High Court · Decided 11 April 2011

Fong Wai Lyn Carolyn v Airtrust (Singapore) Pte Ltd and another

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[2011] SGHC 88Case no. Originating Summons No 505 of 2010 (Summons Nos 2592, 2593, 2619, 2620 and 5602 of 2010)

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Laws this judgment relies on

Companies Act 1967

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Judith Prakash J:
Introduction
[1] On 24 May 2010, the plaintiff filed Originating Summons No 505 of 2010 (“the Leave Application”), seeking leave to bring an action in the name of and on behalf of the first defendant against the second defendant pursuant to s 216A of the Companies Act (Cap 50, 2006 Rev Ed) (“the Act”). The plaintiff claimed that the second defendant had breached the fiduciary duties which she owed to the first defendant as a director. On the same day, the plaintiff filed Summons Nos 2277 and 2278 of 2010 seeking ex parte freezing and search orders (collectively, “the ex parte orders”) against both defendants. On 26 May 2010, I granted the ex parte orders. The court papers and the relevant orders were served on the defendants on 27 May 2010. The defendants then filed various applications to wit Summons Nos 2592, 2593, 2619 and 2620 of 2010 to set aside the ex parte orders (collectively, “the Setting Aside Applications”). The defendants argued that there had been material failure by the plaintiff to make full disclosure in her ex parte applications and there was no real possibility or risk that the defendants would destroy relevant evidence or dissipate assets.
[2] The Leave Application and the Setting Aside Applications were heard together. On 30 November 2010, I allowed the Leave Application in part and also allowed the Setting Aside Applications. The plaintiff subsequently applied for an Erinford injunction but I dismissed her application on 2 December 2010. None of the parties was wholly satisfied with my decisions and they have lodged four appeals in total against the same.
Background and parties
[3] The first defendant, Airtrust (Singapore) Pte Limited (“AT” or “the company”), is a company doing business in the power, oil and gas industry. During the material period, its primary business was pipe trading with parties in Indonesia and the People’s Republic of China. AT’s operations were conducted through various subsidiaries collectively known as the “Airtrust Group of Companies”. The second defendant, Ms Linda Kao Chai-Chau (“Ms Kao”), has been AT’s managing director since 1996. She is also a registered shareholder of the company holding 13.6% of AT’s issued share capital. The plaintiff, Ms Carolyn Fong Wai Lyn (“Ms Fong”), was the eldest daughter of AT’s founder Peter Fong (“Peter Fong”) and his first wife. Ms Fong is also a non-executive director and a shareholder of AT. There was no dispute that Peter Fong had been AT’s controlling mind and will until his death in 2008.
[4] At the time this action started, the other directors of AT were Evelyn Ho, Dennis Atkinson, Anthony Stiefel and Chia Quee Khee. Anthony Stiefel was Ms Fong’s nominee and was allied with her while Evelyn Ho had worked closely with Ms Kao for many years.
[5] In the Leave Application, Ms Fong alleged that Ms Kao had committed several breaches of her fiduciary duties owed to AT during her tenure as managing director. Ms Fong alleged that Ms Kao actively diverted business opportunities away from AT and also caused AT to enter into several agreements and transactions in which she or her relatives had interests. Ms Fong thus sought the court’s leave to commence an action against Ms Kao on AT’s behalf and to conduct such action. She also applied for access to AT’s business records so that she would be able to ascertain the full nature and consequences of the alleged breaches.
Allegations and issues
[6] During oral submissions, numerous allegations of purported breach of fiduciary duties concerning a variety of transactions that were linked directly or indirectly to AT were canvassed. However, the instances were rather disconnected and did not take place in an obvious chronological sequence. For ease of reference and to make it easier to deal systematically with the complaints, I directed Ms Fong and her counsel to prepare a list of proposed Points of Claim (“proposed POC”) that she wished to pursue.
[7] In considering the Leave Application I used the proposed POC as my guide to the claims against Ms Kao that I had to consider. I will make reference to the relevant portions of the proposed POC in the course of this judgment.
Law pertaining to s 216A actions
[8] The relevant portion of s 216A of the Act states:
[9] For an applicant to succeed in an application for leave to commence a statutory derivative action, the applicant must satisfy the Act’s requirements. There are two facets to these requirements. First, there is an inquiry as to whether the notice requirements have been met. If they have not been, the court must consider whether there is any reason why those requirements ought not to be enforced.
[10] Second, there is an inquiry as to the merits of such application. The court must consider whether there is a reasonable basis for the complaint and whether the intended action is a legitimate or an arguable one. If that is satisfied, the applicant must further prove that it is in the prima facie interests of the company that such an action be brought. The corollary is that the intended defendant or the company itself can resist a leave application either on the basis that the applicant is not acting in good faith or that it is not in the interests of the company that the action be brought.
[11] The analysis thus proceeded along the following lines:
(a) Notice
[12] Ms Fong gave notice of her intention to commence an application for leave to commence derivative proceedings against the Ms Kao for breaches of fiduciary duties to AT’s Board of Directors on 1 June 2010. However, the Leave Application was filed on 24 May 2010, seven days before notice was actually given. Obviously, the 14 days’ notice requirement had not been met. Consequently, the issue was whether the court ought to exercise its powers under s 216A(4) of the Act to excuse Ms Kao from the notice requirement.
[13] Section 216A(4) gives the court the power to dispense with notice or to make such orders as the court thinks fit for the giving of notice if it is not expedient to give notice prior to the commencement of the action. In Woon’s Corporations Law (LexisNexis, Looseleaf Ed, 1994, Issue 34 (March 2010 release)) (“Woon’s Corporations Law”) (at para 602) the learned authors opined that “[i]n cases where the giving of 14 days’ notice is not practicable, the complainant may give less notice or none at all before the application is made” [emphasis added]. The burden thus falls on an applicant to show why notice, as required under s 216A(3)(a) of the Act, could not have been given.
[15] Ms Fong’s reasons for not giving the 14 days’ notice were that she feared that Ms Kao would instigate the concealment of AT’s assets and that there was some basis to suggest that AT’s information technology (“IT”) system had already been tampered with. The notice, if served, would have likely alerted Ms Kao to the impending discovery of her wrongdoing and spurred her and her associates on to destroy, conceal or forge evidence. Similarly, it would likely have caused Ms Kao to move funds out of AT and into companies she controlled and would have frustrated AT’s efforts to find out what had happened or to seek recovery from her.
[16] Ms Kao, in response, argued that these reasons were contrived. Given that (a) there was an agreement to perform an audit, (b) an offer had been made to make Ms Fong and Anthony Steifel signatories to several of AT’s bank accounts, (c) there had in fact been no tampering with the IT system and (d) there was no risk of dissipation of assets, there was no reason why the notice requirement ought not to be followed. Further, had the 14 days’ notice been given, an audit would have taken place. These grounds on which both Ms Fong and Ms Kao relied were substantially the same as those raised in their submissions in the Setting Aside Applications (which I will deal with in greater detail below). In any event, counsel for Ms Fong, Mr CR Rajah SC, pointed out that after notice was eventually given to AT on 1 June 2010, AT did not make any meaningful effort to investigate Ms Fong’s claims. In reply, Ms Kao explained that nothing was done because, when the notice was received on the above-mentioned date, the search order was being carried out, and an Extraordinary General Meeting (“EOGM”) had been called to, inter alia, seek the removal of Ms Kao from her position as a director of AT.
