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Grounds publishedDecided 23 May 2013
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High Court

Falmac Limited v Cheng Ji Lai Charlie

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[2013] SGHC 113Case no. Suit No 935 of 2009

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  1. Belinda Ang Saw Ean J:

  2. Introduction

  3. [1] The plaintiff, Falmac Limited (“Falmac”), was a Catalist Sponsor-supervised company at the time it was de-listed by the Singapore Exchange Securities Trading Ltd (“SGX-ST”) on 22 August 2011. Prior to de-listing, Falmac’s business operations were mainly carried out in Tianjin, People’s Republic of China, through two subsidiaries, namely Falmac Machinery (Tianjin) Ltd (“Falmac Machinery”) and Falmac Textile (Tianjin) Co Ltd (“Falmac Textile”). For ease of reference, I shall refer to the two subsidiaries collectively as the “Tianjin subsidiaries”. Each subsidiary owned a factory in Tianjin (hereafter collectively referred to as “the Tianjin factories”).

  4. [2] This Writ of Summons was filed on 30 October 2009. It named five individuals who constituted Falmac’s board of directors during the relevant period in question as the defendants (hereafter collectively referred to as “the former board”). The first defendant, Cheng Ji Jiang (“Ji Jiang”), the third defendant, David Lu Hai Ge (“David Lu”), and the fifth defendant, Yu Wei Ying (“Wei Ying”) were independent directors of Falmac. The second defendant, Charlie Cheng Ji Lai (“D2”) was, at all material times, a director and the Chief Executive Officer of Falmac. The fourth defendant, Fei Xue Jun (“Fei”), was a director and shareholder of Falmac.

  5. [3] Falmac did not serve proceedings against Ji Jiang, David Lu and Wei Ying, and the proceedings against Fei were formally discontinued on 13 July 2010. The present action continues against D2.

  6. [4] Mr Winston Quek (“Mr Quek”) represents Falmac. During the first tranche of the trial, D2 was represented by Mr L Devadason (“Mr Devadason”) who was assisted by Mr Harpal Singh (“Mr Singh”). Mr Devadason fell seriously ill shortly thereafter and Mr Singh took over the conduct of the proceedings.

  7. Overview of the proceedings

  8. [5] In this action, Falmac pleaded a number of breaches of fiduciary duties on the part of D2 involving a range of transactions, dealings and matters. It was alleged, amongst other things, that Falmac under the stewardship of D2 made losses yearly and was heavily indebted to banks and other creditors, and that D2 had managed, conducted and administered Falmac’s affairs without due care and diligence to the extent that the company became financially crippled and could not pay its employees’ salaries.

  9. [6] At the end of the first tranche of the trial on 20 July 2011, Falmac’s core complaint was that D2 still controlled the Tianjin subsidiaries through his nominee, Leon Zhao whose appointment as the legal representative of the Tianjin subsidiaries was unauthorised as it was without the knowledge and consent of Falmac (“the unauthorised legal representative argument”). Falmac averred that Leon Zhao’s appointment enabled D2 to continue to control the Tianjin subsidiaries for his own personal interest and to the detriment of Falmac. As a result, Falmac lost effective control of its principal assets which were the Tianjin subsidiaries. Attempts by two new Falmac board members to gain access to the Tianjin factories in late October 2009 were unsuccessful. To Falmac, this incident demonstrated Falmac’s loss of physical control of the Tianjin factories.

  10. [7] According to Falmac, Leon Zhao was a total stranger. Not only was his appointment as the legal representative of the Tianjin subsidiaries unauthorised, the change of legal representative was not disclosed to Falmac’s shareholders. In addition, Falmac was unable to remove Leon Zhao as legal representative. Consequently, it was compelled to write off the entire value of the Tianjin subsidiaries in its financial statements for the financial year ended 31 December 2009 (“the 2009 financial statements”). Falmac holds D2 responsible for the loss of the Tianjin subsidiaries by reason of D2’s breach of fiduciary duty and/or breach of trust.

  11. [8] Sometime after the first tranche of the trial, Falmac obtained leave of court to re-amend its Statement of Claim (Amendment No 1) on 17 November 2011. With the new amendments (ie, Statement of Claim (Amendment No 2) filed on 21 November 2011), the case against D2 took on a different dimension, namely that D2 had disposed of the Tianjin subsidiaries to a company known as Sino Vision (HK) Ltd (“Sino Vision”) in contravention of s 160(1) of the Companies Act (Cap 50, Rev Ed 2006) and in breach of his fiduciary duties owed to Falmac (collectively referred to as “the s 160 complaint”). Falmac is therefore seeking damages based on the net asset value of the Tianjin subsidiaries, or alternatively for damages to be assessed.

  12. [9] D2 has denied any wrongdoing. His pleaded defence is that the appointment of Leon Zhao as the legal representative of the Tianjin subsidiaries was not unlawful as it was approved by the former board, and that the appointment was recognised and accepted by the authorities in China. In relation to the s 160 complaint, D2’s defence is that the debt-for-share transaction was approved by the former board in the interest of Falmac. However, the former board had no role in the implementation of the debt-for- share transaction.

  13. [10] According to D2, Business Corporate Services Pte Ltd (“BCS”) and Peter Choo Chee Kong (“Choo”) were interested in Falmac for a reserve takeover. In this case, the plan was to use Falmac as the “shell” company for the reverse takeover. Divesting Falmac of all its debt-ridden and loss-making businesses (ie, the Tianjin subsidiaries) was thus part of the overall strategic restructuring of Falmac.

  14. [11] D2’s overall position in his Closing Submissions is that he is being made a scapegoat for the divestment of the Tianjin subsidiaries now that the reverse takeover has fallen through and the white knights (ie, BCS and Choo) have lost money in the process. It is D2’s contention that Falmac needed an excuse for disposing the Tianjin subsidiaries for a consideration of S$2 to Unitex Global Limited (“Unitex”). Thus, apart from the Tianjin subsidiaries being loss-making, the easy way out was to blame D2 by alleging loss of effective control of the Tianjin subsidiaries.

  15. [12] In this action, D2 counterclaims against Falmac for various payments due to him such as unpaid salary as Falmac’s Chief Executive Officer and unpaid director’s fees.

  16. [13] At this juncture, I propose to comment on the state of the pleadings after the last round of late amendments in November 2011. First, the unauthorised legal representative argument (see [6] above) and the s 160 complaint (see [8] above) appear to be advanced as discrete stand-alone pleas. Falmac has not in its pleadings linked the unauthorised legal representative argument to the s 160 complaint and the subsequent registration of Sino Vision as the legal owner of Falmac’s shares in the Tianjin subsidiaries. Falmac has not gone further to assert, and it is not Falmac’s pleaded case, that D2 continues to be in effective control of the Tianjin subsidiaries despite the registration of Falmac’s shares in Sino Vision’s name. Falmac is neither disavowing the Sino Vision transaction, nor arguing that Sino Vision’s involvement was a sham or disguise to cover up D2’s unlawful appropriation of the Tianjin subsidiaries. Simply put, it is not Falmac’s pleaded case that D2 has an interest in Sino Vision, and hence D2 has control of the Tianjin subsidiaries through Sino Vision and Leon Zhao. In the absence of any plea of a causal link between the unauthorised appointment of Leon Zhao on 1 September 2009 and the s 160 complaint they remain discrete stand-alone pleas.

