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Court Of Appeal Upholds Rare Decision To Pierce Corporate Veil
March 2009 | Litigation & Arbitration | Litigation Brief
Jeannette LIM
Introduction
A fundamental principle of company law is that a company has a separate legal personality that is distinct from its members. Thus, members of a company will be shielded from personal liability for the debts and liabilities of the company. The policy behind this principle is to promote free commercial enterprise and risk taking in business.
As such, when the party to a contract is a company, the courts will generally be reluctant to hold the directors or shareholders personally liable for the acts of the company because this goes against the principle of separate legal personality and the related principle that non-parties to a contract will not be held responsible for the acts of the actual parties to the contract.
It has therefore been said that the doctrine of piercing the corporate veil of a company is a "rare exception" which the court will only apply on a case-by-case basis, and even then only under exceptional circumstances, such as cases involving fraud.
In Singapore Tourism Board v Children's Media Ltd and Others [2008] 3 SLR 981, the High Court made a rare decision to pierce the corporate veil of a defendant company to render a shareholder and director jointly and severally liable for the liabilities of the company to the plaintiff.
The plaintiff, Singapore Tourism Board ("STB"), was represented by a team from Rodyk & Davidson LLP, which comprised Lok Vi Ming, SC, Edric Pan, Loh Jen Wei, Joseph Lee, and Jeannette Lim.
The concert that never came to be: Listen Live
STB had agreed to sponsor an event called Listen Live, which was to be staged in Singapore by the defendants, Children's Media Limited ("CML"), Tribute Third Millennium Limited ("Tribute") and Anthony David Hollingsworth ("Tony Hollingsworth"). CML and Tribute are private limited companies incorporated in the United Kingdom. Tony Hollingsworth was a director and CEO of both CML and Tribute. Tribute is the sole member and guarantor of CML whilst Tony Hollingsworth is the sole shareholder of Tribute.
Listen Live was envisaged to be a concert that would take place at the end of a 180-day worldwide campaign called Listen Campaign, which would comprise a series of activities involving well known celebrities to be broadcast globally around the world.
STB paid the defendants a total of S$6.155 million ("the sponsorship sums") towards the staging of Listen Live pursuant to three consecutive agreements entered into between STB and CML. Neither Tribute nor Tony Hollingsworth was a party to the agreements.
Listen Live was originally scheduled to be staged in Singapore in October 2005. However, it was postponed several times at the defendants' requests. STB eventually agreed to enter into an agreement with CML on 18 August 2005 ("the Third Agreement"), under which it was agreed that Listen Live was to be staged in Singapore in April 2006.
Shortly after the signing of the Third Agreement, in January 2006, the defendants informed STB that they were cancelling the event, but refused to refund the sponsorship monies which STB had paid for the staging of Listen Live.
On 27 March 2006, STB filed a claim in the High Court against the defendants. The trial was heard by the Honourable Justice Lai Siu Chiu in September and October in 2007. After a trial spanning over 15 days and involving 17 witnesses, the High Court reserved judgment.
The High Court decision
On 28 May 2008, the High Court delivered its judgment in Singapore Tourism Board v Children's Media Ltd and Others [2008] 3 SLR 981. It gave interlocutory judgment in favour of STB with damages to be assessed and dismissed in its entirety the defendants' counterclaim against STB. The court's decision was based on three main legal findings:-
| (1) | STB was deceived into entering into the Third Agreement with the defendants by reason of the defendants' fraudulent misrepresentation. |
| (2) | STB was entitled to pierce the corporate veil to hold the three defendants jointly and severally liable. The High Court had found on the evidence that Tony Hollingsworth had used CML and Tribute as a façade and/or sham to evade his legal obligations. |
| (3) | A Quistclose trust (that is, a trust for a specific purpose) had arisen on the facts of the case as the sponsorship sums had been provided to CML for a specific purpose of sponsoring Listen Live. |
Based on the evidence adduced, the High Court found that by the time the Third Agreement was signed, the defendants in fact had no intention to stage the event in Singapore. The High Court also found that Tony Hollingsworth had "deliberately set out to ensure" that he had "the benefit of and unimpeded access" to the funds of CML while using CML to distance himself and Tribute from CML's liability.
Court of Appeal upholds High Court judgment
The defendants subsequently appealed against the decision of the High Court. Tribute withdrew its appeal shortly before the hearing of the appeal.
On 14 November 2008, the Court of Appeal dismissed the appeals of CML and Tony Hollingsworth with costs in Children's Media Ltd and Others v Singapore Tourism Board [2008] SGCA 45.
On the issue of fraudulent misrepresentation, the Court of Appeal found no reason to disagree with the High Court's finding that Tony Hollingsworth had, prior to the signing of the Third Agreement, dishonestly misrepresented to STB that sufficient funds had been raised for Listen Live. The Court of Appeal agreed with the High Court that when the Third Agreement was entered into, Tony Hollingsworth's motive was "to avoid any subsequent legal liability for him and the related entities" and that the defendants had in fact no intention to stage Listen Live in Singapore.
The Court of Appeal also concurred that a Quistclose trust had arisen on the facts of the case. The Court was satisfied that Tony Hollingsworth "more than fully appreciated" that the sponsorship monies were paid to CML for a very specific purpose of staging the event, and that this meant that the sponsorship monies were to be refunded in full if Listen Live was not staged.
Most importantly, the Court of Appeal upheld the decision of the High Court to pierce the corporate veil and to hold Tribute and Tony Hollingsworth accountable for the refund of the sponsorship monies (notwithstanding the fact that the party who had contracted with STB was CML). The Court of Appeal thought it was plain from the evidence that Tony Hollingsworth was not just the controlling mind of CML and Tribute, but that he also "freely, and without inhibition", dealt with their assets "as if they were his own".
Corporate veil - not an iron curtain
The Court of Appeal's holding is significant. Though strong evidence must be adduced before the courts will pierce the corporate veil of incorporation, the decision demonstrates that the courts will not hesitate to pierce the company's veil where there are grounds to do so.
Indeed, the judgment reinforces the notion that the courts will not tolerate an abuse of the corporate form and that incorporation is not a carte blanche for the members of a company to do as they wish. This approach is correct not only from the perspective of justice but also rationally - the principle of separate legal entity cannot be applicable when there is evidence that the company is not in fact a separate entity from its members, as clearly illustrated in the Listen Live case.
