Agrosin Pte Ltd v Martynov Igor

Andrew Ang J:

[1] The plaintiff, Agrosin Pte Ltd, filed this action against the defendant, Igor Martynov (its former director and finance director) claiming losses suffered by the plaintiff as a result of the latter’s breach of his contractual, common law and statutory duties owed to the former. The defendant denied responsibility for the losses and counterclaimed for his unpaid salary.

[2] The plaintiff is a Singapore company primarily carrying on the business of trading in chemical and fertiliser products. The defendant was employed as the plaintiff’s finance director from April 1993 to 9 February 2007 and was appointed director on the plaintiff’s board of directors from 2 June 1998 to April 2006. During his time with the plaintiff, the defendant introduced two businesses to the plaintiff involving Caprolactam, a chemical, and nitrogen phosphate potassium (“NPK”), a fertiliser. The Caprolactam and NPK businesses involved:

(a) Direct purchase and sale of Caprolactam; and

(b) Tolling of both NPK and Caprolactam which involved the purchase of raw materials to produce the fertiliser and chemical.

[4] Similarly, in relation to the NPK business, the defendant was alleged to have given the plaintiff the illusion and/or impression of profit for the years from 2003 to November 2004 and smaller losses in end 2004 to end 2005 when, in reality, the plaintiff had incurred huge losses in both periods.

[6] The defendant denied any responsibility for the losses and counterclaimed against the plaintiff for unpaid salary in the aggregate sum of S$323,950.71. In his defence, the defendant admitted that he owed the plaintiff contractual, fiduciary and statutory duties as alleged by the plaintiff. However, in his closing submissions, counsel for the defendant, Mr Philip Fong (“Mr Fong”), admitted that the defendant owed “certain general duties” to the plaintiff, without defining what they were.

[7] The defendant, as director of the plaintiff, owes a duty under s 157 of the Companies Act (Cap 50, 2006 Rev Ed) to “act honestly and use reasonable diligence in the discharge of the duties of his office”. Encapsulated in this provision are the common law duties imposed on directors which include (1) the duty to act bona fide in the interests of the company; and (2) to exercise reasonable diligence in the discharge of their functions. These duties are also implied in the contract between the parties. The issue raised by the plaintiff’s claim is whether the defendant was in breach of either of these duties.

[8] The issue raised by the defendant’s counterclaim is whether he is entitled to his unpaid salary in the aggregate sum of S$323,950.71.

[13] The consequence of the defendant’s misstatements was that the monthly financial statements presented to the board of directors showed that the NPK and Caprolactam business were making profits when, in truth, losses were being suffered. The plaintiff pleaded in its statement of claim (Amendment No 1) (“the Amended Statement of Claim”) at para 18 that:

With regard to the Caprolactam business, I accept evidence on behalf of the plaintiff that had the costs not been understated, the plaintiff would have taken timely action to immediately cease the trading of Caprolactam. As for the NPK business, I accept the evidence of Konstantin Khalimov (“Khalimov”) (managing director of the plaintiff) that the plaintiff would not have even embarked on the business in the first place and would have thus avoided the loss suffered from the NPK business altogether. In his affidavit of evidence-in-chief filed on 12 July 2008 at para 4, Khalimov gave evidence that the defendant had misstated the cost of the NPK business at a meeting in 2003 with the plaintiff’s board of directors thus leading the board to decide to go ahead with the NPK business. This misstatement was subsequently repeated in the Provision of Costs. Khalimov’s evidence on this point was not controverted in cross-examination. I therefore found the defendant in breach of his duty to act bona fide in the interests of the plaintiff and thus liable for the losses caused to the latter (concerning the quantification of which more will be said later).

Whether the court was in a position to assess the standard of care expected of the defendant in the latter’s estimation of costs

[19] In the result, I found the defendant to be in breach of both his duty to act bona fide in the interests of the plaintiff and his duty to exercise reasonable diligence.

[21] The second argument raised by Mr Fong on causation was based on the English Court of Appeal decision in Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360. In that case, the negligent failure of auditors to discover and report upon inaccuracies in the accounts of two companies (GL and GM) which would have shown that the companies were insolvent, led the companies to continue to trade and, in the process, incur further losses. It was held that the auditors did not cause the losses but merely provided the opportunity for them to be incurred.

