High Court · Decided 14 October 2011

Kon Yin Tong and another v Leow Boon Cher and others

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[2011] SGHC 228Case no. Suit No 37 of 2009

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Laws this judgment relies on

Companies Act 1967

Grounds of decision

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Judith Prakash J:
[1] This case involves a company in liquidation and some of the various transactions that it undertook before it was wound up. The plaintiffs, who are the liquidators of the company, seek to recover what they say is the company’s money from the defendants who comprise two former directors and shareholders of the company and other firms who did business with the company.
The parties
[2] The company in liquidation (“the Company”) is Woon Contractor Pte Ltd, a company that was set up in 1995 as a successor to a partnership, Woon Contractor, which carried on business in the construction industry. Woon Contractor was owned and run by the first defendant, Leow Boon Cher (“Mr Leow”), and his wife, Ong Chiew Ha (“Mdm Ong”), the second defendant. On the incorporation of the Company, Mr Leow and Mdm Ong became its sole directors and shareholders and ran it the same way in which they had run Woon Contractor. Mr Leow was the man in the field, getting business and supervising the Company’s construction activities and its workers, whilst Mdm Ong was the back office woman, in charge of administration and accounts. From time to time I shall refer to Mr Leow and Mdm Ong jointly as “the Directors”.
[3] On 4 March 2005, Mr Leow made a Declaration that the Company was unable to continue business by reason of its liabilities. A winding up order was made against the Company on 20 May 2005 and the plaintiffs were then appointed its joint liquidators. The first plaintiff, Mr Kon Yin Tong (“Mr Kon”), was the lead witness for the plaintiffs in the present proceedings.
[4] The third defendant, Aim Top Enterprise Pte Ltd (“Aim Top”) was incorporated on 9 September 2003. Aim Top has two directors who are also its sole shareholders. First, there is Mdm Chiew Kim Lian (who holds 99.99% of Aim Top’s shares). She is the mother of Mdm Ong. The other director and shareholder is Mr Chiow Yit Wah; he was an employee of the Company from its incorporation until 2003 and prior to 1995 had worked for Woon Contractor for several years.
[5] The fourth and fifth defendants, Mr Ong Key Young (“OKY”) and Mr Ong Eng Seng (“OES”), are the partners of a partnership firm called Antah Forwarders (“Antah”) which has the same registered address as Aim Top. OKY is Mdm Ong’s father while OES is Mdm Ong’s brother. OES is also the sixth defendant in the action in his capacity as the sole proprietor of a business known as Western Express Resources Agency (“Wera”), another business sharing an address with Antah.
[6] The seventh and last defendant is Yew San Construction Pte Ltd (“Yew San”). This company was incorporated in 1996 and carries on business as a general contractor in building construction. Its directors and shareholders are not related to the other defendants.
The dispute
[7] The plaintiffs’ position was that during their investigation of the affairs of the Company, they discovered that the Company, acting at the behest of the Directors, had entered into a series of fraudulent and irregular transactions in order to siphon off the money and assets of the Company and put the same out of the reach of its creditors. The allegation made was that the Directors did this because they knew that the Company was insolvent. A summary of the specific allegations in the Statement of Claim (Amendment no 3) follows.
[8] The plaintiffs averred that the Company was insolvent as at 30 April 2003 as it was unable as of that date to pay its debts as and when they fell due and it continued to be insolvent after that date. Further, the plaintiffs averred that the liabilities of the Company exceeded its assets as at 31 August 2003 and the Company was therefore insolvent as at that date as well. The plaintiffs pleaded that the Directors had masterminded a scheme to defraud the Company’s creditors and, in the course of the scheme, had made the Company a party to a series of irregular and fraudulent transactions which had the effect of siphoning moneys out of or removing assets from the Company. The plaintiffs sought to recover various payments made by the Company pursuant to such transactions. The particulars of these are:
(a) a number of payments totalling $537,738 from 5 May 2003 to 6 August 2004, made to Mr Leow allegedly in repayment of loans that he had made to the Company;
(b) a sum of $39,394.78 paid to Aim Top allegedly for rental of lorry, labour, driver service and rental of excavator, such payments being made between 17 February 2004 and 20 June 2004;
(c) a sum of $41,000 paid to Antah for transportation services allegedly provided by Antah;
(d) payments totalling $13,500 purportedly paid to Wera as a sub-contractor even though Wera was not in the building and construction business; and
(e) a sum of $13,111.35 paid to Yew San allegedly for excavation work done at a worksite in Bendemeer.
