COMPANIES (AMENDMENT) BILL (As reported from Select Committee)

Order for Third Reading read.

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

Members are aware that the Companies (Amendment) Bill was referred to Select Committee for consideration. The Select Committee received 29 written representations, eight of which were received after the closing date and of which one was too late for inclusion in the Report. The Committee heard oral evidence from 47 persons in respect of 16 of the 29 written representations. The representations were by and large well-reasoned and well-argued and many of the suggestions 1152made were accepted by the Select Committee. I wish to express my appreciation to the numerous persons who took the time and trouble to give their views on the Bill.

The Report of Select Committee was presented to this House on the 12th of March 1987 as Paper Parl. 5 of 1987. The Bill, as set out at Appendix I of the Report, incorporates the amendments made by Select Committee. Members will observe that a large number of amendments have been made to the Bill and full explanations for all these amendments appear in Appendix V of the Report. I do not, therefore, propose to burden the House by repeating these explanations clause by clause.

A substantial proportion of the amendments are of a drafting nature. These serve to improve the language, remove inconsistencies or else contribute to greater clarity in certain provisions in the Bill. These do not require further comment.

There are, however, some provisions that have aroused considerable public interest and discussion and which I believe deserve special mention. I refer, in particular, to Clause 22 which relates to the disqualification of unfit directors of insolvent companies under section 149 of the Act (Clause 45) which introduces a new Part VIIIA to the Act on judicial management, and Clause 59, which is concerned with the priority of employees' wages and salaries in a winding-up. Much of the Select Committee's time was devoted to these three clauses. As Members will see from Appendix V of the Report, full explanations have been given for each of these amendments to the clauses. In my view, the amendments made to these clauses in Select Committee adequately deal with the criticisms levelled at them as they originally appeared in the Bill.

For the benefit of Members, I will touch briefly on the amendments to these clauses.

Clause 22 presents a new approach as compared with the original clause 22 in providing for the disqualification of unfit directors of insolvent companies. Rather than make minor amendments to ameliorate the harshness of existing section 149, the Select Committee decided that a fundamental shift away from automatic disqualification would be desirable. Disqualification will now be by Court order based on an application by the Minister or by the Official Receiver.

This new provision is based broadly on the UK legislation. Certain concepts in existing section 149 have, however, been retained. These include the cut-off period of three years within which the insolvency liquidation must take place for a person who has ceased to be a director to be disqualified, and the definition of what constitutes a company going into liquidation. Under the new section 149, guidance is also given to the Court on the matters it should take into account in deciding whether the conduct of a director is such as to render him unfit to manage companies.

A notable feature of the new provision is that unlike the existing section 149, a director may be disqualified by the Court after only one insolvent liquidation. The Select Committee considered this to be an important and logical change in the shift away from a system based on automatic disqualification to one based on disqualification by Court order. Notwithstanding this somewhat stricter approach in this latter regard, the Select Committee is of the view that taken as a whole, the new section substantially reduces the harshness of existing section 149 as it will ensure that a full judicial inquiry is made before a person is disqualified. At the same time, the basic policy underlying the provision is preserved. In broad terms, this policy is to prevent incompetent, reckless or negligent directors who have been associated with one or more insolvent companies from carrying on trading under the protection of limited liability and causing substantial losses to other creditors and shareholders.

I now move to clause 46 which inserts a new Part VIIIA dealing with judicial management. This clause was also the subject of numerous comments and criticisms though I should add that the general policy intent of this clause was almost universally accepted. Here again, I do not propose to reiterate the explanations given for the various amendments that appear in the Report. Although the Select Committee was not able to accept all the suggestions put to it, I believe that the suggestions that have been accepted and incorporated into the clause now provide a more workable scheme for the judicial management of companies. Nevertheless, it should be recognized that Part VIIIA introduces an area of law new to Singapore, that notwithstanding the amendments and refinements which have been made in Select Committee, only experience gained from observing how this new judicial management procedure works in practice will reveal other defects that may exist.

