Singapore: Financial Assistance and Directors' Duties

Publication Date01 January 1996
Date01 January 1996
AuthorHans Tjio
SubjectAccounting & finance
Journal of Financial Crime Vol. 3 No. 3 International
Singapore: Financial Assistance and Directors' Duties
Hans Tjio
Rules to preserve corporate assets are a necessary
by-product of limited liability, as well as a means
of limiting agency costs arising from the separation
of ownership and control. Hence, it is axiomatic
that the directors of a company are required to act
fide in the best interests of the company; Re
Smith & Fawcett.1 The weakness of the common
law duty is that courts are reluctant to substitute
the business judgments of the controllers with
their own. According to Lord Wilberforce, in
Howard Smith
'There is no appeal on merits from management
decisions to courts of
nor will courts of law
assume to act as a kind of supervisory board
over decisions within the powers of manage-
ment honestly arrived at.'
Consequently, statutory controls are needed in
particularly egregious situations. For example, s. 76
of the Singapore Companies Act3 provides that 'a
company shall not whether directly or indirectly,
give any financial assistance for the purpose of, or
in connection with the acquisition by any person,
whether before or at the same time as the giving of
financial assistance, of shares or units of shares in
the company'. The section was modelled on s. 67
of the Australian Uniform Companies Act 1961 as
well as s. 54 of the UK Companies Act 1948. In
1987 substantial amendments brought it in line
with s. 129 of the Australian Companies Act 1981,
now s. 205 of the Australian Corporations Law
Ltd v Multi-Pak
Pte Ltd (in
receivership),4 Multi-Pak purchased debts from
Intraco which were owed to it by City. The same
persons managed both City and Multi-Pak. City
was technically insolvent. If wound up, unsecured
creditors would have received only five cents to
the dollar. Yet Multi-Pak obtained only a slight
discount on the price they paid Intraco for the
At first instance, the judge held that the
directors of Multi-Pak acted in breach of fiduciary
duty in purchasing the debts. Intraco, with at least
constructive knowledge of such breach, was liable
as knowing recipient of the money they received.
The judge disregarded the fact that, almost
immediately after the assignment, Intraco agreed to
subscribe for shares in Multi-Pak at par value. The
net effect of the two agreements was that no
money changed hands between the parties.
The Court of Appeal, however, accepted the
link between the two transactions, and allowed the
appeal. There was a good commercial justification
for Multi-Pak to purchase the debts. Intraco was a
government-linked company. Having it as a 20 per
cent shareholder enabled Multi-Pak to obtain loan
facilities, which were otherwise not forthcoming.
Further, by converting the purchased debt into
equity, the directors intended to make City a
downstream subsidiary of Multi-Pak. Recognition
of the link between the debt and share purchases,
however, forced the Court of Appeal to confront
the issue of financial assistance.
Following Hoffman J in
Charterhouse Investment
Trust v Tempest
the Court of Appeal held
Page 307

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