Illegality in Contracts and Its Impact on VIE and UBO Arrangements

Overview

The Singapore Court of Appeal’s decision in Ochroid Trading Ltd v Chua Siok Lui (“Ochroid”) reshaped how Singapore law approaches illegality and contractual enforceability. The court introduced a principled, policy-based framework that has since been applied beyond contracts — extending into trusts, property rights, and corporate structures. 

This article explains how the Ochroid framework has evolved, its application to trust and nominee arrangements, and its implications for those using Variable Interest Entity (“VIE”) or Ultimate Beneficial Owner (“UBO”) structures involving Singapore entities.

The Ochroid Framework

In Ochroid, the court set out a two-stage framework for assessing illegality:

1. Stage 1: Is the contract prohibited?

The court first asks whether the contract is:

• Prohibited by statute — either expressly or by necessary implication; or
• Contrary to public policy under established common law principles.

If a statute expressly or impliedly voids the contract, the inquiry ends there. If the contract merely involves an unlawful purpose, the court applies a proportionality test to decide whether it should still be enforceable.

2. Stage 2: Can restitutionary recovery be made? 

If the contract is prohibited, the court considers whether a party may nevertheless recover benefits conferred under it. Recovery may be allowed if:

• • The claimant is not equally at fault (not in pari delicto);
  • The claimant withdrew before the illegal purpose was carried out (the doctrine of locus poenitentiae or “timely repentance”); or
  • The claim is based on an independent cause of action (e.g., unjust enrichment) that would not undermine the policy of the prohibition.
    
    

Extension of Ochroid to Trusts

This regulatory adjustment provides immediate strategic advantages for foreign investors navigating the Indonesian market:

In Lau Sheng Jan Alistair v Lau Cheok Joo Richard (“Lau Sheng Jan Alistai”), the court extended the Ochroid principles to trust law. The first-stage inquiry — whether the arrangement is prohibited by statute or public policy — applies mutatis mutandis (with necessary adaptations) to trusts.

Illegality in VIE and UBO Structures

1. Nominee and Trust Arrangements under Singapore Law.

Nominee shareholding and trust arrangements are common in cross-border structures — including VIE and UBO setups — where a nominee holds shares in a Singapore company “on trust” for a beneficial owner

Such structures are not automatically illegal. Their enforceability depends on whether the trust was created for a legitimate commercial purpose or to avoid statutory or regulatory restrictions. The Ochroid–Lau Sheng Jan Alistair framework provides the test:

• • Is the trust prohibited by statute or public policy?
  • Would enforcing the trust defeat the purpose of that prohibition?

2. When VIE and UBO Trusts Become Unenforceable

A VIE or UBO structure may be unenforceable if it is used to:

• • bypass ownership restrictions; 
  • Evade licensing or approval requirements; or
  • Conceal foreign control or beneficial ownership.

If the trust or nominee arrangement is the mechanism used to achieve regulatory evasion, the courts may find it void and unenforceable. Even if the illegal purpose is only part of a larger transaction, the trust may still fail if its effect undermines a statutory regime

Courts distinguish between:

• • Incidental illegality – where the illegality is peripheral (e.g., financing connected to an unlawful act); enforcement may still be allowed.
  • Instrumental illegality – where the trust is the tool for the unlawful act (e.g., a nominee used to disguise true ownership); enforcement will be denied.
    
    

Implications for Third-Party Buyers

These principles have serious implications for investors or acquirers buying into entities that hold Singapore companies via VIE or UBO structures. A buyer might believe it controls the Singapore subsidiary through a trust deed or option arrangement. But if that trust is later ruled unenforceable due to illegality, the buyer may discover they have no beneficial ownership in the Singapore entity — even if all offshore documents are in order. This risk is especially high in sectors with ownership or licensing restrictions.

Key due diligence steps include:

• • Examine the trust’s purpose – does it serve a genuine commercial function or attempt to sidestep regulation?
  • Check governing law and jurisdiction – would Singapore courts recognise the trust under public policy?
  • Seek regulatory clarity – confirm whether the structure breaches any ownership or control limits
    
    

Conclusion

The Ochroid framework now governs not only contracts but also trusts, property interests, and nominee shareholdings. Where VIE or UBO arrangements are used to disguise ownership or evade regulation, they are likely to be unenforceable under Singapore law. For investors in Singapore targets, this means that more care should be taken in evaluating any prevailing trust structure. Ultimately, Ochroid highlights a simple principle: transparency, compliance, and legality must form the foundation of every layer of corporate structuring.