[17] On the whole, I agreed with Ms Fong that it was impracticable in the circumstances to adhere to the notice requirements. While I accepted that the factors raised by Ms Kao, viz, the lack of evidence establishing the defendants’ propensity to dissipate assets and destroy evidence, and the willingness of the other directors to conduct an audit, could affect the court’s decision to insist on compliance with the 14 days’ notice requirement, I thought her perspective to be overly narrow. Ms Kao’s reasons merely depicted the state of affairs at the time the application for leave was filed. “Impracticability” was mentioned by the learned authors of Woon’s Corporations Law, but I observe that it was neither elaborated nor explained. Perhaps this was justifiable since such an inquiry would be a question of fact, and the court would be entitled to look at the totality of circumstances to determine whether impracticability existed. The scope of matters to be considered thus ought not to be restricted to the state of affairs at the time of filing the application but, in addition, encompass the conduct of the relevant parties after such an application had been brought to the notice of the company.
[18] It was a key fact that after notice was served on AT on 1 June 2010, AT did not proceed with any meaningful exercise that amounted to a bona fide and determined effort to investigate Ms Fong’s claims. The thrust of Ms Kao’s explanation was that the company was pre-occupied by the concurrent search order and EOGM affecting AT. This at best explained the pressures AT faced at the material time. But those events could not overshadow the fact that there was no record of any deliberation between the other directors on the merits of Ms Fong’s complaints nor any record of any informed decision on whether her complaints should be pursued, investigated or whether it would be in the best interests of AT to take any action on them. If the purpose of the notice period is to allow a company’s board of directors to evaluate and act on the complaints of a disgruntled shareholder, it appeared to me that even if proper notice had been given, this intention would not have been met. There was an absence of any real attempt to independently and diligently investigate and consider Ms Kao’s complaints after her Leave Application was filed. Even if I accepted Ms Kao’s explanation pertaining to AT’s pre-occupation with the search order and EOGM, it was glaring that no action was pursued after those events passed. Rather, AT chose to deal with the matter by merely offering to conduct an independent audit. If AT was indeed sincere in considering Ms Fong’s complaints, it should have conducted its own investigations and audit in order to provide the board of directors with an informed and considered decision on the merits of those complaints. Given the totality of the circumstances, there was a strong inference that, had any notice been served, it would have been met with the same response. It was therefore my view that even if Ms Fong had complied with the 14 days’ notice requirement, it was likely her notice would have been futile. Hence, I considered that it would be wrong to penalise Ms Fong for her failure to do so.
(b) Reasonable basis of complaint
[19] An applicant intending to commence a derivative action has the additional burden of showing a reasonable basis for his complaints and that the intended action is a legitimate or arguable one, ie, it has a reasonable semblance of merit and is not one which is frivolous, vexatious or bound to be unsuccessful, see Urs Meisterhans v GIP Pte Ltd [2011] 1 SLR 552 (“Urs Meisterhans”) at [25], citing Pang Yong Hock v PKS Contracts Services Pte Ltd [2004] 3 SLR(R) 1 (“Pang Yong Hock CA”) at [16] to [17]; Agus Irawan v Toh Teck Chye [2002] 1 SLR(R) 471 at [8]; and Teo Gek Luang v Ng Ai Tiong [1998] 2 SLR(R) 426.
[20] Two broad categories of claims were canvassed in Ms Fong’s proposed POC. The first set of allegations was that Ms Kao allowed AT to enter into contracts with companies in which Ms Kao or her members of her family had an interest (collectively referred to as the “Offshore Companies”). The relatives so implicated were Ms Kao’s sisters (Mandy Kao, Jane Kao, and Joanna Kao) and her brother-in-law (Woo Boon Chong who is Joanna Kao’s husband). The other category of allegations involved Ms Kao diverting contracts and business opportunities from AT to several of the Offshore Companies. In regard to both categories, Ms Fong submitted that Ms Kao had never disclosed her or her relatives’ interests, or the associated dealings, to AT’s board of directors. In support of these allegations, Ms Kao adduced several documents that originated from AT’s company secretary, Ms Kuat Bee Bee (“Ms Kuat”), whom Ms Fong wanted the court to believe was the informant who had made public disclosure of Ms Kao’s indiscretions.
[21] Ms Kao relied on four general defences in reply. First, she claimed that all the Offshore Companies were set up with Peter Fong’s approval or on his instructions. The transactions in issue were entered into when Peter Fong was AT’s controlling mind and will. These transactions were entered into either with the knowledge of the directors or on the basis that directors were content to let Peter Fong do what he thought was necessary. She stressed that the documents apparently implicating her had been in the possession of the company and the transactions were done with the knowledge and active participation of Evelyn Ho, a co-director, and the company secretary, Ms Kuat. The point made was that Ms Kao had nothing to hide, and that explained how and why Ms Kuat possessed those documents. Ms Kuat was informed of the above matters in AT’s ordinary course of business and therefore the documents and information supplied by Ms Kuat ought not to be perceived as the fruits of a supposed whistle blowing exercise. Ms Kuat was told about the setting up of the Offshore Companies and that was how she had the information and was able to assist. Those documents were said to form part of the common knowledge of the management and staff of AT. The information which Ms Fong utilised in these proceedings was, therefore, freely available within AT’s premises. It included the existence of the Offshore Companies, their ownership, bank signatories, agreements, and the payments to Ms Kao’s sisters.
[22] Ms Kao explained the motivation behind the use of the Offshore Companies and how these companies were utilised for the benefit of third parties:
[23] She also explained how she and her relatives became involved:
This was echoed in a later affidavit:
[24] Ms Kao submitted that the Offshore Companies ought to be understood in the above context when the court decided whether there existed a reasonable basis for Ms Fong’s proposed action.
[25] The other three general defences were that the Offshore Companies were either fully or partially owned by third parties who had given their consent for Ms Kao to deal with the Offshore Companies in the way she had; that both Peter Fong and the third parties knew or approved of Ms Kao’s or her relatives’ involvement in the Offshore Companies; and the transactions or arrangements AT engaged in were ultimately undertaken for the benefit of AT. Details of these explanations will be found below.
Scope of the court’s review
[26] During oral submissions, Mr Singh intimated that there was no reasonable basis for Ms Fong’s claims per se since the bulk of the evidence in support of the Leave Application was based on the evidence Ms Kao had supplied in her reply affidavits, all of which came after the commencement of the proceedings. In other words, Ms Fong did not have any material of her own to support the complaints of breaches of fiduciary duty asserted when she filed her Leave Application. Had Ms Kao refrained from explaining the relevant transactions, it would have been unlikely that Ms Fong could have crafted any claims of her own. At the commencement of the OS, there was therefore no prima facie case. Mr Rajah obviously disagreed with this general proposition and submitted that all affidavits filed (specifically affidavits filed by the opposing party) should be considered by the court in arriving in its decision as to whether a complaint possessed any reasonable basis and semblance of merit.
