own personal gain when it is in conflict with duty that he owes to the company. o A director therefore cannot take advantage of a coys inability to secure the business and use it for his or another companys profit. Regal (Hastings) Ltd. v Gulliver [1942] 1 All ER 378 o Here the directors were held to be liable for a breach of director duties in making a profit from the sale of their shares in the subsidiary company, as there was a conflict of interest between their own personal interest and the interest of the company. o Richard Nolan suggest that there is clear conflict of interest as the court could not say for certain that there was no other way for Regal to obtain financing in order to raise the required money. If you really were focused on your job as a director, you would need to do the best for the company by finding alternate sources of financing and not immediately offering to raise the money by themselves. And what the law does is that it stops you from straying and taking advantage of your position at the expense of the company as the profits would have accrued to them rather than the directors o Court fell back to the true essence of the fiduciary duties which is the no profit, no conflict rule. Boardman v Phipps [1967] 2 AC 67 o Confidential information acquired by fiduciary in the course of a fiduciary relationship (trustee-beneficiary situation) and used this information. o Held: Director found to have breached his fiduciary duty (3-2 majority) o Majority found that the Dft had acquired the information and opportunity while representing the interest of the trust and thus there was potential conflict of interest between his duties to the company and his own person interest adopted an approach that required just the mere possibility of conflict. o **But the minority found that his fiduciary duty ended before the conflict had arisen and thus he should not be held to have breached his duties to the company they required the need for there to be a real and sensible possibility of conflict.

Modern Interpretation (More relaxed) Except Singapore United Kingdom More relaxed provisions in the UK Companies Act, 2006. o s. 175(4)(a), UK CA This duty [duty to avoid conflicts of interest] is not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest. o This seems to suggest that the test is not that strict after all, and that the minority in Boardman seem to be more accurate the possibility of conflict need only be reasonable, and NOT the mere possibility of conflict. o But some courts still seem to adopt a strict interpretation using the holding in Regal as a basis. Why? Done to scare fiduciaries to give disclosure To channel them into giving disclosure as a means of avoiding possible instances of them taking advantage

Australia Queensland Mines v Hudson (1978) 52 AJLR. 399 o Plt company looking for uranium, decision was whether to exercise the option to purchase the land and get the land. But the company did not have any $$$, thus the company rejected the option and company became dormant. o Df, its MD, went looking around and found good prospects in iron-ore mining. o Tasmanian authorities gave him licence to mine for iron in Tasmania. Initially appeared to be negotiating on behalf of Pf Company but Pf could not afford it. o Dft used his own funds and kept the Board fully informed of his actions, but not shareholders. Eventually made a profit and Plt then asked for it. o Held: Dft allowed to keep the profits accrued from the transaction as the Privy Council agreed with principle in Boardman minority that possibility of conflict must be a real and sensible one.

Canada The Canadian case of Canadian Aero Services v OMalley suggest that several factors can be used to test if should be taken into account when determining if that has been a breach of fiduciary duties. This suggests that the court is attempting a balancing of factors, but these factors are not 100% accurate, and would ultimately depend on the precise facts of the cases. Canadian Aero Services v OMalley (1973) 40 DLR (3d) 371 per Laskin J o The general standards of loyalty, good faith and avoidance of conflict of duty and self-interest to which the conduct of a director or senior officer must conform, must be tested in each case by many factors which it would be reckless to attempt to enumerate exhaustively. Position or office held (director v employee), The nature of the corporate opportunity (what type of opportunity was it, is it related to the coys business), Tts ripeness and its specificness (what stage of the negotiation) The directors or managerial officers relation to it, The amount of knowledge possessed, The circumstances in which it was obtained and whether it was special or, indeed, even private, The factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company (whether the FD extends beyond his resignation), and The circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge. Peso Silver Mines Ltd (NPL) v Cropper (1966) o Company received an offer of several mining claims that were adjacent to the companys property. The offer was considered by the entire Board, but was subsequently rejected. After the offer was rejected, the Dft formed a new company that acquired the mining claims. o Subsequently, the Dft left Peso and Peso sued the Dft for the shares in the new company, claiming that it was being held in trust for them, as he was a fiduciary of the company when he acquired the shares. o HELD: No breach of duty. Decision of Pesos Board to reject the corporate opportunity had been taken in good faith and for sound business reasons in the interests of the company. Thus, the rejected opportunity ceased to be a corporate opportunity, and cannot be said then to have come to the director by reason of his position as a director.

Singapore courts still adopt a strict and high threshold with respect to conflict of interests Ng Eng Ghee and others [2009] SGCA 14 (the Horizon Towers case) o En bloc sale, members on the sales committee bought additional houses in development in order to be able to increase the number of votes in order for the en bloc sale to pass o VK Rajah took the view that a mere possibility was sufficient to find that there was a conflict of interest by the MC when they failed to disclose the actions to the rest of the shareholders (ie other homeowners) Required a very high standard from the Management Committee as the court analogized their duty to a trustee standard (like in Boardman). Should this trustee standard (mere possibility) or the director standard (real and sensible possibility) more appropriate in Singapore?

ii. Duty to Company-Other Duty Conflict In other situations, the conflict of interest arises not between the interest of the company and the directors duty to the company, but between the duty that the director owes to to the company and with his fiduciary duty owed to another company. This normally arises in the cases of nominee directors who have been nominated to sit on the Board of subsidiary companies and might be conflicted between the duties owed to the holding principal and to the company. Overseas Chinese Banking Corp Ltd v. Justlogin Pte Ltd (2004) o HELD: Nominee directors may take into account his principals interest if it does not conflict with the companys interest but it cannot be at the expense of the companys interests. o Otherwise, a nominee director should exercise his judgement in the best interests of the company and should not be bound to act in accordance with the direction or instruction of his principal appointed and must not put the appointers interest before the companys. Townsing Henry George v Jenton Overseas Investment Pte Ltd [2007] 2 SLR 597 o [64] Appellant director A was appointed to Jentons board by Normandy which had invested in the Newmans Group (comprising initially of Jenton and its wholly owned subsidiary NQF but with the money invested in a new company NGH, which became the group holding company, as a loan, not shares) o Charges were issued to secure NGHs debt to Normandy but these were deficient and the directors of the three companies refused to rectify the charges. In the meantime NQF sold its assets and had disputed cash. o Normandy appointed receivers and managers of NGH and these removed all Jentons directors except for A. A was then appointed by Jenton as representative to NQF where he also became its sole director. A then transferred disputed cash from NQF to Normandy. o Jentons liquidators discovered what happened and sued A for breach of fiduciary duty. o Held: Court held that Normandy did not have valid charge over the disputed cash as Jenton and NQF did not owe it any money, it was NGHs debt. Court found that paying over to Normandy was a breach of fiduciary duty to NQF (not action here) as well as Jenton, as Normandy had no existing claim whether as chargee or unsecured creditor. CA noted that holding company may have different interest from wholly owned subsidiary but that was not the case here nor was that the relevant conflict, and not for us to speculate why Jenton, rather than NQF, has sued the appellant at [56]).

Court proposed a further sub-categorization of the no-conflict rule Double employment rule prohibiting a fiduciary from acting for two principals. But this is usually overcome if both principals consent to it. But consent may not cure the other categories of fiduciary duties below. Duty of good faith where the fiduciary must actively serve the interest of the principal. The no inhibition rule where the fiduciary is inhibited or subjectively believes he is inhibited from carrying out his duties fully in favour of the principal. The actual conflict rule where he cannot help but damage the interest of one principal as against the other. They found that in this case, both the 2nd and 4th categories were breached by A as he had clearly favored the interest of his principal, Normandy, over the interest of Jenton when the disputed cash was paid over to Normandy. Further question: What if A had gotten the consent of Jenton; and if he wanted to get this approval, would this be approved by the Board of Directors or Shareholders in General Meeting?

iii. Special Instances of Conflicts of Interest 1. Using Corporate Information s. 157(2), CA: An officer or agent of a company shall not make improper use of any information acquired by virtue of his position as an officer or agent of the company to gain, directly or indirectly, an advantage for himself or for any other person or to cause detriment to the company. o Captures a general conflict of interest in so far as information is concerned. o Provision was initially created to oppose insider trading, but has since been covered by specific insider trading provisions. o But if the MOF Recommendation of including the abuse of position is included, then it would possibly provide for a more general provision for conflicts of interest.

Whether a particular use of information acquired by a director qua director is improper must be judged by reference to the directors duty to act in the interest of the company. o In Es-me Pty Ltd v Parker (Australia), Burt J found that the information need not be secret but must be confidential in the sense that apart altogether from the statute it would be a breach of the officers fiduciary duty to use that information to gain an advantage for himself. Is information considered to be property? Why do we sometimes try to say that it is for remedial purposes? o If it were property, dont need to talk about conflict of interest at all, can sue under stealing of property. o The piece of paper on which the information is on may be property, but the information itself would not be considered property. o See Boardman v Phipps, where Viscount Dilhourne (at pg 91) and Lord Guest (at pg 115) justified this rule on the ground that information is in certain cases analogous to corporate property.

2) Taking Advantage of Corporate Opportunities Sometimes a constructive trust is imposed such that the profits made from the subsequent use of the property acquired by the director whilst taking advantage of a corporate opportunity will also be given to the company. o Not just required to account for profits, but held responsible to manage the benefits accrued from the property. Important in cases of insolvency, as when the trustee goes insolvent, the beneficiary can claim that he has a beneficial interest in the property and thus can claim property over the opportunity etc. But if there is not trust created, and the trustee goes insolvent, the claim of the company is that of an unsecured creditor. o Cook v Deeks [1916] 1 AC 554 Company had 4 shareholders, but 3 of them wanted to cut off the 4th person from a deal, so they entered into the contract in their own personal names, and, as majority shareholders, then tried to pass a shareholder resolution declaring that the company had no interest in that corporate opportunity. HELD: Shareholder resolution was found to be invalid. Court found that if directors have acquired for themselves property or rights which should belong to company, they must be regarded as holding on behalf of the company Transaction was a misappropriation of the companys assets and opportunities and P can sue the 3 on behalf of the company. o Note: It was a fraud on the minority case, an exception to the rule in Foss v. Harbottle (ratification invalid) unratifiable wrong.

But the courts rarely like to create a trust in such situations, and the courts require a clear exploitation of the property before they would impose that the directors was an implied trustee of the property. o Warman International Ltd. v Dwyer (1995) 182 CLR 544 Court examined the accounts, and apportioned it such that the director would only be required to account for profits for a certain period of time only (5 years worth of profit only) instead of imposing a constructive trust. o Because after awhile the business takes a life of its own, and it would be unfair for them to pass on ALL the profits by creating a trust.

3) Receiving of Bribes and Secret Profits Courts tend to be more favourable towards finding that there is a creation of a constructive trust in cases where the director takes a secret profit or bribe to benefit himself. Kartika Ratna Thahir v Pertmina [1994] 3 SLR 257 o Indonesian General, executive officer of Plt, and wife had joint account in Singapore in which bribe money from certain German contractors employed by Pertaminas subsidiary were kept. Issue whether the bribe is held on trust by the wrongdoer or whether the wrongdoer is simply liable to account as a debtor. o Held: Lai J held that there was a constructive trust over the money and said that we were not bound by Lister v Stubbs (old UK case that held that there was no basis for the creation of a trust in such situations). SGCA affirmed this decision. The PC indirectly in AG for HK v Reid confirmed this decision.

**AG for Hong Kong v Reid [1994] 1 AC 324 o Hong Kong Crown prosecutor took bribes to suppress criminal prosecutions and bought property in NZ. o Held: Dft was holding the bribe as a constructive trust. Made reference to the decisions in Pertamina. o But the principle was more clearly set out. Lord Templemen relied on fact that there had been a breach of fiduciary duty and benefit belongs to beneficiary. But then one additional crucial step. Equity insists that it is unconscionable for a fiduciary to obtain and retain a benefit in breach of duty. Since he was a fiduciary, we presume that he acts in the best interest of his principal. As such he cannot say that he did not take the bribe for the principal. It would be unconscionable for him to deny that he did take it on trust for the principal. From here the proprietary trust interest springs into existence. But see now Sinclair Investments v Versailles Trade Finance [2011] EWCA Civ 347 preferring personal duty to account rather than constructive trust for secret profits. Courts in UK (HC and CA only as they are bound by precedent cases) prefer to find that a wrongdoing director would only owe a personal duty to account for profits, rather than the creation of a constructive trust This distinction is important in cases of liquidation, where a company would only have an in personam claim, which puts them in the position of an unsecured creditor. In this case, the court found that even if there was a proprietary right created, the banks were bona fide purchasers thus they would not be held accountable in any case. Thus far, UK does not follow the decision made by the Privy Council as they still follow the Court of Appeal decisions in Metropolitan Bank v Heiron (187980) LR 5 Ex D 319 and Lister & Co v Stubbs (that a trustee had an equitable duty to account, but there was no proprietary interest)

3. Use Powers Only for their Proper Purposes (not explicitly provided for in CA) Directors are obliged to exercise powers given and to use the companys assets for the purpose they were intended It is no defence to assert that the directors actions were bona fide interests of the company or was ignorant of the law if the actions were for an improper purpose (Hogg v Cramphorn Ltd) Although this duty has always been there, it is rarely invoked to show that there has been a breach of directors duties as the other 3 fiduciary duties are normally sufficient to determine whether or not a director was in breach of his fiduciary duty. **This duty normally comes up in situations where directors are involved in the issuance of new shares. Whilst they are expected to get the approval of shareholders prior to the issuance of these shares (s. 161, CA), these directors are also expected to act properly and carry out their duties. This duty arises in such situations because often it is hard to see or determine if the directors are acting in the best interest of the company, as it is unaffected when the new shares are being given out. From the companys POV, its interest may not be affected as it only benefits from the raising of capital. However, the conflict only arises when you look at the interest of the shareholders of the company, as the issuance of new shares affects the balance of power within the company as well as their relative shareholding within the country. *Therefore, thus duty can be used to catch instances where the directors f ail to act properly or where they prefer the interest of some shareholders compared to others. o Mills v Mills (1938) 60 C.L.R. 150 at p. 164, per Latham C.J. The question which arises is sometimes not a question of the interests of the company at all, but a question of what is fair between different classes of shareholder. Where such a case arises some test other than the interests of the company must be applied... Here the court recognizes that when deciding if there has been a breach of a FD, the court should also direct its mind to the interest of the shareholders and its various classes seems to be the fairest outcome

Howard Smith Ltd v. Ampol Petroleum Ltd (1974) o Directors of a target company allotted shares to one interested party which doomed a takeover plan of another interested party. Directors then testified that their individual purpose in voting for the issue of shares was to raise capital for the company. o HELD: Breach of duty to act for the proper purpose. Overwhelming evidence that the allotment of shares was to facilitate the takeover by their preferred party instead. Hogg v Cramphorn Ltd [1967] o HELD: Issued shares for improper purpose, not to raise capital in company but to prevent a takeover from a competitor. Corporate directors who diluted the value of the stock in order to prevent a hostile takeover are breaching their fiduciary duty to the coy. The court will decide (i) is it bonafide in the best interests and (ii) is it fair to the interested parties. Criterion Properties Plc v Stratford Properties Plc [2002] o HELD: if directors act deliberately to frustrate a takeover bid, that will amount to a breach of their duty to the company even if they have not let their personal interests interfere with the decision.

UK Position Interesting that s. 171, UK CA starts with the proper purposes rule before it talks about how the company should be taking into account the success of the company (s. 172, UK CA). But the s. 172(1)(f), UK CA also talks about need to have regard for the interest and acting fairly to the various classes of shareholders. s. 171, UK CA: Duty to act within powers o s. 171(b) A director of a company must only exercise powers for the purposes for which they are conferred. s. 172, UK CA: Duty to promote the success of the company o s. 172(1)(f) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of members as a whole, and in doing so having regard to the need to act fairly as between members of the company.

Singapore Position Singapore may not have developed this duty fully yet, but the CJ was instinctively applying such a test in Singapore in the case of Townsing. Tokuhon (Pte) Ltd v Seow Kang Hong (No 2) [2003] SGHC 65 o Local decision confirming that where members inter se would be affected differently by the decision of the directors, the test of acting in the best interests of the company would be inappropriate and inapplicable. o In such cases, the issue of whether the directors have breached their duty of good faith should be in reference to what is fair as between different classes of shareholders. This suggest there needs to be a balancing of interests required and from here, the proper purpose rule can be inferred. Townsing Henry George v Jenton Overseas Investment Pte Ltd [2007] 2 SLR 597 o CA found that the proper purpose rule not relevant as appellant director paid disputed cash in exercise of his powers as director of NQF and no question of improper purpose in respect of Jenton arose. Shows that there is such a rule, but it was just not relevant in this case. o Here the liquidators were suing A, and the court found that there was a clear conflict of interest. But here, the proper purpose rule was not breached, as the shareholders of Jenton were actually NGH (who were the ones who took out the loan from Normandy in the first place) thus no shareholders could be said to have been wronged. o Hans suggest that the proper purposes rule: about bringing justice and fairness

c. Authorisation and Ratification

At general law, a director must, if he is a counter party to the transaction with the company, make full disclosure of all information relevant to the transaction. This obligation to disclose does not apply where the directors interest consist only of [his] being a member or creditor of a corporation which is interested in the transaction and if the interest of the director may properly be regarded as not being a material interest. Under s. 156, CA, the following must be disclosed o The nature of the directors interest (whether direct or indirect, and including an interest of a member of the directors family) in any contract or proposed contract with the company o The nature, character and extent of any conflict that might arise by virtue of a director holding any office or owning any property **But as a basic, general principle, mere breaches of disabilities or duties, such as selfdealing, or dealing to the exclusion of the company can be authorized (in advance) or ratified (after the event) by an ordinary resolution of the general meeting after the director has made full and frank disclosure. However, the issues that arise are whether (a) whether a full and frank disclosure to the Board of Directors would constitute sufficient disclosure for approval and (b) if all breaches by a director can be ratified or if there are unratifiable wrongs. 1. Authorization The company can authorize, in advance, some actions made by a director that would ordinarily be in breach of his fiduciary duties owed to the company, if the director makes disclosure about a conflict of interest or if he has a certain interest in a transaction. The issue arising is from whom should the director get this approval from, Board of Directors or Shareholders in general meeting? Statutory Provision Only for Criminal Liability o s. 156, CA allows a director to go the Board and make full disclose about any wrongdoing or any action that would be in breach of his fiduciary duties owed. Hans Tjio: This is a good provision as it channels directors to give disclosure of their actions, and at the same time does not preclude the Articles of Association for providing that the Board be the approving body for breaches of fiduciary duty. However, he suggests that in such situations, the conflicted director should not be allowed to vote or to influence the vote of the other directors to ensure fairness. Common Law Civil Liability o At common law, the general rule is that shareholders are required to give approval for actions by the directors that are in breach of their fiduciary duties. Ideally, this should be even more clearly defined as independent shareholders but the courts realize that this is an impossible task. Thus this reference to independent shareholders is rarely referred to in judgments, and is normally only referred to in soft law o Dayco Products v Ong Cheng Aik [2004] SGHC 192 at [14], suggest that disclosure can be made to the Board for their approval of an action that would normally be in breach of their fiduciary duty if it is included in its Articles of Association.

i. Does the approval of breaches of fiduciary duties breach s. 172, CA? In the case of Dayco, the court suggested that in order to circumvent the need for a shareholder resolution for the approval of a breach of a directors duties, the Board can make this approval provided that it is included in its Articles of Association. However, the court did not discuss was how such an approach could be accommodated in the light of s 172, CA, which renders clauses excluding or exempting directors from liability void (except in the case of indemnity or director/officer insurance). o Does it not seem that providing for a provision in the articles that allows you to get authorisation from the Board to shield and exclude liability for breach of duty would contravene s. 172(1), CA? s. 172, CA: Provisions indemnifying directors and officers o (1) Any provision, whether in the articles or in any contract with a company or otherwise, for exempting any officer or auditor of the company from, or indemnifying him against, any liability which by law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company, shall be void. o (2) This section shall not prevent a company (a) From purchasing and maintaining for any such officer insurance against any liability referred to in subsection (1); or (b) From indemnifying such officer or auditor against any liability incurred by him, in defending any proceedings (civil or criminal) against him or in any application in which relief is granted to him (eg under s. 391)

Movitex v Bulfield [1988] BCLC 10 o Vinelott J thought that fiduciary duties were not really duties in the true sense of the word. Rather they were proscriptions (not prescriptions) involving a negative duty not to put oneself in a position where there is a conflict between ones duty to the company and ones own interests. Sees disclosure not as an exclusion clause but rather allow the avoidance of a potential of liability, a pre-emptive clause that removes a disability that might have arise. Here, the disclosure absolves you because it has cleansed the situation and makes everything proper that was previous improper. o Simply put, disclosure removes the proscription so that no breach ever arises in the first place. On this approach, fiduciary duties are quite restricted, and may not include the positive duty to act in the best interests of the company.

UK and Australia are the only ones that say that fiduciary duties must be negative in nature (ie only the no profit, no conflict would be true fiduciary duties) and other directors duties like acting in good faith or acting for the proper purposes may not be fiduciary duties. **However, in Singapore, this is unlikely to be the position, as we consider both positive and negative duties as part of the fiduciary duties that directors owe.

2. Ratification After the breach has already been committed, the issue is whether the company can forgive the director for the breach of his fiduciary duties. Forgiveness seems to require the shareholders in general meeting as the company does not seem to trust the Board to be able to ratify and still remain impartial especially when the breach was committed by one of its members. And ideally, not just any shareholder, it should be independent shareholders. However, if ratification only requires an ordinary resolution (50% + 1 majority), it would seem unfair that the majority shareholders can allow for the forgiveness of a breach and undermine the rights of the minority who might have an interest in the disapproval of the breach Thus this creates the belief that not everything can be ratified **Furthermore, if you want the shareholders to ratify the breach of the fiduciary duty, the director must give full and frank disclosure. If you give part disclosure, only can get partial forgiveness. Why do we still have the existence of unratifiable breaches? If we can reach the ideal position where only independent shareholders vote on whether there should be ratification, the law does not need to provide for the existence of unratifiable breaches. o The focus should be on WHO is ratifying the breach, rather than what can ratified In 2006, the UK amended its Companies Act to provide a provision that seemed to regulate which parties could ratify such actions. o s. 239, UK CA: Ratification of acts of directors s. 239(4), UK CA - Where the resolution is proposed at a meeting, it is passed only if the necessary majority is obtained disregarding votes in favor of the resolution by the director (if a member of the company) and any member connected with him. o But the legislation did want to override 150 years of case law because the codification of this rule would suggest drawing a line and that the law is determined by just looking solely at the statute. Thus a further provision was mentioned that s. 239(4), UKCA does not override existing case law that prescribes for certain acts that cannot be ratified. S 239(7), UK CA: This section does not affect any other enactment or rule of law imposing additional requirements for valid ratification or any rule of law as to acts that are incapable of being ratified by the company.

i. What breaches can be ratified, and which breaches are unratifiable? Ratifiable Breaches 1. Breach of the Proper Purpose Rule (eg directors issuing shares which results in the dilution of shareholding by certain shareholders) o Such a breach would arise where the directors know that some shareholders cannot raise the money to buy new shares thus their shareholding would be reduced. o Bamford v Bamford [1970] Ch 212 Court suggests that it can be cured by ratification by the company at general meeting. But academics have argued that this shouldnt be the case because it seems unfair to minority shareholders As their interest could be overruled if the majority passes an ordinary resolution to absolve/ratify the actions of directors. Lim Suat Hua v Singapore HealthPartners Pte Ltd [2012] SGHC 63 at [93]

2. Negligence by the Director (with respect to his duty of care and skill) o The company is the one who is owed this duty of care and skill, thus it is for the company to forgive the breach thus would seem to be ratifiable. Daniels v Daniels [1978] Ch 406 Court found that mere negligence is ratifiable. Multinational Gas & Petroleum Co v Multinational Gas & Petrochemical Services Ltd [1983] Ch 258 However, where there is a fraud on the minority, the minority shareholders can force the company to bring the action against the director instead of ratifying or forgiving the breach. Here, the minority would be able to bring a derivative action that would force the company to bring the action against these errant directors. Unratifable breaches 1. Once the company is in liquidation, the shareholders cannot ratify a breach of a director since the value that remains in the company belongs to the creditors. o Here arise the conflict between creditor and shareholders interest. o If the company has a cause of action against a director, it should be preserved, as the money should be recovered, as the money would actually go to the creditors. But shareholders have no incentive to do the right thing in such situations and thus cannot be trusted with making the right decision. 2. Misappropriation of company property to the benefit of directors o Belief that such an action is so wrong that even if the whole (100%) shareholder approve of the ratification, the shareholders cannot even ratify such a breach. o Seen as a theft from the company, looking more and more like a criminal offence, thus it seems to be a unratifiable wrong, a wrong that cannot be ratified no matter who ratifies it

d. Relief from Breach of Duties

For breaches of directors duties like negligence or breach of fiduciary duties that the court finds falls within s 391, the court can grant relief for wholly or partly the whole liability that is incurred by the director, if they find that he has acted honestly and reasonably and that, having regard to all the circumstances of the case including those connected with his appointment, he ought fairly to be excused from any liability. s. 391, CA: Power to grant relief o s. 391(1), CA - If in any proceedings for negligence, default, breach of duty or breach of trust against a person to whom this section applies it appears to the court before which the proceedings are taken that he is or may be liable in respect thereof but that he has acted honestly and reasonably and that, having regard to all the circumstances of the case including those connected with his appointment, he ought fairly to be excused for the negligence, default or breach the court may relieve him either wholly or partly from his liability on such terms as the court thinks fit.

However, it does seem strange that a director could have acted honestly and reasonably if it has been found that the director had acted negligently or was in breach of his fiduciary duties. The Australian equivalent of this provision only requires that the director act honestly in order to get around such confusion.

JSI Shipping v Teofoongwonglcloong [2007] SGCA 40 o Suggest that the standard of reasonability in s. 391, CA is not the same as the negligence standard. o [164] Relying on this body of established case law, the court in Barings opined at [1133] that s 727 of the UK Companies Act could be relied on if the auditors had acted honestly and reasonably, and observed that the auditors may have acted reasonably for the purposes of the section, even though they were found to have acted negligently, if they had acted in good faith and if their negligence had been technical or minor in character, and not "pervasive and compelling application of s. 391 Re DJan of London Ltd [1993] BCC 646 at 649. - Shows how such relief can be granted for directors who have been negligent, that a truly an objective standard is applied.

