BSP1004 Biz Law (Chapter 1 – 3)

Chapter 1: INTRODUCTION TO LEGAL ENVIRONMENT OF BUSINESS

INTRODUCTION TO LAW
What is law? (Prospective effect, not retrospective)
Law is a set of rules. If there are no rules in the society, it will be completely chaotic. This, it
is absolutely necessary that there be laws. It is also absolutely necessary that there are
mechanisms in place in a society to enforce those laws.
 Why do you need laws? To maintain order and stability
 Which country’s laws will we be looking at? Singapore
 Is there a connection between law and business? Yes
 If so –Why should the business know about the law?
Business can have some basic knowledge of law and protect your own interests

Law and Ethics

What is ethics? A set of moral principles and values
(a) Can something which is illegal also be unethical? Murder, Kidnap
(b) Can something be legal but unethical?
Abortion, Animal testing, Cheating on partner, Selling cigarettes and legalized drugs
(c) Can something be illegal but ethical? Speeding the car because someone is really sick
(d) In this course, we will be concentrating on law.

2 SOURCES OF LAW
1) Statutes/Acts/Legislation - Made by Parliament
[Faster, takes shorter time to be passed down]

 Can statute law grow/change over time?

Yes, new ones are implemented and old ones need to change
 How/where can you access them? Government website http://statutes.agc.gov.sg
Note: Bills are not binded, so it is not consider as law yet.

Unlike United States, Singapore does not have jury.

NO JURY
Advantages Disadvantages
More transparent Emotions can be swayed
More participative Can be bribed
Based on facts

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 2) Cases – Made by Judges [Slower, takes longer time to be passed down]
Case law, just like statute law can grow/change over time.

 General doctrine of precedent:

Once the case has been decided, future cases that are the same will be bound the earlier
decision provided that the earlier decision was made by a higher court in the same
hierarchy.
 Why is there such a doctrine? To ensure consistency and fairness to the cases
 How/where can you access them? Law Net www.lawnet.com.sg

EXAMPLE
Court Hierarchy
Highest High Court – (2013)
- Doctors in principle can be liable in negligence.
Court of Lower Court – (2015)
Appeal - Another doctor is being sued in negligence,
Supreme lower court is bound by the 2013 High Court
Court decision.
High Court  What if that doctor appeals all the way to the
Court of Appeal – is the Court of Appeal
bound by the 2013 HC decision? No, because
higher court is not bounded by lower court
State Court aka. decision.
Subordinate Court Lower Court – (2015)
Lowest - Lawyer being sued in negligence – is the court
bound by the ‘doctor’ cases?
It is to the discretion of judge depending on the
similarity between cases.
Statutes and Cases
 The legal solution to any problem lies in looking at the relevant statutes and cases.
 Would a typical business actually refer to statutes and cases? Generally, NO.

Statute Law Case Law

US Yes Yes Advantages of Statute Advantages of Case

Law (Codified) [China, Law [Singapore, US
China Yes No Indonesia etc.] etc.]
Fairer in judging because More flexibility for
India Yes Yes
their government set the judges to judge based on
Indonesia / Thailand / Yes No law a case-to-case basis
Vietnam / South Korea
i.e. Democracy because
the citizens elected the
government and not
judged by some
unknown person

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 CRIMINAL AND CIVIL PROCEEDINGS
Proceedings heard in court may be “criminal” or “civil” in nature.
• What are some examples of criminal matters? Theft, Murder, Arson, Drug Trafficking
• When will the doing of something amount to a crime?
Harmful actions which are against public interest or safety
• Issues that affect the private rights and obligations of two parties is civil matter.
Public interest not affected!
• What are some examples of civil matters? Copyrights, Divorce, Breach of Contract

Criminal Civil
Parties State (Public Prosecutor) v Defendant Plaintiff v Defendant

Aim - To punish perpetrator of the crime To seek remedy for a private wrong
- To deter others from committing
same crime
Discretion Whether or not to initiate an action lies Whether or not to initiate an action lies
with the State with the plaintiff
Terminology Guilty, Jail, Fine, Sentence, Compensation, Asset, Losses, Breach,
Imprisonment, Cane, Victim Settlement, Dispute, Case
Burden of Proof Higher Lower
Public prosecutor must prove that case Plaintiff must prove the case on the
beyond reasonable doubt. Court must balance of probabilities
be more satisfied n evidence against
defendant due to higher consequences.
Decision of the Court Guilty or not guilty Liable or not liable

It is possible that both civil and criminal proceedings arise out of the same set of facts.
• What are some examples? Reckless Driving (Prosecutor v Driver & Victim v Driver)
• If the facts give rise to both a civil and criminal action – is there any connection
between them: ie, are they generally heard by the same court/judge?
No, court hearing is separate as:
 Outcome may be different [e.g. Criminal action may not be approve but civil action
may be successful due to burden of proof]
 Laws may be different
• A business will be more concerned with civil or criminal proceedings
Criminal Action Civil Action

US / China / India / Indonesia / Yes Yes

Thailand / Vietnam / South Korea

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CIVIL DISPUTE RESOLUTION
If there is a legal wrong, would a business definitely want to resolve it through the avenues
provided for seeking redress? If not – why not? No, due to reputation and relationship with
the other party
If a business wants to resolve a legal dispute, these are some avenues open to it for seeking
redress:
1) Negotiation – an informal process of both parties negotiating and settle issues (fastest
and cheapest way to resolve disputes)
2) Litigation
3) Arbitration
4) Mediation
5) Small Claims Tribunal

2) Civil Litigation
2 levels of courts in Singapore: (a) State Courts (b) Supreme Court
Advantages of litigation
Disadvantages of litigation
1. Finality 1. High Cost
Once the court has made a
Go to trial involve a lot of money (e.g. court fees and legal fees)
decision, the parties must
2. Time consuming (usually take years)
abide by the decision 3. Win-Lose situation
unless they are able to
If parties tend to continue business relationship after litigation,
appeal against the
avoid litigation because it creates bitterness/animosity
decision to a higher court
4. No privacy
(Court of Appeal). Goodwill and reputation of business will be badly affected
5. No possible to choose judge
2. No need to obtain Any party cannot pick someone whom they feel might have
the consent of the more expertise in the field
other party 6. Court judgements less internationally enforceable
If defendant do not have assets in SG and refuse to pay, it is not
possible to enforce judgement in another country.
AND They are afraid of biasness by safeguarding their own
interests.

If you win a court case, would the losing party pay some, all or none of your legal fees?
Can be All 3
Example: suing for pen which is not working: What you may get:
• Cost of Pen: $10 • Cost of Pen: $10
• Court Fees: $500 • Court Fees: $500
• Lawyer’s Professional Fees: $2000 • Lawyer’s Fees/Disbursements: $1500
• Lawyer’s Disbursements: $500 • Net Loss: $1000

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3) Arbitration
Model Arbitral Clause (Contract)
• Any dispute arising out of or in connection with this contract, including any question
regarding its existence, validity or termination, shall be referred to and finally resolved by
arbitration at the Singapore International Arbitration Centre in accordance with the
Arbitration Rules of the Centre ("SIAC Rules") for the time being in force.

