Chang Benety and others v Tang Kin Fei and others

Andrew Phang Boon Leong JA (delivering the grounds of decision of the court):

[1] This is an appeal against the decision of the trial judge (“the Judge”) in Tang Kin Fei and others v Chang Benety and others [2011] 1 SLR 568 (“the Judgment”), where the Judge validated certain resolutions passed at several inquorate directors’ meetings of a company, PPL Shipyard Pte Ltd (“the Company”), under s 392 of the Companies Act (Cap 50, 2006 Rev Ed). We allowed the appeal and now give the detailed grounds for our decision.

[2] The Company was incorporated in 1997 and is in the business of designing and constructing offshore drilling rigs. According to the Appellants, its business was largely built up by the efforts of first Appellant, Benety Chang (“Chang”) as well as and the second Appellant, Anthony Aurol (“Aurol”).

[3] Prior to 2001, the majority shareholders of the Company were PPL Holdings Pte Ltd (“PPLH”), a wholly-owned subsidiary of Baker Technology Ltd (“Baker”), a public listed company which held 97% of the shares. The remaining 3% of the shares in the Company were held by E-Interface Holdings Ltd (“E-Interface”).

[4] On 29 March 2001, 50% of the shares of the Company were sold by PPLH to Sembcorp Marine Ltd (“SCM”).

[5] On 13 November 2001, E-Interface became a wholly-owned subsidiary of PPLH.

[6] In 2003, SCM increased its shareholding in the Company to 85%. As the majority shareholder, SCM nominated six of the nine directors of the Company.

[7] The Appellants and Respondents are all directors of the Company. The three Appellants were PPLH’s nominees while the six Respondents were SCM’s nominees. Two of the Appellants, Chang and Aurol, are also directors of PPLH.

[8] Aurol was removed as a director of the Company on 8 June 2010 on the ground that he had allegedly passed on the Company’s confidential information to Yangzijiang Shipbuilding (Holdings) Ltd (“Yangzijiang”), a company which subsequently took over Baker. The other two Appellants, Chang and Douglas Tan, are still directors of the Company.

[9] For a better picture of the dispute between the parties, reference must first be made to the shareholders’ agreement entered into between PPHL and SCM on 9 April 2001 (“the Shareholders’ Agreement”). It provided for the appointment of six directors, with PPLH and SCM appointing three directors each. Clause 5.3 of this agreement provided that the quorum for a director’s meeting is two, provided that at least one director from PPLH and SCM are present. Following the Shareholder’s Agreement, Art 98 of the Company’s articles of association was amended to take into account the agreed arrangement that for there to be a quorum, at least one director from each side must be present at a meeting of the board of directors.

[10] The arrangements in the Shareholders’ Agreement and articles of association regarding the quorum for a meeting of the board of directors were not changed after SCM became the majority shareholder of the Company by amassing 85% of the Company’s shares in 2003, although (as already noted) the number of directors was increased to nine, with six appointed by SCM.

[11] The chain of events leading to the passing of the resolutions in dispute began on 16 April 2010, when Yangzijiang issued a binding letter of offer to Baker to acquire all its shares in PPLH for US$155m (“the Offer”). A term of the Offer was that Chang and Aurol were to give undertakings to Yangzijiang that they would not voluntarily resign from their executive positions with the Company for a period of two years with effect from 1 January 2011.

[12] On 17 April 2010, Baker disclosed the Offer to the market, and stated that the consideration for the purchase was arrived at by taking into account, inter alia, a certain net book value of the Company for the financial year 2009. Subsequently, Baker accepted the offer.

[13] PPLH argued that SCM wanted to scuttle the deal for the sale of its shares to Yangzijiang. SCM tendered a cheque for $59,433,522 as payment for the 15% shareholding of PPLH in the Company but PPLH rebuffed this attempt to purchase its stake in the Company.