[27] I agreed with Mr Rajah. In Urs Meisterhans, Tay Yong Kwang J observed (at [25]) that it would be sufficient for the court to rely on affidavit evidence filed by both sides in support of their claims to ascertain whether the action to be brought in the company’s name had any semblance of merit. This position was also taken by Andrew Ang J in Sinwa SS (HK) Co Ltd v Morten Innhaug [2010] SGHC 157. While both of the preceding cases did not directly deal with the issue argued by Mr Singh during oral submissions (and therefore did not articulate the rationale for making the relevant observation), I considered that the learned judges’ views were correct in principle.
[28] The scope of the court’s review ought not to be restricted to the applicant’s knowledge at the time the application for leave is filed or to the contents of the applicant’s supporting affidavit. It is often the case that a party making the application for leave is not privy and does not have access to significant documents held by the company or its controlling directors. It is not surprising to find that complaints in such proceedings have been partly based upon information received, belief and inference. Conversely, it would be safe to assume that the company or its directors are best placed to explain conduct that is the subject of a complaint. Given the difficulty usually faced by an applicant in having access to the relevant and appropriate information, it would be imprudent and inequitable to confine the scope of analysis to the applicant’s supporting affidavit.
KSCCI-Tynley & Ribands-Foraker
[29] China National Petroleum Corporation (“CNPC”) was a client of AT, and Sino Oil King Shine Chemical Co Ltd (“KSCC”) and China Petroleum Technology & Development Corporation (“CPTDC”) were its subsidiaries or were related companies. In the proposed POC, Ms Fong alleged that Ms Kao diverted the opportunity to earn service fees from these companies from AT to several of the Offshore Companies:
[30] KSCC International Pte Ltd (“KSCCI”) was incorporated on 12 April 2000 on Ms Kao’s instructions. It was a company in which Woo Boon Chong and Jane Kao were directors and shareholders. Ribands Pte Ltd (“Ribands”) was incorporated on 3 April 2001 and Ms Kao and Evelyn Ho were its directors and shareholders. Both KSCCI and Ribands, Ms Fong alleged, had been earning service fees at the expense of AT for being the invoicing agents for KSCC and CPTDC respectively.
[31] As part of that alleged diversion, Ms Fong further averred, the monies were subsequently diverted to two British Virgin Islands (“BVI”) companies, Tynley Holdings Limited (“Tynley”) and Foraker Limited (“Foraker”), both of which were formed in 2000. Ms Kao was the sole shareholder, director and signatory of both companies. Importantly, part of the service fees earned by KSCCI and Ribands had been sent by them to Tynley and Foraker respectively. In addition, part of the monies paid to Tynley had been paid to Jane Kao.
[32] Ms Fong submitted that all monies retained by KSCCI and Ribands, and any part of the Tynley and Foraker monies paid to Ms Kao or her siblings, or both, would have accrued to AT’s benefit had Ms Kao not put in place the arrangements under which these business opportunities were diverted.
[33] In response to the above allegations, Ms Kao explained that the KSCCI–Tynley structure originated from one Liu Wei Min. He was one of Peter Fong’s contacts in CNPC and he was the contact person for various projects that Peter Fong wanted to pursue in Australia, India, Brunei and Papua New Guinea. Liu Wei Min introduced Peter Fong to key people in various divisions of CNPC, and in return, Peter Fong assisted him in various CNPC related projects using special purpose vehicles registered in Singapore and the BVI. KSCCI and Tynley were examples of such vehicles. Tynley, for instance, was used to keep KSCC profits out of China. This was effected as follows: whenever KSCC supplied a shipment of chemicals, the recipient company would make payment to KSCCI. On KSCC’s instructions (given through Liu Wei Min), KSCCI would transfer part of the amount received back to KSCC and send the remainder to Tynley, to be held pending further instructions (also from Liu Wei Min). For its services, KSCCI received from Tynley a service fee of 1.5% of the sales value, and this was in addition to whatever other monies Liu Wei Min was prepared to pay Jane Kao. A similar arrangement was used in the Ribands–Foraker structure: Ribands would invoice CPTDC’s customers and receive payments on CPTDC’s behalf, and those monies received by Ribands would be transferred to either CPTDC or Foraker on the instructions of Liu Wei Min. Ribands, in return, received service fees for its services.
[34] Ms Kao explained that Peter Fong did not involve AT in this service provided to KSCC. Woo Boon Cheong was made a nominee director and shareholder of KSCCI on Peter Fong’s instructions, and Jane Kao was made a director and shareholder with Peter Fong’s consent. As for Tynley, Ms Kao admitted that she was its nominee director, shareholder and bank account signatory. However, she maintained that the assets of Tynley were held on trust for Liu Wei Min, and that upon receiving his instructions, she would arrange for monies in Tynley’s bank account to be sent to recipients nominated by Liu Wei Min. As for the Ribands–Foraker structure, Evelyn Ho and Ms Kao were made nominee directors, shareholders and bank signatories of Ribands, while only Ms Kao held those positions in Foraker. Ms Kao stressed that the appointments in both Ribands and Foraker were made on the instructions of Peter Fong. Ms Kao also explained that she was the bank signatory for Tynley and Ribands since she had to arrange for the monies in the relevant accounts to be remitted to destinations which Liu Wei Min designated.
[35] In light of the above, Ms Kao submitted that Peter Fong was fully aware of the existence of the above companies, and this explained why AT’s staff (ie Ms Kuat and Evelyn Ho) were involved in their operations. Further, it was on Peter Fong’s instructions that the above special purpose vehicles were incorporated. There was no evidence that the schemes were anything other than what Ms Kao explained. Moreover, Ms Kao maintained, AT also benefited from the incorporation of KSCCI, Tynley, Ribands and Foraker. Specifically, when AT required funding in 2005 and 2007 for its pipe trading business, Liu Wei Min permitted funds in KSCCI’s bank accounts to be pledged to support the bank facility in favour of AT. Similarly in 2007, Tynley, through KSCCI, made a loan to Ms Kao which was in turn pledged to the bank to support AT’s facility.
[36] As a preliminary matter, it seemed to me that the transactions concerning KSCCI and Tynley and from Tynley to Jane Kao were beyond the scope of this Leave Application. If any fiduciary duties were owed in these transactions, they were owed to KSCCI and Tynley respectively. Those two companies were the appropriate parties to commence that action, not AT. Those transactions were therefore irrelevant to the proceedings before me.
[37] Nevertheless, I found that the complaint concerning the service fees received by KSCCI and Ribands had a reasonable basis and contained some semblance of merit. On the face of the transactions, it was incontrovertible that Ms Kao had prima facie benefited from the transactions through the commissions made by KSCCI and Ribands. She was a director and shareholder of Ribands, while Mandy Kao and Woo Boon Chong were the directors and shareholders of KSCCI. Given these directorships and shareholding, the inference was that Ms Kao could have preferred her own or her relatives’ interests in KSCCI and Ribands to those of AT. CNPC was a client of AT and, presumably, it would be in the interests of AT to be the one to earn the service fees that were eventually paid to KSCCI and Ribands.
[38] Ms Kao further contended that KSCCI and Ribands were set up for the ultimate benefit of Liu Wei Min. Considering the contrasting versions offered by Ms Fong and Ms Kao, I was not entirely satisfied that Ms Kao’s explanation adequately rebutted the claims made by Ms Fong. First, there was no affidavit filed in support of Ms Kao’s explanation by Liu Wei Min, Woo Boon Cheong or Mandy Kao confirming that Liu Wei Min was in fact the beneficial owner of the KSCCI and Ribands and that Woo Boon Cheong and Mandy Kao were indeed nominees for Liu Wei Min. Second, Ms Kao’s explanation had missed the point of the inquiry. That explanation went as far as proving the background of the creation of companies and who the ultimate beneficiaries were. In addition, Ms Kao also explained how KSCC managed the movement of the invoiced monies after KSCCI’s receipt. But that was not the point of the inquiry. What was of concern was the fact that KSCCI and Ribands were earning service fees. The material factual inquiry therefore was regarding the entitlement to the benefit of service fees earned. Obviously, if Ms Kao can show that these service fees ultimately belonged to AT despite the shareholding and directorships that seem to have conflicted with AT’s interest, then no breach would arise. However, no evidence had been proffered to show the beneficial ownership of those service fees. Accordingly, I granted Ms Fong leave to commence a derivative action in that respect.
