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Court
ruling may be crippling for business
OCTOBER 5, 2002, may well
be remembered as the day multiple directorships finally met their deserving
end in Singapore.
That was the day the
Court of Appeal decreed that any two companies sharing one or more directors
are deemed 'connected' and might share financial obligations. 'It is right,'
the Court said, 'and not unfair, to assume that a director exercises
influence within the company.'
The Appeals Court, led by
Chief Justice Yong Pung How, was presiding over a dispute between the
liquidators of Show Theatres and its two parents, cinema operators Shaw and
Eng Wah.
That companies sharing
directors are 'connected' is well accepted in America and the United
Kingdom. This is the first time it is stated so boldly in Singapore. Some
lawyers have speculated that the CJ could be using the case to impose a
higher standard of corporate governence here.
Unlike in the west,
Singapore imposes no limit on the number of directorships a person can hold.
Companies also like to appoint familiar and 'safe' people to their boards.
The result is that a
small group of corporate figures sit on numerous boards, the most often
cited being Singapore Airlines chairman Koh Boon Hwee who once reportedly
served on 46 companies, although that figure couldn't be ascertained
precisely.
Doubtful ability:
Multiple directorships have raised questions about the director's ability to
fulfill his duties. Now it can even become punitive.
The Appeals Court
judgement can be interpreted in different ways depending on two issues. The
first is whether 'relatedness' is confined to bankruptcy and liquidation
cases, or whether it can be extended to all other instances.
The confusion arises
because the Appeals Court judgement said: '(The relatedness) should apply to
any situation which calls for a determination of the relationship between
two entities. It should not be confined to apply only to the situation of a
person being an associate of the company under liquidation.'
The second issue is how
far the daisy chain of relatedness can go. If Company A and B share a
director, and Company B and C share another director, is Company A related
to Company C? If the answer is yes, most companies in Singapore could end up
being related.
This may mean nothing if
companies have no business with each other. But if they do, and one gets
into financial trouble, its creditors can claim that payments made to
related or connected parties - as newly defined - 'display an unfair
preference'. Under the law, it is the onus of the related parties to prove
otherwise.
Take a real-life example.
Asia Food & Properties, a member of the troubled Sinar Mas group, counts
among its directors Lew Syn Pau, chairman of Ascendas, a subsidiary of JTC
Corp, and Hong Hai, head of listed Haw Par, a member of the United Overseas
Bank group.
The new ruling now means
that both Ascendas and Haw Par are 'connected' to AFP. But Ascendas is also
related to all Temasek companies and Haw Par to the entire UOB group. And of
course AFP is linked to Sinar Mas. Does it mean Temasek and UOB are related
to Sinar Mas?
This is no idle
speculation. Asia Pulp & Paper (APP), another Sinar Mas company, owes
US$13 billion and faces a legion of creditors clamouring for money. Its
creditors may now go through with a fine-tooth comb all financial
transactions (if any) between APP and its 'related' banks.
APP might be an extreme
case. But any company which shares a director with a bank, a financial
company or an insurer, and which borrows money from it, is open to scrutiny.
Shareholder approval:
While the Appeal Court ruling was in the context of preferential treatment
for creditors in a winding-up situation, the term 'connected companies' has
a much wider implication. Listed companies have to seek shareholder approval
for transactions between 'related' parties when certain thresholds are
reached.
Singapore has only three
local banks, each with many directors who serve on many companies which are
almost certainly customers of the banks. If each and every transaction
requires shareholder approval, business could grind to a stop.
In the 'old' (pre-Oct 5,
2002) days, companies could rely on SGX and the Monetary Authority of
Singapore to apply a pragmatic approach. The rule of thumb was that
companies were considered related only if there is control or substantial
shareholding.
This may no longer
be true after the Appeals Court judgement. Suddenly, multiple directorships
have become a conduit through which the problems of one company could spread
to others. -
By Lee Han Shih Business
Times - 10 Oct 2002
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