In addition, the plaintiffs claimed that the Directors had acted in breach of their fiduciary duties by causing the Company to sell a used excavator to a company called Ban Guan & Co (“Ban Guan”) at an under value. It was also asserted that they had acted dishonestly, mala fides and against the interests of the Company and its creditors and, in the alternative, had given fraudulent preference to creditors of the Company who were connected to them. In relation to Mdm Ong, in the statement of claim, the plaintiffs sought to recover a sum of $6,000 paid to her on 27 August 2003 purportedly as a subsidiary for her private vehicle that was allegedly used in the course of the Company’s business. In their closing submissions, however, the plaintiffs did not deal with this claim and therefore I will not consider it.
[9] In their defence, Mr Leow and Mdm Ong averred that the Company was not insolvent either as at 30 April 2003 or 31 August 2003. They asserted that they had undertaken to provide continued financial support to the Company to meet its obligations as and when they fell due and that, over the years, they had provided financial support to the Company by injecting capital amounting to $828,500 into the Company. Mr Leow and Mdm Ong also asserted that all the transactions referred to by the plaintiffs had been carried out in good faith and/or with the knowledge and/or belief that the Company was not insolvent. The other defendants have claimed that the various transactions in which they were involved were made in good faith and for good consideration and that the plaintiffs had not been able to establish fraud on the part of Mr Leow and Mdm Ong.
[10] Arising from the pleadings, there are three main areas that have to be investigated and determined. The first relates to the solvency of the Company as at 30 April 2003 and/or 31 August 2003 and in relation to this situation, it is also important to establish the knowledge of the Directors regarding the Company’s financial position. The second area relates to the payments made by the Company to the Directors and whether they or either of them has to account for any or all of such payments. The third area covers the various transactions between the Company and the third to seventh defendants. In this connection, each transaction and relationship has to be examined to ascertain whether the payments made were regular or were in pursuance of sham transactions and/or were fraudulent preferences. My determination as to whether the Directors acted dishonestly or with intent to defraud the Company and/or the general body of its creditors will play a part in determining their liability for a number of the claims brought. This is an issue therefore to which much attention will have to be given. I will also have to examine whether in any of the impugned dealings the Directors were acting in breach of their fiduciary duties.
The plaintiffs’ narrative
[11] It is important at this juncture to set out the framework of the plaintiffs’ case before I go on to consider the individual allegations and transactions. This framework provides the plaintiffs’ perspective on how the transactions should be viewed and keeping it in mind also prevents one from failing to see the wood because of the abundance of trees. It must, however, be remembered when the following paragraphs are read that they set out the story as the plaintiffs see it and what I have to do in this judgment is to determine whether or not the plaintiffs have mustered sufficient evidence to prove that the story is fact and not fiction.
[12] The original business of Woon Contractor commenced in 1985. After its conversion into a company, the business was profitable for a few years but from 1999 onwards, losses were made every financial year (apart only from 2001) up to 2004.
[13] In January 2003, a construction project referred to as the Fernvale Project was novated to the Company, as main contractor. The employer was the Housing and Development Board (“HDB”) and the works to be undertaken by the Company comprised (a) major infrastructural construction works and (b) earthworks. The lump sum price for the project was about $4,678,000 of which $1,622,800 related to the earthworks. The Company promptly sub-contracted the entire earthworks portion to another contractor called Soon Li Heng Civil Engineering Pte Ltd (“Soon Li Heng”) for a sum of $1,050,000. This sub-contract was on a back-to-back basis with the main contract.
[14] It is the plaintiffs’ case that the Company was insolvent by 30 April 2003 and that from 5 May 2003 until 6 August 2004, a series of unexplained payments were made by the Company to Mr Leow without any supporting documentation to justify the payment vouchers which Mdm Ong prepared. Further, on 5 May 2003, the Company purportedly paid Wera $2,500 for its work as a “subcontractor”. Wera, however, was not in the building and construction business and the cheque was made payable to Mdm Ong instead of to Wera.
