Written by: Chai Wen Min

I. Introduction

You own a company. The company is being wound up, because there is nothing left to pay its creditors. Are your personal assets now at risk? The short answer is no, but this ultimately depends on (a) the nature of the company, (b) the type of claim, and (c) your level of involvement in the company.

II. Are your Personal Assets now at Risk?

B. Default Position

If one assumes the most common form of business,[1] ie, a private company limited by shares,[2] upon winding up, the shareholder’s liability is limited to that which remains unpaid on his or her shares.[3] To illustrate, if John, a shareholder subscribes for ten shares at a dollar each, and has paid up two dollars, he is only liable for that which remains, ie eight dollars. Beyond this, John has no obligation to make further contributions, even if his company is drowning in debt and has nothing left to pay off its creditors.[4] The protection of the shareholder’s assets here is also known as “defensive asset partitioning”.[5]

The reason why this works stems from the fact that a company enjoys a separate legal personality.[6] The company is treated legally as a distinct person, capable of suing and being sued.[7] Its assets are similarly distinct from the shareholder’s personal assets; neither party has an interest in the other’s assets.[8] The company’s creditor therefore cannot call on a shareholder’s assets, even if the shareholder effectively controls the company.[9] Instead, he must look to the company for repayment of his debt.[10] This holds true, even when winding up.[11]

B. First Exception: Fraud

The court may however, in certain cases, ignore the separate legal personality rule and find that a shareholder is still personally liable for the company’s debt. Most commonly, this occurs where fraud is proven.[12] For instance, the court in Re Darby allowed the company’s liquidator to proceed against two shareholders on the basis that fraud had been committed.[13] This was because the shareholders were two undischarged bankrupts who had caused their company to purchase property from another company that they had owned, and at an inflated value as well.[14] Personal liability was therefore imposed on the defendants as shareholders of the latter company.[15]

A similar exception is now reflected in s 340(1) CA,[16] which states that anyone who is a knowing party to the carrying on of the company’s business with “intent to defraud” its creditors may be liable for all or any of the company’s debts. This was seen in Tong Tien See,[17] where three shareholders were held personally liable for their company’s fraudulent trading.[18] Notably, this exception is broader, as it applies to “any person”[19] with knowledge of the fraud, and not just shareholders.[20]

C. Second Exception: Wrongful Trading

A shareholder may also be liable for the company’s debts where “wrongful trading”[21] is concerned. Briefly, if in the course of winding up a company, it appears that (a) the shareholder was a knowing party to the company incurring a debt, (b) the shareholder is an officer of the company,[22] and (c) there was no reasonable ground to expect that the company was able to repay the debt, then he or she would be liable for that debt.[23] Tong Tien See is a prime example of this. The shareholders knew that the company was in “dire financial straits”, but still falsified company accounts to give an impression that their company was in good health.[24] They were thus personally liable to repay the debts incurred by the company.[25]

D. Third Exception: Alter Ego or Agency

Finally, where the company contracts a debt on the shareholder’s behalf, the court might find the shareholder liable for that debt instead. This is known as the “alter ego” or agency exception, and usually occurs where a shareholder (a) controls the company,[26] and (b) mixes the company’s assets with his or her own personal assets.[27] Essentially, the court disregards the company’s separate legal personality because the shareholder himself has ignored This was seen in Sumito,[28] where the shareholder, Alwie, had redirected money meant for the company to his own bank account.[29] At first instance, the High Court found that he was liable for the company’s debts due to the improper mixing of assets.[30] This finding was also upheld on appeal,[31] although it proved to be ultimately inconsequential, since, on the facts, the company was not liable for unjust enrichment or conversion.[32]

III. Which Of Your Personal Assets May Be Affected, And How?

Assuming the shareholder’s personal liability is established, the creditor may apply to the court to seize the shareholder’s property.[33] If the debt is at least $15,000, he may even request that the shareholder be declared bankrupt.[34] Nevertheless, certain property is still protected and cannot be sold or seized.[35] These include:

  • certain tools of trade;[36]
  • personal belongings and necessary household furniture;[37]
  • the debtor’s salary (after deducting monthly contributions, if applicable);[38]
  • property that may be excluded under any other written law;[39] and
  • property held on trust by the debtor.[40]

Notably, the fourth exception protects the contributions to the shareholder’s Central Provident Fund[41] and also prevents the sale of Housing Development Board flats where at least one owner is a Singaporean citizen.[42] This ensures that the average debtor still has his daily needs provided for and also a place to call home.[43] Of course, if the debtor owns a private property, that will not be protected, and he will likely have to sell the property off and downgrade to a cheaper accommodation.

