Legal Nature of a Singapore Private Limited Company

Often, when new entrepreneurs set out to incorporate a Singapore private limited company, they are confronted with certain basic questions that revolve around the definition of a company. For instance, what are the connotations of the term legal personality in the context of companies? what constitutes the Singapore company? who runs the company? what are their functions and liabilities? what is meant by a company's Memoandum and Articles of Association? where and how does limited liability come into play?

This articles provides answers to most of these questions and serves as an excellent starting point for individuals who are setting up a private limited company in Singapore for the first time. For other related topics, see: 

• Singapore Business Entities Types guide provides a comprehensive overview of the various types of business entities (including private and public companies, sole proprietorships, and partnerships) so you can decide on the most suitable business structure for your needs.
  
• Singapore Company Incorporation guide provides detailed information on requirements, procedure, and timeline of incorporating a private limited company in Singapore.

Legal Nature of a Company

Singapore Companies have two legal characteristics that enable them to undertake activities in their own right. They are:

1. Separate legal personality
2. Legal capacity 

Separate legal personality

The law treats a Singapore company as being a separate person from its members and those who manage its operations. What this essentially implies is that:

1. The company can incur and receive obligations and hold property in its own name, enter into contracts with its members, directors or employees and with outsiders, be the registered proprietor of land and own chattels.
2. The company can be the plaintiff or defendant in civil proceedings and in certain cases may be a defendant in criminal prosecutions.
3. The legal rules that separate a company from its participants are referred to by lawyers as the corporate veil.
4. The company continues unchanged even if the identity of its participants changes.
5. The company can enter into legal relationships with its members or directors. 

Consequences of treating a company as a separate legal entity

1. A company's obligations and liabilities are its own and not of its participants.
2. A company's rights are its own and not those of its participants.
3. A company can sue and be sued in its own name.
4. A company has perpetual succession.
5. A company's property is not the property of its participants.
6. A company can contract with its controlling participants. 

Piercing the corporate veil

Despite the general rule that a Singapore company and its participants must be treated as separate legal entities, courts under certain circumstances (outlined below), treat both as the same person.

1. Where the corporate form is used to avoid an existing legal duty
2. Where the company is being used to perpetuate fraud
3. Where the company is acting as the agent or partner of the controller
4. Wrongful trading provisions 

Legal capacity

Companies' ability to carry out acts of legal effect is referred to as their capacity.

1. Companies have full capacity to carry on or undertake any business or activity, do any act or enter into any transaction.
2. Companies have the legal capacity to do most of the things that a natural person can do and some additional things (such as issue shares and create floating charges over their property). 

However participants of the company may be permitted to decide on the limits of the powers of their creation. These limits may be spelt out in the company's constitutional documents - the Memorandum of Association and Articles of Association. 

Elements of a company

Companies operate through servants or agents. The directors have been likened to be the "brain and nerve centre" of the company, followed by the members or shareholders. They represent the mind and will of the company and control what it does. Acts of the directors and members are acts of the company. The scope of the powers of each of these organs is defined by the Memorandum and Articles of Association, in addition to the general principles of company law. 

Managing companies is all about making decisions and this responsibility is shared between the board of directors and the members (shareholders). The Board has the power to manage the business of the company and the members are entitled to vote on limited matters, expressly reserved to them by the Memorandum or Articles of Association or Company Law. 

Responsibilties and Liabilities of Directors

Every Singapore company must have at least one director, who must be ordinarily resident in Singapore. Listed companies are required to have three directors. 

Role of directors

The role of directors is to manage or supervise the management of the business of the company. Functions vary depending on the size and type of company and the role of directors in it. In the case of small businesses, the directors manage the company's business, in the sense, they work in the business and make day to day decisions involved in running it. In larger companies, directors take on a supervisory function, leaving day to day decision making to the executive management. As most of the company's powers are vested in the board of directors, they actually control its affairs and are thus answerable to the company's shareholders collectively. 

Directors have very broad powers of management. This means that most of the capital and enterprise decisions that must be made by the company in the course of its operations, will be made by the directors. 