  17. [14] Second, it is difficult for the court to work out exactly what fiduciary obligation D2 had not observed, and the consequences of any deviation from the same. Mere recitals of the various duties of a director in paragraphs 4 and 5 of Statement of Claim (Amendment No 2), and mere statements of conclusion that D2 had breached fiduciary duties owed to the company do not suffice. The pleadings did not expressly identify the particular obligation that D2 had supposedly breached as a fiduciary to the facts in support of the complaint in question. Falmac’s Opening Statement referred to a director’s duty to act honestly (ie, to act bona fide) at all times in the interests of the company. This was similar to the plea that D2 owed to Falmac a fiduciary duty of good faith. An allegation of breach of duty of good faith is essentially a charge of dishonesty. Like fraud, dishonesty must be distinctly alleged and proved, and it is not permissible for a charge of dishonesty to be inferred from the pleaded facts alleged against D2 in respect of either the unauthorised legal representative argument or the s 160 complaint.

  18. [15] Third, liability in the main action must therefore be decided on the narrow formulation of the claims as pleaded and upon the existence of cogent facts in evidence to support these claims.

  19. [16] Finally, the declaration sought by Falmac in this court – that D2 was in breach of his duties as a director – does not seem to be sought in respect of any loss suffered by Falmac or to claims that might have been made to Falmac. There is a separate claim for damages to be assessed. This claim, which is for common law damages, is not intended as “the other relief” that follows a declaration of right but is to recover compensation for breach of fiduciary duty owed to Falmac. Accordingly, Falmac has to show that there is a causal connection between the breach of fiduciary duty (ie, the relevant wrong) and the relevant loss, if proved. Plainly, it is only in respect of the unauthorised legal representative argument and the s 160 complaint that Falmac is claiming damages based on the net asset value of the Tianjin subsidiaries and the expenses incurred in attempting to recover the Tianjin subsidiaries. For the other alleged claims described in [59] below, the sum total of the evidence is that Falmac did not suffer any pecuniary loss. As Falmac is not asking this court to declare contested legal rights of the parties, whether subsisting or in the future, the relief in the form of a declaration of right is superfluous.

  20. Chronology of relevant events

  21. [17] A proper understanding of this action requires the background facts of the case to be set out in some detail. A chronological account of the relevant events is as follows.

  22. Former board comprising the five named defendants

  23. [18] At all material times, the primary business of Falmac was in the manufacture of precision engineering circular knitting machines and production of cotton yarn in Tianjin. It is common ground that Falmac’s business was entirely derived from the Tianjin subsidiaries.

  24. [19] In October 2004, three of the named defendants were on Falmac’s board: D2, David Lu and Fei. At that time, there was another independent director, Lu Jing, on Falmac’s board. The fifth director, Wei Ying, was appointed in March 2005.

  25. [20] Lu Jing retired from the board in 2006. In March 2006, Fei was appointed executive chairman of the board. However, he stepped down as executive chairman in August 2007, but remained on the board as executive director. Ji Jiang, the first defendant, was appointed a director on 15 August 2007.

  26. [21] D2 was appointed director on 27 October 2004 and, as Falmac’s Chief Executive Officer on 15 December 2004. According to D2, it was Fei who brought him into Falmac. In 2004, Falmac was in need of a capital injection as well as a restructuring of loans with its creditor banks amongst others. Fei as director of Sino Equity Group Limited (“Sino Equity”), the investment vehicle of the Jianwei Group in China, of which Fei was also the chairman, Chief Executive Officer and controlling shareholder made a cash injection into Falmac through an issue of new shares in Falmac. Fei, through his interest in Sino Equity, became the largest shareholder holding 29% of the issued shares in Falmac as at 12 March 2007.

  27. [22] D2 resigned as the Chief Executive Officer of Falmac on 20 July 2009. On 30 July 2009, the three independent directors on the former board also resigned from their positions. This left D2 and Fei as the only two members on Falmac’s board of directors at the end of July 2009.

  28. [23] D2 and Fei were removed as directors on 5 October 2009.

  29. Falmac’s continuous financial woes

  30. [24] Besides the capital injection and loan restructuring mentioned earlier, Falmac had to, inter alia, sell off its assets to pay off its indebtedness. Note 3 of the auditor’s notes to the financial statements dated 31 December 2005 stated:

  31. [25] Furthermore, Note 5 on bank loans and overdrafts said:

  32. [26] Note 5 also disclosed that the Company was in the process of re-negotiating with the creditor banks for a revised bank borrowings repayment scheme.

  33. [27] As things turned out, Falmac’s sale of assets in Singapore was insufficient to repay the requisite S$2.1m leaving a shortfall of S$250,000 unpaid. Falmac also defaulted in payment of three of the repayment instalments that had fallen due and payable as of 31 December 2005. Therefore, on 20 February 2006, the creditor banks demanded repayment of the entire restructured loan together with interest amounting to a total of about S$3.97m.

  34. [28] Falmac’s defaults in payments under certain indebtedness agreements were disclosed in Note 6 to the financial statements for the financial years ended 31 December 2006 and 31 December 2007.

  35. [29] It is clear that the ability of Falmac to continue business as a going concern depended on the company realising assets to discharge its liabilities in the normal course of business, but as the current liabilities of both Falmac and its subsidiaries continue to exceed its current assets over the years, the auditors in Singapore found it increasingly difficult to support the going concern basis of the company and its subsidiaries.

  36. [30] Despite the fact that Falmac and its Tianjin subsidiaries had crippling liabilities, Falmac was still an attractive target to a white knight (in this case BCS and Choo) who perceived Falmac as a cheap and easy way to secure a Catalist listing via a reverse takeover.

  37. Enter Wong Lock Chee and Choo

  38. [31] BCS was a private investment company that was owned and controlled by Wong Lock Chee (“Wong”) and Yeoh Wee Liat (“Yeoh”). Wong, acting through BCS, bought over Falmac’s outstanding debts at a discount from the creditor banks. After 31 December 2008, the creditor banks assigned all their interests and rights in relation to the bank loans, thus making BCS a 16.5% shareholder as well as a substantial creditor in respect of an outstanding loan of approximately S$4.5m. Falmac confirmed in its Closing Submissions that this move by BCS to acquire 16.5% of the equity was “to enable [Falmac] to undergo a debt restructuring plan and to negotiate with corporate entities for a reverse takeover of [Falmac].” BCS saw its role as a white knight and committed funds to Falmac in a bid to buy time to implement its plan to restructure the company’s debts for a reverse takeover. Wong had approached Choo, a director and shareholder of CNMC Goldmine Limited (“CNMC”) on the possibility of a reverse takeover of [Falmac] by CNMC. Choo was said to be “keen on the proposal”, the “proposal” was for Falmac to acquire the entire stake in CNMC in exchange for the issuance of new shares in Falmac, effectively allowing CNMC to achieve a “backdoor-listing”. This ambition to buy Falmac for a “backdoor-listing” naturally required the agreement and cooperation of the former board of Falmac. In fact, there were e-mails from Choo to D2 expressing his seriousness in Falmac and that he needed D2 to work with him. For a flavour of the overtures, some of these e-mails are reproduced below. In an e-mail dated 20 January 2009 to D2, Choo wrote:

  39. [32] On 28 January 2009, Choo e-mailed D2 as follows:

  40. [33] On 26 February 2009, Choo wrote to D2. His e-mail reads:

  41. [34] On 24 March 2009, Choo wrote to D2. His e-mail reads:

  42. [35] On 30 March 2009, Choo e-mailed D2 in the following terms:

  43. [36] It is not disputed that in practice, the debts of the target company (ie, Falmac) have to be restructured and a debt conversion exercise undertaken in order to turn the target company into a shell company before injection of a new business into the target company. In this case, the plan was to use Falmac as the shell company for the reverse takeover. Divesting Falmac of all its debt-ridden and loss-making businesses (ie, the Tianjin subsidiaries) was thus part of the overall strategic restructuring of Falmac.

