The concept of separate legal personality and limited liability is the bedrock of company law. When a Singapore limited liability company enters into a contract governed by foreign law, it would probably not imagine that the mere fact that a foreign law governed the contract itself could potentially override the limited liability protection of its shareholders. However, that was what happened in Government of the City of Buenos Aires v HN Singapore Pte Ltd [2023] SGHC 13, where the High Court applied the foreign law of the contract to lift the defendant’s corporate veil and hold its shareholders personally liable for breach of contract.
On 15 May 2024, the Court of Appeal reversed that decision in Nicholas Eng Teng Cheng v Government of the City of Buenos Aires [2024] SGCA 15 and held that generally, it should be the law of incorporation of the company that should apply to the issue of whether a company’s corporate veil should be lifted – and not the law of the contract.
This is a welcome decision especially for Singapore companies and their shareholders, and emphasises the protection that the Singapore Courts give certainty in commercial transactions. Singapore businesses are promised sufficient certainty on potential risks and liabilities when entering into contracts and/or dealing with various foreign entities. They do not have to be wary of entering into foreign law-governed contracts, on guard for potential avenues that the foreign law would allow for their separate legal personality to be ignored and their shareholders held liable.
Background
The appellant was the sole director and shareholder of a Singapore limited liability company HN Singapore Pte Ltd (“HN Singapore”). Amidst the global COVID-19 pandemic, HN Singapore and the respondent entered into an agreement for HN Singapore to supply 300,000 COVID-19 test kits to the respondent. As HN Singapore failed to deliver any test kit by the agreed delivery date, the respondent terminated the agreement and commenced a claim in the Singapore Courts against HN Singapore and the appellant for inter alia breach of contract. While the appellant was not party to the agreement, the respondent sought to lift HN Singapore’s corporate veil to hold the appellant personally liable.
The first instance decision
At first instance, the High Court allowed the respondent’s claim for breach of contract, awarding total damages of US$237,619.35 to the respondent. The High Court applied Argentine law, the governing law of the agreement, to determine the issue of whether HN Singapore’s corporate veil was to be lifted. The Court found that Argentine law allowed for the veil of incorporation to be lifted if a company was undercapitalised relative to the transaction that it entered into. It therefore ordered that HN Singapore’s corporate veil be lifted, and held that the appellant was personally liable for the sum of damages. It is worth noting that the High Court had held that if Singapore law had applied, the veil would not have been lifted.
The Court of Appeal’s decision
On appeal, the appellant challenged the High Court’s holding that the applicable law governing the question of the lifting of the corporate veil was that of the law of the contract, and contended that the law of its incorporation i.e. Singapore law should apply.
The Court of Appeal allowed the appeal and held in favour of the appellant. It made the following holdings:
- Generally, the law of incorporation should govern the issue of lifting the corporate veil. Since the law of incorporation confers upon the company its separate legal personality and its attendant rights and liabilities, it must be that law which creates the exceptions to the separate entity rule.
- Applying the law of the contract to the lifting of the corporate veil may lead to “governing law shopping” and that would be undesirable.
- However, as a matter of policy, the Court retains a discretion to apply the law of the forum or some other more appropriate law if the interests of justice render it necessary. This would include situations where liability has been shielded by using a company that is subject to a law which does not permit the lifting of the corporate veil. In such cases, the court may nonetheless lift the corporate veil by applying the law of the forum instead.
The Court of Appeal in this case applied Singapore law (being the law of incorporation) to the issue of whether to lift HN Singapore’s corporate veil. Under Singapore law, there was no basis in this case to warrant the lifting of HN Singapore’s corporate veil. The appellant was therefore not personally liable.
Key Takeaways for Commercial Parties
First, this decision provides clarity for Singapore-incorporated companies.
- Given that Singapore law would generally apply to the issue of whether a company’s corporate veil should be lifted, there is sufficient certainty as regards the issue of liability for any foreign law-governed contracts entered into by Singapore companies.
- This is especially significant in the context of increasing volume of cross-border commerce, where contracting parties are often from different jurisdictions and business dealings may be governed by different laws.
- It remains to be seen whether other jurisdictions would likewise apply the law of incorporation to the same issue.
Second, the Singapore Courts have carved out exceptions to retain flexibility to protect claimants where corporate structures are deliberately used to evade and shield against liabilities.
- A claimant faced with a defendant that has deliberately been incorporated in a jurisdiction that does not recognise veil lifting and has abused this to further an improper purpose can nonetheless ask the Court to exercise its discretion to lift the corporate veil by applying the law of the forum or some other more appropriate law.
Finally, where necessary, parties contracting with Singapore-incorporated companies may wish to consider securing a personal guarantee or other types of security as a safeguard to ensure performance of the contract.
- In this case, the Court of Appeal found that there was no basis to lift HN Singapore’s corporate veil since that none of the established grounds to lifting the veil was made out.
- Notably, the Court of Appeal also noted that HN Singapore’s undercapitalisation should have been “readily discoverable” to the respondent, who could have asked for some form of security at the outset.
Given that the corporate veil is not readily lifted as a matter of Singapore law, contracting parties would do well to conduct their due diligence to assess a company’s financial health and capitalisation, and to manage contractual risks by obtaining additional security where necessary.
For further information, please contact:
Yanguang Ker, Herbert Smith Freehills
Yanguang.Ker@hsf.com
