COMPANIES (AMENDMENT) BILL

Order for Second Reading read. 12.28 pm

The Minister for Finance (Dr Hu Tsu Tau): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

Sir, this is, I believe, an opportune moment for me to reiterate Government's belief in the merits of a healthy private enterprise system. At the core of the private enterprise system is the limited liability company and the ability to produce profits is the principal yardstick to judge the success or failure of a company. The limited liability company does not simply represent one interest but a confluence involving the interests of investors, creditors, employees, consumers and the public. It has, therefore, long been recognized and accepted that since the company is an artificial creation of law, it is the duty of Government to ensure that its operations do not prejudice these diverse interests.

There are situations where the privilege of limited liability that has been accorded to companies has been abused by those who are concerned with their management. Inadequate disclosure standards allowed such companies to disguise unlawful transactions. As we have seen in the recent past, companies were used as instruments by directors to raise funds, which are then siphoned out fraudulently leaving companies in financial haemorrhage and doomed to destruction. The consequences of such abuse of corporate power and privilege are pervasive. It has thus become necessary for more thorough and realistic appraisal of the laws relating to the disclosure of companies' affairs and the duties and responsibilities of companies' management. This is one of the principal objectives of this Bill.

The Government is also aware that not all company collapses are due to fraud or other economic crimes. Collapses could be due to cyclical economic factors and indeed this is part and parcel of the private enterprise system. It is also evident that the mortality of companies increases during an economic recession. But even such collapses are not without economic and social misery for various interest groups like shareholders, creditors and employees. Often, collapses are sparked off by the practice of some lenders to foreclose on companies at the first hint of financial trouble caused by temporary liquidity problems. However, some of these companies may have the right products and technology to continue to compete in international markets and given time could actually be cured of their illiquidity. The main objective of this Bill therefore is to provide a legal framework to give such companies which are in financial trouble a more even chance to rehabilitate themselves and be restored to profitability.

Accordingly, Mr Speaker, Sir, the major amendments designed for better disclosure of company affairs and greater investor protection are found in:-

(a) Clauses 36 to 43 and clause 70, which substitutes a new Ninth Schedule. These amendments are designed to impose upon directors of a holding company duties to lay before the company's general meeting the consolidated profit and loss account and the balance sheet statement for the group. The Ninth Schedule is amended to effect additional disclosure requirements so that the readers of accounts can better assess the financial positions of companies. For example, intercompany transactions and an estimate of the maximum amount of contingent liabilities for which a holding company and its subsidiaries could become liable must be disclosed. Disclosure of director -related loans are also required. Particulars dealing with the method of valuation of assets are also provided for; and

(b) Clauses 47 to 53 which strengthen the provisions dealing with investigations of criminal offences and the procedures in relation to disclosure of inspector's reports. Clause 53 confers upon an inspector the power to require a director or past director to produce all documents relating to his bank account if there are reasonable grounds for believing that money in the account is connected with unlawful activities. Also, in order to provide a more expeditious method of conducting company investigation, clause 5 enables the Minister or a person authorized by him to require the production of the books of the company and to take copies of them or extracts from them. These amendments are based on recommendations made by a committee of the United Kingdom Metropolitan Police that was commissioned by Government to examine commercial regulation generally in Singapore. These new powers are necessary if we are to deal effectively with commercial fraud. The House is well aware of the devastation that such fraud could cause. We cannot afford to disregard this threat if we wish to continue to attract investments. This clause, I wish to stress, is included to confer a pre-investigative power on the Minister. It will be used discriminately and safeguards have been inserted to ensure that any information obtained will be kept secret. Honestly -managed companies will have nothing to fear from these new powers.

Other provisions concerned with investor protection include:-

(a) Clause 11 which confers upon the Registrar of Companies power to refuse registration of a prospectus if it appears to him that it is not in the interests of the investing public to do so;

(b) Clause 14 which repeals and re-enacts existing section 76 prohibiting a company giving financial assistance for the purchase of its own shares. The main purpose of the section is to ensure that the capital of the company is preserved intact;

(c) Clause 25 which provides that a company should not, without prior sanction of a general meeting, enter into specified transactions with directors or persons connected with them;

(d) Clause 27 which requires a company to disclose directors' emoluments when served with a notice by at least 10% of its members or holders in aggregate of 5% or more of its capital; and

(e) Clause 65 which provides that a person shall not make an offer to the general public of any shares for purchase unless the offer is accompanied by a statement in writing containing the particulars set out in the clause. These particulars mainly refer to the identity of the offeror. The exemptions from this clause are broadly similar to those under existing law.