  44. [37] On 30 March 2009, Wong from BCS sent D2 five draft agreements via e-mail. Wong also sought D2’s cooperation in his e-mail. He wrote:

  45. [38] Wong’s first draft agreement was a Memorandum of Understanding (“MOU”) between Falmac and CNMC for the reverse takeover. Recitals D and E of the MOU state:

  46. [39] The second and third agreements were settlement agreements offered by BCS to D2 and Fei respectively in respect of certain sums owed to them by Falmac. With regards to Fei, the draft settlement agreement related to an outstanding shareholder’s loan. The draft settlement agreement between D2 and BCS was for salary arrears capped at S$1m and the settlement amount was to be paid upon completion of the reverse takeover. Notably, it was a condition of the proposed settlement with D2 that he, amongst other things, supported and procured the support of Fei to vote in favour of the reverse takeover. Unfortunately, these two draft agreements were never finalized and executed.

  47. [40] The fourth draft agreement was between BCS and a company called Tianjin Kanbo Machinery Ltd (“Tianjin Kanbo”) for the purchase of the Tianjin subsidiaries for a nominal fee of S$1. The name “Tianjin Kanbo” as appears in the draft was provided by D2 to Choo in an e-mail of 25 March 2009. In that e-mail, D2 informed Choo of Tianjin Kanbo’s interest to buy the Tianjin subsidiaries at S$1, and that a Hong Kong company by the name of “Superway Logistics Limited” would pay S$100,000 for half of the six banks’ loan to Falmac. In the same e-mail, D2 requested Choo to pass on this information to Wong who had called him earlier that morning for the names.

  48. [41] The fifth draft agreement related to a proposed sale of certain loans that BCS had earlier acquired from the creditor banks of Falmac. The name “Superway Logistics Limited” appears in the fifth draft.

  49. [42] In the interim period while administrative steps were being taken for the reverse takeover, Choo and BCS provided financial support to Falmac. For instance, Choo advanced loans to Falmac to settle salaries and CPF contributions for Falmac’s employees. Choo also engaged an independent firm, Bizcorp Management Pte Ltd (“Bizcorp”) to take over Falmac’s financial reporting functions after the resignation of Falmac’s finance personnel in late 2008. Due to these changes and other difficulties in preparing financial statements, Falmac had sought and obtained extensions of time to announce its 2008 financial results and hold its 2009 Annual General Meeting (“AGM”). Bizcorp was thus in charge of preparing Falmac’s 2008 management accounts for the AGM.

  50. [43] The relationship between D2, Choo and Wong appeared to have deteriorated after D2 refused to sign off on the 2008 management accounts (“2008 accounts”) prepared by Bizcorp. As a result, the AGM could not be held by the required deadline (ie, 31 July 2009).

  51. [44] As stated, the defendant resigned as CEO of Falmac with immediate effect on 20 July 2009. On 30 July 2009, the three independent directors on the former board also resigned from their positions. This left D2 and Fei as the only two members on Falmac’s board of directors.

  52. [45] After his resignation, D2 purportedly made some statements that appeared in an article published by The Edge Singapore magazine (“The Edge”) on 17 August 2009. The article contained statements relating to “accounting irregularities” and “false accounting” within Falmac. A trading halt on Falmac’s shares was called that same day. The next day, SGX-ST reprimanded Falmac for lack of public disclosure in breach of the Listing Rules (the “Listing Rules”), and asked Falmac to clarify the purported accounting irregularities. On 21 August 2009, trading of Falmac’s shares was suspended, allegedly causing negotiations on the proposed reverse takeover to come to a temporary standstill.

  53. New board of directors

  54. [46] D2’s refusal to sign the 2008 accounts provoked Choo and Wong into removing D2 as a director. On 5 August 2009, BCS requisitioned an Extraordinary General Meeting (“EOGM”) to remove D2 and Fei as directors of Falmac and appoint a new board of directors.

  55. [47] As a point of reference, the trading halt and suspension (on 21 August 2009) occurred in the interim period between the requisition for the EOGM and the subsequent election of the new board on 5 October 2009.

  56. [48] Initially, the EOGM was fixed for 28 September 2009. However, on 4 September 2009, D2 and Fei passed a resolution appointing the firm of M/s Bih Li & Lee to apply for an injunction on behalf of Falmac to stop the convening of the EOGM (“the Bih Li & Lee resolution”). D2 and Fei’s attempt to completely stop the EOGM failed. D2 and Fei merely secured a postponement of the EOGM for one week to 5 October 2009. At the EOGM held on 5 October 2009, D2 and Fei were removed as directors of Falmac and a new board of directors was constituted. The board members comprised Choo, Wong, Yeoh and Kuan Cheng Tuck (“Kuan”) (hereafter collectively referred to as “the new board”).

  57. The first tranche of the trial

  58. [49] After the new board was appointed on 5 October 2009, Falmac brought the present suit against the former board on 30 October 2009, alleging a host of breaches of director’s duties such as the failure to convene Falmac’s Annual General Meeting (“AGM”) and present the financial statements within the required deadlines. Falmac also alleged that D2 in particular was in breach of fiduciary duties owed to Falmac by, inter alia, failing to renew his employment pass and making unwarranted statements about Falmac in The Edge.

  59. [50] On 8 September 2010, Falmac amended its Statement of Claim to include allegations that D2 had unlawfully changed the legal representative of the Tianjin subsidiaries, which resulted in the loss of control of the Tianjin subsidiaries. It was alleged that D2 had resigned as the legal representative of the Tianjin subsidiaries in favour of one Leon Zhao whose appointment was on 1 September 2009. The Chinese authorities approved the change of legal representative to Leon Zhao on 13 October 2009. According to Falmac, Choo and Kuan were denied access and could not gain entry to the Tianjin factories to retrieve the accounting and financial records of the Tianjin subsidiaries. Consequently, the accounts of the Tianjin subsidiaries for the financial year ended 31 December 2009 were not audited, thereby hampering Falmac’s preparation of its own consolidated financial statements for the same financial year. It was also Falmac’s case that the loss of effective control of the Tianjin subsidiaries caused the company to write off the entire value of the Tianjin subsidiaries in Falmac’s 2009 financial statements.

  60. [51] It is pertinent to note that on 1 December 2009, Falmac passed two shareholder’s resolutions removing Leon Zhao as the legal representative of the Tianjin subsidiaries in favour of one Pua Yeow Seng who is the brother of Pua Yeow Chuan (“PYC”), a witness for Falmac at the trial. PYC is the owner of Unitex Global Limited (“Unitex”) with whom Falmac signed a sale and purchase agreement for the disposal of Falmac’s shareholding in the Tianjin subsidiaries on 11 July 2011 (see [127] below).

  61. [52] On 29 October 2010, Falmac commenced legal proceedings in China against D2 and Leon Zhao, seeking to invalidate the change of legal representative of the Tianjin subsidiaries. On 5 November 2010, the Tianjin subsidiaries filed civil indictments against Leon Zhao for the return of the company seals, business licences and other documents. However, all the legal proceedings in China were withdrawn on 3 December 2010.

  62. [53] The first tranche of the trial, which took place in July 2011, was thus advanced on the basis that Leon Zhao was D2’s nominee and that D2 was unlawfully controlling the Tianjin subsidiaries to the exclusion of Falmac.

  63. The second tranche of the trial

  64. [54] Before the second tranche of the trial, Falmac amended its case again, alleging that D2 had breached his fiduciary duties by reason of the transfer of Falmac’s shares in the Tianjin subsidiaries to Sino Vision without the approval of the shareholders of Falmac (ie, the s 160 complaint). Furthermore, Falmac pleaded that D2 was in breach of his fiduciary duty for failing to disclose the transfer to the shareholders of Falmac (“the non-disclosure argument”).

  65. [55] This non-disclosure argument is a non-starter. On Falmac’s own case, the organ of the company to which disclosure of the transfer should have been made was the shareholders. It is settled law that a director owes fiduciary duties to his company, not to the shareholders (see Walter Woon on Company Law (Tan Cheng Han SC gen ed) (Sweet & Maxwell, 2009) at para 8.127 (“Walter Woon”)).

