Auston International Group Ltd and Another v Ng Swee Hua

Chan Sek Keong CJ (delivering the judgment of the court):

[1] This is an appeal from the decision of the judge in Suit No 129 of 2007 (“the Judge”) in holding that the appellants, Auston International Group Ltd (“Auston”) and Auston Institute of Management & Technology Pte Ltd (“AIMT”) (collectively, “the appellants”), were in breach of contract under an investment agreement with one Ng Swee Hua (“the respondent”) (see Ng Swee Hua v Auston International Group Ltd [2008] SGHC 241 (“the GD”)).

[2] Auston is a company listed on the Singapore Exchange (“SGX”). AIMT was, at the material time, a wholly owned subsidiary of Auston. In early 2005, Auston was in need of funding assistance and its then managing director, one Ricky Ang, sought a loan of $200,000 on behalf of Auston from the respondent. The loan was duly made. By an investment agreement entered into between the respondent, Auston and AIMT on 15 December 2005 (“the Investment Agreement”), it was agreed that the respondent would subscribe for convertible bonds of an aggregate principal of $200,000 (“the Convertible Bonds”). The bonds were convertible into either Auston or AIMT shares, or a combination of both. The Investment Agreement also provided that the respondent’s existing loan of $200,000 would be utilised as consideration for the bonds. Further, the respondent would have the option to subscribe for an additional $400,000 worth of bonds within six months from completion of the Investment Agreement.

[3] Under cl 3.3 of the Investment Agreement, AIMT undertook to deliver to the respondent the definitive bond certificates on completion date (defined in cl 1.1 as the day falling on seven days after the execution of the Investment Agreement or such other date as the parties might agree in writing). Clause 6.5 of Schedule 1 to the Investment Agreement provided that:

[4] Clause 3.6 of the Investment Agreement provided for the consequences of non-delivery of the bond certificates:

[5] The respondent was the managing director of AIMT from 3 January 2006 to 13 September 2006, and was also a director of both the appellants from 2 May 2006 to 4 January 2007.

[6] On 14 June 2006, the parties amended the Investment Agreement by a supplementary investment agreement (“the Supplementary Investment Agreement”) to add, inter alia, the following clauses:

[7] A few months later, on 3 November 2006, the respondent sent a conversion notice (“the Conversion Notice”) to the appellants directing them to procure the issuance of 5m ordinary shares of Auston (“the Conversion Shares”). Auston did not act on the Conversion Notice, but instructed its then solicitors to draft a shareholders’ circular to seek shareholders’ approval to issue the Conversion Shares on the basis that such approval was required as the respondent was then a director of the company. The draft circular was, however, never finalised. On 4 January 2007, the respondent resigned from his directorships in the appellants. He then commenced the present action on 1 March 2007 claiming specific performance for the issuance of the Conversion Shares or alternatively damages.

[8] In the court below, the respondent’s case was that AIMT was in breach of its obligations under the Investment Agreement since 14 June 2006 in failing to issue the Convertible Bonds (or the bond certificates to be more precise) and that he was entitled to damages on the basis of the loss of a real and substantial chance of converting the Convertible Bonds into the Conversion Shares. He also claimed interest on his loan pursuant to cl 2.3 of the Investment Agreement and cl 4.1 of Schedule 1 thereto. The respondent claimed separately that Auston was in breach of its contractual obligations in failing to issue the Conversion Shares and in ensuring that AIMT would issue the Convertible Bonds.

[9] The appellants denied liability on several grounds, as follows:

(a) The Convertible Bonds had not been issued as completion did not take place as contemplated by the Investment Agreement, and the respondent had rescinded the agreements (viz, the Investment Agreement and the Supplemental Investment Agreement) by his inaction.

(b) Even if the Investment Agreement was not rescinded, the conditions precedent in cl 3.4 (introduced by the Supplementary Investment Agreement) were not fulfilled, viz, the SGX-ST Listing Manual required shareholders’ approval for the issuance of the Convertible Bonds as well as the conversion of the bonds into equity shares and the allotment of such shares to the respondent as he was a director of Auston at the time of the Conversion Notice.

[10] At the conclusion of the trial, the Judge made the following findings:

(a) The Convertible Bonds had been issued on or about 19 December 2005 (the GD at [26] and [47]).

(b) The conditions precedent in cl 3.4 (introduced by way of the Supplementary Investment Agreement) had no application to the Convertible Bonds (the GD at [29] and [31]).