Limitation of Relief under s. 391, CA However, this power for relief does not extend to breaches of trust involving misappropriation of trust property. o Hytech Builders v Tan [1995] 2 SLR 795 This is congruent with tbe fact that misappropriation of corporate property is quite serious thus should be allowed and thus cannot be condoned. Shows that there is some consistency in the law as shareholders also cannot ratify breaches by directors for the misappropriation of company property.

e. Remedies for Breach of Duties

Remedies for a breach of duties 1. Rescission of the contract (McKenzie v McDonald [1927] VLR 134) Effectively rendering the contract void (but is it void ab initio?) Still subject to the bars of rescission: (a) Affirmation (after full and frank disclosure by the director) by the company, (b) laches (delay in bringing a claim), (c) where restitututio in integrum is impossible or (d) if third party rights are affected. 2. Reclaiming property (with the help of tracing) even against innocent volunteers If the property has already been passed on to a third party, the burden is on the third party to show that it is a bona fide purchaser for value without notice, in order to keep the property. If the third party can show that he is indeed Equitys Darling, the company can then make the director account for the profits that had been accrued from the sale of the property (Blackham v Haythorpe (1917) 23 CLR. 156) However, the company would be able to claim the property back from an innocent volunteer (someone who did not pay for the property) as he would not be able to claim as he would not be a bona fide purchaser for value. 3. Account for the profits that the director has made, and those profits may even be held on trust for the company [also covered under s. 157(3)(a), CA] The court can ask for the equitable accounting of profits (detailed account) of assets and liability derived from the profits and order the director to return that profit to the company. **But it is merely a personal interest (in personam), and would not be useful in a case of insolvency, as they would merely be unsecured creditors. The courts may find that the directors were holding the bribe in trust for the company, which means that it can order that all the profits be returned to the company, even those accrued after coming in to the possession of the director (like if the director used the profits to invest or from bank interest rates) 4. Ordering the director to compensate the company for its losses due to the breach When there is a breach of directors duties, a company has a choice whether to claim damages or to sue the director for his profits. s. 157(3)(a), CA: Provides that where there has been a breach of s 157, the errant director is liable to the company for (a) any profit made by him or for (b) any damage suffered by the company as a result of the breach. The company may opt to choose either remedy, whichever may be more favorable to its interest. The election need not be made until the time has come for judgment to be entered in the companys favor against the director. Why are we more concerned about breaches of fiduciary duties as compared to the breach of duty of care and skill (which provides for damages as it is similar to civil tort of negligence) As it provides for a greater range of remedies to the company. Causation rules may be more relaxed than for negligence liability o Equity is more liberal just need to show factual causation only, might not need to show legal causation. Different limitation periods for different breaches of duties o Period to bring a claim is longer for breaches of fiduciary duty Negligence requirements like foreseeability may not be so strictly applied

6. Protection of Minority Shareholders a. Policy Rationale for the Protection of Minority Shareholders The concept of protecting minorities is perhaps most prominent in constitutional law
and is based on notions of individual equality, fundamental fairness and justice. The difficult balance that exists is the issue of when the court should intervene to protect minority shareholders from majority rule? Prima facie legitimate and normally efficient majority rule versus Selective intervention by the court to prevent unfair and normally inefficient prejudice towards the minority
Policy Considerations Majority Rule Minority shareholders freely choose to be minorities (and are free to exit) Contractual Bargain Minority shareholders invest/risk less than majority shareholders The contractual bargain in company law is based on the notion of economic efficiency, not about individual equality (unlike a constitutional democracy) The majority has the greatest incentive to maximize profits Economic Efficiency Majority rule is more administratively efficient Protection of Minority In closely held companies minority shareholders may be unable to exit (members therefore have legitimate expectations of being treated fairly) Enforcing the contractual bargain (section 39), which includes minority rights, promotes certainty, investor trust and ultimately increases investment. Tyranny of the majority can destroy corporate value Business decisions made by a disinterested court may be more efficient than business decisions by a majority with a conflict of interest

b. Overview of Minority Mechanism and Remedies Available

Was the wrong suffered by the corporation or by the shareholder? Wrong suffered by a member in a personal capacity Personal action (benefit to the member) 1. 2. 3. Oppression (s. 216) Just and equitable winding up [s. 254(1)(i)] Shareholders Personal Action a) Express contract (eg employment contract) b) Statutory contract (e.g. s. 39) c) Rights in Companies Act (e.g., s. 189) d) Common law (e.g., right to vote) 1. 2. 3. Wrong suffered by the company but ignored by directors Derivative action (benefit to the company) Common Law Derivative Action Only for foreign or Spore listed coy Statutory Derivative Action (s. 216A) Only for non-listed Spore companies Oppression (s. 216) Court can authorize derivative action Or grant damages to the company

i. Overlap among minority mechanisms The same wrongful acts undertaken by a majority shareholder director can support a (1) personal action based on commercial unfairness [s. 216, CA or s. 254(1)(i), CA] and/or (2) a derivative action based on a breach of directors duties. Potential remedies in a successful oppression claim (s. 216) include a winding up [the same as in s. 254(1)(i)] and a derivative action [the same as s. 216A and the common law derivative action] In some cases, the court may order compensation for damages to the company as a remedy for oppression (s. 216, CA) which would be the same as those ordered for a derivative action (either s. 216A, CA or common law) ii. Uniqueness of each minority mechanism The common law derivative action is the only commonly used remedy available for foreign incorporated companies. As opposed to the statutory derivative action (s. 216A) which can only be brought by unlisted Singaporean companies. As opposed to the statutory derivative action (s. 216A), in a CLDA there is: o No defined procedure and/or legal test for bringing a CLDA. o It requires the aggrieved shareholder to establish wrongdoer control. o It does not apply in the case of pure negligence. In cases which are entirely based on breaches of directors duties the aggrieved shareholder may be unable to bring a personal action (either ss. 216 or 254(1)(i)) and instead must bring a derivative action (either common law and s. 216A) A minority shareholder cannot receive personal/direct relief in a derivative action (in contrast to oppression or just and equitable winding up). Oppression and just and equitable winding up can be established without a breach of the articles and without conduct amounting to a breach of directors duties (e.g., removal of director contrary to legitimate expectations) It is possible to meet the test for a just and equitable winding up (s. 254) without establishing oppressive conduct (s. 216) (e.g., deadlock between shareholder directors) In most successful s. 216 oppression cases, the court will not award a winding-up as it is normally the remedy of last resort (esp when a company is large and/or thriving).

iii. Evaluation of Minority Remedies/Mechanisms Preference of Oppression Remedy: The broad scope of wrongdoer behaviour (commercial unfairness) and flexible (court thinks fit) direct remedies for minority shareholders have led to the expansion of the oppression remedy (s. 216) and rendered the other remedies less importantbut not irrelevant. o Limitation: But in some cases, it may not be the desired remedy: (1) in cases where the client wants a winding up as the outcome (just and equitable winding up preferred), or (2) when there is a one-off breach of director duties (can only bring derivative action) Different mechanisms may be used simultaneously (but beware of the notice requirement for s. 216A) The only commonly used remedy available for foreign corporations is the common law derivative action.

c. Rule in Foss v Harbottle

Generally, the rule is viewed as being composed of two principles: The proper plaintiff principle The majority rule principle Foss v Harbottle (1843) 2 Hare 461 o Two shareholders alleged that certain directors of the company had sold land to the company at exorbitant prices and had caused the company to make improper mortgages in relation to the land. The shareholders, who did not hold a majority of the shares, sued the directors for the alleged wrongs done to the company. o Held: The court chose not to intervene and held that the shareholders did not have locus standi [standing] to pursue the action. o The court noted that the suit by the minority shareholders could not be sustained when the fact was that the powers of the general meeting as an organ of corporate decision-making were still existent (as they had never went to the general meeting to try and get them to bring a cause of action or let them decide whether to ratify the breach) To allow the minority shareholders to maintain a suit that alleged a wrong done to the company would be to endorse the minoritys usurpation of the decision-making powers of the general meeting. o The company in the general meeting could have defeated the court by ratifying the sale. In addition, there was no indication that the complainant shareholders had taken any steps to put to the general meeting whether a suit against the directors ought to be pursued o In law, the corporation, and the aggregate members of the corporation, are not the same thing for purposes like this; and the only question can be, whether the facts alleged in this case justify a departure from the rule which prima facie would require that the corporation should sue in its own name

Benefits & Cost of the Rule of Foss Benefits Cost Provides a shield for majority shareholders Reduces the scope for wasteful litigation who engage in conduct that is detrimental to (e.g., in the case of possible ratification) corporate value, without consequences. Constrains the potential for duplicative Robs minority shareholders who have been litigation and double recovery treated unfairly of an equitable remedy (e.g. reflective loss) Allows management to decide whether to Provides courts with an ambiguous tool to sue - without being second guessed by less reduce their dockets (e.g., irregular/regular qualified parties (minorities/courts) language) The exceptions to the rule in Foss attempt to maintain the benefits of the rule while reducing the costs that such a strict rule imposes.

i. Underlying Principles of Foss v Harbottle

a. Proper Plaintiff Rule The legal rationale for the proper plaintiff principle is that a company is a separate legal entity and, thus a member may not sue to enforce a companys rights. Therefore, the proper plaintiff in an action for a wrong alleged to have been done to the company (e.g., when directors have breached their duties against the company) is the company itself. Effect: it restricts minority shareholders from bringing an action with respect to wrongs done to the company because the majority shareholders have the de facto power to decide when the company will pursue an action. b. Majority Rule Principle The rationale behind the majority rule principle is that it would be fruitless to allow a shareholder to sue based on an irregularity where the irregularity can be cured by majority ratification. The court will be slow to intervene where a majority of the shareholders may lawfully ratify the irregularity that forms the basis for the shareholder claim. Effect: It restricts minority shareholders from commencing an action with respect to mere irregularitieseven if irregularities are breaches of personal rights.

In Singapore, s. 392, CA renders the common law jurisprudence on irregularities moot as it makes clear that the only irregularities that will support a minority claim are those that cause substantial injustice (i.e., they are more than mere irregularities)

c. Link between the two principles Both principles restrict the ability of minority shareholders to commence litigation and place the power to do so in the hands of the majority Making the company the proper plaintiff vests the power to pursue claims for wrongs against the company in the hands of the majority. Prohibiting minority shareholders from bringing claims based on irregularities that can be ratified significantly limits the personal wrongs upon which a minority can base a claim. Evaluation: Margaret Chew, Minority Shareholders Rights and Remedies, 7 The proper plaintiff rule may indeed be viewed as a subset of the principle of majority rule, for it is premised on the notion that the majority ought, in the ordinary course of corporate decision-making, to have a predominating influence. Ordinarily, the management of a companys business is vested in the board of directors by the companys articles of association (Art. 73, Table A; s. 157A, CA). Directors, in most instances, are elected to sit on the board, because they themselves are majority shareholders or because they have been accorded the supportof the majority shareholders. Where circumstances arise such that a company may have grounds to pursue legal action against another person or entity, the decision as to whether or not a company should sue is therefore a management decision to be made by the board of directors. Barring any circumstances to suggest otherwise, the directors decisions may be expected, at least theoretically, to project or reflect the majority will. To allow a minority shareholderto sue on behalf of a company, and in the process ignore the majority will, would be to displace the government procedure of the company. Why should the minority be able to leapfrog the majority to assert its own agenda, after having agreed to procedures and rules, which are premised upon majority rule?

ii. Exceptions to the Rule in Foss v Harbottle

General Exceptions The exceptions to the rule in Foss attempt to maintain the benefits of the rule while reducing the costs that such a strict rule imposes. At its core, the rule in Foss is a procedural rule that is concerned with locus standi. Unless a member can demonstrate that the proceedings fall within an exception to Foss the member will have no standing to bring a claim. The four exceptions to the rule in Foss v Harbottle 1. Personal claims 2. Ultra vires transactions 3. Transactions requiring a special majority 4. Cases of fraud on the minority (i.e., the common law derivative action) Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (UKCA) o There is no room for the operation of the rule if [2] the alleged wrong is ultra vires the corporation, because the majority of members cannot confirm the transaction. There is also no room for the operation of the rule if [3] the transaction complained of could be validly done or sanctioned only by a special resolution or the like, because a simple majority cannot confirm a transaction which requires the concurrence of a greater majority. There is an exception to the rule where what has been done [4] amounts to fraud and the wrongdoers are themselves in control of the company (fraud on the minority).

Exception 1: The wrong results in an injury to a member in their personal capacity The proper plaintiff principle does not prevent a member from pursuing a claim for an injury to themselves in their personal capacity. However, a reflective loss cannot be the basis for the members personal claim. A member may acquire personal rights in four ways: 1. Express contracts A member may be a party to an express contract with other members or a party to an express contract with the company. That member can bring an action to enforce these contractual rights under the general principles of contract law. 2. Statutory contract (s. 39, CA) The memorandum and articles form a statutory contract between the members inter se and between the company and its members. Limitations: o The right must be a personal right conferred on the member as a member (Elly) o The member cannot make a claim based on a procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice (s. 392, CA) Rayfield v Hands [1960] Ch 1 o The plaintiff-shareholder brought an action to force the other directors (who were also members) to buy his shares, in accordance with the articles. o The shareholder was allowed to bring his personal action (without joining the company as a party) against the director-members based on a breach of the articles because the court held that the articles form a contract between the members (i.e., a personal right). The court declared that the director-members were bound to buy the shares].

3. Companies Act S. 409A, CA allows a member to seek an injunction to compel compliance or prevent someone from contravening the Companies Act. Examples of personal rights conferred on members in the Companies Act include: o Two or more members who hold at least 10% of the share capital of the company may call a general meeting (s. 177, CA) o A member of a company who is entitled to attend and cast a vote at a meeting of the companys members has a right to appoint a person as a members proxy to attend and vote at the meeting (s. 181, CA) o A member has the right to inspect the minute books of meetings of the companys members free of charge (s. 189, CA) o A members right to remedies for any wrongdoing Statutory derivative actions (s. 216A) Oppression remedy (s. 216) Just and equitable winding up [s. 254(1)(i)] 4. Common Law Rights There is a large body of case law concerning the common law rights vested in individual members. Two important examples of such rights are: The right to vote (unless the right is denied by an irregularity) o Pender v Lushington (1877) 6 Ch D 70 The plaintiff transferred some shares to nominees so that the nominees could vote. This was done to defeat a provision in the articles which limited a member to a maximum number of votes. The chairman of the meeting refused to accept the nominees votes and the plaintiff challenged this refusal. Held: The court held that a nominee whose name was on the register was entitled to vote, and the court would not look behind the register for any beneficial interests. He is a member of the company, and whether he votes with the majority or the minority he is entitled to have his vote recordedan individual right in respect of which he has a right to sueThat has nothing to do with the question raised in Foss v Harbottle and that line of cases.

The right of a member-director not to be wrongfully removed from their position as a director o Pullbrook v Richmond Consolidated Mining Company (1878) 9 Ch D 610 o A director was required by the companys articles, by way of qualification for the post, to hold as registered member in his own right shares worth 500 pounds. Pullbrook had mortgaged his qualification shares, and delivered to the mortgagee an unregistered transfer. The directors, on learning this, refused to allow him to sit on the board. o The court held: (1) that he still held the shares in his own right; and (2) that he had suffered an individual wrong for redress of which he could sue in his own name.

Limitation: Reflective Losses cannot be the basis for a members personal action A shareholder does not have a cause of action against a defendant merely because the company in which she holds shares has a cause of action against that defendant. This rule applies even if the shareholder has suffered a reflective loss (either by a decrease in the value of her shares in the company or the amount received as dividends from the company) as a result of the defendants wrongdoing towards the company. o A shareholder cannot make a claim for reflective loss even if the company decides not to pursue its claim against the wrongdoer that caused the direct loss to the company and the shareholder has their own separate cause of action o This makes sense because it prevent double recovery! Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[1982] Ch 204 o Newman was a public listed company in which Prudential had a minority shareholding. Prudential pursued a derivative action on behalf of Newman Ltd against two of the executive directors of Newman alleging various instances of fraud including paying above market price for assets from a company in which directors were major shareholders. o Prudential also pursued a personal action (and a representative action on behalf of all of the other shareholders) based on the claim that the directors fraud reduced Newmans net profits and thus negatively affected the price of its shares o Held: CA in obiter found that a shareholder cannot bring a personal claim based on a reflective lossthe company alone can sue for such a wrong Decision made in obiter because by the time the matter was heard by the CA, the coy had already brought an action against the directors. o [A shareholder] cannotrecover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a loss is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss.

Exceptions to the no reflective loss rule 1. Where the company has no cause of action to recover its loss o The company may not be able to pursue its claim because of the actions of the wrongdoer where the company has been liquidated (Giles v Rhind) o The company may not be able to pursue its claim because the company is in a jurisdiction that has no proper remedy (Hengwell Development) o Eg. In China where prior to 2005 did not have a common law remedy of derivative action, thus allowed to bring personal claims. o Where the wrongdoer director was involved in preventing the company from bringing the claim (John v Gore Wood & Co) 2. Where the shareholder suffers a loss separate and distinct from that suffered by the company (eg. John v Gore Wood & Co) o However, this is not truly an exception because the loss suffered by the member is direct, it is not even a reflective loss suffered by the company. Policy Rationale - This rule clearly allocates the power to sue in the hands of the company and the majority o The courts feel that it is up to the majority to decide if it wants to pursue a course of action. o And thus it is only in very egregious isntances that they will not follow the majority rule principle and allow a member to bring a personal claim for loss of share values. - Also, the court does not want a situation where there might be double recovery!

Exception 2: The matter is one which could validly be done by some special majority The proper plaintiff rule has no application where the articles require a special majority and the proceedings are brought to challenge a decision which has disregarded such a requirement. In the case where articles require a special majority, the rights can be considered personal rights of members to bring a personal action. If the majority could simply ratify a breach of a special majority provision using a simple majority (50% + 1) it would defeat the purpose of a special majority. Edwards v Halliwell [1950] 2 All ER 1064 o The rule provided that employed members contributions could only be increased by a two-thirds majority of its members. A delegate meeting of the union passed a resolution increasing the contributions without taking a ballot. o Held: Court found that the claimants could bring an action against the directors for the breach. [The rule in Foss v Harbottle does] not prevent an individual member from suing if the matter in respect of which he was suing was one which could validly be done or sanctioned, not by a simple majority of the members of the company or association, but only by some special majority [T]he reason for [this] exception is clear, because otherwise, if the rule were applied in its full rigour, a company which, by its directors, had broken its own regulations by doing something without a special resolution which could only be done validly by a special resolution could assert that it alone was the proper plaintiff in any consequent action and the effect would be to allow a company acting in breach of its articles to do de facto by ordinary resolution that which according to its own regulations could only be done by special resolution. Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[1982] Ch 204 o There is also no room for the operation of the rule if the transaction complained of could be validly done or sanctioned only by special resolution or the like, because a simple majority cannot confirm a transaction which requires the concurrence of a greater majority

Evaluation: In light of Exception 1 (Statutory Contract) to Foss, is Exception 2 redundant? Exception 3: The wrong complained of is an ultra vires act of the company Under the common law, an ultra vires act could not be ratified by the majority and therefore, in relation to ultra vires transactions, the rule in Foss could not apply. But s. 25, CA substantially limits the scope of the common law ultra vires doctrine. However, the remaining limited powers of a member to deal with an ultra vires act in s. 25 can still be enforced by a member in their own right (Prudential Assurance) o Section 25(1) validates ultra vires transactions and therefore a member can no longer seek to recover any property transferred under an ultra vires agreement by reason alone of the act being ultra vires. o **However, under s. 25(2)(a) a member can restrain the company from committing an ultra vires actbut this right is lost when the act is wholly executed. o **S. 25(2)(b), CA allows a company or a member to use ultra vires acts to support a claim against a director. Thus, a minority member may claim oppression (s. 216, CA), just and equitable winding up [s. 254(1)(i)] or seek a statutory derivative action (216A, CA) , all of which may be supported by evidence of ultra vires acts Evaluation: In light of exception 1 to the rule in Foss, is exception 3 redundant?

Exception 4: The wrong complained of amounts to fraud on the minority An action commenced under this exception is referred to as a common law derivative action It is a derivative action because although it is pursued by a member of the company, the member is not suing to enforce their own personal rights, but rather those of the company (i.e., the rights being enforced are derived from the company) It is a common law action in that it is not based on a provision in the Companies Act and is distinct from the statutory derivative action available under s. 216A The common law derivative action is a procedural device based in equity which provides an exception to the rule in Foss The fraud on the minority exception was introduced by the courts to prevent wrongdoings by corporate controllers from going without redress. In the absence of the exception, wrongdoing corporate controllers would stifle the claims against themselves by preventing the company from suing Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 o There is an exception to the [rule in Foss] where what has been done amounts to fraud and the wrongdoers are themselves in control of the company. In this case, the rule is relaxed in favour of the aggrieved minority, who are allowed to bring a minority shareholders action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue

Question: Why are we not concerned about fraud on the majority? Test for Common Law Derivative Action (Fraud on the Minority) There are two elements that must be established for a fraud on the minority claim: 1. The company is prima facie entitled to the relief claimed; and 2. The wrongdoers have committed fraud on the minority a. Benefit to the wrongdoer director(s) b. Detriment to the company (Benefit was at the companys expense) c. Wrongdoer control of the company Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[1982] Ch 204 o In our viewthe plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed, and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v. Harbottle. o Followed in the local cases of Ting Sing Ning v Ting Chek Swee [2008] and Sinwa SS v Morten Innhaug [2010]

a. Element 1: The company is prima facie entitled to the relief claimed The complainant must establish that the company has a reasonable basis for the relief claimed and that the action sought is a legitimate or arguable one. However, the complainant does not need to prove the companys claim on a balance of probabilities but only on a prima facie basis. The recent HC case of Sinwa SS (HK) Co Ltd v Morten Innhaug suggests in obiter that this element should involve the same analysis as the prima facie case requirement in s. 216A. Sinwa SS (HK) Co Ltd v Morten Innhaug [2010] 4 SLR 1 o In obiter dicta: Andrew Ang J, whether a derivative claim is brought under statute or common law, the court must, from the outset, assess whether the company has a reasonable case against the defendant for which the company may recover damages or other relief

b. Element 2: The wrongdoers have committed a fraud on the minority In Singapore, the leading authorities suggest that three elements must be established to prove fraud on the minority (i.e., there is a three-part test) The two leading Singapore texts on shareholder remedies (Chew at p. 90; Woon at p. 372) explicitly suggest the three-part test approach. Ting Sing Ning v Ting Chek Swee [2008] 1 SLR 197 o Has been the only CLDA case to reach SGCA. But as Ting Sing Ning primarily focused on the issue of wrongdoer control the Court of Appeal did not consider in detail the other parts of the fraud on the minority test and thus did not explicitly adopt the three-part test approach. However, the SGCA at [13] positively cites a quote from Daniels v. Daniels which provides judicial authority for the three-part test. Sinwa SS (HK) Co Ltd v Morten Innhaug [2010] 4 SLR 1 o Ang J, in obiter, acknowledged the three-part test may well be right [55] but went on to posit that the law in this area is not settled. Justice Ang [51] set out a possible alternative singular test in obiter for establishing fraud on the minority as: any wrong committed by a director, if accompanied by an improper attempt to stifle an attempt by the company to obtain redress in respect of that wrong

Evaluation: As the leading authorities in Singapore and the UK support the use of the three-part test, that would suggest that this would be the applicable law as it stands. However, might want to consider the possibility of the application of the less strict singular test by Ang J should apply. i. Wrongdoer obtained some sort of benefit If the wrongdoer obtained no benefit for himself it appears that a minority member is not allowed to pursue a common law derivative action However, fraud on the minority does not require proof of fraud. It is enough to demonstrate that a directors breach conferred a benefit on the wrongdoers Negligence of the wrongdoer director will be sufficient only if the wrongdoer obtains some sort of benefit as a result of the negligence. Thus, if the wrongdoer director breaches their duty but obtains no benefit, a minority member is not allowed to pursue a common law derivative action Pavlides v Jensen [1956] 2 All ER 518 o A minority shareholder sought to pursue a derivative action against the directors of the company for damages. The directors were accused of being grossly negligent in effecting the sale of an asbestos mine belonging to the company at a price greatly below its true market value. o Held: action could not be maintained under the fraud on the minority exception as the directors did not obtain any benefit from the transaction. Action can only be brought by the company if voted for by a majority. Daniels v Daniels [1978] 2 All ER 89 o Minority shareholders sought to pursue a derivative action against the controlling directors for negligently selling the companys land at below market value to one of the negligent directors o Held: Minority shareholders were allowed to maintain a derivative action against the controlling wrongdoer directors of the company o A minority shareholder who has no other remedy may sue where directors use their powers, intentionally or unintentionally, fraudulently or negligently, in a manner which benefits themselves at the expense of the companyit would seem to me quite monstrous, particularly as fraud is so hard to plead and difficult to prove, if the confines to the exception to Foss v Harbottle were drawn so narrowly that directors could make a profit out of their negligence

ii. The benefit was obtained at the expernse of the company When a wrongdoer director benefits at the expense of the company the shareholders cannot ratify the breach to prevent a derivative action. Cook v Deeks [1916] 1 AC 554 o Minority shareholder brought a derivative action against majority shareholders directors for diverting a contract away from the company to themselves. o Minority shareholder claimed that the company was entitled to the benefit of the contract. The Majority-Shareholder-Directors passed a shareholders resolution that the company claimed no interest in the contract o PC Held: The Privy Council allowed the minority shareholders derivative action Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 (HL) o Company brought an action against former directors for profiting from an opportunity to purchase shares that had come to the former directors in their capacity as directors. o However, the company did not have the funds to purchase the shares when the directors decided to act. (i.e., the directors did not benefit at the companys expense) o Held: Lord Russell in obiter opined that if the defendant directors had wished to protect themselves they could have ratified the breach by a vote at the general meeting, as the company did not have the capacit to take advantage of the corporate opportunity in the first place. However, they were found to have breached the duty to avoid conflicts of interest (hence why this in obiter). o Opposite of Cook v Deeks where the majority could not ratify (and therefore a DA could be brought) because the benefit occurred at the companys expense.

iii. The wrongdoing director(s) of the company had control of the company Even if the conduct of the wrongdoer is such that it amounts to fraud on the minority , if the wrongdoer does not have enough control to stifle an action being brought in the name of the company, then the court will not allow the minority to bring a derivative action because the action could be pursued regularly by the company. Mozely v Alston (1847) 1 Ph 790 o A plaintiff minority shareholder pursued a representative action against the directors of a company for exercising powers of directors in breach of the articles of association. o Held: Lord Chancellor held that the plaintiff shareholder could not bring the claim because it was supported by a majority of shareholders (i.e., the wrongdoers did not have control). o The bill expressly alleges that a large majority of the shareholders are of the same opinion with them; and, if that be so, there is obviously nothing to prevent the company from filing a bill in its corporate character to remedy the evil complained of

To establish that the wrongdoer directors have control, the minority must show either that the wrongdoers: Hold a majority of the voting power; or Exercised de facto control by their influence to control a majority of the voting power. There is no need to show a formal application to the company to instigate proceedings was rejectedparticularly where the wrongdoer holds a majority of voting power.

Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[1982] Ch 204 o What is meant by control, which embraces a broad spectrum extending from an overall absolute majority of votes at one end, to a majority of votes at the other end made up of those likely to be cast by the delinquent himself plus those voting with him as a result of influence or apathy [it amounts to more than vague de facto control] **Ting Sing Ning v Ting Chek Swee [2008] 1 SLR 197 o The plaintiff was a minority shareholder and director in a Hong Kong incorporated Company (Havilland). The plaintiff pursued a CLDA against other directors in the Company for breaching their fiduciary duties. o On appeal, the only issue was whether the wrongdoing directors had control of the Company; the wrongdoer minority shareholder directors held 42% of the Companys shares and his sister held 10% of the shares. o However, at an EGM, the companys independent shareholders unanimously voted against the continuation of the derivative action. o CA Held: Held that it was more likely than not that the wrongdoer sister would vote in support of the wrongdoer director for three reasons: (1) the family relationship between the first respondent and his sister (particularly since they were part of an Asian family); (2) the first respondents sister was the largest shareholder in Merit which had benefited from the alleged breach of fiduciary duties by the first respondent; and (3) the sisters shareholding in Merit was a gift from the first respondent. o Accordingly, the CA held that the Respondents should be regarded as having an absolute majority and as being in control of Havilland. o The vote of independent shareholders against the derivative action was insufficient to convince the Court that the respondents were not in control because the independent shareholders were not fully informed of the nature of the allegations of fraud against the respondent

Evaluation: Wee Meng Seng & Dan W. Puchniak, Derivative Actions in Singapore: Mundanely Non-Asian, intriguingly Non-American and at The Forefront of The Commonwealth in The Derivative Action in Asia: A Comparative and Functional Approach, 353-54 o Response: It is interesting to note that the rhetoric of Asian values has even crept into the cases on minority protection. In Ting Sing Ning v. Ting Chek Swee, as stated earlier, one of the reasons the Court of Appeal gave for aggregating the shareholding of the sister to that of her defendant director brother was that the influence of family on business decisions could not be discounted in an Asian family, which still tended to be rather clan -like, especially when the ties were through blood rather than marriage very much a reference to Asian values. With all respect to the court, the invocation of Asian values is questionable, and could lead to difficulties in the future (e.g., will the shares of two German brothers be considered separate under the wrongdoer control test because they are not Asian?) o Since 1987, there have been approximately seventy reported and unreported decisions involving shareholder litigation - 40% of these decisions have occurred in the last five years and 23% of shareholder remedy cases in Singapore involve disputes among family members o Several of the leading cases in Singapore run directly against what one would consider Asian family values (e.g., Low Peng Boon v Low Janie; Thio Keng Poon v Thio Syn Pyn; Sim Yong Kim v Evenstar Investments Ltd) o This should not surprise as family disputes in closely held companies have formed a substantial amount of jurisprudence in the UK, Australia and Canada that are the jurisdictions from which Singapore draws much of its inspiration.

Exception: The common law derivative action may not be allowed when it is brought by a minority shareholder but is opposed by a majority of the minority or a committee of independent directors Smith v Croft (No 2) [1988] Ch 114 o Minority shareholders pursued a derivative action against the directors for sums which had been paid away in transactions that were ultra vires. o Minority shareholders had 14% of the voting rights; the defendant directors had 63%; and other shareholders had 21%. The 21% minority did not support the derivative action. o Held: Court held in obiter that the plaintiffs may have had no right to pursue a derivative action because a majority of the shareholders who were independent of the defendants did not want the action to continue. o However, with respect to the ultra vires transaction of the directors it was not necessary to establish wrongdoer control (ie ultra vires is an exception to Foss) Ting Sing Ning v Ting Chek Swee [2008] 1 SLR 197 o At an EGM a resolution against continuing the plaintiff minority-members derivative action was unanimously passed by independent shareholders. o The court found that the independent shareholders had not been informed about the nature of the allegations of fraud against the defendants. Therefore, the court did not consider whether an independent body of shareholders voting against the action was enough to prevent it from proceeding. o It would therefore appear that the shareholders voted not to support the appellants action against Ting, Sia and Binti for the benefit of Havilland without being told about the nature of the allegations of fraud against them. It would appear that both Ting and the solicitors for Havilland did not take the trouble to explain to the shareholders what the claims were really about, nor did they let the shareholders read the experts affidavit or the exhibit.

**In a case in which both shareholders hold 50% of the shares, the court will likely determine control by examining whether the wrongdoer was able to prevent the companys action from being brought against her. Sinwa SS (HK) Co Ltd v Morten Innhaug [2010] 4 SLR 1 o In my view, while shareholding (including shares that the errant director/shareholder may be able to garner outside of his own shares) would be an obvious way of determining control, it should not be the sole determinant. In reality, controllers of companies often exercise control without resort to voting power. The crucial question, to my mind, is not whether the defendant had the requisite shareholding but whether the defendant was able to prevent an action from being brought against him o As such, I would incline towards the substance over form approach adopted by Vinelott J. After all, the crux of the matter is whether the errant director was able to suppress an action against himself qua director. This was also the approach adopted by the English Court of Appeal in Barrett v Duckett [1995] BCC 243 (Barrett). In that case, like the present, both the plaintiff and the first defendant held 50% shares in the company. Although the plaintiffs attempt to bring a derivative action was eventually struck out, Peter Gibson LJ held, on the issue of control, as follows (at 250): Although Mrs Barrett [the plaintiff] is not a minority shareholder but a person holding the same number of shares as the other shareholder, Christopher [the first defendant], in the circumstances of this case she can be treated as being under the same disability as a minority shareholder in that as a practical matter it would not have been possible for her to set the company in motion to bring the action.

Exception 5: Justice of the case dictate that the minority be allowed to commence an action This exception has neither been accepted nor rejected in Singapore, thus might be an alternative grounds on which a minority can bring a cause of action, but UK has rejected (Prudential) Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1993) 11 ACLC 1082 (Australia) o Equity is concerned with substance and not form, and it seems to me to be contrary to principle to require wronged minority shareholders to bring themselves within the boundaries of the well-recognised exceptions and to deny jurisdiction to a court of equity even where an unjust or unconscionable result may otherwise ensue. The circumstances of modern commercial life are very different to those which existed when Foss v Harbottle was decided. The body of shareholders of a public company is ordinarily far greater in number, and the controlling minds of individual shareholders are far more difficult to identify than was the case with the relatively small corporations that existed 150 years ago. These developments and the complexities and sophistication of modern shareholding make it often very difficult to bring derivative claims within the established exceptions. o To the extent that policy may be relevant in determining whether a f ifth and general exception to the rule should be recognized, I consider it to be desirable to allow a minority shareholder to bring a derivative claim where the justice of the case clearly demands that such a claim be brought, irrespective of whether the claim falls within the confines of the established exceptions. Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[1982] Ch 204 o The English Court of Appeal explicitly rejected the just of the case exception **Ting Sing Ning v Ting Chek Swee [2008] 1 SLR 197 o The court found that the appellant established the fraud on the minority exception and therefore did not need to consider whether the justice of the case exception was applicable under Singapore law.