[14] The SCM-appointed directors took steps to strengthen their control of the Company. At a scheduled meeting of the board of directors on 28 April 2010, which was attended by the Appellants, the Respondents introduced matters not specifically stated on the agenda and proceeded to appoint a new managing director to replace Douglas Tan, a new Chief Financial Officer and Joint Secretaries, all of whom were nominated by SCM. Despite the Appellants’ objections to these appointments, which were not within the ambit of the present appeal, the appointments were approved by six votes to three.

[15] On 10 May 2010, SCM lodged complaints (“the SCM complaints”) with the Company that Chang and Aurol had allegedly breached their duty to the Company by disclosing confidential information to Yangzijiang about its book value for the financial year 2009 six days before the said accounts were lodged with the Accounting and Corporate Regulatory Authority. In view of these allegations, the chairman of the board of directors, Tang Kin Fei (“Tang”), thought it was in the Company’s best interests to deal with the allegations immediately. As a result, Don Lee Fook Kang, a SCM-nominated director, e-mailed all the directors on 10 May 2010 to convene a board meeting on 11 May 2010 (“the 11 May meeting”) for the purpose of appointing a law firm to advise the Company on the SCM complaints.

[16] The Appellants did not attend the 11 May meeting. Tang received a letter from Wee, Tay & Lim, acting for the Appellants, objecting to the meeting as inadequate notice was given and a list of possible lawyers who could be appointed to advise the company was not circulated before the meeting. He also received a letter from Straits Law Practice, acting for PPLH, stating that Aurol had not committed any breach of confidentiality, and even if there was such a breach, it was de minimis. The Respondents nevertheless proceeded with the meeting and resolved to appoint WongPartnership to advise and act for the Company in respect of the SCM complaint.

[17] On 15 May 2010, SCM commenced Suit No 351 of 2010 against PPLH and E-interface (“the Suit”). In the Suit, SCM sought, inter alia, a declaration that when it became the owner of 85% of the issued and paid up capital of the Company on 9 July 2003, the provisions of the shareholders’ agreement and the Company’s articles of association, that were premised on an equal partnership with PPLH and E-Interface, ceased to apply. SCM also alleged that the sale of Baker’s shares in PPLH was a breach of an implied term that neither party would, without offering its shares in the Company to the other, act in a manner which would cause the other to end up being a “partner” of a party owned or controlled by someone else other than the parties to the shareholders’ agreement. SCM claimed various reliefs, including a right to acquire the remaining shares held by PPLH and E-Interface in the Company. PPLH and E-Interface counterclaimed against SCM for, inter alia, injunctive relief against the removal the Appellants as directors.

[18] Subsequently, WongPartnership, on their own initiative, suggested to Wee, Tay & Lim that another board meeting be convened to discuss their appointment. On 27 May 2010, the Respondents called for another Board meeting to be convened on 3 June 2010 (“the 3 June Meeting”). On 31 May 2010, the Appellants sought confirmation that the meeting would be conducted in accordance with the terms of the Shareholders’ Agreement and that each side’s directors would therefore have three votes regardless of the number of directors present. The Respondents’ solicitors replied on 1 June 2010 to the effect that Art 98 of the Company’s articles of association did not restrict the six SCM-nominated directors from casting more than three votes. On 2 June 2010, the Appellants replied that they would not attend the 3 June Meeting. The Respondents proceeded with the 3 June Meeting in the Appellant’s absence and passed the following resolutions:

(a) confirming the appointment of WongPartnership to act for and advise the Company;

(b) instructing WongPartnership to investigate the allegations raised in the 10 May letter and advise the Company on its response to the allegations; and

(c) instructing WongPartnership to provide general advice relating to the Suit and the continued operations of the Company.

[19] Notwithstanding the resolutions passed at the 3 June Meeting, the Respondents thought it prudent to hold yet another directors’ meeting to expressly appoint WongPartnership to represent the Company in the Suit. On 10 June 2010, notice was given that yet another board meeting would be held on 14 June 2010 (“the 14 June 2010 meeting”). Wee, Tay & Lim proposed a circular board resolution to limit WongPartnership’s authority in respect of the Suit but the Respondents preferred to give WongPartnership wider authority in the resolution.