Broadly speaking directors can exercise the following powers in managing the business of the company:

1. appoint additional directors
2. borrow money
3. convene meetings of the company
4. delegate their powers
5. forfeit shares
6. issue shares
7. issue debentures
8. issue negotiable instruments
9. make calls subject to any limitations in the company's Articles
10. pay brokerage that is reasonable
11. petition in bankruptcy
12. reject or transfer shares
13. sue 

Duties of directors fall under two broad categories

1. Statutory duties of care, skill and diligence
2. General law duties or fiduciary duties of loyalty and good faith 

Statutory duties are administrative duties, enforced by the Singapore Accounting and Corporate Regulatory Authority of Singapore (ACRA) such as: 

1. General duties of disclosure.
2. Proper keeping of accounting records to sufficiently explain the transactions and financial position of the company.
3. Preparation of the financial statement, giving a true and fair view of the state of affairs of the company, for the company's Annual General Meeting. The directors must ensure that the first AGM is held within 18 months of the incorporation of the company and, following that, in every calendar year at not more than 15 months interval.
4. Proper calling and conduct of company meetings (directors meeting and shareholders meeting). The directors should ensure that there are regular meetings to review the company's financial and trading position properly. The frequency of the meetings depend upon the nature and scale of the company's operation. Additionally, the shareholders are required to meet with each other and vote on certain issues which require their agreement.
5. Maintaining statutory books. Every company shall keep a register of its members and the various statutory books at the company's registered office or some other appropriate place where notice of the place has been lodged with the Accounting and Corporate Regulatory Authority (ACRA). In addition, minutes of directors and shareholders' meeting must be maintained.
6. Appointment of Auditors within three months of the company's incorporation, who will hold office until the conclusion of the first Annual General Meeting where they may be reappointed. 

General law or fiduciary duties, enforced by the Company include:

1. Duty to act in good faith in the interests of the company. In other words, the director must act honestly. The interests of the company are the interests of its

• members
• the company as a commercial entity separate from its members
• creditors
• other companies in the group of companies
• employees, customers, suppliers and the community 

2. Duty to act in good faith for a proper purpose. 

3. Duty to retain discretion. Directors cannot undertake or agree that they will not exercise powers given to them in the company's Articles of the Companies Act. They must utilise their freedom to make decisions on the behalf of the company wisely, and can delegate their powers, provided it is done with proper authority. 

4. Duty to avoid conflicts of interest. There are three levels of regulation applicable to this duty.

• General law rules
• Company's Memorandum and Articles of Association
• Statutory provisions in the Companies Act 

As per general law rules: directors must not place themselves in a position of conflict, where a personal interest conflicts with their duty to act in the interests of the company. 

As per the Memorandum and Articles of Association, a director can have a conflict of interest provided he discloses the interest. 

As per statutory regulations, directors should engage in

• disclosure of transactions with the company, where the interest is materialist and
• disclosure of potential conflict arising from holding other offices or possessing property. 

5. Duty not to engage in wrongful reckless trading

Sec 339 (3) of the Companies Act places on the directors of a company, a duty not to knowingly incur debts where there is no reasonable ground for expecting that the company would be able to pay its debts. This duty comes into play only if the company is being wound up or there are legal proceedings against the company. 

6. Duty against the improper use of information

Sec 157 (2) of the Companies Act prohibits directors from making improper use of information, that they acquire by virtue of their position, to meet their personal gains or to cause detriment to the company. 

Director liabilities

Statutory duties and liabilities of Singapore company directors are enforced by the Accounting and Corporate Regulatory Authority of Singapore (ACRA). Consequences of breach of statutory duties can involve any of the following:

• a fine imposed by the Registrar
• legal proceedings can be initiated and if the offender is found guilty, criminal penalties can be imposed, such as fines and prison sentences
• registrar may impose a fine and default penalty without instituting legal proceedings

General law duties are enforced by the company of the which the person is a director. The company may bring legal action to enforce these duties. The company's civil remedies (i.e. the legal means to recover a right, or to obtain redress for a wrong) for breach of general law duties include:

1. court injunction requiring the director to stop doing something or to make him/her take remedial action
2. where there is a loss to the company due to the breach of duty, the company can demand compensation from the director
3. account of profits - where the director has made a profit by breaching fiduciary duties the company can demand that he repay the profits
4. rescission of contract - where a contract is rescinded (i.e. terminated) because of a director's breach of duty, the parties to the contract may be returned to the position held before the contract was entered into
5. constructive trust - if by a breach of duty, the director has some property of the company, the company can seek a court order that the director holds the property on trust for the company. In other words, he cannot sell it and must return it to the company upon request. 