Mr Speaker, Sir, the other major reform is found in clause 46 which introduces a judicial management procedure to provide for financially troubled but viable companies to rehabilitate themselves. The procedure has been adapted from the relevant insolvency laws in the United States and the United Kingdom, and strives to strike a balance between the interests of the shareholders and the creditors. Under the procedure, the Court may, on the application of an insolvent or near-insolvent company or its creditors, appoint a judicial manager if it considers that the appointment would promote one or more of the following purposes:-

(a) the survival of the company, or the whole or part of its business as a going concern;

(b) the promotion of a compromise or arrangement between the company and its creditors; or

(c) a more advantageous realization of its assets than in a winding-up. The Court may also invite the Minister to make a nomination, or the Minister may himself nominate a person to act as a judicial manager, if he considers it is in the public's interest to do so.

It would be noted that the benefits of a successful company rescue accrue not only to its shareholders but to employees, the business community and the general public. A key element in a company rescue is the provision of a breathing space during which plans can be put together to achieve the purposes just mentinoed. The judicial management procedure, accordingly, provides for a statutory moratorium on all actions and proceedings against a company. Government is also aware, however, of the danger of undermining prudent lending practice by prejudicing creditors' rights to enforce their security. Special provision is therefore made in section 227H to give recognition to the rights of secured lenders. With the approval of the Court, the judicial manager may dispose of the property subject to security, other than those under floating charge and the net proceeds of the disposal would be applied towards discharging the sums secured by that security. The new judicial management procedure, therefore, provides a legal framework that would, in a suitable case, enable the rescue of a potentially viable business and thus prevent a premature liquidation.

Mr Speaker, Sir, perhaps at this point, I should utter a few words of caution. The new provisions under Part VIIIA must not be used as delaying tactics to avoid an inevitable liquidation of a company that is hopelessly insolvent. A Court will make a full enquiry into the financial affairs of a company and its prospects for rehabilitation or reconstruction, etc, before making a judicial management order. Other provisions in this section are designed to deter frivolous applications being made to the Courts. The new provisions are not a panacea for beleaguered companies that are incapable of being rescued and are destined for liquidation. Government's objective is not to tamper with the normal entry and exit of firms in the private enterprise system but to provide a chance to resuscitate some financially troubled companies that are capable of returning to profitability.

There are other areas which Government believes it is desirable that the impact of existing law should be ameliorated. Clause 22 amends section 149 of the Act which deals with powers to restrain persons from acting as directors of companies, where they have been directors of two or more companies that have gone into insolvent liquidations within a 5-year period and have been found to be unfit to continue to manage companies. Having regard to the considerable public debate and criticism that section 149 has excited, particularly as regards the principle of automatic disqualification, I think that it is necessary to spend some time to clarify the intent of this section.

Mr Speaker, Sir, section 149 raises a presumption that a person who is or has been a director of two companies that have gone into insolvent liquidation within the 5-year period is unfit to act as a director until he satisfies the Court that their collapse was not due to his irresponsible or unscrupulous conduct. The policy in the section is that the public should be safeguarded against unscrupulous or irresponsible directors who trade through the vehicle of two or more companies and allow such companies to become insolvent and then establish a new company to wreak financial havoc, all the while, leaving behind a trail of unpaid creditors and retrenched workers.

The section is based, in concept, on section 9 of the UK Insolvency Act 1976 (now repealed) and section 300 of the UK Companies Act 1985 (now repealed also). I should, however, mention that the UK Insolvency Act 1985 makes even more radical changes than those appearing in the abovementioned sections. For example, under the UK provisions, a director could become personally liable for the debts of an insolvent company if he knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation and had not taken steps to minimize the loss to creditors. Further, the Court in the UK may make a disqualification order against a person who is or has been a director of a company where there has been only one company insolvency.

Mr Speaker, Sir, Government is aware that section 149 also catches the responsible and innocent director who will have to satisfy the Court that the collapse of the two or more companies was not due to his recklessness, etc. Nevertheless, we believe that only by conducting a judicial enquiry can the true cause of the insolvencies be established and that, until they are so established, it is necessary for the protection of the public that the directors concerned should not continue to manage companies.

Section 149 has also aroused considerable criticism from the Law Society and the Society of Accountants which have sought to have excluded from the operation of the section on behalf of their members who act as directors of companies - often as non-executive directors. Company law draws no distinction, it is noted, between the duties and the obligations of executive directors and non-executive directors. Indeed, as non-executive directors, they are expected to contribute their expertise in business affairs for the benefit of the company. Their duties go beyond mere attendance at board meetings. Further, a conscientious non-executive director should, in Government's view, set a practical limit on the number of his non-executive directorships if he is to properly discharge his duties and obligations to his companies. These considerations are regrettably often ignored in Singapore. In the result, Government sees no good reason to favour directors who are members of professional partnerships. Besides, to discriminate in such a manner may be challengeable as being contrary to Article 12 of the Constitution.

