CLIENT UPDATE
2014 OCTOBER
DISPUTE RESOLUTION
Can Related Companies Be Treated As
A“
Single Economic Entity”At Law?
Introducti
on
Related companies under the same group are often closely run, whether in terms of ownership,
management, or operation. Under the laws of incorporation, they exist as separate legal entities.
However, is there a legal principle that treats some companies as having the same corporate personality
on the grounds of being a “
single economic entity”
?This was the question considered by the Singapore
High Court in Manuchar Steel Hong Kong Limited vStar Pacific Line Pte Ltd [
2014]SGHC 181.
In this case, the claimant wanted to enforce an arbitration award against a non-party to the arbitration
agreement on the premise that the non-party and the debtor were a single economic entity, and thus
sought pre-action discovery to prove this point. The Court dismissed the application on the grounds that
the documents requested were not necessary.
Importantly, the Court also rejected the applicability of the “
single economic entity”concept in Singapore,
choosing instead to uphold the separate legal personality of a duly incorporated entity, which is a basic
tenet of company law in Singapore.
Bri
ef Facts
There was a charterparty dispute between Manuchar Steel and SPL Shipping, a BVI company, which led
to arbitration proceedings in London. Following the arbitration, two awards were granted in favour of
Manuchar Steel.
Manuchar Steel faced many difficulties in its attempt to enforce the award against SPL Shipping. It then
decided to commence proceedings in Singapore to enforce the awards against a related company, Star
Pacific, on the basis that Star Pacific and SPL Shipping were a single economic entity. Manuchar Steel
alleged that the two companies were operationally unified and that the companies’employees treated
both companies interchangeably in correspondence and acknowledgements.
However, before Manuchar Steel commenced proceedings against Star Pacific, it applied for pre-action
discovery for evidence that Star Pacific and SPL Shipping were indeed a single economic entity.
Holdi
ng of the Hi
gh Court
The High Court rejected the application for pre-action discovery on the grounds that Manuchar Steel had
not passed the high threshold required.
Additionally, the Court considered the “
single economic entity”concept, finding that it was not a concept
recognised at law in Singapore, nor was there any good legal basis to support its recognition.
W hat i
s the “si
ngle economi
c enti
ty”concept?
The Court used the following example to explain the “
single economic entity”concept. P enters into a
contract with D, which is related to a third company TC. The exact relationship between D and TC is
unknown, but it is accepted that D and TC belong to the same corporate group. D breaches the contract. P
has two options:
(i)
P commences proceedings against TC for D’
s breach of contract;or
© Rajah &Tann Singapore LLP
1
CLIENT UPDATE
2014 OCTOBER
DISPUTE RESOLUTION
(ii)
P commences proceedings against D first, and if P succeeds, P then enforces the judgment
or arbitral award against TC.
In both options, P intends to argue that it has a valid claim against TC because TC and D operate as a
single economic entity and hence TC is equally liable for D.
Appli
cabi
li
tyi
n Si
ngapore law
The Court disapproved of the “
single economic entity”concept, both conceptually and in terms of support
from case law.
Conceptually, the Court recognised that the basic tenet of company law in Singapore is that a company
and its shareholders are separate legal persons. This is the position in most advanced legal systems.
However, there are exceptional situations in which the law, by piercing through the corporate veil that
separates the company from its shareholders, ignores the separate legal personalities of the company and
its shareholders. The Court found that such situations usually involve some form of abuse of the
company’
s legal personality.
The “
single economic entity”concept goes further than piercing the corporate veil. While the movement
of liability under the piercing of the corporate veil is unidirectional (in the direction of the ultimate
controller, usually the parent), the movement of liability under the concept of single economic entity is
multidirectional in that all members of the group will share liability. Further, it is not based on any abuse
or impropriety.
The Court also examined existing case law and considered that there was a lackof support for the “
single
economic entity”concept.
(i)
The Court considered the seminal case of Adams vCape I
ndustries plc [
1990]I Ch 433,
which held that subsidiary companies are separate legal entities, and that a corporate group
may use whatever corporate structures are available to organise their legal liability in the
most advantageous way.
(ii)
The Court also considered the long and well established example one-ship companies. The
general position is that a one-ship company is not liable for losses caused by a sister ship
owned under another company, reinforcing that the “
single economic entity concept”has no
place in Singapore law.
Concludi
ng W ords
It is not uncommon for companies within a group to be closely associated. In some instances, there may
be some form of operational unity, or else an overlap in management. However, this in itself does not
mean that they may be considered as one legal entity;instead, each company is treated in law as having
its own separate legal personality. Parties should therefore exercise great caution and restraint should
they wish to pursue a claim against a related, but non-party to a matter /contract simply on the basis that
the related non-party is purportedly part of the same group and shares some similarities with the actual
contracting party.
The Court will be prepared to lift the corporate veil between shareholders and company if the adherence
to the separate corporate personality position leads to abuse. However, although there are certainly
instances where the corporate structure will not protect shareholder impropriety, this may not be easy to
prove, as mere allegations of impropriety or abuse do not per se automatically entitle a claimant to lift the
corporate veil.
© Rajah &Tann Singapore LLP
2
CLIENT UPDATE
2014 OCTOBER
DISPUTE RESOLUTION
Other than that though, the Courts have maintained that companies are free to structure themselves and
their related organisations in a manner which best manages legal liability.
Parties wishing to enquire about corporate structure and potential liability may contact our Dispute
Resolution team below.
Please feel free to also contact the Knowledge and RiskManagement Group at [email protected]
Contacts
Jansen Chow
Partner
Si
m W eiNa
Partner
D (65) 6232 0624
F (65) 6428 2149
D (65) 6232 0583
F (65) 6428 2141
[email protected]
Jonathan Yuen
Partner
Mohammed Reza
Partner
D (65) 6232 0161
F (65) 6428 2152
D (65) 6232 0197
F (65) 6428 2128
[email protected]
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