Title: Legal Nature of Companies

The information below provides a guide to the basics of incorporation of a company and the relevant requirements in the Companies Act (Cap 50). It should be read with the relevant legislation1. Always seek legal advice if you are unsure of any matters.

1. OVERVIEW 1.1 You have decided to start a business and you want to incorporate a company.

But wait! There are some essential things you would need to know before you decide to incorporate a company in Singapore. The purpose of this write-up is to let you know what the essential pre-incorporation matters are before you embark on your entrepreneur journey. 1.2 This write-up provides information on:

1) 2) 3) 4) 5) 6)

what is a company; the different types of company; what is limited liability; the rule of separate legal personality; exception to the rule of separate legal personality; and contracts that circumvent limited liability;

2. WHAT IS A COMPANY 2.1 A company is a business entity registered under the Companies Act (Cap 50).

It is a legal entity with a separate identity from those who own or operate it. Therefore it can be considered as an artificial person created by the law. The Companies Act2defines company to mean companies incorporated pursuant to the Act. We usually refer to such companies as Singapore registered companies or local companies.
1

The Companies Act and the Regulations can be viewed from http://www.acra.gov.sg/Legislation/Companies+Act.htm 2 Section 4 of the Companies Act

3. THE DIFFERENT TYPES OF COMPANY 3.1 The Companies Act provides for the incorporation of different types of

companies, classified by reference to the basis and extent of the members liability and according to whether they are private or public companies. 3.2 Most companies in Singapore are limited liability companies which mean the

liability of the members is limited by shares or by guarantee. Some companies are unlimited companies which means the members have unlimited liability. 3.3 Companies limited by shares are the most common form of company in This type of

Singapore. They are suitable for most general business activities.

company has a share capital and the liability of each member is limited to the amount, if any, unpaid on their shares. 3.4 Companies limited by guarantee are companies formed on the principle of

having the liability of its members limited to the respective amounts that the members guarantee to contribute to the property of the company if it is wound up. This type of company does not have a share capital and its members are guarantors rather than shareholders. 3.5 Below are the types of companies incorporated in Singapore. For the purpose

of this write-up, we will only touch on local companies incorporated under the Companies Act. a) Private Company3 This is a locally incorporated company where the maximum number of shareholders is limited to 504.

Section 4(1) of the Companies Act defines a private company as (a) any company which immediately prior to 29th December 1967 was a private company under the provisions of the repeals written laws; (b) any company incorporated as a private company by virtue of section 18; or any company converted into a private company pursuant to section 31(1), being a company which has not ceased to be a private company under section 31 or 32. 4 Section 18(1)(b) mandates that a private company limits the maximum number of shareholders to 50 in its memorandum or articles.

b) Exempt Private Company This is a private company:

which has not more than 20 shareholders, and none of the shareholders is a corporation holding direct or indirect beneficial interest in the shares; or

which is wholly owned by the Government and which the Minister, in the national interest, declares by notification in the Gazette to be an exempt private company5.

c) Public Company limited by shares A public company limited by shares is a locally incorporated company in which the number of shareholders can be more than 50. A public company must register a prospectus with the Monetary Authority of Singapore before making any public offer of shares and debentures. d) Public Company limited by guarantee A public company limited by guarantee is usually not a trading company but one which carries out non-profit making activities that have some basis of national or public interest, such as for promoting art, science or charity etc. The Minister may approve the registration of the company without the addition of the word Limited or Berhad to its name. 4. WHAT IS LIMITED LIABILITY

4.1

Limited liability in this context means the company's debts are its own and

members are protected from personal liability unless they are negligent or gave personal guarantees. The liability of the members is limited to the amount that they each agreed to contribute as capital to the company. If this amount has already been fully paid to the company, then the member need not contribute any more towards the companys debts. If the amount has not been fully paid, then the members liability is limited to the unpaid amount.

Section 4(1), Companies Act

4.2

The effect of limited liability is that a member of a company limited by shares

is generally not required to contribute amounts from their personal asset, beyond the subscription price of their shares, to meet the debts of the company.

5. THE RULE OF SEPARATE LEGAL PERSONALITY

5.1

Connected to the concept of limited liability of shareholders of a company, the

law treats a company as being a separate person from its members and those who manage its operations. This is the doctrine of separate legal personality.

5.2

The company as its own legal person, has the following characteristics:

a)

has rights to own properties;

b)

can sue or be sued in its own name;

c)

has perpetual succession, the company as its own legal entity, will continue in law with its own identity regardless of changes in its membership;

d)

can enter into contracts with its members, directors or employees;

e)

can enter into contracts with suppliers and customers; the companys obligations and liabilities are its own and not those of its participants6; and the companys rights are its own and not those of its participants.

f)

g)

5.3

The legal rules that separate the company from its participants are commonly

referred to as the corporate veil.

Generally, the participants (including the shareholders and directors) of a company are not personally accountable for the debts and losses of the company.

6. EXCEPTION TO THE RULE OF SEPARATE LEGAL PERSONALITY

6.1

Although the general rule is that a company and its participants must be

treated as separate legal entities, there are circumstances where the courts will be asked to lift the corporate veil and ignore the separate personality of the company.

6.2

This request will normally come from a creditor of the company, who may

want the major shareholders or directors to be held liable for the companys debt.

6.3

In some cases, the courts will lift the corporate veil and treat the company and

one or more of its participants as the same person. In some circumstances, the court will deem it appropriate to look through the veil of incorporation to discover the identity of the participants in the company and impose liability upon them.

6.4

The corporate veil may be lifted or pierced in the following situations:

a)

the corporate form is used to avoid an existing legal duty or obligation;

b)

the company is being used to perpetrate a fraud;

c)

the company is acting as the agent or partner of the controller; or

d)

other situations as the courts deem fit.

6.5

Besides the above-named situations, the wrongful or fraudulent trading

provisions under section 340(1)7 and section 339(3)8 of the Companies Act operate
7

Section 340(1) - If, in the course of the winding up of a company or in any proceedings against a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the Court, on the application of the liquidator or any creditor or contributory of the company, may, if it thinks proper to do so, declare that any person who was knowingly a party to the carrying on of the business in that manner shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court directs. 8 Section 339(3) - If, in the course of the winding up of a company or in any proceedings against a company, it appears that an officer of the company who was knowingly a party to the contracting of a debt had, at the time the debt was contracted, no reasonable or probable ground of expectation, after taking into consideration the other liabilities, if any, of the company at the time of the company being able to pay the debt, the officer shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $2,000 or to imprisonment for a term not exceeding 3 months.

to lift the corporate veil in some circumstances. The Companies Act also permit the piercing of the corporate veil and allows claims to be made against specified corporate participants for the debts and obligations of the company9.

7. CONTRACTS THAT CIRCUMVENT LIMITED LIABILITY

7.1

There are certain situations whereby a member of a limited company may

agree separately with a creditor to be personally responsible for a companys debts. This will be a contract between that member and the creditor. A common situation is that a major creditor such as a bank may ask the members of the company to provide a guarantee to the bank of the amount loaned to the company. This would mean the members of the company agree with the bank to pay the companys debt if the company is unable to do so.

7.2

The effect of such agreement is to negate the benefits of limited liability for the

members of the company in respect of the debt that forms the subject of the agreement.

Sections 145(10), 144(2) and 403(2), Companies Act