Veil of Incorporation

Question: Discuss about theVeil of Incorporation. Answer: Introduction Traditionally, in the majority of the Commonwealth jurisdictions around the world, including Singapore, the law recognizes a company as a distinct personality (Bello Michael 2014). In other words, a corporate has an identity and existence that is separate from its members. The most significant impact of this legal recognition is that the obligations and debts that are accrued by the business belong to it and that in general unless the subject corporate is an unlimited company, the members of a company do not share its liabilities (Cheng 2010). Thus, the creditors of the corporate can only seek the settlement of their debts from the company. In case the company is adjudged insolvent and is incapable of settling the debts it owes, the creditors must bear the loss even in those circumstances where the individual members of the company are in a position to pay the debts. Under company law, the only obligation that the incorporators of company have is to contribute towards the outstandin g amount based on either the shares they have subscribed to in the company, or the amount that they have consented to contribute towards debt settlement, in the event it is a corporate limited by guarantee (Macey Mitts 2014). Ideally, this statutory obligation is only owed to the company and not the company's creditors. As such, in case the company shares have already been paid in full or were issued on a wholly paid basis, the incorporators of a company that is limited by shares lack additional liability to the company. Therefore, in the context of a limited liability company, the liability of the members to make contributions towards the company is only limited to the amount that they have settled to contribute. Nevertheless, whereas an incorporated company is recognized in law as a separate legal person' distinct from its members, there are various instances in which the courts disregard such separate legal person, and instead, regard the corporate and its officers or members as one for restricted purposes (Singapore Academy of Law 2016). Therefore, for instance, there can be situations where the courts hold the incorporators or officers of a company liable for the debts that have been incurred by the company. Accordingly, this holding by the courts is commonly identified as the doctrine of lifting or piercing the veil' of incorporation. The doctrine was developed in the famous English Case of Salomon v Salomon Co Ltd where the House of Lords held that although a company is a legal entity that is separate from its members, as an issue of law, the parties are divided by what is referred to as a corporate veil.' It is this corporate veil' that forms the basis of the courts ignoring the legal recognition of an incorporated company as a separate and distinct entity from its incorporators, thereby holding the incorporators or officers of a company liable to the debts incurred by a company (Millon 2010). The instances or circumstances in which the courts in Singapore pierce the corporate veil fall into two main categories, namely: at common law and by statute. Under statute, particularly in the Companies Act, there are at least three examples where this is expressly manifested (Singapore Academy of Law 2016). First, Sections 339(3) and 340(2) of the Companies Act allows the courts to pierce the corporate veil in those circumstances it establishes that a company has incurred debts without any probable or reasonable expectation that it would be in a position to settle the incurred debts. Accordingly, the collective effects of the aforementioned statutory provisions is that where a company contracts debts without any probable or reasonable expectation that it would be capable of paying the debts in future, any member or officer of the company who was aware of the company's inability to pay the debts but went ahead to contract the debts, is guilty of an offence. The officer or member of the company may, upon conviction, be made individually liable to entire or any part of the subject debts. Second, Section 340(1) of the Companies Act permits the court the pierce the corporate veil in those circumstances where it establishes that debts incurred by the company were as a result of business transactions that were aimed at defrauding creditors. The court may adjudge that any individual who had knowledge and was party to the fraudulent activities personally liable for whole or any part of liabilities or debts the company owes creditors. Finally, Section 403(2)(b) of the Companies Act allows the court pierce the corporate veil where it makes a determination that a company has incurred debts as a result of paying dividends that are in excess of the profits. In both principle and practice, dividends are only payable when the company is profitable in order not to unreasonably prejudice the company's creditors. Therefore, a Chief Executive Officer (CEO) or director of a corpo rate who willfully allows the payment or pays