Mega-Bond
[39] China Petroleum Pipeline Engineering Corporation (“CPPEC”) was a company incorporated in China and it was a client of AT. Mega-Bond was a BVI company incorporated in 2002 and Ms Kao was its sole director and shareholder. In her proposed POC, Ms Fong alleged:
[40] Ms Fong claimed that Ms Kao had used her position as AT’s managing director to divert contracts that should have gone to AT to her own company, Mega-Bond. On 18 November 2004, CPPEC entered into an agency agreement with Mega-Bond. Under that agreement, CPPEC had to pay Mega-Bond a service fee of 5% of the gross value of a contract CPPEC had entered into with Emirates National Oil Co. Limited (ENOC) LLC to build a petroleum terminal. The value of the ENOC Contract was USD$ 22,476,276.40, and the resulting service fee payable to Mega-Bond would have been USD$ 1,123,813.82. Although the signatory of the agency agreement was one Paul Bertrand (listed as President of Mega-Bond, but a person who Ms Fong said was fictitious), Ms Fong submitted that Ms Kao was Mega-Bond’s directing mind.
[41] Ms Kao averred that Mega-Bond was incorporated for the benefit of several of Peter Fong’s Chinese contacts. As a matter of background, Ms Kao explained that CNPC and China Petroleum Pipeline Bureau (“CPPB”) (a subsidiary of CNPC) explored and secured overseas projects without any involvement on the part of Peter Fong or AT. These projects included the Mozambique project that was the subject of Ms Fong’s complaints. As Peter Fong had informed Liu Wei Min to look for Ms Kao whenever assistance was required, Liu Wei Min asked Ms Kao to set up another BVI company to handle these overseas projects to assist CNPC and CPPB. Mega-Bond was set up for this purpose and Ms Kao arranged for herself to be the nominee shareholder of Mega-Bond, holding its shares on trust for Liu Wei Min. Ms Kao also arranged for herself and Ms Kuat to be the joint signatories for Mega-Bond’s account with Bangkok Bank in the United Kingdom. By assisting these Chinese companies in the above manner, Peter Fong and AT gained significant goodwill which, Peter Fong believed, would translate into greater business opportunities in the future.
[42] This issue was a finely balanced one. Ms Kao averred that Mega-bond was set up ultimately on Peter Fong’s instructions (ie his direction to assist Liu Wei Min) and her shares in Mega-Bond were held on trust for Liu Wei Min. On the other hand, it was clear that on the face of the records, Ms Kao was the shareholder and director of Mega-Bond and she had preferred Mega-Bond’s interests to those of AT. The fact of the matter was that Mega-Bond had secured a contract from a client of AT. As was the case for the KSCCI and Ribands issue, no affidavit has been filed by Liu Wei Min in support of Ms Kao’s version. Ms Kao had not been able to show that all profits generated by Mega-Bond were transmitted to Liu Wei Min, or any other strong evidence to support her version of events or which could satisfactorily negate any allegation of breach of fiduciary duty.
[43] I found that Ms Fong’s complaint had a reasonable basis and a semblance of merit. There was only Ms Kao’s reply affidavit to go by and I was not satisfied that her explanation necessarily precluded Ms Fong’s claim. At the very least, there existed a serious factual question to be tried and I was unable to say Ms Fong’s action was bound to be unsuccessful. It appeared to me that there was no reason why AT could not have taken advantage of the opportunity of earning the service fees from CPPEC. Even if there was a suggestion that AT was not interested in exploiting that opportunity, there was no reliable objective evidence to suggest that AT’s directors were informed of this opportunity but declined to take advantage of it. I therefore granted Ms Fong leave to commence a derivative action on the Mega-Bond allegation as set out in the proposed POC.
Comeco Entities
[44] In her proposed POC, Ms Fong alleged:
[45] Ms Kao explained that these Comeco Entities were held on trust for one Jennifer Zhang, a former employee of CPTDC. Jennifer Zhang had been Peter Fong’s business associate since the 1990s when she was stationed in Singapore. She was subsequently posted to Bahrain to set up a company, Comeco EC, to run a business in Africa. Comeco EC was a wholly owned subsidiary of CPTDC’s sister company, China Petroleum Material & Equipment Corporation (“CPMEC”).
[47] In 2006–2007, CPMEC wanted to close all of its overseas branches and this affected Comeco Europe BV. At the same time, Jennifer Zhang was due to retire from CPMEC. She wished to continue working on her own, but she did not want CPMEC or her colleagues to think that she was using business opportunities she had gained through her employment with CPMEC. Jennifer Zhang therefore needed AT or some other entity to be her nominee shareholder. The constitution of Comeco Europe BV contained a pre-emption clause which meant that the majority shareholders of Comeco Europe BV had to offer their shares to AT before offering them to other parties. In order to enable Jennifer Zhang to keep control of Comeco Europe BV, AT had to be the purchaser. At the request of Jennifer Zhang, AT took over the other 70% of the shares at book value. As AT intended to transfer the shares to other nominee shareholders within a year, the prices paid were not booked as AT’s investment. On 22 November 2007, those Comeco Europe BV shares were transferred to Ribands so that AT could pull out completely from this arrangement and recover what it had paid for those shares. Ms Kao submitted that both she and Evelyn Ho, directors and shareholders of Ribands, were holding the shares on trust for Jennifer Zhang.
[48] At the end of November 2007, Jennifer Zhang needed a new company in Bahrain. Bahrain’s regulations required a corporate shareholder registering a new company to submit its audited reports. Jennifer Zhang requested AT to be the new company’s shareholder since AT had the business track record and the audited reports to fulfil these requirements. Peter Fong then assisted Jennifer Zhang by allowing her to use AT’s name as the initial shareholder of Comeco Gulf (WLL). This shareholding was meant as a transient measure and AT was to subsequently transfer the ownership to Jennifer Zhang’s appointed nominee shareholders. In early 2008, AT’s shares in Comeco Gulf (WLL) were transferred to Mandy Kao.
[49] As for Mandy Kao’s involvement in the Comeco entities, Ms Kao explained that it arose out of a personnel management issue. Jennifer Zhang’s original employees had returned to China and she needed new staff for her operations. AT assisted her in recruiting employees as part of the management services provided to the Comeco entities, but in less than a year, Jennifer Zhang ran into some personal difficulties. This resulted in several staff members leaving the entities in 2008. Since Jennifer Zhang and Mandy Kao had been friends since 2001, Ms Kao asked Mandy Kao to help Jennifer Zhang manage the Comeco Gulf operation and her office while Jennifer Zhang returned to China to attend to both her retirement and personal matters. The Comeco Gulf (WLL) shares were transferred to Mandy Kao so that she could process the paperwork during her visits to Bahrain. She was to hold the shares on trust for Jennifer Zhang. Although Mandy Kao’s involvement was originally intended to be short term, Jennifer Zhang was unable to return to work due to her medical condition (though she remained a director of the company). In the event, both Mandy Kao and Jane Kao ended up managing Comeco Europe BV for Jennifer Zhang. Ms Kao explained that since they were the ones running the operations, AT’s Comeco BV shares were transferred to their company, Eastjet, at a nominal value so that Jane Kao could become one of Comeco BV’s directors and handle the necessary paperwork, accounts and audits. Mandy Kao received a management fee for her services in managing Comeco’s operations but all the company’s profits remained in the Comeco books for Jennifer Zhang. Additionally, due to Jennifer Zhang’s deteriorating health and her decision to wind down the business, AT had recently decided to discontinue the business relationship.
