You are the training manager at an accounting practice in Singapore. The partner in charge of the accounting practice has asked you to prepare a training session for newly employed graduates. In the training session you provide them with the following questions to answer.
- Will running a business through a company protect a director’s personal assets if something goes wrong with the business of the company? (5 marks)
- Why does the Companies Act have provisions that automatically disqualify a person from being a director of a company? (5 marks)
Please prepare an answer to the above two questions and where necessary refer to relevant case law and legislation to support your answer.
- The company is a legal person separate from its participants
There is said to be a corporate veil between the company and its members, in that:
- Its obligations and property are its own and not those of its participants
- Its existence continues unchanged even if the identity of the participants changes
- This means that the company when registered is separate from a natural person.
- The company although not a “real” person is recognised by the law as something separate and legal to a natural person (i.e. it is a legal person).
- This principle is based on the case of Salomon v Salomon(1897)
According to Salomon v Salomon，S controlled the company but was not an agent of the company. The company was running a business in its own right and separate from its controller. Therefore, when there is a problem with the company's business, the subscriber (as a member) is not liable for the company's debts, unless the law provides (ie, limited liability).
- Statutory exceptions under s218 and s219 IRDA, s33 Income Tax Act and common law lifting of the corporate veil – Courts lift the corporate veil and ignore the separate personality of company. Lifting means the company and its directors are seen as one. Therefore, the directors become liable for the obligations of the company.
For example– retail business, must watch cash flow and debts, avoid （wrongful）insolvent trading – don't order inventory if the company is unable to meet its debts when they are due or payable, otherwise the director will be personally liable in the event that the company is insolvent.
- Company directors can be disqualified from acting as a director, under the Company Directors Disqualification Act 1986 if they are found guilty of 'unfit conduct' - for example, if they: committed fraud. continued to trade when the company was insolvent - or they failed to assist the appointed Insolvency Practitioner.
Automatic disqualify by
- Bankruptcyfor the period and worldwide
- Convictionof offences involving fraud or dishonesty punishable with imprisonment for 3 months or more
- need to be sent to jail but being convicted of offence with this punishment is enough
- period is 5 years after conviction or after release from jail
- Subject to civil penaltyunder s 232 of Securities Futures Act
- Persistent defaultin relation to specified administrative requirements under the Act
- is 5 years
- Involved with at least three companies over 5 years period that have been struck off
- is 5 years from last company being struck off
Elon Pte Ltd was recently formed to take advantage of the interest in crypto currencies. The company was created to be an investment vehicle for people wanting to invest in crypto currencies but having no knowledge or expertise. The company would attract investors and then pool the money and buy various crypto currencies around the world and manage the risk for investors.
The three directors of the company are Elon, Donald, and Sau Fuk
Elon is the technology expert; Donald is the marketing expert and Sau Fuk is the crypto currencies expert.
The company holds board meetings every month to discuss finances and the investment opportunities. Donald does not attend on the basis he is busy drumming up new business. Sau Fuk turns up but is always busy on his laptop sorting out technology issues and merely agrees to what is being discussed without bothering to read the documents or raise questions.
Elon is the only person to take matters seriously at the board meetings.
As a result of Donald’s marketing expertise, the company attracted $50,000,000 in funds. Donald also received a free trip to the Maldives from a grateful investor. The trip was valued at $8,000.
Sau Fuk invested the money into various crypto currencies. However, after three months because of the downturn in the financial markets the value of the funds dropped to $4,000,000.
The shareholders are not happy and wish to take action against the directors for causing such a large financial loss.
- Advise the company if the directors have breached any of their duties to the company under the Companies Act.
- What can the company claim back from the directors as compensation?
Please refer to relevant case law and legislation where appropriate.
As a marketing expert, he was busy applauding the launch of new business, instead of attending the meeting, he violated his duty of care and due diligence. Unders157(1) - A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office.
- a director must exercise the same degree of skill and diligence which an ordinary man acting with reasonable care would as if he were acting on his own behalf, having regards to the circumstances of the case.
- All directors are required to exercise the amount of diligence that would at least allow them to be familiar with the operations of the company’s business and keep informed about the financial status of the company.