Mr Speaker, Sir, it is pertinent to note that up to August 1985, out of the 68 persons who were disqualified by the section, only three of them applied to the Court for leave. The Court granted leave in each of the three cases to the directors concerned and allowed them to resume their directorships unconditionally. It is not apparent, therefore, that the section is operating unjustly or that it is causing unnecessary hardship. Government is therefore not minded at this stage to abandon the principle in section 149. Government, however, agrees that the rigour of the application of the section should be modified in four major respects. Clause 22, in amending section 149, would have the effect of lessening the impact of the section on corporate management in the following ways:

(a) by excluding from the operation of the section, unregistered companies as defined in section 350(1). The result would be that persons who are disqualified under the section would not be debarred from participating in partnerships or associations.

(b) by providing a defence to persons - (i) who resign as directors from newly formed companies before these companies have commenced business or exercised any borrowing powers; or (ii) who can show that they could not, with the exercise of reasonable diligence, have been aware of the fact or occurrence constituting to the offence;

(c) by introducing a cut-off period of three years under section 149(1)(b) in respect of the second company that went into insolvent liquidation. No cut-off period was previously given. The three-year cut-off period is the same as presently exists under section 149(1)(a) in respect of the first insolvent liquidation; and

(d) by enabling the Minister to exclude from the operation of the section certain companies (and their directors) carrying on business in venture capital industries and thus not discourage entrepreneurial ventures in these high-risk industries.

Mr Speaker, Sir, another area where my Ministry believes relief should be given is in relation to retrenchment benefits and gratuities payable to an employee when a company is being wound up. Under existing law, employees have no priority under section 328 for payment of retrenchment benefits and gratuities over other unsecured debts, though they do have priority for wages, including wages payable during a period of notice of termination of employment. Government is of the view that it is fairer to accord priority to such employee benefits and gratuities in the winding-up of a company. Accordingly, the principal amendment to section 328 would ensure that retrenchment benefits and gratuities would be included in the definition of "salary" in subsection (2) and thus have the same priority as salaries and wages. The other amendment proposed to the section is to give a higher priority to pension fund contributions, including CPF contributions, in the event of the winding-up of a company, than is provided for in the existing section 328.

There are other clauses in the Bill which are designed to improve the administration of the Act. Together with the amendments which are of a drafting nature or are intended to increase fines, they are sufficiently referred to in the Explanatory Statement. The only other provision in this Bill deserving of special mention appears in clause 10, which would relieve foreign companies that are listed on the Stock Exchange from the obligation to file an abridged prospectus when making a rights issue. This is in line with the desire of Government to develop the capital market in Singapore and to reduce related costs.

In view of the major reforms that are proposed in the Bill and their implications to the business and financial community and the public at large, I propose that the Bill be committed to Select Committee, as was the case with most of the previous Bills to amend the Companies Act, in order to enable the views of all interested parties to be obtained.

Sir, I beg to move.

Question proposed.

Mr Lim Boon Heng (Kebun Baru): Mr Speaker, Sir, I rise in support of the Companies (Amendment) Bill as moved by the Minister for Finance. But I have some points which I would like to put to him, and also to explain why I support this Bill going to Select Committee.

First of all, let me express my appreciation to the Minister for clause 60 which will amend section 328 of the Companies Act which now puts retrenchment benefits under priority in case a company should go into liquidation. The Minister will recall and Members will recall that in several past sessions of Parliament, we spoke on this subject and we are glad to note that finally the Minister for Finance has heeded our calls.

Next, I would like to turn to section 149 of the Companies Act which is now covered under clause 22 of the Amendment Bill. The Minister has explained in some detail on the desirability of section 149. However, it has attracted a lot of criticisms that, while the objective of the section is desirable, it is unduly harsh and labelled as an administrative overkill. But I am glad that the Minister has at least taken note of the criticisms that have been levelled and now makes it easier on the part of directors to discharge their duties and tries to remove part of the section which would deter the setting up of companies, particularly in those volatile high-tech and high-risk businesses. I had initially thought that perhaps section 149 would be repealed. But the Minister has chosen to amend certain aspects of it which have been criticized.

However, there is still one point to note, ie, a director who has been a director of two companies which have gone insolvent would be debarred from being a director of another company. Would this still not be unduly harsh on such directors? Because, as the Minister has said, there are many causes for company failures, would not such a clause make a person guilty until proven innocent? Rather than the other way round where a person is innocent until proven guilty. So I hope this particular section would receive the comments of the public since it is a matter that has aroused great interest, and I hope that the people who have an interest in this particular section would make their representations to the Select Committee.