[50] Ms Kao submitted that in assisting Jennifer Zhang, AT did not suffer any losses, but gained from receiving management fees and trading income which amounted to $600,000 between 2007 and 2010. Similarly, as a result of Jennifer Zhang’s contacts in the Greater Nile Petroleum Operating Co Ltd (“GNPOC”), AT won a steel pipe contract in 2007 which generated a net profit of $477,000. AT also made advances to the Comeco entities at Jennifer Zhang’s request. These advances (which were paid back in full) were recorded in AT’s books but were not considered as investments in Comeco by AT.
[51] In support of Ms Kao’s version of events, Jennifer Zhang affirmed a statutory declaration, declaring that AT held shares of the Comeco entities on her behalf from June 2007 to November 2007 (for Comeco Europe BV) and November 2007 to October 2008 (for Comeco Gulf (WLL)). She also affirmed that she had known Mandy Kao since 2001 and Mandy Kao had been her nominee for her investments in the above companies and had also been assisting her in the operations of various Comeco entities.
[52] In respect of the Comeco claims, it was my view that Ms Kao had offered a sufficient explanation of how AT’s shareholding in the Comeco entities found its way to Eastjet and how her sisters were involved in the Comeco operations. Unlike the other complaints concerning KSCCI, Ribands and Mega-Bond, the beneficial owner of the Comeco entities had spoken up in support of Ms Kao’s version of events. Jennifer Zhang had affirmed a statutory declaration that Mandy Kao was running the Comeco entities on her behalf and that Mandy Kao was holding the shares as her nominee. In reply, Ms Fong could neither adduce any evidence to cast doubt on Jennifer Zhang’s assertion nor cast serious doubt on the explanations Ms Kao provided in her defence. I was satisfied that AT had never beneficially owned the shares in the Comeco entities in the first place, and therefore the eventual movement of the shares to Eastjet had not been tainted by any breach of the fiduciary duty Ms Kao owed to AT.
Wrangwell & IOM
[53] There were two IOM vehicles, both of which were used in AT’s pipe trading business. The first, International Oilfield Manufacturing Establishment, Vaduz (“the Original IOM”), was a joint venture between AT and one Pak Trisulo, an Indonesian, that was set up for the conduct of a pipe trading business in Indonesia. The company was de-registered sometime in 2006 or 2007. The second was IOM Establishment Limited (“the New IOM”). That company was initially a BVI company known as I-Gate Ltd whose name was changed to its current one in 2004 after it was taken over by Ms Kao. That much was undisputed by the parties.
[54] Ms Fong alleged the following in her proposed POC:
[55] Ms Fong made five claims in respect of the IOM business. First, she complained that Ms Kao was in the process of diverting funds away from AT via the IOM account maintained by AT. That account reflected a balance of $36m in favour of AT. Out of this sum, Ms Kao asserted that only $19.5m actually belonged to AT, while the rest was due to one Anton Suleiman. Ms Fong asserted that Ms Kao had continually represented to her that IOM was a vehicle for the pipe trading business of AT and one Anton Suleiman. However, Ms Fong later found out that it was Ms Kao who, since 2001, had been IOM’s sole shareholder. Ms Fong alleged that this was an elaborate ploy by Ms Kao to divert funds away from AT, and submitted that the entire $36m belonged to AT.
[56] Second, Ms Fong complained that Ms Kao had allowed AT to enter into agreements with the New IOM, under which AT’s service fees as its agent had been reduced from 4% in 2005, to 3% in 2006, and finally to 2% in 2007. As a result, the New IOM had benefited at AT’s expense. Ms Fong alleged that Ms Kao never disclosed her interest in the New IOM to AT.
[57] Third, Ms Fong claimed that Ms Kao preferred the interests of the Original IOM to those of AT when she caused Hunting Airtrust Tubulars Pte Ltd (“HAT”), a subsidiary of AT, to forgo service fees of US$20 per tonne of premium pipe products due under a commission agreement dated 15 March 2003 signed by Ms Kao (on HAT’s behalf) and by one “Paul Betrand” (on behalf of the Original IOM). Ms Fong submitted that this amounted to self-dealing and Ms Kao had benefited herself at the expense of AT.
[58] Fourth, Ms Fong alleged that Ms Kao had been or was in the process of diverting monies out of the HAT/OCTG (the latter acronym referred to one Oil Country Tubular Goods (“OCTG”)) account. She did this by “re-classifying” the monies held in that account, to monies standing to the credit of Wrangwell Ltd (“Wrangwell”) and subsequently paying out sums amounting to approximately $5m. Wrangwell was a company of which Mandy Kao was a shareholder.
[59] Fifth, Ms Fong alleged that Ms Kao preferred the interests of Wrangwell to those of AT when Ms Kao caused HAT to be replaced by Wrangwell in AT’s contracts relating to the Chevron project or Tianjing Pipe Corporation (“TPCO”).
[60] In response to the various complaints put forward by Ms Fong, Ms Kao took the general position that the context in which the IOM vehicles had been used ought to be properly understood. The IOM vehicles had been used to host multiple projects, with different beneficiaries at varying points in time. This meant that the shareholder of IOM was a mere nominee for different third parties who used the IOM vehicles during the relevant periods. This, Ms Kao contended, explained why Ms Fong remarked that IOM’s shareholding was constantly changing. Moreover, Ms Kao averred that when Ms Fong increased her involvement in AT in 2009, she had in fact briefed both Ms Fong and Anthony Stiefel on how AT was run, including on matters related to IOM.
[61] Ms Kao explained the history of the IOM companies. Between 1982 and 1983, Peter Fong had informed her that he set up a Lichtenstein company (the Original IOM) with himself and Mr Trisulo as shareholders in the proportions of 75%:25%. The purpose of the Original IOM was to hold investments in a pipe threading plant in Batam Indonesia (PT Purna Bina Nusa). Not only was this done for tax purposes, but it was also for Mr Trisulo to hide his own involvement in that venture since he was the Commissioner of PT Purna Bina Nusa. Subsequently, in 1996, Anton Suleiman’s pipe trading business was also placed under the Original IOM. Ms Kao averred that, in order to simplify matters, Peter Fong directed her to become the sole nominee shareholder of IOM. She was accordingly appointed on 30 May 2001 by a letter signed by Peter Fong. (The letter was addressed to Prasidial-Anstalt, presumably the solicitors of the Original IOM). In time, Anton Suleiman’s business dominated IOM’s business. In the above transactions, Ms Kao maintained, IOM vehicles were never related to AT.
[62] The Original IOM was subsequently de-registered. This was carried out by the Lichstenstein authorities as the Original IOM had not complied with the jurisdiction’s disclosure requirements. Reluctant to disrupt the underlying business, another company (a dormant BVI company) was acquired and its name was changed so that it had the same name as the Original IOM. This was the New IOM. This was done with Peter Fong’s and Anton Suleiman’s full knowledge. The new IOM was to serve the same purpose as the Original IOM. Ms Kao was its initial shareholder but she claimed that she had since transferred the shares back to Anton Suleiman’s nominee. She exhibited a transfer trail to the nominee, one Irene Susanto Adikoesoemo (“Irene Susanto”).
[63] In respect of the sum of $19.5m, Ms Kao explained that this amount represented the profit which AT had derived from IOM during the period from 2006 to 2009. This amount needed to be brought into AT. The amount was reported in AT’s books as a performance fee from IOM when that business ended. The pipe trading activity under AT/IOM had come to an end because AT’s joint venture investment in Tubular Resources (“TR”) (started in 2003) had ended and TPCO Pan Asia (started in 2008) would be taking over.