Additional Criterion for Common Law Derivative Action The plaintiff must have (1) clean hands & there is (2) no need to show that there is no other available alternative remedy. 1. Since the power to permit a shareholder the right to pursue a common law derivative action resides in equity, a minority shareholder may be disqualified if she does not have clean hands or delays pursuing the action. Nurcombe v Nurcombe [1985] 1 WLR 370 o Minority shareholder wife had commenced a derivative action alleging that her director husband had wrongfully diverted profits from the company. o In earlier matrimonial proceedings, the wife had treated the profits allegedly diverted from the company as the assets of her husband and, on that basis, was awarded a portion of that money in the divorce. o Held: CA rejected the wifes claim to be entitled to bring a derivative action because she did not have clean hands. o A particular plaintiff may not be a proper person because his conduct is tainted in some way which under the rules of equity may bar relief. He may not have come with clean hands or he may have been guilty of delayIn Gower, Modern Company Lawthe law is stated in my opinion correctly: The right to bring a derivative [claim] is afforded the individual member as a matter of grace. Hence the conduct of a shareholder may be regarded by a court of equity as disqualifying him from appearing as [claimant] on the companys behalf. This will be the case for example, if he participated in the wrong of which he complains.

Ting Sing Ning v Ting Chek Swee [2008] 1 SLR 197 o The Court of Appeal considered the plaintiff-members delay in pursuing the common law derivative action as a legitimate factor to be considered but held that in this case the plaintiff-member was not responsible for the delay. **Sinwa SS (HK) Co Ltd v Morten Innhaug [2010] 4 SLR 1 o Justice Ang found that the plaintiff was not acting bona fide in the best interest of the company by attempting to bring a derivative action. He based his finding on the fact that the plaintiff had not laid all of his cards on the table and might not have disclosed the real motive for bringing a derivative action in the name of [the Company]. Justice Ang further found that the plaintiff appeared to be throwing everything but the kitchen sink at the defendant as a result of being unhappy with a dispute that arose in the plaintiffs business dealings. o This unhappiness, and not the best interest for the company, appeared to be what may have been behind the plaintiff bringing the derivative action although, Justice Ang held that it was not for him to speculate on the real motive behind the plaintiffs actions and confined his finding to the fact that the application was not bona fide in the interest of [the company] o Finally, it must be remembered that the derivative action is an equitable device, used to alleviate the harshness which on occasion may result from a strict application of the rule in Foss v Harbottle. Accordingly, the maxim he who comes to equity must come with clean hands applies. It follows that he who seeks to use a derivative action must do so in the best interests of the company and not for some ulterior purpose. o Since the procedural device has evolved so that justice can be done for the benefit of the company, whoever comes forward to start the proceedings must be doing so for the benefit of the company and not for some other purpose. It follows that the court has to satisfy itself that the person coming forward is a proper person to do so.

2. The mere availability of an alternative remedy will not preclude the court from granting leave to pursue a derivative actionespecially when the alternative remedy is not a better remedy (e.g., it may cause delay). Ting Sing Ning v Ting Chek Swee [2008] 1 SLR 197 (CA) o As regards the second alternative of an action for oppression under the Hong Kong equivalent of s 216, the respondents have not shown us why it affords the best solution to the dispute or that it is a better remedy for the appellant. To begin with, the appellant is not alleging that he has been oppressed, but that the respondents have used Havillands funds in breach of their duty as directors. Furthermore, an oppression action will require the appellant to start all over againresulting in even more delay to the resolution of the present dispute. Delay is one of the grounds on which the respondents have argued that this court should not give leave to the appellant to commence the derivative action. o Followed in Tam Tak Chuen v Eden Aesthetics [2010] (HC): it should be noted that the CA made it clear in that Pang Yong Hock was not authority for the proposition that, as long as the alternative of winding up the company was available, leave would be refused, however meritorious the proposed claim may be What I had to determine was whether in this particular case the remedy of winding up was more beneficial. Sinwa SS (HK) Co Ltd v Morten Innhaug [2010] 4 SLR 1 (HC) o Although in obiter Ang J discusses extensively the fraud on the minority test, he dismissed the plaintiffs claim for leave to bring a CLDA because another adequate remedy (arbitration clause under the shareholders agreement) was available which made the derivative action unnecessary.

Puchniak & Tan CH, Company Law in SAcL Annual Review, 211-212 o In Sinwa SS (HK) Co Ltd v Morten Innhaug [2010] 4 SLR 1the High Court
dismissed the plaintiffs claim for leave to bring a common law derivative action. In arriving at this decision, Justice Andrew Ang spent a significant amount of time discussing the fraud on the minority test. However, this entire discuss ion was obiter as Justice Ang ultimately found that, regardless of the outcome of the fraud on the minority test, leave had to be denied because another adequate remedy was available which made the derivative action unnecessary. The general principle that the availability of an alternative remedy may effectively foreclose the court from granting leave for a derivative action is on one level straightforward and on another level vexing. We respectfully agree with Justice Angs finding that the fundamental reason why the derivative action is necessary is that without such an extraordinary remedy justice would not be done. Therefore, it logically follows that the necessity of a derivative action must be established before leave for this extraordinary rem edy can be granted. This much is straightforward. What is vexing is whether the mere availability of another remedy ( eg, an action for oppression or just and equitable winding up) axiomatically makes the derivative action unnecessary. In other words, will leave for a derivative action only be granted if there are no other available remedies? In this case, Justice Ang seems to agree with the Court of Appeals finding in Ting Sing Ning v Ting Chek Swee that the mere availability of another remedy is insufficient to foreclose the court from granting leave for a derivative action. However, the CA in Ting Sing Ning appeared to go one step further than Justice Ang by requiring that the available alternative to a derivative action must be a better remedy or the best solution before the court would be foreclosed from granting leave to bring a derivative action . While Justice Ang acknowledged that at first blush Ting Sing Ning appears to require an alternative remedy to provide the best solution or a better remedy, he goes on to find that the language used by the Court of Appeal was purely rhetorical . As such, in this case, Justice Ang found that an alternative remedy needs to merely provide a real option (not the best solution or a better remedy) to the plaintiff-shareholder for it to effectively foreclose the court from granting leave for a derivative action. We respectfully prefer the stricter standard that the Court of Appeal suggests in Ting Sing Ning over Justice Angs approach. In our opinion, courts should not be foreclosed from choosing the best solution which is the logical implication of Justice Angs suggested approach. This holds true even when the best solution is an extraordinary remedy like the derivative action. Justice Angs finding that a shareholder seeking leave to bring a derivative action does so at little or no risk to himself (Sinwa at [22]) suggests that the derivative action is uniquely at risk for minority shareholder abuse. Indeed, if minority shareholders could bring derivative actions at little or no risk to themselves, we would agree that derivative actions would be uniquely open to minority abuse which may justify limiting them whenever another adequate remedy is available (even if the other available remedy was not the best remedy). However, we respectfully suggest that minority shareholders who bring derivative actions do so with risk to themselves. As such, we are of the view that derivative actions do not necessarily present any greater risk for abuse t han other shareholders remedies and therefore should not be foreclosed from being granted unless a better remedy is available. There are two primary reasons why shareholders who pursue derivative actions face substantial risk. First, minority shareholders who pursue a derivative action are prima facie responsible for their own legal fees and are potentially liable for a substantial portion of the legal fees of the defendant if they are unsuccessful in the leave application or derivative action (which was precisely what happened in this case). Second, even if the derivative action succeeds, any financial reward is paid to the company not the minority shareholder who pursued the action. The only way that minority shareholders can benefit from a derivative action is if the award to the company causes a pro-rata increase in the value of their shares (which econometric evidence has shown is highly uncertain in listed companies). We suspect that the substantial risk that minority shareholders face when pursuing derivative actions is the reason why it is extremely rare for shareholders to pursue derivative actions in almost all jurisdictions. It also suggests that the court should only be foreclosed from granting them when there is a better remedy available.

Evaluation of Common Law Derivative Action Limitations: The implementation of the more efficient statutory derivative action (s. 216A, CA) means that for practical purposes, a common law derivative action will only be an option in cases where the company is a foreign incorporated company or a company listed on the Singapore Exchange ( s. 216A, CA only applies to Singapore incorporated companies that are not listed on the Singapore Exchange). Both the common law and statutory derivative actions do not result in a direct personal benefit to minority shareholders. All damages recovered as a result of a derivative action are paid to the company. This normally makes the derivative action a less attractive option for minority shareholders than the oppression remedy (s. 216, CA) which provides flexible remedies that directly benefit minority shareholders (e.g., the purchase of an oppressed minoritys shares or a division of assets on winding up) The wide scope and flexible remedies of the oppression remedy (s. 216, CA) has also made other common law personal shareholder rights less important (e.g., in the case of a breach of the articles or improper removal of a director) and s. 392, CA has rendered the common law jurisprudence on irregularities moot. Advantages: Ting Sing Ning v Ting Chek Swee [2008] 1 SLR 197 (CA) and Sinwa SS (HK) Co Ltd v Morten Innhaug [2010] 4 SLR 1 (HC) illustrates that the common law derivative action is still alive in Singapore. The oppression remedy is meant to mainly address personal (and not purely corporate) wrongs. Therefore, in situations where there is purely a corporate wrong, which does not amount to oppression (e.g., in a one-off breach of a directors duty), a derivative action may be the most appropriate way for a minority shareholder to seek redress. This is particularly the case where the shareholder wants to maintain their interest in the company. In addition, the derivative action may be used as a tactic to force a settlement because once leave is granted to pursue a derivative action, the company will normally be required to indemnify the plaintiff which means that the defendant must pay her lawyer while the plaintiff-shareholder can proceed to trial using the companys funds. When a company is a foreign incorporated company or is listed on the Singapore Exchange the common law derivative action (and not s. 216A, CA) will be the only option for carrying out this strategy.

Procedure for a Common Law Derivative Action The applicant for leave to pursue a CLDA has to be a member of the company. There is no particular procedure prescribed in the Rules of Court. The action should be commenced as an action on behalf of all the shareholders (i.e., as a representative action) except for the defendants. The company should be added as a co-defendant to ensure that it is bound by the judgement. If the wrong procedure is followed it will not necessarily be detrimental to an applicants derivative action if the procedural error is an irregularity flowing from a bona fide mistake which can be cured without prejudice to the defendant. The applicant should be able to show that she attempted to persuade the company to commence the action prior to bringing the application to pursue the action derivatively. The issue of standing should be decided as a preliminary issue prior to trial o Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[1982] Ch 204 He ought to have determined as a preliminary issue whether the plaintiffs were entitled to sue on behalf of [the company] by bringing a derivative action Such an approach defeats the whole purpose of the rule in Foss v Harbottle and sanctions the very mischief that the rule is designed to protect.

At the preliminary stage, the plaintiff member must establish her case on a prima facie basisbut is not required to prove her case. o Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[1982] Ch 204 In our view, whatever may be the properly defined boundaries of the exception to the rule, the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed and (ii) that the action falls within the proper boundaries to the exception to the rule in Foss v Harbottle.

The costs are borne by the plaintiff member and any proceeds recovered are awarded to the corporation. The court has the discretion to order the plaintiff-members costs in pursuing a common law derivative action to be paid by the company, even where the action proves to be unsuccessful. o Wallersteiner v Moir (No 2) [1975] 1 QB 373 But what if the action fails? Assuming that the minority shareholder had reasonable grounds for bringing the action that it was a reasonable and prudent course to take in the interests of the company he should not himself be liable to pay the costs of the other side, but the company itself should be liable, because he was acting for it and not for himself. In addition, he should himself be indemnified by the company in respect of his own costs even if the action fails. It is a well know maxim of law that he who would take the benefit of a venture if it succeeds ought also to bear the burden if it fails. Smith v Croft (No 2) [1988] Ch 114 Walton J held that a claimant would have to show that the indemnity is genuinely needed in the sense that the claimant did not have sufficient resources to finance the action in the meantime.

Evaluation: The uncertainty of the procedure for determining standing, receiving indemnification for costs and the difficulty in establishing fraud on the minority (particula rly wrongdoer control) makes the common law derivative action unappealing for most minority shareholders

d. Statutory Derivative Action (s. 216A, CA)

1. Procedural requirements for bringing a Statutory Derivative Action The company must be incorporated in Singapore & not listed on the Spore Exchange. o Although the CA does not specifically say that only locally registered companies may avail themselves to this remedy, the provision mentions that this remedy only applies to companies, and under Singapore law, this refer only to locally incorporated companies. Ting Sing Ning v Ting Chek Swee (2008) o Involved a Hong Kong incorporated company, thus Plt could not avail himself to a claim under s. 216A, CA, and had to resort to bringing a claim for a CLDA under the fraud on the minority exception. o The reason for s. 216A, CA only applying to unlisted companies was the fear that unscrupulous people would make frivolous claims to harass listed companies and thereby attempt to manipulate share prices. This may seem hard to follow given there are of market manipulation provisons in the Securities and Futures Act (ss. 197/8/9) o But recently (Oct 2012), the MOF has accepted the proposal by the Steering Committee of Review of the Companies Act to amend s. 216A to apply to all Singapore incorporated companies, whether listed in Singapore or overseas.

The complainant must either be a (1) member of the company, the (2) Minister of Finance or (3) any other person who the court deems proper [s. 216A(1)] o Ordinarily, the only persons that the court would allow to make such a claim under the last head are creditors who have a valid interest in the company. S. 216A, CA is a procedural remedy to provide shareholders with standing to bring a claim against wrongdoing directors on behalf of the company. A s. 216A, CA action is brought in the companys name (and is therefore technically not a derivative action). **The loss being claimed must be that of the company - not the shareholders loss and not merely a reflective loss (same as CL DA) unless one of the above exceptions apply. o Hengwell Development Pte v Thing Chaing Chin [2002] 4 SLR 902 Plt, Hengwell (H), was the majority shareholder of a Singapore unlisted JVC. Far East was Hs minority partner in the JVC. The only business of the JVC was that of a wholly owned China subsidiary (Q). Under the JV agreement, FE had day-to-day control of Q. H claimed that the directors appointed by FE to Q misappropriated funds from Q by making fraudulent misrepresentations. Thus, H claimed that Qs directors breached their contractual and fiduciary duties owed to Q and the JVC. An action could not be commenced against the directors of Q by Qs board because the board was controlled by the wrongdoer directors and there was no derivative action under Chinese law - so the JVC could not bring an action for and on behalf of Q. The JVC also could not commence an action against Qs directors because there was no quorum at the JVCs directors meeting. Hence, H brought a s. 216A derivative action in the name of the JVC for damages flowing from the misappropriated funds. In response, the defendants claimed that the JVC had no standing as it had merely suffered a reflective loss. Held: Found that H was allowed to bring a s. 216A, CA claim in the name of the JVC for recovery of the damages. [I]F there is no risk of double recovery and there is no prejudice to the creditors or shareholders of the company, which has no remedy in any event under Chinese law, the policy reasons behind the decision in Johnson v Gore Wood & Co do not apply.

2. Elements for the s. 216A, CA (Statutory Derivative Action) Proper notice to the directors before commencing an application for leave. The complainant is acting in good faith. It is prima facie in the interests of the company that the action be brought.

a. Proper Notice Notice ought not to be interpreted in an unduly technical, restrictive or onerous manner. Form of Notice: The Companies Act does not stipulate the exact form/content of notice. Content of Notice: It should provide enough detail to alert and inform the directors of the derivative action, so that they may decide whether the company should pursue the action itself. o Re Bellman v Western Approaches Ltd (1981) 130 DLR (3d) 193 (Canada) Failure to specify each and every cause of action in a notice does not, in my opinion, invalidate the notice as a whole. Period of Notice: Plaintiff must provide 14 days notice to the directors before commencing a s. 216A, CA application. o No requirement that the company be given extra time (> 14 days) if such time is required for the company to receive independent legal advice (Tam Tak Chuen v Eden Aesthetics) o If the complainant can demonstrate that providing 14 days notice was not practicable or expedient, then less notice may be allowed if the complainant can demonstrate why the court should exercise its discretion under s. 216A(4), CA. o Fong Wai Lyn Carolyn v Airtrust (Singapore) [2010] Plt was a NED and minority shareholder of a Singapore-incorporated private company, and she brought an application under s 216A, CA against the companys MD. Plt claimed that the Dft breached her fiduciary duties for failing to avoid conflicts of interest (taking corporate opportunities). However, the Plt only gave notice of the application to the company 7 days after it had been filed. Dft claimed that the failure to give sufficient notice invalidated the claim by the Plt. Held: Court granted leave to bring the derivative action under s. 216A, CA, pursuant to its discretion under s. 216A(4), CA despite the lack of sufficient notice. The court took into consideration the following rationale in allowing leave to bring the derivative action: There was evidence that providing notice would undermine the action being sought (ie Dft would have covered her tracks or transferred the money elsewhere) Notice would have been futile thus making notice impracticable and unnecessary - The Court may consider the Companys conduct before and after the s. 216A, CA leave application to determine if they took any actions to address the claim being brought. Dan W. Puchniak & Tan Cheng Han, Company Law in Singapore Academy of Law Annual Review, 158-159 To Judith Prakash J, the key fact supporting her finding of impracticability was that, even after notice was provided, the Company failed to make a bona fide and determined effort to investigate [the plaintiffs] claim. This led her Honour to conclude that it would have been futile for the plaintiff to have provided 14 days prior notice as such notice would not likely have caused the directors to have considered whether the company should pursue the proposed action; rendering moot the central purpose of the notice requirementAs such, Prakash J held that it would be wrong to penalise the plaintiff for her failure to provide prior notice when it is clear that even if such notice was provided, the directors would still not

have made a bona fide effort to consider whether the company should pursue the plaintiffs proposed actionIn this vein, we respectfully caution that it should not be assumed that the directors failure to act based upon inadequate notice is necessarily evidence that they would have similarly failed to act had proper notice been providedIndeed, in our respectful opinion, it is possible (if not likely) that directors will respond differently to plaintiffs who meet the notice requirement and have not yet commenced legal proceedings than to plaintiffs who have neglected the notice requirement and have already rushed to the courthouseour hope is that this caution will quell any attempt to extrapolate a general principle from this particular decision that the futility exception can be established based solely on evidence of the directors failure to properly respond to inadequate notice . This being said, even in light of our caution, it should be acknowledged that a practical implication of Prakash Js decision is that directors will now likely be advised to always make a bona fide and determined effort to investigate [the plaintiffs] claim and this is unquestionably a positive corporate governance development, which can be maintained if the behaviour of directors who receive inadequate notice is one but not the only factor that the court considers when determining whether the futility exception to the notice requirement applies, even if inadequate notice is provided. b. Complainant is acting good faith Imports the common law requirement that the plaintiff ought to have clean hands and to proceed without unreasonable delay o However, here the onus is on the defendant to establish that the complainant is not acting in good faith. The defendant must demonstrate something more than the plaintiffs self -interest or hostility between the parties to establish that the plaintiff is not acting in good faith. o Tam Tak Chuan v Eden Aesthetics [2010] It was clear from the facts that the main motivation was financial, not personal, and the beneficiaries of the action would be EA and EH and their shareholders who included [the defendant] himself (ie, he would benefit in his capacity as a shareholder of the companies although he might lose the case in his personal capacity). When the action is clearly within the interests of the company to pursue, it will be prima facie be in good faith, and the defendant will likely have to show that the action is frivolous, vexatious or devoid of absolutely any merit to establish bad faith. o Agus Irawan v Toh Tech Chye [2002] 2 SLR 198 The company traded in wheat and was entitled to volume rebates by the Australian Wheat Board. The Plt brought a s. 216A, CA derivative action against the Dft director for breaches of their fiduciary duty for diverting the rebates meant for the company to third parties. The complainant and his father were shareholders and directors of one of the companies which received the allegedly diverted rebates. Held: The Court dismissed the plaintiffs application on the ground that prima facie there was no evidence that the company was entitled to the rebates. Furthermore, Plt had not acted in good faith as the rebates that went to third parties went to a company owned by the claimant, and allowing this claim would have resulted in double recovery.

Richardson Greenshields of Canada v Kalmacoff (1995) The complainant, Richardson Greenshields was a merchant bank that had bought $155 in shares (one share) in a company for the express purpose of pursuing a derivative action. Dft argued that the complaint was not acting in good faith since it was pursuing the action as a result of having disgruntled and dissatisfied clients who had bought shares on its recommendation and whose views had been disregarded by the directors of the company By actively pursuing the action, the Plt was alleged to have been motivated by a desire to gain a reputation as a shareholder champion, in order to solidify its relationship with existing clients & attract new ones. Held: Plt had met the good faith test and was allowed to pursue the action, as the the action raised legitimate issues and these claims could not be considered frivolous, vexatious or devoid of merit.

c. The action is prima facie in the interest of the company The complainant must establish that it is (1) prima facie in (2) the interests of the company that the action be brought. Prima facie o The complainant must establish that there is a reasonable chance (not a likely chance) that the action will succeed if brought. The complainant does not need to prove the allegations on a balance of probabilities. o Richardson Greenshields of Canada v Kalmacoff (1995) 123 DLR (4d) 628 Before granting leave, the court should be satisfied that there is a reasonable basis for the complaint and that the action sought to be instituted is a legitimate or arguable one. Agus Irawan v Toh Tech Chye [2002] 2 SLR 198 The terms legitimate and arguable must be given no other meaning other than what is the common and natural one, that is, that the claim must have a reasonable semblance of merit not that it is bound to succeed or likely to succeedI need only consider the grounds and points of challenge raised by the defendants to see if they are sufficient in themselves to destroy the credibility of the plaintiffs propounded case without a full scale hearing to determine who was truthful and who was not. Dan W. Puchniak & Tan Cheng Han, Company Law in Singapore Academy of Law Annual Review, pp. 159-61 In the recent case of Urs Meisterhans v GIP Pte Ltd [2011]Tay J reiterated the well established standard that plaintiffs must demonstrate only that the intended action is a legitimate or arguable one to satisfy the requirement under s 216A(3)(c) of the CA that the proposed action must appear to be prima facie in the interests of the companyfirst, it would be impractical to require a s 216A Companies Act plaintiff in a leave application to establish more than a legitimate and arguable case based on affidavit evidence. Indeed, requiring anything more would essentially force the plaintiff to conduct a trial in the leave application in order to be granted leave to conduct yet another trial; clearly a redundant and inefficient result. Second, such a facilitative approach is justified in light of the significant economic and informational hurdles that s 216A plaintiffs face as a result of being in the unique position of a plaintiff which is saddled with the burden of funding and building a case on behalf of another (separate) legal person: the company....

Interest of the Company o The broad commercial interests of the company must be considered (not just the monetary amount of the claim) when determining if it is in the companys interests. Pang Yong Hock v PKS Contracts Services Pte Ltd [2004] 3 SLR 1 The company may have genuine commercial considerations for not wanting to pursue certain claims. Perhaps it does not want to damage a good, long-term, profitable relationship. It could also be that it does not wish to generate bad publicity for itself because of some important negotiations which are underway

**Whether other adequate remedies exist may also be considered in refusing to grant leave. However, merely because there is an alternative remedy is not alone a sufficient reason for the court to refuse leave they might only refuse leave if there is a better remedy available. Tam Tak Chuen v Eden Aesthetics Pte Ltd [2010] 2 SLR 667 it should be noted that the Court of Appeal made it clear in [ Ting Sing Ning] that Pang Yong Hock was not authority for the proposition that, as long as the alternative of winding up the company was available, leave [under s. 216A] would be refused, however meritorious the proposed claim may be

o o

The requirement of good faith in s. 216A(3)(b) and the requirement that the action be brought in the interests of the company are interconnected. **The defendant has the onus of demonstrating that any ratification by the majority was independent before the court will consider whether such a ratification demonstrates that bringing the action is not in the interests of the company (s. 216B). Margaret Chew, Minority Shareholders Rights and Remedies, 299-300 o Section 216B(1) of the Companies Act was clearly included by the draughtsman to remove the common law barrier to a minority shareholder action posed by the possibility that majority shareholders may ratify breaches of directors fiduciary dutyWhere the allegedly wrongdoing directors do not hold the majority of shares, or where they do not have any control or influence over the majority of shareholders, there is little justification for the courts to disregard the voice of the majority. The difference, however, between the common law procedure and the statutory derivative action appears to be that under the common law, the minority shareholder had to show that the wrongdoers were in control of the majority shareholders to establish a fraud on the minority before the court would disregard the views of the majority shareholders. Section 216B appears to reverse the burden of proof such that the onus is on the allegedly wrongdoing directors to convince the courts that any shareholders resolutions absolving them of breaches of duty was a result of independent voting. If it is clearly shown that the directors did not have any influence or control over an independent majority of shareholders, who chose to approve the directors breaches of duty, the court may, as expressly provided for in section 216B(1), take evidence of this approval by the members into account

3. Advantages and Disadvatages of the s. 216A, CA Statutory Derivate Action Advantages of s. 216A, CA compared to the common law derivative action o It is clear that standing will be addressed as a preliminary issue [s. 216A(2)]. o It is clear that a plaintiff, may be able to obtain an order that reasonable fees and disbursements will be indemnified by the company [s. 216A(5)(c)]. o The court may make any order it thinks fit to help facilitate the actionwhich may include giving the complainant access to important evidence [s. 216A(5)]. Often it is hard for the complainant to get information regarding the company especially where the majority has control. o No requirement to establish fraud on the minority, and in particular wrongdoers control, to have standing to bring a derivative action. o Under common law, the minority shareholder had to show that the wrongdoers were in control of the majority shareholders to establish a fraud on the minority before the courts would disregard the views of the majority shareholders. Under s. 216B(1), the burden of proof is reversed as the onus is on the alleged wrongdoing directors to convince the court that any shareholder resolution absolving the directors was the result of an independent vote. o The complainant can intervene in an existing action (s. 216A) that the company does not carry out properly. In the case where a company bring a claim half-heartedly with no intention of properly following through with it, the complainnant can intervene and take over the cause of action. o The statutory derivative action may be used as a tactic to force a settlement. Because once leave is granted to pursue a derivative action the company will normally be required to indemnify the plaintiff which means that the defendant must pay her lawyer while the plaintiff-shareholder can proceed to trial using the companys funds. Disadvantages that remain regarding the s. 216A, CA Derivate action o The courts at the interlocutory stage will still have to decide whether it is in the interests of the company to allow a derivative action (this may be no easier for the courts than determining fraud on the minority). o As with any derivative action, the company (not the shareholder pursuing the claim) will receive any damages awarded o But the shareholder may be indemnified for costs. o The statutory derivative action fails to simplify the law as it does not appear to replace the common law derivative action for Singapore incorporated companies which are not listed on the Singapore Exchange and is not available for foreign incorporated companies or Singapore incorporated companies listed on the Singapore exchange. Ting Sing Ning v Ting Chek Swee [2008] 1 SLR 197 o These proceedings are concerned with a common law derivative action and not one under s 216A of the Companies Act because Havilland is a Hong Kong company and therefore is not entitled to avail itself of the remedy provided by s 216A. Reform: Steering Committee of Review of the Companies Act to amend s. 216A to apply to all Singapore incorporated companies, whether listed in Singapore or overseas, which has been accepted by the Ministry of Finance in October 2012. These amendments are likely to be applicable by end-Oct 2013. Foreign incorporated companies are still required to rely on the CLDA.

e. Oppression Remedy (s. 216, CA)

1. Procedural Requirements for Oppression Remedy Against whom a s. 216, CA claim can be brought: A s. 216, CA claim for Oppression can only be brought against a Singapore incorporated companies. o Lim Chee Twang v Chan Shuk Kuen Helina [2010] 2 SLR 209 The plaintiff-shareholder claimed he was the victim of oppression as a 40% shareholder of a group of five companies. The defendant was the only other shareholder, who in effect held 60% of the shares in a number of group companies. Three of the group companies were incorporated in Singapore, one in the British Virgin Islands and one in Hong Kong. S. 216 clearly providesremedies for shareholders or debenture holders of a company. Under s 4 of the Act, this is defined to mean a company incorporated pursuant to the Act or pursuant to any corresponding written law. In Ting Sing Ning v Ting Chek Swee, the CA held that a foreign company (in that case incorporated in Hong Kong) was not entitled to relief under s 216A of the Act. By a parity of reasoning, neither would s 216 apply to [foreign incorporate corporations].

Who may bring a s. 216, CA claim for oppression: ss. 216(1) & (7), CA provide that the following catergories of people may bring a claim: o A member of the company A person who is merely the equitable owner of shares, but is not listed on the company register, is not a member [s. 19(6), CA] and therefore cannot bring a s. 216, CA claim for oppression must be listed on Registry of Members. However, according to English case law, an equitable shareowner can: o Have her nominee (i.e., the registered but not equitable shareholder) bring a claim on her behalf) or, o Register as a member and bring a claim based on the commercial unfairness that occurred as an equitable member. And will this still be an issue in this age of electronic share purchasing online, where shareholders are immediately registered. A defendant in a s. 216 action is estopped from objecting to an applicants claim based on: The unfair removal of the applicant members name from the registry (Owen Sim Liang Khui v Piason Jaya Sdn Bhd), or The failure of those responsible for the company register to properly register the member (Kitnasamy v Nagatheran) o A person who although not a member, has shares transmitted by operation of law This includes a trustee in bankruptcy or personal representative of a deceased member, who although not listed on the company register, received the shares by operation of law. Note that an equitable purchase of shares is not considered a transmission of shares by operation of law and therefore does not provide an equitable owner of shares with a right to bring a s. 216, CA claim. o A debenture holder of the company o The Minister in the case of a declared company A declared company is a company which is designated as such by the Minster pursuant to Part IX of the Act. When may s. 216 oppression be claimed: s. 216, CA provides members a remedy for personal wrongs suffered in their personal capacity as members it is an exception to the rule in Foss. o As s. 216, CA is a personal action, the applicant is responsible for his own costs and can receive direct benefits from a remedy (which is not possible in a DA).

