20 March, 2018
Introduction
Piercing of the corporate veil is a well-established exception to the established principle that a company is a separate legal person from its shareholders. This exception allows the courts to look through the company’s distinct legal identity and treat it as an alter ego of the company’s shareholders. Veil piercing is typically applied for the benefit of third parties seeking to establish a shareholder’s liability for the actions of or debts incurred by the company, rather than for the benefit of a shareholder seeking to assert rights properly belonging to the company.
In the recent Singapore case of Jhaveri Darsan Jitendra and others v Salgaocar Anil Vassudeva and others [2018] SGHC 24 (“Salgaocar”) however, it was a company insider – an individual who claimed to be the beneficial shareholder of certain companies – rather than a third party, who sought to displace the company’s separate legal identity and to treat assets held by the companies as belonging to him. This was effectively an attempt to effect “reverse veil piercing”. The attempt was unsuccessful.
The Singapore High Court rejected this attempt at reverse veil piercing, and took the opportunity to clarify the categories of corporate veil piercing and to reiterate the rationale underlying the doctrine of veil piercing.
Separate legal entities and corporate veil piercing in Singapore before Salgaocar
The Singapore courts have always been slow to disregard a company’s separate legal identity. In a recent decision, Goh Chan Peng v Beyonics Technology Ltd [2017] 2 SLR 592 (“Beyonics”), the Singapore Court of Appeal reiterated that veil piercing would generally only be justified where there is an abuse of the corporate form or if the same is necessary to give effect to a legislative provision. In the same vein, the Court of Appeal clarified that companies within the same corporate group would be treated as separate legal personalities rather than a single economic entity1.
This reluctance to disregard the separate legal personality of corporations is in keeping with the approach adopted by the English courts. In the seminal decision of Prest v Petrodel Resources Ltd [2013] 2 AC 415 (“Prest”) , the UK Supreme Court explained that veil piercing would only apply if there were no other means for the claimant to achieve an equivalent legal result. Further, even if the claimant could establish that there were no alternative means of recourse, the Court would only pierce the veil where there was an abuse of the corporate form by the controller in order to evade an existing legal restriction or obligation2 . As explained by Lord Sumption, who delivered the leading judgment, “the corporate veil may be pierced only to prevent the abuse of corporate legal personality”3 .
Both Beyonics and Prest did not consider whether it would be possible for a company insider to invoke the concept of veil piercing. However, these cases made clear that veil piercing is specifically targeted at precluding abuses of the corporate form to evade existing liabilities. This set the stage
for the decision in Salgaocar which now confirms that reverse veil piercing is not recognised in Singapore at all.
The decision in Salgaocar
Salgaocar concerned two originating summonses brought by the plaintiff companies and their legal owner, seeking the discharge of caveats lodged against properties owned by the companies. The caveats were lodged by the defendant, who claimed to be the beneficial shareholder of the companies. In seeking to maintain the caveats, the defendant contended that as the beneficial shareholder of the plaintiff companies, he had a caveatable interest in properties legally owned by the companies by virtue of, amongst others, the principle of reverse veil piercing.
The High Court rejected this argument. In doing so, it identified three separate categories of corporate veil piercing:
- Standard piercing: where a third party invites the court to disregard the separate legal personality of the company and to hold the shareholder liable for the company's obligations;
- Outsider reverse piercing: where a third party invites the court to disregard the separate legal personality of the company and to hold the company liable for the shareholder's obligations; and
- Insider reverse piercing: where a shareholder invites the court to disregard the separate legal personality of the company.
The Court held that standard piercing and outsider reverse piercing are both available under Singapore law, but that insider reverse piercing is not. Its decision was based on the following grounds:
- First, reverse piercing is unsupported by authority. The Court cited two English cases in which reverse veil piercing claims were rejected (Macaura v Northern Assurance Company, Limited, and Others [1925] AC 619 and Tunstall v Steigmann [1962] 2 QB 593). The Court noted that there were no Singapore authorities which expressly endorsed the concept. The position in the US, where reverse piercing claims have been allowed (two Minnesota cases were cited), was distinguished on the basis that those cases concerned statutory provisions which policy rationale allowed for reverse piercing, and because Minnesota law adopted a broader and more flexible philosophy than English and Singapore law toward when a company’s separate legal personality should be disregarded4 .
- Second and more fundamentally, reverse piercing is contrary to the underlying rationale for piercing the corporate veil. As elucidated in Prest and Beyonics , this rationale is to prevent the company’s controllers from abusing the separate legal personality of the company to the detriment of third parties. In cases of reverse piercing however, there is no abuse of the corporate form, as it is the shareholder who seeks to avoid the strictures of separate legal personality in order to take the benefit of rights properly held by the company. To disregard the separate legal identity of the company in such circumstances would not further the public policy imperative of avoiding abuses of the corporate form, and would instead allow the shareholder to enjoy the benefits that flow from the separate legal personality of the company without any of its disadvantages5.