[64] As regards the allegations pertaining to HAT, Ms Kao explained that the service fee of US$ 20 per ton ceased in 2006 when TR had bid for a long term supply contract with Chevron Thailand to supply American Petroleum Institute (“API”) with special connection pipes. As a result TPCO had had to offer a more competitive price. It was decided that the US$20 per ton fee reserved for HAT should be terminated. Nonetheless, the services of HAT to TPCO continued. As far as the reduction in fees to AT and HAT under their respective agreements with IOM was concerned, the decrease was justified since the benefits received by AT and HAT under those agreements were in exchange for very little on their part.
[65] With reference to the Wrangwell issue, while Ms Kao admitted that Mandy Kao was Wrangwell’s sole shareholder, she averred that Mandy Kao was the nominee for TPCO, and that it was TPCO’s decision to use Wrangwell as the vehicle in which they parked their overseas profits. Ms Kao also explained the facts leading up to the incorporation of Wrangwell in 2006. At that time, AT conducted its specialised connection pipe trading business through its two subsidiaries, HAT and TR. HAT itself was a joint venture between Hunting PLC (“Hunting”) and AT. Its sole purpose was to hold an investment in a processing facility in China with TPCO as partner. AT maintained a HAT/OCTG account, and the monies therein were earned from the connection pipe business for Chevron Thailand undertaken by the other two subsidiaries.
[66] TR was a joint venture between AT, TPCO (which was a Chinese steel mill) and Hunting. TR sold two types of pipes: API pipes (which were standard pipes) and special connection pipes (which were pipes which were threaded with better seals produced through a patented process). TR would buy API pipes from TPCO and sell them to end users. TPCO did not have the patent rights to use the process for upgrading the API pipes to special connection pipes. TPCO used HAT to buy pipes from TPCO and pay the royalties to enable the use of the patented threading process to upgrade these pipes to special connection pipes. TPCO would arrange for the threading to be done in China but wanted to keep the surplus for conducting this upgrading. As HAT was only an investment company, TR’s purchases through HAT were booked as amounts owing to/from IOM. Any surplus funds (belonging to TPCO) in IOM’s book accounts in HAT would then be remitted to AT. This was reflected as an account owing by AT to IOM under a sub-account name HAT/OCTG (to distinguish it from IOM/OCTG which was a business deal done with Anton Suleiman). In other words, in AT’s books, while monies were recorded in the IOM account, it was actually TPCO’s monies which AT was holding onto. AT never utilised any of the same. For this hosting service, AT received a service fee of approximately US$770,000.
[67] In 2006, TR had a project in Thailand and needed a company in Thailand to carry it out. However, their Thai tax lawyer advised TR not to use a subsidiary or employee of TR as this might make TR itself liable for tax in Thailand. At that time, Ms Kao was the managing director of TR and she asked Mandy Kao to allow TR to use her name as Mandy Kao would qualify as an unrelated party. It was Ms Kao’s position that she did this in consultation with, and with the approval of, TPCO, Hunting and AT. Wrangwell then set up OSC (a Thai company) with a few Thai nominees. Three years later, OSC obtained a Foreign Business Licence which allowed OSC to be wholly foreign owned. Wrangwell then arranged for OSC to have the same shareholding as TR (ie TPCO, Hunting and AT). This left Wrangwell as a dormant company.
[68] Returning to the allegations made by Ms Fong, Ms Kao submitted that that monies were moved to the Wrangwell account to enable the repatriation of funds to TPCO which, she alleged, was the owner of the funds in that account. When Ms Kao was contemplating retiring in 2009, she felt that using IOM to keep these funds would complicate the accounts for anyone taking over AT’s management. She informed TPCO about this tidying up exercise and that TPCO was looking for another company to park its overseas profits in. She told TPCO that they could use Wrangwell and they agreed because TPCO was familiar with Wrangwell, having used it previously. Wrangwell was by then a dormant company, with Mandy Kao still as its nominee shareholder. Therefore in 2009, Ms Kao directed that the funds owned by TPCO (but kept by AT) be recorded in AT’s books as Wrangwell’s. That account was renamed from HAT/OCTG to Wrangwell and no monies were actually transferred to Wrangwell. The monies were eventually paid out on TPCO’s directions. This tidying up was carried out in view of Ms Kao’s impending retirement and the transactions were made known to Ms Fong and Anthony Stiefel. Wrangwell thereafter assumed the role of HAT in facilitating TPCO’s sale of special connection Pipes to TR. By early 2010, the Wrangwell account was eliminated from AT’s books.
[69] Considering the evidence put forward by both parties, I was satisfied that there was no substance in Ms Fong’s complaints. In relation to the first allegation, I did not find any merit in Ms Fong’s complaint that Ms Kao had diverted funds from AT, especially on the mere assertion that Ms Kao had claimed that not all $36 million was due to AT. As explained by Ms Kao, the monies belonged to Anton Suleiman. This evidence was corroborated by Irene Susanto who confirmed that she was Anton Suleiman’s nominee shareholder in the New IOM. That confirmation similarly disposed of the second allegation made by Ms Fong. If Anton Suleiman had at all material times been a beneficial owner of the New IOM, Ms Fong’s claim pertaining to Ms Kao’s supposed interests in the New IOM necessarily failed. It was apparent, and uncontroverted in reply, that the monies parked in the IOM account of AT never belonged to AT beneficially in the first place. What belonged to AT was the portion that represented the performance fee that accrued to it when the IOM business ended (thus explaining why AT was only entitled to $19.5 out of the $36 million on the books).
[70] There was also no merit in the third allegation. It might seem that Ms Kao had benefited the Original IOM at the expense of HAT, which amounted to a conflict of interest since she had also been the sole shareholder of the Original IOM since 2001. However, it must be stressed that it was Peter Fong himself who signed off the letter appointing her to this position. Given that it was accepted that Peter Fong was the controlling mind and will of AT at the material time, it has to be inferred that AT approved of Ms Kao’s “interest” in the Original IOM. Moreover, Ms Fong could not point to any other evidence to suggest that Peter Fong’s approval should not be attributed to AT. Furthermore, Ms Kao explained that the termination of the service fees payable to HAT was to increase the competitiveness of TPCO. This reduction was explained by commercial reasons and Ms Fong could not provide any collateral reason to discredit that explanation. The agreement to terminate the service fee was between HAT and the Original IOM. What was perhaps interesting was the annotation contained therein, which stated that, with the competitive pricing (arising from the elimination of the service fee), the Original IOM would be able to bring in continuous business from the threading plant, which in turn would benefit HAT in terms of more dividends. Given Peter Fong’s original approval and that the benefit from the termination of the service fee ultimately accrued to HAT, I was of the view that there was no substance to the allegation that Ms Kao had breached any fiduciary duty owed to AT in this regard.
[71] Lastly, I deal with the two claims pertaining to Wrangwell. For the re-classification of monies, there was no dispute that a tidying up exercise had indeed been undertaken by Ms Kao. The objective of the move was to clarify the ownership of the monies. I accepted that the monies due under the HAT/OCTG account ultimately belonged to TPCO. What weighed heavily in favour of Ms Kao’s version was TPCO’s written letter to TR to confirm that their export of Hunting premium connection pipes to TR was conducted via HAT and subsequently Wrangwell. Indeed, I was satisfied that Mandy Kao was merely a nominee shareholder in Wrangwell. Since the monies never belonged to AT, and it was ultimately TPCO’s decision to use Wrangwell, I found that there was no merit in the allegation that Ms Kao breached her fiduciary duties in that respect.
(c) Good faith