2. Test for s. 216, CA Oppression Claim s. 216(1), CA provides that any member of the company may apply to the court on the grounds: (a) That the affairs of the company are being conducted or the powers of the directors are being exercised in a manner [1] oppressive to one or more of the membersincluding himself or in [2] disregard of his or their interests as membersof the company; or, (b) That some act of the company has been done or is threatened or that some resolution of the membershas been passed or is proposed which [3] unfairly discriminates against or is otherwise [4] prejudicial to one or more of the members (including himself) Hence, prima facie, s. 216(1), CA seems to suggest that there are 4 separate grounds under which a claim for oppression could be brought by a member. However, the four grounds have been interpreted as alternative expressions of a single ground based on commercial unfairness. Therefore, to succeed under s. 216, CA, the complainant member must demonstrate that the conduct of the company offends the standards of commercial fairness and is deserving of intervention by the courts (Over & Over v Bonvest Holdings) Westfair Foods Ltd v Watt (1991) 79 DLR 48 UK o I cannot put elastic adjectives like unfair, oppressive or prejudicial into watertight compartments. In my view, this repetition of overlapping ideas is only an expression of the anxiety of Parliament that one or the other might be given a restrictive meaning. Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 Australia o in my view a court now looks at [the relevant Australian provision] as a composite whole, and the individual elements mentioned in the section should be considered merely as different aspects of the essential criterion, namely, commercial unfairness. **Over & Over v Bonvest Holdings Ltd [2010] 2 SLR 776 at [70] & [71] o [70] - s. 216 appears to provide four alternative limbs under which relief may be granted oppression, disregard of a members interest, unfair discrimination or otherwise prejudicial conduct. These four limbs are not to be read disjunctively. The common thread underpinning the entire section is the element of unfairness. o [71] Margaret Chew, Minority Shareholders Rights and Remedies: It would be futile, if not impossible, to split pedantic hairs over the precise and exact meaning of the medley phraseology favoured by the legal draughtsman. The fruit of such labour could only add uncertainty and confusion.The expressions in the Singapore, Malaysian, UK and Australian provisions oppression, disregard of interests (or contrary to interests), unfair discrimination and prejudice (or unfair prejudice) all point toward behaviour on the part of the majority shareholders or the controllers of a company that departs from the standards of fair play amongst commercial partiestherefore, rather than distinguishing one ground from the other in section 216, the four grounds set out therein ought to be looked at as a compound one, the purpose of which is to identify conduct which offends the standards of commercial fairness and is deserving of intervention by the courts...in determining the scope of section 216, rather than deciphering the precise nuance of each of the expressions oppression, disregard of interests, unfair discrimination and prejudice, a compendious interpretative approach, with an emphasis on the rationale and purpose of section 216, is hereby advocated.

Reference can be made to case law from foreign jurisdiction which have similar provisions: UK: Section 459, UK CA 1985 replaced the ground of oppression with unfair prejudice and therefore cases considering s. 459 (now s. 994, UK CA 2006) provide useful guidance for interpreting s. 216, CA (although the two sections are not identical). Malaysia, Australia and Canada: All have sections in their respective company acts that are similar to s. 216, CA and thus, their case law may also provide useful guidance.

3. Test for commercial unfairness under s. 216, CA Commercial unfairness under s. 216, CA is determined by a (1) written agreement and (2) legitimate expectations between the shareholders (this makes up the contractual understanding between parties). The concept of commercial unfairness provides the court with extremely wide discretion for determining when to intervene into corporate affairs to disrupt majority rule. o However, the court cannot decide what is fair and unfair on a case by case basis without a judicial rationale. o Therefore, in determining what is commercially fair they examine the contractual understanding between the parties. If this understanding is breached, it amounts to unfairness. ONeill v Phillips [1999] 1 WLR 1092 o Phillips initially owned the entire company and ONeill was employed as a manual worker but after a few years impressed Phillips with his energy and ability, so Phillips gave ONeill 25% of the issued share capital and appointed ONeill as a director. o Eventually, Phillips retired from the Board, and ONeill took over the running of the business and allowed ONeill to draw 50% of the profits. Subsequently, there were negotiations between Phillips and ONeill to increase ONeills shareholdings in the company to 50% but the negotiations did not result in a concluded agreement. o The following year, the construction industry went into a recession and relations between Phillips and ONeill soured, and Phillips told ONeill that he was no longer to have overall management of the company and would no longer receive 50% of the profits. ONeill issued proceedings alleging unfairly prejudicial conduct under s. 459, UK CA 1985, and claimed that Phillips had acted unfairly in first, terminating the equal profit-sharing arrangement and second, repudiating the alleged agreement for the allotment of more shares to ONeill. o HL Held: The conduct of Phillips did not amount to any unfairness as the court was of the opinion that there was no basis consistent with established principles of equity to hold that Phillips had behaved unfairly either by resiling from the equal profit-sharing arrangement (because P made no promise to share the profits equally there was no equitable understanding between the parties that was breached) or by withdrawing from the negotiations with respect to increasing ONeills shareholding to 50% of the share capital (which was not binding until a formal document was executed). Here the court did not doubt that ONeill expected to get 50% of the shares, but the HL did not believe that there was any agreement that he would continue to get this in the future. Here the court found that there was no meeting of the minds and that from a commercial business point of view, cannot rely on what just one party expects. o Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative historythat it chose this concept to free the court from technical considerations of legal right and to confer wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles. As Warner J said in Re J E Cade & Son Ltd The courthas very wide discretion, but it does not sit under a palm tree. Over & Over Ltd. v Bonvest Holdings Ltd [2010] o Commercial fairness, therefore, is the touchstone by which the court determines whether to grant relief under s. 216 of the Companies Act.However, whether the majoritys conduct may be characterised as unfair is, to be sure, a multifaceted inquiry

a. Written Agreements between the members The starting point for determining commercial unfairness is the written agreement between the members here the courts are looking for a quasi-contractual agreement between the parties. A member cannot normally claim unfairness unless there has been a breach of the memorandum, articles or any shareholders agreement as acting in accordance with the articles is indicative of fair play and therefore should be the starting point for any s. 216, CA action. However, a minor breach of a rule, which does not produce unfairness, will clearly not support a remedy under s. 216, CA. In fact, successful cases under s. 216, CA, normally involve ongoing or multiple breaches that amount to commercial unfairness. Re Saul D Harrison & Sons Plc [1995] 1 BCLC 14 o The plaintiff held C class shares (carried rights to dividends and to capital distributions in a liquidation, but no entitlement to vote) in a company that made industrial cleaning cloths. The business was founded by the Plts great-grandfather. o The company had substantial assets but had recently been run at a loss. The plaintiff complained that the directors (her cousins) had unreasonably continued to run the business, instead of winding up and distributing the assets to the shareholders. o Held: That the claimant had no legitimate expectations over and above any expectation that the board would manage the company in accordance with their fiduciary obligations and the terms of the articles of association and the Companies Act, and that no breach of these obligations had been shown. o In deciding what is fair or unfairit is important to have in mind that fairness is being used in the context of a commercial relationship. The articles of association are just what their name implies: the contractual terms which govern the relationships of the shareholders with the company and each otherSince keeping promises and honouring agreements is probably the most important element of commercial fairness, the starting point in any casewill be to ask whether the conduct which the shareholder complains was in accordance with the articles of association. b. Legitimate Expectation of the Parties However, where the majoritys assertion of power complies with the written agreement between the members but conflicts with the legitimate expectations of the minority members, the conduct of the majority can be challenged under s. 216, CA as oppression. Legitimate expectations arise out of informal or implied understandings between the shareholders which formed the basis of their association and mutual trust and confidence. Re Saul D Harrison & Sons Plc [1995] 1 BCLC 14 o I have in the past ventured to borrow from public law the term legitimate expectations to describe the correlative right in the shareholder to which such relationship may give rise. It often arises out of a fundamental understanding between the shareholders which formed the basis of their association but was not put into contractual form. **Over & Over Ltd. v Bonvest Holdings Ltd [2010] SGCA 7 o Another principle that should be rememberedis that courts, in deciding whether to grant relief under s. 216 must take into account both the legal rights and the legitimate expectations of members [I]t is well-established that informal understandings and assumptions may be taken into account in determining whether the minority has been unfairly treated. A majority shareholder may be within his strict legal rights but the manner in which he exploits his legal rights may call for the courts intervention . In particular, it is trite law that conduct can be unfair without even being unlawful **ONeill v Phillips [1999] 1 WLR 1092 o The legitimate expectation must reflect an expectation between the members (not simply one members reasonable expectation) which demonstrates the fundamental understanding of the membersand does not impose an obligation upon one of the members which in fairness was not part of the fundamental understanding. It is not about what one party expected, its about meeting of the minds.

i. Legitimate expectations based on the informal understanding The nature of informal understandings suggests that in most cases they are limited to quasipartnership arrangements Over & Over Ltd. v Bonvest Holdings Ltd [2010] SGCA 7 o [78] - Courts, in deciding whether to grant relief under s 216 of the Companies Act, must take into account both the legal rights and the legitimate expectations of members. While these legal rights and expectations are usually enshrined in the companys constitution in the majority of cases, a special class of quasi-partnership companies form an exception to this rule.

For a company to be classified as a quasi partnership it should in most cases have at least one or more of the following features (Ebrahimi v Westbourne Galleries Ltd): A personal relationship between the shareholders that involves mutual trust and confidence (this normally exists where a pre-existing partnership has been incorporated); An agreement that all or some of the shareholders will participate in the conduct of the business; and/or A restriction on the transfer of shares (pre-emptive rights to purchase shares) o NB: The SGCA in Over v Over suggests that this criteria is of limited importance but that illiquidity of shares (i.e., non-tradability on a liquid market) matters. Dan W. Puchniak & Tan Cheng Han, Company Law in Singapore Academy of Law Annual Review, 206-207 o Justice Rajah suggests that a preliminary step in evaluating a s. 216, CA oppression claim is to determine whether the company in question is a quasi-partnership. As mentioned above, this determination is important because in quasi-partnerships it is more likely that the understandings of shareholders will be informal (rather than formal) in nature. In addition, Justice Rajah suggests that in the context of quasipartnerships, courts should apply a stricter yardstick of scrutiny ( Over & Over at [83]) because minority shareholders are more vulnerable due to the relative informality of understandings and illiquidity of shares in such companies. Up to this point, we agree with Justice Rajahs approach. However, Justice Rajah goes on to find that in the process of determining whether a company should be classified as a quasipartnership, the court should not consider whether there is a restriction on the transfer of the companys shares.We respectfully disagree with this point. We submit that there are at least three important reasons why the court should consider the existence of a share transfer restriction when determining whether a company is a quasi-partnership. First,restricting the transferability of shares removes one of the key distinctions between the corporate form and general partnership which arguably makes a company more partnership-like. Second, restricting the transferability of shares increases the likelihood that shareholders will base their relationships on informal understandings because there is a greater certainty that all of the shareholders will remain familiar to one another which is a hallmark of quasi-partnerships. Third, by definition, a restriction on the transferability of shares reduces the liquidity of shares which is a primary reason that Justice Rajah provides for treating quasipartnerships as a special class of companies in the first place. In sum, as share transfer restrictions make companies more partnership-like and support several features that distinguish quasi-partnerships from other companies, we submit that they should be considered by the court in evaluating a companys quasi-partnership status. This is not to say that a quasi-partnership company cannot arise in the absence of share transfer restrictions but that the existence of such a restriction is an important factor to be taken into consideration

It should be noted that although most quasi-partnerships are private companies, it is possible for a public company to be classified as a quasi-partnershipbut such a classification is extremely unlikely in the case of listed public companies, as they are unlikely to fulfill the criteria above. Tan Choon Yong v Goh Jon Keat [2009] 3 SLR 840 o Two Dfts incorporated a Company and asked the Plt to resign from his current position and join their Company. The Plt joined based on a mutual understanding that he would be the CEO, a director and play a major role in running the Company. o The Company listed itself on a quasi-exchange and attracted investors by highlighting the plaintiff s experience and the leadership role in the Company and as a result of the listing, the Company raised $3,816,800. Soon after, the Dfts used their majority voting power to appoint two new directors to gain control of the Board and dismissed the plaintiff from his CEO position (at a meeting that was not valid). o The Plt claimed that the Dfts actions amounted to oppression under s. 216, CA. o Held: The actions of the defendants amounted to oppression. Dan W. Puchniak & Tan Cheng Han, Company Law in Singapore Academy of Laws Annual Review, 168-169 o This case is somewhat unusual as it involved the finding of a legitimate expectation [based on an informal understanding] in a public company with listed shares.Even though this case involved a public company, based on the current case law, evidence of an understanding between the plaintiff and defendant provides prima facie support for the courts finding that the plaintiff had a legitimate expectation that he would be a director and the CEO of the Company. However, two points, which have not yet been fully explored in the case law, may be worth examining as they suggest that the scope or existence of the plaintiff s legitimate expectation may have been different than what the court ultimately found in this case. First, one might argue that even with an agreement between the parties, by virtue of s. 152 of the Companies Actwhich provides shareholders in public companies with the right to remove any director by way of ordinary resolution notwithstanding any agreement to the contrarya member can never have a legitimate expectation not to be removed by majority vote as a director in a public company. In addition, although there was an understanding between the plaintiff and defendants, it might be queried as to whether the Companys issuance of a large number of shares to outside investors changed or destroyed the legitimate expectation of the plaintiff as it was no longer based upon an understanding between all of the members.

Specific Circumstances 1. Legitimate expectations based on informal understandings must have been explicity communicated between the parties o Thio Keng Poon v Thio Syn Pyn [2010] 3 SLR 143 (Malaysia Dairy) The appellant was the founderof a successful group of dairy companies. The appellant transferred his shares to his wife and six children for no consideration, effectively giving them control of the companies. The issue arose when revealed that the appellant had been double-claiming for business related travel expenses. Without any notice to the appellant, the appellants oldest son called a board meeting to remove the Appellant from his management positionsthe decisions were then ratified at the AGMs. The appellant claimed his removal amounted to oppression under s. 216 as it breached the informal understanding, which gave rise to a legitimate expectation that he would retain his management positions. SGCA Held: Found that there was no evidence of any such understanding between the appellant and his family members. The [appellants] understanding was unspoken and therefore, there was no way his family members could have known about it.

Dan W. Puchniak & Tan Cheng Han, Company Law in Singapore Academy of Laws Annual Review, 206-207 Based on the trial judges findings, the Court of Appeal held that the [appellants] understanding was unspoken and therefore, there was no way his family members could have known about it We submit that merely because a shareholders understanding is unspoken does not axiomatically mean that it cannot be known to (or shared by) the other shareholders. In fact, considering business and cultural norms in Singapore, it seems plausible that when a founding patriarch gifts his shares to his family, out of respect for the patriarch, there is an understanding that he will maintain a management position in the company. One could reasonably argue that such an understanding would exist even if it was not specifically articulated to his family members at the time of the share transfer. If such a general unspoken understanding indeed exists in Singapore, then there may have been a legitimate expectation that the appellant not be removed from his management positions. However, even if the court would have found such an unspoken legitimate expectation, it may not have changed the outcome of this case because the appellants double-claiming behavior may have ultimately fallen beyond the scope of protection provided by the unspoken legitimate expectation. Thus although he might have had the legitimate expectation not to be removed, it was based on an understanding that this was contingent on him not doing anything wrong.

2. Legitimate expectations based on informal understandings will unlikely arise where the parties have sought professional advice and negotiated the terms of the articles. o Over & Over Ltd. v Bonvest Holdings Ltd [2010] SGCA 7 Where, however, the acquisition of shares in a company is one of the results of a complex set of formal written agreements it is a question of construction of those agreements whether any such superimposed legitimate expectations can arise. In Re a company, ex parte Schwarcz (No 2) [1989] BCLC 427, Peter Gibson J expressed similar sentiments. He notedthat the parties had spelt out in detailed agreements all matters which were to govern their relationship, and thus rejected the petitioners claim that their legitimate expectations were not limited to their rights under a written service agreement. In the facts before me, the parties dealing at arms length had entered into the Agreement, which comprehensively laid down the rights of each shareholder. To my mind, it is difficult to find that any legitimate expectations apart from those contained in the Agreement were created.

Overall Evaluation Dan W. Puchniak & Tan Cheng Han, Company Law in Singapore Academy of Laws Annual Review, 206-207 o We respectfully submit that the Court of Appeals decision [in Thio Keng Poon v Thio Syn Pyn [2010] 3 SLR 143] to limit the scope of legitimate expectations to understandings between all of the shareholders in a company makes sense. Expanding the scope of legitimate expectations to include the unilateral beliefs of individual shareholders would open a Pandoras Box for the oppression remedy in Singapore even if those unilateral beliefs were reasonable. Such an expansion would allow an individual shareholder to use s 216 to effectively enforce secretly held terms on all other shareholders (ie, terms which the other shareholders neither agreed to nor were unaware of). This would introduce a significant amount of uncertainty into shareholder relationships in Singapore which would discourage equity investment. In addition, creating a situation where the enforceable relationship between shareholders is based on what exists solely in the minds of individual shareholders would create an evidentiary nightmare in s 216 oppression cases.

ii. Legitimate expectations based on implied understandings Implied understandings arise based on the nature and commercial purpose of the corporate structure It allows courts to find legitimate expectations which are not specifically provided for in the written documents but nevertheless reflect the shareholders interests and expect ations in the corporate relationship. Examples of implied understandings: The constitution and Companies Act would be complied with, to the best of the abilities of the management and the administration, with leeway given for the occasional lapse (but not when substantial injustice is caused) Corporate participants in directorial positions would not use their position to defraud other participants, contrary to their directors duties. o Low Peng Boon v Low Janie [1999] 1 SLR 761 The majority shareholder-director caused the company to pay low dividends to increase the companys profits. The majority shareholder-director benefited personally from this because his annual bonus was based on the amount of profits of the company. The majority-director was also alleged to have used the companys funds for personal expenses. Held: The court found that the actions of the majority amounted to unfair oppression under s. 216, CA. Re Gee Hoe Chan Trading Co Pte [1991] 3 MLJ The majority shareholder directors (holding 60%) had been paying themselves directors fees and salaries but not declaring any dividends. The minority shareholders (40%) were aggrieved because not only did the majority exclude the minority from directorial positions, the majority also voted themselves onto the board and paid themselves generous salaries, and did not affect any declaration of dividends. Held: The court held that it was grossly inequitable that the majority shareholders should make use of their controlling power in both the general meeting and the directors meeting to adopt a policy which benefited only themselves and gave hardly any benefit to the minority shareholders, thus amounting to oppression under s. 216, CA.

There is an implied understanding that in quasi-partnerships there is a higher standard of corporate governance that must be observed by the majority shareholder vis--vis the minority shareholder. o Over & Over Ltd. v Bonvest Holdings Ltd [2010] SGCA 7 In the context of quasi-partnerships, therefore, the courts have consistently applied a stricter yardstick of scrutiny because of the peculiar vulnerability of minority shareholders in such companies Eng Gee Seng v Quek Choon Teck and others [2010] 1 SLR 241 The Plt was a minority shareholder and director in a quasi-partnership which he started with the two Dfts. The quasi-partnership was incorporated based on an oral agreement or mutual understanding between the parties that they would all have equal shareholding and ownership, equal rights of management, and equally share in the profits of the quasi-partnership. In breach of this understanding, the Plt was removed as a director and subsequently did not share equally in the profits of the company as he was denied directors fees, salary and dividends. The plaintiff brought an action claiming that the breach of the informal and implied understandings between the partners amounted to oppression under s 216, CA. Held: Court found in favour of the plaintiff and ordered the defendants to buy out the plaintiffs shares at a price determined by an independent valuator

Turning to Borden, a case also involving a quasi-partnership, the Court of Appeal laid out at [82] principles similar to that of Sim Yong Kim and then said that the courts will insist upon a high standard of corporate governance on the part of the controllers at [83]: It bears repeating that in a case such as the present where a company has the characteristics of a quasi-partnership and its shareholders have agreed to associate on the basis of mutual trust and confidence, the courts will insist upon a high standard of corporate governance that must be observed by the majority shareholders vis--vis the minority shareholders. Read with the distinction drawn in Sim Yong Kim between ordinary companies and quasi-partnerships, I am of the view that our law requires controllers of quasi-partnerships to demonstrate a higher level of governance as compared with those of ordinary companies. Borden touches on two aspects of corporate governance in particular. The first concerns the issue of disclosure. Borden appears to impose upon controllers in a quasipartnership a duty to explain or justify their management decisions to nonexecutive minority shareholders (see [44] and [51]). The second concerns situations where there exists a conflict of interest. Borden appears to suggest that even if a particular course of conduct would not amount to unfair conduct in the context of an ordinary company, such conduct might well be regarded as unfair in the case of a quasi-partnership. In the context of quasipartnerships, therefore, the courts have consistently applied a stricter yardstick of scrutiny because of the peculiar vulnerability of minority shareholders in such companies.

Margaret Chew, Minority Shareholders Rights and Remedies, 156-57 Indeed, the case of Lim Swee Khiang v Borden Co (Pte) Ltd [2006] SGCA 33 appears to suggest that there exists a set of implied understandings for quasipartnerships, based on equitable principles, and extending beyond traditional company law approaches to directors and shareholders dutiesthe court underlined that the company in question was not an ordinary company but a quasi-partnership where the shareholders repose trust and confidence in one another, and shareholders, therefore, owed equitable duties to one another.

Evaluation It is extremely difficult to establish unfairness based on legitimate expectations in a listed company. Section 216, CA applies to listed and unlisted companies. However, it remains to be seen whether it is useful for shareholders in listed companies. o The expectations of shareholders in listed companies are different from unlisted companies. This be attributable to the fact that: Shares in listed companies are liquid which allow for easy exit when a shareholder is displeased with management. Listed companies are more heavily regulated as a result of securities laws and listing requirements which provides another layer of shareholder protection. Listed companies involve a greater number of dispersed investors which necessitates that the companys constitution and applicable laws are the totality of shareholder rights vis--vis internal corporate affairs. o Any legitimate expectation in a listed company will therefore likely be based on an implied (rather than an informal) understanding. ONeill v Phillips [1999] 1 WLR 1092 o So I agree with Jonathan Parker J. when he said in In re Astec (B.S.R.) Plc. [1998] 2 BCLC 556: in order to give rise to an equitable constraint based on 'legitimate expectation' what is required is a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former

c. Other Criterion for Commercial Unfairness It is not enough to only demonstrate a breach of the written or informal agreement must show that that the breach prejudiced the claimant o Ng Sing King v PSA International Pte Ltd [2005] 2 SLR 56 It does not necessarily follow, however, that breach of any expectations enshrined in the Agreement is tantamount to oppressive conduct. Admittedly, breach of these terms would disappoint the shareholders expectations. Nonetheless, many other factors have to be considered to ascertain whether the breach resulted in unfairness, such as (1) whether the breach was deliberate, (2) whether it was a significant breach in disregard of a major expectation and (3) whether any detriment was caused to the aggrieved shareholder. Above all, the plaintiffs have the onus of showing that the breach prejudiced their interest in some way. In this respect, Jonathan Parker J in Re Blackwood Hodge plc [1997] 2 BCLC 650 underscored the importance of satisfying the court that harm has been caused by the breach. The following pronouncementis especially apposite: [T]he petitioners must establish not merely that the [company] directors have been guilty of breaches of duty in the respects alleged, but also that those breaches caused the petitioners to suffer unfair prejudice in their capacity as preference shareholders. As Neill LJ said in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 31: The [relevant] conduct must be both prejudicial (in the sense of causing prejudice or harm to the relevant interest) and also unfairly so: conduct may be unfair without being prejudicial or prejudicial without being unfair, and it is not sufficient if the conduct satisfies only one of these tests ...the question is far more complicated than merely ascertaining whether the Agreement was violated. The expectations of the plaintiffs must also be considered against the backdrop of commercial realities.

It is clearly not enough to demonstrate majority rule to establish unfairness o Ng Sing King v PSA International Pte Ltd [2005] 2 SLR 56 There is a fine distinction, in this regard, between the (a) legitimate rule of the majority, and (b) tyranny of the majority. As Lord Wilberforce elaborated in Re Kong Thai Sawmill (Miri) Sdn Bhd, the mere fact that one or more of those managing the company possess a majority of the voting power and, in reliance upon that power, make policy or executive decisions with which the complainant does not agree, is not enoughThe court cannot intervene in the face of mere disagreement amongst the shareholders, for it does not act as a supervisory board over the decisions made by shareholders: Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. Section 216 should therefore not be invoked by the court to interfere with the internal management of a company by directors who are acting honestly and not seeking to advance their interests or the interests of others at the expense of the company or contrary to the shareholders interests: Re Bright Pine Mills Pty Ltd [1969] VR 1002. This principle is of particular relevance to the present facts. The plaintiffs might understandably feel aggrieved or even feel that they have been treated unfairly. Nonetheless, that sentiment alone is an insufficient basis for a successful application under s 216

Commercial unfairness may be established based on a single act or multiple acts. o However, in both cases the important question is whether the act or acts offends the standards of commercial fairness and is deserving of intervention by the courts o More often than not, most of the s. 216 oppression cases actually involve multiple acts, rather than single acts. o Over & Over Ltd. v Bonvest Holdings Ltd [2010] SGCA 7 In this case the Court of Appeal found that both singular acts and the combination of multiple continuous acts amounted to oppression. Courts suggest that an isolated act like (i) a singular dilution of the minoritys shares by the majority, or (ii) a clear and egregious misappropriation of monies contrary to an implied understanding, would suffice as oppresive conduct. On the other hand, a singular assertion of (i) excessive remuneration or (ii) inadequate dividend payment would not amount to oppression. [74] - Based on a plain reading of s 216(1) itself, therefore, it appears that either a course of conduct or even a single act could theoretically amount to oppression. It has been noted, however, that the majority of the cases that have been decided by the courts pertain to minority complaints under limb (a) above, viz, oppression manifesting itself in the extended abuse in the conduct of the companys affairs (see Victor Yeo and Joyce Lee, Commercial Applications of Company Law in Singapore at p 282). Nonetheless, the following passage from Minority Shareholders Rights and Remedies correctly encapsulates the position on what might be said to single distinct acts of unfair behaviour (at pp. 228229): It is recognised, however, that a past oppressive act, although remedied, may belie a risk of future oppressive acts and may have continuing oppressive effects. Therefore, the fact that an excluded director has been reinstated or that a diversion of monies has been repaid may not mean oppression of the minority has necessarily ceased.

Possible to claim oppression even if the party claiming oppression has breached the duties they owe as a director to the company o If the oppressed party breaches their directors duties, it does not foreclose them from succeeding in a s 216 oppression claim. This makes sense as the two actions (oppression and a DA) while often overlapping are distinct. o Spectramed Pte Ltd v Lek Puay Puay and others and another suit [2011] SGHC 43

**Counterpoint: Commercial unfairness under s. 216, CA may be avoided by an offer to purchase the minoritys shares o A fair offer by the majority to purchase the shares of the minority may prevent the wrongdoing conduct from being unfair under s. 216, CA o ONeill v Phillips [1999] 1 WLR 1092 An offer will likely be considered to be fair if the majority offers to (1) purchase the minoritys shares at fair value and without a minority discount, determined by a competent expert, (2) both parties will have equal access to relevant company information concerning the value of the shares and an equal opportunity to make submissions to the expert; and, (3) if the offer is not provided in a reasonably timely manner after the legal process has been commenced, then a reasonable amount for legal costs must be provided in the offer. As I have said, the unfairness does not usually consist merely in the fact of the breakdown but in failure to make a suitable offer. And the majority shareholder should have a reasonable time to make the offer before his conduct is treated as unfair. The mere fact that the petitioner has presented his petition before the offer does not mean that the respondent must offer to pay the costs if he was not given a reasonable time]

**Counter Point: Informal and implied understanding could be used to prevent minority from claiming oppression. o Although informal and implied understanding are usually relied on to subject the actions of the majority to greater scrutiny, it could also be used to prevent the minority from complaining about matters in which they have informally or implicitly given the majority carte blanche to carry out. o Tan Yong San v Neo Kok Eng and others [2011] SGHC 30 It is clear from the authorities that what constitutes unfair conduct may be assessed with reference to the legitimate expectations of minority shareholders, which may in turn arise from informal or implied understandings vis--vis the majority shareholders: Ng Sing King v PSA International Pte Ltd at [95]; Eng Gee Seng at [11]; Over & Over at [84]. While such informal or implied understandings are usually relied on to subject the actions of the majority to greater scrutiny, they can conversely also be used to prevent the minority from complaining about matters in which they had given the majority carte blanche. The present case is one such example. Since the understanding between Tan and Neo was that Neo could run the Chip Hup Group as his personal fiefdom, Tan cannot be heard to complain now that Neo had been manipulating CHH and its subsidiaries for his own personal gain. It did not matter that Tan was unaware of and could not acquiesce to the specific acts Neo had done throughout this period

d. Standard of Proof for Commercial Unfairness Commercial unfairness under s. 216 is determined on an objective standard. Although the standard of fairness has not been specifically considered by Singaporean courts, UK case law is persuasive. Unfairness may be established even if the alleged wrongdoer did not intend to harm the complainant-member or did not believe the action to be wrong. However, what the objective standard is will depend on the context in which the dispute occurs ie subjective-objective standard what a objective or reasonable person would do in those given circumstances. ONeill v Phillips [1999] 1 WLR 1092 o Although fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family. In some sports it may require, at best, observance of the rules, in others (its not cricket) it may be unfair in some circumstances to take advantage of them. All is said to be fair in love and war. So the context and background are very important. Re a company (No 005134 of 1986) ex parte Harries [1989] BCLC 383 o (1) The test of unfair prejudice is objective. (2) It is not necessary for the petitioner to show bad faith. (3) It is not necessary for the petitioner to show a conscious intention to prejudice the petitioner. (4) The test is one of unfairness, not unlawfulness. Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 o Its merit is to emphasise that the court is applying an objective standard of fairness...An appeal to the view of an imaginary third party makes the concept seem more vague than it is real[it would be] more useful to examine the factors which the law actually takes into account in setting the standard[In deciding what is fair or unfair] it is important to have in mind that fairness is being used in the context of a commercial relationship.

e. Examples of Commercial Unfairness under s. 216, CA It is useful to examine the types of cases that tend to amount to commercial unfairness. However, it must be stressed that commercial unfairness is a malleable concept that must be proven in each individual case. The following are just possible categories but is by no means determinative. i. Dominant/Majority Member advancing their own interest Relief may be obtained under s. 216, CA where directors or majority shareholders pursue a course of conduct that advances their own interests at the expense of the company or minority shareholders. Commonly, this occurs when the majority shareholders directors use their power to divert corporate assets and/or opportunities to themselves or parties in which they have an interest. o The diversion of corporate assets or opportunities normally constitutes a breach of a directors common law, fiduciary and statutory duties. However, breach of a directors duty is neither sufficient nor necessary for a claim to succeed under s. 216. A director may enter into a competing business and take up rejected opportunities of the company where she is able to have her proposed actions approved by the majority. However, the same action may amount to a breach under s. 216 if there were legitimate expectations that directors would not compete. At common law, shareholders do not owe duties to each other. However, under s. 216 a shareholder may be able to challenge the actions of another shareholder if they amount to unfairness. Specifically, shareholders in quasi-partnerships may have a duty to disclose conflicts of interest and refrain from voting on the same resolutions. Lim Swee Khiang v Borden Co (Pte) Ltd [2006] SGCA 33 o It was accepted by the parties that the company was a quasi-partnership. The main grievance of the minority shareholders was that opportunities and assets belonging to the company were essentially given to another company which was controlled by the son of one of the majority shareholders and in which the same majority shareholder also owned shares. o Held: The Court of Appeal found the acts of the majority oppressive under s. 216, CA and held that shareholders in quasi-partnerships will be held to a higher standard of corporate governance. Specifically, the court suggested that in a shareholders meeting that involved a decision on questionable transactions the majority shareholders with a conflict of interest should have refrained from voting. In addition, the majority shareholders should have disclosed their conflict of interest.