[22] In the same case, a claim made by an investor (HD) in GM (which owned all the shares in GL), on the basis that he would not have made such investment nor lent moneys to the two companies had the auditors performed their duties with reasonable skill and care, was similarly dismissed. It was held that the fact that it was foreseeable that a potential bidder for shares in a company or a potential lender might rely on a company’s audited accounts was not of itself sufficient to impose on the auditor a duty of care owed to the bidder or lender. However, if the auditor had been made aware that a particular bidder or lender would rely on the audited accounts and the auditor intended that he should so rely, he owed a duty of care to that identified party and could be liable in damages for any breach thereof.

[23] I must confess I cannot see how the case helps the defendant despite some superficial similarity. To begin with, the plaintiff’s case is founded upon dishonesty and not mere negligence (see para 15 of the Amended Statement of Claim). It is one thing to determine the scope of the duty by reference to the kind of damage from which a defendant must take care to save the plaintiff harmless (see Caparo Industries plc v Dickman [1990] 2 AC 605 per Lord Bridge at 627). This is a matter of policy. It is another thing altogether to suggest that a finance director of a company, practically in sole charge of certain businesses of the company, may with impunity mislead the company as to the profitability of the businesses when it should have been obvious that had it known the truth, the company would not have continued the Caprolactam business or embarked on the NPK business. The defendant owed the plaintiff fiduciary duties as director and was in breach of those duties. It is clear that the defendant’s breach was the effective or dominant cause of the plaintiff’s loss.

[28] I do not think it right to characterise the plaintiff’s claim as one for loss of a chance. The defendant’s characterisation of the plaintiff’s claim in this manner, was based on his interpretation of para 18 of the plaintiff’s Amended Statement of Claim (see [13] above). It is clear to me that the plaintiff did not claim for a loss of chance. If it had, para 18 of the Amended Statement of Claim would have read: “… the Plaintiffs lost an opportunity to take timely action to minimise losses incurred by the Plaintiffs” or something to that effect. Instead, the plaintiff’s Amended Statement of Claim asserts that “the Plaintiffs were prevented from taking timely action”. It appeared to me that the present case had nothing to do with loss of a chance. On this point, the observations of Stuart-Smith LJ in Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602 on the distinction between what falls within the realm of loss of a chance and what requires proof on the balance of probabilities are apposite. The learned judge’s observations made in the context of a case in which loss was caused to the claimant by negligence are well summarised in Harvey McGregor, McGregor on Damages (Sweet & Maxwell, 17th Ed 2003) (“McGregor on Damages”) at para 8-034:

[29] In my view, the present case fell within the second category described by Stuart-Smith LJ. It is not a case which concerns the loss of a chance. The plaintiff had to prove on a balance of probabilities that it would have acted to prevent the loss had the defendant not been in breach of its duties owed to the plaintiff. I was satisfied that the plaintiff had proven this. Accordingly, I rejected the defendant’s argument on loss of a chance. The defendant’s case was wholly misconceived. In this connection, I share the sentiments of the learned author of McGregor on Damages who observed at para 8-037 that:

Of course the learned author’s comments pertained to claimants who sought to couch their claim as one for loss of a chance to obtain percentage success. But it seems that even defendants sometimes feel tempted to overcomplicate matters by bringing in the loss of a chance doctrine when it could have no conceivable application. This was the case here.

[31] I turn now to the question of the quantum of damages.

[33] In Vita Health, the defendant (Pang Seng Meng) was the operating and controlling mind of the Vita Health Group of Companies (“VHGC”) which carried on the business of import, export and distribution of medicinal and pharmaceutical products. VHGC was made up of Vita Corporation Pte Ltd (“VCL”) which was the parent company of Vita Health Laboratories Pte Ltd (“VHLS”) and Vita Health laboratories (Hong Kong) Ltd “VHLHK”). Between 1997 and 1998, the defendant procured substantial investments in VCL from two large investment companies. It was a term of the investment agreements that VHGC would be listed or, to be more precise, that VHGC would be held by a listed vehicle, by the end of 1999.

