There is a new development in the law on corporate attribution in Singapore with the Court of Appeal’s decision in the recent ‘Red Star’ ruling. Consider the following situation: Person B is more or less the sole shareholder and director of Company A. Company A seeks to recover from a third party, Person C, the proceeds arising from the fraudulent acts of Person C against Company A. Person B was a party to these fraudulent acts by Person C. Can Person B’s fraudulent acts and knowledge be attributed to Company A, such that Company A is precluded from recovering from Person C as a result of the illegality defence? This was the conundrum the Singapore Court of Appeal had to address in Red Star.
Recent UK decision in the area
In Bilta (No 2), a majority of the Supreme Court appeared to accept the proposition that the acts and knowledge of a director should be attributed to the company such that the illegality defence would be available where there are no innocent shareholders or directors. In Singularis, the Supreme Court clarified that in deciding whether knowledge of a fraudulent director of a ‘one-man company’ should be attributed to his company, the court must consider the context and purpose of the attribution. In other words, there is no presumption that the fraudulent conduct of a director of a ‘one-man company’ is to be attributed to the company.
The decision in Red Star
In Red Star, the appellant company, Red Star Marine Consultants Pte Ltd (’RSM’), sued the estate of a former employee (‘Ms Kaur’) who had passed away (the ‘Estate’). Ms Kaur had siphoned monies away from RSM to buy insurance policies and properties during her employment as a personal assistant with RSM. RSM was a company controlled by one ‘Mr Singh’, who owned all but one share in RSM and who was also its sole director. The remaining share was owned by Mr Singh’s wife. As such, RSM was essentially a one-man company (Red Star at ). Based on the evidence presented, the High Court held that Mr Singh was privy to the fraud by Ms Kaur as he was aware of and consented to Ms Kaur’s taking of moneys belonging to RSM. This was affirmed by the Court of Appeal (Red Star at ).
As such, the remaining issue was whether the acts and knowledge of Mr Singh should be attributed to RSM. If the knowledge of Mr Singh could be attributed to RSM, RSM would be precluded from recovering the monies from the Estate as a result of the illegality defence. The Estate submitted that Mr Singh’s acts and knowledge should be attributed to the company because RSM was practically a one-man company and was its “directing mind and will”.
Directing mind and will
The Court of Appeal in Red Star emphasised that the term “directing mind and will” of the company was not to be seen as a rule of attribution in itself. The court reiterated that the term “directing mind and will” was merely a description of the person identified as the one whose knowledge and acts were to be attributed to the company under the rules of attribution. The court therefore applied the special attribution rules enunciated in ‘Meridian’ (see Red Star at ).
The Court of Appeal had the opportunity to consider both the UK Supreme Court’s decisions in Bilta (No 2) and Singularis. The Court of Appeal agreed with the decision in Singularis that there is ‘no hard and fast rule or even presumption that the knowledge or conduct of a sole director or shareholder must be attributed to the company. Instead, the court must consider both the legal and factual context of the case… [C]ontext of this case [was] crucial to [its] decision on the issue of attribution.’ (Red Star at ).
Context of the case
As the court identified the illegality defence as the legal rule to be applied in relation to RSM, it had to decide if allowing RSM’s claim would be consistent with the purpose of the illegality defence. The Court of Appeal held that it would not be consistent. If the Court of Appeal were to allow RSM’s claim against the Estate, Mr Singh would effectively benefit from the claim through increased dividends or director’s fees from RSM.
Red Star was also distinguished from Bilta (No 2). In Bilta (No 2), the company was in insolvent liquidation and the action was brought for the benefit of creditors by the liquidators (Red Star at ). However, in Red Star, Mr Singh was still very much in control of RSM. If Mr Singh’s knowledge was not attributed to RSM, he would be in a position to benefit from his fraudulent conduct.
The court therefore attributed Mr Singh’s fraudulent knowledge and acts to RSM. The result was that RSM was precluded from claiming against the Estate.
The Singapore’s position is now clear and is aligned with the UK’s position, ie in deciding whether the court should attribute the knowledge of the fraudulent director to a one-man company, the court has to consider the context for the purpose for which the attribution is relevant (Red Star at ). The identification doctrine which previously meant that the acts and knowledge of its sole director would automatically be attributed to the company where one-man companies are concerned is now no longer good law in Singapore (Red Star at ). There is no presumption that the knowledge or conduct of a sole director or shareholder must be attributed to the company. Instead, the court will look at both the legal and factual context of the case.
Ben Chester Cheong is Lecturer at the School of Law of the Singapore University of Social Sciences.