Low Peng Boon v Low Janie [1999] 1 SLR 761 o Held: The shareholder-director used company funds to pay for his personal travelling expenses and this was held to be oppressive conduct. ii. Abuse of Voting Powers The use of voting powers may amount to unfairness under s. 216 when the majority shareholders cause harm to the minority by using their voting power in (a) bad faith, (b) for a collateral purpose and/or (c) in a manner inconsistent with the spirit of the MOA/AOA. Re SQ Wong Holdings (Pte) Ltd [1987] 2 MLJ o Two directors of the company had deliberately refused to make dividend payments on their shares. This policy was motivated by a desire to preserve their dominance in, and control over, the company. Since, pursuant to the terms of the articles, their shares could not be voted if dividends were paid. To ensure that they maintained management control, they had to embark upon a policy of non-payment of dividends. o Held: Chan Sek Keong JC held that the non-payment was motivated by self-interest and the directorial discretion not to pay dividends had been used for a collateral purpose, thereby amounting to oppressive conduct under s. 216. Over & Over Ltd. v Bonvest Holdings Ltd [2010] SGCA 7 o If directors represneting majority shareholders abuse voting rights by voting in bad faith or for collateral purposes, oppression can be said to be established: Polybuilding (S) Pte Ltd v Lim Heng Lee [2001] 2 SLR (R) 12.

iii. Exclusion from Management Where a shareholder has a legitimate expectation (an understanding which exists between all of the parties) of being involved in the management of a company, to exclude her, even if done entirely in accordance with the articles of association, may on its own, amount to unjust conduct justifying the courts intervention under s. 216, CA. The plaintiff must establish a legitimate expectation of management participationwhich will most often arise in quasi-partnerships. It normally will be extremely difficult to establish a legitimate expectation of management participation in a public company [especially in a listed public company] because a public company can always remove a director regardless of the articles (s. 152, CA) and will likely have liquid shares (able to sell shares on the open market easily). Even if a legitimate expectation of management participation is established, one party may be fairly excluded from management if the circumstances warrant it (e.g., irretrievable breakdown in the relationship) and fair compensation is provided. If a person assumes personal liabilities (like guarantees) for the company in exchange for being appointed to a management position, this will likely create a legitimate expectation that the person cannot be removed from the management position unless they are released from such liabilities (Tan Yong San v Neo Kok Eng) **Tan Choon Yong v Goh Jon Keat [2009] 3 SLR(R) 840 o The court found that the plaintiff in a public listed company had a legitimate expectation to be a director and the CEO of the Company and that exclusion from this role amounted to oppression. o After taking all circumstances into account, I find that there was an understanding between all parties concerned that Dr Tan would, without more, play a major role in the running of the company, not only as a director but also as its CEO. As Dr Tan had a legitimate expectation that he would be the company's director and CEO, attempts by Mr Goh and Ms Tan to renege on this arrangement without just cause may, in line with Kitnasamy, be regarded as oppressive conduct that cannot be countenanced. o Evaluation: Dan W. Puchniak & Tan Cheng Han, Company Law in Singapore Academy of Law Annual Review, 168-69 One might argue that even with an agreement between the parties, by virtue of s 152 of the Companies Act which provides shareholders in public companies with the right to remove any director by way of ordinary resolution notwithstanding any agreement to the contrary a member can never have a legitimate expectation not to be removed by majority vote as a director in a public company. Thio Keng Poon v Thio Syn Pyn [2010] 3 SLR 143 o Patriach of the family distributed shares within the company to his family members, who subsequently removed him from management of the the company. The claimant claimed that the transfer was undertaken based on the informal understanding that he would retain his management positions, and that this gave rise to legitimate expectations that was breached when he was removed from his management position. o CA Held: Court found that there was no evidence of any understanding between the appellant and his family members that he would retain management positions after the share transfer. Chao JA clarified that where the shareholder had a unilateral belief, even if that belief is reasonable, is insufficient to give rise to legitimate expectations. Chao JA found that although the appellant did indeed believe that there existed this understanding between himself and the family members, this expectation merely existed in the appellants mind and there was no way that his family members could have know about it. Hence the court found that the appellants unilateral assumption or belief was not an understanding between all of the shareholders and therefore could not be used to support his s. 216 oppression claim.

Kitnasamy v Nagatheran [2000] 2 SLR 598 legitimate expectation to protect investment o The applicant successfully asserted a legitimate expectation to remain a director of the company under s. 216. The appellant was instrumental in securing the main contract for which the company was established and had invested money and effort to do so. His investment in money and effort could only be preserved if he remained director as the contract would be jeopardized by his removal. In addition, his position as a director was necessary to protect his investment as the other shareholder-directors were keen on drawing out moneys received by the company. Re a Company (No 04377 of 1986) [1987] BCLC 94 Must show prejudice o I cannot accept that if there is an irretrievable breakdown in relations between members of a quasi-partnership, the exclusion of one from management and employment is ipso facto unfairly prejudicial conduct which entitles him to petition under [the UK equivalent to s. 216)]. It must depend on whether, if there is to be a parting, it is reasonable that he should leave rather than the other member or members and on the terms he is offered for his shares or in compensation for his loss of employment. Tan Yong San v Neo Kok Eng and others [2011] SGHC 30 Personal Guaranties o Tan was made a director and minority shareholder of a number of group Companies in exchange for periodically signing documents in his capacity as a director several of which made him a guarantor for a number of the Companies legal obligations. In return for Tans role as a rubberstamping director, he received directors fees. Tan was summarily removed from his director positions but maintained his position as the Companies guarantor. o Held: Plts removal amounted to oppression under s 216 as it breached an informal understanding that Tan would receive his directors remuneration in consideration for the liabilities that he assumed as a guarantor for the Companies. o On the evidence available, I find that when Tan was removed as a director of CHH and CHKC, he had not done anything to suggest that he was acting against the interests of both companies. Neo simply wanted him out because Neo believed he was aligned with Lim. Whether that suspicion was subsequently justified did not change the fact that there was no good reason for removing Tan at the time. Moreover I find that Tan received his Directors remuneration in consideration of inter alia, his personal liabilities under the numerous counter-indemnities that he signed. So long as any of these counter-indemnities remained alive, he would have been entitled to his Directors remuneration.

iv. Serious Mismanagement The mere disagreement of the minority with a business decision of the majority will not support a s. 216, CA oppression action. Where mismanagement is merely unfortunate commercial judgment by the companys controllers, it is not actionable under s. 216, CA. There is arguably an implied legitimate expectation that the majority directors will not use their powers in a manner that breaches their duty of care, skill and diligence; and if they do, it may amount to commercial unfairness. o The court may be more willing to grant a claim based on mismanagement under s. 216 where the controllers have acted in a manner that is self-serving (although self-serving conduct is not a prerequisite). In a quasi-partnership, the controllers may have a positive duty to explain business decisions to minority shareholders in cases where the decisions do not ostensibly further the interests of the company

Re Tri-Circle Investment Pte Ltd [1993] 2 SLR 523 o The minority complainant claimed that the majority had insisted on carrying on a loss making business. However, it was shown that the majority was confident that the business could make a profit. o Held: The court was of the view that the majoritys decision to continue to carry on the business, regardless of the minoritys objections, was not oppressive since it was the prerogative of the majority as long as it was not a prerogative exercised in bad faith or wilfully disregarding the minoritys interests for ulterior purpose . Lim Swee Khiang v Borden Co (Pte) Ltd [2006] SGCA 33 o The court held that the failure to explain business decisions, which on their face did not appear to be in the interest of the company, could lead to an inference that the controllers were not acting in the interests of the company and thereby acting oppressively under s. 216, CA. o Given the nature of the relationship between the members of Borden, as agreed by them, SKLs claims of oppression or disregard of the appellants interests required an explanation from the respondents. In cases of this nature, where the members have agreed to associate together in trust and confidence in one another, we are of the view that a failure to explain amounts to an inability to explain or to justify why they did what they did. We are not here concerned with an ordinary trading company, where the shareholders have agreed to accept majority control and decision-making. In the absence of any explanation, the respondents must be deemed to have intended the consequences of their acts and omissions. o The mere fact that one or more of those managing the company posses a majority of the voting power and, in reliance upon that power, make policy or executive decisions, with which the complainant does not agree is not enough. Those who take interest in companies limited by shares have to accept majority rule. It is only when majority rule passes over into rule oppressive of the minoritythat the section can be invoked. Re Macro (Ipswich) ltd [1994] 2 BCLC 354 o This is the first English case to hold that minority shareholders were unfairly prejudice by the majoritys serious mismanagement. In this case, the acts of mismanagement clearly included numerous breaches of the duty of care and skill and were self-serving. o The question whether any action was or would be unfairly prejudicial to the interests of the members has to be judged on an objective basis. Accordingly it has to be determined, on an objective basis, first whether the action of which complaint is made is prejudicial to members interests and secondly whether it is unfairly so. I share Peter Gibson J's view that the court will normally be very reluctant to accept that managerial decisions can amount to unfairly prejudicial conduct. Two considerations seem to me to be relevant. First, there will be cases where there is disagreement between petitioners and respondents as to whether a particular managerial decision was, as a matter of commercial judgment, the right one to make, or as to whether a particular proposal relating to the conduct of the company's business is commercially soundIn my view, it is not for the court to resolve such disagreements on a petition under s 459 [the equivalent to Singapores s. 216]. Not only is a judge ill-qualified to do so, but there can be no unfairness to the petitioners in those in control of the company's affairs taking a different view from theirs on such matters. Secondly, as was persuasively argued by [counsel for the respondents], a shareholder acquires shares in a company knowing that their value will depend in some measure on the competence of the management. He takes the risk that that management may prove not to be of the highest quality. Short of a breach by a director of his duty of skill and care (and no such breach on the part of either Mr Purslow or Mrs Purslow was alleged) there is prima facie no unfairness to a shareholder in the quality of the management turning out to be poor.

v. No or Inadequate Dividends and/or Excessive Directors Compensation As a general rule a shareholder normally has no right to compel a company to declare dividends as it is a business decision of the board of directors. Therefore, even in a quasi-partnership, minority shareholders normally have no legitimate expectation of a dividend, hence a failure to recommend or declare a dividend will not normally alone be enough to establish unfairness. When the court finds commercial unfairness based in whole or in part on claims of inadequate dividends it is normally in cases where: 1. The minority had an informal legitimate expectation that profits would be distributed to all of the shareholders but in fact profits were only distributed to the majority shareholder directors as directors fees; and/or 2. There was a significant gap between the financial benefits received by the majority and minority - which is normally contrary to an implied legitimate expectation of a relatively equal sharing of profits (especially in a quasi-partnership). Re Sam Weller & Sons Ltd [1990] BCLC 80 o The petitioners (42.5% of the shares) alleged that their interests as members of the company had been unfairly prejudiced by the payment (on the insistence of the person in control of the company) of the same dividend for many years. Under s 459(1) of the English Companies Act 1985, relief will be granted if it is shown that the companys affairs are being or have been conducted in a manner which is unfairly prejudicial to the interest of some part of the members. o Held: That there could be such unfair prejudice to the petitioners even though as members of the company those responsible for the conduct complained of had also suffered the same or even greater prejudice. It also held that non-payment of dividend or the payment of low dividend could amount to conduct which was unfairly prejudicial to some members of the company. Re Gee Hoe Chan Trading Co Pte [1991] 3 MLJ o The majority shareholder directors (holding 60%) had been paying themselves directors fees and salaries but not declaring any dividends. The minority shareholders (40%) were aggrieved because not only did the majority exclude the minority from directorial positions, the majority also voted themselves onto the board and paid themselves generous salaries, and did not affect any declaration of dividends. o Held: The court held that it was grossly inequitable that the majority shareholders should make use of their controlling power in both the general meeting and the directors meeting to adopt a policy which benefited only themselves and gave hardly any benefit to the minority, thus amounting to oppression under s. 216, CA. o The benefits which the respondents had obtained from the company were out of all proportion to the benefits which the petitioners had gained. In fact, at the time of the filing of this petition, the petitioners were getting nothing at all either in terms of directors` fees or dividends. In my judgment, the respondents had acted in the affairs of the company in their own interest rather than in the interest of the members as a whole. If this was not oppression or in disregard of the interest of the petitioners, I did not know what was. Low Peng Boon v Low Janie [1999] 1 SLR 761 o The majority shareholder-director caused the company to pay low dividends to increase the companys profits. The majority shareholder-director benefited personally from this because his annual bonus was based on the amount of profits of the company. o Held: The court found that the actions of the majority amounted to unfair oppression under s. 216, CA.

vi. Loss of Stratum The substratum of the company refers to the fundamental basis upon which the parties enter into the corporate relationship. A loss of substratum could occur when the business objective for which the company was formed cannot be met This may result in the court awarding a just and equitable winding up under s. 254(1)(i),CA or a winding up under s. 216(2)(f), CA. ONeill v Phillips [1999] 1 WLR 1092 o I do not suggest that exercising rights in breach of some promise or undertaking is the only form of conduct which will be regarded as unfair for the purposes of section 459. For example, there may be some event which puts an end to the basis upon which the parties entered into association with each other, making it unfair that one shareholder should insist upon the continuance of the association. The analogy of contractual frustration suggests itself. The unfairness may arise not from what the parties have positively agreed but from a majority using its legal powers to maintain the association in circumstances to which the minority can reasonably say it did not agree: non haec in foedera veni. It is well recognized that in such a case there would be power to wind up the company on the just and equitable ground (see Virdi v. Abbey Leisure Ltd. [1990] B.C.L.C. 342) and it seems to me that, in the absence of a winding up, it could equally be said to come within section 459 (equivalent to s. 216, CA). Over & Over Ltd. v Bonvest Holdings Ltd [2010] SGCA 7 o In many ways, this resembles the loss of substratum that Margaret Chew refers to in Minority Shareholders Rights and Remedies ([71] supra) at p 205: Where it can be shown that the new or proposed business venture is not one that had been contemplated or agreed upon by the parties upon incorporation, this conduct on the part of the majority may amount to oppressive conduct under section 216 of the Companies Act, since it effectively forces the minority to participate in a corporate venture that he had not expected. His monies are locked into a company with commercial objectives he never considered investing in. Ng Sing King v PSA International Pte Ltd [2005] 2 SLR 56 o The court held that there was no oppression under s. 216, but proceeded to wind up the company on just and equitable grounds under s. 254(1)(i) on the basis that there was a loss of substratum. Neither party was blamed for the dismal state of the company.

vii. Actions of the oppressor in other companies? (In parent-subsidiary situations) Evidence of the conduct of the oppressor can be drawn from their conduct in another company if it can be shown that the affairs of the company are related to the affairs of the other company. Such a relationship may exist in a parent-subsidiary situation or where the companies have similar shareholders and/or directors and are essentially being run as a single business unit (group of companies situation). Lim Chee Twang v Chan Shuk Kuen Helina [2010] 2 SLR 209 o The court found that evidence of oppressive conduct in one group company could be used as evidence of oppression in another group company if the companys affairs are demonstrated by the plaintiff to have affected one another. o In Kumagai our Courts, like the English and Australian courts, are willing to intervene where the unfairly prejudicial conduct in one company, a subsidiary, affects the affairs of the holding company and thereby also becomes the affairs of the holding companyJust because Company A is a subsidiary or parent of Company B per se too would also not be sufficient.The complainant must be able to show something more, including how the conduct of the affairs of Company A are affecting the affairs of Company B. If the position were otherwise, there will be a serious gap in the remedies available to an aggrieved minority shareholder.

4. Remedies available under s. 216(2) s. 216, CA: Personal Remedies in cases of oppression or injustice o s. 216(2), CA [If oppression is established under s. 216(1)] the Court may, with a view to bringing to an end or remedying the matters complained of, make such order as it thinks fit and, without prejudice to the generality of the foregoing, the order may: (a) Direct or prohibit any act or cancel or vary any transaction or resolution; (b) Regulate the conduct of the affairs of the company in future; (c) Authorise civil proceedings to be brought in the name of or on behalf of the company by such person or persons and on such terms as the Court may direct (derivative action) (d) Provide for the purchase of the shares or debentures of the company by other members or holders of debentures of the company or by the company itself; (share buyout) (e) In the case of a purchase of shares by the company provide for a reduction accordingly of the companys capital; or (f) Provide that the company be wound up Such an order as the court thinks fit o The list of remediese in s. 216(2), CA is merely illustrative, and is not exhaustive. o The courts extremely wide discretion under s. 216(2), CA even allows it to compensate the company for damages suffered (eg where there is a breach of directors duties) However, it appears that under s. 216 the court is likely only willing to provide relief to companies in rare cases where damages to the company can conveniently be dealt with as one component of the shareholders more general commercial unfairness claim. In other words, where there is purely a corporate wrong, a derivative action not a s. 216 actionshould be commenced. This approach is supported by the same policy rationale derived from Foss for limiting derivative actions. Kumagai Gumi Co Ltd v Zenecon Pte Ltd [1995] 2 SLR 297 The Court of Appeal held that it might be appropriate to order the oppressor to compensate the company for any loss caused to it, without the necessity of a separate derivative action, but did not exercise this order in this case. Low Peng Boon v Low Janie [1999] 1 SLR 761 In a s. 216, CA claim, the court ordered the errant director to make restitution to the company of the unauthorized travelling expenses and bonuses he received. The claim for corporate damages was one component of the claim and could conveniently be dealt with in the context of the shareholders more general claim of commercial unfairness under s. 216, CA.

Factors Affecting Granting of Remedy o The conduct of the applicant may reduce or eliminate the remedy awarded There is no requirement that the applicant must come with clean hands (Re London School of Electronics Ltd (1986)] However, objectionable conduct by the applicant may affect the remedy awarded in the following manner: It may justify prejudicial conduct by the majorityleading the court to deny a remedy (Re RA Noble & Sons (Clothing) Ltd [1983]) It may result in the court reducing the amount of relief awarded (Richards v Lundy [2000])

a. Derivative actions under s. 216(2)(c) Where oppression has been established, the court has the remedial power to authorize the complainant to commence a derivative action (either under s. 216A, CA or common law) An action in which the relief sought is solely for the company should be brought as a derivative actionon behalf of the company. o However, in cases where relief is sought for both the member and company, relief by way of a derivative action may be sought under s. 216(2)(c), CA. This strategy may be particularly useful for Singapore companies that are listed in Singapore (i.e., they do not have the benefit of a s. 216A, CA statutory DA but have access to s. 216, CA) which are unable to establish fraud on the minority for a common law derivative action. o However, the practical importance of the derivative action remedy (and derivative actions generally) has been diminished due to the Court of Appeals statement in Kumagai that in principle corporate damages can be awarded under s. 216, CA. o Kumagai Gumi Co Ltd v Zenecon Pte Ltd [1995] 2 SLR 297 The Court of Appeal held that it might be appropriate to order the oppressor to compensate the company for any loss caused to it, without the necessity of a separate derivative action

Evaluation: Considering the Kumagai decision, what purpose (if any) do the statutory and/or common law derivative actions serve?

b. Buyout orders and winding up under ss. 216(2)(d) and (f) In most cases it either orders (1) the majority to buyout the minoritys shares or (2) a winding-up because this is the most efficient way to end the matters complained of. s. 216(2)(d), CA: Buyout - Allows the court to make an order for the purchase of shares (i.e., a buyout order) by the members or by the company itself. o A buyout order is normally the most reasonable remedy because it allows the minority to realize the value of their interest in the company and puts an end to the unfairnessbut does not destroy the company. o However, if the majority has insufficient resources for a buyout, the court may provide the majority with the (a) option of a buyout (failing which the company will be wound up) or (b) simply order a company to be wound-up. s. 216(2)(f), CA: Winding Up - Allows the court to order that the company will be wound-up. o Due to the harsh and drastic nature of a winding up, the court considers it as a last resort and has sometimes been reluctant to find oppression where the only order sought is a winding-up o Where a company has been severely mismanaged there may be grounds to order a winding-up o Over & Over Ltd. v Bonvest Holdings Ltd [2010] SGCA 7 CA Held: That the plaintiff had suffered oppression under s. 216, CA and ordered that the Respodent purchase the Appellants shares at fair market value (ie. without a minority discount). Court found that if the Respondent chose not to buyout the Appellant, they would wind up the company. There is obviously no residual goodwill or trust left between the parties and therefore we do not think it would be right for [the appellant-plaintiffs] shareholding to remain tied up with the company in a broken and bitter relationship. Nor do we think it would be appropriate for us to attempt to regulate future conduct of the companys affairs. Tan Choon Yong v Goh Jon Keat [2009] 3 SLR(R) 840 The court held that the actions of the defendants amounted to oppression and ordered that the defendants purchase the plaintiffs shares at a price to be determined by the parties within 30 days of the judgment failing which the Company would be wound up.

Lim Swee Khiang v Borden Co (Pte) Ltd [2006] SGCA 33 The court awarded a buyout remedy in a successful appeal even where the remedy sought and clearly desired was a winding-up. If the state of affairs in a particular case can be remedied by an order other than a winding-up, there is no reason for a court to wind-up the company. Further, we are of the view that winding-up should only be ordered if, having taken into account all the circumstances of the case, it is the best solution for all the parties involved. In general, the courts are not minded to wind-up operational and successful companies unless no other remedy is available. Re Gee Hoe Chan Trading Co Pte [1991] 3 MLJ 137 The majority had insufficient resources for a buyout. Therefore, the court decided to order a winding-up]

The valuation of shares is normally a contentious issue when a buyout is ordered o The overriding principle that guides the court when determining the share value is what is fair and just in the particular circumstance. The court may be assisted by professional valuators but ultimately it is the judges decision to determine what value should be paid for the shares. o The shares are normally valued at either the date the buyout order is made (judgment date) or the date the s. 216, CA proceeding is commencedwith the trend in the case law generally preferring the former approach. o As a general rule, in the case of a quasi-partnerships, the court should not value the shares based on a discount to reflect the minoritys lack of control. However, the general rule may not apply: o (1) When the petitioner acquired her stake as an investment; and/or o (2) When the petitioner voluntarily severed her connection with the company o The share price set in a buyout order may be reduced if the applicant does not come with clean hands or her conduct partially justifies the prejudicial conduct. o The court does not have discretion under s. 216(2) to award pre-judgment interest. However, the court can enhance the price of the buyout for the interim period (i.e., the period from the valuation date to the date of the order) if during the interim time the petitioner was denied the benefit of her shareholdings. Over & Over Ltd. v Bonvest Holdings Ltd [2010] SGCA 7 General Rule o The Court of Appeal allowed the appeal finding that the appellantplaintiff had suffered oppression under s. 216 and ordered that the respondent-defendant purchase the appellant-plaintiffs shares at fair market value (i.e., without a minority discount). o As the breakdown in the relationship between the parties was entirely precipitated by the Respondents inappropriate conduct, we do not think that it would be fair for Appellantto sell its shares inat a discount on the basis of its minority stakeIn the light of this, we are of the view that the appropriate order is to have the fair market value of [the JV Company] ascertained by an independent valuerThe independent valuer is to assess the value of [the JV Company] on the basis of the fair market value of its assets as of the date of this decision. Profinance Trust SA v Gladstone [2002] 1 WLR 1024 o Prima facie an interest in a going concern ought to be valued at the date on which it is ordered to be purchased. That is, as Nourse J said, subject to the overriding requirement that the valuation should be fair on the facts of the particular case. The general trend of authority over the last 15 years appears to us to support that as the starting point, while recognising that there are many cases in which fairness (to one side or the other) requires the court to take another date.

Tullio v Maoro [1994] 2 SLR 489 Court has discretion with valuation o Thus in our view, there is ample persuasive authority for departing from what might be thought to be a general rule to value the shares as at the date of the order. The question we have to face is whether the value must be subject to a valuation. Although in the case of a company which has always been active a valuation would produce the fairest result, it would not necessarily be so where, as in this case, the company had been inactive and was being resuscitated by the injection of fresh capital. Each case must depend on its own particular facts. On the facts of this case a valuation as at the date of the courts order or at the date of the presentation of the petition or a valuation at an earlier date or any valuation at all could not produce a fair result. Fairness, in our judgment, could only be achieved in this case by ordering the respondent to purchase the shares at the price at which the respondent sold them to the appellant in the first place. We felt confident in so ordering as it was evident to us that the learned trial judge had applied what she thought was the general rule and which would produce a fair result. She had not exercised her discretion in all the circumstances of the case and the facts which she found.

f. Just and Equitable Winding Up [s. 254(1)(i)]

1. Procedural Requirements s. 254(1), CA likely would only apply to Singapore incorporated companies and not foreign incorporated corporationsas the section uses the term company and not corporation throughout o However, s 351(1)(c)(iii), CA appears to provide a just and equitable winding-up remedy for members in foreign incorporated corporations. The persons who may apply for a company to be wound up under s. 254(1), CA are set out in s. 253(1), CA: o s. 253(1), CA includes a number of people that may make an application for a winding-up under s. 254(1), CA including the (a) company, (b) creditors and (c) contributory, and (d) liquidator, amongst others. o s. 253(1)(c), CA provides that a contributory --which is defined in s. 4(1) and has been interpreted to include all members-may apply for a winding-up if: The shares were originally allotted to the member, or The shares are held by the member for at least six months of the 18 month period before making the application, or The person is holding the shares as a result of them being transferred through death or bankruptcy of the former holder [s. 253(2)(a)(ii), CA]. A person with an interest in the shares of a company, but who is not a registered member, will also likely be considered to be a contributory and can bring an action under s. 254(1) as a result of falling under s. 253(1)(c). Miharja Development Sdn Bhd v Tan Sri Datuk Loy Hean Heong [1995] 1 MLJ 101

Note: Theoretically past members may qualify as contributories but for practical purposes will never be able to receive a just and equitable winding-up 2. Why bring a claim for a just and equitable winding up? The most common reason a company is wound up is because it is unable to pay its debts. Members may also choose to wind up a company voluntarily because they believe the company no longer serves a purpose. S. 254 deals generally with circumstances under which a company may be wound up by the court. Typically, minority shareholders do not have the voting power to secure a special resolution to effect a voluntary winding-up [s. 254(1)(a) and s. 290(1)(b)]. However, minority shareholders can seek a winding-up on just and equitable grounds under s. 254(1)(i), CA. The just and equitable grounds test provides the court with extremely wide discretion (but an extremely limited remedy). 3. Consequences for bringing a claim for a just and equitable winding up The advertisement of a winding-up petition normally results in the companys credit drying up, as banks will freeze the companys account and creditors will deal only on cash terms. In addition, the presentation of a winding-up petition against the company is often an event of default in loan agreements and guarantees. o However, since an application under s. 216 is not a winding-up petition, it does not have to be advertised and thus does not have the negative effects of commencing a s. 254(1)(i) winding-up. Therefore, particular care should be taken before commencing an application under s. 254(1)(i), CA due to the negative consequences and implications of this remedy.

d. Relationship between s. 254(1)(i), CA and s. 216(2)(f), CA winding up The courts have traditionally taken a restrictive view of their discretion to wind-up a solvent company because of the potential hardship for various stakeholders . The reluctance of courts to exercise their discretion for a just and equitable winding-up led to the development of the oppression remedy. There is an overlap between a (i) s. 254(1)(i), CA winding-up based on just and equitable grounds and a (ii) s. 216(2)(f), CA winding-up as a remedy for an oppression claim as they both provide the court with jurisdiction to remedy any form of unfair conduct against a minority shareholders **However, a CA decision of Sim Yong Kim v Evenstar Investments Pte Ltd [2006] 3 SLR 827 made clear that the circumstances in which a minority may succeed in an application for winding-up under s. 216(2)(f), CA and s. 254(1)(i), CA are distinct. Therefore, the two minority remedies should be considered independently. A successful oppression action may not result in the court granting a winding-upas a winding-up order under s. 216 is seen as a remedy of last resort. On the other hand, it may be just and equitable to wind-up a company even where there is no oppression or commercial unfairness - especially in a irretrievable breakdown of a quasipartnership. e. Strategic Considerations when choosing between ss. 254(1)(i) and 216(2)(f), CA Especially in the case of a successful company or where the non-complaining minority shareholders may suffer losses from a winding-up, the flexibility of a s. 216, CA, winding-up may make it easier for an aggrieved minority to receive some remedy. Indeed, the court may reject a s. 254(1)(i), CA petition if it is seen as an attempt to bypass the more appropriate and moderate remedies under s. 216, CA However, a s. 254(1)(i) petition may be more appropriate in cases where an aggrieved minority is intent on winding-up the company and/or the facts point to a fault neutral breakdown of a quasi partnership (which may lack oppression). Where there is the possibility of both actions succeeding, an aggrieved minority may choose to concurrently pursue an application under ss. 216(2)(f) and 254(1)(i), CA. An important consideration when deciding to commence a s. 254(1)(i) application is that it has potentially crippling effects on the company (which is not the case in a s. 216(2)(f), CA application). The courts do not (See below) look kindly on a minority who uses this power for the purpose of improving their bargaining position. Sim Yong Kim v Evenstar Investments Pte Ltd [2006] 3 SLR 827 o The company, Evenstar was a quasi-partnership in which two brothers held all of the shares. The petitioner, who was a minority shareholder, entered into the company pursuant to his brothers promise that he would buyout the petitioners shares should the petitioner exit the company, thus he had a legitimate expectation of being bought out by the OB on reasonable terms. o The Court of Appeal held that this amounted to a legitimate expectation which was breached when the majority brother refused to purchase the petitioners shares for a reasonable price. The Court ordered a just and equitable winding up under section 254(1)(i). o The court even used ss. 257(1) and 254(1)(i) together, CA to defer the winding up by 30 days to allow parties an adequate opportunity to reach a compromise. o [T]he provisions of our [Company Act] do not support any suggestion that the just and equitable jurisdiction under section 254(1)(i) is necessarily a subset of the oppression jurisdiction under section 216 One might wonder whether the state of the law would allow a malicious shareholder to try to wind up his company under section 254(1)(i) and to bypass the more appropriate and moderate remedies available under section 216. In our view, a shareholder who prefers a section 254(1)(i) remedy to harass the company will risk having his application struck out as being vexatious.

f. Test for s. 254(1)(i), CA winding up Fairness is the primary litmus test that the court uses to decide whether to grant a just and equitable winding-up under s. 254(1)(i), CA. The court will balance the unfairness caused to the aggrieved minority as a result of the failure to order a winding-up with the unfairness caused to the other corporate stakeholders as a result of ordering a winding-up. Unfairness will be determined objectively and the facts and circumstances supporting such a claim must still be present at the time when the winding-up order is made. The court will normally not see it as fair to allow the minority to create conductions that justify the company being wound-up and then to use those same self-induced conditions as a justification for a s. 254(1)(i) winding-up. In determining what is fair, the court will consider legitimate expectations of the members similar to those considered under s. 216, CA (Oppression Remedy) Even in a small private or quasi-partnership company, mere disagreements between shareholders will not be sufficient to establish grounds for just and equitable winding-up Sim Yong Kim v Evenstar Investments Pte Ltd [2006] 3 SLR 827 o Section 254(1)(i), CA calls for the application of equitable principles to determine whether a winding-up order should be made in the circumstances of each case. There are two aspects to this jurisdiction: first, whether there is sufficient cause to order a just and equitable winding up, and second, whether the winding-up order resulting in the destruction of the company is just and equitable: in other words, whether the cure is worse than the illness, as the winding up might result in loss for all parties ...We accept that the notion of unfairness lie at the heart of the just and equitable jurisdiction in s 254(1)(i), CA and that that section does not allow a member to exit at will, as is plain in its express terms. Nor does it apply to a case where the loss of trust and confidence in the other members is self-induced. Chow Kwok Chuen v Chow Kwok Chi [2008] 4 SLR(R) 362 o The appellant and respondent were brothers, who along with a third brother were codirectors of three family companies set up by their late father. o After the fathers death the Companies continued their usual business of leasing out commercial properties with three management staff. o The brothers relationship became increasingly acrimonious and they were unable to agree on how to manage the Companies. The respondent successfully brought applications to wind up the Companies under s. 254(1)(i) and one brother appealed o The Court of Appeal upheld the decision of the High Court that the Companies should be wound up under s. 254(1)(i). o The CA found that there was no need to be a technical deadlock (ie two directors each holding 50% and no casting vote), but a functional deadlock (ie where parties could not agree on how to manage and run the company) was sufficient to bring about a winding-up. o First, the character of a company being small or private is not of itself sufficient to constitute a just and equitable basis to wind up a company. Something more must be presentCaution must therefore be exercised before a winding-up order is made. In each instance where a winding-up order is sought, there must be sufficient grounds before the court makes the order as that would have the effect of dispensing the petitioner from complying with the scheme of things provided in the memorandum and articles of association.