[15] By 3 July 2003, Soon Li Heng had completed the earthworks under their sub-contract for the Fernvale Project. Prior to that date, the Company had made three progress payments to Soon Li Heng totalling $368,000. On 4 July 2003, the Company received a claim for some $630,000 (less the retention sum) from Soon Li Heng and this demand made Soon Li Heng the Company’s biggest creditor. The HDB subsequently certified that the Fernvale Project had been successfully completed.
[16] In June and July 2003, the Company sold various pieces of construction equipment to Wera. These vehicles were purportedly leased back by the Company for various periods beginning from January 2004.
[17] On 28 July 2003, the Company purportedly paid Wera another $10,000 for work as a “sub-contractor”. This time the cheque was made payable to Mr Leow and was deposited into Mr Leow’s bank account.
[18] On 30 July 2003, Soon Li Heng’s lawyers sent the Company a letter of demand in respect of its claim. The Company did not respond to this demand.
[19] On 31 July 2003, Antah invoiced the Company for $35,000 in respect of services that it had supposedly performed between January 2003 and June 2003. In the view of the plaintiffs, these invoices were not supported by any credible documentation.
[20] On 20 August 2003, a sum of $1,000 was purportedly paid to Wera. This time the cheque was made out in favour of Mr Leow’s Maybank credit card account.
[22] In the meantime, on or about 24 August 2003, HDB had paid the Company a sum of approximately $550,000 for work done on the Fernvale Project. As a result, the balance in the Company’s bank account became $641,456.99. Two days later, a cheque for $200,000 drawn from the Company’s bank account was deposited into Mr Leow’s personal bank account. Mr Leow stated in court that approximately $100,000 out of this money was used to trade in the stock market. By the end of August 2003, the amount remaining in the Company’s bank account was $83,103.90.
[23] Aim Top was incorporated on 9 September 2003 with Mdm Ong’s 63 year old mother and Mr Chiow, as its initial directors. It is the plaintiffs’ belief that Aim Top is in fact owned and controlled by the Directors and was formed by them so that they could have a new umbrella under which to conduct business when the Company failed.
[24] From 1 October 2003, the Company started selling construction equipment to Aim Top. This included a 10-tonne lorry which was leased back to the Company in November 2003. The lorry was sold for $37,440 but the rentals paid by the Company to Aim Top eventually amounted to $27,200. The plaintiffs said that this meant that Aim Top had received the lorry at a heavily discounted price and that there was no commercial justification for the sale and the lease back.
[25] In December 2003, the Company purportedly leased an SK-200 excavator-with-breaker from Aim Top at $7,000 per month. At about the same time, it leased to Aim Top a PC200/SK200 excavator for $5,800 per month. The plaintiffs contended that there was no commercial justification for these transactions.
[26] On 8 April 2004, the Company sold a used excavator for $57,750 to Ban Guan. The plaintiffs found this sale suspicious because they had discovered evidence which indicated that Ban Guan had itself sold the same excavator to a third party at the price of $88,200 several days before purchasing the excavator from the Company.
[27] On 15 June 2004, the Company paid a sum of $13,111.35 to Yew San for purported excavation work. The plaintiffs said that there was no credible evidence that this work was actually done by Yew San for the Company.
[28] Under the judgment delivered in Suit 863 a total sum of $773,058 was found to be due from the Company to Soon Li Heng. On 22 February 2005, Soon Li Heng sent a statutory demand to the Company for the judgment sum. Just about two weeks later, on 5 March 2005, Mr Leow made the declaration of the Company’s inability to continue business by reason of its liabilities.