(c) Auston was in breach of the Investment Agreement and that damages ought to be assessed on the basis of the loss of chance to convert the Convertible Bonds into the Conversion Shares (the GD at [47]).

The Judge also held that the respondent was entitled to interest at the contractual rate as provided in the Investment Agreement.

[11] The basis on which the Judge found that the Convertible Bonds had been issued is set out at [26] – [28] of the GD, as follows:

[12] The reasoning of the Judge as set out in these passages is clear. As far as the Convertible Bonds were concerned, the appellants had accepted that they had been issued to the respondent as the latter had subscribed and paid for them by utilising his loan to Auston as consideration for the bonds. The issue of the Convertible Bonds on or about 19 December 2005 was confirmed by the Supplementary Investment Agreement which acknowledged the issuance. As such, the conditions precedent in cl 3.4 did not apply to the Convertible Bonds. The Judge’s finding that the Convertible Bonds had been issued was not intended to refer to the issue of the bond certificates but to the acquisition of legal rights to the Convertible Bonds by reason of the respondent having paid for them, and of Auston treating the Convertible Bonds as having been issued notionally. At [24] of the GD, the Judge said:

[13] We turn now to the appeal proper. The appellants’ principal complaint against the Judge’s decision is that in entering judgment on liability in favour of the respondent, she had gone beyond the parties’ written pleadings and oral submissions that the Convertible Bonds had not been issued. The appellants’ counsel contended that at the trial below, both parties proceeded on the basis that the respondent had amended his pleadings to agree with the appellants’ defence that the Convertible Bonds had not been issued, and not simply that the related bond certificates had not been issued. He also contended that counsel for the respondent had argued his case on that basis. However, the Judge refused to accept the parties’ pleaded case and made her finding on what she considered the true facts to be, ie, the Convertible Bonds had been issued, and that counsel for both parties had confused the issue of the said bonds with the issue of the bond certificates. In her view, the true dispute between the parties was simply whether the appellants were in breach of their obligations, notwithstanding the non-issuance of the bond certificates, to issue the Conversion Shares upon receipt of the Conversion Notice. At [16] and [47] of the GD, she said:

[14] Counsel for the appellants submitted before us that the Judge was wrong in law to go beyond the issue(s) pleaded by the parties. He referred to principles established by case law, such as Ong Seow Pheng v Lotus Development Corp [1997] 3 SLR 137 and The Ohm Mariana [1993] 2 SLR 698. Counsel for the respondent, on the other hand, relied on cases such as PT Tenar Indoam Oil Services v Third Wave Group Ltd [2008] SGHC 18 in support of the contention that there is no absolute rule prohibiting a court from making findings of fact outside of the pleadings.

[15] We have examined the sequence of pleadings in this case and it is apparent to us that there was no confusion in respect of the respondent’s pleaded case. It may be that counsel for the respondent was himself confused and had confused the court below by his written and oral submissions by not drawing a legal distinction between the issuance of the Convertible Bonds and the issuance of the certificates for the bonds. In this respect, the respondent had initially pleaded unequivocally that the Convertible Bonds were issued and his claim was for specific performance for the issuance of the Conversion Shares or for damages. The relevant paragraphs of the (last amended) statement of claim (“SOC”) (notwithstanding that the SOC was amended thrice, the relevant paragraphs were not amended in substance and were essentially the same as the paragraphs appearing in the original SOC) were as follows:

[16] It can be seen in para 5 of the SOC that the respondent had pleaded that he had “subscribed for S$200,000 worth of convertible bonds issued by [AIMT]”. In other words, he had agreed that his outstanding loan of $200,000 to Auston be treated as a subscription for the Convertible Bonds which, as agreed between the parties, were treated as issued, and that only the certificates remained to be delivered to the respondent.

[17] However, after the SOC was served on the appellants, the appellants filed their defence which pleaded, inter alia, at paras 6 and 9 (in the original defence, and at paras 7 and 10 in the last amended defence) as follows:

(a) Completion did not take place and the Convertible Bonds were not issued to the respondent as the definitive bond certificates were not delivered to the respondent as required under cl 3.3 of the Investment Agreement.

(b) The conditions precedent in cl 3.4 of the Investment Agreement (as amended by the Supplementary Investment Agreement) were not satisfied, given especially the failure to obtain shareholders’ approval.