The discretion of the court under s. 254(1)(i), CA is extremely wide and therefore (as in the case of s. 216, CA) it is improper to suggest that particular facts will result in a successful claim for a s. 254(1)(i), CA winding-up. However, it is instructive to consider some types of cases in which a s. 254(1)(i), CA windingup have been successful. o Chow Kwok Chuen v Chow Kwok Chi [2008] 4 SLR(R) 362 " Section 254(1)(i) of the Act merely provides that the court may order the winding up if the Court is of opinion that it is just and equitable that the company be wound up. The Act does not define or set any parameters for determining what would constitute just and equitable. However, in In re Blriot Manufacturing Aircraft Company (Limited) (1916) 32 TLR 253, Neville J said at 255: The words just and equitable are words of the widest significance, and do not limit the jurisdiction of the Court to any case. It is a question of fact, and each case must depend on its own circumstances While case law has established that certain grounds would be sufficient to constitute just and equitable, such grounds are not a closed list . As Lord Wilberforce stated unequivocally in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (Ebrahimi) at 374375: [T]here has been a tendency to create categories or headings under which cases must be brought if the clause is to apply. This is wrong. Illustrations may be used, but general words should remain general and not be reduced to the sum of particular instancesthe concept of just and equitable is a dynamic one and we should not circumscribe its scope by reference to case law when the cases themselves do not seek to do more than just apply the concept of just and equitable to the circumstances of each case.

Irretrievable Breakdown o In the case of a private closely held company or a quasi-partnership, a just and equitable winding-up may be ordered where there is an irretrievable breakdown in the relationship between the director-shareholders, even though oppressive conduct cannot be squarely pinned on one party. o However, a complainant cannot succeed in a s. 254(1)(i) application where he/she is the cause of the irretrievable breakdown. o Ng Sing King v PSA International Pte Ltd [2005] 2 SLR 56 The oppression action under s. 216 of the Companies Act was dismissed, but the company was wound up on the just and equitable ground under s. 254(1)(i) on the basis that there had been an irretrievable breakdown in the relationship amongst the shareholders. The Court was of the opinion that although no party could be blamed for the breakdown, the parties could nevertheless no longer work together. This was coupled with the fact that the company was not profitable and had a loss of substratum. It is patently obvious from the evidence considered above that there are irreconcilable differences and that the shareholders can no longer work together. The degree of acrimony amongst them is readily apparent from their conduct at the board meetings. These meetings were disorderly and acrimonious and the disputes amongst the shareholders hampered the calm discussion of urgent issues on the agendaI therefore have no doubt that on the ground of irretrievable breakdown of relationship alone, winding up of the company is just and equitable.

Chow Kwok Chuen v Chow Kwok Chi and anor [2008] 4 SLR 362 The SGCA upheld the High Courts decision to order a winding-up in a closely held family company (which was not a quasi-partnership) as a result of a breakdown in the management of the Companies. Lord Wilberforce held in Ebrahimi (at 376) that deadlock was to be understood in a general rather than a technical sense, and that just and equitable need not and should not be confined to situations of true or absolute deadlock.While the odd number of three directors may suggest that the board of directors should in theory be able to arrive at a decision by majority, that does not necessarily follow if there is total mistrust among the directors as is the position here. The net result which we see is that no decision could be made because any proposal by one brother would be shot down by the other two. This is a case of a three-way impasseAccordingly, we would agree with the Judge that there is a case of real deadlock amongst the three brothersdirectors. The management of the Companies is at a stalemate. Lawrence v Lawrich Motors (Prt) Ltd [1948] SALR 1029 One of the two shareholder directors of the company had an affair with the others wife. The husband of the unfaithful wife petitioned to wind up the company on just and equitable grounds. The court found that there was a tension or resentment between the quasipartners, which rendered continued cooperation impossible. There was no need to attach blame for the breakdown. What if the the director who had cheated with his partners wife had come to the court to ask for a just and equitable winding up? o The courts would not have awarded the just and equitable winding up as you cannot claim this remedy where your are the cause of the irretreivable breakdown in relations.

Loss of Substratum o Where a company has a main or primary objective, and it can no longer be achieved, it may be just and equitable to wind up the companyeven when there is no issue of oppression. o Summit Co (S) Pte Ltd v Pacific Biosciences Pte Ltd [2007] 1 SLR 46 The additional or alternative ground relied upon by Summit that winding up is just and equitable is the loss of substratum of the CompanyI find the assertion that the non-transfer of the Spirig lines was a loss of the substratum of the Company to be untenable. It was to me yet another complaint dragged into issue to bolster the petition. The petitioner has to show that the substratum of the business of the Company has gone or, in the words of Lord Justice Baggallay in In re German Date Coffee Company (1882) 20 Ch D 169 at 188, that there is an impossibility in carrying on the business of the company as at the date of the petition. It is, in my view, difficult to see how it can be said on the evidence before me that at the date of the petition it was impossible for the business to continue. Ng Sing King v PSA International Pte Ltd [2005] 2 SLR 56 Court found that it had another grounds to find that a s. 254(1)(i), CA winding up was appropriate as the companys primary business purpose had been undermined, and was no longer a viable business opportunity. This is an additional ground to fortify my conclusion that winding up is just and equitable. I believe that the company is no longer viable and it would thus be pointless for the shareholders to continue flogging a dead horse.

Fradulent Inception or Purpose of the Company o A company which was fraudulent at its inception may be wound up on just and equitable grounds. o Re Thomas Edward Brinsmead & Sons [1897] 1 Ch 406 The Company had been formed to carry out the business of manufacturing pianos to pass off as the products of another firm (fraud). The company had little capital and offered shares to the public to raise capital. Many shareholders who had subscribed for shares had brought actions to remove their names from the companys register and to have their money returned, upon the ground that they had been defrauded into becoming shareholders of the company by fraudulent misstatements in the prospectus. Held: The Court of Appeal ordered a just and equitable winding-up]. If ever there was a case in which it was just and equitable that a company should be wound up by the court, we cannot doubt that that case is this case.

g. Deferring a s. 254(1)(i) winding up order The court can use its discretion under s. 257(1), CA to defer the winding-up to provide the parties with the opportunity to reach a compromise. **This is a way in which the court can soften the harshness of a winding-up order and facilitate the contractual freedom of the parties. o Sim Yong Kim v Evenstar Investments Pte Ltd [2006] 3 SLR 827 Apart from directing how the winding up should be conducted, we are also of the view that the court's power under s 257(1) also allows it to defer the winding up until parties have been given adequate opportunity to reach a compromise. This practice of staying a winding-up order to allow parties to reach an alternative arrangement is one which is well-established in jurisdictions such as Australia: see Re Cumberland Holdings Ltd (1976) 1 ACLR 361 at 380; Bernhardt v Beau Rivage Pty Ltd (1989) 15 ACLR 160 at 166. Chow Kwok Chuen v Chow Kwok Chi [2008] 4 SLR(R) 362 In Evenstarthis court exercised its power to wind up the company on the facts of that case. But it also left the door open for the parties to reach a mutually acceptable solution to their dispute, which they eventually did. In the present case, we propose to do the same. We affirm the Judges order to wind up the Companies but will suspend it from taking effect for one month to allow the parties to come to an amicable settlement to preserve the legacy of Mr Chow that one or more of the sons desired. If no settlement is reached on the expiry of suspension, the winding-up order will take effect immediately

7. Shares and Debentures a. Introduction

A company may raise money for its business in two main ways (1) equity financing and (2) debt financing. In equity financing, the company issues shares to an investor for a sum of money or other consideration, and the investor becomes a shareholder of the company. In debt financing, the company borrows money from an investor who becomes a creditor of the company. The capital raised by a company enables it to acquire its assets and to carry on business. o Assets of the company = Equity capital + debt capital Equity Financing o The main instrument in equity financing is the share. The financier provides the company with money and in exchange obtains a share, which entitles him to certain rights in the company. It is important to note that in small companies, the purpose of issuing shares is usually not meant to raise capital, but to give the shareholders control over the company. Financing for the company will come from elsewhere, including shareholder loan, bank loan and overdraft facilities secured on the controllers personal assets, which are forms of debt financing. Debt Financing o It is sometimes necessary for a company to borrow money to finance its expansion, to meet cash flow needs or for other business reasons, and this is called debt financing. o Credit is an integral part of the modern economy. A reason why the 2008 financial crisis caused so much damage was because banks refused to extend credit, making it difficult or impossible for companies or individuals to raise the requisite finance to meet their obligations.

b. Equity Finance
1. Share Capital a. Meaning of Capital Basically, capital is the total price of the shares that have been issued by the company. It is a measure of value and is the consideration which the shareholders have provided to the company in exchange for their shares. i. Authorised Capital (before 30 Jan 2006) It is the pre-set maximum capital the company is authorised to raise, based on the total sum of the par values. Originally for allowing shareholders control as any increase in authorised capital requires shareholders resolution. Abolished because it is a largely useless concept, that was liable to mislead. Lian Hwee Choo Phoebe v. Maxz Universal Development Group Pte Ltd (2009) Transitional problem after abolishing authorised capital. Although concept is now obsolete, the companys AOA and Art. 40(a), Table A still refers to it. Claimant claimed that the due to a version of Art 40, CA in the companys articles, a resolution to issue new shares was invalid as it did not state the number of shares to be issued, as the term capital in the section must now refer to issued capital. CA Held: Words must be construed in the context it was entered into, and thus shareholders under s. 161, CA could give blanket consent without stating the number of shares to be issues. CA found that the concept of authorised capital was abolished, capital in Art 40(a), CA still referred to authorised capital, not issued capital. ii. Issued Capital It is the aggregate capital that the company has raised or will raise by the issuance of shares. There is no minimum capital requirement in Singapore law except in very limited situations (e.g. banking institutions), thus the existence of $2 companies. Issued Capital = Paid-up Capital + Uncalled Capital iii. Paid-up Capital & Uncalled Capital The paid-up capital is the amount that is paid up on the shares that have been issued. However, shares that have been issued may not be fully paid up (uncalled capital). o Call up the unpaid portions of the share may be called up during its existence of upon liquidation in s. 65(2), CA. S. 123(1)(c), CA: Share certificate must state the amount that remains unpaid. However, this is an obsolete concept since most shares nowadays are fully paid up upon issuance. b. Par value (before 30 Jan 2006) Under the old law, a share must have a nominal or face value. It is a convenient value chosen by the company to be the minimum price at which shares can generally be issued. Company is allowed to issue shares above their par value (at a premium) but cannot issue shares below par value. o Ooregum Gold Mining Co of India v. Roper (1892) HELD: Company generally cannot issue shares below their nominal par value on terms that the shareholders have no further obligation to pay the difference. Company can issue shares at a premium, but the premium must be accounted for by creating a share premium account. o

Reason for par value is that it protects the interests of the creditors company cannot raise new funds when the market value of its shares has fallen below par value. Another reason for par value is that it protects the interests of the shareholders reduces the possible dilution of their fraction of ownership. Not convincing. Par value does not have anything to do with the inherent value of the company and serves no useful purpose. It is purely arbitrary! It diverts attention away from real issues, and is liable to mislead unsophisticated investors into thinking it has some economic relevance. Ho & Lan, The Par Value of Shares: An Irrelevant Concept in Modern Company Law [1999] SJLS 552 o 2 functions of par value: 1. The par value of shares fixed the maximum amount that a shareholder in a company limited by shares would have to pay by way of statutory liability. However, the shareholder may be liable under contract for any additional sum payable by way of premium 2. The share capital is fixed and certain and every creditor of the company is entitled to look at that capital as his security. o Implication from function of par value: 1. The creditor is entitled to ascertain how much of the liability on the shares remains undischarged. Hence, the company is generally disallowed from reducing its share capital (w/o proper authorisation). 2. It will be a fraud against shareholders and creditors if the shares are issued at a discount except in specifically provided circumstances. This has the effect of lowering the statutory liability of the new shareholders. o Shortcomings: o Meaningless the nominal amount of the capital, which was intended to represent the actual amount of capital invested by the shareholders or net asset value of the company, rarely indicates the amount of the actual (cause it varies) or original contribution (which may be arbitrarily set if contribution was in property) and thus should be abolished. o Misleading it may mislead investors to perceive that it represents the monetary value of the corporations capital. o Illusory protection to shareholders and creditors if shares are offered above par but below market value, the shareholders are disadvantaged even though with reference to the par value of the shares they are protected. o Financial inflexibility company cannot issue shares at below par value (without court approval) when the market is bad and the company is in need of quick financing. o No par value system benefits: o Truthful representations shares without par value will have the cardinal principle of accuracy. The cost of shares will reflect the true market value. o Principle of caveat emptor therefore, without a par value, the responsibility of finding out the true worth of the company lies with potential investors and creditors. o Flexibility in financing the only concern would be that shares may be issued at very low prices which may result in share dilution. o Simplicity there would be no different kinds of shares with different par values etc. o Pareto optimality it will only make some people better off without making anyone worse off. Therefore, it is more desirable since it increases the total net welfare.

2. Shares a. Definition of Shares S. 4, CA: Share means a share in the share capital of a corporation and includes stock except where a distinction between stocks and shares is expressed or implied. S. 121, CA: Shares shall be movable and transferable property. It is intangible and has no physical existence. Borlands Trustee v. Steel Brothers & Co Ltd (1901) [X] o HELD: A share is the [1] interest of a shareholder in the company [2] measured by a sum of money [3] for the purpose of liability in the first place (obsolete concept since a fully paid up share has no more liability) and of interest in the second but also [4] consisting of a series of mutual covenants entered into all the shareholders inter se in accordance with s. 39(1), CA. S. 39(1), CA: Memorandum and Articles constitute a contract between shareholder and the company, and between the shareholders inter se. Prudential Assurance Co v Newman Industries (No 2) o Shares are a right of participation in the company on the terms of the articles of association.

However, this definition is deficient because it only refers to the contractual aspect of the shares, but not to the proprietary aspect? See Cambridge Gas. **Cambridge Gas Transportation Corporation v. Official Committee of Unsecured Creditors of Navigator Holdings (2006) o HELD: A share is [1] a measure of the shareholders interest in the company, a bundle of rights against the company and the other shareholders. [2] As against the outside world, that bundle of right is an item of property, a chose in action. [3] But as between the shareholder and the company itself, the shareholders rights may be varied or extinguished by the mechanisms provided by the AOA or the Companies Act. Shares are not just contractual, also an element of property. And the nature of this property can be amended/varied depending on the articles or the CA. An improvement from before as it discusses both the internal and external aspect of a share. Professor Pennington, (1989) 10 Company Lawyer 140 o It may be disappointing to conclude that the most that may be said of shares in a registered company by way of definition is that they are a species of intangible movable property which comprise a collection of rights and obligations relating to an interest in a company of an economic and proprietary character, but not constituting a debt. For a lawyer's purposes, however, that suffices. Gower and Davies on what is the nature of shares: o Shares are recognized in law and fact as objects of property that are bought, sold, mortgaged and bequeathed. It would be unreal to deny that shares are owned. o Proprietary and financial aspects of a shareholders rights do not obscure the fact that a shareholder is a member of an association, with rights, at least in relation to ordinary shares, to take part in its deliberations by attending and voting at general meetings.

Evaluation: Idea seems to be that the contract constituted by the Articles of Association defines the nature of the rights, which are not purely personal rights, but instead confer some sort of proprietary interest in the company though not in its property.

b. Rights of Shareholders Fundamental in company law is that shareholders do not have interests (neither legal nor beneficial) in the property of the company, as it is a separate legal entity, and the owner of the shares is only conferred legal rights, broadly classifiable into 3 groups: [1] Rights in relation to the payment of dividends (Income rights) [2] Rights of voting at company meetings (Voting rights) o Unless the shares dont carry voting rights (eg some Preference Shares) [3] Rights to recieve the return of capital on an authorised reduction of capital, or on a winding up of the company (Capital rights) What about Creditors? o They are entitled to two rights: To be paid back their principal amount ( Capital Rights) and/or interest for their lending (Income Rights). o However, they do not get voting rights; this is the defining difference between shareholders or creditors. But creditor might bargain to be able to appoint a director. Doctrinal basis of the rights of shareholder shareholder has an interest in the company itself. Shareholder has rights in the company as well as against it an insider. Debenture holders has rights against the company, and if debenture is secured, in its property, but never in the company itself an outsider. Evaluation: Ross Grantham, The Doctrinal Basis of the Rights of Company Shareholders Submits that it is still appropriate to consider shareholder as an owner of company, and that income and capital rights are not unique to shareholders as the distinguishing feature (from the Creditor) is the voting right. What distinguished the shareholder is that the shares also afford rights in the company. By virtue of his ownership of the share, the holder is entitled to a voice in both the structure and management of the company, rights not normally granted to other creditors. o Argument against: But shares in listed companies are usually for financial investment and merely for occupation, shareholders do not have expectation to have a voting say in the running of the company. o Also, dilution of ownership nowadays by the courts also implies that powers enjoyed by shareholders no longer necessarily amounts to ownership of the company. c. Types of Shares Types of shares generally not regulated under the Companies Act, but the varying rights given to each type of share must be expressly included in the AoA or Terms of Issue. What are the reasons for creating different classes of shares? o To distribute benefits in different ways (eg class rights) o To attract investors by issuing shares with preferential rights. o To allow Government to control privatised company with a golden share. o To confine control for those with weighted votes (Bushell v Faith) However, where the terms of issue make no express distinction between the rights of different categories of shareholders, the presumption is that all shares rank equally. Bushell v. Faith (1970) Shares with weighted votes o HELD: In private companies, shares can have weighted votes. In UK, this also applies to public companies and circumvents s. 152, CA (that notwithstanding the MOA/AOA, directors in a public company can be removed by ordinary resolution).

Evaluation: The rule in Bushell v. Faith does not apply to public companies in Singapore because s. 64, CA requires that in a public coy, 1 share have 1 vote only (except golden shares). But with MOF has accepted Recommendation 3.4 in Oct 2012 to also allow public companies to issue shares with multiple votes.

i. Preference Shares Defn: Refers to shares that enjoys priority for dividends or capital over an ordinary equity share. But it is strangely defined in s. 4(1), CA as a share that carries no voting rights, dividend rights or capital rights beyond the specified amount this definition is contradictory with conventional commercial practices. o In Singapore, companies may still issue preference shares with full voting and particapation right, but are referred to as ordinary equity shares. Also, definition in s. 4, CA also does not apply to s. 75, CA, where rights attached to preference shares must be set out in the MOA and AOA. o This implies that company may issue preference shares that are not those defined in s. 4, CA. o So in reality, 2 types of preference shares? New Companies Act will delete this confusing definition (Recommendation 3.1 accepted by MOF on 3 Oct 2012) 3 basic principles governing the nature and extent of class rights of a preference shareholder: [1] Source of preferential share rights it is a construction of the relevant provisions of the companys constitutions, resolutions passed under the AOA and Terms of Issue. [2] Exhaustive statement of rights all special rights attached to share must be expressly specified, otherwise they will not be conferred. o Entitlement in 1 financial aspect of shareholding does not mean a preferential right for other aspects (Priority is confined to where it is expressly provided for) [3] Presumption of equality in the absence of specific provisions, rights of all shareholders are deemed equal. o Birch v. Cooper (1889) HELD: The MOA and AOA are exhaustive statement of rights, and hence in the absence of specific provisions, all rights of shareholders are presumed to be equal. Re Hume Industries (FE) Ltd (1974) HELD: Court rearticulated the 3 principles governing the extent and nature of the shareholders rights. If the rights are not set out expressly, they do not exist.

S. 75(1), CA: Rights attached to preference shares should be set out in the MOA/AOA o Prof Woon argues that s. 75(1), CA does not preclude additional rights that were conferred by the Terms of Issue of the preference shares. He submits that although prima facie no rights exist, but onus would be on the preference shareholders to prove that the additional rights are valid.

CRITICISM by A/P Wee Meng Seng: But this will render s. 75(1), CA nugatory. At common law, the preference shareholder already bears the onus of proving that he is entitled to a particular right, and should be restricted to this. Non-compliance with the express setting out in the MOA or AOA should render transaction void for illegality. ii. Equity Shares (or Ordinary Shares) S. 4(1), CA: Ordinary shares are any share which is not a preference share. S. 64, CA: All equity shares in public companies carry 1 vote unless it is the golden share in newspaper companies. Equity share is the residuary class in which is vested everything after the special rights of preference shares, if any, have been satisfied. They bear the most risks, but enjoy the most if the company does well. o Risk as they get their return of capital only after the preference shareholders. o But where the company receives huge profits, preference shareholders will only get a fixed amount of dividends, and cannot share in the huge profits of the company (unless provided for in the articles).

iii. Deferred Shares Shares that have their right to dividends deferred to those of ordinary shareholders. iv. Golden Shares Special rights can be attached to particular shares for so long as those shares are held by a named individual. Such share exist usually in the case of privatised companies that were transferred from the state to private ownership. S. 10, Newspaper and Printing Presses Act creates a special type of shares called management shares entitles holder either on a poll or by a show of hands to 200 votes for certain matters. o This provision is an exception to the mandatory rule in s. 64, CA that an ordinary share in a public company is entitled to only 1 vote. 3. Class Rights A class right is a right attached to a particular class of shares. Eg. Priority to dividends in a preference share. But what if the right is enjoyed by a shareholder but not referable to a particular share? Held in Cumbrian Newspapers Group Ltd to be a class right as well. Eg the right to 3 votes in Bushell v Faith. To protect class rights, the MOA/AOA may include a variation of rights clause. Class rights are not to be altered without satisfying certain pre-requisites as specified in the MOA/AOA (if any) o Eg Special resolution (75%) of the members of that class at a separate meeting. o May provide for other procedure or require consent by certain individuals. Also, s. 74(1), CA provides that shareholder holding of 5% of the companys shares can apply to the court to have any variation or abrogation of class rights cancelled. o S. 74(4), CA: The court must be satisfied, having regard to all the circumstances of the case, that the variation or abrogation would unfairly prejudice the shareholders of the class represented by the applicant before disallowing the variation or abrogation. s. 74(8), CA: The claimant is not limited from also claiming under s. 216, CA.

However, where the there is no modification of rights clause in the MOA/AOA, an aggrieved shareholder may only be able to claim that it has been unfairly prejudiced under s. 216, CA (Oppression Remedy). a. Variation of Class Rights i. What amounts to a variation of class right? Distinction is drawn between (1) rights on the one hand and (2) the result/consequences of the exercise of or the enjoyment of those rights on the other. **White v Bristol Aeroplane Co Ltd (1953) o Company had both preference & ordinary shares, and proposed to issue these shares to its existing ordinary shareholders only. Preference shareholder applied for an injunction, relying on Art 88 (Procedure Clause). o Held: The rights of the existing preference shareholders were not altered; even though the effect was that their class voting power was diluted. o Romer LJ at pg 82: The rights, as such, are conferred by resolution or by the articles, and they cannot be affected except with the sanction of the members on whom those rights are conferred; but the results of exercising those rights are not the subject of any assurance or guarantee under the constitution of the company, and are not protected in any way.

ii. Procedure Clause Where the MOA/AOA may prescribe a special procedure to be followed when class rights are varied. Eg. 75% majority is required to approve the resolution varying class rights at a separate class meeting. Where such a procedure clause (or modification of rights clause) is present, it seems that the special procedure has to be complied with for a resolution varying class rights to be valid. There is however no Singapore authority on this point yet. iii. Ignoring Procedure Clause When amending a class right, does it suffice to only pass a special resolution at a general meeting, and ignore the procedure clause? Conflicting Australian authorities, but the better view is that it is insufficient to allow the company to simply ignore the procedure clause. The procedure prescribed by the procedure clause must be followed for the resolution to be valid, otherwise the procedure clause is useless/nugatory. iv. Deleting Procedure clause Two arguments that support the view that the procedure must be followed (ie cannot merely pass a special resolution in general meeting and ignore the procedure clause) 1. s. 74(7), CA: For the purposes of this section, alteration of the clause is deemed to be a variation of class rights. o But Woon on Company Law argues that the provision operates only for the purpose of the section, ie triggering the protection of the court under s 74(4). o Argument has some force, but ultimately it is an issue of construction; by determining if the procedure clause itself should be considered a class right. 2. A procedure clause is also an entrenching provision, under s. 26A, CA, and cannot be removed except with a unanimous decision. o s. 26A(4), CA: An entrenching provision is a provision which stipulates that other specified provisions (a) may not be altered in the manner provided by the Companies Act, or (b) may not be altered except (i) with a greater than 75% majority, or (ii) where other specified conditions are met. o s. 26A(2), CA: Provides that an entrenching provision may be removed or altered only if all the members of the company agree. v. Limit on Voting to Modify Class Rights Shareholders do not enjoy unlimited freedom when they vote on a resolution to amend the companys articles of association. Allen v Gold Reefs of West Africa Ltd Court found that shareholders must vote bona fide in the interests of the company as a whole when voting on a resolution to amend the articles. British America Nickel Corp v OBrien Ltd [1927] AC 369 A company issued mortgage bonds secured by a trust deed, which provided that only a 75% majority could modify the rights of the bondholders. Company subsequently faced financial difficulty, and provided that the mortgage bonds could be exchanged for income bonds, but this was prejudicial to the mortgage bondholders. Held: Modification of class rights held to be invalid. Where a majority is given the power to bind the minority, it exercise must be exercised for the purpose of benefitting the class as a whole, and not merely individual members only. Although the right to vote is a right of property (a right to advance his own interest), a vote on a resolution to modify class rights must be exercised for the purpose, or dominant purpose, of benefiting the class as a whole. **An adoption of Allen v Gold Reefs in the case of class rights where the individual must act in the interest of the class as a whole, and cannot act for his own interest.

4. Issue of Shares Involves a 3 steps procedure. 1. Company must decide to make an offer of shares, public or non-public, and set the terms of the offer. o s. 161, CA: Directors shall not exercise power to issue shares without prior approval of shareholders in general meeting. Mandatory requirement. Approval may be specific or general. Usually general mandate is given at companys annual general meeting. Any issue of shares made without shareholder approval is void. o s. 157A, CA: Power to issue shares is governed by companys constitution, which is usually vested in the Board of Directors Howard Smith v Ampol Petroleum: However this power must be exercised for a proper purpose or they will breach their fiduciary duties. 2. Purchaser must agree with the company to subscribe to the shares, and the company will enter into a contract with the purchasers (this contract is specifically enforceable) o Formality: In private companies, there is little formality, whilst in listed companies the allocation is a formal process. Contract is constituted in the form of a letter of allotment. 3. Completion takes place when the company allocates the shares to the subscribers. o The share certificates are issued and the subscriber is registered as member of the company in the Register of Members; legal title of the shares vested in him. 5. Ownership of Shares S. 121, CA: A share is a movable, transferable property. a. Legal Ownership/Interest S. 190, CA: Legal ownership is manifested by registration in the companys register of members. o The person registered inside the Register of Members is the legal owner. However, the legal owner may not always be the beneficial owner; where the legal owner vest the benefits of the shares in a nominee original owner recieves the benefits through nominee. b. Equitable Interest Arises in the same way as for any other type of property (e.g. sale of shares straightaway gives the purchaser equitable interest, before the transfer of legal ownership). And where there are competing claims, it is resolved using property rules; (1) Only legal owner or authorised persons can transfer title (nemo dat rule), (2) where there are competing equitable titles, the first in time prevails (Hawks v McArthur) or (3) an earlier equitable interest may be defeated by a later legal interest of a bona fide purchaser for value without notice (Equitys Darling exception). Equitable ownership rights are generally non-registerable S. 195(4), CA: No notice of any trust, express, implied or constructive shall be entered into the companys register of members. o Reason: This is to simplify things for the company company deals with the registered owner in his own right and not in a representative capacity, and thus treats the person registered as the absolute owner. o Look Chun Heng v. Asia Insurance Co Ltd (1952) HELD: Company need not take notice of trusts and does not have to give effect to trusts of its shares. However, the CA provides for some exceptions to s, 195(4), CA: o Ss. 195(1),(2), CA: Personal representative of the deceased/bankrupt person may be registered as such. o S. 195(3), CA: Shares marked on the Central Depository System as being held on trust.