Clause 60 which amends section 328 of the Act deals with the preferential claims of employees of a company in a winding up. A number of amendments were made to this clause in Select Committee. The most significant feature of these amendments is the removal of the limitation that only wages or salaries payable in respect of services rendered within a period of four months before the commencement of winding up can be claimed as a priority debt. An employee in a winding up would now have a preferential claim for wages and salaries up to an amount that is equivalent to five months' salary or $6,250 whichever is the lesser. This will ensure that on a winding up, an employee can expect to receive in priority a fair sum of what is due to him for notice pay, gratuity or retrenchment benefit pursuant to his contract of employment under an award or agreement, regardless of whether such sum becomes payable before, on or after the commencement of a winding up.

As a final comment on the Bill, Members will see from the Report that certain amendments in clauses 2, 9 and 65 have not been proceeded with. These amendments were concerned directly or indirectly with the prospectus requirements under this Act. It was decided not to proceed with these amendments in this Bill as it was felt that what was really required was a thorough review of the prospectus requirements in the Companies Act so as to make them more compatible with the rapid developments taking place in the securities industry. This review has become more urgent having regard to the need to promote the bond market both at the domestic and the international level and, at the same time, to liberalize the law relating to prospectus in circumstances where a lesser degree of protection to investors is justifiable. These proposals will be taken up in the next Companies (Amendment) Bill.

Sir, I beg to move.

Question proposed.

Mr Heng Chiang Meng (Jalan Kayu): Mr Deputy Speaker, Sir, I am sure that the support, applause and congratulations for the Minister for Finance both within this House and outside would be deafening. May I with your permission, Sir, join in the din.

The Bill before us is a first-class example of the democratic process of legislation at work. It is not just an ordinary Bill but one that will affect the business and economic well-being of Singapore. The Select Committee and the Minister have handled the Bill in such a way that few, if any, can be unhappy with the amendments.

Sir, the Minister has told us that the Select Committee received 29 written representations and saw 47 persons representing themselves, their companies or various associations. It has produced a voluminous Report of 515 pages and the result is the amendment Bill. I am sure that all those who have given their viewpoints are happy because I believe most, if not all, of their representations have been taken into consideration.

Sir, at the time when the Bill was first presented, there were two main areas of contention, as the Minister has pointed out. One was the automatic disqualification of directors under section 149. The other, of course, was the lack of rehabilitation for ailing companies. The business community wanted the removal of section 149 for good reasons. The Minister wanted the retention of the powers of section 149 for equally good reasons. With the new approach, I believe that both parties are satisfied.

The new amendments on the judicial management were somewhat more difficult because there were just too many conflicting interests. And the Select Committee and the Minister had to perform the fine art of balancing the rights and needs of various conflicting interests such as creditors, bankers and financiers, workers, employees, shareholders, directors and a host of others, including, most importantly, giving the judicial manager enough powers and room to do a proper job of helping the ailing company to its feet.

Sir, while there may be still some who may not be fully satisfied with the final amendments, I am sure that all will agree that the Select Committee and the Minister have taken all interested and very often conflicting views into consideration. For example, section 227B taken together with section 227H with respect to floating charges may not please the bankers. However, I agree with the Minister that every opportunity must be given to the judicial manager to succeed. The whole intention of these amendments on judicial management will be defeated if the manager fails to do a proper job because his hands are tied too much. In any case, I believe that the banks will be able to adjust to the changed situation because of the new legislation.

Sir, I am more certain that regardless of happiness or unhappiness on the part of anybody or any party, all will agree that these new amendments will bring forth a new era in the business history of Singapore, a new era that is much needed and welcome by all.

Sir, I fully support the Bill. 12.55 pm

Mr Leong Horn Kee (Thomson): Mr Deputy Speaker, Sir, I too would like to congratulate the Minister for his excellent work in the Select Committee. As I read the Select Committee's Report, I am particularly impressed by the Minister's approach and attitude. I like his openness in being quite prepared to consider suggestions and even accept the good ones. And also his candour in explaining why he was unable to accept other suggestions. I would like to express my unreserved praise for the Minister for introducing further amendments to this Bill.

