In the recent case of Re Haeusler, Thomas  SGHC 93, the Singapore High Court described the disqualification of a director imposed by Section 155A of the Companies Act (“Section 155A Disqualification”) a most draconian penalty, in order to act as a deterrent for every director against allowing a defunct company to remain on the Singapore register of companies (“Register”).
Facts: A core part of the Applicant’s business is incorporating and administering companies, including acting as the local resident director of such companies.
By mid-2017, three of such companies (“Relevant Companies”) were struck-off the Register pursuant to Section 344 of the Companies Act, for failure to file annual returns for at least 2 years.
The Section 155A Disqualification applied to the Applicant for a period of 5 years with effect from 6 June 2017. However, the Applicant was unaware about his disqualification and continued to act as a director for other companies until mid-2018, by which he learnt about his Section 155A Disqualification.
On 20 August 2018, the Applicant made an application under Section 155A(3) of the Companies Act to seek permission from the Court to continue acting as a director during the period of his disqualification (“Section 155A(3) Application”).
Decision: In dismissing the Section 155A(3) Application, the High Court described the Section 155A Disqualification as “the bluntest of blunt instruments" and “a most draconian penalty”, for the following reasons:
(1) Automatic: The Section 155A Disqualification does not require any administrative act by the Registrar or any judicial act by the court, and applies regardless of whether the director bore any personal fault, or when the director was appointed;
(2) Fixed 5-year Period: The Section 155A Disqualification must remain intact until it expires, except where a Section 155A(3) application is approved by the Court allowing a limited liberty for the applicant to act as a director of a company during the disqualification period;
(3) Immediate Commencement: The Section 155A Disqualification operates “after the date on which” the 3rd company is struck off, even if his immediate disqualification will leave the company with zero directors or with no director ordinarily resident in Singapore. A director who acts in breach of the Section 155A Disqualification commits a crime.
(4) Lost of Opportunity for Contractual Protection Ex Ante: A director is exposed to the risk of a Section 155A Disqualification even though he accepted appointment as a director before the commencement of Section 155A. The director would have lost the opportunity to bargain for contractual protection to mitigate such risk.
(5) Total Disqualification: The disqualified director cannot “in any way (whether directly or indirectly) take part in or be concerned in the management of, any company”. This total disqualification is imposed even though the director may bear no personal responsibility in respect of the three struck-off companies.
(6) No Notice: The Registrar is not required to notify a director that he has been disqualified under Section 155A(1).
As to how the discretion under Section 155A(3) should be exercised, the decision in Re Haeusler, Thomas should be read together with the earlier Court of Appeal decision in Kardachi, Jason Aleksander v Attorney-General, which was summarized in our earlier case commentary “3 Strikes, You’re Out”.
Where the three striking-off arise from a breach of the Companies Act, a Section 155A(3) applicant must demonstrate “capacity for compliance”. The High Court identified 3 dimensions as to the applicant's capacity for compliance:
(1) the circumstances which led to the three companies being struck-off under Section 344;
(2) the compliance record of the other companies of which he is a director, other than the three struck-off companies; and
(3) his conduct during the period of his disqualification.
The Court then made 5 observations of a Section 155A(3) applicant:
(1) No blanket application: A Section 155A(3) applicant should identify the specific company or companies in which he is seeking leave to act as a director. He should explain:
- the specific level of involvement he is seeking to have, whether:
- to accept appointment as a director; or
- to take part in the day-to-day management of the company; or
- to be an occasional consultant to the company; and
- the reason for the level of involvement from both his and the company’s perspective.
- the specific level of involvement he is seeking to have, whether:
(2) Immediate transition steps: A disqualified director/Section 155A(3) applicant must show that he took immediate steps to effect an orderly transition to replacement directors for the companies in which he is a director. Any applicant who fails to effect that transition (during any period allowed by the Registrar) will be exposed to criminal prosecution, and would have failed to demonstrate one of the dimensions of his capacity for compliance.
(3) Serving of disqualification: The applicant must serve at least some period of disqualification whereby he does no act as a director of any company. He is expected to demonstrate precisely when he started serving his disqualification and that he served an appreciable period of disqualification before making the Section 155A(3) Application. It would ordinarily be difficult to secure leave to act as a director before serving any period of disqualification or even after mere days or weeks of starting to do so.
(4) Period of disqualification: The Section 155A(3) applicant has to satisfy the court that the period of disqualification he served achieved the deterrent objective of Section 155A.
(5) Beyond Applicant’s Control: It is possible for the Section 155A(3) applicant to secure leave if he satisfies the court that the striking-off of the three companies were due to circumstances beyond his control and despite his best efforts. If the director accepted appointment as a director after Section 155A came into force, the applicant will also have to demonstrate how the terms of his appointment as a director catered for the risk that:
(a) he would have to allow the three defunct companies to remain on the Register despite being defunct; and
(b) he would be put in breach of the Companies Act by circumstances beyond his control and despite his best efforts.
Takeaway: Section 155A encourages directors of a defunct company to either voluntarily strike it off or wind it up instead of leaving it to the Registrar. The Court agreed with the Attorney General’s recommendations on how a director could minimize the risk of breaching the law and causing a company to be struck off under Section 344:
(1) Performing better due diligence on prospective clients to preempt accepting clients who may turn out to be uncooperative – such proactive approach would also be a factor in favor of a Section 155A(3) Application.
(2) Section 344A of the Companies Act can be invoked to voluntarily strike a company off the Register (in appropriate circumstances) to prevent a Registrar-initiated striking-off action under Section 344. This would be possible if the terms of engagement for the appointment of director is suitably drafted to address the risk of consent requirement from the company’s shareholders.
A director qua director, could apply for a defunct company to be compulsorily wound up on:
(1) the just and equitable ground under Section 125(1)(i) of the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”); or
(2) the ground that the company is in default of its obligation to lodge its annual return or to hold an Annual General Meeting under Section 125(1)(b) of IRDA.
The learning point from Re Haeusler, Thomas is that it is imperative for corporate service providers, including those who provide director services, to carry out careful due diligence on prospective clients (and proper documentation of such), and review their terms of engagement to provide for the flexibility to invoke Section 344A to facilitate a company-initiated striking-off action in appropriate circumstances. To the extent that the director will have to incur expense in filing the winding up application, such cost should be factored in deposit of funds to account or priced into the cost of the director’s services.
This article was prepared by Mr Kingsley Tan (Intern).
If you require any further information on the above, please do not hesitate to contact:
David TEO Shih Yee
LONGBOW Law Corporation