How the times have changed! We’ve gone from a corporate environment where litigious shareholders were considered a problem, to one where they’re considered a positive influence. Indeed, there’s a growing sentiment that reducing the liability of directors and business owners may be bad for business.
On top of that, even clients nowadays are better informed on how to pursue legal action – and you can expect more than a few to have a lawyer on speed dial.
Understanding the Legal risks involved in running a Singapore Incorporated business
If you’re a business owner or director, all of this is a real concern. Here are some ways to manage the risk intelligently:
1. Understand how the “veil of incorporation” does and does NOT work
Depending on your corporate structure, you may – as a director or owner – be protected by the “veil of incorporation”. The most common example of this is a Private Limited company.
Under the Singapore Companies Act, a Private Limited company is a separate legal entity from its owners. When someone enters into a contract with such a company, the contract is with the company as an entity, and not with the owners. As such, there is an added layer (the veil of incorporation) which prevents you from being personally sued in some instances. The same condition means that you are not personally responsible for the company’s debts.
However if you buy a property under the company name (Secured loan) or obtain a SME loan under the company (unsecured loan), the banks or financial institutions will likely require you to become the Personal guarantor. This is an act where the banks tie the company debts to your personal liability.
Likewise, a Limited Liability Partnership (LLP) is a structure where there are two or more partners. Under this sort of corporate structure, you cannot be sued for the actions of another partner. As a simplified example: say you and another engineer set up a firm, and the other engineer makes a mistake and faces a lawsuit (e.g. something he designs fails). You will not, as his partner, face the same liabilities.
This is why it’s important to decide on the right corporate structure, when first setting up the company. Come talk to us for help, and well can offer some guidance based on your specific type of business.
2. Have a law firm that you work with and are in ready contact with. Don’t wait till the last minute.
From the moment you set up a company, decide on a law firm you like, and try to start working with them. For example, make this the firm that drafts and oversees most of your contracts – and make them the regulars that you consult.
When problems arise, this same law firm will already have an understanding of your business; and they will know the contracts you’ve used, having been the ones to review or draft them. This saves times, and remember that in the legal process, every hour saved can amount to hundreds or even thousands of dollars saved.
Working closely with a law firm will also give you pre-emptive warning; they can point out clauses or activities that expose you to litigation. Prevention is always better than cure, given that the cure in this case (i.e. a successful court battle) can end up costing as much as if you lost anyway.
3. Maintain a healthy distance between yourself, and your business entity
Never do things like use your personal bank account for your business, or act as a personal guarantor for company loans. As far as possible, distance your personal assets from your business assets (this is easier to do with certain corporate structures, see point 1).
If possible, try to do this even with your persona. While some business owners like to tie the business to their personality, this carries a higher degree of risk. For example, if you say or do something that’s construed as offensive to the public (thus costing business), clients or shareholders can use that as grounds for a lawsuit.
(It’s also frustrating in the long run, as everything from your social media posts, to your life activities, could end up being curtailed for the company image.)
As a corporate secretarial service provider, we can help you handle business affairs in a professional way, separate from your personal concerns and assets.
4. Never get informal or shoddy with AGMs
In our previous article, we mentioned the importance of AGMs. It’s paramount that you follow the proper procedures, to avoid lawsuits by shareholders.
Bear in mind that, even if a lawsuit seems frivolous and gets thrown out (e.g. someone wants to sue you just because a motion wasn’t brought up in writing, prior to the AGM), it still costs you time and money. A shareholder doesn’t need to win a case against you; they can do plenty of damage just through their initial accusations and you will waste a lot of time and money fighting the case and lose focus on your business.
Some litigious shareholders have picked on the most minor things – such as errors in the minutes of an AGM months ago, as grounds to try and sue you. By following the rules to the letter, you can confidently navigate around these “landmine” shareholders.
5. The simplest and most effective rule, is to demand everything in writing
Whatever it is a shareholder or client brings up, always ensure it’s in writing. Communications should be well documented in email threads, or – at the very least – in text messages.
Never come to verbal or impromptu agreements; these make any resulting legal cases a nightmare to resolve (time and money is wasted, when the courts have to sort through a “he said / she said” situation).
This rule should extend to all the employees in your company. For example, your general manager or other partners should be documenting any replies to shareholder queries (this also reminds them to have their replies vetted, before clicking the “send” button).
Above all, try to maintain good relations, because lawsuits can happen for emotional rather than objective reasons
It’s a mistake to think that, if you do everything “above board”, that’s sufficient to prevent potential lawsuits. In fact, people often sue for personal rather than objective reasons. So it helps to be more personable and establish good relations and rein in their rampant emotions. Take a deep breadth and calm yourself down and choose your words carefully no matter how angry you are.
For example, it might make very little sense for someone to sue you over what they feel to be a “disparaging comment” made at an AGM. It’s also unreasonable for a customer to sue you over, say, a failed $20 product. It’s likely to cost them far more money to sue you than to just let it go.
However, these people may sue you anyway, just because they personally dislike you. And again, it doesn’t matter whether they win or lose – you will still end up wasting time and money settling the issue.
There’s also the issue that, in the court of public opinion, people tend to assume the worst of the accused. Even if accusations of you “cheating shareholders” are proven false, there will be some people who continue to believe you only won because you had good lawyers, that you had a good cover-up, etc.
As such, being well-liked is an unstated and important part of protecting yourself from lawsuits. A beloved business owner can make a serious mistake and still be forgiven by shareholders / customers; a business owner who’s disliked won’t get away with even a minor slip-up.