COMPANIES (AMENDMENT) BILL

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COMPANIES (AMENDMENT) BILL: Order for Second Reading read.

Mr Lim Hng Kiang: Mr Deputy Speaker, Sir, I beg to move, "That the Bill be now read a Second time".

Sir, in May 2003, the Companies Act was amended to implement 20 recommendations of the private sector-led Company Legislation and Regulatory Framework Committee, or the CLRFC. This Bill proposes further amendments to the Companies Act, taking into account other recommendations of the CLRFC and public feedback on the draft Bill. The changes will simplify and update provisions in the Companies Act to create a more robust regulatory environment for our companies and businesses.

In view of the public feedback received, the Ministry of Finance will defer the implementation of some of the recommendations of the CLRFC such as the removal of par value and share buybacks out of capital and take more time to consult the business community on the operational details of their implementation.

Sir, I shall now highlight the main amendments proposed in the Bill.

Abolition of ultra vires

Currently, the Companies Act contains an 'ultra vires' doctrine and requires the proposed objects of a company to be stated exhaustively in its Memorandum. If the company performs an act that is not authorised by the object clauses, it will be considered 'ultra vires'.

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Clauses 8 and 9 of the Bill amend sections 22 and 23 respectively to abolish this requirement. Given that a company is already considered in law to be a legal person, it will be statutorily conferred all the powers of a natural person and will have full capacity to carry out any lawful business or activity. The amendment will also allow companies the choice to limit its capacity, rights or powers in its memorandum or articles of association to preserve the rights of internal redress by members against the directors. The amendment is in line with the current practices in New Zealand and the UK.

One shareholder, one director companies

Currently, all companies are required to have at least two shareholders and two directors, with the requirement that at least one director must be locally resident.

This Bill amends the Companies Act to allow all companies, regardless whether they are public or private companies, to have one director and one shareholder. To preserve the accountability of such companies, we will retain the local residency requirement for at least one director.

There will be two additional safeguards. First, while the same person can be both the director as well as the shareholder, he cannot act as the company secretary. This ensures that there will always be an independent company officer. Second, the shareholders will be personally liable for the debts and obligations incurred by the company if it is left without a director for more than six months. One director, one shareholder companies are already permitted in New Zealand.

I understand that the UK government is also considering implementing such a regime.

Company auditors

Currently, a person intending to be an approved company auditor goes through

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two separate approval processes. First, he registers himself as a public accountant with the Public Accountants Board pursuant to the Accountants Act. Second, he applies to the Minister for Finance to be an approved company auditor under the Companies Act.

Clause 3 of the Bill streamlines the procedure and removes the statutory requirement for public accountants to have to seek approval from the Minister. Instead, any person who satisfies the registration requirements to be a public accountant under the Accountants Act will automatically be an approved company auditor.

Capital raising by private companies

Currently, a private company is prohibited from raising capital by inviting members of the public to subscribe to its shares or debentures. Clause 6 of the Bill removes the prohibition and allows private companies to raise capital through public offerings without converting to public companies, so long as they fulfil the disclosure requirements under the Securities and Futures Act.

Inclusion of registration numbers

In the Companies (Amendment) Bill 2002, one of the amendments was to dispense with prior screening of similar company names. As a result, the distinctive registration number of a Singapore-incorporated company, rather than its name, has become a more unique identifier for companies.

Clause 28 of the Bill amends the Companies Act to require a company to show its registration number on all business letters, statements of account, invoices, official notices and publications issued by the company. Taking into account feedback from businesses, the

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Government will grant companies a grace period of six months after the amendment comes into force for companies to use up their existing stock of stationery and to modify their internal systems to comply with the new regulation.

Penalty provisions

Currently, the Companies Act imposes a penalty for directors who fail to comply with the prescribed financial reporting standards and to ensure that the financial statements present a true and fair view. It also imposes a penalty on any person who makes or authorises the making of false or misleading statements with respect to the information required under the Act.