Arbitration can be conducted can be conducted in various venues, including at the Singapore
International Arbitration Centre (SIAC)
Advantages of arbitration Disadvantages of arbitration
1. Cheaper than litigation 1. Very limited grounds for
No lawyers involve. No need to pay court and legal fees appeal against an
2. Usually faster arbitral award
3. Less formality
4. There is privacy (protects company’s reputation & 2. Need the consent of both
image) parties
5. Possible to choose arbitrator with industry
experience (e.g. engineers/professionals that can
provide a fairer advice which is better)
6. More internationally enforceable
Arbitrators can be of any nationality hence it is neutral and
less bias. AND Arbitration rewards may be enforced
domestically and internationally

4) Mediation – negotiation with the help of a trained 3rd party

• Mediation can be conducted at various avenues including at the Singapore Mediation

Centre (SMC) [need to pay a certain amount] & the Primary Dispute Resolution Centre
(PDRC) [free] – which offers mediation as a prelude (right before) to litigation.

Advantages of mediation Disadvantages of mediation

1. Cheaper than litigation and arbitration 1. No judgement, may not
No lawyers involve. No need to pay court and legal fees be final
2. Fast (usually within a few weeks) If parties cannot reach an
3. Win-Win situation (amicable) agreement or settlement, they
Mediator helps both parties to find a mutually acceptable may have to embark on other
solution. forms of resolution (e.g.
litigation) which waste more
4. There is privacy (protects company’s reputation &
time
image)
5. Range of solutions can be explored as compared to 2. Need the consent of both
court judgement parties

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 Litigation Arbitration Mediation
Small Claims Big Claims
(below $10,000)
US / China / India / Yes Yes Yes  Small  Mediation
Indonesia / Claims  Arbitration
Thailand / Vietnam Tribunal  Litigation
 Mediation
 Litigation
(uncommon)

5) Small Claims Tribunal - hears small claims (i.e. $10,000 or less)

 However, if both parties agree in writing, claims up to $20,000 can be heard.
 However, not all types of small claims can be heard at the small claims tribunal.
 The most common type of claim that can be heard: disputes relating to the sale of goods
or services.
Advantages of small claims tribunal Disadvantages of small
claims tribunal
1. Cheaper 1. Claims over $20,000
No lawyers are involved in the small claims tribunal (no legal or cannot be heard
court fees)
2. Fast and Quick
3. Business/Consumer can use the small claims tribunal to
bring a claim against another business
4. No need to obtain the consent of the other party
5. There is judgement

METHODS OF ENFORCING CIVIL JUDGMENTS

What happens if a dispute is resolved – but the debtor does not pay? Is the debtor
committing an offence? Not an offence if debtor never pay
However, in such a case, the creditor has several options open to him to enforce payment,
such as the following:
(1) Bankruptcy
(2) Writ of Seizure and Sale
(3) Garnishee Order
• Is it possible that despite the use of one or more of such methods, the creditor is
unable to recover all that is owed? Yes
• What is the implication of this on a business?
Award will be little value to business
• When should a business be thinking about such issues – before or after suing?
Before

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1) Bankruptcy – the inability to pay debts
 Minimum amount that needs to be owing: $15,000
When a person is made a bankrupt the public trustee or in some cases an accountant would step
in to gather the assets of the bankrupt and distribute them to the creditors.

What items cannot be gathered/seized?

Basic necessities, Clothing, CPF contributions, HDB

Consequences of bankruptcy:
- No travelling
- Cannot borrow money without disclosing bankruptcy
- No credit card
- Cannot work as banker/accountant etc.

Bankruptcy end when you fully paid OR may be discharged after certain times based on
terms.

2) Writ of Seizure and Sale – official warrant to seize a debtor’s property. Only liable to
assets in Singapore
Why would someone go for some other method of enforcement such as a WSS, instead of
bankruptcy? Yes, because of the cost owed and it is less time-consuming. (E.g. For small
debts, creditors need the cash fast)

Choosing Between the Different Options

• Debt: $20,000 • Debt: $20,000

• Available Assets under Bankruptcy: • Available Assets under WSS:
$16,000 $14,500
• Cost of Bankruptcy: $3000 • Cost of Bankruptcy: $500
• Creditor Will Get: $13,000 • Creditor Will Get: $14,000

3) Garnishee Order - A court order allowing the seizure of amounts “owing and accruing”
to debtor (eg: monies in bank accounts). No minimum amount

B pay C bank & C bank is

supposed to pay A the
monies back

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Discussion Question:
X is running a restaurant business and owes Z another business $5000. Z has been asking for
payment for months. However, so far X is yet to pay. Z also learns that X has not been paying
its employees and apparently X is facing cash flow problems. Advise Z on the following:
(a) As between X and Z – is it a civil or criminal matter?
Civil matter due to breach of contract
(b) Where can Z go to resolve the dispute?
Small claims tribunal because the contract consist of “sales of business”
(c) What if there is a judgment and X still does not pay?
Writ of seizure and sale OR Garnishee order

Tutorial 1: INTRODUCTION TO LEGAL ENVIRONMENT OF BUSINESS

1. Typically would the following sets of facts amount to a criminal matter or a civil matter or
both? In so far as a particular set of facts amounts to a civil matter, how best can the dispute
be resolved? In so far as a particular set of facts amounts to a criminal matter, you should
explain why you think this is so.

Answering this type of question:

(1) Civil or criminal matter? Depending on does it goes against public interest/safety
(2) List the best possible methods of dispute resolution according to sequence of
preferred method first: 1st Mediation, if not, 2nd Litigation
(3) Explain the benefits of the first recommended method mentioned above, followed
by second method if possible. Answer based on these factors:
(a) Cost – Cheaper / more expensive than other methods; legal & court fees included
/ not included
(b) Time - Takes a shorter / longer period of time to resolve dispute
(c) Privacy – Privacy protects / no privacy affects the business reputation and image
(d) Formality – Less formality = less legal procedures therefore less cost and time;
More formality = legal procedures takes longer therefore higher cost and time
(e) Win-Win / Win-Lose Situation – Win-win = amicable relationship between both
parties and business r/s easier to continue ; Win-lose = bitter & sour relationship
between both parties because of disputes and business r/s harder to continue
(f) Consent of the Other Party – Need to obtain = disadvantage because other part
may not agree ; No need to obtain = advantage because saves time
(g) Finality - Judgement = finality which saves time both parties have to oblige ; No
judgement = no finality whereby parties may not agree with the suggested solution
and may waste time to seek alternatives to resolve dispute (e.g. litigation)
(h) Internationally Enforceable (qns related to other countries) – Internationally
enforceable = less future problems as can be applied in other countries (advantage)
; Not internationally enforceable = more future problems because cannot be
applied in other countries (disadvantage)

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Qn 1 Example A
T Ltd gets S Pte Ltd to renovate its office for $200, 000. There is some dispute over payment
and the renovations. Meanwhile, S Pte Ltd is also renovating the premises of T Ltd’s subsidiary
under another contract. The contract is silent on dispute resolution.
(1) It is a civil matter because it only affect the premises of T Ltd and does not affect public
interest or safety.
(2) Best methods: 1st Mediation and then Litigation
(3) Explain why Mediation first!
a) Cheaper than other methods like litigation and arbitration
b) Takes a shorter period of timer, approximately few weeks
c) There is privacy so it protects the business reputation and image
d) Less formality because less legal procedures, so it saves cost and time
e) Win-win situation as mediator finds a mutually acceptable solution
f) Need consent of both parties so is more troublesome
g) No judgement so no finality
h) Internationally enforceable N/A

Qn 1 Example B
T is an employee of X Pte Ltd, which provides relocation transportation services. On one
occasion, T while speeding in the company vehicle with client’s goods knocks down S.
(1) Both criminal and matter because T has committed an offence under the Road Traffic Act
and it is against the interest of public.
(2) Best methods: Litigation for Court & Mediation / Litigation for Victim S because they sue
separately
 Litigation for Court because T commit an offence and he will definitely be prosecuted for
his reckless driving offence under the Road Traffic Act.
 Whereas, S can decide whether to sue T / X Pte Ltd for knocking him down through
litigation or demand compensation through mediation.
 S should choose mediation because it is faster for S to claim the compensation.
Note: When employee T does something wrong, Company X is liable. S is more likely to sue X
Pte Ltd because X Pte Ltd has more money and assets so S has higher chances of getting his
compensation.