[72] In deciding whether the good faith element had been met, I was guided by the principles established by the local cases of Pang Yong Hock CA, Law Chin Eng and Another v Hiap Seng & Co Pte Ltd (Lau Chin Hu and others, applicants) [2009] SGHC 223, Agus Irawan v Toh Teck Chye, and Poondy Radhakrishnan and Another v Sivapiragasam s/o Veerasingam [2009] SGHC 228. These principles are:
[73] Given that I found that several of Ms Fong’s claims contained some semblance of merit, the burden fell on Ms Kao to show that Ms Fong’s Leave Application was made in bad faith. Four arguments were made:
Mr Singh took the position that if this court found merit in any of the above arguments, it would be sufficient to dismiss Ms Fong’s Leave Application on the ground of bad faith.
[74] First, Mr Singh made the legal argument that Ms Fong ought to be precluded from bringing this action since she herself had committed various similar breaches of fiduciary duties owed to AT. Ms Fong admitted in her first affidavit that she had always been content to let her father (Peter Fong) run the operations of AT with Ms Kao, notwithstanding the fact that she herself been a director of AT since 1995. She was willing to stand aside and allow Ms Kao to exercise full control in running the company. The crux of counsel’s argument was that Ms Fong owed AT a duty of reasonable diligence and her failure to actively participate in managing the affairs of AT amounted to a breach of this duty. The issue therefore was whether that alleged breach was sufficient to amount to bad faith so as to preclude Ms Fong’s Leave Application. Second, Mr Singh intimated that Ms Fong knew full well how AT structured its businesses, ie the use of nominees. Not only did she know of these complex corporate structures, but also, on at least one occasion, she had assisted in the planning and creation of such a structure herself. Specifically, counsel pointed to an Anguillan company called Airtrust Trading Limited (“ATL”) where Ms Fong was the ultimate shareholder. On the basis of the documents exhibited, I accepted that Ms Fong was aware of the use of offshore vehicles for tax purposes and the practice of parking profits outside AT by the use of nominee shareholders related to the company.
[75] However, even if I accepted that both of the above arguments had some evidential basis, I did not see how Ms Fong’s conduct was relevant to the inquiry of good faith. This was because the law indicates that only conduct that related to the commencement of the derivative application would be relevant to substantiate any alleged lack of good faith. Woon’s Corporations Law at para 603 pointed out:
[76] Third, Mr Singh suggested that prior negotiations pertaining to the parked IOM funds tainted the current application. In this argument, there was a suggestion that Ms Fong herself had breached her fiduciary duties to AT when she attempted to partake in the spoils of the supposed breaches committed by Ms Kao. In rebuttal, the Ms Fong averred that she never:
[77] I accepted Ms Fong’s explanation. I was unable to accept that anything could be made out of Ms Kao’s allegation that Ms Fong knew how AT’s business was run. Ms Kao faced the difficult task of proving both that Ms Fong knew of Ms Kao’s or her relatives’ shareholdings in the Offshore Companies, and that these shareholdings had led to AT’s interest being compromised. In other words, even if Ms Kao pointed to instances where Ms Fong knew of nominees per se, Ms Kao could not point to any concrete evidence which showed that Ms Fong knew of a diversion of business or of self-dealing by Ms Kao. Curiously, it was Ms Kao herself who indicated that Ms Fong was briefed on how AT was run and I take that to mean that Ms Fong was briefed on the practice of nominees being used. But that in and of itself could not support a further inference that Ms Fong knew of any alleged wrongdoing by Ms Kao. That practice could not, in isolation, be a breach of fiduciary duty if it was AT’s way of running its business, and the way the business was run was to AT’s benefit. Similarly, I could not infer any wrongdoing from Ms Kao’s allegation that Ms Fong herself proposed that an offshore foundation be established to hold monies pending a determination of their true ownership.
[78] Further, Ms Kao seemed to suggest that the movement of monies was sufficient to prove a motive by Ms Fong to feather her own nest. I was unable to accept this submission because it seemed premature. The movement of monies cannot be considered in the abstract and must also be considered in the light of the intention behind, and the result of, such movement. Ms Fong had explained that intention of the move was to hold the monies pending a determination of the true ownership of the monies. This was plausible. Ms Fong asserted that she had no knowledge of the breaches and, a fortiori, there could not be any intention to partake in the spoils of Ms Kao’s alleged breaches. As regards the final result of such a movement, if Ms Kao wished to prove that Ms Fong intended to share in the “slush fund”, she had the burden of proving that Ms Fong knew that these monies arose out a breach of fiduciary duty, and further that Ms Fong had intimated her intention of sharing in those tainted monies. No concrete evidence was adduced to discharge that burden, and accordingly, I found no merit in Ms Kao’s assertion.
[79] In arguing the above, Mr Singh also raised the more general issue of whether a director, who is herself in breach of duties, should be granted leave to bring a derivative action. He cited the decision of Pang Yong Hock and another v PKS Contracts Services Pte Ltd [2003] SGHC 195 (“Pang Yong Hock HC”) as authority for the proposition that such wrongdoing would disqualify Ms Fong. That case can, however, be easily distinguished from the present Leave Application. The case of Pang Yong Hock HC concerned several unusual transactions entered into by the company. Two shareholders brought an action against the only other two shareholders of the company who had the majority control of the company. Counter-allegations were also made against the applicants who themselves had approved and were fully aware of the same transactions that were complained about. What differentiates Pang Yong Hock HC from the present case is that the allegations and counter-allegations involved the same transactions that were the subject matter of the derivative action, and it was clear that the opposing parties were pointing fingers at each other and each party shouldered some portion of blame in those transactions. The derivative action was untenable in the circumstances. In the present case, even if I accepted the contention that Ms Fong had herself committed the breaches Ms Kao alleged she did, these purported breaches were distinct from the breaches Ms Fong had sought to prosecute in the derivative action. The good faith requirement under the Act must be in respect of conduct commencing the derivative action, not good faith generally in all past conduct of the applicant, see IGM Resources Corp v 979708 Alberta Ltd [2004] A.J. No. 1462.
[80] Fourth, Ms Kao accused Ms Fong of hatching an improper scheme to seize control of AT by leveraging on the legal proceedings brought against Ms Kao in order to marginalise Ms Kao as a shareholder and director and then to pressurise Ms Kao into selling her shares in AT to Ms Fong. Ms Fong denied the existence of any collateral purpose and argued that such an allegation was a mere red herring to distract the focus away from the alleged breaches committed by Ms Kao. As pointed out by Ms Fong, any collateral purpose was irrelevant to the claim for derivative relief in relation to the wrongs and breaches committed by Ms Kao.
[81] In the Canadian case of Balbir Pathak v Nizar Moloo (2008) ABQB 389, the court dealt with a Canadian provision which was in pari materia to s 216A save that the section provided for “reasonable notice” as opposed to “14 days’ notice”. There, two shareholders with equal shareholdings, both directors of the company, were deadlocked in negotiations. The complainant then brought an application for a derivative action under section 240 of the Business Corporations Act (R.S.A. 2000, c. B-9) (Canada, Alberta), alleging that the respondent had breached his fiduciary duties to the company by, inter alia, appropriating corporate opportunities that favoured the business of a competing corporation operated by the respondent’s wife and son, and misusing the company’s confidential information. Prior to the action but subsequent to the complainant’s knowledge of the breaches, however, the parties had been in some talks to part ways through a buy-out by the complainant of the respondent’s shares in the company. These talks eventually failed because the respondent refused to accept the amounts valued. When the talks broke down, the complainant threatened to sue. The court held that this was not evidence of a lack of good faith (at [30]).
