Issues regarding section 76 of the Singapore Companies Act

B.        Problems

However, as attractive as the proposition that this should be the correct test in interpreting s 76(1)(a) may be, such an approach is not without significant problems.

1. No Risk or Low Risk

It is unlikely that a company can suffer no risk at all when it provides for financial assistance. All transactions that a company undertakes would contain an element of risk.

For instance, on the facts of Lew Syn Pau, it may be possible to find that the defendant company was put at risk. In the case, the public prosecutor attempted to widen the net of the prohibition to the Singapore parent of the assisting company (a Mauritian company). The High Court refused to lift the corporate veil of the subsidiary company and as a consequence, found that the Singapore parent suffered no depletion or risk of depletion of its assets. However, adopting a broad application the depletion criteria, it might be possible to find that the assets of the Singapore parent was in fact put at risk of depletion if there was a risk of depreciation to the value of the assisting company’s shares. Although this may be perhaps taking too broad a view, it should nonetheless be noted that if the corporate veil had been lifted, the broad application of the depletion criteria would be more likely to catch rather than release. In other words, a value judgment has actually been made with regards to what can be deemed to be acceptable risk, as opposed to whether the company suffered no risk, to which it most probably has not.

The notion that a company can suffer no risk at all when it provides financial assistance is untenable. If Menon J had meant no risk, it would be unlikely that this requirement could limit the scope of the prohibitions under s 76 in any real way. Rather, I believe that Menon J had actually meant low risk instead. If this was truly his meaning, this would seem to run contrary to the previously mentioned “common thread” of s 76(2) and the capital maintenance doctrine.

 

2. Legislative Intent of the s 76

While we have retained capital maintenance as the legislative intent of s 76, there are significant opinions expressed elsewhere that claim that the restriction of giving financial assistance is aimed at preventing a particular kind of abuse of power by directors, such as preventing market manipulation and preventing management of the company from interfering with the normal market in the company’s shares by providing support from the company’s resources to selected purchasers.

The shift away from capital maintenance with regards to the purpose of s 76 can be seen through recent developments. In light of the two new exceptions to the prohibition introduced by the 2005 Amendments under s 76 (9A) and s 76 (9B), significant doubt has arisen that the legislative intent is purely for the preservation of capital. If it is now permissible that companies are able to give financial assistance even out of capital, provided that, inter alia, the solvency criteria and the best interests of the company are met, then s 76 would seem to contradict the doctrine of capital maintenance. In this light, s 76 is perhaps best understood from the alternative perspective.

Therefore, the restriction on financial assistance is better seen as striking at an abusive and improper practice of corporate controllers and the protection of creditors. The fact that an act does not lead to the depletion of the company’s assets does not mean that the act is not objectionable. In truth, the company could actually benefit from an illegal financial assistance arrangement. If such was the case, the fact that the company has suffered no depletion of its assets when it provides financial assistance is irrelevant.

Further, if Parliament had intended for the depletion of assets to be a requirement for the finding of financial assistance, it would probably have included it in the 2005 Amendments. In this context, it is conceivable that the legislature had intentionally omitted the requirement for the depletion of a company’s assets from s 76 and had intended the act to be sufficiently wide so as to prevent abuses. If this is true, then Menon J’s statement would be reading too much into legislative intention. As such, it is respectfully submitted that the requirement for the depletion of a company’s assets should not be considered a pre-requisite of finding for financial assistance.

3. Commercial Interests and Financial Assistance

We now move on to consider the second part of Menon J’s statement, which says that even if there was a depletion of the company’s assets, it would not automatically mean that s 76 had been contravened. In other words, even if there was a depletion of the company’s assets, the transaction could still not fall within s 76, so long as the impugned transaction is in the commercial interests of the in question. In support of this proposition, Menon J brings forth compelling policy arguments, saying that: “It would neither be desirable from the perspective of promoting legitimate enterprise nor necessary from that of protecting the company and its creditors, since some risk is inevitable in free enterprise, to lean in favour of invalidating such transactions without regard to the real commercial interests that caused the company to enter into the transaction.” He then moved on to endorse a similar proposition made by Buckley LJ’s in Belmont Finance Corporation v Williams Furniture Ltd (No. 2). In addition, he also cites the Court Appeal decision in Intraco Ltd. V Multi-Pak Singapore Pte Ltd with apparent approval.

1. “Reason” and “Purpose” – a Brief Overview and Comparison

Intraco has been frequently cited as the authority for the above mentioned principle. Both High Courts in WuYang Construction Group Ltd. v. Zhejiang Jinyi Group Co. Ltd. and Others and Lew Syn Pau cited it for this proposition and with apparent agreement. However, in Wu Yang Construction Group Ltd v. Mao Yong Hui and another, Chan CJ said that the earlier Court of Appeal decision in Intraco was mistaken, at least to the extent that it thought that the bona fides and legitimate commercial intent of the company could always absolve a transaction from violating the financial assistance rule. He clarifies that the element of commercial interest is only relevant when examining the purpose for which the company had entered into the transaction. In the Court’s opinion, the decision in Intraco had confused the two elements of “reason” and “purpose” and had come to the wrong conclusion on the scope of s 76(1) .