2. X is a tech company which has a presence in many countries. It has not paid taxes for many
years now – including in Singapore. Do you think this is legal or illegal? If it is legal – is it
unethical? If it is illegal – it is a crime or a civil matter?

Depends on whether is it tax planning or tax evasion.

(a) Tax planning – Legal but unethical. Ethical if they focus on CSR, but in this case is
not.
(b) Tax evasion – Illegal. It is a crime because X has committed an offence under Income
Tax Act.

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3. Can the government bring a civil action against a business and can a civil action be brought
against it?

 Government can bring a civil action against a business.

 Business can bring civil against government.
 Over problems with contract (e.g. property) and similarly vice versa

4. Why would a business mediate at the Singapore Mediation Centre when it can get
mediation services at the court (eg: at the Primary Dispute Resolution Centre/e@dr) as a
prelude to litigation, for free and likewise, why would a business which has not chosen to
go to the Singapore Mediation Centre then go for mediation services offered by the court
(eg: at the Primary Dispute Resolution Centre/e@dr)?

Mediation can be for both small claims and large claims!

Choose SMC:
 Parties may be able to choose the mediator who may have technical expertise in that
particular field
 Do not want to harm / strain relations between both parties by filing lawsuit first

PDRC:
- Mediator appointed by court, both parties got no choice
- Filing lawsuit first harm / strain relations between both parties
 Saves time, if mediation doesn’t work, they can immediately go for litigation and not
waste time further

5. Can you go for arbitration if both the businesses are local? However, businesses are likely
to go for arbitration only if the contract states so. If there is such an arbitration clause in the
contract, can one of parties institute litigation instead?

Regardless whether businesses are local or not, they can go for arbitration.
If there is such an arbitration clause in the contract, one of the parties cannot institute
litigation. Once the parties have agreed on an arbitration upon signing of contract, they can
only go for arbitration.

6. Is it compulsory for a business to engage the services of a law firm? When will it be
preferable/necessary to do so? If a business engages a law firm to institute a legal action,
and when the final bill comes, the business feels that the law firm has overcharged, what
can the business do? Is there anything else the business could have done before engaging
the law firm?

 It is not compulsory to engage the services of a law firm.

 It will be preferable if the business is expanding. The larger the contract or dispute, the
more need to engage lawyers.
 The business cannot do anything. The business should have enquire and find out the
different rates at different law firms first.

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CHAPTER 2: TYPES OF BUSINESS ORGANISATIONS

• Choosing a wrong type of organisation may

affect the business and may affect the owner of
SP P the business.
LP Co • Can you convert from one form of business to
another? Yes
LLP

1. SOLE PROPRIETORSHIP [SP]

(a) Preliminaries
• To operate a sole proprietorship, one has to register with ACRA
• What typical information must be given during registration?
Personal details like name / IC / address & Nature of Business
• Why does the law require registration?
Keep records for tax purposes. In case something goes wrong, authorities can check
whether business is illegal.

However, there are some limited exceptions.

• If you do not fall within the exceptions and you don’t register it is an
Registration
offence.
• Registration is cheap and fast. $115
• Aside from registration, you may need to get licensing which is handled by Licensing
other agencies/authorities
• If licensing is required, higher cost more and take more time.

(b) Liability
• Sole proprietor is personally liable for the business debts and his personal assets
can be seized to satisfy business debts, as there is no separation between the sole
proprietor and his business. [Bad for the owner himself]
• Similarly, if he has some personal debts, can the business assets be seized? Yes

(c) Dissolution
• Dissolution of a sole proprietorship is generally straight forward and can be:
- Voluntary or
- Involuntary (bankruptcy, death etc.)

2. PARTNERSHIP [P] - a group of persons carrying on a business in common with a view

of profit

(a) Preliminaries
• For there to be a valid partnership, does there have to be a written agreement?
Doesn’t have to be in writing. Can be verbal agreement.
• The minimum number of partners is 2 and the maximum is generally 20.
• The registration and licensing process (if any), is the same as that for sole
proprietorships.

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(b) Liability
• In relation to business debts incurred by the partnership, the partners can be
personally liable and their personal assets can be seized to satisfy business debts,
as the partnership is not a separate legal entity.

Example:
- A & B are partners
- Partnership Debts: $100,000
- Partnership Assets: $0
- A’s personal Assets: $150,000
- B’s personal Assets: $200,000
- What can the creditor do? Can go after A or B OR Both according to profit sharing ratio

• However, in relation to personal debts incurred by partners, can all of the

partnership assets or only the debtor partner’s share, be sought after?
According to the profit sharing ratio!

Example: E.g. according to profit sharing ratio:

- A & B are partners
If profit sharing ratio is 50-50, A can
- Partnership Debts: $0
- Partnership Assets: $100,000 get $50,000 from the S100,000
- A’s personal Debts: $70,000
- How much of the partnership assets can be sought after by the creditor? According to
the profit sharing ratio

(c) Relation between Partners

• The Partnership Act provides that unless the contract provides otherwise, all
partners share profits and losses/liabilities equally.
• The Partnership Act provides that unless the contract provides otherwise, all
partners have the equal right to manage the business.
• The Partnership Act provides that all partnership property belongs to partners.
• Case Example: Ponnukon v Jebaratnam:
- Plaintiff and Defendant entered into a partnership to develop a piece of land.
- Partnership tried to obtain a loan from bank to buy the land, but was not successful.
- Subsequently, Defendant got a loan from his relatives and bought the land.
- Later the Plaintiff brought an action stating that the land belonged to the partnership.
- What do you think the court decided?
Not partnership property so land does not have to split.
• How can this issue of who owns what, be made clearer?
State expressly in the contract before signing

• Partners owe a fiduciary relationship towards each other; ie: they owe a duty of
trust towards each other.
• What could be some examples of a breach of such duties?
Misapplication of monies or fraud ; Runs a competing business partnership against
existing partnership

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• Breach of Fiduciary Duties (Example)
- Ritz-Carlton (US) and KMS, an Indonesian company, entered into a hotel
partnership to run Ritz-Carlton Bali Resort which belonged to KMS.
- Later, Ritz-Carlton decided to build another hotel in competition to the Ritz-Carlton
Bali Resort.
- What do you think the court decided?
Ritz Carlton held liable and KMS awarded damages.