  66. [56] Returning to the narrative, D2 explained that on 9 July 2009, the former board had passed a resolution to transfer the entire equity in the Tianjin subsidiaries to Sino Vision by way of converting debts for shares in the Tianjin subsidiaries. It is significant that Falmac is not challenging this resolution. Its case is simply that shareholders’ approval must be sought, and no such approval was obtained.

  67. [57] According to D2, Leon Zhao was a director of Tianjin Kanbo and he was its representative in the negotiations with D2 in July 2009. Subsequently, Tianjin Kanbo used Sino Vision as the contracting party because of the debts the latter entity had acquired from the creditors of the Tianjin subsidiaries. Pursuant to the resolution of 9 July 2009, Falmac entered into two separate Equity Transfer Agreements (“the Equity Agreements”) on 30 July 2009 with Sino Vision to transfer Falmac’s shares in the Tianjin subsidiaries to Sino Vision. The Equity Agreements were signed on behalf of Falmac by Wei Ying, one of the independent directors on the former board (presumably before her resignation). D2 accepted that the Equity Agreements were subject to formal approval of shareholders, and that insofar as shareholders’ approval was concerned, it was not for him to follow up on the formalities in the Equity Agreements as he was no longer with Falmac as of 5 October 2009.

  68. [58] As proof of the completion of the share transfer in the absence of shareholders’ approval, Falmac produced documents ostensibly from the Commercial and Industrial Bureau of Tianjin, the authenticity of which was disputed by D2.

  69. The parties’ claims

  70. [59] Falmac alleged numerous breaches of fiduciary duty on the part of D2, and they are grouped under the following categories:

  71. (1) Failure to comply with various provisions of the Companies Act and the Listing Rules relating to the convening of an AGM and the preparation of financial statements;

  72. (2) Failure to comply with the provisions of the Companies Act and the Listing Rules relating to directors of Falmac;

  73. (3) Non-disclosure to SGX-ST of a Chinese judgment against Falmac Machinery;

  74. (4) Passing of the resolution on 4 September 2009 to appoint Bih Li & Lee to act for Falmac without the consent or approval of Falmac;

  75. (5) Disclosure of information to The Edge which resulted in the suspension of Falmac’s shares;

  76. (6) Causing Falmac to lose control and ownership over the Tianjin subsidiaries; and

  77. (7) Transfer of Falmac’s shareholding in Tianjin subsidiaries to Sino Vision without shareholders’ approval.

  78. [60] Conversely, D2 averred that he had at all times complied with his duties as a director to Falmac. In addition, D2 brought a counterclaim for salary arrears and other sums owed under his employment contract with Falmac.

  79. [61] It should be noted at the outset that the Companies Act and the Listing Rules apply here, as this case primarily concerns the relationship between a Singapore-incorporated company listed on the SGX-ST and its former board of directors. This is notwithstanding the fact that certain underlying contracts were governed by Chinese law, or that some of the parties involved were foreign nationals.

  80. [62] It is trite law that every director owes certain duties as a fiduciary to his company. As Millet LJ explained in Bristol and West Building Society v Mothew [1998] 1 Ch 1 at 18:

  81. [63] In addition to these general duties are the specific duties imposed on directors by statute. Under s 157(1) of the Companies Act, a director has the duty to “act honestly and use reasonable diligence in the discharge of the duties of his office”. The duty to act honestly has been interpreted as referring to the common law duty of a director to act bona fide in the interests of the company (see Lim Weng Kee v Public Prosecutor [2002] 2 SLR(R) 848 (“Lim Weng Kee” at [32]).

  82. [64] The Court of Appeal in Townsing Henry George v Jenton Overseas Investment Pte Ltd (in liquidation) [2007] 2 SLR (R) 597 (“Townsing”) held that s 157 (1) duty to act honestly in discharge of his duties as a director is equivalent to the common law duty to act bona fide, and that the duty of honesty and duty to act bona fide may be regarded as a composite obligation. The two duties “impose a unitary obligation to act bona fide in the interests of the company in the performance of the functions attaching to the office of director” (Townsing at [59]).

  83. [65] The duty to exercise reasonable diligence also encompasses the duties of care and skill (Walter Woon at para 8.13). The relevant standard of care and diligence is objective, ie, whether the director has exercised the same degree of care and diligence as a reasonable director found in his position, and may be raised if the director possesses some special knowledge or experience (see Lim Weng Kee at [28]).

  84. [66] Other specific duties imposed on directors by statute include the requirements to make and retain adequate financial records.

  85. [67] Notably, a breach of a director’s statutory duty, which may well give rise to certain consequences under statute, does not ipso facto result in a breach of fiduciary duty. Persistent failure to comply with obligations as regards the filing of accounts and returns may amount to unfitness to hold appointment as a director under s 155 of the Companies Act. Such failures, however, need not involve any dishonest intent; nor would such conduct constitute a breach of fiduciary duty. Thus, it is necessary to have in mind that in order for a particular act or omission to constitute a breach of fiduciary duty, it must fall within the various obligations of a fiduciary that reflect the core duty of loyalty recognised at common law, or the duties that fall within the scope of director’s duties as defined under s 157 of the Companies Act.

  86. [68] In reviewing the conduct of a director in relation to decisions of a business and commercial nature, the court does not substitute its own judgment for that of the directors. As stated in ECRC Land Pte Ltd v Ho Wing On Christopher [2004] 1 SLR(R) 105 at [49]:

  87. [69] With the legal framework in mind, I now turn to consider the various allegations against D2.

  88. Outline of discussion

  89. [70] It is plain from the way Falmac developed its case that many of the alleged breaches of fiduciary duty that kicked off the litigation on 30 October 2009 were ill-conceived, and the company in its Closing Submissions continued to pursue them even though there was no related monetary loss to the company. These alleged breaches are those grouped under the first four categories (items (1) to (4)) in [59] above (hereafter collectively referred to as “the secondary claims”). I propose to deal with these secondary claims later.

  90. [71] This judgment will first discuss the main areas of dispute based on the development of the case each time the pleadings were amended by Falmac. The main areas of dispute are:

  91. (1) The suspension of trading in August 2009; and

  92. (2) Loss of the Tianjin subsidiaries by reason of:

  93. (i) The unauthorised legal representative argument; and

  94. (ii) The s 160 complaint.

  95. Suspension of trading in August 2009

  96. [72] The Edge published an article on 17 August 2009 containing certain controversial statements apparently made by D2. The relevant portion from the article is set out below:

  97. [73] This article resulted in a trading halt that was followed by a suspension of Falmac’s shares three days later. The trading halt was called on Falmac’s shares on 17 August 2009; the next day, the SGX-ST asked Falmac to make an announcement to clarify the statements made in the article. D2 responded on 19 August 2009. On 21 August 2009, trading of Falmac’s shares was suspended, as there was a limit of three days for a trading halt. After the suspension, D2 responded to the SGX-ST and later sent a draft announcement to the SGX-ST to clarify his comments in the article on 23 August 2009. The draft announcement prepared by D2 was not satisfactory and SGX-ST asked Choo to assist on 28 August 2009. After D2 was removed as director, the new board provided the clarification sought by SGX-ST on 7 January 2010. Wong confirmed that SGX-ST was finally satisfied with Falmac’s explanation as there was no further inquiry thereafter.

