Effects of Incorporating a Singapore Company
A company is not a natural person but an artificial entity through which one or more person(s) can carry out their business. The law vests the company with rights, duties and obligations which it has to fulfill. A company is a non-natural person that is invisible as well as intangible. Nevertheless, the creation of a company confers specific rights as well legal obligations on the company and its shareholders. These are discussed here.
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The Singapore Companies Act defines a company as “a company incorporated pursuant to this Act or pursuant to any corresponding previous written law.” This definition implies that a company comes into existence on its incorporation.
After incorporation, the company acquires a name that is stated in the Constitution. The company can exercise all powers and functions of an incorporated company under its name from the incorporation date.
This article will highlight the legal status of an incorporated company and explain some of the important cases which helped to create the current legal framework.
On incorporation, a company acquires a legal personality which is distinct from that of its members. Being a separate entity, it has its own name and has to act under that name. This arrangement gives rise to the following:
- The assets of the company are separate from its members.
- The company has the capability to own its property.
- The company can incur debts, maintain a bank account and can sue and be sued in its own name.
- The company can enter into contracts.
- Shareholders of the company are not liable for any acts of the company irrespective of the amount of share capital that they hold.
CASE: SALOMON V SALOMON & CO LTD (1897) AC 22
Aron Salomon was a shoe and boot manufacturer. He was carrying his business under the name ‘A Salomon & Co.’ as a sole trader. His children wanted a share in the business and Salomon created a new limited liability company. Salomon held 20,001 shares and gave his wife and five children one share each. Salomon sold the business to the company for £39,000 which also included an amount of £10,000 as a debt to him. The business was now in the form of a company, and Salomon was its main equity-holder and also the holder of the company’s debentures. The company eventually faced difficulties and was under the process of liquidation. The company’s assets were sufficient to pay off the secured creditors which included Salomon, but payment to the unsecured creditors of the company was not possible. The liquidator appointed to wind up the company sued Salomon stating that Salomon was personally liable for the debts of the company. The judge of the High Court and the Court of Appeal agreed, ruling that Salomon had set up the company merely to transfer his business and he being the principal, the company in reality was his agent. Being the principal, the court further stated that Salomon was liable for the debt to the unsecured creditors. The Court of Appeal stated that the only reason Salomon established a company was to reduce his liability and for all other purposes the business operated as before.
However, the case was appealed to the House of Lords which held that a properly incorporated company results in the existence of a separate person wherein the members would not be held liable for its losses. Salomon had set up the company in compliance with the Companies Act and fulfilled all the requirements of the Registrar of Companies. Thus, the company, from its incorporation date is a completely different person than its members, irrespective of whether or not the exact same business is being carried out through it.
This case is one of the seminal cases in Company Law. This case clarifies the separate legal personality of a company which is independent of that of the members that comprise it. The landmark judgement in this case has a direct impact on the other effects of a company incorporated as per the law, that are explained below.
Due to a company’s separate legal personality, the company can own property in its name. The company can enjoy this property and sell it in its name as well. The company, and not the members, is the person who owns, controls and manages the property.
CASE: MACAURA V NORTHERN ASSURANCE CO LTD (1925) AC 619
Macaura was the owner of an estate in Ireland. He sold the timber of his estate to a company named ‘Irish Canadian Sawmills Ltd’. However, the insurance for the timber was in his name and not in the name of the company. He and his nominees held the shares of the company and he was also one of the substantial creditors of the company. Two weeks after insuring the timber, a fire broke out and destroyed the timber. Macaura claimed the insurance proceeds for himself under the policy he held. The insurance company refused to pay Macaura the claim amount. The House of Lords extended its support to the insurance company. The reason behind this was that since Macaura sold the timber to the aforementioned company, he had given up his interest in it. The case was finally disposed of and the insurance company did not honor Macaura’s claim. To get the claim amount, the insurance for the timber should have been in the name of the company and not in Macaura’s name since the company is a separate legal personality.
Once the property is in the name of a company, the company is its sole owner. No member can claim any interest in it.
Liability of Members
The liability of the members of a company depends upon the kind of company incorporated (company limited by shares, company limited by guarantee, etc). The liability of a company is its own and not of its members. For example, in a company limited by shares, the liability of the members is limited up to the value of shares that they hold. No additional capital contribution towards the company is required.
CASE: RE APPLICATION BY YEE YUT EE (1978) 2 MLJ 142
Yee was the company secretary of Trans-Market Research Pte Ltd which was a wholly-owned subsidiary of an American company. When the company retrenched the staff, a dispute arose with respect to the retrenchment benefits. The Industrial Arbitration Court granted an award against the company even though the company was absent from the proceedings. Meanwhile, the company appointed Yee as a director. The company did not comply with the Arbitration award. The award held Yee to be personally liable since he was a director. The High Court of Singapore decided that a director is not liable for any debts of the company and would only be liable in case of breach of his duties or any fraud that he or she commits.
Thus, the company cannot hold its members liable for any debt that occurs in the company.
Ability to Sue and be Sued
The company is capable of suing and can also be sued in its name. The company can sue with respect to any of its rights or duties. For example, if a company enters into a contract, the company owns all rights in the contract against the other party.
In case of breach of duties by a director, the company can enforce its rights against its directors.
CASE: FOSS V HARBOTTLE (1843) 2 HARE 461
Two shareholders of a company (Victoria Park Company) initiated an action against the directors and other officers of the company. The action was due to improper use of the company property. The court was of the view that the injury caused in this case was to the company and the company therefore has the standing to sue.
Thus, the members and the company are not the same.
Members may come and go, but the company can on for ever. During the war all the members of one private company, while in general meeting, were killed by a bomb, but the company survived – not even a hydrogen bomb could have destroyed it.L.C.B Gower
Perpetual succession refers to the continuous existence of a company. The company is immortal and the legal existence of the company is separate from the owner. In comparison to other business structures, the company is entitled to a continuous life. For example, in the case of a partnership firm, the incapacity or death of the partners affects its continuity. On incorporation, the company acquires an independent status separate from the lives of the members who constitute it.
A company continues to exist unless it is properly wound up or struck off the register as per the Company law provisions. The company survives even if all its members die. The status of the company is “perpetual”. There is no effect on the company either by the:
- Death or
- Insolvency of its members.
CASE: RE NOEL TEDMAN HOLDINGS PTY LTD (1967) QDR 561
In this case, a husband and wife were the only shareholders and directors of the company. Both of them died in an accident and were survived by their infant child. In spite of their death, the company was still in existence as per the law. According to the Articles, the directors had to approve the transfer of their shares. Since there were no directors, the court decided to appoint new directors. However, members were required to vote for their appointment and the company had no members. The court then decided to allow personal representatives of the deceased to appoint new directors that could assent on the transfer of the shares.
This case clarifies that even in case of death of all the members of the company, the company will still exist. The perpetual existence of the company contributes to the company’s stability as well as long life.
A company will come into existence on registration under the Company Law in Singapore. The company law treats a corporation as a “person” and it has rights and obligations as a separate person, distinct from its members. When deciding to start up a business in Singapore, it is essential to understand the different types of structures and the rights and duties each bestow.