The law
Insolvency
[29] A company is insolvent if it is unable to pay its debts. Section 254(2) of the Companies Act (Cap 50, 2006 Rev Ed) (“the Act”) provides the definition of a company’s inability to pay debts:
[30] The current position the courts are inclined to adopt with regards to the definition of insolvency is enunciated in the case of Chip Thye Enterprises Pte Ltd (in liquidation) v Phay Gi Mo & Ors [2004] 1 SLR(R) 434 (“Chip Thye”). In Chip Thye, the suit was commenced by the liquidator against the directors of the company which was a family-owned company engaged in the building construction business. Belinda Ang J held that one ought not to look for a single appropriate test for insolvency:
[31] Secondly, Ang J held that the answer to determining the solvency of a company lies in scrutinising all relevant evidence available:
[32] Thirdly, as the case is not one that concerns the determination on whether a winding-up petition should be granted, but a determination concerning transactions entered into or made before liquidation, the learned Judge held that:
[33] Despite the fact that no one single test is conclusive as a measure of solvency, it is commonly accepted that the two primary indicia of a company’s inability to pay debts are the cash flow test and the balance sheet test. For most purposes, it is the present inability to pay debts that is the crucial factor.
[34] It is important to bear in mind, however, that the determination of whether a company is insolvent is essentially a question of fact. This can be seen from Tong Tien See Construction Pte Ltd (in liquidation) v Tong Tien See & Ors [2002] 3 SLR 76, where Tay Yong Kwang JC (as he then was) held:
[35] Generally, the burden of proof is borne by the party making the allegation of insolvency. However, s 100(3) of the Bankruptcy Act (Cap 20, 2008 Rev Ed) (“Bankruptcy Act”) provides for a presumption of insolvency in a situation where, as between the parties to the transaction, one is an associate of the other. This presumption may come into play in my consideration of the transactions that took place between the Company and the third to seventh defendants.
[36] The cash flow test deems a company insolvent when it cannot meet its obligations as and when they fall due. The balance-sheet test, on the other hand, would deem a company insolvent when the current liabilities of the company exceed its assets.
[37] With respect to the cash flow test, the court will look at the company’s financial position taken as a whole. The relevant factors which can be taken into consideration include:
(a) all of the company’s debts as at that time in order to determine when those debts were due and payable;
(b) all of the assets of the company as at that time in order to determine the extent to which those assets were liquid or were realisable within a timeframe that would allow each of the debts to be paid as and when it became payable;
(c) the company’s business as at that time in order to determine its expected net cash flow from the business by deducting from projected future sales the cash expenses which would be necessary to generate those sales; and
(d) arrangements between the company and prospective lenders, such as its bankers and shareholders, in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a time later than the debts.
[38] It should also be noted that the court adopts a commercial rather than a technical view of insolvency. Thus, while the phrase “is unable” might be thought to refer to the inability at the relevant time to pay debts which have then fallen due, its conjunction with the phrase “as they fall due” indicates a continuous succession of debts rather than a calculation of debts existing on any particular day. The essential question is whether the company’s financial position is such that it can continue in business and still pay its way. The court therefore has to consider whether any liquidity problem the company may have is purely temporary and can be cured in the reasonably near future. Further, the court may also have regard to claims falling due in the near future and to the likely availability of funds to meet such future claims and the company’s existing debts.
[39] On the other hand, the balance sheet test deems a company insolvent if its assets are insufficient to meet its liabilities, including contingent and prospective liabilities. It is thus a wider test than the “cash flow” test which only takes into account debts.
[40] A “contingent liability” would refer to a liability or other loss which arises out of an existing legal obligation or state of affairs, but which is dependent on the happening of an event that may or may not occur. “Prospective liability” however, has been judicially defined as “a debt which will certainly become due in the future, either on some date which has already been determined or on some date determinable by reference to future events”. It thus embraces both future debts, in the sense of liquidated sums due, and non-liquidated claims.
Sham or fraudulent transactions
[41] The plaintiffs’ primary case concerns numerous sham transactions allegedly concocted by the Directors to fraudulently siphon moneys away from the Company so that the creditors would not be able to obtain the same. The law governing fraudulent trading is s 340 of the Act and is reproduced below:
[42] It was said at first instance in Tang Yoke Kheng v Lek Benedict [2004] 4 SLR(R) 788 (“Tang Yoke Kheng”), at [12] that in order to succeed under this section, the plaintiff would have to prove two elements, namely:
(a) that the business of the company has been carried on with intent to defraud the creditors of the company or of any other person or for any fraudulent purpose; and
(b) that the defendants were knowingly parties to the carrying on of the business in that manner.