[18] The appellants’ pleaded defence was that because the certificates had not been issued or delivered to the respondent, it resulted in the transaction not being completed, and therefore the Convertible Bonds were not issued. The appellants’ pleading equated the failure to issue the certificates with the failure to complete the purchase of the bonds. The appellants pleaded their defence in this way because they took the view that cll 3.4 and 3.6 of the Investment Agreement (as amended by the Supplementary Investment Agreement) were applicable to the issue of the Convertible Bonds. Specifically, the defence was that they were under no obligation to issue the bonds as the conditions precedent, in cl 3.4, especially the requirement of shareholders’ approval, had not been satisfied. The defence based on cl 3.6 was that the respondent had rescinded the Investment Agreement.

[19] In view of the appellants’ position that they had not issued the Convertible Bonds, the respondent amended the SOC by adding, amongst others, paras 9A and 11A as follows:

[20] Unfortunately, the apparent lack of linguistic clarity of the words in paras 9A and 11A of the amended SOC, ie, the purported suggestion that there was non-issuance of the Convertible Bonds (without making clear that the pleadings were intended to refer to the certificates and not the bonds themselves), led counsel for the appellants to argue that the respondent had agreed that the Convertible Bonds had not been issued. However, given the circumstances in which para 9A was included as an amendment, the relevant words in para 9A are wholly consistent with the assertion that the appellants had failed to issue the bond certificates, rather than the assertion that the transaction relating to the Convertible Bonds had not been completed. The averment that [AIMT] had “clear obligations under the [Investment] Agreement” but “failed, refused and/or neglected to take any steps to procure the issuance of the convertible bonds” [emphasis added] is clearly a reference to the bond certificates. This reading of para 9A fits in well with para 5 which was not amended in substance and which stated that the Convertible Bonds had been subscribed for and issued. Similarly, para 11A also fits in well with para 5 as it merely asserted that the respondent had suffered loss and damages because he had been denied the opportunity to convert the Convertible Bonds into the Conversion Shares. We should mention that the respondent had also pleaded at, inter alia, paras 4C and 5 of his amended reply (and again with the same lack of clarity) that the Convertible Bonds had not been issued. However, the meaning of this “admission” must be considered in the context of the amended defence, and so considered, it was simply a reiteration of the claim that the appellants had failed to issue the bond certificates. This is made clear in para 9 of the amended reply which states:

[21] Thus, when the appellants pleaded in their defence that the Convertible Bonds had not been issued as the terms of the Investment Agreement (as amended by the Supplementary Investment Agreement) were not met, the respondent replied to the defence by asserting that since AIMT admitted that the Convertible Bonds were not issued, it was in breach of its obligations to issue them. This reply could not be regarded as an abandonment of his allegation that the failure of AIMT to issue the bond certificates and/or the Conversion Shares was a breach of the appellants’ obligations under the Investment Agreement and that the respondent was entitled to damages for the breach.

[22] The respondent’s evidence before the court is likewise consistent with the above interpretation. At para 26 of his affidavit of evidence-in-chief, he said:

[23] The transcript of the respondent’s re-examination by his counsel confirms this point:

[24] In the circumstances, the appellants’ complaint that the Judge had decided a case not pleaded by the parties has no merit. The Judge decided the case as pleaded by the respondent and rejected the case as pleaded by the appellants. The Judge was fully entitled, as a matter of law, to find on the basis of the respondent’s pleaded case before her that the Convertible Bonds had been issued.

[25] As for the Judge’s finding that the Convertible Bonds were issued on or around 19 December 2005, the evidence is clear beyond doubt that as between Auston and the respondent, the former had acknowledged in its annual accounts that the latter was in law the owner of the Convertible Bonds, even though the certificates had not been delivered to him. Auston’s auditor had testified (see [11] above) that although he had not sighted “the physical issuance of the convertible bonds”, from an audit perspective and based on the documents he sighted, he was satisfied that there was in existence the (unsecured) Convertible Bonds. Auston’s annual audited accounts approved at its annual general meeting showed that the Convertible Bonds had been issued. Although Auston had not issued the physical bond certificates, Auston had treated the respondent as being notionally the owner of the Convertible Bonds. In our view, the Judge was correct to state at [24] of the GD that the absence of the certificates did not detract from the legal position that Auston had recognised the respondent as the owner of the Convertible Bonds and that the “function of the certificate is one of convenience” (see the GD at [24]; referred to at [12] above).

