|  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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