Role, rights and duties of shareholders

Role of shareholders

Shareholders are members of a company. All Singapore companies are required to have at least one member. Members are, broadly speaking, owners. They are people who have invested money with the company in the expectation that they will receive a return of their investment, if the company is successful, either in the form of distributions paid out of the company's profits during its trading life or in the form of a growth in the value of their investment in the company, over time. In a company limited by shares, members are shareholders - people who have subscribed for or purchased shares in a company. Shareholders play an important role in raising capital for organizations. 

Shareholders are granted special privileges, including the right to vote on matters such as elections to the board of directors, the right to propose shareholder resolutions, the right to share in distributions of the company's income, the right to purchase new shares issued by the company, and the right to a company's assets during a liquidation of the company. Generally, shareholders have a say in limited matters, when compared to directors. 

Broadly speaking shareholders have the following powers:

1. power to adopt, modify or repeal provisions in the company's Memorandum or Articles
2. power to veto certain reductions of capital, and in the case of public companies
3. power to remove directors from office and approve auditors

Shareholders also have reserve powers in the following matters

1. where the Board is unable to act
2. to commence and prosecute legal proceedings where the alleged wrongdoers control the company
3. to ratify directors' acts

Shareholders Rights

Shareholders enjoy the following rights

1. Voting Rights
2. Distribution Rights
3. Right to receive information
4. Class Rights 

Voting Rights is the main control device that members of a company usually have. Understanding shareholders voting rights encompasses three issues

• On what matters and in relation to what decisions are they given a vote
• In what circumstances can they initiate consideration of an issue (rather than just accept or reject a proposal put to them by others)
• How many votes does each shareholder have 

Distribution Rights refers to shareholders' entitlement to receive money or assets from the company. Distribution by companies to their shareholders can be in the form of

• dividends which are payments from the company's profits
• a return of capital - which is the return to the shareholder of the amount originally subscribed for the share and
• an entitlement to share in the company's surplus assets on winding up 

Right to receive Information. The Singapore Companies Act gives members the right to receive information about the company.

1. It helps to prevent the company's managers from acting to the detriment of the shareholders.
2. If an irregularity has occurred in the conduct of the company's affairs, the ability to obtain information can be important for shareholders in deciding whether to take action against the wrongdoers. 

Class rights. Where a Singapore company has issued shares of different classes, the right attaching to each class is called class rights. Sec 75 of the Companies Act requires that the terms of issue of preference shares and other classes, must be set out in the company's Memorandum or Articles of Association. 

Limited Liability of shareholders

In the case of Singapore companies limited by shares, the liability of the members to contribute to the debts of the company is limited to the amount that they each agreed to contribute as capital to the company. If the amount has already been fully paid to the company, then members need not contribute anything more to the company's debts. If the amount has not been fully paid then the members' liability is limited to the unpaid amount. 

The effect of limited liability is that members of a company limited by shares, are generally not required to contribute amounts from their personal wealth beyond the subscription price of their shares, to meet the debts of the company. 

Members Remedies

Statutory remedies available to members are as follows:

1. taking legal action to obtain any of a wide rage of remedies for oppressive conduct
2. seeking to wind-up the company because it is just and equitable to do so
3. seeking an injunction to prevent someone from contravening the provisions of the Companies Act
4. seeking to prevent a variation of any rights attached to the shares of the member 

General law remedies

Shareholders can seek remedies under the following circumstances:

1. where the personal rights of a shareholder is affected
2. the shareholder has been oppressed

   the shareholder's interests have been disregarded

3. the shareholder has been discriminated against 

Company Secretary's Role

Every Singapore company is required to have at least one company secretary who must be a natural person and have his/her principal or only place of residence in Singapore. The company directors appoint the company secretary and the Articles of Association provide for the terms and conditions of office to be determined by the director. 