Sir, I would like to comment on two particular sections, one on section 149 and the other on section 227. As I said, I am pleased that the Minister has kindly repealed the original section 149. Many Members in this House have spoken against the automatic disqualification feature in the original section 149. Now with the new feature where it is only by application, I think this approach is definitely a more enlightened one. The original section 149 is an inhibition against entrepreneurship which the Minister for Trade and Industry yesterday lamented was lacking in Singapore. Again, I would like to express my praise for the Minister for his responsiveness. It bears well for the good image of the Government.

The new amended section 149 puts the onus on him and the official receiver to apply to the Court to disqualify the delinquent directors. I note that there is a new version, which is, the Minister could apply for disqualification even after a director has been involved in one insolvent company. I agree with this stricter approach. I think it is necessary. May I ask the Minister, however, that given this added power, how would he go about identifying people whom he feels should be disqualified? What criteria would he use? And even after having disqualified the person, what means do we have to police and safeguard that this person would not continue to manage businesses either under proxies or through other means?

Sir, the other area I would like to comment on is section 227 on the judicial management. This is a sound move. It is a new innovation in our Singapore legislation. It helps to save financially troubled companies which are inherently viable. It provides a form of shelter for companies to restructure while holding off the creditors. The key to the success of this section 227, as I see it, is whether Singa- pore has a pool of capable people who could take on the job as judicial managers. May I ask the Minister, conceptually, who are the people he feel could be given this assignment? Would there be a sufficient number of people in Singapore to take on these jobs? As we know, some of our best managers and managing directors are quite entrenched in Singapore companies. How could we entice them to come out from their secure jobs with good perks and incentives to take the risk of being judicial managers? At the moment, as I see it, there are insufficient incentives to attract such persons to take on this task. If we expect them to just draw a fixed salary and take on this onerous responsibility of being a judicial manager, I think we will be hard put to find enough people to do this job.

In the United States, there are people who are called company turnaround artistes who specialize in going to sick companies and curing them. The main incentive for these people is that they are offered stock options of the companies. When they do manage to turn around the companies and the companies become successful, the value of their shares becomes much more valuable. Therefore they make substantial capital gain in the process. But in Singapore, as the Minister is quite aware, there is the legal requirement that when an employee exercises his stock option at the point of time when he exercises it, the Income Tax Department will come in. They will impose an income tax which is the difference between the fair market value of the shares against the option price. This means that the Government now has a share of the cake which is about 33%. Should the Minister not at this point in time also review the law governing such stock option schemes, whereby at least for the judicial managers they will be given the added incentive of enjoying more capital gains for their hard work?

Mr Deputy Speaker: It is approaching 1.00 pm. I suspend the sitting and will take the Chair again 2.30 pm.

Sitting accordingly suspended at 1.00 pm until 2.30 pm. Sitting resumed at 2.30 pm

[Mr Deputy Speaker in the Chair]

Debate resumed.

Encik Othman bin Haron Eusofe (Geylang Serai): Mr Speaker, Sir, I rise to support the Companies (Amendment) Bill.

Sir, when the Select Committee on the Companies (Amendment) Bill sought views on the proposed Bill, the National Trades Union Congress (NTUC) led by my colleague, the Member for Kebun Baru, who is also the Chairman of the GPC for Labour, made representations before the Committee on various matters affecting the workers. Briefly, our main concern was over the lack of protection for notice pay in the event of a winding up of a company, particularly where workers' service is terminated on or before the winding up commences. Secondly, the retrenchment benefit which is linked to the four months or 12 months as provided in the Bill before the winding up would be meaingless to the worker as such benefits are usually computed on a number of years of service of the worker multiplied by a certain quantum, say, two or three weeks per year of service. Finally, the status of a union and the collective agreement in the case of a unionized company placed under judicial management.