[20] As there was no agreement, the Respondents passed a resolution at the 14 June 2010 meeting in the Appellant’s absence to empower WongPartnership to enter an appearance on behalf of the Company and to accept all documents served in the Suit on the Company’s behalf.

[21] The Appellants called for a meeting of the board of directors on 21 June 2010 (“the 21 June 2010 meeting”). The agenda included giving wider authority to WongPartnership in relation to the Suit and giving the chairman or any other person nominated by him the authority to give instructions to WongPartnership in relation to the Suit as well as to receive advice from that law firm.

[22] On 18 June 2010, Straits Law Practice, acting for PPLH, sent a telefax to the Respondents’ solicitors stating that they had no issue with WongPartnership advising and representing the Company in the suit. They suggested that instructions to WongPartnership should be on the basis of unanimous instructions, but were unable to propose a resolution acceptable to all parties. The Respondents then suggested that Douglas Tan, a PPLH-nominated director, be allowed to comment on or add to the instructions given by the chairman or his nominee as an interim measure but this suggestion was not accepted by the Appellants. The 21 June 2010 meeting proceeded without the attendance of the Appellants. The resolutions set out in prayer 5 of the amended application were passed at this meeting.

[23] It is noteworthy that there was subsequent progress on the issue of WongPartnership’s appointment. On 29 June 2010, WongPartnership wrote to Wee, Tay & Lim to propose that their scope of appointment be to advise and represent the Company in relation to the Suit and to do all things necessary for the conduct of the Suit (“the 29 June Letter”). As an initial step, WongPartnership was to advise the Company on the role and approach which it should adopt in the Suit. Wee, Tay & Lim confirmed that this was acceptable on 1 July 2010 (“the 1 July Agreement”).

[24] The Respondents’ prayers in its application (in Originating Summons No 590 of 2010) in the court below were as follows:

[25] The Respondents’ position in the court below was that the above resolutions should be declared valid despite the lack of a quorum as they did not result in substantial injustice to the Appellants. They argued that the resolutions had to be validated in order to allow WongPartnership to advise the company on the SCM Complaints as well as the Suit.

[26] The Appellants’ position, on the other hand, was that the Respondents had breached both the Shareholders’ Agreement as well as the Company’s articles of association in proceeding with the meetings without a quorum and failing to adjourn them.

[27] Clause 5.3 of the Shareholders’ Agreement states as follows:

The relevant part of Art 98 provides as follows:

[28] The parties’ arguments centred on the application of s 392, which reads as follows:

[29] The Appellants argued that lack of quorum was a substantive irregularity incapable of being validated under s 392. Further, they added that even if the lack of quorum was a procedural irregularity, it could not be cured under s 392 as this would lead to substantial injustice. In particular, they contended that the irregularities in question deprived them of their right to a quorum, exposed Aurol and Chang to investigation, and was part of the consistent course of conduct by the Respondents to scuttle the deal between Yangzijiang and Baker for the acquisition by the former of all the latter’s shares in PPLH. They also argued that there was no need for to proceed with the application as they had already agreed to WongPartnership’s appointment.

[30] The Judge held as follows:

(a) The absence of a quorum was, by statute, only a procedural irregularity. Both the procedural irregularity and the substance of the resolutions must be considered as part of the holistic approach mentioned in The Oriental Insurance Co Ltd v Reliance National Asia Re Pte Ltd [2008] 3 SLR(R) 121 (“Oriental Insurance”);

(b) Where there is a deadlock in the sense that no quorum can be formed for a board meeting, to allow one party to push ahead with its agenda in the absence of the other party was prima facie a substantial injustice. It would be for the proposing party to persuade the court why the resolutions should nevertheless be validated;

(c) Prayer 1 was in respect of a resolution passed at a board meeting convened at very short notice and its substance was, in any event, covered by prayer 2. As such no order on prayer 1 was made;