Next, I would like to turn to the provision for judicial management. The intention of clause 46 is wholly laudable from my point of view. This, as the Minister has said, is conceptually similar to the Chapter 11 proceedings in the United States. Under the new provisions, companies that are facing temporary liquidity problems should be given a reasonable chance to continue to operate and to overcome their problems. And in this current recession, owing to a lowering of confidence, creditors have been nervous and there have been some instances of hasty action being taken to secure payment, forcing premature closure of companies and causing unnecessary loss of jobs.

Notwithstanding the good intentions of this new chapter, I think it will be prudent for us to examine how the provisions would function. There has to be a fair balance, as the Minister has said, between the interests of the company, its shareholders, directors and employees as against the interests of creditors. And all these would have to be thoroughly considered. But no matter how laudable the intentions of the proposed new chapter, we must be careful to avoid any possible undesirable effects. For example, Chapter 11 proceedings in the United States have been criticized by their trade unions. It has been alleged that some companies have taken advantage of Chapter 11 proceedings to proscribe trade union rights. The proposed amendments do not spell out the conditions that may be imposed on the conduct of industrial relations once a judicial manager is appointed. I think this should be verified. This is one example of the issues that we will have to examine when we introduce this new provision for a judicial manager.

Sir, I thus support the move to refer the Bill to a Select Committee of Parliament.

Mr Chng Hee Kok: Mr Speaker, Sir, I support the move to commit this Bill to a Select Committee as there are extensive new provisions governing the management of companies, especially those provisions on judicial management and definitions. As this and others will be deliberated by the Select Committee, I shall not go into details. However, I must voice my unhappiness over one particular provision which is the result of the deliberations of a previous Select Committee. I am referring to section 149 which the Minister has just elaborated.

The proposed amendment in clause 22 makes practically no change to section 149. In essence, the so-called double liquidation penalty in section 149 remains intact. Coming on the heels of several requests from businessmen, professionals, Members of this House, and the recommendation by the Economic Committee that section 149 be revised, the proposed changes come as a great disappointment. I am afraid that this may inhibit further progress that we are aiming for in business. Section 149 takes no account for the vagaries of business as has been pointed out before. It treats employee directors no differently from those directors who are shareholders in the company, neither does it make a distinction between executive and non-executive directors. The Minister has pointed out that in company law there is no difference between executive and non-executive directors. But in practice, there is a difference. Although section 149 is based on section 9 of the UK Insolvency Act which he has just mentioned, I understand that a director is debarred on the specific orders of a court order at a liquidation hearing. This is not automatic and I believe it does not apply to all directors unless the Act has been extensively amended in 1985. The UK Insolvency Act makes a specific order on the debarment of a director at the time of a liquidation hearing.

I think he is also right when he mentioned that the UK Act has been amended and now makes the penalties even higher for directors who continue to transgress and operate despite the debarment. In this instance, perhaps we should also do a similar thing. A director who has already been debarred should, of course, be personally liable for all debts that he has incurred when he continues to operate despite being debarred. But on the other hand, we have to look into making some specific provisions to protect the innocent directors, especially those who are employee directors. I do not know how much chance we have in Select Committee. This was well deliberated in the previous Select Committee. But I honestly hope that the next Select Committee will take a much closer view of section 149.

Mr Speaker: It is one minute before 1.00 pm and it is an appropriate moment to take the suspension. I suspend this sitting and will take the Chair again at 2.30 pm.

Sitting accordingly suspended at 12.59 pm until 2.30 pm. Sitting resumed at 2.30 pm

[Mr Speaker in the Chair]

Debate resumed.

Mr Jeyaretnam: Mr Speaker, Sir, even without the Minister referring to the events towards the end of last year, it was quite apparent to everyone that this Bill was prompted by those events.

We certainly welcome some of the amendments that are proposed to the Companies Act. But I have questions, particularly on one amendment. But before I come to that, may I say that we welcome the amendment to section 328 of the Act. It is long overdue. The amendment would make it possible now for workers to get retrenchment benefits in companies that face winding-up or liquidation in priority over other unsecured debts. That is certainly a step for the protection of our workers, and we welcome it and we are grateful to the Minister for bringing in that amendment.