This Bill revises the penalty amounts, with the possibility of a jail sentence for fraudulent behaviour. The increased penalties will serve as more effective deterrence. It will give the Courts greater discretion to impose penalties that are more closely proportionate to the possible gains that could be reaped from such non-compliance. The changes are comparable to the existing penalties for similar offences in the Securities and Futures Act. They instil confidence among investors that companies incorporated in Singapore present true and fair financial statements, in accordance with the prescribed accounting standards.

Mr Deputy Speaker, Sir, we will continue to review the recommendations of the CLRFC. The Government will press on with company law reform to make our corporate environment conducive for companies and entrepreneurship to thrive.

Sir, I beg to move.

Question proposed.

Mr Sin Boon Ann: Sir, the present amendment Bill before this House is part of a series of amendments to the

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Companies Act that the Government has put in place to implement the changes proposed by the CLRFC to make our business environment more cost competitive and efficient. These changes are timely and, in some cases, long overdue. I was in the Committee that mooted these changes and, quite naturally, I fully support the amendments that are now contained in the Bill.

Sir, even though I generally support the Bill, I do have a number of observations that I wish to place before this House. First, clause 3 amends the present section 9 of the Act by widening the category of persons who are allowed to act as liquidators. Previously, only auditors are qualified to act. However, it would seem that the job of a liquidator may be carried out by other professionals or whoever through experience or training. I believe they are equally qualified to rise to the undertaking; hence, the widening of the categories of those who may act as liquidators.

While the widening of the categories of people who may qualify to act as liquidators will result in giving the public a wider range to choose from and, hopefully, lower fees in the process, what the amendment Bill has not addressed really are the professional standards and training of liquidators. Up until now, liquidators in Singapore are not qualified by virtue of any specific and dedicated course of study either in a professional or tertiary institute. The principal reason why auditors have traditionally been asked to act as liquidators may perhaps have to do with their familiarity with accounts and finance. Yet, Sir, we all know that liquidating a company involves skill sets that are more than just an ability to handle accounts. They are expected to act as managers, counsellors, lawyers and astute negotiators. These are qualities that their primary training may not prepare them for, and something that they have to pick up along the way. More than just

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skills, liquidators are also required to exercise judgment that only experience can give. They are also required to balance generally the different interest groups in a liquidation from creditors, employees and shareholders. Above all, liquidators are expected to exercise ethical consideration in their judgment.

Sir, unfortunately, there is nothing that exists today that can properly be said to formally prepare a person for a career as a professional liquidator. Yet, the role of a liquidator in a winding up situation is no less important than that of an accountant or solicitor. A liquidator's job requires a high level of professionalism and training. In the CLRFC report, there is specific mention of setting up a body similar to the Law Society or Institute of Certified Public Accountants to set the standards, training and regulation of liquidators and insolvency practitioners. Our Government has indicated that it has accepted the recommendation and I am pleased to note that this is not one of those recommendations that Government has put a reservation on. I hope that it will, sooner than later, be the case when such a body is set up.

Secondly, clause 6 gives effect to recommendation 1.5 of the CLRFC report which argues for more liberal policy of allowing private limited companies to raise money from members of the public. Presently, private limited companies are not allowed to raise money from the public. This has often been a severe limitation on private limited companies that seek additional working capital or funds for expansion. Often, where companies are in a position to raise money from the public, the cost involved together with the demands of regulatory compliance often serve to act as a deterrent. Allowing private companies an easier route to raise money may actually help to lower the cost of business for smaller companies. While we want to make it easier for small companies to raise

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money, one must recognise and accept that there are costs involved. Presumably, standards governing such invitations to investors to put money with these companies will not be as rigorous as the IPOs of public companies. Otherwise, the cost may just be too prohibitive for the company to even consider trying.