  98. [74] It is noteworthy that when the Writ of Summons was filed on 30 October 2009, Falmac’s main grievance with D2, in reality, was the article itself that was published in The Edge. What D2 did was perceived by Wong to be a spiteful attempt to sabotage BCS and Choo’s reverse takeover. It was seen as D2’s way of retaliating against BCS who had requisitioned for an EOGM to remove D2 as a director. The concern then was that the suspension could jeopardise the reverse takeover. As such, Falmac’s pleaded case concentrated on the suspension in the following terms:

  99. [75] Although the new board’s clarification on 7 January 2010 was accepted by SGX-ST, trading of Falmac’s shares remained suspended. It is important to note that the suspension continued for different reasons. Simply put, although the article in The Edge was the spark that triggered Falmac’s trading suspension, it was not the factor that eventually brought about Falmac’s de-listing on 22 August 2011.

  100. [76] I start with the requirement to submit a resumption proposal to lift the suspension after SGX-ST accepted Falmac’s explanation of the matters reported in The Edge. Pursuant to Rule 1304(1) of the Listing Rules, Falmac was required to submit a resumption proposal to SGX-ST to resume trading of Falmac’s shares within 12 months of the date of suspension, ie, by 21 August 2010. During the period of suspension, however, Wong and Choo still worked towards accomplishing the reverse takeover. As an illustration, Falmac announced on 9 March 2010 the execution of the contract with CNMC to acquire all the shares in CNMC on 8 March 2010 (“the CNMC contract”). Subsequently, on 24 December 2010, Falmac announced the agreement of Falmac and CNMC to extend the Long-Stop Date under the CNMC contract from 31 December 2010 to 31 March 2011 with a further option to extend the Long-Stop Date by another three months to 30 June 2011.

  101. [77] Falmac needed time to complete the due diligence exercise for the reverse takeover by CNMC. This included geological survey reports and the audit of CNMC’s financial statements. Hence, on 22 December 2009, Falmac applied for time extension until 30 April 2011 to submit the resumption proposal as it could not submit a resumption proposal by the original deadline of 21 August 2010.

  102. [79] On 28 April 2011, Falmac submitted its resumption proposal in relation to the CNMC contract to acquire 100% of the share capital of CNMC to SGX-ST. Unfortunately, Falmac’s resumption proposal was not acceptable to SGX-ST. As a result, SGX-ST duly de-listed Falmac on 22 August 2011.

  103. [80] In these circumstances, the delays in getting the suspension lifted were not due to D2. There was clearly no causal link between the trading suspension arising from the article in The Edge and the factors that led to eventual de-listing on 22 August 2011.

  104. [81] It is now convenient to look at Wong’s explanation in cross-examination regarding the resumption of trading proposal:

  105. [82] Wong also explained the difficulty faced in justifying to SGX-ST the viability of the resumption proposal (that was later rejected and resulted in Falmac’s de-listing):

  106. [83] For the reasons above, there is no merit in Falmac’s contention that D2 was responsible on account of the article in The Edge for Falmac’s diminished reputation and value as a result of the trading suspension.

  107. Loss of the Tianjin subsidiaries

  108. Observations

  109. [84] The Statement of Claim was amended on 8 September 2010 (ie, Statement of Claim (Amendment No 1)) to introduce another cause of action. By this amendment, Falmac claimed that it lost control of the Tianjin factories due to D2’s unlawful change of the legal representative of the Tianjin subsidiaries to his nominee, Leon Zhao. It was argued that D2 continued to control the Tianjin subsidiaries as their de facto legal representative.

  110. [85] The material facts must be borne in mind in assessing the veracity of this plea. Based on the documentary evidence, the new board was aware of Leon Zhao’s appointment at least since 1 December 2009 but did not amend the Statement of Claim until 9 months later. On 1 December 2009, Falmac as the 100% shareholder of the two Tianjin subsidiaries passed two resolutions removing Leon Zhao as the legal representative of the Tianjin subsidiaries in favour of Pua Yeow Seng. On 20 March 2010, Falmac announced in the Straits Times that the appointment of Leon Zhao was unauthorised.

  111. [86] Falmac raised no objection or protest to D2 that Choo and Kuan had been denied access to the Tianjian factories on 20 October 2009. Apparently, no subsequent attempts were made to visit the Tianjin factories. In fact, Falmac filed the amendments on 8 September 2010 even before Falmac sued D2 and Leon Zhao in China on 29 October 2010 and before the Tianjin subsidiaries sued Leon Zhao for the return of the company seals and business licences on 5 November 2010.

  112. [87] Falmac claimed that it lost effective control of the Tianjin subsidiaries by reason of the unauthorised change of the legal representative, and denial of access to the Tianjin subsidiaries including D2’s refusal to return the company seals and business licences. Therefore, Falmac’s aggregate loss which is based on the net assets of the Tianjin subsidiaries is RMB 47,435,365. 92 (for ease of reference and reading, this figure is rounded down to RMB 47m in this Judgment).

  113. [88] There was a further amendment to the Statement of Claim in November 2011 (ie, Statement of Claim Amendment No 2)) such that by the second tranche of the trial, Falmac was claiming that D2 had transferred Falmac’s shares in the Tianjin subsidiaries to Sino Vision in breach of s 160 of the Companies Act and in breach of his fiduciary duties owed to Falmac (ie, the s 160 complaint). Section 160 of the Companies Act read as follows:

  114. [89] I commented on the state of the pleadings after Falmac’s last amendment in November 2011 in [13] above. It must again be remembered that there is no averment of a causal link between the two complaints, namely the unauthorised appointment of Leon Zhao as legal representative of the Tianjin subsidiaries on 1 September 2009 and the s 160 complaint. Notably, it is not Falmac’s pleaded case that D2 has an interest in Sino Vision and that he continues to have de facto control of the Tianjin subsidiaries through Sino Vision and Leon Zhao.

  115. Analysis

  116. [90] Falmac contended that the change of legal representative was unlawful, and that it was D2’s way of controlling the Tianjin subsidiaries even after his departure from Falmac. Falmac’s pleaded case is that the change of legal representative was effected without the approval and knowledge of the Falmac’s board of directors and/or shareholders. It is worth noting that it was only in the Reply and Defence to Counterclaim (Amendment No 2) that Falmac asserted that Leon Zhao was D2’s nominee, that D2 appointed Leon Zhao as the legal representative in order to gain control of the Tianjin subsidiaries, and that D2 was the de facto legal representative of the Tianjin subsidiaries.

  117. [91] Mr Quek in his Closing Submissions referred to the respective Articles of Association of the Tianjin subsidiaries, which prescribed that approval of a change of legal representative must be given by the shareholders. In this case, it was Falmac who had to give the approval but contrary to D2’s assertion, there was no board resolution from Falmac to this effect. Mr Quek relied on the evidence of Dorothy Ho, the company secretary, who testified that she had not seen such a board resolution.

  118. [92] Mr Quek relied on several matters to prove that D2 remained in control of the Tianjin subsidiaries as de facto legal representative after 1 September 2009. They are as follows:

  119. (1) Absence of knowledge on the part of Falmac as to who Leon Zhao was. Moreover, Leon Zhao had never reported to Falmac since his appointment as legal representative.

  120. (2) Falmac was unable to change the legal representative from Leon Zhao to Falmac’s authorised representative, Pua Yeow Seng, because it did not have the company seals and business licences. D2 did not return these items to Falmac following his departure from the company.

  121. (3) On the instructions of D2, Choo and Kuan were prevented from gaining access to the Tianjin factories on 20 October 2009.

  122. (4) D2 was seen at a trade exhibition held in Shanghai on 14 June 2011. The Tianjin subsidiaries had a booth at this exhibition, and D2 was introduced to PYC of Unitex as the boss of the Tianjin subsidiaries.

  123. [93] First of all, the plea that Leon Zhao was D2’s nominee whom he used in order to gain control of the Tianjin subsidiaries to Falmac’s detriment is essentially a charge of dishonesty. As stated by the Court of Appeal in Townsing at [60], a director’s duty of honesty (or the duty to act in good faith) is a facet of a fiduciary’s core duty of loyalty. In its Closing Submissions, Falmac maintains that D2 changed the legal representative to Leon Zhao “in order to keep [the Tianjin subsidiaries] out of the reach of [Falmac] whilst he still remains in control of the said subsidiaries through Leon Zhao.”

