Introduction

In this article, I wish to share some insights about what to look for when you ask someone to hold shares in a company for you. Such an arrangement is often called a nominee shareholder arrangement.

Reason for such arrangements

The person who is named as the owner is the nominee while the person who actually paid for the shares is the beneficiary. The beneficiary often feels that there is a need to be not named on the register of members as a shareholder and hence enters into such an arrangement.

Uses

The main use is that the actual beneficial owner of the shares will not be seen to be on the public records as a shareholder of the relevant company. This can give a measure of privacy and confidentiality.  There are other methods such as setting up intermediary companies though these methods might cost more to implement than a nominee shareholder arrangement.

Pitfalls

Most of the pitfalls in such an arrangement arise from the fact that the nominee is put in a position of control of the rights that attach to the relevant shares; in addition, the company is not required by law to recognise any trustee or nominee shareholding arrangement.

Some of the common pitfalls that I have seen in my several years of practice are as follows:

• The legal owner or nominee refuses to return the shares to the beneficiary.
• The legal owner exercises the rights or enjoys the rights attached to the shares without the consent or knowledge of the beneficial owner. In particular, he uses the shares as security or sells them.
• The legal owner passes away or is deregistered and the beneficial owner is unable to get the shares transferred to himself.

Some Solutions

The solutions that I have recommended and implemented in the past aim at eliminating the possibility of the nominee exercising rights over the shares that he is not entitled to exercise and at the very least ensure that the arrangement is in written form and can be produced as evidence.

Firstly, it is essential that a nominee shareholder agreement with clear and adequate provisions for the beneficiary be prepared and stamped with the Inland Revenue Authority of Singapore or relevant tax office of the country where the shares are located. Stamping is essential in Singapore so that the nominee shareholder agreement can be produced in the Singapore courts as evidence.

However, based on experience and consideration of the risks concerned, a signed and stamped nominee shareholder agreement alone is not sufficient, even if it contains undertakings by the nominee to not exercise rights attached to the shares. As many unfortunate beneficiaries in such arrangements can attest, the nominee may choose to breach the agreement.

There are other documents and practical steps that can be prepared and taken and we have advised on and implemented such steps for beneficiaries before. Some of these involve amending the company’s constitution and taking necessary actions with the share certificates.

Conclusion

Although the nominee shareholder arrangement is straightforward conceptually, it actually involves risks for the beneficiary which should be dealt with strongly failing which the beneficiary may find himself having to commence proceedings to assert his rights and ownership.

The arrangement can be likened to a situation where someone passes physical possession of a valuable to another person. The beneficial owner must ensure that the person who has possession does not seek to enjoy rights that he is not entitled to enjoy, and that he can get the property back easily when he wants to.

Characterist LLC’s Adrian Wee, Dominic Chan, Noel Oehlers, Daniel Ng, and Nicole Chee, are representing the Ngee Ann Kongsi in their application for an urgent Court order for the Teochew Poit Ip Huay Kuan to deliver up vacant possession of the premises it occupies in the Teochew Building at 97 Tank Road, in order that redevelopment works for the Teochew Building may commence.

The Ngee Ann Kongsi had planned for the redevelopment works for the Teochew Building to start on 1 July 2018. At the end of June 2017, the Ngee Ann Kongsi had served notice on the Teochew Poit Ip Huay Kuan for it to move out by the initial deadline of 30 June 2018. What followed were negotiations between the parties on the arrangements in respect of the moving out. However, despite protracted negotiations, both parties could not reach a consensus on such arrangements. In the light of the negotiations, the redevelopment works were also postponed twice, and is currently due to commence on 2 January 2019 (with the handing over of the Teochew Building to the main contractors to take place on 17 December 2018).

However, as still no consensus could be reached between the parties, and with the deadline for the handing over and commencement of the redevelopment works drawing near, the Ngee Ann Kongsi had to take out an urgent application to the Supreme Court of Singapore for the Teochew Poit Ip Huay Kuan to deliver up vacant possession of its premises to the Ngee Ann Kongsi.

The complete online version of the article may be found at the following link: https://www.zaobao.com.sg/znews/singapore/story20181208-914036

Persons who act as nominees in Voluntary Arrangements have a duty to act in utmost good faith. Where the nominee’s conduct of the creditors’ meeting is in bad faith, such that the nominee’s conduct is deficient, leading to a material irregularity at or in relation to the creditors meeting, the nominee may, in appropriate cases, be personally liable to pay the legal costs of affected creditors.

Individuals facing imminent bankruptcy proceedings have the option of attempting a Voluntary Arrangement (VA) pursuant to Section 45 of the Bankruptcy Act. The VA entails the debtor making a proposal to his/her creditors, usually involving a deferral of payment and a reduction in the total amount owed. The proposal is then voted on by creditors. If the proposal is approved by a special majority of creditors, the VA is then binding on all creditors. In this respect, the VA is not dissimilar to the Scheme of Arrangement regime for companies.

Key to the VA scheme is the role of the nominee. The nominee is a qualified insolvency practitioner who is appointed to oversee the VA process and to adjudicate creditors’ claims for the purpose of voting. However, as the nominee is usually proposed and paid for by the debtor (who has, in turn, already satisfied him/herself of the nominee’s sympathies to the cause), obvious questions often arise as to the impartiality of the nominee.

In the case of Balbeer Singh Mangat and Sirjit Gill,^[1], both Debtors applied for a joint voluntary arrangement (JVA). The Nominee appointed is a Senior Partner in the largest audit, tax and consulting firm outside the Big Four in Singapore. Having supported the Debtors’ JVA proposal, the Nominee convened a creditors’ meeting.

At the creditors’ meeting, the Nominee made 2 key decisions:

1. The votes of creditors whose claims were marked “objected to” were not to be counted for the purposes of voting; and
2. The result of the creditors’ vote could not be determined until the court had ruled on the correctness of the Nominee’s decision to mark certain creditors’ votes “objected to”.

The effect of the Nominee’s decisions was to shift the task of adjudication of claims from the Nominee to the Court.

Several major creditors applied for a review of the Nominee’s decisions and conduct.

In determining that the proposal had not been passed at the creditors’ meeting, the Court made the following observations:

1. The Nominee had acted improperly in marking the creditors’ votes “objected to”;
2. It was clear from Rule 84(6) of the Bankruptcy Rules that any creditor whose claim was marked “objected to” should nonetheless be allowed to vote and such vote should be counted for the purposes of determining whether the proposal had passed unless it was subsequently declared invalid by the Court. In this respect, the Nominee had acted improperly in excluding votes marked “objected to” and was in breach of his duty and responsibility. The Nominee’s actions defied logic;
3. In leaving the decision as to whether the proposal had been passed to the Court, the Nominee was trying to evade his responsibility by “fudging the issues and his decision”.

For the above reasons the Court held that there were material irregularities in the conduct of the creditors’ meeting. The Nominee was ordered to pay personally half of the costs of the creditors’ applications.

It should be noted that, in certain circumstances, nominees are protected from being made personally liable for costs. For example, Rule 84(10) of the Bankruptcy Rules provides that a nominee cannot be liable for costs even if his/her decision as to whether a creditor’s claim should be accepted or rejected for the purposes of entitlement to vote at a creditors’ meeting is wrong and reversed on appeal.

However, the protection under Rule 84(10) does not extend to conduct of the nominee which results in material irregularity in respect of the creditors’ meeting itself. This includes conduct which is in bad faith and/or a breach of the nominee’s duties in relation to the meeting.