Sir, I am happy to note that most of the suggestions raised by the NTUC for workers' welfare have been incorporated in the amended Act, namely, sections 328 and 227S, in the case of judicial management. This would ensure that in future when companies wound up, our workers could be assured of priority payment for some benefits.

With the clarification of the position of notice pay, it would be easier now for our unions to deal with the liquidators on the issue. The new section 227S of the Act now provides authority for trade unions in unionized companies to represent their members in respect of outstanding wages or salaries. Sir, I am speaking on this Bill to thank the Minister for his kind concern and understanding of workers' problems and for taking workers' welfare into consideration when amending the Act. This demonstrates the strong relationship between the unions and the Government. In some countries when companies are placed under judicial management, it provides the management with the opportunity to do away with the union. For example, the use of Chapter 11 in the United States and the predicament of the unions there on this issue. Sir, this strong understanding and good relationship between the Government and the unions has helped and would continue to help our unions to be effective in their role to safeguard workers' welfare.

Dr Augustine Tan: Mr Deputy Speaker, Sir, I also rise to support this Bill and to add my compliments to those expressed by my fellow MPs. This Bill is a difficult one to steer through the Select Committee, as there were many representations and many provisions. I also join my colleague from Geylang Serai in welcoming the amendments introduced to clause 59 which protects workers' interest.

I want to take up a number of issues concerning clause 22 which refers to section 149. In the first place I welcomethe amendment which is much needed, as it will certainly help to encourage the development of entrepreneurship in Singapore. The earlier version was very restrictive and would have scared off many people from taking responsibility for companies. But I would like to make some specific suggestions, if I may. On page 46 of the Report, sub-paragraphs (b)(i) to (iv) are conditions which, if violated by directors will lead to their removal as directors. I think we need to add two more sub-paragraphs.

'(v) if a director is involved in defrauding creditors knowingly by allowing the company to trade while it is insolvent.'

Sir, there are many cases where the directors of a company know the financial situation of the company but yet they carry on the business using up whatever credit is extended to them knowingly. It is a clear case of fraud and should be included in that sub-paragraph.

A sixth sub-paragraph should be added there:

'(iv) if a director is involved in defrauding creditors knowingly by transferring assets through inter-company transactions while the company is insolvent.' There have been many cases, again, of company directors who attempt to do this to defraud creditors.

Then on page 47, subsection (11). There are two exclusions there. (a) is in regard to a judicial manager, and (b) to a receiver and manager in the discharge of their duties. Perhaps we should add a third:

'(c) an external consultant nominated by creditors with the consent of directors to assist in restructuring or otherwise to rescue the company without going into judicial management or receivership to avoid undue publicity which may precipitate his downfall.'

Sir, the purpose of adding this paragraph (c) is to protect an external consultant that may be called upon by the creditors jointly with the directors of the company to assist in restructuring the company. And this could happen just prior to the appointment of the judicial manager, and such a person ought also to be protected under the provisions of this Act.

I next turn to clause 45 which deals with section 227. This new version represents something of a half-way house between Chapter 11, which is in operation in the United States and the British company practice. In fact, it goes somewhat beyond the current British practice, as I understand it, reading from the Select Committee Report because it has implemented some of the provisions of the Committee called the Cork Committee or Cork Report. So clearly we are moving into unchartered waters. The question is whether the provisions under this clause would be effective. The Member for Chua Chu Kang, who was a member of the Select Committee, mentioned in one of the hearings that even under Chapter 11 in the United States, which is far more liberal in so far as the company management is concerned, only about 10% of the troubled companies are ultimately saved. So I just wonder whether our provisions would enable us to save more than 10% or somewhat less.