However, Sir, if the standards of disclosure expected of such companies are not going to be as rigorous as that of a conventional IPO, how can we be sure that the public interest will be adequately protected from shenanigans and scams? In the case of publicly listed companies, there is always the presence of the Singapore Stock Exchange to act as a watchdog for the public interest. But for non-listed companies, we should continue to ensure that our legal regime will not make it easier for foreign crooks to try their luck here. Otherwise, there is a risk that some unwary and non-financially sophisticated uncles and aunties here may be scammed of their hard-earned money and life-long savings.

Thirdly, the proposed amendment in clause 31 seeks to introduce a new section 157C which allows directors to place reliance on information provided by management and professional advisers. The amendment seeks to clarify the extent of a director's duty when it comes to acting on information and advice of others. However, there is a caveat. Directors must act in good faith, make proper inquiries and have no knowledge that this reliance is unwarranted. Sir, while the policy intention of the clarification is good, it still does not remove the anxiety on the part of directors that they may still get it wrong. As I see it, the present amendment merely codifies what I believe is the common law position of the duty of care of a director. It does not provide any further guidance on what exactly is the proper scope of

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inquiry on the part of the director. Conduct based on words like "proper" or "reasonable care" are always, in a legal sense, determined ex post facto. In other words, anxiety continues to remain on the part of a director and I would say that the proposed changes have not exactly given directors much relief by way of clarification.

Apart from the above comments, I should add that the Government should be commended for its laudable efforts in seeking to make bold changes to our companies legislation to bring our laws in line with international standards and to make Singapore more competitive internationally.

With that, Sir, I support the Bill.

Dr Gan See Khem: Mr Deputy Speaker, Sir, I welcome the amendment in the Companies (Amendment) Bill that allows one person to set up, be the sole director and sole member of a company and also allows private companies to raise funds through public offers. This change is much needed in the drive for entrepreneurship and flexibility in the private sector. The abolishment of an unnecessary requirement is an encouraging move for the development of a vibrant marketplace.

Provision for an easier facilitation of company resolutions and instructions is also provided for under the proposed amendment. This encourages more risk taking, as individuals who set up companies are protected by the corporate veil identity. This, in turn, should help encourage greater daring and entrepreneurialship coupled with a greater ability to react in a timely manner in times of crisis and change.

At the same time, the new amendment helps to prevent too much abuse of the new amendments of one-director companies. As a sole director, he

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is not allowed to resign from his position. On the other hand, the amendments still do nothing to alleviate the danger of fraud being perpetrated by individuals who might use the corporate identity as a shield to guard against personal liability. In addition, because of the relaxation of the bankruptcy rules, it is now easier for an individual to default on his contractual obligations once he petitions for bankruptcy. However, by passing these amendments, greater risk taking and entrepreneurial behaviour will be encouraged. The old maxim of caveat emptor , or let buyers beware, should be applied at least as far as private companies are concerned. The Government cannot afford to safeguard every single individual who does business with Singapore companies.

In so far as public companies are concerned, the Government understands the need to further regulate and protect members of the public. However, it is a correct stand to allow private companies more freedom to develop themselves and form business relationships. Yet, accordingly, private individuals and companies who choose to do business with one-director private companies should recognise the dangers and safeguard themselves by conducting the necessary background checks.

The need to move with the times has also led to the introduction of a major amendment to the Companies Act concerning electronic communication. Companies in the United States are already in the forefront in the utilisation of electronic communication to provide further efficiency in the conduct of their business affairs. The Government has also invested heavily over the years to provide the IT infrastructure for Singapore to compete effectively in the international arena. Arguably, this is the correct time for the proposed amendments to the Act so as to allow Singapore companies to effectively move into the information age.

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The new sections 387A and B allow notices of company meetings to be posted on company websites. Additionally, documents such as circulars, annual reports and announcements may similarly be posted on company websites. I would also note that notices of meetings or company accounts, balance sheets, reports and other documents may be published on a website as long as it is legible,

and only subject to agreement between the individual and the company.

