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COMPANY LAW
Introduction
The purpose of this topic is to introduce you to the two ways in which a company may raise
money for its business equity financing and debt financing.
o 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.
o In debt financing, the company borrows money from an investor who becomes a
creditor of the company.
For most purposes, the law regards shareholders as the owners of the company.
o They are the residual claimants of the company, in that their claims against the
company rank after the claims of the companys creditors.
o If a company does badly and becomes insolvent, the creditors will be paid a portion
of their debts in the companys insolvent liquidation, whereas the shareholders will
get nothing.
o But if the company does well, all the companys profits belong prospectively to its
shareholders, after paying off the fixed sums owed to the companys creditors.
Hence, the risks undertaken by a shareholder are higher than a creditor, but the
returns are also potentially higher.
The main instrument in equity financing is the share.
o The financier provides the company with money and in exchange obtains a share,
which entitles him to certain rights in the company.
o Another term which often crops up in discussions about the equity of a company is
capital. We will discuss the meaning of this term in a next section.
o If a company has the necessary profit record or sufficient capitalisation, it may be
listed on a stock exchange. This makes it easier for the company to raise funds from
the public. The process of offering shares to the public is called a flotation.
It is important to note that in very small companies the purpose of issuing shares is usually
not meant to raise capital, as depicted aforesaid, but to give the shareholders control over the
company.
o In a two-person company, it is usual for the company to issue two $1 shares to the
two founders of the company.
o The issue of the shares is meant to give the shareholders complete control over the
company, for the shareholders will typically use their voting rights to appoint
themselves as directors of the company.
o Financing for the company will come from elsewhere, including shareholder loan,
bank loan and overdraft facilities secured on the controllers personal assets.
It is sometimes necessary for a company to borrow money to finance its expansion, to meet
cash flow needs or for other business reasons. Credit is an integral part of the modern
COMPANY LAW
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.
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
II.
EQUITY FINANCE
Share Capital
1.
Meaning of capital
Capital is used in company law in a restricted sense which does not coincide with the
broader way in which it is used in ordinary speech or even by company financiers.
o Most dictionaries would define capital (in the financial sense) as wealth available
for or capable of use in the production of further wealth.
o For company lawyers, however, capital is a measure of value and what it values is the
consideration which the shareholders have provided to the company in exchange for
their shares.
o Thus, if the shareholders have contributed cash and other assets to the extent of
$10,000 to the company in exchange for their shares, then $10,000 is the value of the
companys issued capital, and this is also the paid-up capital.
o It is crucial to bear the above paradigm in mind. A companys capital is not a
measure of its current wealth. It is a historical measure of the amount that
shareholders have contributed (ie invested) in the company. In this sense it is no
different from the money that creditors have lent to the company. That is the reason
why some people have argued that share capital is a form of perpetual loan with no
certainty of return.
o Other than selling their shares, shareholders can only get back the capital they have
invested in the company in three situations: when the company reduces its capital,
when the company buys back its own shares, or when the company is wound up.
The Companies (Amendment) Act 2005 has simplified the law on capital considerably. Still,
there are a few concepts that you need to know.
(a) Authorised capital (before 30 January 2006)
The authorised capital of a company is the pre-set maximum limit to the number of shares
the company can issue.
o This is set when the company is incorporated but can be increased later: old s.
22(1)(c), 71(1)(a), 71(4).
o This was abolished by the Companies (Amendment) Act 2005. Good riddance!
COMPANY LAW
The concept of authorised capital is a largely useless concept that is liable to mislead.
o A company is not required to issue all the shares it can issue.
o For eg, a company could be incorporated with an authorised capital of $10 million,
divided into 10 million shares with par value of $1, but only issued two shares. The
issued capital of the company would be $2. The authorised capital of $10 million
would seem impressive to the uninformed, when in truth it was thoroughly
misleading.
o The abolition of authorised capital means that investors can now focus on the issued
capital of a company without being sidetracked by its authorised capital.