[34] To effect the backdoor listing of VHGC on the Australian Stock Exchange, the defendant arranged for a reverse takeover whereby an Australian listed company, later re-named Vita Life Sciences Limited (“VLS”) would take over VHGC in exchange for shares issued by VLS. The arrangement was documented in a share sale agreement (“SSA”). The defendant became the largest shareholder in VLS and was appointed managing director. He was later forced to step down in March 2002 and proceedings were instituted against him by VHLS (first plaintiff), VHLHK (second plaintiff), VCL (third plaintiff) and VLS (fourth plaintiff) for breach of fiduciary duties which included the fraudulent creation of false and irrecoverable receivables purportedly due from third party entities in Indonesia, the Philippines and Taiwan. The court found, inter alia, that:

It held that:

The defendant asserted, in regard to the transactions between VHLS and Vitaton/VHLP, that the true loss, if any, suffered by VHLS was limited to the actual cost of the products VHLS purchased from its suppliers less all the moneys received from the Indonesian operations. In the judge’s view, that approach blatantly attempted to attenuate the causative effect of the defendant’s tortious conduct and ignored the corrosive consequences of his deceit. He therefore held that in the factual matrix of the case it was appropriate that the defendant bore the difference between what he led VHLS to believe it would recover and what it actually recovered. Hence, his statement that “[t]he true loss he caused is captured in this case by pinning the defendant personally to the false picture he painted”.

[35] The defendant argued that Vita Health was distinguishable as it was a case involving fraud and the factual circumstances were vastly different. Although I do not think counsel for the defendant cogently distinguished Vita Health, I agree that the proper measure of damages is the loss actually suffered by the plaintiff in continuing with the Caprolactam tolling business and in embarking on the NPK tolling. The line quoted above from Vita Health at [98] was not intended to be of universal application but, as it clearly stated, “in this case”.

[36] It will be observed that the facts of that case were complex and the court in that case was seeking a method of quantifying the damages that would “justly compensate the claimant for all financial losses and/or damages flowing directly from the fraud” that being the true principle. VK Rajah JC had referred to the House of Lords’ decision in Smith New Court Securities v Citibank NA [1997] AC 254 to show how, in assessing damages for fraud, a mechanical approach was to be eschewed in favour of flexibility. In that case, the claimants were induced to purchase shares in the Ferranti company by the defendant’s agent’s fraudulent statement that other persons were interested in acquiring the shares. The shares were bought by the claimants as a market-making risk and at a price commensurate with an acquisition as such. The Ferranti shares turned out to be worth far less as a result of the disclosure that a fraud, unrelated to and occurring in advance of the purchase, had been perpetrated on the company. The claimant disposed of their shares over a period of five to six months and incurred a substantial loss which they sought to recover against the defendant. The normal measure of damages would have been the purchase price of the shares less their actual value at the time of acquisition. The House of Lords held that this was not an inflexible rule and decided, reversing the Court of appeal, that in order to compensate the plaintiff for the fraud, what fell to be deducted from the purchase price was not the value of the shares at the date of their acquisition but the actual proceeds of their disposal.

Whether the defendant is entitled to recover the sum of S$323,950.71 representing his salary which has yet to be paid by the plaintiff

[38] The defendant sought payment of his unpaid salary from December 2005 to 9 February 2007 which amounted to $323,950.71. The plaintiff resisted this claim on the ground that the plaintiff had made a decision in 13 January 2006 to postpone expatriate staff salaries from December 2005. The defendant had agreed to the plaintiff’s proposal. The plaintiff thus argued that as long as the plaintiff had yet to lift this suspension, it need not pay the defendant his salary. This may be so if the defendant was still in the plaintiff’s employ. However, it is inconceivable that the plaintiff would be entitled to suspend payment of the defendant’s salary even after the termination of the defendant’s employment. The defendant, like all other employees of the plaintiff, is contractually entitled to his salary. The decision of the plaintiff to suspend payment of the staff salaries could not possibly have so far-reaching an effect as to abrogate this right.

[39] On a separate point, in the plaintiff’s defence to counterclaim filed on 24 April 2007, the plaintiff disputed the amount claimed on the ground that on or about 13 June 2006, it had informed the defendant that he would only be paid half his salary with effect from 1 July 2006. According to the plaintiff, taking into account this reduction, the defendant’s unpaid salary amounted to $241,145.36. I could not accept this argument for there was no evidence that the defendant had accepted this variation of his salary. While the plaintiff could have terminated the defendant’s employment the moment it discovered the misstatements, it did not do so because it wanted to give the latter an opportunity to compensate the plaintiff for the loss it had suffered. Having chosen not to terminate the defendant’s employment, the plaintiff has to pay the defendant his full salary.

[41] In the result, I granted the plaintiff interlocutory judgment with damages to be assessed together with interest at 5.33% from 22 February 2007. I also allowed the defendant’s counterclaim for his unpaid salary with interest at 5.33% from 29 March 2007. The plaintiff shall be entitled to set-off its claim against the defendant’s counterclaim.