(d) The resolutions in prayers 2, 3(c) and (d), 4 and 5(a) were neutral and in the Company’s interests as it had to be represented in the Suit. As for prayer 5(b), it was practical to identify someone from whom WongPartnership could receive instructions. As such, these prayers were validated; and

(e) Prayers 3(a) and (b) were not neutral. They appeared one-sided because they assumed that the proposed investigation regarding the SCM complaints was truly in the Company’s best interests. However, the true motive for the investigation had not been established. Hence, these prayers were not validated.

[31] The Appellants’ case before this court was that that the Respondents had breached both the Shareholders Agreement and the Company’s articles of association in:

(a) proceeding with the meetings when no director from PPLH was present (“the Quorum irregularity”); and

(b) not adjourning the meetings when there was no quorum (“the Adjournment irregularity”).

[32] The Appellants reiterated their arguments made in the court below, namely, that the Respondents’ actions, as outlined in the above paragraph, involved substantive (and not merely procedural) irregularities that were therefore incapable of being validated under s 392, and that, even if they were procedural irregularities, substantial injustice would be caused to them if the resolutions were validated. In so far as the Respondents were concerned, they also relied on the same arguments advanced in the court below, namely, that the irregularities in question were clearly procedural and may therefore be validated pursuant to s 392, and that no substantial injustice would be caused if there was such validation.

[33] Section 392(1)(a); also reproduced above at [28]), which makes it clear that a lack of a quorum is prima facie at least a procedural irregularity (cf the words “unless the contrary intention appears”), provides as follows:

[34] The power of the Court to remedy such a procedural irregularity is provided for in s 392(2) (also reproduced above at [28]), as follows:

[35] Section 392 is largely based on s 1322 of the Australian Corporations Act (No 50 of 2001). However, the proposition that procedural irregularities will not invalidate court proceedings was adopted from the law relating to insolvency proceedings and may be traced back to s 179 of the Insolvency Act of 1874 (38 Vic No 5) (Qld), which provided as follows:

[36] The said provision was first applied in the sphere of company law when s 3 of the Companies Act 1893 (57 Vic 3) (Qld) was enacted. The rationale for the provision, as explained during the Parliamentary Debates on the bill, was as follows (see Queensland, Parliamentary Debates, Legislative Assembly, 19 July 1893, 239 (per Thomas Joseph Byrnes)):

[37] Considering its history, it appears that s 392 balances the twin considerations that proceedings are not invalidated for minor reasons, and that procedural irregularities do not result in unjust situations that cannot be remedied by the courts. Hence, once a court is satisfied that an irregularity is procedural, the only question is whether it results in substantial injustice that cannot be remedied by an order of court.

[38] As noted above, the Appellants argued that the quorum requirement under Art 98 is an expressly negotiated right that gives them an unchallengeable right to create a deadlock. Thus, the lack of quorum in this instance is a substantive irregularity. They relied on this court’s decision in Thio Keng Poon v Thio Syn Pyn and others and another appeal [2010] 3 SLR 143 (“Thio Keng Poon”) and other Australian decisions to support their argument that some irregularities, while meeting the description in s 392(1), are nonetheless characterised as substantive breaches.

[39] The Respondents countered that it was clear from s 392(1) that a lack of quorum is, without more, a procedural irregularity and there was no reason why s 392(1) should not be given its plain meaning. In addition, they stated that the Adjournment irregularity is covered by s 392(1)(b) and is a procedural step which deals with the process of calling meetings and not the substance of the resolutions passed.

[40] In determining whether an irregularity is procedural or substantive, the following passage from the judgment of the court in Thio Keng Poon (at [66]) is instructive:

Reference may also be made, in this regard, to R P Austin & I M Ramsay, Ford’s Principles of Corporations Law (LexisNexis/Butterworths, Australia, 14th Ed, 2010) at para 7.582.