(b) Issued capital
The issued capital is the aggregate value of the consideration received by the company for
all the shares that it has issued.
o There is no minimum capital requirement under Singapore law, except in very limited
situations, for example, for banks and insurance companies.
o In practice many small companies are thinly capitalised and rely on shareholder loans
for their business operations.
(c) Paid-up capital and uncalled capital
The paid-up capital is the amount that is paid up on the shares that have been issued.
o Shares may be issued but not fully paid up.
o Issued capital = paid-up capital + uncalled capital
o Uncalled capital may be called up by the company any time during its existence or
upon liquidation. A company may therefore retain the unpaid portion on its shares as
a reserve to be called up in the event it is wound up: s 65(2). A share certificate must
state the amount that remains unpaid on the shares: s 123(1)(c).
It is now almost invariably the practice for shares to be fully paid up on their issuance. As
such, a companys issued capital will be the same as its paid-up capital. Uncalled capital is
very much a matter of historical interest.
2.
COMPANY LAW
Par value and the share premium account were abolished by the Companies
(Amendment) Act 2005. Section 62A(1) now states that shares of a company have no
par or nominal value.
The par value, while nominal and had no connection whatsoever with the innate worth of the
share, had an effect on equity financing.
o A company generally cannot issue shares below their nominal value on terms that the
shareholders have no further obligation to pay the difference: Ooregum Gold Mining
Co of India v Roper [1892] AC 127.
B.
Shares
1.
Definition
Rights of shareholders
3.
COMPANY LAW
It is trite law that shareholders do not have any interests in the companys assets by
virtue of their capacity as shareholders of the company. The legal rights attached to
shares are broadly classifiable into 3 groups:
(i)
Rights in relation to the payment of dividend (income rights);
(ii) Rights of voting at company meetings (voting rights);
(iii) Rights to the return of capital on an authorised reduction of capital, share
buyback, or in a winding up (capital rights).
Types of shares
o
o
As you learnt earlier, the types of shares that a company may issue are not generally
restricted by the Companies Act.
A companys shares may be divided into different classes, e.g. preference and
ordinary shares, A and B types of ordinary shares and ordinary and deferred
shares. What are the reasons for creating different classes of shares?
COMPANY LAW
The definition is odd because often in practice, a preference share is one which has
both voting rights and a right to share in the surplus. Indeed, the definition does not
apply to section 75 which requires that all rights attached to preference shares must
be set out in the memorandum and articles of association.
The Companies (Amendment) Act 2014, s 3 has deleted this definition.
Deferred shares are shares that have their right to dividends or capital deferred to
those of ordinary shareholders.
Special rights may be attached to particular shares for so long as those shares are held
by a named individual.
This type of right has been included in the articles of association of some privatised
companies at the time when the businesses were first transferred from state to private
ownership.
Section 10 of the Newspaper and Printing Presses Act (Cap 206, 2002 Rev Ed) creates a
special type of shares called management shares.
o A management share entitles the holder either on a poll or by a show of hands to 200
votes upon any resolution relating to the appointment or dismissal of a director or any
member of the staff of a newspaper company.
o This makes an exception to the mandatory rule in section 64 that an ordinary share in
a public company is entitled to only one vote.
o But as stated earlier, s 64 has been deleted by the Companies (Amendment) Act 2014.
4.
Ownership of shares
o
COMPANY LAW
Transfer of shares
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But the position of a transferee in Singapore is helped by section 128, which requires
the directors, if they refused to register a transfer, to serve on the transferee, within
one month after the date the transfer was lodged, a notice of refusal and a statement
setting out the facts which are considered to justify the refusal.
Compare this with section 771 of the UK Companies Act 2006, a new provision in
English companies legislation, which requires the company to provide the transferee
COMPANY LAW
with such further information about the reasons for a refusal to register a transfer as
the transferee may reasonably require.