But this does not mean that the law does not recognise the interests of the beneficial owner Where a share is not registered in the name of the owner, equitable ownership can still arise through trust, sale, mortgage etc. The equitable owner still has the beneficial title (beneficiary) and the registered owner may be deemed as a trustee. Hawks v. McArthur (1951) First in time prevails o Registered owner, M, sold shares to purchasers who did not register themselves as members. Subsequently, the Plt obtained judgment against M and a charging order on the shares. Now there was conflicting claims for the same shares. o HELD: Even though the requirements of the AOA with respect to the transfer of shares (pre-emption rights) had not been complied with, the sale of the shares to the purchasers vested in them the beneficial interests (equitable ownership) of those shares. Purchaser prevailed as their interest arose earlier in time. EG Tan & Co (Pte) Ltd v. Lim & Tan (Pte) Ltd (1987) Bona Fide purchaser o Dft obtained share certificate from a fraudster, who took it from P based on a fraud, and D argued that he was a bona fide purchaser for value without notice. o HELD: No valid claim. D was not a bona fide purchaser (not purchaser payment was for a debt) and does not take priority (as he did not register) over P who had the earlier equitable title.

However, there are situations where the beneficial owner may not be able to recover the shares if the motive for the non-registration is against public policy (eg. illegality/improper purposes) Suntoso Jacob v. Kong Miao Ming (1986) o P, an Indonesian, transferred his shares to D on trust to give the appearance that the company was owned by Singaporeans so that the company can register the tug boat under Singapore. They had a falling out and subsequently tried to claim that he was a beneficial owner, o HELD: Illegal. Although it is legal for shares to be registered in the name of nominees, P had practised a deception on the public administration, which is an improper purpose and beneficial owner cannot enforce the trust in his favour. c. Effects of Non-Registration If purchaser does not register, he will remain as an equitable owner. o He will keep the share certificate and the blank transfer form until such time when he sells the shares or decides to register himself or his nominee. Pros: Prior to the availability of scripless trading, you would be able to transfer title quickly without needing to go through the procedures. Cons: But if he does not register, equitable owner will not get the dividends it will go to the legal owner.

6. Transfer of Shares a. Types of Share Transfers i. Transfers involving Share Certificate S. 123(1), CA: A share certificate is prima facie evidence of title. o Share Certificate Estoppel person relying on share certificate when purchasing shares can sue the company when it turns out that the person named therein is not the true owner, and he had relied on such representation for the purchase. o Re Bahia & San Francisco Railway Co (1868) T owned shares and SG procured the transfer of her shares by forgery. Company issued a new share certificate to SG who later sold it to BG who paid for it in full. HELD: BG awarded damages. If a 3rd party bona fide purchaser relied on the share certificate in buying the shares to his detriment, the company is estopped from denying that the person is entitled to the shares referred to. It will be considered a negligent misstatement.

S. 126, CA: Transfer of shares, not on the stock exchange, is effected by a lodgement of an executed transfer form and the share certificate. o The lodgement carries an implied warranty that the form is genuine. o Only registered (not beneficial) owners can execute the transfer form. Yeung Kai Yung v. HSBC (1981) Rogue obtained and lodged a transfer form through a stockbroker, obtained a new share certificate and sold the certificate to Plt. HELD: HSBC liable. Although the stockbroker was innocent, but if HSBC had checked, they would have realised that the signature was wrong. The lodging of the transfer form carries an implied warranty that the form is genuine and this is an undertaking that indemnifies from any losses suffered by reason of such registration. Xiamen International Bank v. Sing Eng Pte Ltd (1993) Legal owners gave bank shares as an equitable mortgage and the bank could not register because they were beneficial owner only only the legal owners could execure the transfer form. HELD: Succeeded eventually. Bank executed the transfer form in the capacity as attorney of the legal owner of the shares.

S. 130, CA: Unless there are share transfer restrictions, upon receipt of the transfer form and the share certificate, a company must effect the transfer of the shares within 1 month.

ii. Scripless Trading Transfer forms are no longer necessary for stocks traded on the stock exchange. S. 130I, CA: Scripless trading and the creation of the Central Depository Pte Ltd has resulted in transfers being done electronically with the CDP only obliged to send a confirmation note to the buyer and seller. S. 130J, CA: Any transfers so effected and thus registered with the CDP are deemed to be conclusive and cannot be rectified.

b. Restrictions on Transferability Shares are freely transferrable subject to restrictions that may be imposed by (a) the MOA, AOA or (b) by an agreement between the company and the shareholder. However, the freedom to transfer should be given a broad interpretation and the restrictions should be read narrowly (Pacrim Investments v Tan Mui Keow Claire) Restrictions have commercial sense especially in companies where the identities of the members are important, or in small companies running a family business. Might also be concerned with the dilution of share value. Private Companies S. 18(1)(a), CA: Private companies must restrict a right to transfer its shares. o One of the conditions before a company may be incorporated as a private company is that its MOA or AOA must restrict the right to transfer its shares. Examples of restrictions (1) Pre-emptive rights: Giving other members the right to buy shares first before it can be transferred to an outsider, or (2) providing that the transfer may only take place with the Boards approval. o Sing Eng (Pte) Ltd v. PIC Property Ltd HELD: Directors may decline to register an application for registration.

Public Companies Unlike private companies, not mandatory to have share transfer restrictions. For Public Listed Companies, the general rule is that restrictions are not allowed. o In order to create a vibrant secondary market for the trading of shares. o But shareholder may agree with the company not to sell shares within a certain moratorium period by contractual agreement Pacrim Investments Pte Ltd v. Tan Mui Keow Claire (2008) Poh held shares in MSL and signed agreement not to sell, assign or dispose of the shares for 1 year. Poh then pledged those shares to Pacrim as a mortgage for a loan. After the agreement had ended after 1 year, Pacrim sought to register the share but MSL refused. MSL claimed that the pledging of the shares for a mortgage went against the moratorium. CA Held: Agreement did not extend to restricting the shareholder from using the shares as security for loans, as the share restriction should be intepreted strictly, and found that it was not sold, thus was not in breach.

Directors power to refuse registration At Common Law, directors have no discretion to refuse to register a transfer unless the MOA/AOA provides for it specifically. o Re Smith & Fawecett Ltd (1942) HELD: If such power is given, it is a fiduciary one that must be exercised in the bona fide interests of the company and not for any collateral purpose. Court will presume that directors have acted bona fide and onus of proof is on the party seeking to show breach of duty.

In Singapore, s. 128, CA qualifies the position at common law, by requiring directors to state reasons for refusing a registration. o Ss. 128(1),(2), CA: If directors refuse to refer a transfer, must issue to the transferee a notice of refusal and a statement setting out the facts that justifies the refusal. Court may review the reasons for refusal under s. 128(2), CA and rectify the companys register of members under s. 194(1), CA.

Xiamen International Bank v. Sing Eng Pte Ltd (1993) Art 37, AOA gave director absolute discretion to refuse to register any transfer of shares of persons whom they do not approve. Directors tried all sorts of way to refuse and delay registration. HELD: Reasons invalid. Directors were acting for their own interests and company refused the registration to prevent the enforcement of power of sale under an equitable mortgage. Where reasons given under s. 128(2) are misconceived or invalid, the directors must register the shares. Court had power under s. 194(1), CA to rectify companys register of members. It is established law that once reasons are given by a company for the manner in which the discretion to refuse registration has been exercised, the court may review the sufficiency of these reasons. HSBC (Malaysia) Trustee v. Soon Cheong Pte Ltd (2006) Director refused registration of transfer of shares because he would breach the companys MOA by having > 50 members [s. 18(1)(b)]. Hence, only permitted 2 members to register. HELD: Reasons valid. Reason was legitimate and the directors had proceeded on proper principles. Hence, it was bona fide in the interests of the company. S. 128(2), CA means that the directors powers to refuse registration of transfer of shares at their discretion are not unfettered. Evaluation: Best interest test seems arbitary. Perhaps the tipping point for court was that it had treated all executors equally. Perhaps a key consideration for the court would also be some evidence of consistency, when considering best interest and good faith.

7. Interest in Shares (Not Examinable) S. 7, CA: The Companies Act provides for a definition of interest beyond what we normally understand as legal or beneficial interests. o Sets out the circumstances when a person is deemed to have an interest in a share for the purposes of, inter alia, determining substantial shareholdings, directors general duty of disclosure etc. o Interest in shares include: s. 7(6)(d), CA: Equitable interests Beneficiaries, persons with contract to purchase shares etc. s. 7(6)(c), CA: Control over rights attached to a share Persons entitled to control right attached to shares (except proxy) s. 7(6)(a), CA: Right to acquire a share; ss. 7(4),(4A), CA: Interest through bodies corporate Allows controller to have interest in the shares held by the company i.e. X (with 50% share in Y) Y (with 20% shares in Z) Z. In such a case, X has interests in the 20% share in Z. S. 7(9), CA: What is not deemed as interest S. 7(9)(a), CA: Interest of a bare trustee S. 7(9)(b), CA: Interest of person whose ordinary business is the lending of money and who holds share as security in the ordinary course of business S. 7(9)(c), CA: Interest of person holding share in prescribed office S. 7(9)(ca), CA: Interest of company in share buyback

c. Debt Finance
1. Debentures S. 4(1), CA: o Debenture includes debenture stock, bonds, notes and other securities of a corporation whether constituting a charge on the assets of the corp or not, but excludes certain other instruments like a cheque, letter of credit etc. o This definition is generally not useful, but the terms whether constituting a charge on the asset of the corporation or not suggest that it applies to both secured and unsecured debts o Furthermore, the list is not exhaustive and court must still interpret the ambit of the term. Levy v. Abercorris Slate & Slab Co (1887) o HELD: Debenture is not a strictly technical, legal or commercial term. It means a document that either creates a debt or acknowledges the debt.

a. Creation of a Debenture Clear case: Where the company creates a series of securities acknowledging indebtedness of the company, and offers them to the public and lists them for trading on a public market. How about a bank loan? o Generally accepted that a bank loan is NOT a debenture o Cf Knightsbridge Estates Ltd v Byrne, where a loan secured by mortgage over houses and shops was held to be a debenture for the purposes of s. 95, CA. These developments are consistent with recent practice of securitizing loan investments Bensa Sdn Bhd v. Malayan Banking Bhd (1993) o **HELD: Definition of debenture must catch up with the modern day commerce where sphere of business has increased substantially due to technological and communication advancements and hence, ambit should include any obligations, covenants, undertakings or guarantees to pay or any acknowledgement thereof. b. Issue of Debenture There is minimal regulation in the issue of debenture, except in a public offer. s. 94, CA: A contract with a company to take up and pay for any debentures of the company may be enforced by an order for specific performance. o Overrides normal contractual rule that lender is liable only in damages. Default rule is that consent from shareholders or existing debenture holders is not required for the issue of new debentures (contrast with s. 161, CA for issue of shares) Company is required to keep a register of debenture holders. c. Transfer of Debentures Bearer Form: Unlike shares, debentures can be issued in bearer form title may be transferred by delivery of the instrument alone, but if the form is misplaced, then no way to recover the debenture. It is recognised as a negotiable instrument. Registered Form: s. 93(1), CA allows debentures to also be issued in registered form, in which case they are transferred in the same manner as shares.

Note: If the debentures are listed on the stock exchange, rules on scripless trading of shares apply mutatis mutandis (almost identically) here.

d. Redemption of Debentures Unlike share capital, there are no capital maintanence rules that apply. S. 95, CA: Unlike shares, debentures can be redeemed unless they are perpetual/irredeemable debentures. o Redemption can be made at the option of the company or the lender, or at a fixed date. o How can a perpetual debenture holder recover the principal amount? By selling the perpetual debenture on the securities exchange. S. 100(1), CA: The security for perpetual debentures may be enforced by court order on application of the holder of the debentures if the conditions are met.

e. Reissue of Debentures S. 96, CA: Provided that there are no contrary provisions in the MOA and AOA, debentures that have been redeemed can be reissued as if they were never redeemed in the first place. o This allows the revival of the original transactions and not the creation of new ones.

2. Rights and Remedies of Debenture Holders a. Rights of a Debenture Holder Unlike sources of shareholders rights (the Companies Act, MOA, AOA and shareholders agreement), a debenture holders rights are normally found in the contract constituting the debenture, and the security documents. Contract normally provides for events of default: specific instances where the lender can recall the loan or enforce the security on the happening of one or more events. o Eg. Failure to repay installments of principal amount, company has been wound up, company failes to keep up a financial covenant. Companies Act also confers some rights of members on debenture holders He also has some rights of shareholders (e.g. power to restrain ultra vires act under s. 25(2)(a), CA, and availability of oppression remedy under s. 216, CA) b. Remedies available to a Debenture Holder Usual remedy on default by the company is the appointment of a receiver and a manager. If the debenture is secured, the debenture holders may appoint a reciever who will, in default, take possession of the companys charged assets and pay off the debt. Where the recievership is over the entiretity of the companys assets, it is a form of insolvency proceedings. Sometimes, receiver only take over a specific piece of property = limited receivership. But if banks security extends to all the companys assets (ie a global security), or if it is substantially one, receiver that is appointed effectively takes over the running of the entire coy, and is also vested the power to run the companys business and direc tors would have effectively lost powers to manage the company. Would they be subjected to the same duties that directors have?

3. Security a. Introduction to Credit and Security There is no rule that states that a company must give security for money that it borrows whether it must do so or not depends entirely on commercial factors. However, very few companies are so creditworthy that financial institutions will give them loans without asking for some form of security in return. Purpose: Security is important to improve the prospect of real recovery of the debt. o When company liquidates, secured creditors rank before unsecured creditors who rank pari passu (and take a proportion of what is left, which is usually less than the loan). Real security rights in or over assets of the company to secure payment of the debt (e.g. mortgage over a factory). Personal security personal claims against the party and not over the assets (e.g. personal guarantees, surety). b. Consensual Real Security Arises from a transaction intended as a Security. Only 4 forms of consensual real security known to English and Singapore law: o Pledge: possession taken over property pledged, right to detain until debt is paid, implied power to sell on default, confined to physical assets normally goods and documentary intangibles (e.g. pawn, jewelry). o Contractual Lien: Possession is taken for purpose other than as a security, power to detain until debt is paid, no implied power of sale (e.g. delivery to a buyer, storage, repair), o Mortgage: Transfer of ownership to the mortgagee for security (Common Law), has equity of redemption (assets shall be retransferred to debtor on discharge of his obligations), and power of sale. o Charge: Security interest in property created by contract, no title or ownership transferred, mere encumbrance on the asset, but sufficient to create a proprietary interest. Generally, security is created by consent of the parties although certain liens and charges can be created by operation of law. o Referred to as legal security security arises by operation of law and not consent (e.g. solicitors lien). Quasi-Security o An arrangement that is not a security but serves a security function. o Entity (bank or finance company) providing money or credit to finance acquisition of an asset relies on ownership of the asset to protect against default by borrower. o Examples of quasi-security: Hire-purchase agreement: widely used to finance the purchase of chattels, finance company has security in the form of the title of the chattels. Conditional sale. Retention of title: agreement that ownership does not pass until vendor is paid, possession of assets may have already passed but ownership (legal and equitable both) remains with the vendor, who can repossess. Set-off. Flawed asset.

4. Charges a. What is a charge S. 4, CA: Charge includes a mortgage and any agreement to give or execute a charge or mortgage whether upon demand or otherwise. o Basically a charge is a right in or over the companys property given to the creditor as security for a loan. Swiss Bank Corp v. Lloyds Bank Ltd (1980) HELD: A charge is a right in or over a particular asset or class of assets which are appropriated to satisfaction of the debt. No taking of possession or transfer of ownership; mere encumbrance. Legal Charge created by statute, operation of law, not by consent of the parties Equitable Charge consensual charge (not recognised in CL, only in equity) o Equitable mortgage is when the act does not confer a legal title on the mortgagee but nonetheless demonstrates a binding intention to create the security (e.g. a contract), thus mortgagee gets equitable title. o Equitable charge not amounting to mortgage is when the property is made liable to the discharge of debt and confers a right of realisation by judicial process (e.g. appointment of receiver, order for sale). Needs the court because there is no transfer of legal title. Most common form of charge! b. Creation of a Charge As a charge is a consensual security, agreement to create a security is required. Unilateral action by creditor against the asset does not suffice (cf Asiatic Enterprises). At law, agreement for security only creates contractual rights, not proprietary rights. A transfer is needed for title to pass and to create proprietary rights. But Equity regards as done that which ought to be done. So an agreement for security is able to confer a security interest in equity, converting a contractual right into a real right. Effects of the creation of a charge An agreement to give a charge creates (a) a present security in the present assets of the chargor and (b) an inchoate, present security in the future assets, provided the parties intended to create a present, not contingent security. o Future assets mean the assets that are acquired by the chargor after the date of the agreement. o Under a present security, when the charger acquires new assets (eg machinery or buildings), the charge attaches to the asset automatically, without more. This charge is deemed to relate back to the date of the agreement, although it only came into being subsequently. Creation of a future charge even without agreement (in the case of a contingent charge) Asiatic Enterprises (Pte) Ltd v. UOB (1999) (CA reversing High Court) o Clause 10 in the facility letter allowed for the creation of an equitable charge that on default, allowed the bank to attach any outstanding debt to any property and to lodge a caveat. o HELD: Not a present security interest, but a contingent right to unilaterally assert a secuirty over the companys assets. o However, the agreement did not provide a mechanism for the creation of a charge, thus UOB could only rely on the mechanism provided by law. Under law, only if UOB was in possession of funds or movable assets of Asiatic, could it assert its right over them and appropriate them as security. In this case the dispute was over land (immovable), thus no charge could be created. o Lodging of caveat did not attach the charge to the property. A caveat was lodged to protect a pre-existing right in land.

Charges may be created by accident Re Bond Worth Ltd (1980) o Clause in contract held that the supplier of the goods will retain equitable and beneficial ownership until payment is made. o HELD: Charge created. Although clause was drafted as a retention of title clause (in a valid retention of title clause, the equitable title passes but legal title remains), it is in fact a charge. o However, in this case, since the charge was registerable but was not registered, it is void against the other creditors of the company. In some cases, it is difficult to distinguish a charge from a sale and buy-back agreement. Thai Chee Ken v. Banque Paribas (1993) o Transaction was a sale and buy-back agreement that was structured differently because a negative pledge prevented a straightforward pledge of shares. Liquidator argued that it was not a sale and buy-back agreement but a mortgage that should be void for failure to register. o HELD: Court found that it was a genuine sale and buy-back agreement, and that the document was NOT a sham designed to conceal the true agreement between parties. External route Examination of the documents: whether the transaction may be struck down as a sham or disguise. If found to be a sham, the court will need to look beyond the documents to determine the nature of the agreement. o Therefore, the court must consider the construction of the agreement although it was originally intended to be created as security, it was ultimately structured differently. Internal route Proper characterisation of the transaction as a matter of construction of the documents: the nature of the rights intended by the parties is to be ascertained from the terms of their agreement, while the characterisation of such rights is a matter of law to be determined by the courts. Lee Eng Beng, Invisible & Springing Security Interests in Corporate Insolvency Law o Argued that the High Courts judgment was better (because s. 4, CA sees an agreement for a charge to be a charge, but is there really an agreement?), Court of Appeals decision was right but reasoning was wrong, and with potentially serious ramifications. o Court of Appeal seems to have implicitly acknowledged that it is conceptually possible for a contract to provide for a creditor to acquire increased security rights upon default of the debtor. Court gave an example that if the bank happened to have in its possession, Ps funds or movable assets, then bank can appropriate them as security for the outstanding debt. Such springing security interests create an invisible security over the assets and unfair to other creditors if the Bank could have elevated itself to a secured creditor this is anathema to insolvency law and the provision (as constructed by the Court of Appeal) evades the fundamental pari passu principle of insolvency law. o CRITICISM: But the only one disadvantaged is the unsecured creditor and unsecured creditor always bear the risks of a future secured creditor beating them in priority.

c. Registration of Charges In addition to the companys obligation to maintain its own register of charges under s. 138(2), CA, certain types of charges created have to be registered under ss. 131 133, CA. S. 131(1), CA: Registration must be within 30 days of its creation. S. 131(3)(g), CA: All floating charges are registerable (must be registered). S. 131(3), CA: Fixed charges need to be registerable only if they fall within 1 of the categories listed (see actual provision for all categories): o S. 131(3)(a), CA - A charge to secure an issue of a debenture. o S. 131(3)(e), CA - A charge on land or any interest in land. o S. 131(3)(f), CA - A charge on book debts S. 137, CA: Court has the power under certain conditions (by accidence or inadvertance) to extend the time within which a charge may be registered. What is the rationale for the registration requirement? o Smith v. Bridgend Borough County Council (2002) HELD: It was intended for the protection of the creditors of a company. Registration will give the creditors the opportunity to discover whether the assets were burdened by floating/fixed charges that will thus reduce the amount available for unsecured creditors upon liquidation.

i. Effect of Registration of Charges Registration does not confer priority priority is still governed by the common law rules of priority of competing securities (e.g. nemo dat principle). Priority is not affected by the registration (unlike LTA), and the creation date of the charge is the definitive factor for priority. Once a charge is registered, a certificate of registration will be issued. o S. 134(2), CA: This certificate is conclusive evidence that the charge was indeed registered and cannot be attacked for late registration (e.g. if the certificate was negligently issued even if you register late). o But conclusiveness of the certificate only relates to the registration and is not conclusive as to the validity of the charge (unlike LTAs indefeasibility) Asiatic Enterprises (Pte) Ltd v. UOB (1999) (CA reversing High Court) HELD: There was no creation of a charge when there is just an agreement to a charge on a contingency. Hence, even if a certificate of registration is gotten, it does not operate to confer validity on a charge which was invalid for other reasons.

Registration of a charge gives constructive notice to the world of the existence of the charge but not notice as to its precise terms. o Wilson v. Kelland (1910) Presence of a negative pledge clause prohibiting company from dealing with the charged asset. P knew of the charge but went to loan company for a mortgage and D argued that P had notice. HELD: No proper notice to the precise term of the charge. P did know of the charge, but did not know of the specific restrictions and hence entitled to claim the charged assets over D. **Modern practice is usually to register the particulars of important clauses (like a negative pledge) in the charge specifically, thus giving proper and actual notice. o **Kay Hian & Co v. Jon Phua Ooi Yong (1988) HELD: Registration of the particulars of the debentures was held to be paramount. Hence, chargees of subsequent charges seeking priority over the registered floating charge needs to prove that they had no knowledge of the negative pledge clause. Burden of proof is on the subsequent chargee to show lack of notice.

ii. Effect of Non-Registration of charge S. 131(1), CA: Failure to register a charge within the stipulated period will render the charge void as against the liquidator and any creditor of the company o This causes a secured creditor to become unsecured. Charge not valid against third parties (ie non-contracting parties). S. 131(2), CA: But charge remains valid between the company and the chargee (company still has obligation to pay back the money) but it is now merely a personal right only. o Registration is merely a perfection requirement so that charge may be asserted against third parties.

d. Types of Charges Company can create fixed or floating charges and there is no particular form of words required to create the different types of charge. It is ultimately a question of interpretation of the particular loan instrument to determine whether the security created is a fixed or floating charge. o Fixed Charge attaches itself to specific asset/property right from the beginning and follows it wherever it goes. Fixed charge prohibits dealing with charged assets without consent of chargee. Not suitable for non-fixed assets like raw material or inventory Rights persist even if sold, except against Equitys Darling. Floating Charge floats over the charged assets until it crystallises, thus useful as a security over a changing class of property (e.g. inventory, raw materials that will be used up in the course of business). Is a proprietary interest. Ss. 226(1A)(1), 328(5), CA: Floating charge means charge which, as created, was a floating charge. i. Characterization of Charges o To determine whether a fixed or floating charge has been created, a 2-stage process is used. Agnew v CIR (2000) [implicitly followed in Re Spectrum Plus] o First, document is interpreted to ascertain the intention of the parties. o Purpose is to ascertain the nature of the rights and obligations that the parties intended to create through the charge. o Secondly, once the rights are ascertained, the law is applied to categorize the security created. o This does not depend on the parties intentions, or the label they used.

In characterizing the charge, there are several overriding policy considerations: Public interest in ensuring that preferential creditors obtain the protection which Parliament intends them to have. o The courts will be slow to undermine the rights of the preferential creditors (employees & revenue authorities), when characterising the charges. Documents will be construed in their commercial contexts. o Courts will take in to account the fact that they had negotiated at arms length.

ii. Characteristics of a Floating Charge Re Yorkshire Woolcombers Association Ltd (1903) No longer applicable o HELD: Romer LJ, 3 characteristics of a floating charge : [1] Charge is on a class of assets of a company present and future. [2] Class of assets is one which, in the ordinary course of business of the company, would be changing from time to time (eg inventory or raw materials) **[3] Until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets. Singapores Position Dresdner Bank AG v. Ho Mun-Tuke Don (1992) o Security document by bank prohibited company from dealing with the charged shares, although in practice, company dealt with the shares freely everyday and did not actually deliver the share certificate to the bank. Instead, bank only asked for a daily list of shares that were charged. o HELD: Floating charge. Court held that [2] and [3] most important. Shares charged to the bank changes from time to time in ordinary course of business. Until certain steps were taken by bank to enforce the charge, company was at liberty to carry on business in the ordinary way with the shares. UKs Position Agnew v. CIR (2000) o HELD: Lord Millett - Criteria [3] is most important and serves to distinguish a fixed charge from a floating charge. The first 2 features are dispensable. The most important feature is whether the company could have free use of the charged asset control, manage and withdrawal from it without the banks consent. **Re Spectrum Plus Ltd (2005) o HELD: Lord Scott at [111] Agreed with Agnew that the essential characteristic of the floating charge is [3], that the asset subject to the charge is not fully appropriated as a security for the payment of the debt until the occurrence of a future event. In the meantime, the chargor is left free to use the charged asset and to remove it from the security. As a fixed charge can have the characterisitics of [1] and [2]. o [106], [107] - Also found that if a security had [3], it would qualify as a floating charge, and cannot be a fixed charge, whatever its other characteristics may be. o **Essentially, the freedom to deal with the charged asset is the important element in determining if it is a floating charge.

iii. Book Debts Book debts are created when the company has provided goods and services and customers paid in credit/have not paid. The debt is written on the books, and the payments later made are the proceeds. 1. Separation of Book Debts from Proceeds. o Re New Bullas Trading Ltd (1994) [OVERRULED BY AGNEW NO SEPARATION] Security document purported to create a fixed charge over the book debt as long as it remains uncollected, but if the proceeds have been collected and put into a designated account, it became released to become a floating charge, unless the chargee gave directions to the contrary, which it never did.

HELD: Court allowed the separation. It was commercially advantageous to have a fixed charge over the uncollected debts and floating charge over the collected proceeds. Court emphasised the freedom of contract of the parties they can agree to such terms of the debentures themselves. But what about the broader public interest which overrides unrestrained freedom of contract?

Agnew v. CIR (2000) [ACTUAL CONTROL = FIXED CHARGE] HELD: Court overruled Re New Bullas Trading Ltd. There was simply no reason to examine the conceptual distinction at all although the book debt and the proceeds are 2 different assets, but if a floating charge over the proceeds allows the company to use the proceeds for its own benefit, and can be withdrawn from the security, the charge over such book debt simply cannot be a fixed charge. **The value of a book debt lay in its proceeds, and the debt itself would be worthless and would not be a security at all if the secured party had no control over its proceeds, thus in order to create a fixed charge over book debts, chargor must not be allowed to deal with the proceeds. In conclusion, it requires actual control (chargor prohibited from removing the book debts and the proceeds from security without the chargees consent) over the collateral (BOTH book debts and proceeds) by the assignee for the creation of a fixed charge. Passive control (right to intervene to stop such dealing) is insufficient.

2. Bank allowed Company to draw from Book Debt account. o Siebe Gorman & Co Ltd v. Barclays Bank Ltd (1979) [OVERRULED BY SPECTRUM] Company gave bank fixed charge over its assets and book debts, and proceeds from the book debts to be paid into a current (overdraft) account. However, the company was not prohibited from drawing on the account, and was allowed to draw as long as it kept within its overdraft limits. HELD: Fixed charge. The contract created control over the book debts and gave no rights for the company to withdraw without the banks assent. o Re Spectrum Plus Ltd (2005) D argued with a technical tracing argument proceeds paid into the bank account, but bank account was always in deficit. Hence, withdrawal from the account is not a withdrawal of the proceeds but a fresh new loan from the bank. HELD: Floating charge. Court rejected the tracing argument it is technically accurate but ignores commercial realities of the situation. Court also overruled Siebe Gorman v. Barclays Bank and found that if the borrower was entitled to deal with the book debts and utilised the proceeds of the book debts until the occurrence of a specified event, then the security was only a floating security. Hence in the instant case, as the bank did not place any restrictions on the use that Spectrum could make of the proceeds of the debts when paid into Spectrums account, it had in law only a floating charge over the debts. A fixed charge over a book debt can only be created if the bank has actual control over the book debts and the proceeds through payment into a blocked account (affirming Agnew). It is not enough to contractually create control; bank must in fact exercise actual control over the assets of the company.