IV. What Can You Do To Protect Yourself?

A. The Fraud Exception

Where the first exception of fraud is concerned, a neat trick to avoid any finding of fraud is to give a personal guarantee for the company’s debts. This entails doing what might seem counter-productive, but the courts have found that the giving of personal guarantees for a company’s debts can negate a finding of fraud.[44] Losses would include the guaranteed sum, but the potential risk of full-blown liability is very much lowered. Now, not much can be done if you have already been found guilty of fraud. That is spilt milk and personal liability invariably follows. But there is, however, some saving grace. This is because the shareholder is only liable for the debts that have arisen due to his fraud.[45] In that sense, there is still some protection available.

B. The Wrongful Trading Exception

Protecting yourself from a wrongful trading charge is easier. You should simply appoint other people to carry out the company’s business. This is because liability for wrongful trading only arises if the shareholder is also an officer of the company, eg a director.[46] It is however presently unclear whether a shareholder who influences or has control over the directors that he appoints may be treated as a shadow or de facto[47] If so, conceivably, liability for wrongful trading may still arise. Nevertheless, assuming you retain oversight as a director, you should keep abreast of the company’s financial situation and disengage the company from certain transactions if the company cannot reasonably meet its financial obligations thereunder.

C. The Alter Ego or Agency Exception

You can also take steps to actively protect yourself where the “alter ego” or agency exception is concerned. As mentioned earlier, the mixing of a company’s assets with personal assets is a key determinant in finding that the company is merely an agent or “alter ego” of the shareholder.[48] A shareholder would thus do well to avoid using the company’s assets as his own,[49] and he should also maintain some form of transparency in the company by observing the usual “corporate formalities and governance rules”,[50] eg by having dual signatories on the company’s bank account.

V. Conclusion

In summary, stay clean and stay alert. A shareholder is always entitled to run his or her company the way he or she chooses. But these choices inevitably have consequences. In a somewhat strange twist of fate, the personal assets of a shareholder are best guarded if he or she is merely a passive investor, ie, he or she is not involved in the company. This is because without knowledge or any control of the company’s affairs, there is no basis to pin personal liability onto a shareholder. At best, your exposure is whatever that is left unpaid on your shares. These are ultimately sunk costs, and should be treated as such.

* Year 3 LL.B. undergraduate, School of Law, Singapore Management University.

Disclaimer: This article does not constitute legal advice or opinion. Lexicon and its members do not assume responsibility, and will not be liable, to any person in respect of this article. In particular, this article does not address the modifications that COVID-19 (Temporary Measures) Act 2020 makes to s 339(3) of the Companies Act. Notably, the Insolvency, Restructuring and Dissolution Act (No. 40 of 2018) mentioned in this article has yet to come into force.

[1] Victor C S Yeo, Articles on Singapore Law (2005) at [14.5.6].

[2] See s 19(4)(a) Companies Act (Cap 50, 2006 Rev Ed) (“CA”).

[3] See s 250(1)(d) CA.

[4] See s 22(3) CA.

[5] Henry Hansmann, Reinier Kraakman, Richard Squire, “Legal Entities, Asset Partitioning, and the Evolution of Organisations” (November 2002) (“Hansmann”) at pg 6.

[6] Goh Chan Peng v Beyonics Technology Ltd [2017] 2 SLR 592 (SGCA) (“Beyonics”) at [71].

[7] Ng Heng Liat v Kiyue Co Ltd [2003] 4 SLR(R) 218 (SGHC) at [12].