[26] Counsel for the appellants has not produced any statutory or case authority to show that because the bond certificates had not been issued, Auston’s acknowledgement in its books that the respondent was the owner of the Convertible Bonds could not provide a legal basis upon which the respondent could convert them into the Conversion Shares. We agree with the Judge that the bond certificates in the present case were only documentary evidence of the respondent’s ownership of the bonds. The failure of the appellants to procure the issue of the certificates could not be a ground for depriving the respondent ownership of the Convertible Bonds.

[27] Before us, counsel for the appellants also contended that the Judge erred in finding that the conditions precedent in cl 3.4 of the Investment Agreement (as amended by the Supplementary Investment Agreement) did not apply to the Convertible Bonds.

[28] In our view, this argument has no merit. As pointed out by the Judge, the definition of “Convertible bonds” in the Supplementary Investment Agreement (see [6] above) acknowledged that “the first tranche of S$200,000” worth of convertible bonds had been issued in or around 19 December 2005. Both parties are as such evidentially estopped from denying that the bonds had not been issued. It follows that cl 3.4 had no application to the Convertible Bonds. They were applicable and were intended to apply only to the additional $400,000 worth of convertible bonds which the respondent must subscribe for within the time prescribed for in the Investment Agreement.

[29] The next issue we have to decide is whether the conversion of the Convertible Bonds required shareholders’ approval in order to comply with the requirements of the SGX-ST Listing Manual. This is a regulatory issue that is different from the contractual issue under the Investment Agreement (as amended by the Supplementary Investment Agreement), concerning the conditions precedent in cl 3.4. We have decided that the contractual issue raised by the appellants has no merit (see [28] above). The appellants have argued that that under the SGX-ST Listing Manual, such approval was necessary because the respondent became a director of Auston after the Convertible Bonds had been issued to him and was a director at the time of conversion. The appellants argued that such shareholders’ approval had not been obtained and therefore they were not in a position to effect the conversion of the said bonds into the Conversion Shares.

[30] The Judge rejected this argument as irrelevant to Auston’s liability as she held that under the terms of the Investment Agreement, the onus was on Auston to obtain its shareholders’ approval for the issuance of the Convertible Bonds as well as for their conversion into the Conversion Shares. We agree.

[31] However, we need to deal with one other point (which, although not necessary to the disposition of this appeal, may have significance for investors generally). In the court below, the Judge accepted that there existed a general mandate empowering the directors of Auston to issue shares in December 2005 when the Convertible Bonds were issued, but that on 3 November 2006 (the date of the Conversion Notice), that general mandate had lapsed and the respondent had failed to lead evidence to show that the mandate was renewed (the GD at [37]– [38]):

[32] We do not think this analysis is correct. It seems to us to be contrary to commercial practice for a person in the position of the respondent to have agreed to subscribe for the Convertible Bonds without an assurance of the tradability of the Conversion Shares on the SGX without any further approval by Auston. Otherwise, the respondent would have assumed the risk of the Convertible Bonds being unilaterally rendered “unconvertible” by Auston. It may be recalled that cl 6.5 of Schedule 1 to the Investment Agreement provided that “[t]he delivery of Auston Shares upon the exercise of any right of conversion of any Convertible Bond … shall be effected by crediting the securities account designated by the holder of the Convertible Bond” (see [3] above). This clause is indicative of the existence of a shareholders’ resolution approving the issue of the Convertible Bonds to the respondent, with the right of conversion without any further approvals. Otherwise, there would have been some language to state expressly that further shareholders’ approval is necessary for the conversion itself. In this connection, s 161(4) of the Companies Act (Cap 50, 2006 Rev Ed) makes provision for this situation:

[33] In the case of Auston, the relevant shareholders’ resolution passed on 30 May 2005 was as follows:

[34] In the light of s 161(4) of the Companies Act, the relevant resolution was sufficiently broad to authorise the directors of Auston to issue the Convertible Bonds with a conversion date after the expiry of the general mandate to the respondent. In the present case, we would have expected the terms of the relevant resolution to apply expressly to the issue of the Conversion Shares even after the expiry of the general mandate. In our view, the resolution passed on 30 May 2005 was in itself sufficient as it authorised the directors to issue convertible securities on such terms and conditions as they may deem fit.

[35] The Judge below also expressed the view that shareholders’ approval was required for the conversion of the Convertible Bonds as the respondent was a director of Auston on 3 November 2006 at the time when he elected to convert his bonds. In essence, she agreed with the appellants’ submission that Rules 804 and 812 of the SGX-ST Listing Manual would have to be complied with. For ease of reference, we set out the relevant rules below:

The expression “equity securities” is defined in the SGX-ST Listing Manual as “shares (including preference shares) and convertible equity securities, and securities (other than debt securities) classified by the Exchange as equity securities.”