*Xiamen International Bank v Sing Eng (Pte) Ltd [1993] SGHC 126; [1993] 2 SLR(R) 176
*HSBC (Malaysia) Trustee Bhd v Soon Cheong Pte Ltd [2006] SGHC 193, [2007] 1 SLR (R)
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(b) Transfer involving share certificates
o
A share certificate is prima facie evidence of title (section 123(1)) and contains a
statement as to whether the shares are fully or partly paid.
The transfer of shares that are not traded on the stock exchange is effected by the
lodgement of an executed transfer form and the share certificate with the company:
s.126.
The lodgement of a transfer form carries with it an implied warranty that the form is
genuine.
Only the registered owner may execute the transfer form; a beneficial owner has no
power to do so.
o
o
Xiamen International Bank v Sing Eng (Pte) Ltd [1993] SGHC 126; [1993] 2 SLR(R) 176
o
Unless there are share transfer restrictions, upon receipt of the transfer form and the
share certificate, a company must effect the transfer within a month: section 130.
III.
For stocks traded on the stock exchange, transfer forms are no longer necessary.
Scripless trading and the creation of the Central Depository Pte Ltd (CDP) has
resulted in transfers being done electronically with the CDP only being obligated to
send a confirmation note to the buyer and seller: section 130I. Indeed, any transfers
so effected and thus registered with the CDP are deemed to be conclusive and cannot
be rectified: s.130J.
DEBT FINANCE
Debt financing involves the company borrowing money from the financier. This part
introduces you to the debenture and the charge.
A.
Debentures
COMPANY LAW
The term debenture is defined in the Companies Act by listing instruments which
are included and providing another list of instruments which are expressly excluded:
s.4(1).
However, such a laundry list definition is not meant to be exhaustive and it remains
for the courts to determine the ambit of the term debenture.
Levy v Abercorris Slate & Slab Co (1887) 37 Ch D 260, 264 per Chitty J
Note that a company does not have to issue debentures as it can borrow commercially or issue
other types of commercial papers such as promissory notes or bills of exchange.
1.
Transfer of debentures
2.
Debentures like shares may be listed on the stock exchange but unlike shares may be
issued in bearer form, that is, the title may be transferred merely by delivery.
If it is issued in registered form, they are transferred in the same manner as shares: s
93(1).
Redemption of debentures
o
o
3.
Unlike shares, debentures may be redeemed unless they are perpetual debentures:
s.95.
The security for such perpetual debentures may, however, be enforceable by an order
of the Court on the application of the holder if the Court is satisfied that certain
conditions exists: s.100.
Reissue of debentures
4.
Provided that there are no contrary provisions in the M&A, debentures which are
redeemed may be reissued with the same rights and priorities as if the debentures
were never redeemed: s.96.
The intention of the section is to allow a revival of the original transactions and not
the creation of new ones.
Rights and remedies of debenture holders
o
o
o
The main sources of a shareholders rights are the articles, Companies Act and
shareholders agreement, if any.
As for a debenture holder, his rights are mainly to be found in the contract
constituting the debenture, and the security documents, if any.
Where the debentures are secured, the usual remedy on default by the company is the
appointment of a receiver, or where the security extends over all or substantially all
the companys assets, a receiver and manager.
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B.
COMPANY LAW
Security: charges
General reading: Woon, pp. 521-548 (note that some parts of it are outdated)
1.
Not many companies are so creditworthy that financial institutions will give them loans
without asking for some form of security in return, although it is arguable that in theory banks
should lend on a cash-flow basis.
Note that the meaning of security here is different from securities as the latter is used to
refer to shares, debentures, options etc.
2.
There are only four forms of consensual real security known to English and Singapore law:
o Pledge;
o Contractual lien;
o Mortgage; and
o Charge.
English law, unlike American law, draws a sharp distinction between security and quasisecurity.
o A quasi-security performs a security function but is not regarded as security under
English law.
o Notable examples of quasi-security include the hire-purchase agreement, conditional
sale, retention of title, set-off, flawed asset etc.
3.