(d) Relationship with Third Parties

• If a partner enters into a contract with a third party, is the firm or the other
partners bound to the third party?
• The answer may be “Yes”, if the partner in question has: A, B
- Actual authority to do so or – tell / seek approval beforehand &C
- Implied (ie: usual) authority to do so or
- Apparent (ie: outwardly appears to have) authority to do so
X
Firms should be given notice to prevent from being liable for partner’s actions.
Note: Though we are talking about partners, in relation to the question of whether someone
has authority to act on behalf of another, similar principles apply to
directors/employees/agents.

• If a partner commits a tort or wrongful act (eg: he is negligent) in the course of the
partnership business, which affects a third party, would the firm or the other
partners be liable to the third party?
• Eg: A & B are partners of a modeling agency and B assaults a model who suffers
injuries; is the firm liable for the losses? Depends on the question of degree
Note: Though we are talking about partners, similar principles apply to
directors/employees/agents.

Example: Lim Kok Koon v Tan Cheng Yew

• Lawyer who was partner in law firm, took cheques from the client issued to his
name to act as a “personal trustee” – eg: make investments.
• Lawyer absconded with the money.
• Was the law firm liable to the client? No, firm is not liable. Up to question of degree

(e) Dissolution
• The Partnership Act provides that unless the contract provides otherwise, a
partnership can be dissolved automatically without referring the matter to court in
some situations such as the following:
- A partner gives notice to dissolve it,
- A partner dies or
- A partner is made a bankrupt.

• The Partnership Act also provides that where a partnership cannot be dissolved
automatically, reference may be made to court to dissolve it in some situations such
as the following:
- One partner is guilty of conduct prejudicial to the carrying on of the business,
- It is just and reasonable to do so (eg: there is a deadlock between the partners).

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3. COMPANY [CO]

(a) Preliminaries
• Companies have also to be registered with ACRA. Licences from other authorities
may also be required.
• Registration process is slightly more complex and expensive compared to
registering other organisations. ( Cost around $135)
• It is more complex because a “constitution” has to be lodged. The constitution has
to provide basic information about the company and also contain rules governing
the internal management of the company. (Many rules needs to be applied to the
company)

Note: private companies can use model constitutions provided by ACRA (either in part or
in whole) if they want to.

(b) Dissolution
In relation to dissolution, the process may also be more complex and expensive
compared to the dissolution of other types of organisations.

(c) Separate Legal Entity

• Though comparatively more complex and expensive to set up and dissolve, a
company may be attractive because it creates a separate legal entity.
• The separate legal entity concept has various implications / consequences:

(1) Unlike a partnership, a company can own property in its own name.

Eg: A & B own a business named “C” – can they buy property (eg: shop) in the name
of C? No, can only be bought under name of A/B or A&B
However, correspondingly also note: property of the company belongs to the company
and not to the members (ie: shareholders) or directors.
Eg: A runs a business named “C” and takes things out of C for his personal use; could
he face consequences? Yes, it belongs to the company and not himself directly, so it is
considered as theft

(2) Debts of the company belong to the company and not to the members (ie:
shareholders) or directors.
Eg: A & B own a business named “C” and C has incurred a debt; would A & B be
personally liable? Partnership  A&B will be personally liable; Company  A&B will
not be personally liable
• However there are some narrow exceptions to this rule to prevent abuses.
- For instance, section 340(1) of the Companies Act provides that when a company is
being wound up or is being sued, if it appears that the business of the company is carried
out with the intention to defraud creditors, the persons responsible could be made liable
for the debts of the company.
Note: Because of the limited liability, there is a need to protect creditors and so there is
more regulation.
Eg: may need to have auditors; may have to submit reports/returns to ACRA.
Breach of some duties may result in criminal liability.
Thus a company is also more complex to run.

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 (3) Being a separate legal entity, potentially the company can have perpetual
succession, ie, even after its original members/directors have died, the company can
still carry on operations. This is good as there will be no disruption.

(4) Since a company is a separate legal entity – it can sue and be sued in its own name.
Eg: if “C” is a company and X has caused it a loss, who can sue X?
Directors of the company can sue X

• However, there are exceptions, such as where there is fraud, whereby members
can bring an action on behalf of the company.
Eg: A & B are members (ie shareholders) of a company C. A is also the director of C.
If he misappropriates money from C, whose loss is it? Who can sue A? The loss
belongs to C. Members (in this case, B) can sue A to demand compensation paid to
company C.

TYPES OF COMPANY

i) Private Company [Pte Ltd]

• When commencing operations, a typical business which wants to set up a company,
would register a “private company” “limited by shares” (abbreviated as “Pte Ltd”).
• The term “limited by shares” means that the members’ (ie: shareholders’) liability to
company is limited by their shares.
• The term “private company” refers to a company whose constitution has:
- Restrictions on share transfers and
• Limit the number of members to 50.

ii) Public Company

• A “public company” unlike a private company would not have such
restrictions/limitations. Thus for instance, companies listed in the Stock Exchange
would be public companies. [However, public company may not necessarily be listed on
stock exchange]
• Why wouldn’t a typical business which intends to set up a company, commence by
registering a public company limited instead of, a private company?
Public company  raise funds from public
Why not register as Public Company:
• Retention of control on shares
• High regulations and stringent criteria in order to be listed on Stock Exchange
• The scale of the business may not be as big for a public company

Note: A foreign business which intends to set up a company in Singapore (or a Singapore
business which intends to set up a company overseas) may set it up either in the form of a
“branch” or a “subsidiary”.
Branch Subsidiary

Legal Status Not a separate legal entity from the Separate legal entity from the
overseas parent company overseas parent

Liabilities belong to Parent company Subsidiary

Profits / Assets belong to Parent company Subsidiary

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4. LIMITED LIABILITY PARTNERSHI [LLP]

(a) Preliminaries
• A new form of business organization introduced in 2005.
• There must be a minimum of 2 partners.
• To carry on operations as a LLP, must also be registered with ACRA. Licensing from
other authorities may also be required.
• Registration process less complex and expensive compared to registering a
company (eg: need not submit a constitution) but slightly more complex and
expensive compared to setting up a sole proprietorship or partnership.
C
(b) Features P
• LLP combines features of both a partnership and a company.
• Internally – it is like a partnership (eg: unless contract provides otherwise: every
partner has a equal share of profits, equal say in management, etc).
• Externally – it is like a company (eg: partnership property belongs to the LLP, there
is limited liability, it has perpetual succession, etc). In relation to dissolution too, it is
like a company (ie more complex and expensive).
Eg: A & B are partners of an LLP named “C”.
If C has incurred a debt; can A or B be personally liable for it? No, not liable

(c) Suitability
• LLPs are ideal for persons who want to have the informality of running a business
which is characteristic of partnerships but who at the same time want limited
liability which is characteristic of companies.
• Some may still prefer setting up a company compared to a LLP because, for
instance, a company would generally be in a better position to raise finance. Why?
 Company can be publicly listed
 Better position to offer more securities
 More assets
 Only companies can mortgage “stock on trade” / inventory etc.
 More regulations and formalities (eg. audit) so lenders/creditors are more confident
with companies

• Some may still prefer setting up a partnership compared to a LLP because, for
instance, the LLP being a limited liability organisation, there are some statutory
duties/liabilities, breach of which can result in criminal liability.

5. LIMITED PARTNERSHIP [LP]

(a) Preliminaries
• A new form of business organization introduced in 2009.
• There must be a minimum of 2 partners (at least one general partner and one
limited partner).
• To carry on operations as a LP, must also be registered with ACRA. Licensing from
other authorities may also be required.