[41] In Thio Keng Poon, where an attempt was made to remove a director, the irregularity concerned a failure by the other directors to first request the director in question to vacate his directorship before passing a resolution to remove him as director. This was a breach of Art 88(c) of the company’s articles of association. The court held that this was a substantive breach, which was not an irregularity of the same genre as that contemplated in s 392(1) because it involved a breach of a specific requirement in the articles of association, which clearly specified the procedure for removing a director.

[42] The irregularity in Thio Keng Poon must be viewed in the context of an irregularity regarding an attempt to remove a director. This court stated that the failure to serve a notice to resign upon that director, as required by the company’s articles of association, was certainly not of the same genre as the irregularities listed in s 392(1). In contrast, in relation to a lack of quorum per se, the Singapore courts have largely, in view of s 392(1)(a) (reproduced above at [28] and [33])), regarded this as a procedural irregularity (see, for example, Sum Hong Kum v Li Pin Furniture Industries Pte Ltd [1996] 1 SLR(R) 529 (“Sum Hong Kum”) at [35], and Kwa Ban Cheong v Kuan Boon Sek and others [2003] 3 SLR(R) 644 at [22]). This is consistent with the approach in Australia (see, for example, Re Pembury Pty Ltd (1991) 4 ACSR 759 at 761 and Whitehouse v Capital Radio Network Pty Ltd [2004] TASSC 12 at [12]).

[43] It follows that the Appellants’ contention that the lack of quorum in the present case must be a substantive irregularity merely because the parties had expressly negotiated for a deadlock right cannot be accepted. In Sum Hong Kum, where deadlock rights were also involved in the context of an inquorate meeting, Warren Khoo J (“Khoo J”) correctly found that in view of s 392(1), the lack of a quorum was without more, a procedural irregularity. We respectfully agree with Khoo J and are of the view that the lack of a quorum in the present case is a procedural irregularity. Consequently, the Adjournment irregularity, which arises from the Quorum irregularity, is also procedural. However, this does not mean that the Appellants’ contention was wholly without merit when viewed from the perspective of substance (as opposed merely to form) inasmuch as the court will not validate a procedural irregularity if to do so would be – or is likely - to cause substantial injustice to any person (see s 392(6)(c) reproduced above at [28]). Put simply, such an approach would achieve, in substance, the same result which the Appellants had sought in any event provided that they could demonstrate that substantial injustice had indeed been suffered by them. And that is an issue to which our attention now turns.

[44] As just mentioned, as the Quorum and Adjournment irregularities involve procedural irregularities, a question arises as to whether the Judge erred in exercising his power under s 392(2) to validate the resolutions. This turns on whether the Appellants would suffer substantial injustice if the resolutions are validated.

[45] As for what constitutes substantial injustice, this court explained in Thio Keng Poon as follows at [75]:

[46] In addition, in Golden Harvest Films Distribution (Pte) Ltd v Golden Village Multiplex Pte Ltd [2007] 1 SLR(R) 940, this court held at [54] that that the determination of substantial injustice under s 392 involved “a holistic weighing and balancing of the various interests of all the relevant parties” [emphasis added]. This holding was endorsed in Oriental Insurance at [106].

[47] In Re Goodwealth [1990] 2 SLR(R) 691 (“Re Goodwealth Trading Pte Ltd”), a minority shareholder petitioned to wind up the company. In response, the majority shareholder sought to hold a board meeting to appoint solicitors to represent the company in order to strike out the petition. The minority shareholder and director employed the defensive tactic of not attending the board meeting, which resulted in a deadlock. This court held the lack of quorum caused substantial injustice as it resulted in disputed decisions, namely the appointment of solicitors to represent the company, being taken by one of only two shareholder groups in a company to the exclusion and possible disadvantage of the other shareholder.