  124. [94] In the context of pleadings involving fraud and dishonesty, the following observations of Millet LJ in Paragon Finance Plc v BB Thakerar [1999] 1 All ER 400 (at 407) are apposite here:

  125. [95] The plea that Leon Zhao was D2’s nominee was premised on the assertion that Leon Zhao was a stranger to the new board. Such a plea is not enough to satisfy the rules of pleadings elucidated above. There must be something about the appointment of Leon Zhao, some conduct which is dishonest before a breach of fiduciary duty of good faith can be established.

  126. [96] It is pertinent to note that dishonesty as director was not put to D2 in cross-examination nor specifically alleged against D2 in pleadings. Like fraud, dishonesty must be distinctly alleged and proved, and it is not permissible for a charge of dishonesty to be inferred from the pleaded facts alleged against D2 (ie, to be inferred from the pleaded facts such as Leon Zhao was a stranger, that D2 acted without Falmac’s consent or knowledge and that the change of legal representative was done surreptitiously).

  127. [97] In addition, there is the principle that the more serious the allegation, the more cogent the evidence required must be to prove dishonesty, even on the balance of probabilities. In assessing the evidence, I bore in mind this principle.

  128. [98] Wong’s evidence is that Leon Zhao never contacted Falmac. Zhang Shuren (“Zhang”), the former General Manager of Falmac Machinery, said that whilst he was still employed by Falmac Machinery, he never saw Leon Zhao. On the other hand, D2 denies any involvement or interest whatsoever in the Tianjin subsidiaries. D2’s evidence is that Leon Zhao was Fei’s choice as legal representative. According to D2, Leon Zhao was a director of Tianjin Kanbo. D2 was not particularly challenged on this aspect of his testimony. Moreover, I was not persuaded that Choo, who had previously spoken to Fei, had actually checked this important matter with Fei. Choo claimed to have asked Fei who Leon Zhao was but could not remember Fei’s answer because it was not clear. If as Choo reasoned that the identity of Leon Zhao was an obvious point to raise with Fei, and that upon checking Fei did not give him a clear answer, the natural thing to do was to press for a comprehensible answer. This was not done.

  129. [99] In my view, Falmac has not established on the evidence that the appointment of Leon Zhao as the legal representative of the Tianjin subsidiaries was unlawful. As of 1 September 2009, only D2 and Fei were the remaining board members of Falmac; both had approved Leon Zhao’s appointment. I have earlier mentioned D2’s evidence that it was Fei who had chosen Leon Zhao as the legal representative (see [98] above). During cross-examination, Wong conceded that the change of legal representative from D2 to Leon Zhao was approved by Falmac’s former board of directors.

  130. [100] Having regard to the fact that the change of legal representative took place during the incumbency of the former board, it is not surprising that Falmac’s pleaded case is that D2 was in breach of fiduciary duty for not informing the shareholders of the change of legal representative (see [7] above). This plea is a non-starter seeing that directors of a company generally do not owe any fiduciary duties to the shareholders (see Walter Woon at para 8.127).

  131. [101] I noticed that with the exception of D2, the board members of the Tianjin subsidiaries were apparently different from the former board. Although the minutes of the former board’s resolution had not been discovered, the minutes of the resolutions passed by the board members of the Tianjin subsidiaries together with Falmac’s letters of appointment (signed by D2) approving the appointment of Leon Zhao were disclosed. Notably, Falmac accepted the authenticity of the minutes of the board resolutions of the Tianjin subsidiaries that approved Leon Zhao’s appointment as legal representative of the Tianjin subsidiaries as well as the authenticity of Falmac’s letters of appointment approving the appointment of Leon Zhao. All these documents were put together in an Agreed Bundle of documents whereby authenticity of the documents was accepted by consent but not the contents thereof. See generally Goh Ya Tian v Tan Song Gou and others [1981]-[1982] SLR(R) 193 on meaning and effect of agreed bundles of documents at trial. The appointment of Leon Zhao was approved by the Commerce Commission of Ninghe. Again, Falmac accepted the authenticity of the Commerce Commission’s certificate in the Agreed Bundle.

  132. [102] Falmac’s case is that the change of legal representative was to pre-empt the removal of D2 as a director of Falmac. Mr Quek pointed to the timing of the change of legal representative which took place immediately after BCS requisitioned for the EOGM on 5 October 2009 to remove D2 and Fei as directors of Falmac. It is unclear how this contention assists Falmac. If D2 had wanted to retain control of the Tianjin subsidiaries, there was really no need for D2 to relinquish his position as legal representative to Leon Zhao. The loss of directorship in the holding company, Falmac, would not have any practical effect on his status as legal representative seeing that: (a) the board members of the Tianjin subsidiaries were different from the former board save for D2, (b) D2 was a board member of the Tianjin subsidiaries, and (c) on Falmac’s own case, D2 retained the company seals and business licences of the Tianjin subsidiaries.

  133. [103] There is evidence that D2 advised Falmac’s external auditors in Singapore that he had stepped down as Chairman of the Tianjin subsidiaries and held no other appointment. In an e-mail dated 19 October 2009 to Celine Lim, the manager of Falmac’s external auditors (who had earlier written to D2 for information on 15 October 2009), D2 wrote:

  134. [104] Falmac was aware of Leon Zhao’s appointment before 1 December 2009. But Falmac only announced that D2 had changed the legal representative without the approval of Falmac on 9 March 2010. It also made the same announcement in the Straits Times on 20 March 2010. Wong admitted that the new board never wrote to D2 objecting to Leon Zhao’s appointment.

  135. [105] Mr Singh, acting for D2, drew the court’s attention to Falmac’s misleading evidence. The impression Falmac wanted to give the court was that it had tried to get back the Tianjin subsidiaries but was unsuccessful. This impression was untrue. First, the civil indictments in China were not even served against D2 and Leon Zhao. The inability to serve the civil indictment on D2 to invalidate Leon Zhao’s appointment had nothing to do with D2 evading service, as Falmac led the court to believe. D2 had given to the company secretary his residential address in Shanghai which was the same address Wong used to communicate with D2 on 29 October 2009 to advise him of his removal as legal representative of the Tianjin subsidiaries. However, Falmac did not give D2’s residential address in Shanghai to its lawyers in China from Tianjin Yidao Law Firm. This was confirmed by the witness, Liu Yan, a lawyer from Tianjin Yidao Law Firm. Second, while the civil indictment against Leon Zhao was for the return of the common seals, no such claim was made against D2. Third, no police report was made in China that the Tianjin factories were wrongfully taken by Leon Zhao or D2 as Wong admitted in cross-examination.

  136. [106] In my view, Falmac’s overall evidence lacked probative value such that Falmac had not discharged its legal and evidential burden of proving that Leon Zhao was D2’s nominee, that the use of a nominee was to disguise D2’s de facto control of the Tianjin subsidiaries, or that D2 had deliberately misled the Commerce Commission of Ninghe to believe that D2 had resigned as legal representative when he knew or must have known that this was false.

  137. (2) Denial of access to the Tianjin factories and loss of effective control of the same

  138. [107] Falmac’s case was essentially that D2 had prevented Choo and Kuan from gaining access to the Tianjin factories (see [6] above). Falmac’s version of events was as follows. On 20 October 2009, Choo and Kuan made a trip to China to visit the Tianjin factories and to obtain the financial records of the Tianjin subsidiaries in order to prepare Falmac’s consolidated financial statements. Choo and Kuan first visited the Falmac Textile factory but were denied access by the security guard at the entrance. Having no choice but to leave, Choo and Kuan then proceeded to visit the nearby Falmac Machinery factory, whereupon they were attended by the factory’s then General Manager, Zhang, who allowed Choo and Kuan into the factory but he later instructed them to leave after receiving a telephone call from D2 who directed Zhang to ask them to leave immediately.