Then there is the amendment to section 149. As the Minister has said, there has been considerable criticism over the existing section 149. May I say I am glad that an attempt has been made to mitigate the rigours of section 149. But in my view these amendments do not go far enough. I do not think the amendments deal with the criticisms that have been levelled at section 149 of the Act. I do hope that the Select Committee will pay greater attention to the objections raised by people who should know, to section 149. The gravamen of the charge is that it penalizes directors who may be completely innocent, and that is something which we should not encourage. It departs, as has been mentioned by a Member speaking on this Bill, from the principle that unless somebody is proven guilty he should be presumed to be innocent of any guilt or offence or default.

Now may I turn, Sir, to clause 5 which introduces new sections 8A to 8H. Sir, these proposed sections 8A to 8H give the Minister, as it were, absolute powers to require a corporation to produce books relating to the affairs of the corporation not only to him or to his Ministry but to any person authorized by him. As I said, Mr Speaker, Sir, a little while ago, it would seem to be an absolute power vested in the Minister without any qualification. I would like to hear from the Minister the reason why his Ministry thinks the Minister should be invested with this power. One suspects it is because the Ministry perhaps takes the view that it does not have the power to call for books of a company and to inspect the books.

Mr Speaker, Sir, you will recall that when I tabled my motion on the Pan-El crisis, I then attributed the events that eventually occurred to the neglect of the MAS. The Minister was vehement in his answer that the Ministry or the MAS did not have the powers to call for the books or to ask for explanations of the affairs of the corporation. They referred the complaints to the Stock Exchange Committee and the Stock Exchange Committee came back with a reply, "We do not have the powers", and so everybody was content to leave things as they were. But as I pointed out, there was power under the Securities Industry Act for the MAS to have referred the complaints to the Securities Industry Council, and then for the Council to require all the books to be produced to it for inspection, to investigate the affairs of the company.

So there is power there under the Securities Industry Act, and the new Act of course takes the powers much further. But it is not just that. There is already sufficient power under the Companies Act at present. I am, of course, referring to Part IX of the Act which deals with investigations. By section 230 of the Companies Act, the Minister may declare a company a declared company, which would have the effect of applying the provisions of Part IX to that company and, having declared it, to appoint one or more inspectors to investigate the affairs of that company and to report his opinion thereon to the Minister. That is to be found in section 231. But section 230, unlike the proposed section 8A, spells out quite clearly the situations in which the Minister may exercise the power given to him under the Act. They are all spelt out in section 230 in paragraphs (a) to (d), and they are quite wide enough. Paragraph (a) for example, allows the Minister to declare a company a declared company for the purposes of the Act where a prima facie case has been established that, for the protection of the public or the shareholders or the creditors of the company, it is desirable that the affairs of the company should be investigated. In paragraph (b) you find that the Minister can also do that where there are allegations of fraud, misfeasance or other misconduct by persons who are or have been concerned with the formation or management of the company. Then you have got a much wider one under paragraph (c): that for any other reason it is in the public interest that the affairs of the company should be investigated under this Part. Finally, in the case of a foreign company, that the appropriate authority of another country has requested for such a declaration to be made. So there you have it. The very same powers that are now proposed to be given under the proposed sections 8A to 8H, but the advantage and the saving grace, if I may say, of section 230 is that it spells out the situations under which the Minister may exercise the power. Section 8A does not do that. It simply says that if the Minister is satisfied that there is good reason for so doing, he may act under the section. No attempt is made to spell out what would be a good reason for the Minister to exercise this power. I have several times complained about the powers given to Ministers without restraint or without subject to limits imposed by Parliament.

The other undesirable thing about this section is that it does not spell out who the authorized person may be under the proposed section 8A. Under section 230 it is an auditor who can be appointed to investigate the affairs of the company. There seems to be a view, Mr Speaker, Sir, in the Government that it is necessary for the Government to amass itself with power after power in order to control or to regulate the affairs of its citizens, and that of course includes companies and businesses. What is needed, if I may say, is not just amassing of powers to itself by the Government but the exercise of proper judgment. You may have any amount of powers but if you are not prepared to exercise your judgment, then no amount of powers is going to help you. I cited a case in point, the Pan-El affair. The power was there all along. It was there in the Securities Industry Act. It was there in the Companies Act, under section 230. But whoever made the decision did not exercise his judgment properly. He assumed quite wrongly, in my view, that the MAS did not have the powers. And so we had the debacle of Pan-El and the debacle of the Stock Exchange suspending its activities for three days. So there you have it. It is a failure to exercise judgment. I would therefore ask the Minister whether he would try and justify the necessity for further powers to be given to the Minister. What we need is an assurance that his Ministry will exercise its judgment more carefully in the affairs of companies or corporations.