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 (b) Features
• A general partner would be liable for the all debts and obligations of the LP.
• A partner registered as a limited partner would not be liable to third parties for the
debts and obligations of the LP beyond the amount of his “agreed contribution”.
• However in return, the limited partner cannot take part in the management of the
LP. If he does so, he would become liable for all the debts and obligations of the LP.
• LP does not have separate legal entity.

(c) Suitability
• A limited partnership is very much like an ordinary partnership with the exception
that the limited partner has limited liability to the extent of his “agreed
contribution” and he cannot take part in management.
• Thus an LP is especially attractive to an angel investor (venture capitalist) who just
wants to make an investment without incurring more liability than what he
invested or agreed to.
Eg: A & B are partners; A does something wrong in the course of partnership business
which causes a loss to C. Who can C sue and to what extent?
Partnership Sue both
Company / LLP  Sue the company
LP  Sue A to the extent that he is liable for the loss in the business

SP P LP LLP Co
US Yes Yes Yes Yes Yes
Private and Public:
Corp or Inc
UK Yes Yes Yes Yes Yes
Private: Ltd
Public: Plc
Japan Yes Yes Yes Yes Yes (Kabushihi
(Go-mei (Go-Shi (Yuge Kaisha)
Gaisha) Gaisha) n Public: Various
Gaisha types
)
China Yes Yes Yes Yes ( Yes
(普通合伙) (有限合伙) 特殊 Private: 有限公司:
普通 Public:股份有限
合伙) 公司
India Yes Yes No Yes Yes
Private: Pvt Ltd
Public: Plc
Malaysia Yes Yes No Yes Yes
Private: Sdn Bhd
Public: Bhd
South Yes Yes Yes No Yes
Korea Hapmyoung Hapja Hoesa Private: Yuhan
Hoesa H): Hoesa
Public: Jusik
Hoesa

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 Specific Comparison on Tax

US Position: Company pays corporate income tax. When shareholders get dividends,
shareholders get tax individually

Singapore Position: SP. P. LLP. LP are taxed on individuals. Only companies in SG is taxed
by corporate income tax

SP P LP LLP Co
Is owner taxed individually: Yes Yes Yes Yes No
Yes or No?
Generally is owner personally liable Yes Yes Yes No No
for business debts: GP– unlimited
Yes or No? LP – agreed
contribution
Are there Little Little Little Some Lots
formalities/documentation:Little or
Some or Lots?
Are there criminal liabilities for Little Little Little Some Lots
failing to observe various matters
Little or Some or Lots?

Discussion Question
• A (a foreigner) is running a travel agency with B (a Singaporean) who has contributed
capital but does not take part in the day to day management of the business.
• C buys some tickets from the agency which is subsequently not honoured by the airlines.
When C later turns up at the agency to confront A, he finds that the shutters are down. He
also later finds out that A has disappeared.
• Thus C wants to sue B instead, whom he has managed to trace. Assuming the price of the
tickets is $10,000, the profit/loss sharing ratio between A and B is 50-50 and B is innocent,
discuss the extent of B’s liability.
As B is a limited partner, B is liable to his profit sharing ratio which is 50. So, B has
to pay C $5,000.

TUTORIAL 2: TYPES OF BUSINESS ORGANISATIONS

1. Nor Luc is a Malaysian and has a sole proprietorship in Singapore in the form of a retail
shop. The shop is rented. He has a car registered in his name and he uses it for both business
and private purposes. He also owns an expensive Rolex watch. He lives in a rented HDB
house. He also has $1000 in his local bank account which is in his name. Of late his
business has not been doing well and he has run into huge debts. The total debts of the
business amount to $170000.
i. Advice the creditors as to some of the options open to them.
• Option 1: Writ of seizure and sale
Creditors can seize Nor Luc personal assets such as car registered under his name, the
amount of money in his bank, his Rolex watch, things in the house (eg. branded
clothing) and assets to the business (eg. things in the shop).

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 • Option 2: Bankruptcy
Pros – Have to share amount with other creditors
Cons – Can obtain Nor Luc’s future income, assets overseas & money in bank accounts
ii. If after all the legal avenues for redress have been exhausted (such as bankruptcy),
assuming the creditors have not been fully repaid, is there anything else they can do at
that stage? What’s the implication of your answer on a business?

Appointment of Receiver. Creditors can get the court to appoint a receiver to collect
part of the debtor’s income for the creditor. However, there is no guarantee to be paid
back on the loans.
iii. Is there anything they could have done earlier (including some sort of insurance/etc –
search the web) to protect themselves or minimize the risks?
i. Get a guarantor
ii. Get a credit insurance
iii. Find out more and understand the financial status
iv. Factoring – sell accounts receivable to factor then factor claim money from the
person/company that owes the money
iv. What if the facts were the same as stated in the first paragraph, but Nor Luc was in
partnership with Slac Kah in relation to the provision shop? Can they go after one
partner instead of the other?

Yes. Both Nor Luc and Slac Koh have unlimited liability in partnership. Hence,
creditors can go after Slac Koh as well.

v. What if the facts were the same as stated in the first paragraph, but Nor Luc was running
a company with Slac Kah as a fellow shareholder and director?

Company is a separate legal entity and the company itself will be liable for the debts.
As a fellow shareholder and director, Slac Koh will not be personally liable.
The shares in the company may be used to pay creditors.
Exceptions: Fraud, the shareholder/director will be personally liable

vi. What if the facts were the same as stated in the first paragraph, but Nor Luc and Slac
Kah were carrying on a limited liability partnership?

LLP is a separate legal entity and LLP will be liable for the debts.
Exceptions: Fraud, the shareholder/director will be personally liable

vii. What if the facts were the same as stated in the first paragraph, but Nor Luc was a
general partner and Slac Kah was a limited partner in a firm registered as a limited
partnership?

General Partner, Nor Luc: Liable for all the debts and obligations in LP
Limited Partner, Slac Kah: Not liable for anything beyond his “agreed contribution”

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2. Tom, Dick and Harry are in an ordinary partnership running an accountancy firm. They
have equal shares and have contributed equally to the capital. Advise Dick and Harry in
relation to following issues:

(a) Tom leaves home one morning by car to meet Joy who is a client of the firm. On the
way, he knocks down Hope Loh. Is the firm liable? For the purposes of this question,
assume insurance is not available/applicable for some reason or other and that Tom
does not have the means to pay the full amount. Would your answer be the same if they
were running a company and all three of them were directors or it was an LLP?

No, the firm is not liable because Tom could be meeting the client a personal reason.
Note: Travelling from home to work / work to home is generally not in the course of
business! Unless he is using company’s car/bus/vehicle

(b) Tom also orders some standard stationary products in the name of the partnership from
a sole proprietor who knows Tom is a partner in the firm. When the other two partners
find out, they do not think that the partnership requires them because the items are
slightly on the expensive side and so they do not want the partnership to pay for them.
Must the firm pay? Would your answer be the same if they were running a company
and all three of them were directors or it was an LLP?

The firm must pay because Tom has the implied authority of buying stationary
products.
The answer is the same if they were running a company and all three of them were
directors or it was an LLP. However, for company and LLP, the sole proprietor can
only go after assets of company and LLP and not personal assets.