[8] Macaura v Northern Assurance Co Ltd [1925] AC 619 at 626.

[9] Beyonics, supra n 6, at [72] and [75].

[10] Hansmann, supra n 5, at pg 6.

[11] See s 250(1)(d) CA.

[12] Gerhard Hendrik Gispen v Ling Lee Soon Alex [2001] SGHC 350 at [128].

[13] In re Darby ex parte Brougham [1910] 1 KB 95 (“Re Darby”) at 101.

[14] Ibid.

[15] Hans Tjio, Pearlie Koh, Lee Pey Woan, Corporate Law (Academy Publishing, 2015) (“Hans Tjio”) at [06.042].

[16] See also s 238(1) of the Insolvency, Restructuring and Dissolution Act (No. 40 of 2018) (“IRDA”).

[17] Tong Tien See Construction Pte Ltd v Tong Tien See [2001] 3 SLR(R) 887 (“Tong Tien See”).

[18] Id, at [64].

[19] See s 340(1) CA.

[20] Tan Cheng Han S.C., Walter Woon on Company Law (Sweet & Maxwell, Rev 3rd Ed, 2009) at [2.54(5)].

[21] See s 239(12) IRDA.

[22] Under s 4(1) CA, an “officer” in relation to a company includes any director or secretary thereof, or any person employed by it in an executive capacity.

[23] See s 339(3) read with 340(2) CA.

[24] Tong Tien See, supra n 17, at [64].

[25] Id, at [95].

[26] Control is of course insufficient: see this article at [3].

[27] Hans Tjio, supra n 15, at [06.050] and [06.054]; see Asteroid Maritime Co Ltd v The owners of the ship or vessel “Saudi Al Jubail” [1987] SGHC 71 (“Saudi Al Jubail”) at [21].

[28] Tjong Very Sumito v Chan Sing En [2012] 3 SLR 953 (“Sumito”).

[29] Id, at [71]; Alwie Handoyo v Tjong Very Sumito [2013] 4 SLR 308 (SGCA) (“Alwie”) at [99].

[30] Sumito, supra n 28, at [73].

[31] Alwie, supra n 29, at [100].

[32] Alwie, supra n 29, at [88].

[33] See O 45 r 1(a) read with O 47 of the Rules of Court (Cap 322, R 5, 2014 Rev Ed).

[34] See s 61(1)(a) of the Bankruptcy Act (Cap 20, 2009 Rev Ed) (“BA”).

[35] See s 13 of the Supreme Court of Judicature Act (Cap 322, 2007 Rev Ed) (“SCJA”); s 78(1) read with 78(2) BA; FAQ 10 for Information for Creditors, Ministry of Law <https://io.mlaw.gov.sg/bankruptcy/information-for-stakeholders/information-for-creditors/&gt; (accessed 14 June 2020).

[36] See s 13(b) SCJA; see also s 78(2)(b) BA.

[37] See s 13(a) SCJA; see also s 78(2)(c) BA.

[38] See s 13(c) SCJA; see also s 78(2)(e) BA.

[39] See, eg s 51(6) of the Housing Development Act (Cap 129, 2004 Rev Ed) (“HDA”); s 78(2)(d) BA.

[40] See s 78(2)(a) BA.

[41] See s 24(1) read with 24(2)(c) of the Central Provident Fund Act (Cap 36, 2013 Rev Ed).

[42] See, eg s 51(5) read with s 51(7) HDA.

[43] See also Peter Low LLC v Higgins, Danial Patrick [2018] 4 SLR 1003 at [125].

[44] Traxiar Drilling Partners II Pte Ltd v Dvergsten, Dag Oivind [2019] 4 SLR 433 (SGHC) at [126].

[45] Morphitis v Bernasconi [2003] Ch 552 at 579.                     

[46] See s 339(3) read with 340(2) CA.

[47] Under s 4(1) CA, the definition of a director includes shadow or de facto directors.

[48] See this article at [7].

[49] See eg Saudi Al Jubail, supra n 27, at [21].

[50] Hans Tjio, supra n 15, at [06.050].