I have two other matters, Mr Speaker, Sir. The first is the proposed amendment to section 50. I have raised this point before but that is no reason for not raising it again and, that is, the provision in the section for an appeal from the decision of the Registrar of Companies where he refuses to register a prospectus of a company. Under the proposed amendment, any person who is aggrieved may appeal to the Minister and the Minister's decision is stated to be final, not to be called in question in any court. This is a very familiar thing and we get it time and time again in Government legislation, and I have drawn attention every time to the danger of investing powers without any questioning by an independent tribunal, from any review of the Minister's powers or of any executive authority. I cannot see why in this case an appeal could not have been provided to the courts. I am sure it is not going to be argued or stated that it would be against the national interest or detrimental to the safety or security of the country if the matter were brought before the courts and is debated.

Finally, Mr Speaker, Sir, may I ask when will some of these provisions of the Companies Act, particularly in its requirements in the preparation of accounts be made applicable to statutory boards. Under the Companies Act, statutory boards, because they are an agency of the Government, are exempt. Is there any real reason, any valid reason, why statutory boards should be made exempt? I have referred to the accounts of the HDB that they do not bring in the accounts of the subsidiary companies. They do not consolidate those accounts into their accounts. And the Auditor General himself has referred to certain omissions in the HDB's accounts. But they remain simply at that because the Companies Act does not extend to the statutory boards. So we have the HDB concealing its profits and not showing them in the accounts so that the public are not aware that the HDB has got something like $100 million or $150 million tucked away somewhere else. So I would make a plea that it is time sections relating to the keeping of accounts, if not the whole of the Companies Act, be made applicable to statutory boards, that they be brought within the purview and control of the Companies Act.

Mr Tang See Chim (Chua Chu Kang): Mr Speaker, Sir, this latest Companies (Amendment) Bill is 120 pages long, excluding the explanatory notes. It is a formidable technical document. It seeks to amend the present company law on various aspects and to provide for the creation of a judicial manager to look after financially troubled companies with a view to their rehabilitation.

This afternoon I would like to concentrate on two aspects of the amendments. The first relates to the amendment to section 149 of the Companies Act on double liquidation and the second on judicial management of a financially troubled company. Section 149 of the Companies Act has generated a fair amount of controversy. This provision automatically disqualifies a person who had been a director of two companies which were wound up because of insolvency within five years of each other from being a director for five years. The working of it has been seen to be harsh. Fairly prominent businessmen whose conduct the business community views as blameless have been disqualified under this provision.

The unfairness comes in because, firstly, the disqualification is automatic and, secondly, there is no cut-off period for the second company that goes into liquidation. Under the existing law, a person could have resigned from a company, say, 20 years ago and had absolutely no dealing with the company for the last 20 years and yet he could be automatically disqualified as a director if the company should go into liquidation within five years of another company from which he had also resigned but less than three years before its liquidation. This automatic disqualification may be convenient for the bureaucrats but would definitely discourage genuine entrepreneurs from sitting on boards of companies.

The Minister says that there should be a presumption of incompetence to protect investors. But this presumption offends against the fundamental legal principle that a person is presumed to be innocent until he is proven guilty. The present amendment which seeks a cut-off period of three years for the second company and provides for a defence to any prosecution will afford some degree of relief but I am afraid it does not go far enough.

The purpose of the provision, as I see it, Mr Speaker, Sir, is to disqualify directors who are incompetent and who have made a mess of the affairs of the companies of which they are directors. These people should be prevented from being directors of other companies and to make further messes. The present automatic disqualification, even as amended, does not discriminate the innocent from the guilty. As long as a person is a director of two companies which go into liquidation within five years of each other and the companies are insolvent at the time of being wound up, he is automatically disqualified. This works hardship especially in the present economic recession where it is likely, particularly in respect of companies with family connections, that if one company goes down the other would soon follow within a fairly short time all for no reason other than the general economic condition over which he has no control. Yet he is disqualified and can only prove his innocence by an application to court to lift his disqualification.

If the aim is to catch the guilty, surely the logical thing to do is to allow the court in a winding-up to pronounce whether or not any director involved in the company is guilty for having mismanaged the affairs of the company and, if so, whether he should be disqualified to sit as a director in another company and for how long. The Minister has referred to the UK Insolvency Act, 1985. The UK Act does not provide for automatic disqualification. It empowers the court to pronounce on the director whether he is fit or not in any case before it. The court can do so on its own motion or on the application of the Secretary of State, the UK equivalent of a Minister in Singapore. I hope the Minister will look at the provision closely when the Bill is before the Select Committee and to make the necessary amendments. This would have a stimulating effect on the formation of companies and in however small a way may help in the recovery of the economy from its present recession.