(c) Tom also gives tax advice on the side, which is not disclosed to the other partners and
makes a profit in the process. The other partners subsequently find out. Must Tom
account for the profits made? Would your answer be generally the same if they were
running a company and all three of them were directors or it was an LLP?
Tom must account for profits made in Partnership because the Partnership Act states
that all partners share profts and losses / liabilities equally. Answer is the same for
company and LLP.

3. If you a running a “business”, subject to certain exceptions (eg: if you are taxi driver), it
must be registered. But what amounts to running a “business”? What do you think are some
relevant factors in deciding whether a person is running a “business”?

Relevant factors: Gain, Services / Goods, Capital, Size and scale, Accounts / Records,
Length of time, Employment, Name, Address

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4. Read the case of Ng Chu Chong v Ng Swee Choon [2002] 1 SLR (R) 343 (via Lawnet) to
get a brief outline. The case deals with a partnership dispute and concerned the issue of
which of the two partners in question had the right to use a trademark when the
partnership ended.

(a) Did the court hold that the trademark in question was partnership property?
Yes. Trademark was a partnership property because it is owned in the names of both
people in partnership.

(b) Did the court find that the right to use the trademark was transferred to the plaintiff from
the partnership?
Yes. An agreement between the parties that the first defendant would transfer her share in
partnership to the plaintiff’s sole proprietorship in consideration for the payment of
$91,614.70 and promised to continue employment with Grand Am.
From the date of partnership dissolution on 31 Dec 1997, the rights in the trademark
become vested in the plaintiff.

(c) From a business/legal viewpoint how could the whole problem have been
avoided/prevented?
Write down an agreement and sign it before the start of business so it’s simpler.

(d) What was the source of law in this case: cases alone, statutes alone or both?
Both case law and statue (trademark)

5. Woods is a well- known chain in the US selling organic products. Ah Ding and Ah Dong
visit America and see the potential to open Woods outlets in Singapore. Assume that Woods
is in principle agreeable to granting them a franchise by entering into a contract with them
under which Woods will get a cut of the gross profits arising from the Singapore operations.
Assume also that Ah Ding and Ah Dong intend to contribute about $500,000 as capital for
the business they are going to set up and that they intend to borrow another $500,000 from
a bank in Singapore.

(a) Advice Ah Ding and Ah Dong as to what sort of business organisation they should set up
in Singapore.
It is best for them to set up a company. Company can obtain funding easier than other types
of business organisation.
(i) Bank has more confidence in company because there are more regulations and
control in setting up a company so it is more reliable.
(ii) Company have more assets from their inventory to give banks as collaterals
(“floating charge”)

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(b) For the purposes of this question we have assumed that Woods only wants to enter into a
contract with Ah Ding and Ah Dong. What if Woods set up a partnership, LLP or Co with
Ah Ding and Ah Dong in Singapore? In such an event, what if due to the sale of defective
products (arising from improper handling/storage in Singapore), the Singapore operations
incur a liability of $2m – what would be Woods level of exposure to the liability?
Set up LLP in Singapore:
Liabilities of both parties will be governed by Limited Liability Partnership Act
Set up Co in Singapore: Liabilities of company will be governed by Companies Act
Woods level of exposure to the liability:
P – Unlimited liability, up to $2m. He can sue Ah Ding and Ah Dong
LLP – Only LLP can be sued and cannot go after founders for money
Co – Only Co can be sued and cannot go after founders for money

Note: If it is just a contractual agreement, Woods is not liable because it is not partnership!
It is just joint venture.
Partnership – More likely sharing of net profits
Contractual agreement – More likely sharing of gross profits

(c) In relation to (b) what if Woods decided to directly invest in Singapore on its own and sets
up a branch – what would be Woods level of exposure to the liability?
Branch is not a separate legal entity so the liability still belong to Woods.

6. If you are running an online business based in Singapore and your customers come from
all over the world: (a) must you register your business and (b) if so, in which country?

(a) Must register your business because of Business Registration Act

(b) As business is based in Singapore, register in Singapore under Accounting and Corporate
Regulatory Authority of Singapore (ACRA)

CHAPTER 3: COMPANY LAW, MEMBERS & DIRECTORS

MEMBERS (ie. Shareholders)

• Every company must have at least 1 member/s.
• Generally, directors manages a company (Section 157A)

• Though it is the directors who make decisions on behalf of the company, in some
specific situations, it may be necessary to get members’ approval (eg: where new shares
are sought to be issued) pursuant to provisions of the Companies Act (CA) and the
company’s constitution.
Note: Section 152 gives the members the power to remove directors by an ordinary resolution.
What is the practical effect of this power? So that directors cannot abuse their authority

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(a) Members’ Rights - While members cannot manage the company, they have various rights.

1) Attending Meetings and Voting - There are 2 types of meetings.

i. Annual General Meeting (AGM)

• Subject to an exception, all companies must have an AGM once every year;
failure results in the commission of an offence.
• During the AGM typically members’ approval is sought in relation to issues
such as appointment of directors or auditors.
• During such meetings, the members also have the opportunity to query the
directors on the performance of the company.

ii. Extraordinary General Meeting (EGM) - All other meetings besides the AGM
are classified as the EGM.
• Can be either Ordinary Resolution / Special Resolution

2) Others

i. Right to receive various types of information pertaining to the company.

Why? Right to receive such information to assess whether the company is being
run in a proper fashion

ii. Right to the balance (if any) on dissolution.

Does a member have a legal right to demand dividends? No legal right

Difference between Equity Financing and Debt Borrowing

• Essentially, the shareholder is providing capital to the company. Another method to
raise funds is for the company to borrow from a bank or financial institution.

Equity (Share) Debt

Returns are in the form of: Dividends Interest
Returns are typically – guaranteed under No Yes
the contract?
Lender can have some say in the Some say No say
management of the company – yes/no?
On dissolution of the company, the lender Yes No
may get a bite of what’s left after debts have
been paid – yes/no?

DIRECTORS
• Every company must have at least 1 director/s.
• Directors must be at least 18 years of age and be a natural person (a real human being)
• Directors are appointed by the members and can be removed by the members by an
ordinary resolution (AGM or EGM).

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(a) Disqualification of Directors

• Though there are not that many qualifications to be a director, once a person is a director,
there are many grounds on which he can be subsequently disqualified.
• The reason for this is to offer greater protection to persons such as creditors because
of limited liability
Note:
For the same reason, there are also similar grounds on which the manager of a LLP can be
disqualified.
In some situations, the disqualifications may be automatic, while in others, they may not be.
If a disqualification is disobeyed it is an offence, unless the disqualification has subsequently
been lifted (such as by the court).

Section 148 of CA
• Under section 148 an undischarged bankrupt cannot be the director or indirectly take
part in the management of the company. Why? Not credible / not trustworthy
• The disqualification is automatic.

Section 149 of CA
• Under section 149 a director may be disqualified, if he was a director of a company
which became insolvent while he was a director or within 3 years of him ceasing to be
one, provided the director’s conduct was such as to make him unfit to be a director.

• Example:
- X was a director of Z Pte Ltd.
- X left Z Pte Ltd in 2009.
- X then became a director of Y Pte Ltd.
- In the meantime, Z Pte Ltd was made insolvent in 2010.
- Can X continue as a director of Y Pte Ltd? It depends on whether is he involvedin
anything that affects A Pte Ltd in becoming insolvent.

• Disqualification is not automatic.

• Disqualification order, if issued, may be up to 5 years.