[48] It bears noting that the quorum requirement in the present case was not merely an ordinary one specifying a minimum number as such but also one which related, in fact, to the issue of representation on the board of directors. This requirement was to ensure that parties would have their interests represented at board meetings and could thus prevent the Company from making any decision which would prejudice them. The importance of this requirement is evident as it was not only provided for in the articles of association but enshrined in the Shareholders’ Agreement as well. In our view, where such a quorum requirement is breached, there will prima facie be substantial injustice to the side which exercised its deadlock rights.

[49] Undoubtedly, the nature of the resolutions passed at the board meeting must be considered as well. If innocuous resolutions affecting no party’s rights are passed, it is most unlikely that any party would apply to the court to invalidate them. As Margaret Chew aptly observed, “[i]n most cases ... where an applicant has sought to impugn an irregularity, the irregularity and the proceedings initiated to invalidate it ... are likely to be symptoms of a greater struggle between shareholding factions, oftentimes between the minority and the majority” (see Margaret Chew, Minority Shareholders’ Rights and Remedies (LexisNexis, 2nd Ed, 2007) at p 14) [emphasis added]. Indeed, in the present case, the deadlock rights were relied on by the Appellants to ensure that resolutions, which advanced the Respondents’ complaints against some of the Appellants, were not passed by the board. The resolutions passed by the Respondents in the absence of the Appellants purported to appoint WongPartnership not only to represent and advise the Company in the Suit, but also to investigate the SCM complaints (see [24] prayers 3(a) and (b)). The Judge rightly found that the resolutions relating to the investigation of the SCM complaints were one-sided as they assumed that the proposed investigation regarding the SCM complaints was in the Company’s best interests. By instructing WongPartnership to investigate the SCM complaints, the Respondents placed the Appellants, who were the subject of the allegations, in a disadvantageous position. Clearly, the Respondents were attempting thereby to gain a tactical advantage over the Appellants in the Suit. Although the resolutions relating to the SCM Complaints were not validated by the Judge, they shed light on the Respondents’ intention to make use of the inquorate meetings to pass resolutions to the possible disadvantage of the Appellants. Following Re Goodwealth, it is evident that this cannot be permitted if the resolutions that are the subject of this appeal, whilst seemingly innocuous on their face, still relate to the tactical advantage just mentioned. This is a point to which we now turn.

[50] Whether the validation of the said resolutions will cause substantial injustice must be seen in the context of the 29 June Letter. The Appellants had set out their position on the appointment of WongPartnership as follows:

As mentioned above, the Respondent’s accepted this proposal on 1 July 2010 (resulting in the 1 July Agreement).

[51] However, the resolutions validated by the Judge expanded WongPartnership’s role to include the providing of general advice on any issue relating to the dispute between its shareholders and the continued operations of the Company. Furthermore, these resolutions provided that the Chairman of the Company would give and receive instructions from WongPartnership in relation to the Suit. This enlarged scope of WongPartnership’s role gave the Respondents a significant advantage over the Appellants for, while the resolutions made provision for Douglas Tan to comment or add to the instructions provided to WongPartnership, the Chairman would have the final say if Douglas Tan’s instructions conflicted with the Chairman’s instructions. In these circumstances, there would be no check on the Respondents, who could instruct WongPartnership to act to the Appellants’ detriment.

[52] Essentially, the validation of the resolutions had the effect of overriding the 1 July Agreement on the appointment of Wong Partnership and widening its scope. This constituted, without more, a substantial injustice to the Appellants as they were deprived of the bargain which they had struck with the Respondents and WongPartnership. There was no indication that the 1 July Agreement was, as the Respondents contended, merely an interim agreement. As such, the parties should have abided by the terms of the said Agreement.

[53] In the final analysis, after conducting “a holistic weighing and balancing of the various interests of all the relevant parties” (see also above at [46]), we found that validating the resolutions would cause substantial injustice which cannot be remedied by an order of court. As was the case in Thio Keng Poon, there was a link in the present case between the procedural irregularities and the substantial injustice suffered by the Appellants. The result might have been different if the Respondents had not proceeded with the inquorate board meetings.