**Dora Neo, Fixed and Floating Charges over Book Debts: A Post Mortem on the Debate o Traditionally, the classic disadvantage of a fixed charge has been that the chargor would be prevented from deaing with the charged asset, but this does not seem to present a real obstacle in the case of book debts, as there is generally no need for the chargor to deal with them whilst uncollected. o Hence this resulted in the creation of arrangements that debenture holders hold a fixed charge over the companys present and future book debts of the company, and at the same time, allow the company to deal with the proceeds of the book debts in the ordinary course of business after the debts were collected This was accepted following Siebe Gorman, but has since been overruled by Spectrum Plus which found that only a floating charge was created. The finding is consistent with the English case of Illingworth v Houldsworth (1904) where it found that a floating chargeis ambulatory and shifting in its nature. This description of a floating charge is a reflection of the chargors freedom to deal with the assets and remove it from security, as mentioned in Spectrum Plus. o **Essentially, the freedom to deal with the charged asset is the important element in determining if it is a floating charge. o Spectrum Plus is likely to be unpopular amongst commercial parties in Singapore but is the right one. If decision in New Bullas is correct, then it would drive a coach and horses through the provisions of the insolvency legislation designed to subordinate floating charges to preferential claims by allowing a fixed charge over book debts while they were uncollected, but allowing chargor to deal with proceeds during the collection, then floating charge over book debts would never occur! On the other hand, Lord Scott opined that banks would not be overly disadvantaged because they probably would have made the same lending decisions even if they had known they would not be protected by a fixed charge but a floating charge. In any event, the existence of a floating charge still gives the bank priority over unsecured creditors As was the case in Re Spectrum Plus. Court needs to balance the interest of the banks/lenders and that of the preferential creditors (like employees), and from a commercial point of view, the interest of the preferential creditors should be favored. Lee Eng Beng, Surviving Spectrum Plus: Fixing Charges over Debts o If Singapore follows Spectrum Plus, banks can no longer take fixed charge over a borrowers debts if banks allow the proceeds of the debts to be paid into the borrowers account and be used by him without restriction. o Hence, an alternative method (if you want unrestricted linking) is that bank will offset by interest earned on the credit balance in the blocked account, hence deducting it from the debts of the borrower. Borrower still has no right to utilise the proceeds of the charged receivables, and thus, this arrangement appears to satisfy the control test in Spectrum Plus bank has absolute discretion whether to apply the moneys in the blocked account and borrower has no right to expect that the bank will always apply the moneys to reduce the outstanding sums under the facility, thus allowing him to draw more sums under the facility.

iv. Crystallisation of a Floating Charge Until a floating charge crystallises, it remains ambulatory and shifting and the chargor is at liberty to use the assets charged in the ordinary course of business. Crystallisation of a floating charge converts it into a fixed charge (this fixed charge is not a fixed charge, especially in the context of priorities) over whatever assets are within the class at the time of crystallisation. Usually, charge documents stipulate events of default upon the happening of which the chargee may crystallise the charge. In the absence of such stipulations, the charge may also be crystallised when the creditor takes steps to take possession of the security, or generally upon the winding up of a company or its business. o Dresdner Bank AG v. Ho Mun-Tuke Don (1992) Bank obtained the possession of the shares before the company went into liquidation. There was no provisions of events of default that provides for crystallisation in their letters of hypothecation because the security documents purported to create fixed charges. HELD: Floating charge void. Crystallisation is a process in the enforcement of a floating charge and does not retrospective change the nature of the security. Original floating charge was void for failure to comply with the registration requirements under s. 131, CA, and the voiding still applies after crystallisation into a fixed charge. *Upon crystallization, the floating charge fastens on the assets subject to the charge, and thenceforth the company is not at liberty to deal with the assets, whether in the course of business or otherwise. *It is true that at that stage the charge has become a fixed charge, but the resulting fixed charge arose from the original floating charge and is in effect the same security affecting the same assets. There is no new charge created on those assets.

g. Priorities Among fixed charges: o Legal charge > Equitable charge unless the equitable charge comes first and the subsequent legal charge has knowledge of the equitable charge. o Among equitable fixed charges, where equities are equal, the first in time prevails. Floating charges: o Only crystallises after its creation, but once a floating charge, always a floating charge and will always rank behind a fixed charge even if the fixed charge is created/crystalized later. That is why nowadays, most chargee uses negative pledge to prohibit the chargor company from taking up new securities. o New security (even if fixed charge) with knowledge will take a lower priority. Kay Hian & Co v. Jon Phua Ooi Yong (1988) HELD: Chargee of specific charges seeking priority over the registered floating charge has to prove that they have no knowledge of the negative pledge clause. Nonetheless, the opposite view is frequently suggested, in the words of Gore-Browne: In order to give greater protection to floating charges, the practice has developed, which the Registrar has accepted, of including the prohibition in the trust deed among the registered particulars of the charge. It is widely assumed that this will give constructive notice of the prohibition, but this has not yet been tested in the courts.

Preferred creditors: o S. 328(5), CA: When company is would up, certain preferred creditors take higher priority than the holders of floating charges. Ss. 328(1)(b),(c)(e)(f), CA: Employees claim to unpaid wages retrenchment benefits, CPF contributions, Employees remuneration Ss. 328(1)(g), CA: All amount of tax assessed and all GST tax due o S. 226, CA: When receivers are engaged by a creditor to secure a floating charge (when the company is not winding up), certain preferred creditors take higher priority that the holders of floating charges. These provisions reverse the common law priority ranking by preferring unsecured creditors (preferential creditors like employees and revenue authorities over secured creditors of floating charges.

e. Scripless Trading The normal rules for charging shares and debentures do not apply to scripless securities and no security interests may be created in such securities except as provided by in ss. 130N and 130P, CA. S. 130N(2), CA: Security interests in scripless security may be created by way of an assignment or a charge. o Provisio to s. 130N(2), CA: Once so created, assignor or chargor may not create any other security interest with respect to that lot of scripless securities. Equivalent to a negative pledge

8. Capital Maintenance and Financial Assistance

1. Capital Maintenance Doctrine In the case of a company limited by shares, the capital subscribed by the shareholders should be maintained as a fund for the protection of creditors and should not be returned to the members. Re Exchange Banking Co (Flitcrofts Case) (1882) o HELD: The creditor has no debtor but the company, which has no property except the assets of the business. Therefore, the creditor gives credit to that capital, and gives credit to the company on the faith of the representation that the capital shall be applied only for the purposes of the business and he has therefore a right to say that the company shall keep its capital and not return it to shareholders. Trevor v. Whitworth (1887) o Lord Watson: Paid-up capital may be diminished or lost in the course of the companys trading and that is a result which no legislation can prevent. o But persons who deal with and give credit to a limited company naturally rely upon the fact that the company is trading with a certain amount of capital already paid, as well as upon the responsibility of its members for the capital remaining at call. They are entitled to assume that no part of the capital which has been paid into the coffers of the company has been subsequently paid out except in the legitimate course of its business.

2. Basis of the Doctrine of Capital Maintenance The doctrine of capital maintenance is mainly for the protection of creditors. Creditors take risks that loan may be depleted in the course of business. But they did not take the risk that the company will return its capital to members. This is especially important due to the principle of limited liability that prevents creditors from going after shareholders in order to recover the money they are owed. Hence, company owes duty to creditors to preserve its assets for the payment of its debts and not dissipate the assets improperly. This doctrine can also be used to protect existing and prospective shareholders. Prevents the share capital from being extracted out or eroded by certain shareholders to the detriment of others and the company. Prevents the expropriation of a class of shareholders, where one class of shareholders use capital reduction to buyout other shareholders. 3. Specific Rules of the Doctrine of Capital Maintenance [a] Company must not reduce its capital except in the manner provided in the Companies Act. [b] Company must not purchase/acquire its own shares or the shares of its holding company, except where it is permitted by the Act. [c] Company must not lend on the security of its own shares or the shares of its holding company. [d] Company must not give financial assistance for the acquisition of its shares or the shares of its holding company, except where it is permitted by the Act. o Note: Rule [5] has no consensus on the rationale of the prohibition it tries to protect the companys resources but more seen as preventing abusive and improper practices of corporate controllers. [e] Company must not pay dividends to its members unless there are profits available for that purpose.

a. Reduction of Capital
1. What is Capital Reduction S. 78A(1), CA: The test of whether a capital reduction has taken place is whether the capital yardstick of that appears in a companys accounts (i.e. the issued capital, paid-up capital or uncalled capital) has been reduced. 3 common examples of capital reduction: o S. 78A(1)(a), CA: Extinguishing or reducing liability on uncalled capital. o S. 78A(1)(b), CA: Cancelling paid-up capital which is lost lost reduction. o S. 78A(1)(c), CA: Returning excess capital to shareholders capital reduction. a. Traditional Court Approved Reduction S. 78G, CA: Company may reduce its capital in a way by a (1) special resolution and also requires the (2) approval by an order of the court [s. 78I, CA] o Notice of order and information to be lodged at ACRA. The court will not approve of the capital reduction unless: o Interests of the creditors are not adversely affected. o Shareholders are treated equitably. o Cause of the reduction was fully informed to the shareholders to make an informed choice when voting. o Reduction is for a discernable purpose.

Creditor protection mechanisms are set out in ss. 78H, 78I(2), CA. b. Alternative Solvency-Based Reduction (using a s. 7A solvency statement) Ss. 78B (Private company) & 78C (Public company), CA o 3 main requirements: [1] ALL directors must make a s. 7A solvency statement unless it is a loss reduction. [2] Company passes a special resolution to approve of the reduction. [3] S. 78B(1)(c), LTA: Publicity of the reduction is given. The solvency statement under s. 7A, CA is an expression of the directors opinion that the company is and will remain solvent after capital reduction.

S. 78D, CA, read with s. 78F, CA: Creditors may apply to court for the reduction (made under ss. 78B or 78C, CA) to be cancelled. i. How to make a s. 7A Solvency Statement? The nature and content of the solvency statement depends on whether the company is audited or not. o In a company in which the accounts of the company are audited, the solvency statement can take the form of (1) statutory declaration or (2) Ordinary statement and the auditors report to support the declaration. o But in a company whose accounts are not audited, the directors are required to make their s. 7A, CA solvency statement in the form of a statutory declaration. Requires director to declare that the company (1) is cash flow solvent at the time of the statement, (2) Balance sheet solvent for 12 months, (3) cash flow solvent for 12 months and (4) balance sheet solvent before and after transaction. 2. Effects of Contravention of the Rules of Capital Reduction Directors commit a breach of duty and thus directors can be made liable to replace the misapplied capital [Re National Funds Assurance Co (1878)] 3rd party may be made to refund the money earned from the capital reduction on basis of constructive trust if they had knowledge. S. 7A(6), CA: Directors who made a solvency statement without reasonable ground will be liable for a fine not exceeding $100,000 and imprisonment of not more than 3 years or both.

b. Company Acquiring its own Shares (Share Buyback) [s. 76(1)(b)]

1. General Prohibition and Exception S. 76(1)(b), CA: Company is not allowed to buy back (i) its own shares or (ii) shares in a holding company of the company, either directly or indirectly. Exceptions: o It may only issue redeemable preference shares that may be redeemed provided that certain requirements are complied with as per s. 70, CA. o Court may order for buyback as a remedy in cases of oppression or injustice under s. 216(2)(d), CA. o **Statutory exceptions as set out in ss. 76B 76G, CA

Note: Prohibition of share buyback of the company relates to the doctrine of capital maintenance, and the protection of creditors and certain classes of shareholders. But the prohibition of share buyback of a holding company is due to the difficulty that is involved should there be a takeover From the point of view of corporate governance, takeovers are considered to be efficient as they allow for inefficient/ineffective management to be removed and to be replaced by those in a better position to run the company, and cross-shareholding is a great impediment to the possibility of takeovers. a. Effects of Contravention of Prohibition against share buyback Such transactions will be void under s. 76A(1)(a), CA. 2. Reasons for and against share buyback a. For Share Buyback There is a need to differentiate in cases whether there is an active market in the companys shares or not. No active market in the companys shares 1. To make shares more liquid so as to attract external investors. 2. To provide an exit for existing shareholders. 3. To obtain an injection of short-term capital, as some shareholders might not want to invest for long. 4. To facilitate operation of employee share scheme. b. Against Share Buyback 1. Reduces companys capital by giving money to shareholders (direct contravention of the doctrine of capital maintenance). o There is a crucial difference between equity capital and loan capital former is a permanent capital (locked in with the company) while latter can be repaid at the end of the loan period. 2. It could be open to abuse and lead to unconstitutional conduct by management. o Directors may use buyback to buy out troublesome shareholders, or favour a retiring shareholder. Not the role for directors to decide who makes up the shareholding 3. Risk of market manipulation for shares in a listed company, and may thus mislead investing public about the value of the companys shares. o As when there is a buyback, there is an increase Active market in the companys shares 1. A way to return value to shareholders 2. To achieve a target capital structure (e.g. replace expensive share capital with cheaper debt). 3. To bolster or stabilise market price of shares. 4. To facilitate operation of employee share scheme

3. Permitted Share Buyback (ss. 76B 76G, CA) Common rules that are applicable to all forms of buybacks: S. 76B(1), CA: Requires express authorisation by the Articles to allow for a buyback Except redeemable preference shares, numbers of shares that can be acquired is limited to 10% of shares in between annual general meetings. Repurchased shares, unless held as treasury shares, are deemed to be cancelled. The 4 permitted methods of share buy-backs under ss. 76C 76G, CA are as follow: S. 76C, CA: Off-market purchase on equal access scheme. o Offer is made to all shareholders. o Any company (listed or non-listed) may use this method. o Must be authorised in advance by ordinary resolution. o Scheme must treat all members equally. S. 76D, CA: Selective off-market purchase. o Company offer to purchase shares from identified members in accordance with an agreement. o Available only to non-listed companies. o Agreement must be authorised in advance by special resolution. o Interested persons and associates are not entitled to vote on the resolution. S. 76E, CA: Market purchase. o Company purchases its own shares on a securities exchange o Only available to listed companies o Must be authorised in advance by ordinary resolution. o Authority for purchase: May be unconditional or subject to conditions. May be varied or revoked by the company following the same procedure used to grant authority to the share buybacks. S. 76DA, CA: Purchase under a contingent purchase contract. o Company can enter into a contingent purchase contract with members in the future such contracts are put warrants (member has the right to sell shares back to the company) or call options (company has the right to buy back the shares from the member). o Any company (listed or non-listed) may use this method. o Proposed contingent purchase contracts must be authorised in advance by special resolution. Protection for Shareholders/Members o Prior consent/authorisation by members is always required, either by ordinary of special resolution. o Equality of treatment where applicable. o Notice specifying intention to propose resolution authorising buyback must contract prescribed information for members to make an informed decision when voting. Protection for Creditors o Protected by solvency requirement under s. 76F, CA. o Directors not requirement to make s. 7A, CA solvency statement only needs to be satisfied that company will be solvent after authorising payment for the share buyback. o Solvency tests under s. 76F, CA different from the s. 7A, CA solvency statement. o S. 76F(3), CA: Director or manager who approves of a share buyback commits

4. Underlying Policy Considerations - Protection for Members and Creditors

an offence if he knows that the company is not solvent.

6. Share Buyback as Informal Capital Reduction S. 76F(1), CA: Company may use either profits or capital to pay for share buyback provided that it is solvent. o Not mandatory for the company to use its profits to acquire shares first before it may resort to capital. S. 76G, CA: If company uses capital for share buyback and the shares acquired are cancelled, capital is reduced. o Hence, company can use share buyback as an informal method of capital reduction. Evaluation o Advantages: Less formalities, creditors have no standing to complain to the court unlike capital reduction. o Disadvantages: Buyback is capped at 10% in between AGMs. No similar cap for capital reduction.

7. What happens to share that are bought back? (Treasury Shares) S. 4(1), CA: Treasury shares are shares that are purchased under a buyback but not cancelled immediately and are continued to be held by the company. S. 76I, CA: Amount of treasury shares is limited to 10% of the total number of shares in that class of shares, or if there is only one class of shares, the total number of shares.

c. Lending Money on the Security of its Own Shares [s. 76(1)(c)]

1. Prohibition S. 76(1)(c), CA: Company cannot lend money on the security of its shares or the shares of its holding company. o Because, if the loan is not repaid, the company will end up holding its own shares contravening the doctrine of capital maintenance. o S. 21(1), CA: also, the company will end up holding the shares of its holding company, which contravenes this provision preventing a corporation from being a member of its holding company.

2. Effects of Contravention Transaction is void under s. 76A(1)(b), CA.

d. Prohibition of Financial Assistance [s. 76(1)(a)]

1. Historical Background Traditionally regarded as a rule of capital maintenance people who want to acquire shares should do so from their own resources and not with help from the company. PP v. Lew Syn Pau (2006) o HELD: The legislative purpose of enacting s. 76, CA is to ensure that the capital of the company is preserved intact. (Sundaresh Menon JC) Wu Yang Construction Group Ltd v. Mao Yong Hui (2007) o HELD: The provision was enacted to prevent abuse in the form of persons using the funds of the company to acquire control of the company by first borrowing to purchase the company, then using the companys funds to pay off the loan. (Chan Sek Keong CJ) o This will deplete the companys assets and offend the doctrine of capital maintenance.

2. General Prohibition and Elements General Prohibition: S. 76(1)(a), CA: Company is not allowed to give any (a) financial assistance for the (b) purpose of, or in connection to any person for the acquisition or proposed acquisition of shares in the company or in a holding company of the company, either directly or indirectly. o Note: Only applicable to Singapore incorporated companies (See Lew Syn Pau at [181] as the provision applies only to a company, not a corporation) Exceptions: ss. 76(8) and 76(9), CA provide for instances where it will not be considered financial assistance. Authorised Financial Assistance: ss. 76(9A), (9B), (10)

Elements: Charterhouse Investment Trust Ltd v. Tempest Diesels Ltd (1986), followed in Singapore by Intraco & Wu Yang Construction o HELD: 2 elements in the prohibition. [1] The giving of financial assistance; AND (conjunctively) [2] The financial assistance was given for the purposes of or in connection with an acquisition of shares. a. Prohibited Financial Assistance Definition of Financial Assitance S. 76, CA does not define what amounts to financial assistance. Wallersteiner v. Moir (1974) o HELD: You look at the companys money and see what has become of it. You look at the companys shares and see into whose hands they have gone. You will then soon see if the companys money has been used to give financial assistance (Lord Denning). Charterhouse Investment Trust Ltd v. Tempest Diesels Ltd (1986). o HELD: The words financial assistance has no technical meaning and their frame of reference is the language of ordinary commerce. Must examine the commercial realities of the transaction and decide whether it can properly be described as being financial assistance. o Must bear in mind that the s. 76, CA is a penal one and should not be strained to cover transactions that are not fairly within it. Wu Yang Construction Group Ltd v. Mao Yong Hui (2007) o The expression "financial assistance" suggested any form of material assistance to which a monetary value could be ascribed, without which the party acquiring a company's shares would have been unable to acquire the shares.

Some examples of financial assistance: [1] Company lends money to A to put A in funds so that he can buy the companys shares from Z or subscribe for shares in the company (s. 76(2), CA). [2] Company guarantees Bs bank overdraft and on the security of this, the bank advances money to B so that he can buy the companys shares from Z or subscribe for shares in the company (s. 76(2), CA). [3] Company releases an obligation or debt owed to C to the company so as to put C in a position to buy or subscribe for shares in the company (s. 76(2), CA). [4] Company buys an asset from D with the purpose of putting him in funds to acquire the shares of the company (Belmont Finance Corporation Ltd v Williams Furniture Ltd) DEPLETION REQUIREMENT must the financial assistance involve a depletion of the assets of the company or puts the assets at risk? No a requisite factor, but key to finding FA. PP v. Lew Syn Pau (2006) o HELD: Menon JC: Depletion of asset test must be satisfied before financial assistance can be found. Court held that a common thread runs through each instances of prohibited assistance listed in s. 76(2),CA which is that the act in question actually or contingently (possibly) depletes the assets of the company. Wu Yang Construction Group Ltd v. Mao Yong Hui (2007) o HELD: Court approved of PP v. Lew Syn Pau and held that in this case, there was no depletion of VGOs capital as a result of the allotment of the issued VGO shares. o **Chan CJ said it must satisfy a causation test that the party acquiring the shares would not have been able to acquire the shares but-for the financial assistance.

Hence, although the cases support that depletion might be a requirement, but it is not conclusive. Nevertheless, the evidence of actual or contingent (possible) depletion of the assets will only strengthen the financial assistance cases. b. For the purpose of or in connection with The giving of financial assistance is not illegal unless it is given [1] for the purpose of the acquisition of shares (the relevant purpose) or [2] in connection with the acquisition. o **Wu Yang (HC): These two elements are to be read together; In connection with must be read narrowly so as to be consistent with for the purpose of, or else the broad intepretation of the 2nd limb will be render the 1st limb otiose. o S. 76(3), CA: [1] is deemed satisfied if a substantial purpose of giving financial assistance was for the acquisition of shares, and it need not be the sole or dominant purpose. o S. 76(4), CA: [2] is deemed satisfied if, when the assistance was given, company was aware that the financial assistance would financially assist the acquisition of shares, or where the shares had already been acquired, the payment of any unpaid amount for the shares or any calls on the shares. Belmont Finance Corporation Ltd v. Williams Furniture Ltd (No. 2) (1980) o HELD: Financial assistance given. The purchase of Maximum shares by Belmont was not a bona fide commercial transaction but was a scheme to put G in funds to acquire Belmont using Belmonts own funds. o Hence the substantial or sole purpose of the transaction was give G the funds to purchase the shares in Belmont. Furthermore, it was also not a transaction in the ordinary course of Belmonts business and did not enable Belmont to acquire anything which it genuinely needed for its own purpose (cf Wu Yang Construction).

Intraco Ltd v. Multi-pak Singapore (1994) [Doubted by Wu Yang Construction] o HELD: No financial assistance. Court held that purchase of Multi-paks share was not caught under s. 76, CA. o The transaction was entered into bona fide in the commercial interest of the respondent [Multi-pak benefitted from the deal because the strategic alliance with Intraco (a government-linked company) allowed it access to marketing and supply links]. Hence, the purpose was not to give financial assistance. o However the important case of Brady v Brady was not cited. **Wu Yang Construction Group Ltd v. Mao Yong Hui (2007) [affirming Brady v Brady] o HELD: Wu Yang had no locus standi to raise issue of financial assistance as he does not fall under s. 76(3), CA Thus everything after only in obiter o Court rejected the approach in Intraco and drew a distinction between the purpose and the reason of the transaction, following Brady v. Brady. o Argued that the court in Intraco mistook reason for purpose. Even if the company giving the financial assistance to the purchaser has a bona fide interests with good commercial reasons, it can still give rise to the purpose of providing financial assistance. Reason can be a bona fide with good commercial reasons but still have invalid purpose. To hold that financial assistance may validly be given for a bona fide commercial reason will provide a blank cheque for avoiding the effective application of s. 151, CA in every case. Purpose is the means to reason end. o **Elaboration in Wu Yang only in obiter dicta but it broadens the scope of the prohibitions of financial assistance. Unfortunate but probably unavoidable in view of the broad language used in s. 76, CA. o Note: [57] Court in Wu Yang opined that the reasoning given in Intraco about s. 76, CA was merely obiter, as it did no relate to the issue on appeal.

3. Effects of Contravention S. 76A(2), CA: The transaction that constitutes the scheme of financial assistance is thus voidable at the option of the company. o This includes related contracts which are voidable once notice is given to the 3rd party. o s. 76A(3), CA: Party seeking to set aside the contract/financial assistance must have locus standi to bring a claim. (a) A member of a company, (b) a holder of debentures of a company, (c) a trustee for the holders of debentures or (d) a director of a company S. 76(5), CA: If company contravenes s. 76(1), CA, the officers of the company shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $20,000 or to imprisonment for a term not exceeding 3 years or both. o Applies to all capital maintenance doctrines. o Company does not commit an offence, but every officer in default is guilty of an offence under s. 76(5), CA. Director must pay compensation to company or anyone who suffered loss or damage this remedy is contingent upon a conviction. Court can also order for compensation on just and equitable grounds. This is in addition to all civil remedies. o Breach of fiduciary duties. o Commencement of derivative actions (CLDA & s. 216A, CA) o Oppression (s. 216, CA) o Constructive trust imposed on 3rd parties to recover asset if they had knowledge or assisted. o Tort for damages for civil conspiracy.

4. Exceptions (Excepted Transactions) Those that does not amount to Financial Assistance S. 76(8), CA identifies specific transactions that are not treated as being prohibited: o (a) Payment of a dividend in good faith and in the ordinary course of dealing. o (b) Payments made by company pursuant to a capital reduction exercise o Etc etc etc, the list goes on and is not exhaustive. S. 76(9), CA identifies exempt companies that deal in the business of lending money, as well as arrangement which are designed to facilitate employee share schemes. o Eg Banks/Financial Institutions

5. Authorised Financial Assistance (Whitewash Methods) 3 methods of approving the giving of financial assistance. o [1] Directors resolution + special resolution by shareholders + courts approval (only required if there is an objection) [s. 76(10), CA] Members, creditors and debenture holders are given a right to object to the court against the proposed financial assistance [s. 76(12), CA] o [2] Directors resolution + s. 7A, CA directors solvency statement [s. 76(9A), CA] Amount capped at 10% of the aggregate of the total paid-up capital of the company and its reserves. [s. 76(9A)(a), CA] Company must receive fair value in connection with the financial assistance [s. 76(9A)(b)] + additional requirements [s.76(9A)(c),(d)] [3] Directors resolution + s. 7A, CA solvency statement + unanimous approval of shareholders [s. 76(9B)] + additional info [s.76(9B)(a),(b)] Amount not capped at 10%. **Some ambiguity as to the nature of the unanimous decision. Clear that if company uses a written resolution, all members must approve of the financial assistance But if a general meeting is convened to pass the resolution, it is not clear whether (i) all the members must approve, or (ii) all members present at the meeting can approve. Note: S. 76(9D), CA: Compliance with the above white-washing procedures does not absolve a director from his duties to the company if he makes a solvency statement without any reasonable grounds, he will be guilty of an offence punishable by a fine of up to $100,000 and imprisonment of 3 years.

S. 76(15), CA: A director may still be liable to the company if his involvement in the matter constitutes a breach of his duties to the company. Evaluation: New measures have made it easier for companies to give financial assistance for acquisition of its shares in 2 aspects: o First, where the amount is less than 10% of the companys total capital, consent of all members not required. o Second, if amount is more than 10% of companys total capital, members unanimous consent required but creditors or debenture holders have no right to apply to court to object to the giving of the financial assistance.

6. Reform SC Recommendation 3.27, accepted by MOF (Oct 2012): S. 76(1)(a), CA should be abolished for private companies, but continue to apply to public companies and their subsidiaries. A new exception that allows a public company to grant financial assistance if giving the assistance does not materially prejudice the interests of the company or its shareholders or the companys ability to pay its creditors.

e. Dividends
1. Introduction Dividends are a common form of distribution to shareholders - member of a company may not get any money from the company qua member except in the form of dividends. o When dividends are declared, they become a debt owed by the company to the members. Members however, have no right to demand a declaration of dividends even if there is a profit, but may succeed under commercial unfairness due to abuse of voting powers under s. 216, CA. o Re SQ Wong Holdings (Pte) Ltd (1987) HELD: Commercial unfairness present because directors refused to pay dividends since the paying of dividends will make their shares nonvotable and hence losing their dominance. Hence, voting to not pay out dividends was motivated by self interest.

S. 403(1), CA: No dividends may be paid out unless there are profits available. o But there is no legislative guidance on what constitutes profits must refer to case law, and it is not always clear what counts as profits. Two types of profits: Revenue Profits (profits derived from the companys commercial dealings) and Capital Profits (realised gains from selling a fixed or capital asset like land, machinery) o Dividends from Revenue Profits may be declared even though capital isnt intact, but dividends declared from Capital Profits can only be declared when the companys capital is intact (Marra Devt v BW Rofe) Evaluation: is the law on dividends too lenient? o No, sufficiently lenient: As they law should allow for flexibility to the company to decide if it wishes to declare dividends, if it has profits. o Yes, too lenient: As it affects the interest of the creditors. But there are already checks and balances in place for declaring dividends for capital profits. 2. Effects of Contravention Directors who wilfully paid or permits to be paid any dividends will be guilty of an offence under s. 403(2)(a), CA and be liable to the extent that dividend exceeded profits as per s. 403(2)(b), CA. o Marra Development Ltd v. BW Rofe Pty Ltd (1977) HELD: To be guilty, the officer must know facts that would establish that there was no proper declaration of a dividend because of insufficient profits. The material time to assess the officers knowledge is at the time of the declaration, not the time of payment. If it is discovered that a dividend has been declared illegally, the Board may apply to court to have the declaration set aside. o It is not permissible for the company to declare a unilateral moratorium. Members who receive dividends knowing that there are no profits out of which to pay them will be liable to refund those dividends. o They will hold the money as constructive trustees (Re Cleveland Trust) o They may be made to indemnify the directors who are compelled to restore the sums paid away illegally (Re Alexandra Place). 3. Reform CLRFC had recommended the modernisation of the dividend rules. o Proposed to use the UKs approach the distribution may only be made out of (accumulated realised gains - accumulated realised losses). Not implemented. But Steering Committee (2012) has recommended the retention of current rules. NZ, Canada and US (Model Business Corporations Act) adopted another approach o Solvency Tests - Companies can declare dividends so long as it is solvent.

2. Criticisms of the Capital Maintenance Doctrine

The doctrine of capital maintenance is criticised on both practical and doctrinal grounds. 1. The doctrine does not provide consistent or reliable protection of creditors because the operation of the doctrine is dependent on various yardsticks in the companys balance sheets and these figures are historical. 2. Doctrine is arbitrary and incorrectly assumes that any distribution of capital must have prejudiced creditors and is riddled with inconsistencies. Hence it does not provide reliable protection for creditors. 3. Doctrine imposes costs and restrictions on company management without any countervailing benefit. o Creditors nowadays also dont care so much about the amount of the companys issued capital as they pay more regard to the companys financial strength as indicated by its financial ratios, its business prospects and the overall economic environment. Is the juxtaposition of capital maintenance rules with solvency tests incoherent? No, as it can be suggested that since capital reduction was allowed on the basis that the company would continue to enjoy a safety margin beyond solvency, and thus in reality, court are in effect applying a kind of solvency test approach?

3. Future Reforms
A/P Wee M S, Reforming Capital Maintenance Law: The Companies (Amendment) Act 2005 The 2005 reform raises the issue of whether the solvency tests cohere satisfactorily with the traditional framework of the doctrine of capital maintenance. Should the solvency test approach be the remaining approach and the capital maintenance doctrine be abolished (like New Zealand)? Solvency test are not part of the capital maintenance framework as they are doctrinal difference, and capital maintenance should be abolished in favour of solvency tests because: o It imposes costs and restrictions on company management without any countervailing benefit. o Creditors nowadays also dont care about the amount of the companys issued capital so much. o Fund of capital represented by share capital does not indicate how much money is in the company. Should the prohibition of the financial assistance on the acquisition of shares be abolished and should we rely on the law of directors duties or wrongful trading and market abuse provisions to control any improper use of directorial discretion? o In the UK, no more prohibition on giving financial assistance by private company because inappropriate for companies to carry the cost of complying with the rules of financial assistance. The clearest theme of the 2005 Amendment Act is the objective of reducing regulation and improving the flexibility of conducting the affairs of a company in Singapore, enhancing competitiveness of our company law in the global economy. Possible that its full impact may extend beyond the realm of company law e.g. ease of capital return may lessen the need for alternative business vehicles that were thought to be needed partly because of the cumbersome capital maintenance rules of company law. Further development needed for the solvency tests to ensure the balance between the conflicting needs of protecting creditors and not imposing impossible or unwarranted demand on a director (who faces the prospect of criminal liability if he is negligent). o Only then can the solvency based reforms reach their logical conclusion so as to discard the long venerated doctrine of capital maintenance. 2012 Reforms by Steering Committee for Review of the Companies Act