dividends well aware that the company has not realized any profits is liable to the company's creditors for the due debts (Singapore Academy of Law 2016) In contrast, apart from the aforementioned statutory provisions, the Singaporean Courts can pierce the corporate veil using the common law exclusions to the application of the separate personality doctrine. One common law exception is that involving the abuse or misuse of the corporate vehicle (Singapore Academy of Law 2016). Ideally, people establish companies for different reasons. However, there is no doubt that one of these reasons is to protect themselves from individual liability in the event the corporate fails. It was observed in Adams v Cape Industries Plc [1990] 1 Ch 433 that the mere fact that officers or members of a corporate use the corporate vehicle to insulate themselves from individual liability is not a reason for the courts to ignore the doctrine of separate personality. Nonetheless, the court has held in Prest v Petrodel Resources Ltd [2013] 2 AC 415 and Simgood Pte Ltd v MLC Shipbuilding Sdn Bhd Bhd [2015] SGHC 303 that this position is distinct where the officer s or members of a company misuse or abuse the company structure for improper purposes. Therefore, if a person already has particular obligations but tries to use the company vehicle to avoid the obligations in question, the courts will often disregard the separate personality nature of the company. For instance, in Jones v Lipman [1962] 1 WLR 832, the court held that an individual who has already consented to sell their house cannot evade this contractual obligations through transfer of the house to a corporate. Similarly, in Re Darby [1911] 1 KB 95, the court held that if a business is used to commit a deceitful act, the courts will treat such a company as well as its incorporators as one and the same. Therefore, if a corporate is established with an intention to defraud unknowing investors, the court can pierce the corporate veil and old the members or officers of the company liable even if the company and the incorporators are distinct and separate under the law. Subsequently, it is important to note that in Yap Sing Hock I, Public Prosecutor (1992) 2 MLJ 714, the court observed that there are unlimited purposes for which the court can pierce the corporate veil. Furthermore, these purposes include the discovery of engaging in trade practices with the enemy, finding of tax evasion, improper or illegal purpose, and on the basis of equitable consideration (Macey Mitts 2014; Singapore Academy of Law 2016) In conclusion, it is clear from the preceding discourse that the common law doctrine of lifting or piercing the corporate veil as was developed by the House of Lords in Salomon v Salomon Co Ltd continues to influence the Singaporean jurisprudence on Company law. The central principle concerning the status of companies as body corporates is that they are separate from their members and other controllers. Thus, the general rule is that the corporate veil will always be maintained. However, the courts in Singapore, as well as other jurisdictions such as Malaysia, have often recognized that this general rule may at times lead to injustice and promote the perpetuation of an illegality if it is strictly applied. Thus, for purposes of promoting the rule of law, prevention of abuse of the corporate vehicle, and access to justice, the Parliament and the courts have prescribed the various circumstances under which the corporate veil can be pierced. Under the Companies Act, there are at least three circumstances in which the courts may lift or raise the corporate veil, including (i) where they establish that a company has incurred debts without any probable or reasonable expectation that it would be in a position to settle the incurred debts; (ii) where they determine that the debts incurred by the company were as a result of business transactions that were aimed at defrauding creditors; and (iii) where it makes a determination that a company has incurred debts as a result of paying dividends that are in excess of the profits. On the other hand, in suo moto, the court can use the common law exclusion to the doctrine of separate personality, which is the abuse of the corporate vehicle, to raise the corporate veil. References Bello, A.S, Michael, O. 2014. Piercing the Veil of Business Incorporation: An Overview of what Warrants It. Review of Contemporary Business Research, Vol. 3, No. 2, pp. 117-138. Cheng, T.K., 2010. Form and substance of the doctrine of piercing the corporate veil. Mississippi law journal, 80(2). Macey, J. and Mitts, J., 2014. Finding order in the morass: The three real justifications for piercing the corporate veil. Cornell L. Rev., 100, p.99. Millon, D., 2010. The Still-Elusive Quest to Make Sense of Veil-Piercing. Texas Law Review, 89, p.15. Singapore Academy of Law. 2016. Ch.16 Singapore Company Law. [online]. Retrieved from: https://www.singaporelaw.sg/sglaw/laws-of-singapore/commercial-law/chapter-16 [Accessed 11 November 2016].