Section 154 of CA
• Pursuant to section 154(1) if a director is guilty of an offence involving fraud or
dishonesty, punishable on conviction with imprisonment of 3 months or more, or if he
has been convicted of any offence under Part XII of the Securities and Futures Act,
he is automatically disqualified for 5 years.

• Pursuant to section 154(2) if a director has committed offence in relation to

management of the company (eg: breach of section 157 of the CA), he may be
disqualified up to 5 years. Disqualification under this part is not automatic.

• What is the difference between the two sections and why is there a difference?
Section 154(1) is more serious because it involve fraudulent actions than 154(2) which is
more of negligence

24
Section 155 of CA
• The Companies Act requires various documents/accounts/reports to be filed with
ACRA.
• What is the reason for this? To assess the risks for investors and creditors to see if the
company is suitable for providing loans
• If these have not be filed that could result in the commission of an offence.
• Section 155 provides that if a person is persistently in default he will be automatically
disqualified for 5 years.
• The term persistently in default is defined as having been convicted of 3 or more offences
within a period of 5 years.

SOME DIRECTORS’ DUTIES IMPOSED BY CASE LAW

1) A director has the duty to act in the best interests of the company and should not place
himself in a position of conflict of interest (this duty is also referred to as a “fiduciary
duty”).
• What are some ways in which a director can breach fiduciary duties? Pocketing a
sum of money into the company / Set up another company to compete with current
company
• Can a director be a director of two companies – is there a conflict of interest?
Different Industry: Can be a director of two companies; No conflict of interest
Same Industry: Cannot be a director of two companies; There is conflict of interest

2) A director should act with due care and skill (ie should not be negligent).
• What are some ways in which a director can be negligent? Signing a check without
checking / Agreeing without proper background checks / Not attending meetings

SOME DIRECTORS’ DUTIES IMPOSED BY CA

• In addition to the duties imposed by case law, directors may be subject to duties
imposed by the Companies Act.
Note: Many of case law and Companies Act duties overlap.
Breach of some of the provisions of the Companies Act would result in civil liability, some
would result in criminal liability and some would result in both.

Section 156 of CA
• Under section 156(1) if a company is entering into a contract and a director knows of
that and he has a material interest in that, he must disclose that to the Board.
• Eg: Co A is entering into contract with Co B and X is a director of Co A and Co B.
• What is the reason? Declare to both Company A and B due to conflict of interest

• Section 156(3) states that such interest shall mean material interest.
• Eg: Co A is entering into contract with Co B and X is a director of Co A and a major
shareholder of Co B. There is material interest so X has to disclose (If X is an ordinary
investor with a few shares in the company, there is no material interest).

• Section 156(13) provides that interest of the director include interest of his family.
• Eg: Co A is entering into contract with Co B and X’s wife is a director of Co B. There
is material interest so X have to disclose.
• The section provides that a failure to do so would result in the commission of an offence.

25
Section 157 of CA
• Section 157(1) provides that a director must act honestly and use reasonably diligence
in the discharge of his duties.
• This is a very important section and it encompasses many of the case law duties discussed
earlier (ie: must act in the best interests of the company, must not place himself in a
position of conflict of interest, must exercise due care and skill, etc).
• Section 157 provides that if there is a breach, civil liability and/or criminal liability can
arise.

Section 162(1) of CA
• Under section 162(1) generally a company cannot make a loan or guarantee a loan
given to a director.
• What is the reason? It is a risk of a director not paying back the money
• However, this is subject to several exceptions (eg: the company is a bank and it is making
a loan to its director).
• If the exceptions are not met, the directors who authorize the loan/guarantee could
face civil and/or criminal liability.

Section 169 of CA
• Section 169 provides that emoluments given to directors such as directors’ fees and
allowances, have to be approved by members.
• What is the reason? If the director can just declare any amount, the fees will be misused
• Failure to do so can result in civil liability.

LIABILTIES UNDER SECURITIES AND FUTURES ACT

• Besides the Companies Act, directors (and others) could face liabilities under the Securities
and Futures Act.
• The Securities and Futures Act prohibits many types of conduct such as:
- Market Rigging  Selling huge amount of shares between 2 person to create inflation
of price in the market
- Insider trading  Trading of privilege information not release to public

Insider Trading
• Generally under section 218 of SFA where:
A person connected to a corporation, knows or ought reasonably to know that he:
(a) Possesses information which is not generally available to the public and
(b) Which can have a material effect on the price/value of a security;
He should not:
(a) Buy/Sell,
(b) Get another person to buy/sell or
(c) Directly or indirectly communicate the information to another person if he knows or
ought reasonably to know that the other person would buy/sell or get another person to buy or
sell.

26
• Section 219 of SFA effectively provides for a similar sort of prohibition in relation to
persons not connected to a corporation.
• Eg: An in-house company lawyer gives confidential information to her husband who
sells off his shares in that company and also passes the information to his mistress who
does the same. Would there be liability and if so – under what sections? Yes, there
will be liability under section 218 and 219 of SFA

• Consequences of a breach of these sections include:

- Criminal Liability
- Civil Penalty: aim to punish but lower burden of proof (easier to proof)

International Comparisons

Minimum Number of Imposition of Prohibition of Insider

Directors Directors’ Duties & Trading & Liabilities
Liabilities for Breach for breach
China 1 to 3 Yes Yes

US 1 to 3 Yes Yes

India 2 to 3 Yes Yes

Indonesia 1 Yes Yes

Thailand 1 Yes Yes

Malaysia 2 Yes Yes

Discussion Question:

• X, his wife and daughters are directors of company Z. They have been siphoning off
the company’s money for their own benefit. For instance, they used the company’s
money to fund personal investments. Z is now in financial difficulties and is in the
process of liquidation:
• Have the directors breached any duties? Yes, breach of fiduciary duties
• Whose loss is it? Company Z loss
• Who can sue to recover the loss? Members of Company Z

TUTORIAL 3: COMPANY LAW, MEMBERS & DIRECTORS

1. Happening Place is a private company. Tuf Tan holds 45% of the shares in Happening
Place Pte Ltd. Advise Tuf Tan and the directors as to the following:

27
(a) The directors appoint Payne Soh as the company’s public relations officer (ie an employee).
Payne Soh has a personal conflict with Tuf Tan on one occasion. As a result, at a
requisitioned meeting of the members Tuf Tan manages to get a resolution directing the
directors to fire Payne Soh. The directors refuse to obey.

Section 157A of Companies Act state that firing an employee is director’s decision because
director manage day to day operations.
i. Tuf Tan can pass ordinary resolution to remove the director. He need to consider at
different factors like the performance of the director on whether is it necessary to
remove a director
ii. He can sell his shares to other members or shareholders and then offer it to outsiders
but it is not so feasible and not easy.
Although he has the right to enforce and amend the constitution of the company, the
company’s public relations officer is not considered as part of the company’s constitution.
This is also another reason why despite obtaining a resolution, he does not have the right
to determine who to fire as the directors refuse to agree with him or obey him.

(b) Tuf Tan is also unhappy that one director’s mistress Lolli, has been appointed production
manager (ie an employee) of the company’s factory.

Situation 1:
Lolli is not capable for the production manager job, section 157 is breached. It could be
civil or criminal liability. In order to take civil action, company need to prove their loss.
Situation 2:
Lolli is capable for the job as there may still be no due diligence and there is conflict of
interest. There may be more suitable candidate that is better than Lolli. Members can sue
on behalf of the company if the company incur losses due to the director’s negligence.