Sir, I would now like to say a few words on the provision enabling financially troubled companies to be put under judicial management. This is a totally new concept in the insolvency laws of Singapore. It is to be welcomed, especially in view of the present economic condition. The new procedure will enable financially troubled companies to have a certain degree of protection from its creditors. At present, our insolvency laws are pro-creditor. There is no formal protection of the debtor from the creditors. A company unable to pay its debt may be wound up for temporary liquidity problems even though its long-term prospects are good. The new provision is a major innovation in the general structure of the insolvency procedure and will provide an interregnum during which the affairs of the company can be sorted out. It also provides an opportunity for the company and its creditors to reach some sort of compromise or accommodation.

The Bill sets out the circumstances under which a company or its creditors can apply to court for the appointment of a judicial manager. It also sets out the judicial manager's powers and functions. The exact powers and functions of the judicial manager will no doubt be looked at carefully when the Bill is before the Select Committee. The Bill provides that only an approved company auditor can be appointed judicial manager unless the appointment is made by the court or on the nomination of the Minister. The question that may be asked is whether an approved company auditor is the best qualified person to be appointed judicial manager whose primary task is not to liquidate the company but to chartits path back to profitability and, possibly, future growth. Entrepreneurs with proven abilities may be a better person. But who is a proven entrepreneur? Perhaps the Registrar of Companies can compile a list of such capable persons for selection and appointment by the court. A merchant banker or a retired top administrator from the Civil Service or even a retired Minister of the Government can go on the list. These people may have a broader perspective than an approved company auditor.

I am happy that the Bill is to be committed to a Select Committee and no doubt these and other details will be looked at closely. Sir, I support this Bill in principle.

Mr Leong Horn Kee (Thomson): Mr Speaker, Sir, I would also like to make a few remarks on this Companies (Amendment) Bill.

Firstly, I would like to voice my general support for the various amendments proposed in the Bill, particularly the requirement to furnish more information in the financial reports of companies and also the provision for a company in financial difficulty to be put under judicial management pending a restructuring that would lead to the revival of the company.

However, Sir, I would like to express my disappointment over one section of the Bill, and that is, the proposed amendment to section 149. I believe that, in the first instance, section 149 is over-cumbersome and unnecessarily harsh to directors and managers. The provisions of this section act as a deterrent to local entrepreneurs to start new firms. In addition, corporate officers who are assigned to sit on the boards of companies would hesitate or be discouraged from accepting such appointments. As the Minister has said, the blame for the failure of companies often cannot be attributed to the directors or even to the management. Sometimes market conditions change so fast that remedial actions could not be taken in time.

The amendments to section 149 now seek to limit the liability period to three years. But if we ask any director or manager, I feel that most of them would think that this is little added comfort to them. Innocent directors and managers who already have one insolvent liquidated company under their name will have to continue working with the uncomfortable feeling that section 149 is a tightening noose around their necks. They cannot afford to have just one more failure in their hands.

Sir, I believe that we should not make it such that a person who has been involved in two failed companies should have a stigma placed on him. Entrepreneurs have to try again and again. They start new businesses and invariably they run companies which are always at a higher risk. Even mature established companies have their ups and downs. Very often tough entrepreneurs take failures in their stride. They quickly pick up the pieces and start all over again. Hence, I will say that we should not limit their chances of success by just saying that they should have only two tries.

In order not to stifle entrepreneurship in Singapore, I would like to see the provisions of section 149 amended to tackle only those managers or directors who are found to be fraudulent. Ordinarily, those innocent directors and managers who have done their best to run their companies should not be taken to task. Therefore, Sir, I believe many people feel that the provision in this section 149 should be amended such that it should not be automatic, and only those people who are proven or found to be fraudulent should be taken to task.

In this light, I support the Minister's proposal for a new provision which enables section 149 to exempt certain companies which, in his view, are venture capital industries to be gazetted by him. I hope he could give us more details on how he proposes to identify companies which are in this class, and whether he could take a more liberal attitude in terms of classifying companies which may be exempted from section 149. In view of the comments made by my colleagues and I welcome the proposal by the Minister to commit this Bill to a Select Committee which I hope will listen to the many appeals that have been made to this House.

Mr Chew Heng Ching (Kaki Bukit): Sir, I rise in support of the Bill in general. Except for one or two reservations, I think the proposed amendments to the Companies Act are steps in the right direction. Most laudable of all the amendments is the introduction of section 227 on the appointment of a judicial manager to help save the company in a financial bind from liquidation. Sir, the move will not only give the ailing company some recourse but I believe it will, in general, bring about greater communication between the company and its creditors, an area which is much lacking now.