[82] In essence, the court took the view that shareholder fights leading to a commencement of a derivative action were insufficient to taint the good faith of an application as long as there was a valid basis for the claim. Such a position was similar to the one taken in Tam Tak Chuen v Eden Aesthetics Pte Ltd & Anor [2010] 2 SLR 667 [15] – [16], citing Pang Yong Hock CA. In cases of this nature, there will always be hostility between the opposing factions involved. Unless the proposed derivative action is purely motivated by spite or a personal vendetta, and the action lacks any basis connected with a legitimate claim, shareholder fights are insufficient bases from which to infer bad faith. In the present proceedings, while Ms Kao’s complaint was Ms Fong’s proposed buy-out of her shares, I have found that Ms Fong had raised several legitimate claims that AT could pursue against Ms Kao. As a result, such a collateral purpose (even if true) would be insufficient to support any finding of bad faith that could preclude Ms Fong’s proposed derivative action.
(d) Prima facie interests of the company
[83] Having found that Ms Fong had provided several complaints possessing some semblance of merit, the court had to consider whether Ms Fong’s action appeared to be prima facie in the interests of AT. In doing so, my task was to weigh all relevant circumstances and decide whether the claim ought to be pursued. I was so satisfied. Obviously, if Ms Fong succeeds in the eventual claim, AT would be entitled to the service fees earned by the entities in which Ms Kao or her relatives have interests. Those fees were, potentially, substantial.
[84] I was asked to consider whether there was any good commercial reason to refuse leave to commence the proposed derivative proceedings. The main thrust of Mr Singh’s submissions on this issue was that Ms Fong was the only shareholder who sought to institute a derivative action. No other shareholder had come forward to support her. Counsel for AT, Mr Quek Mong Hua, intimated that the company was involved in investment and it was a holding company of subsidiary companies that were still trading. Further, Ms Kao was pivotal to the operations of AT and, if leave was granted, Ms Kao would effectively be unable to run AT. I was not convinced by these arguments. In the present proceedings, any alleged fiduciary breach arising from the service fee arrangements would necessarily mean that AT would stand to benefit from a constructive trust in its favour. The burden of establishing that such an action would not be in the interests of the company must be on the parties that oppose the application for leave.
[85] The burden thus fell on AT and Ms Kao. Their arguments were insufficient to convince me that it would not be in the prima facie interests of AT for the action to proceed. In deciding whether it would be in the prima facie interests of the company for a derivative action to be commenced, the court invariably has to undertake a sensitive and difficult evaluation of the various conflicting interests of the company. That was the underlying concern in earlier s 216A applications. The court has to consider the possible benefits the company would receive from a successful claim as against the inconvenience, expense and adverse effects that such a claim may cause the company concerned. It must also consider any possible detriment that could affect the overall value of the company. I did consider AT’s and Ms Kao’s argument, and recognised that the action may affect AT’s and its subsidiary’s operations adversely. However, while that was a possibility, it did not seem a probable consequence of my decision. It was undisputed that Ms Kao led the company after Peter Fong’s passing and it was also undisputed that Ms Kao had been central to the operations of AT. However, it could also not be forgotten that AT was not a one-man show. There was a fully competent board of directors that could manage AT’s operations in the interim when Ms Kao could not take on management functions. Moreover, I could not place much weight on AT’s argument that its business operations were ongoing and that its business would be affected. All companies that are the subject of such actions will face these same difficulties. If these difficulties suffice to preclude the commencement of derivative actions, every going concern entity will have a blanket immunity against any derivative action. I was not persuaded by the defendants’ arguments and I agreed that it was in the prima facie interests of AT that Ms Fong’s derivative action be commenced.
Setting aside of search and freezing orders
Law and Background
[86] Four elements are required for a search order, see Asian Corporate Services (SEA) Pte Ltd v Eastwest Management Ltd (Singapore Branch) [2006] 1 SLR(R) 901 (“Asian Corporate Services”). The court must consider whether the applicant has an extremely strong prima facie case, whether there is a real possibility that the opposing party would destroy relevant documents, whether the damage suffered by the moving party would be serious, and whether the effect of a search order would be out of proportion to its legitimate object. Similarly, in respect of a freezing order, see Bahtera Offshore (M) Sdn Bhd v Sim Kok Beng and another [2009] 4 SLR(R) 365, the court must consider whether the applicant has a valid cause of action over which the court has jurisdiction, whether there is a good arguable case, whether the opposing party has assets within (or outside) the jurisdiction, and whether there is a real risk that the assets may be disposed of or dissipated.
[87] The initial basis for Ms Fong’s application for a freezing order was that Ms Kao had been dissipating AT’s assets and that there was a real risk that Ms Kao would continue to do so given her control of AT and the company’s operational structure and practices. Further, Ms Fong deposed that Ms Kao had been causing AT’s documents and records to be destroyed or tampered with. This meant that tracing the monies received in breach of Ms Kao’s fiduciary duties and the identification of AT’s assets would be unduly difficult if I did not grant a freezing order in Ms Fong’s favour.
[88] The complaints and grounds for the search order were couched in similar terms. Ms Fong claimed that Ms Kao had moved documents which were previously in AT’s possession to either her home or to a warehouse in her sisters’ names. An allegation was made that Ms Kao has a concealed attic in one of her properties. Had a search order not been ordered, Ms Fong alleged, since Ms Kao possessed the propensity to forge and tamper with evidence, there were good grounds to fear that documents necessary for the action would be destroyed.
Defendants’ case
[89] Both the freezing and search orders had been granted ex parte, and both defendants applied to set them aside. The defendants’ positions were aligned on this issue and their arguments were either materially the same or had been adopted by each other during the proceedings. The primary submission was that the search order ought to be set aside because there had been serious abuse in the manner that it was carried out. Tan Poh Tin, Evelyn Ho and Esther Soo all deposed affidavits pointing out various improprieties committed by members of Ms Fong’s forensic expert team from Insight Risk Group (the group that conducted the search). They alleged that those representatives overstepped their boundaries allowed by the search order when they employed harsh interrogation techniques and threatened criminal sanctions if the relevant individual refused to answer questions posed during the search. Mr Singh submitted that, as a matter of principle and policy, this ground alone was sufficient to set aside the search order.

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Fong Wai Lyn Carolyn v Airtrust (Singapore) Pte Ltd and another

Laws this judgment relies on

Grounds of decision

Introduction

Background and parties

Allegations and issues

Law pertaining to s 216A actions

(a) Notice

(b) Reasonable basis of complaint

Scope of the court’s review

KSCCI-Tynley & Ribands-Foraker

Mega-Bond

Comeco Entities

Wrangwell & IOM

(c) Good faith

(d) Prima facie interests of the company

Setting aside of search and freezing orders

Law and Background

Defendants’ case