Mr Deputy Speaker, Sir, while I support the move to move into the information age with electronic communication, it took me quite a while to figure out the specific steps and procedures that are drafted in the Bill. I would like to ask the Minister, for example, how he proposes that a company implements this agreement between the members and the company whenever the different purpose applies, and what constitutes "legible" in this context. Is it sufficient that a link be provided on the company's homepage directing the Internet users to the appropriate document? Or is it required of the company to paste the entire document on the homepage? It also seems rather strange that a person needs to be given notice of the notice of a meeting. How is this notification meant to take place and what is the rationale behind the need to give a notice of a notice?

Our understanding is that over time, electronic communication is meant to give cost savings to companies so that they do not need to print hard copies of documents to be sent out to all members. In the American context, having documents in electronic form does result in substantial cost savings due to the large number of members the larger American companies have. However, in the Singapore context, the move to encourage electronic communication may lead to higher overall cost for listed small and medium-size enterprises as the cost

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to modernise their websites and to render their web documents with computer graphics may outweigh cost savings gained from having to print fewer hard copies. Furthermore, such electronic communication will disadvantage members who are not computer-savvy or have no ready access to the Internet. I would like to enquire on the nature of measures the Government seeks to undertake in order to address the technology disadvantaged, especially prevalent among the older Singaporeans, who may also be very avid investors.

With the advent of the information age, there is no doubt that the Singapore business community should move with the times and pursue aggressively the move towards electronic transmissions of their communication needs. Except for the need to hear some further clarification from the Minister with regard to the implementation strategy for electronic communication, I support the amendments to this section of the Act.

Mr Deputy Speaker, Sir, I would like to raise some concerns, however, with regard to the further amendment to the Companies Act with regard to the criminalisation of offences by all directors of companies, whether they are independent or executive directors. Under the amendment proposed, directors now have to ensure that the profit and loss accounts are accurate, the profit and loss accounts are laid out at every AGM, the consolidated accounts are laid out at the AGM of a holding company, and the balance sheet and the profit and loss accounts at the AGM must be signed by two directors declaring that the figures are accurate and reflect a true and fair value of the state of affairs of the company. This introduction of additional penalties and tightening of existing regulations in the Companies Act serves

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only to make the duties of directors of listed companies even more onerous, I believe, without having real effect of assuring the reliability and accuracy of data relating to the profit and loss of the company.

Sir, even the most conscientious director will only know what he or she is told. We have to remember that the boards do not produce the numbers. They got the numbers from someone else. Also, we need to be mindful that no rules or oversight can keep numbers straight if the company has a culture of bending them. Hence, further penalties for board members may make an existing situation where companies are hard pressed to identify and persuade qualified people to assume directorships even more difficult. We need to be mindful that a prescriptive approach to corporate governance also risks encouraging firms to focus on avoiding penalties rather than pursuing good corporate governance. We need to be conscientiously aware that we do not exemplify the form over substance efforts to supercharge the directors with responsibilities that may deter the best amongst us to serve as directors, and hence denying our companies the oppportunity to attract and retain the best talent to serve as members of our boards.

Rules and regulations may help shore up confidence in the market, but they will not magically produce good behaviour. At the end of the day, we must note that we cannot legislate goodness. The problem is you cannot always see it either. However, I note that the criminalisation of such offences goes in line with new disclosure policies that have been set up in place and are directed at preventing fraud and concealment of company's affairs as well as to seek accountability of directors who have misbehaved. In the wake of the Enron and the Asia Paper and Pulp incidents, these updates in the provisions of the Companies Act seem particularly urgent.

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In light of further developing the culture of good corporate governance as well as promoting the climate for further enterprise, I would like to express and reiterate my support for the proposed amendments to these sections of the Companies Act.

Mr Lim Hng Kiang: Mr Deputy Speaker, I would like to thank the Members for raising very pertinent issues of the Bill. Let me address them.