The Company Secretary occupies a pivotal role in the administration of the company. He/she is the person who ensures compliance with the many regulations affecting companies. He is the one who keeps the necessary registers, sends out notices, organizes meetings, takes down minutes and files whatever forms are required by ACRA. The main function is to handle all the paperwork and procedural matters involved in running an incorporated company. In short, the smooth running of the company depends on his efforts. 

Key duties include

1. establishing and maintaining all company registers
2. arranging for shareholder and director meetings
3. lodging and filing documents with ACRA
4. acting as a liaison with he Stock Exchange and ensuring compliance with requirements (announcements, disclosure etc.)
5. arranging for allotment and issue of shares and handling transfer and transmission of shares
6. providing administrative assistance in the preparation and presentation of annual returns
7. acting as advisor to directors, other officers and members
8. acting as intermediary between directors and officers of the company
9. responsible for custody and use of common seal of the company and legal documents. 

Memorandum and Articles of Association

Singapore Company Law provides a mechanism by which participants can agree upon the basis on which various things connected with the ongoing operation of the company will be carried out. This is done through the company's constitutional documents - Memorandum and Articles of Association. 

The Memorandum of Association sets out the key characteristics of the entity that has been created. The Articles of Association set out how the company is internally regulated. All companies must have a set of Articles of Association. Companies are generally free to design their own or may choose to adopt by default, the set of articles provided for in the Fourth Schedule of the Companies Act, referred to as Table A. The Memorandum and Articles of Association are meant to complement each other. Where there is a conflict, provisions in the Memorandum will prevail over those in the Articles. 

Content of Memorandum of Association

The memorandum defines the company. A company's Memorandum of Association must be dated and should at least contain the following:

1. name of the company
2. details about the company's share capital
3. full names, addresses and occupations of the subscribers to the memorandum and
4. a statement indicating the subscribers desire to form the company and their agreement to take up shares in it 

Content of Articles of Association

The Articles of Association generally contains provisions that regulate the internal management of the company. Companies are generally free to decide on the content of their articles. Articles normally deal with matters that relate to:

1. the issue of share capital and the variation of rights attached to shares
2. liens and calls on shares, as well as, transmission and forfeiture of shares
3. procedures for general meetings of the company and notices relating to the same 

Legal effect of Memorandum and Articles of Association

The memorandum and articles are regarded as a statutory contract between a company and its members, and among the members themselves. It binds even new members entering the company. Non-compliance with the Articles is amount to procedural irregularity. If a provision of a company's Memorandum or Articles of Association is not observed then:

1. in case of non-compliance by a company, a member may be able to obtain a declaration or injunction requiring the company to comply
2. in case of non-compliance by a member, another member of the company may be able to obtain declaratory or injunctory relief or damages. 

Shares and Share Capital

What is a share?

Shares represent ownership in a company. When an individual buys shares in a company, they become one of the owners of the business. This entitles them to a share of the distributed profits of the company, known as dividends. 

A share in a limited company, is a claim against the company to which the rights set out in the Companies Act and the company's Memorandum and Articles of Association attach. Generally those rights will be:

1. Distribution Rights (i.e. rights to receive dividends during the company's life, and, depending on the terms of issue of the particular share, rights to repayment of the principal and to share any surplus assets of the company on a winding up) and
2. Control Rights (i.e. rights to exercise some control over the management of the company's affairs, generally taking the form of a right to vote on particular decisions affecting the company) 

Share Capital

The company's share capital is the amount of money or assets contributed to the company, by its members when they subscribe for shares in the company. In subscribing for a share, a person who wishes to become a member takes some of their own money or assets and contributes that amount to the company. The amount contributed becomes the property of the company, and the contributor is issued with shares in the company, which may be ordinary shares or shares with particular rights attached. Share capital is a principal source of finance for companies limited by shares. 

The minimum share capital requirement for Singapore companies is $1. 

It is interesting to note, that the concept of authorised capital - the amount of share capital, with which the company proposes to be registered, and the division thereof into shares of a fixed amount - has been abolished in Singapore and no longer applies to companies incorporated here.