The $2 company, Action Information Management Pte Ltd (AIM), was today (24 Dec) confirmed by Dr Teo Ho Pin, Coordinating Chairman of 14 PAP TCs, as the company which won the open tender to buy the software system, Town Councils Management System (TCMS), developed by NCS for the town councils.
It was not known when Lau became a shareholder of AIM but by 2008, the ACRA data clearly shown that the 2 shareholders of AIM were:
- Ng Pock Too $1
- Lau Ping Sum $1
What are the risks of doing business with a $2 company?
Preface
A friend living in Tanjong Pagar asked me, what was wrong with doing business with a company of $2 capital. I told him that there was nothing wrong – if things did not go extremely wrong. And I thought I might as well write down what I told him and share my views with readers here too.
In this article, I am merely writing about the possible risks of dealing with a $2 capitalised company, I am in no way advocating that one should avoid dealing with a $2 registered company. Many of these small companies are out to do an honest business.
The issue of Action Information Management Pte Ltd(AIM) (a company owned by former PAP MPs) and 15 town councils (including Ajunied) involved many more serious concerns which I am not covering here.
It is not uncommon in the commercial world for one to conduct business with a company that has a registered capital of $2. There are many reasons why a company is capitalized with only $2, for examples :
- shareholders do not have so much money, thus company relied on loans,
- the nature and size of business does not require a large capital,
- for the purpose of satisfying or overcoming legal requirements, e.g. tax avoidance.
- for the ease of management control, and
- as a strategy to minimize liabilities if the project fails
Experienced executives or businessmen tend to be vigilant when dealing with a $2 capitalised company, especially if (a) the business contract with such tiny company is of high value, or (b) a failure by that $2 company to carry out its part of the contract would have a great impact or result in huge losses to your business operations. The reasons for such vigilance are obvious :
(1) Legal Recourse
If professional negligence occurred, you would want to sue the contractor or supplier to recover your huge losses. If your contractor is a company with $2 registered capital, then the worst that could happen to your contractor in compensating you is that he loses his entire sum of capital – and that sum is $2.
By the Companies Act, shareholders and management are not responsible for a company’s losses and liabilities. You cannot go after a shareholder’s expensive bungalow or a director’s nice car.
You see, there are some people in this world who only want to earn huge profits but bear as little risk as possible. They set up a company with $2 capital and get someone (or themselves) to advance a secured loan to this $2 company to finance the business operations. If things go well, they make profits. If things go rocky, the secured loan will have the first right of being re-paid (i.e. taken out of the company), leaving virtually nothing for the trade creditors and customers.
(2) Risk of Fraud
Business contracts often involved prepayment, deposit of money or custody of assets in a location outside your control. If shareholders (often acting as directors as well) of the $2 company are desperate of money, they could simply disappear away with your money or assets. Such fraud is not uncommon in the business world.
(3) Resources of a $2 company
A $2 registered company is not likely to possess good resources to service you (unless it is a subsidiary of a giant company, in which case, the setting up of $2 company is probably for reason of management control or tax purpose – still, this giant company can legally walk away from the liabilities of its $2-subsidiary).
If your service contract with a $2 registered company ended up being outsourced to another unrelated company, then you may have over paid for that service. Why do you need that $2 middle-man, especially if that company doing the real job is already well known in the market? Apart from additional communication and administrative problems, there is also the issue of legal recourse if things go wrong – do you sue the $2 company or its outsourced company?
Should you trust a $2 registered company?
Well, if you are getting someone to fix your basin or buying a furniture, you do not want to get too paranoid about your supplier’s registered capital.
However, if you are getting a company to provide or service the financial systems of 15 town councils, then I would say you owed a duty to the millions of residents to be much more diligent than engaging a $2 shell company to bear all the legal responsibilities – in an event of something go badly wrong!
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Celia Lim
Ref:tremeritus
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