Next, Sir, I would like to turn to page 75, paragraph 3(a). Paragraph 3(a) provides for the nomination of a person who is an approved company auditor and who is not the auditor of the company to act as a judicial manager. This nomination obviously comes from either the management side or the creditors of the company or some joint action between them. As I read some of the submissions, there was some complaint that this was unduly restrictive because of the small number of company auditors who may qualify to do such a job as a judicial manager. So I see some attempt at compromise in the amended Act under paragraph 3(e) of the same page 75, where it is provided that where a judicial manager is appointed by the court or nominated by the Minister, that person need not be an approved company auditor. I am somewhat at a loss to understand why, in the case of company directors and creditors, the restriction was maintained, namely, that the judicial manager who was nominated had to be a company auditor, whereas when it came to the court or the Minister they were quite free to choose whoever they wanted to. In other words, there is no restriction that he had to be a company auditor. Why is this so? I am in favour of it, but why not extend the same provision to the earlier case? In other words, allow the company directors and/or creditors to nominate somebody who is not necessarily a company auditor.

On page 76, paragraph 4(a). I will read from paragraph 4:

'When a petition is presented to the Court, notice of the petition -

(a) shall be published in the Gazette and in an English and Chinese local daily newspaper and a copy thereof sent to the Registrar; and

(b) shall be given -

(i) ...

(ii) ...'

I notice here that there is no time limitation set out and I believe a word such as "forthwith" or "within two weeks" would be appropriate. If one compares this provision with a subsequent provision, section 227K, where the word "forthwith" is put in there or some time period is also specified. This is of importance, Sir, because we are dealing with a company which is financially troubled and time is of the essence. Already there were many complaints by those who made their representations to the Select Committee that the time taken for a Court to appoint a judicial manager is also very critical. So the gazetting part should be done as quickly as possible. I know the Minister tried to accommodate some of these complaints by providing for an interim judicial manager.

Then on page 85, section 227I (c), right at the top, it says there [this is in regard to a judicial manager], the judicial manager of a company:

'shall be entitled to be indemnified in respect of that liability, and to have his remuneration and expenses defrayed, out of the property of the company which is in his custody or under his control in priority to all other debts except those subject to a security to which section 227H (2) applies.'

This exclusion of those securities mentioned under section 227H(2) appears to be inequitable. One could imagine a situation where the judicial manager incurs very substantial costs expenses, and the assets of the company which are not tied up under that provision may not be sufficient to defray his expenses. So I believe that perhaps the Minister might want to consider amending this either immediately or sometime in the future.

My final point, Sir, refers to page 89, under section 227N (3). I will read it:

'The judicial manager shall report the result of the meeting (which shall, subject to subsection (2), be conducted in accordance with regulations) to the Court and shall give notice of that result to the Registrar and to such other persons or bodies as the Court may approve.'

Sir, you will notice the reference to "regulations". But as I scan this Bill there is no explicit reference to regulations, no enabling provisions. Perhaps the Minister can explain why this was left out. Perhaps the regulations will be spelt out later.

Dr Richard Hu Tsu Tau: Mr Deputy Speaker, Sir, first, I would like to thank all the Members who have spoken, particularly for all their unstinting support of the Bill. They should really be directing their thanks to the Members of the Select Committee which include the Members for Chong Boon, Bukit Merah, Chua Chu Kang, Clementi, Leng Kee, Jalan Besar and the Speaker, for spending all their time in these deliberations.

I will now turn to more specific issues raised by Members. The Member for Thomson has asked whether there are any specific criteria which can be used to identify directors who are going to be excluded or penalized for doing things detrimental to the company. I do not think there are any set guidelines for this because their transgressions should be fairly apparent and the Minister or the Official Receiver would from experience know what criteria to use.

He also raised the question as to whether there would be sufficient people willing to undertake the job of a judicial manager and has made some proposals to remunerate them adequately through share option schemes and so forth. Of course, we really cannot tell in advance whether the judicial management system will work effectively. We will simply have to allow for a trial period. But I am fairly confident that this opens up quite a new range of work for approved company auditors and there should be no difficulty in finding sufficient people willing to undertake this job. As to the question of whether we should provide them with special incentives like share options, that is another issue altogether and the tax implications are being looked at by my Ministry in connection with other issues raised during the Budget debate. We will be announcing some of the decisions in due course.