2. Rain, Snow and Moon are directors of Nature Productions Pte Ltd. Advice them as to
whether they can continue as directors in the following circumstances:

(a) A month ago, Moon was declared a bankrupt by a court in Malaysia where he has property
and business dealings. Moon is still acting as a director of Nature Productions Pte Ltd.
Moon cannot continue as the director of Nature Productions Pte Ltd because he will be
automatically disqualified. Under Section 148(1) of the Companies Act provides that an
undischarged bankrupt cannot be a director or indirectly take part in the management of a
company. The rationale behind this is because if a person cannot manage his own affairs,
he should not be managing the affairs of a company. Thus, He need to apply to court to
dismiss his bankruptcy.

28
(b) Rain was also the director of Water Works Pte Ltd which was made insolvent sometime
back.
Under Section 149 of the Companies Act, the circumstances must be that the director was
a director of a company which became insolvent while he was a director, or within three
years of him ceasing to be one, and the director’s conduct was such as to make him unfit to
be a director. Example: He misuse company’s funds.
It depends on whether the “sometimes back” is within the three years. If Rain was the
director within three years of insolvency, he may be unfit to be a director of Water Works
Pte Ltd. If Rain was the director when the company has yet to be insolvent within the three
years’ timeframe, he can continue as a director in this circumstances.

(c) Snow is also a director of Flakes Pte Ltd and has been convicted of an offence under section
157(1) in relation to that company.
Snow will not be able to continue as a director of Flakes Pte Ltd if the court decides to
disqualify him pursuant to Section 154(1) of the Companies Act because Snow convicted an
offence where he may be automatically disqualified

(d) Assuming Moon, Rain and Snow are disqualified from acting as directors on the grounds
stated in (a), (b) and (c) respectively, can they continue to run another business organisation
which is not a company (ie: SP, P, LP or LLP)?
Pursuant to Section 37(1) of the Limited Liability Partnerships Act, Moon, Rain and Snow will
not be able to run a LLP during the period of their disqualification order as directors of
companies under the Companies Act. He can be a partner but not a manager.
However, they will still be able to manage Sole Proprietorships, Partnerships and Limited
Partnerships. For (b) and (c), they can still continue running the business. For (a) bankruptcy,
all forms of business are not allowed. They cannot run any form of business unless obtain leave
of court.

3. Trust, Ernest and Honest are directors of No Problems Ltd, a public listed company. Advice
No Problems Ltd and the directors in the following circumstances:

(a) No Problems Ltd, enters into a contract for the purchase of 1000 tons of iron from another
company. Trust is the majority shareholder in that other company.
Under Company Act section 156 (1), since Trust is the majority shareholder in that other
company, before the No Problems Ltd enters into the contract, he must declare that he is a
majority shareholder at the meeting of directors or send a written notice to the company
containing the details. If he declare and there is a loss, he could also breach section 157 for not
exercising due diligence within his fiduciary duties.

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If Trust did not make a disclosure of his interest to directors of No Problems Ltd, the other
directors could sue him as he will have committed an offense under Section 156 of Companies
Act and he will be subjected to criminal liability. If section 156 & 157 is breached, there could
be a disqualification.

(b) At a board meeting in which Honest is present, it is revealed that the company is going to
lose the company’s biggest client. Honest on hearing this, sells off his shares in No
Problems Ltd, a few days later.

Since Honest possesses information concerning No Problems Ltd that is not generally available
to the public and might have a material effect on the price of the shares, under Securities and
Futures Act Section 218 (1) and 218 (2), he cannot sell his shares until the information is made
public. So assuming the information was not made public at the point of time when Honest
sells off his shares, the other directors could sue him as he will have breached Securities and
Futures Act Section 218.
Consequences: Civil penalty by MAS or criminal liability or disqualification of director under
154(1) of CA

Assuming that he sold the shares after the information was made public, there will not be a
breach of Section 218.

4. As can be seen a director can face a lot of potential liabilities. From a practical/business
viewpoint, what can you do to reduce the risk? For instance, can you buy insurance to cover
the risks? Search the web. If so, does it mean directors can slacken in their duties?

 Directors should know the law himself

 Can buy liability insurance even if it is not compulsory
This insurance serves two purposes. First, it protects directors and officers against
non-indemnified loss, thereby protecting the personal assets of the directors and
officers when no other financial protection is available. Second, it manages the
company’s potentially severe indemnification obligations. Claims against the
company itself are generally not covered, although some policies today cover securities
claims against the company
 Indemnification - The internal indemnification provisions of the company should be
reviewed to assure that they provide the maximum protection permitted by law.
 Statutory Limitation of Liability - Virtually all states have laws that permit the
corporation to limit or eliminate certain types of director (and in some instances officer)
liability.

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5. Read the case of Lim Weng Kee v Public Prosecutor [2002] 2 SLR (R) 848 (via Lawnet)
to get a brief outline. The case deals with a breach of director’s duties and concerns a
director of a pawn shop who released pawned items without making proper checks.

(a) Did the facts give rise to criminal proceedings or civil proceedings or both?
This particular case is criminal proceedings.The charges are with reference to previous
cases as well as legislation.
The test for criminal liability under section 157(3)(b). First, “reasonable diligence” in s
157(1) implied that a director’s conduct must be measured against some objective
standard of behaviour. Second, the structure of s 157 showed that Parliament did not
intend different tests of diligence for civil and criminal breaches. Third, as the aim of
criminal liability was to protect the public interest by deterring directors from acting
negligently, the test for such liability had to be sufficiently robust: at [30], [34] to [37].

(b) What section of the Companies Act was breached and why was it breached?
Section 157(1), 157(3) & 157(4) was breached.
The relevant subsections of s 157 CA read as follows:
(1) A director shall at all times act honestly and use reasonable diligence in the discharge
of the duties of his office. …
(3) An officer or agent who commits a breach of any of the provisions of this section shall
be —
(a) liable to the company for any profit made by him or for any damage suffered by the
company as a result of the breach of any of those provisions; and
(b) guilty of an offence and shall be liable on conviction to a fine not exceeding $5,000 or
to imprisonment for a term not exceeding one year. paginator.book Page 850 Sunday,
October 4, 2009 11:52 PM [2002] 2 SLR(R) Lim Weng Kee v PP 851
(4) This section is in addition to and not in derogation of any other written law or rule of
law relating to the duty or liability of directors or officers of a company.
The Prosecution had proved beyond a reasonable doubt that the appellant had objectively
failed to use reasonable diligence in the discharge of his duties as a director of the three
pawnshops. The items were extremely valuable and no person of ordinary prudence would
have permitted the release of the items without first having the cheques cleared and
honoured.
(c) Would there have been a civil proceeding or criminal prosecution if it was an ordinary
partnership instead of a company? Why?

There will only be a civil proceeding between Lim Weng Kee and Samuri if it was an ordinary
partnership because an ordinary partnership have lesser rules and regulations than a company.
An ordinary partnership will have unlimited liability on the directors as it is not a separate
entity. Hence, the partners in the partnership are considered all directors so there will not be
charges breached under the Companies Act.
Company have limited liability. LLP do not run on huge amount of credit so there is no criminal
liability even though it has limited liability.
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