Charges
o
o
Thai Chee Ken v Banque Paribas [1993] SGCA 38 ; [1993] 1 SLR(R) 871
o Pan-El needed money to pay for a tranche of shares in Orchard Hotel (Singapore) Pte Ltd.
Banque Paribas was willing to lend the money but it required security. It asked for what
it termed was a pledge of the shares. Unfortunately Pan-El was not able to give a
pledge, as it was prohibited from doing this by a negative pledge it had given to other
creditor banks.
o To solve the problem, the transaction was structured differently, in the form of a sale and
buyback. The bank would purchase the shares from Pan-El on 31/8/1985, and
simultaneously Pan-El would agree to repurchase the shares from the bank at a higher
price on or before 31/12/1985. The sale and purchase price bore no relation to the value
of the shares. Instead they reflected the financing that Pan-El required and the interest the
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COMPANY LAW
Bank would have earned. In economic terms the new structure was no different from the
bank taking a mortgage/charge over the shares. Instead of relying on its right to sell the
shares on default of Pan-El, the bank would rely on its ownership of the shares to perform
a security function.
Subsequently, Pan-El went into liquidation. Thai Chee Ken was appointed its liquidator.
A liquidator, for your information, is the person appointed to conduct the affairs of a
company in liquidation. He is usually an accountant. The Companies Act and insolvency
legislation confer on him various powers to set-aside transactions entered into by the
company before it is wound up, and Thai sought to rely on one of the provisions, section
131(3), which imposed registration requirements on certain charges created by a
company. Thai argued that the transfer of the shares to the bank was not a sale, but a
mortgage, and Pan-Els right to buy-back the shares was an equity of redemption. Next,
he argued that the mortgage was void against him, as contrary to section 131(3), the
mortgage had not been registered. The Court of Appeal rejected his arguments.
The Court of Appeal pointed out first that it was not argued that the documents were a
sham or disguise designed to conceal the true agreement between the parties. What the
court was saying here was that the liquidator did not argue that the documents did not
reflect the parties true intention of the legal relations that they intended to create between
themselves. If it was argued that the documents were a sham, the court would have to
discover by extrinsic evidence what the parties true agreement was and to disregard, if
inconsistent with the true agreement, the written words of the sham agreement. 4
Second, the Court of Appeal held that as it was not argued that the documents were a
sham, their proper characterization was a matter of construction of the documents.5 The
court went on to explain its approach on construction. It held, following the English
courts, that while the court is scrupulous to ensure that the policy of protecting creditors
enunciated in section 131 was not evaded by the adoption of a legal shell that apparently
and formally lied outside the statutory provisions, the court should not take a hostile
attitude and presumed that evasion of the policy was intended. The justification for this
was that different legal forms could be used to achieve the same economic object or end
and that some legal forms legitimately fell outside the statutory provisions.
Guided by this principle, the Court of Appeal construed the documents and concluded
that they constituted a genuine sale and buyback. This was so even though there were
elements in the documents that were at variance with the transaction being a sale and
buyback. First, the prices bore no relation to the value of the shares at the date of the two
agreements but were based simply on the financing requirements; and secondly, there
were some terms in the repurchase agreement which were not usually found in a contract
for the sale of shares.
For example, the court would look at the post-contractual conduct of the parties, even though generally speaking
post-contractual evidence was usually inadmissible. This was referred to as the external route of construction by
Staughton LJ in Welsh Develoment Agency v Exfinco. An example is the dressing up of a tenancy agreement as a
licence, in order to avoid creating a protected tenancy under rent control legislation. If a transaction relied on as a
sale was a sham, the court might strike it down as a security for a loan.
5
This was referred to as the internal route of construction by Staughton LJ, and this involved a two-stage process.
First, the rights intended by the parties to be created was to be ascertained from the terms of their agreement, and
then the court, at the second stage, would apply the relevant tests to the rights thus ascertained to characterise the
nature of the transaction which the parties had created. The internal route of construction was applied in some
high profile recent cases, which we will look at in a moment, when the courts held that floating charges, rather
than fixed charges as the parties had claimed, had been created.