First, on the issue of liquidators. Mr Sin Boon Ann raised several key points. We do agree that liquidators should not only come from public accountants. There is a range of skill sets required, and that is the rationale for this amendment, that hitherto we only restrict the appointment of liquidators to auditors, but now we have opened up the requirement. By opening up, we also must be mindful that we must set the relevant criteria and qualifications to be appointed as liquidators. As Mr Sin Boon Ann mentioned, there is no professional course to train or develop such a group of people and, therefore, we have to be very careful when we set out these criteria. What we will do is we will look at practices in other countries. For example, we will look at the UK Insolvency Practitioners Regulations where they set out such criteria and see whether these criteria and qualifications are relevant to us. It is going to be something similar to directors. There is no professional course to train directors. But we do know what directors do, and we do know the important roles that directors play. We do know that directors do come from a wide range of backgrounds and professional training and experience. And we do know what the qualifications and criteria of directors ought to be. I think we will go about it in this light. We are not planning to approach this in a legislative manner like the Law Society or ICPAS. We will look at this more like a professional association. MinLaw and MOF would

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study this issue and see how we can set up an Insolvency Practitioners Association, as recommended by the CLRFC.

The second issue that Mr Sin brought up is about raising of funds. As with most of the issues in the Companies Act, we have to strike a balance. Previously, we did not allow private companies to raise funds from the public. This, of course, hinders the development of small private companies. Now we will allow them. But if they do so, then I think it is fair that they should comply with some requirements. We are looking into the details, but what we are looking at would be that they first ought to comply with the requirements under the Securities and Futures Act. But, of course, the requirements can be quite stringent and may not be pertinent to the full range of private companies wanting to raise funds. Therefore, we will carve up certain situations where the amounts to be raised are modest or the amounts to be raised are from sophisticated investors or from financial institutions, or the amounts to be raised are from a very small group of people and not from the general public. So I think within this wide ambit of the Securites and Futures Act, we will carve up certain sub-categories where the raising of the capital is more directed and therefore may not require such stringent disclosure requirements as with the IPO. These are works in progress.

The third point which Mr Sin raised is about the anxiety of directors. I would like to take this point together with what Dr Gan raised about the onerous duties of directors. Again, we have to strike a balance. Directors have a fiduciary duty. It is a heavy responsibility, but that is the reason why we have directors to be there to discharge this responsibility. On the other hand, directors may not have the full range of information that they need, and that is the reason why we try as much as possible to clarify the duties of the directors so as to make it more

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reasonable for them in discharging their duties. This proposed amendment, while not completely removing the anxiety of directors, does accord the directors some protection, ie, if they seek advice and this advice is prepared by and received from the management or from professional advisers and experts, then I think they can take this advice and they will not be responsible for this advice that they have received. But, at the same time, they must use their judgment, which is what we require directors to do, ie, they must ask for the right advice and they must scope the advice. So they cannot totally discharge themselves from these responsibilities.

But all said and done, directors' duties and liabilities are something that are constantly evolving, and we will have to continue to monitor case laws and international developments and study how all these provisions that we are planning to put in place can be refined in the future. This is something that we will have to get in touch with the private sector and make sure that the rules and regulations that we put in place are relevant. In that sense, I do not think we are putting onerous responsibilities on directors. I hope to assure Dr Gan that this is not our intention. We are trying to strike this balance.

The other point which Dr Gan raised is the use of electronic communication. Again, here we have to strike the right balance - how to minimise cost through the effective use of IT and electronic communications, but at the same time ensure that the documents and the

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information are accurately and reliably conveyed to the investing public or to the members of the company. This is something that we have to be pragmatic about. We have to work out the regulations in detail. And the guideline here is that it must be something which the company can execute in agreement with either the investors or the people associated with the company. So we will draft out the general guidelines in the regulations, but the specific implementation of this electronic communication would have to be something that has to be agreed upon between the company and the people that the company is communicating with.

I hope that clarifies some of the issues raised.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Mr Lim Hng Kiang].

Bill considered in Committee; reported without amendment; read a Third time and passed.