- Third and relatedly, it is unnecessary to pierce the corporate veil in such cases because there are other legal means by which the shareholder may pursue a remedy. These include the commencement of derivative action on behalf of the company, or reliance on trust principles. The High Court adopted the refrain in Prest that “if it is not necessary to pierce the corporate veil, it is not appropriate to do so ”6 .
That said, the Court did not completely shut the door on reverse veil piercing
- it recognised that in cases involving interpretation of statutory provisions (as in the US cases cited by the plaintiff), the policy rationale of the relevant statute may make it appropriate to invoke reverse veil piercing7. The Court did not identify which Singapore statutory provisions may have this effect, but based on the US cases which the Court considered, the most likely scenario would be where the statute clearly intends to confer a benefit on the shareholder but where the circumstances are such that the right to assert that statutory right happens to reside with the shareholder’s wholly-owned company.
Implications of Salgaocar
Salgaocar is the latest in a series of Singapore cases which reject legal doctrines that seek to displace the separate legal personality of a company.
A related concept for which the death knell has sounded in the Singapore Courts in recent years is that of the “single economic entity”, where litigants (both company insiders and outsiders) have argued that the rights or liabilities of one group company can be enforced by or against another company in the same group by virtue of the fact that the group operates as a single legal unit8 .
The rejection of reverse veil piercing in Singapore, and the strict position on the separate legal personality of a company, would be relevant in the following situations:
- Actions concerning groups of companies or joint venture companies: A shareholder or a parent company cannot rely on reverse veil piercing to pursue claims for losses suffered by its subsidiaries, but must establish that it has suffered its own independent loss. Such independent loss could be by way of direct loss of investment or overpayment for shares in the subsidiary. It should be noted that Singapore law also generally precludes shareholder claims for loss in the form of a decline in the value of shares held in the company, on the basis that such loss is merely a reflection of the loss suffered by the company (the “no reflective loss principle” – see Townsing Henry George v Jenton Overseas Investment Pte Ltd (in liquidation) [2007] 2 SLR(R) 597 at [69] -[70]). Given the “no reflective loss” principle and the clear rejection of reverse veil piercing in Singapore, it is all the more important for the parties involved in corporate acquisitions or joint venture arrangements to consider the inclusion of clauses by which the purchaser or joint venture party would be deemed to have suffered a loss equal to the loss suffered by the target or joint venture company. Shareholders or purchasers may also consider obtaining guarantees and indemnities for their direct benefit in respect of certain anticipated losses which may be incurred by the company.
- Insurance actions: In light of Salgaocar, it is clear that a shareholder will be unable to rely on reverse piercing to recover under a policy covering assets owned by or losses sustained by the company rather than the shareholder, even if the company is wholly owned. While this should not be an issue for most sole or majority shareholders (given that the shareholders will effectively take the benefit of the company’s insurance claims), problems may arise where title to the insured assets are held by the company while the insurance beneficiary is the shareholder9, or vice versa. Care should therefore be taken to ensure that there is no mismatch between the entity holding title to the insured properties and the beneficiary of the insurance policy. Further, while a shareholder has no insurable interest in property owned by the company, a shareholder can insure the capital he has invested or profits he expects to receive from his investment in the company, such as insurance on his shares or dividends10 .
- Actions involving property rights: A shareholder will be unable to rely on reverse piercing to assert proprietary rights in assets held by the company, unless the shareholder is able to establish that the property rights are vested in it personally such as by way of trust.
In summary, the decision in Salgaocar reinforces the position that the shareholder must establish its independent entitlement to the rights its seeks to assert. Unless specifically envisioned by statute, the shareholder will derive no assistance from the principle of reverse veil piercing.
1 Beyonics at [71]
2 Prest at [35]
3 Prest at [34]
4 Salgaocar at [68]
5 Salgaocar at [74]
6 Salgaocar at [73] citing Prest at [35]
7 Salgaocar at [68]
8 Beyonics, and Manuchar Steel Hong Kong Ltd v Star Pacific Line Pte Ltd [2014] 4 SLR 832
9 This was the case in Macaura v Northern Assurance Company, Limited, and Others [1925] AC
619
10 Birds’ Modern Insurance Law (Sweet & Maxwell, 10th ed, 2016) at 63 states that “a
shareholder can insure his shares against any loss in value due to the failure of an enterprise”;
likewise MacGillivray on Insurance Law (Sweet & Maxwell, 13th ed, 2015) states at [1-127] that
one can “insure not the property but the capital which he has staked on the adventure and the
profits which he expects to derive from his investment”.
For further information, please contact:
Melvin Sng , Partner, Linklaters
melvin.sng@linklaters.com