Other Members have been mainly complimentary for which I thank them. The Member for Whampoa, as usual, asked some very penetrating questions which I will attempt to address. He has suggested that we should perhaps add two conditions to section 149 which would make it obligatory for directors to be charged under this section for fraud if they continue to allow companies to operate when they are clearly insolvent. These are useful suggestions. But I do not think they are really appropriate additions to the legislation. They would be criteria used either by the Official Receiver or by the Minister in determining whether petitions should be made to the Courts for directors to be charged under this section.

He has also suggested that on page 47, paragraph 11(a) and (b), should include a proposal to allow the appointment of an external consultant to assist the judicial manager to reconstruct the company. Again it is a useful idea but I would have thought that such a step ought to have already been seriously considered by the directors of the company.

Dr Augustine Tan: The judicial manager is being protected under that section. The consultant should similarly be protected.

Dr Richard Hu Tsu Tau: No. What I meant was that there need not be the formal appointment of such a consultant because the directors of the company are quite at liberty, before a judicial manager is considered, to appoint a specialist who might be able to help restore the company.

Dr Augustine Tan: That is not my point, Mr Deputy Speaker, Sir. It is for the protection of that person so appointed that I was suggesting the amendment. That particular section refers to the protection of the judicial manager or the receiver. So I was suggesting extension of the protection to an external consultant who had been appointed prior to the appointment of the judicial manager.

Dr Richard Hu Tsu Tau: Thank you for the clarification. Again, I do not think it is really necessary because he is a professional engaged to assist the judicial manager or the company and would be adequately protected under the terms of his contract.

The Member for Whampoa has also asked whether under our new legislation more than 10% of companies could be rescued. That is a question which I find impossible to answer. No legislation can stop companies going under if they are badly managed or if circumstances turn against them. Legislation is only introduced in the hope that it can make it easier for companies which are not totally insolvent to be rescued and to avoid them being forced into liquidation by the precipitous action of one or two small creditors. It is a holding period and we will simply have to see whether, in practice, it aids in the recovery of companies which are fundamentally sound but may be encountering temporary cash flow problems which could lead to, under present regulations, premature liquidation.

The Member for Whampoa has also asked why are companies and their directors not allowed to nominate anyone other than approved auditors whereas the Court and the Minister have such discre- tion. This is because we have to be very careful that people who are nominated to be judicial managers have the qualifications, knowledge and expertise to do the job properly, and we believe that approved auditors will normally have these necessary qualifications. However, there may be certain cases where, depending on the size of the company and nature of its operations, someone outside the auditor's profession might do equally well, if not better, and I think one ought to leave the discretion in this area to the Minister or to the Court on an exceptional basis rather than on a regular basis.

The Member for Whampoa also has said that on page 76 there appears to be an omission. He has made reference to section 227K where such a provision has been made but the circumstances are not entirely the same. In section 227K there is a specific step to be made and therefore the word "forthwith" had to be included whereas in the section on page 76 the time frame will in fact be specified in the regulations.

The Member also said that on the top of page 85, he wanted to know why there is a certain exclusion under section 227H. The exclusion refers to property held under fixed charges and I think an exception cannot be made to this rule because it will undermine the whole basis of priority in the liquidation process where holders of fixed charges always have prior claim to the assets of the company under liquidation. To do so would undermine the whole basis of section 328 of our Companies Act. A ranking of this sort with prior claims by secured creditors followed by floating charge creditors and unsecured creditors requires the exclusion in section 227I (2).

Finally, he has asked why on page 89, section 227N, a reference is made to regulations but there seems to be no regulations published as yet. These regulations will, in fact, be issued simultaneously with the new legislation. It is a normal procedure that a complete set of new regulations will be issued in parallel with legislation, covering the implementation procedures. The regulations are far more detailed and are of a nature not appropriate for inclusion in the main legislation.

I think I have covered most of the questions raised.

Question put, and agreed to.

Bill accordingly read a Third time and passed.