Meetings – Singapore Code of Corporate Governance recommend disclosure of the number of meetings attended by directors, but they may still breach duty if they fail to exercise reasonable diligence in making decisions
- • Because Donald also got free travel to the Maldives from grateful investors. The value of this trip is US$8,000. This free trip to Maldives was a secret bribe. This violatesDuty to avoid conflict of interestswhich isDirectors must not place themselves in a position where a personal interest conflicts with duty to act in the interests of company without making appropriate disclosure and obtaining the necessary permission.
- A director or senior executive officer must not place themselves in a position where there is an actual or substantial possibility of a conflict between a personal interest and their duty to act in the interests of the company unless the permission of the company is obtained.
- Company can recover losses under common law and s157(3)(a) CA-Breach s157(3)(a) – may be liable for any profits made or any detriment suffered by the company that results from the breach
- Criminal liability – s157(3)(b) CA-Breach s157(3)(b) — the person may be prosecuted for a criminal offence and fined up to a maximum of $5,000 or be imprisoned up to one year.
Since Sau Fuk turns up but is always busy on his laptop sorting out technology issues and merely agrees to what is being discussed without bothering to read the documents or raise questions.
He breach the dutyof care and diligence – no objective test. Unders157(1) - A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office.
Sau Fuk invested the money into various crypto currencies. However, after three months because of the downturn in the financial markets the value of the funds dropped to $4,000,000.Sau Fuk breach the duty to avoid conflict of interest,directors must not place themselves in a position where a personal interest conflicts with duty to act in the interests of company without making appropriate disclosure and obtaining the necessary permission. UnderS157(2) CA – misuse position and information to gain advantage and cause detriment.
Elonis the only person to take matters seriously at the board meetings.
The company can refer to:
S157(1) CA - <$5k and or < 1 year jail
S157(3)(a) CA – civil liability – account of profit, damages
S157(3)(b) CA – criminal liability - <$5k and or <1 year jail
Common law damages – company can sue directors to recover loss as a result of breach of directors’ duties
Ken Lo is a director of K and E Lo Enterprises Pte Ltd. He is wanting to appoint his wife Joan and his cousin Catherine as fellow directors of the company. Joan lives in Singapore but has no expertise in running a company as she has been a housewife raising the children. Catherine lives in New Zealand. Catherine was recently made a bankrupt in New Zealand. Her period of bankruptcy is three years and she still has 3 months remaining of her period of bankruptcy.
He also wants to make sure that the constitution of the company cannot be changed so that he is always the chairman of any meetings and that at all meetings he must be present. He does not want this rule once passed ever to be changed.
Please advise Ken of the following:
- Can Joan and Catherine be appointed as directors of the company (3 marks)
- How does the company change it rules? (4 marks)
- How can Ken prevent the rule from ever being changed? (3 marks)
In your answer you are required to refer to relevant legislation and case law
- Cannot appoint Joan and Catherine as directors of the company.
- Because Joan has no expertise in running a companyandshe has been a housewife raising the children.. Because as a director, she must comply with duty of care，skill and diligence.Skills depend on whether the director is executive or non-executive and whether he has special qualifications. Special knowledge or experience – tested against the skill of a reasonable director with similar knowledge and experience.
- Catherines was recently made a bankrupt in New Zealand and she still has 3 months remaining of her period of bankruptcy. So that Catherine cannot be a company director while her bankruptcy remains undischarged. If she attempt to become a company director while her bankruptcy is undischarged, she will be breaking the law. Once her bankruptcy has been discharged, she is free to become a director again
- The company can change it rules under s 26 and s 37:
- Must pass a special resolution of members (75% of members present / proxy at meeting)
- Proper notice must be given s 184 (14 days notice for private and 21 days notice for public companies)
- Lodge change with the Registrar at ACRA
- Ken can prevent the rule from ever being changed by using entrenched provision.
According to S26A(1),
- An entrenched provision is included at the time of incorporation
- An entrenched provision is included after incorporation but is agreed to be an EP by all members
Alteration of Entrenched Provision S26A(4)
- Not by special resolution
- Can not be altered other than by > 75% or other special test.
END OF PAPER
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