  139. [108] D2 rejected Falmac’s version of events. D2 contended that he did not prevent or exclude Falmac’s Choo or Kuan from the Tianjin factories. D2 also challenged the sufficiency and reliability of the evidence of Falmac’s witnesses, in particular Zhang’s evidence.

  140. [109] Dealing first with the Falmac Textile factory, I was of the view that Falmac had not made out its claim. On the evidence of Falmac’s own witnesses, there was nothing to link the events of 20 October 2009 at the Falmac Textile factory to D2. Rather, the evidence suggested that at the time of the visit, the factory had been locked up by a creditor bank after Falmac Textile defaulted on a loan. I refer to the minutes of the meeting held by Falmac’s new board of directors on 14 December 2009 wherein Choo informed the new board as follows:

  141. [110] To clarify, Avenue Asia Mauritius Ltd had obtained judgment against Falmac Machinery in June 2009, and D2 had informed the company secretary of this judgment on 21 and 26 July 2009.

  142. [111] A SGX announcement on 11 July 2011 by the new board on the proposed divestment of the Tianjin subsidiaries contained the following statement:

  143. [112] While the evidence was unclear as to the exact date of the foreclosure, this must have been soon after 31 December 2008. As such, it was likely that Falmac’s alleged loss of control of the Falmac Textile factory was due to the Agricultural Bank of China’s seizure of the property, rather than D2’s actions.

  144. [113] As for the Falmac Machinery factory, there was conflicting evidence on whether Choo and Kuan were denied access to the Falmac Machinery factory on D2’s instructions. Zhang gave evidence that D2 had telephoned him soon after Choo and Kuan had entered the factory, instructing him to ask them to leave immediately. According to Zhang, because of this, he was fired by D2 the next day because he allowed Choo and Kuan to enter the factory. On the other hand, D2 flatly denied these allegations at trial. D2 explained that Zhang was dismissed on the ground of conflict of interest involving his wife’s business.

  145. [114] D2 argued that Zhang was not an independent witness because he was being paid by Falmac to give evidence. After Zhang ceased to work for Tianjin Machinery, Falmac employed Zhang as a “representative for China” from late October 2009 to August 2011. Apparently, Zhang’s job was to assist with Falmac’s lawsuits in China. However, in cross-examination, Choo and Zhang seemed to agree with counsel for D2 that Zhang was also engaged to give evidence in the present proceedings in Singapore. Choo’s explanation in cross-examination was as follows:

  146. [115] Zhang’s evidence in cross-examination was similar:

  147. While I would not go so far as to conclude that Zhang’s evidence was entirely fabricated, it was nevertheless unsafe to rely solely on his evidence that it was D2 who had denied Choo and Kuan access to the Falmac Machinery factory. The need to exercise caution stems from my observation that despite the incident, Falmac did not protest at any time after the visit. The incident was not given any prominence and significance until Falmac amended its pleadings on 8 September 2010. Furthermore, now that the reverse takeover had failed, the tendency to point the finger of blame at others is conceivable. In any case, the incident at the Falmac Machinery factory is now a secondary issue as the crux of Falmac’s case on the Tianjin subsidiaries seems to be the s 160 complaint - that D2 had caused Falmac’s shareholding in the Tianjin subsidiaries to be transferred to a third party without the approval of shareholders.

  148. [116] Before I move on to deal with the s 160 complaint, there is the matter of PYC’s evidence. PYC was Falmac’s witness. He was called to testify that D2 was still in control of the Tianjin subsidiaries as late as 14 June 2011 (see [92 (4)] above). PYC was at a Shanghai trade exhibition on 14 June 2011 and he met D2 there. He testified that the Tianjin subsidiaries were participants and had set up a booth at the trade exhibition. PYC was introduced to D2 by one Wu Qin Piao who referred to D2 as the “boss” of the Tianjin subsidiaries. Falmac also relied on D2’s name that was handwritten on the back of the business card of the General Manager of the Tianjin subsidiaries. PYC got the card from his customer who enquired of the General Manager as to the owner of the Tianjin subsidiaries and he wrote down D2’s name on the back of his name card. D2 has refuted PYC’s evidence in his second Affidavit of Evidence-in-Chief. First, he denies “any involvement or interest whatsoever, whether as shareholder or director or legal representative or employee, in Falmac Machinery (Tianjin) Ltd and/or Falmac Textile (Tianjin) Co Ltd.” Second, he denies meeting or talking to PYC. He said that he was at the exhibition to meet his former colleagues who had earlier told him that they would be in Shanghai for the exhibition. In my view, PYC’s evidence is hearsay and has no evidential value. Even if PYC’s evidence is admissible, it is not relevant since it is not Falmac’s pleaded case that D2 has an interest in Sino Vision and controlled the Tianjin subsidiaries through Leon Zhao and Sino Vision.

  149. [117] There is another related plea in the form of a general assertion in paragraph 4(8) of the Statement of Claim (Amendment No 2) that D2 was under a duty to manage and deal with Falmac’s property in a trustee-like manner. It was stated that the loss of effective control of the Tianjin factories was due to D2’s breach of trust by reason of the unlawful appointment of Leon Zhao as legal representative. I make two points. First, this plea is premised on the appointment of Leon Zhao being unlawful. I have already explained that Falmac has not established this assertion (see [99] above). Second, the general assertion in paragraph 4(8) of the Statement of Claim (Amendment No 2) is simply unhelpful. A legal representative supposedly holds the company seals of the subsidiary, which owns the property (the Tianjin factories in this case). A holding company like Falmac is not the owner of the subsidiary’s assets. That being the law, no duty of trusteeship is applicable here (see Townsing at [57]).

  150. The s 160 complaint

  151. [118] Under s 160 of the Companies Act, the directors of a company are prohibited from carrying into effect any proposals for disposing of the whole or substantially the whole of the company’s undertaking or property unless those proposals have been approved by the company in general meeting. The issue here was whether the former board (D2 included) acted in breach of this provision in passing the board resolution to transfer the equity in the Tianjin subsidiaries to Sino Vision and signing the Equity Agreements without any shareholders’ approval. In the present action, Falmac is not disavowing the equity transfer to Sino Vision.

  152. [119] In the first place, it is worth noting that far from D2 acting purely of his own volition, the divestment of the Tianjin subsidiaries appears to have originated from Wong and Choo in relation to plans for the reverse takeover. In March 2009, before the new board had assumed its responsibilities, Wong, Choo and D2 were working towards the disposal of the Tianjin subsidiaries for a nominal sum of S$1 (see [40] above). I also refer to the various e-mails in [31] to [35] above. This activity was consistent with the reverse takeover plan whereby Falmac was to be restructured into a shell company.

  153. [120] One of the main points of contention regarding this issue was the admissibility and authenticity of documents known as “Basic Information of Foreign Investment Enterprise” (“the Basic Information documents”) lodged with the Commercial & Industrial Bureau of Tianjin, China (“the Tianjin Commercial Bureau”). Falmac introduced these documents to show that Sino Vision had become the registered shareholder of the Tianjin subsidiaries. The Basic Information documents, being copies of the originals, constituted secondary evidence and thus would only be admissible in evidence if falling within one of the exceptions in s 67(1) of the Evidence Act (Cap 97, 1997 Rev Ed) (“the EA”). Mr Quek submitted that the exception for public documents in s 67(1)(e) of the EA applied. The Basic Information documents were thus admissible under s 67(4) of the EA because they had been certified as true copies, as evidenced by the red seal of the Tianjin Commercial Bureau on the documents. On the other hand, Mr Singh submitted that the Basic Information documents were not certified copies within the meaning of s 78 of the EA, as there was neither a certification at the foot of the documents that they were true copies of the originals nor a date on the seal.