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COMPANY LAW
It may be essential to determine if the transaction creates a charge as it may have a bearing on
the obligation to register the transaction and the priority of the security so created. Is an
agreement to give a charge a charge?
*Asiatic Enterprises (Pte) Ltd v UOB [1999] SGCA 85; [1999] 3 SLR(R) 976 reversing UOB
v Asiatic Enterprises (Pte) Ltd [1999] SGHC 167; [1999] 2 SLR(R) 671
4.
Registration of Charges
Effect of Registration
o
o
o
*Asiatic Enterprises (Pte) Ltd v UOB [1999] SGCA 85; [1999] 3 SLR(R) 976 reversing UOB
v Asiatic Enterprises (Pte) Ltd [1999] SGHC 167; [1999] 2 SLR(R) 671
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6.
COMPANY LAW
Types of charges
o
o
o
No particular form of words is required to create the different types of charges. It is a question
of interpretation of the particular loan instrument to determine whether the security created is
a fixed or floating charge.
The classical description of the characteristics of a floating charge was that of Romer LJ in Re
Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284, 294.
Re Yorkshire Woolcombers Association Ltd
I certainly think that if a charge has the three characteristics that I am about to mention, it is
a floating charge.
(1) If it is a charge on a class of assets of a company present and future;
(2) If that class is one which, in the ordinary course of business of the company, would be
changing from time to time; and
(3) If you find that by the charge it is contemplated that, 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 I am dealing with.
The above must now be read in light of Re Spectrum Plus Ltd.
Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyds Rep 142
*Dresdner Bank AG v Ho Mun-Tuke Don [1992] SGCA 75; [1992] 3 SLR(R) 307
Re Cosslett (Contractors) Ltd [1998] Ch 495 (CA)
*Agnew v CIR (also reported as Re Brumark Investments Ltd) [2001] 2 AC 710 (PC)
affirming [2000] 1 BCLC 353 (CA, NZ)
o PC stressed importance of actual control over the collateral (book debts and their
proceeds). The decision cast doubt on the Siebe Gorman case.
o PC refused to follow the New Bullas case, a decision of the English Court of Appeal.
It is not possible to have a fixed charge over the book debts (where there is sufficient
control) and a floating charge over the proceeds (where the debtor can use in its
business once collected).
*Re Spectrum Plus Ltd [2005] UKHL 41; [2005] 2 AC 680; [2005] 3 WLR 58 reversing
[2004] EWCA Civ 670, [2004] 3 WLR 503
o The English Court of Appeal in this case refused to follow Agnew v CIR.
o Instead, it followed Siebe and decided that a fixed charge could be created by placing
a certain restriction on the freedom of the chargor to use the proceeds of its book
debts once paid into a bank account as required by the terms of the debenture.
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o
o
COMPANY LAW
On appeal, the House of Lords, despite strong arguments that this would disrupt
banking practice, held that Siebe Gorman was wrong.
The HL held that to create a fixed charge over book debts, the bank needs to have
actual control over the book debts and the collection through payment into a blocked
account. It is not enough to contractually create control; the bank must in fact
exercise it.
As the Spectrum case has the usual effect and does not only apply prospectively, old
banking documentation based on Siebe Gorman would have to be looked at again.
Dora Neo Fixed and Floating Charges over Book Debts: A Post Mortem on the Debate
(2005) 17 SAcLJ 617
Lee Eng Beng Surviving Spectrum Plus: Fixing Charges over Debts (2005) 17 SAcLJ 932
7.
Until a floating charge crystallises, the chargor is at liberty to use the assets charged
in the ordinary course of business.
The crystallisation of a floating charge converts it into a fixed charge 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 crystallise when the creditor
takes steps to take possession of the security or generally upon the winding up of a
company or its business.
*Dresdner Bank AG v Ho Mun-Tuke Don [1992] SGCA 75; [1992] 3 SLR(R) 307
A floating charge also loses priority to preferential debts in a winding up or receivership:
s.226, s.328(5).
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