Sir, I would just like to make two observations or suggestions, one in respect of section 149 and the other in relation to section 171. Section 149 has been debated by Members. I share their surprise and concern that the section has not been repealed, as popularly demanded. The provisions in the section specify that companies on venture capital business will be exempted. I share the concern of the Member for Thomson that venture capital business should be clearly defined and the definition should be as flexible as possible. To the businessman and the layman, venture capital business is something high-tech, high-risk, high-investment manufac- turing business. I think we should also consider high value -added services industry, an area which we have identified as a growth area for us in the 80s. These services industries could also be classified as venture capital business.

Coming to section 171, this section emphasizes the need for corporate company secretaries to be professionally qualified in order that they could be appointed to the post. Sir, I think the move is a praiseworthy one. The Act is, however, silent on the appointment of company directors. I am not proposing that we introduce stringent qualification criteria for officials to be appointed as company directors. I think this will be against our objective of promoting entrepreneurship. What I am suggesting is that perhaps the Minister could look into introducing minimum qualification criteria for officers to be appointed as company directors. I am concerned because under the present law office peons, company drivers and such like people are appointed as company directors as a matter of convenience, even though we are fully aware that there are more suitably qualified people in the company to assume the posts of company director.

I agree with the Members of the House that, since there are many amendments in the Bill Act and that they affect a wide cross-section of the business community, the Bill should best be referred to a Select Committee.

Dr Hu Tsu Tau: Mr Speaker, Sir, since the Bill will be committed to Select Committee, I will not go into details on individual comments made by Members. But they seem to centre around one main issue, ie. section 149 which has been uniformly disliked by all the speakers this morning and this afternoon. But in defence of this section and the proposed amendments, I would like to make a few points. Firstly, section 149 applies only to companies which fail because they are insolvent, and by that I mean they fail because they owe creditors a lot of money. Companies can fail for a whole variety of other reasons. If they lose only the shareholders' money, they would not be faulted under this section. It is only when they lose large sums of money, public money, that they are caught by this section.

Secondly, it is also designed to penalize errors of omission rather than commission. It is arguable whether this is considered better or worse than the UK provisions which are just the other way round, where the disbarments are determined by the courts or by the Secretary of State for Industry against directors who have committed crimes against the company. The rules we are proposing are to discourage companies from appointing name-plate directors, or office boys, for reasons of convenience. As a result, executive directors are often able to manipulate companies at their leisure without restraint. Basically, outside directors represent the shareholders, the minority shareholders of the company who have no direct say in the day-to-day operations of the company. And if they are not required to exercise some responsibilities, as they are not required under present laws, the risk of executive manipulation multiplies manifold.

It is also said that section 149 is unfair because there is automatic disqualification. But I would like to point out that directors who are disqualified are permitted to apply to the courts and, indeed, I think the record so far suggests that the courts have been fairly liberal in re-instating them. However, since it is obviously a matter of considerable public interest, I would ask all those who are dissatisfied with the present arrangements to make their views known in writing or verbally to the members of the Select Committee for consideration.

On section 46, Insolvency Act provisions, there seems to be general support for these new provisions which are unique in that they try to arrive at a balance in protecting the interests of the shareholder and the interests of the creditor. We have not adopted the Chapter 11 provisions of the US law because they are overly protective of the shareholder and work against the interests of the creditor and cases of abuse have been known. We are proposing a compromise which will strike abalance between the interests of these two groups.

I take the point that the qualifications required of a judicial manager seems fairly restrictive, as he would have to be an approved company auditor. There would appear to be a case for widening the scope to include non-accountants who qualified to act as judicial managers.

I think I have covered most points, except the two raised by the Member for Anson. As to the question whether statutory boards should be brought under the Companies Act, I think it is unnecessary. The Member for Anson has said that because Statutory Boards do not have to comply with the Companies Act, it allows Government to conceal its profits. I think that is a totally absurd notion. Take the case of the Housing and Development Board. It is owned by the Government, which means it is owned by the people. There is no need to conceal profits, as profits belong to the people. I think it is a facile argument. However, it is not an issue I want to debate today.

Finally, the point raised by the Member for Anson as to the adequacy of powers under the existing Companies Act and the Securities Industry Act. I do not agree with his opinion obviously. He says that sections 230 and 231 give the Minister the power to declare any company a declared company. But what he does not realize is that the Minister cannot do this arbitrarily because he has to have a prima facie case and this is extremely difficult to prove under the present laws. Hence, the need for amendments introduced under sections 8A to 8H, for precisely this reason.

Question put, and agreed to.

Bill accordingly read a Second time.

Resolved,

That the Companies (Amendment) Bill be committed to a Select Committee consisting of Mr Speaker as Chairman and seven Members to be nominated by the Committee of Selection. - [Dr Hu Tsu Tau.]