  154. [121] I agreed with Mr Singh that the Basic Information documents could not be produced as proof of the truth of the contents. Under s 64 read with s 66 of the EA, the general rule is that documents must be proved by primary evidence, ie, the document itself must be produced for the inspection of the court. The Basic Information documents did not constitute primary evidence and thus had to fall within the exceptions in s 67 of the EA, the “public document” exception in s 67(1)(e) being the most relevant exception. The Basic Information documents were public documents within the meaning of s 76 of the EA as they were records of public officers in a foreign country. Moreover, it appeared that they were documents intended for public reference (see Lim Weipin and another v Lim Boh Chuan and others [2010] 3 SLR 423 at [44]). However, as for the means of proof of such documents, the applicable provision is s 80(g) of the EA, rather than s 78. Section 80(g) of the EA provides that public documents in a foreign country may be proved in the following manner:

  155. [122] In this case, the Basic Information documents did not contain such a certification under the seal of a notary public or consular officer of Singapore and were thus not proved.

  156. [123] Be that as it may, Falmac’s Chinese lawyer from Tianjin Yidao Law Firm, Mr Xu Bo (“Mr Xu”), testified that he had attended at the Tianjin Commercial Bureau to inspect the original documents lodged there. Mr Xu is permitted to give an eye-witness account of what he saw (see s 65 (e) of the EA), but not secondary evidence as to the truth of the contents of the documents he inspected. For example, he is able to testify that he saw the name Sino Vision, that he saw the shares registered in the name of Sino Vision and that he saw the date 18 August 2011. (I accept the evidence that Sino Vision is the translation in English of the name of the company in Chinese.) However, he was not in a position to testify as to the truth of what he had seen.

  157. [124] Returning to the substantive complaint, I find that Falmac has not proven that D2 was in breach of s 160 of the Companies Act or in breach of fiduciary duty. I accept D2’s evidence that the Equity Agreements between Falmac and Sino Vision were conditional contracts. There were two separate Equity Agreements: one for each Tianjin subsidiary, although they were otherwise identical. Article 7 in both Equity Agreements provided as follows:

  158. [125] The effect of Article 7, in particular sub-clauses (1) and (2), was that the Equity Agreements were conditional on the approval of Falmac’s shareholders, amongst other things. The terms of the Equity Agreements indicate the parties’ understanding that the Equity Agreements were a provisional arrangement, pending the actual validation of the transfer by the relevant authorities and corporate organs of the parties involved. Article 7(1) provides a time frame of 12 months for the completion of “formalities to effect the transfer of the equity”. Article 7(2) gives some examples of such necessary formalities, including but not limited to a board resolution consenting to the transfer and completing the registration of changes in Falmac’s shareholding, etc. Logically speaking, such formalities would also include shareholder approval of the equity transfer as required by law, and this was confirmed by D2 in the witness stand. In other words, the Equity Agreements were expressed to take effect after formal approvals (including shareholders’ approval) have been obtained. This position was confirmed by D2’s testimony during the trial. This being the case, the Equity Agreements being conditional contracts did not evidence an effective disposal of the Tianjin subsidiaries by D2.

  159. [126] I now come to Mr Xu’s eye-witness testimony. He saw the date 18 August 2011 and the name of Sino Vision in Chinese. Assuming for the sake of argument that this date, 18 August 2011, was the registration of the shares, this would have been more than two years after the Equity Agreements were signed on 30 July 2009. It was envisaged in the Equity Agreements that the formalities would be attended to and completed within one year failing which the Equity Agreements would come to an end. Mr Singh surmised that since the date 18 August 2011 exceeds the stipulated period of one year, the only explanation is that the Equity Agreements were extended with the involvement of the new board.

  160. [127] I noted that the new board passed a resolution to divest the Tianjin subsidiaries on 14 December 2009 and the divestment was subject to shareholders’ approval. Despite claiming to have lost effective control of the Tianjin subsidiaries with the appointment of Leon Zhao, and the subsequent exclusion of Choo and Kuan from entering to the Tianjin factories, Falmac still treated the Tianjin subsidiaries as company assets. It went ahead with the divestment of the loss-making Tianjin subsidiaries, which was an integral part of the reverse takeover plan. Falmac signed a memorandum of understanding with Unitex on 21 May 2010 and a sale and purchase agreement with Unitex on 11 July 2011 (“the Unitex SPA”). Under the Unitex SPA, the aggregate sale consideration for 100% equity interest in the Tianjin subsidiaries was S$2. The Unitex SPA was conditional upon: (a) shareholders’ approval; (b) successful acquisition of the entire issued share capital of CNMC; and (c) resumption of trading of Falmac’s shares on Catalist. Under the Unitex SPA, the effective date of the transfer of the entire equity interest in the Tianjin subsidiaries from Falmac to Unitex was 11 July 2011 even though the actual transfer had not taken place. As Falmac did not have any business other than the Tianjin subsidiaries, it became a shell company which would be de-listed if it remained without any viable business.

  161. [128] After executing the Unitex SPA, the reverse takeover was eventually derailed. As it turned out, there were delays in resumption of trading. Falmac was de-listed on 22 August 2011 for the reason that Falmac had difficulties persuading SGX-ST to accept its resumption proposal submitted on 28 April 2011.

  162. [129] Despite admitting under oath on 18 July 2011 that the de-listing had to do with Falmac’s resumption proposal that involved CNMC, Wong (as Falmac’s Managing Director) disingenuously announced in the company’s Notification of Delisting Date sometime after the 22 August 2011 that the company had become a shell company with no business due to the inability of the company to access the Tianjin factories as a result of the change of legal representative by D2.

  163. [130] Furthermore, there was no issue of non-disclosure of the Equity Agreements to the new board in this case. The Equity Agreements were approved by the former board in July 2009. The new board took over on 5 October 2009. By the time the new board was appointed on 5 October 2009, D2 had himself been removed on the same date.

  164. [131] Notably, it is not Falmac’s case that the resolution passed by the former board in July 2009 was fraudulent or otherwise invalid. Neither is it Falmac’s case that there was a causal link between the unauthorised appointment of the legal representative argument and the s 160 complaint.

  165. [132] Anyhow, for the sake of argument, even if the appointment of Leon Zhao was misguided or negligent, this would not expose D2 to a charge of breach of fiduciary duty. As stated above, the various obligations of a fiduciary merely reflect different aspects of the core duty of loyalty. A breach of fiduciary obligation connotes disloyalty and beyond mere neglect. In any case, the court usually does not inquire into the merits of a management decision honestly arrived at (see [68] above). In this case, there were ostensibly management reasons for the former board to approve the Equity Agreements to avoid ligation, and seeing that Sino Vision would then take over and be responsible for the liabilities of the Tianjin subsidiaries.

  166. [133] Having regard to the matters discussed above, the overall conclusion reached in this Judgment is that Falmac has not proven its case against D2 under these two heads of complaints - the unauthorised legal representative argument and the s 160 complaint.

  167. The secondary claims against D2

  168. [134] I now come to other breaches of fiduciary duty alleged in respect of D2. I have referred to these complains as secondary claims (see [70] above). I have also explained in [16] that the declaratory relief that Falmac is seeking is superfluous. Although the action continued against D2, the secondary claims were alleged against all the directors. In my view, it is not enough to look at what happened in the company and to simply say that as all the directors are to be blamed D2 must therefore be in breach of directors’ duties.

  169. Non-compliance with rules on AGM and financial statements

  170. [135] Falmac alleged various breaches of the rules relating to the convening of an AGM and the presentation of financial statements, namely:

  171. (1) Failure to convene Falmac’s AGM for the year ending 31 December 2008 by the statutory deadline;

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