The distinction between the purpose for which the assistance is given and the reason why the purpose is formed is an adoption of the distinction drawn by the House of Lords in the case of Brady v Brady, which Chan CJ adopted as authoritative. In Brady, it was made clear that an unlawful purpose is not removed by the fact that the directors were motivated by the best interests of the company. Their motivation was a reason for their act, rather than the purpose itself. In delivering his judgement, Lord Oliver pointed out that “purpose” had to be distinguished from “reason” or motive which would almost always be different and wider.

This distinction makes good sense. As was mentioned earlier, given that one of the apparent legislative intents of the act is to protect against corporate abuse, the fact that the company had actually benefited from the transaction does not mean that its actions were not objectionable. For example, even if the reason that the company had entered into a transaction was for its own benefit, it should not prevent it from offending s 76 if the main purpose or one of the purposes of the transaction was to provide financial assistance to the intended purchaser so as to enable him to acquire shares in the company.

2. The Prohibition in Singapore – a Wide Scope

We shall consider the scope of s 76 in comparison to the UK. The rule in Singapore is quite different from the English purpose exception. S 76(1)(a) still retains the phrase “in connection with” and “for the purpose of”, and appears to treat them as distinct alternatives, so that if the company escapes the prohibition under the purpose limb, it would nonetheless be caught by the wider “in connection with” limb. S 76(3) and (4) further elaborate these two phrases in s 76(1)(a).

The scope of s 76 of the Singapore Companies Act is significantly wider than the UK equivalent. For example, in relation to purpose under s 76(3), it is sufficient that the acquisition of shares was a substantial purpose of the financial assistance. The fact that there was another principle purpose to the assistance (i.e. for the commercial interests of the company) would fall within the purpose exception of the UK act, but not exempt a company from the Singapore prohibition. Further, under s 76(4), even if the acquisition of shares was not a substantial purpose for the assistance, it could still fall within s 76 if the company was aware that the assistance would result in the acquisition of the company’s shares. On the other hand, assistance which only incidentally helps in the acquisition of a company’s shares would fall within the UK purpose exception, assuming the assistance is given in good faith in the interest of the company.

Here, it is apparent that the ambit of s 76 is very wide and may potentially catch even innocuous transactions. There have been several attempts to narrow it, including what was set out in Lew Syn Pau by Menon J. Additionally, Andrew Phang J, in the High Court version of Wu Yang, said that the phrase “in connection with” should be read restrictively, so that it is consistent with the meaning of the phrase “for the purpose of”. His justification for this was that s 76 was not meant to capture transactions which were “entered into bona fide in the commercial interest of the company itself.” While such a reading could help in narrowing the ambit of s 76, it should be noted that Phang J’s suggestion was mere obiter and contradicts the strict approach of the Court of Appeal.

Unlike the High Court in both the cases of Wu Yang and Lew Syn Pau, the Court of Appeal approach in Wu Yang clearly departs from its previous decision in Intraco. This decision is widely perceived to be a step back from the perspective of those who prefer to construe the prohibition on financial assistance restrictively. However, this is not to say that the Wu Yang approach is unreasonable in application.

For instance, if one adopts a strict reading of s 76, any financial assistance which escapes the “purpose” limb would nonetheless fall within the “in connection with” limb so long as the company was aware that the acquisition of shares would result from the assistance.  Even if the sole purpose of the transaction was for the benefit of the company and the acquisition of shares was merely coincidental, the prohibition under s 76 could still bite.

Under such a regime, it would seem that the facts of Wu Yang did fall into the literal ambit of s 76(1)(a), but possibly not within the spirit of the section. S 76 could not have been intended to block legitimate commercial transactions. As such, although the proposed tests differ, both the High Court and Court of Appeal in Wu Yang considered the transaction to be to be a genuine commercial one which did not contravene s 76. Thus, the Wu Yang approach is unreasonably in application.

IV.        The Need for Change and the Current Stand

The discussion on the ban on financial assistance under s 76 is far from over. In view of the fact that there is a huge range of fact situations where such issues may arise, it is submitted that s 76 should be reviewed in the next round of amendments to the Companies Act. To begin, the first inquiry should be with regards to whether s 76 is still relevant today, given that these rules could still be controlled through other means. In the alternative, a clear set of guidelines with regards to legislative intent should be set out so as to guide courts in the application of s 76 to the myriad of fact situations.

However, while commercial realities would compel me to agree with Menon J’s statement and the decisions prior to Wu Yang in the Court of Appeal, as the law stands now, I am more inclined to agree with Chan CJ’s broad interpretation of the prohibitions in s 76. Such a reading would be more in-line with a literal understanding of the statute and is more congruent with the supposed legislative objectives of both capital maintenance and the protection against abuses. While it is evident that further changes to the section should be made, they should be made by the legislature rather than the judiciary. The efforts of the other judges are valiant in attempting to uphold the spirit of the statute; however this amounts to judicial writing into the rule and would seem to go against the literal wording of the statute.

Hence, with regards to whether a bona fide transaction would exempt a company from s 76, it is submitted that the court has to find that the company’s interests were the primary purpose of the transaction, as opposed to a mere reason, and additionally, should the court find that the supposed financial assistance was also a substantial purpose, s 76 would still be contravened.

V.        Conclusion

In conclusion, with reference to the current iteration of s 76, the broader approach taken by the Court of Appeal in Wu Yang is more preferable to Menon J’s proposition. The depletion of corporate assets should not be considered to be a requirement for the finding of financial assistance under s76 and even if corporate assets were depleted, the fact that the transaction was entered into for the companies’ own commercial interests would not by itself automatically exempt a company from contravention of s 76.

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