[36] In our opinion, Rules 804 and 812 have no application when a person who is holding convertible bonds is appointed to the board of directors and subsequently exercises his right of conversion. In our view, the said rules contemplate shareholders’ approval only for the issue of convertible securities, and not their conversion. This is because the right to convert would already be vested in the holder before he became a director. The purpose of those rules is to avoid conflicts of interest by preventing directors from issuing shares or convertible securities to themselves in the absence of shareholders’ approval.

[37] On the facts, it is therefore clear to us that the appellants were in breach of their obligation in failing to issue and credit the Conversion Shares into the securities account designated by the respondent pursuant to cl 6.5 of Schedule 1 to the Investment Agreement.

[38] The remaining issue we have to decide is how damages should be assessed. Having found that the Convertible Bonds were issued, the Judge decided the issue of liability against the appellants and also that damages be assessed on the basis of the loss of chance to convert the Convertible Bonds into the Conversion Shares. We do not agree with this basis for assessment. The doctrine of “loss of chance” was recently revisited by this court in JSI Shipping (S) Pte Ltd v Teofoongwonglcloong (a firm) [2007] 4 SLR 460 at [147]–[156], wherein the principles laid down in Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602 (“Allied Maples”) were re-endorsed. In essence, where the loss of chance caused by the defendant’s default is dependent upon the action of an independent third party, a plaintiff might not be required to show on a balance of probabilities that the chance would have come to fruition. Damages would be assessed so long as the chance is a real or substantial one, as opposed to a speculative one. On the other hand, if no third party is involved, a plaintiff must prove what he would have done if there had been no breach on a balance of probabilities. The distinction is evident from the following extract from McGregor on Damages (Sweet & Maxwell, 17th Ed, 2003) (“McGregor”), at paras 8-034–8-037:

[40] Before us, counsel for the respondent contended that the earliest possible date to issue the Conversion Shares was 4 January 2007 and damages should be assessed on that date. This contention is based on the appellants’ position that shareholders’ approval to issue the Conversion Shares was required, and 4 January 2007 would, reasonably, be the earliest date to obtain such approval. On the other hand, counsel for the appellants argued that damages should be for failure to issue the Convertible Bonds and for assessment purposes, the court should take the price of Auston shares on 22 December 2005, that being the contemplated date for completion under the Investment Agreement.

[41] We do not accept both arguments. The respondent’s contention that 4 January 2007 was the relevant date for assessment is premised on the belief that shareholders’ approval was required, while the appellants’ contention of 22 December 2005 was premised on the Convertible Bonds not having been issued. Both are wrong.

[42] The general principles applicable in determining damages on the seller’s failure to deliver securities are set out in McGregor where the point is made (at para 24-003) that “[t]he normal measure of damages is the market price of the shares at the contractual time for delivery less the contract price.” This would represent the amount that the buyer must obtain to put himself in the position he would have been in had the contract been performed, since to do so he must purchase equivalent shares in the market (ibid). It is also observed that the cases that have been adjudicated upon “indicate an application of [such] common principles while at the same time bringing out small differences” (McGregor at para 24-005). Thus, the date of breach may be postponed if the seller had sought more time to issue the shares and the buyer was willing to grant such indulgence, and the market price on the postponed date will therefore be the relevant one (ibid, citing Wilson v London and Globe Finance Corp (1897) 14 TLR 15). Whether these principles apply depend on the facts of the cases on which they were based. With reference to the present case, it will be necessary for the assessor to take into account the system of share trading on a scripless basis in the SGX. This means that the Conversion Shares, upon their issue, have to be transferred and registered in the name of the Central Depository (Pte) Limited (“CDP”) to be held by the CDP for the account of the respondent before they can be traded in the SGX. Therefore the appropriate date for determining the measure of damages should be the date on which the Conversion Shares become listed on the SGX for trading.

[43] What this date is depends on the facts. In the present case, there appears to be some evidence on record indicating that the appellants had asked the respondent for time to sort out the problem of getting shareholders’ approval, which the respondent appeared to have agreed to, although it led to nothing. Nevertheless, the period of indulgence given by the respondent may have to be factored into determining the relevant date for the respondent to go into the market to purchase the shares (see McGregor at para 24-005).