In addition, “defraud” and “fraudulent purpose” connote “actual dishonesty involving, according to current notions of fair trading among commercial men, real moral blame” (see In re Patrick and Lyon, Limited [1933] Ch 786 at 790).
[43] When the case went on appeal (Tang Yoke Kheng v Lek Benedict [2005] 3 SLR(R) 263), the Court of Appeal held:
It is generally recognised, as enunciated above, that in order to make a finding of fraud, the court requires a greater degree of proof than it would when coming to a finding on issues of fact that do not involve fraud.
[44] Additionally, in Liquidator of Leong Seng Hin Piling Pte Ltd v Chan Ah Lek and others [2007] 2 SLR(R) 77, it was held that the standard of honesty was not measured according to some private standard of a defendant or the objective standard of the reasonable man, although it may serve as a guide in the assessment of whether the defendant was dishonest. Rather, the subjective intention of the defendant that he had acted in good faith constituted evidence which the court evaluated and tested against the weight of other objective facts available including, if required, the objective standard of the reasonable man.
The law on unfair preference and undervalue transactions
[45] It is helpful to also set out the law on unfair preference and undervalue transactions at this juncture. The relevant statutory provisions are s 329 of the Act read with ss 98 – 102 of the Bankruptcy Act. Section 329 of the Act is as follows:
[46] Section 98(1) of the Bankruptcy Act provides that:
Further, an individual enters into a transaction with a person at an undervalue if:
[47] Additionally, the relevant period in so far as it concerns a transaction allegedly at an undervalue, is the period of five years prior to the presentation of the winding up proceedings (s 100(1)(a) Bankruptcy Act). However, s 100(2) of the Bankruptcy Act requires that in order for the transaction to be declared void, it must be shown that the company under liquidation:
(a) was insolvent at that time; or
(b) became insolvent in consequence of the transaction.
Under s 100(3) of the Bankruptcy Act there is a presumption of such insolvency where, as between the parties to the transaction, one is an associate of the other.
[48] Section 101 of the Bankruptcy Act lays down the criteria establishing when a person would be considered to be an associate of another person. More specifically, s 101(2) states that a person is an associate of an individual if he is the person’s spouse or relative. Regulation 3 of the Companies (Application of Bankruptcy Act Provisions) Regulations (“CABAR”) provides that ss 98 - 103 of the Bankruptcy Act shall be read subject to “such textual and other modification as may be necessary” for their application to a company being wound up. As such, when the situation relates to two companies, the reference to ‘individual’ in the Bankruptcy Act must be read as referring to a company as a necessary modification contemplated by reg 3 (see: Show Theatres Pte Ltd (in liquidation) v Shaw Theatres Pte Ltd [2002] 4 SLR 145).
[49] It should be noted however, that where the claim is that of an undervalue transaction, the party alleging that the transaction was at an undervalue has to prove this to the court. It is settled law that he who asserts must prove and the burden of proof, on a balance of probabilities, of such undervalue rests with the liquidators who assert that the transaction was effected at an undervalue. There is no presumption provision as to undervalue as there is as to insolvency.
Unfair preference transactions
[50] Similarly, s 99 of the Bankruptcy Act states the following:
[51] The relevant period for an unfair preference transaction would be within two years of the presentation of the winding-up petition and it is for the associate to rebut the presumption. It was also held in [35] of Re Tiong Polestar Engineering Pte Ltd (formerly known as Polestar Engineering (S) Pte Ltd) [2003] 4 SLR(R) 1, that as long as there was an intention on the part of the company to prefer the associate, that would be sufficient to constitute unfair preference even if it was not the main intention of the company.
Was the Company insolvent on either or both of the specified dates?
[52] The plaintiffs took the position that the evidence showed that the Company was insolvent on 30 April 2003 and continued to be thereafter.
[53] First, the bank reconciliation statement prepared by the Company showed that its cash balance as of that date was $101,654.73. The plaintiffs compiled the invoices due and payable by the Company as at 30 April 2003 and found that these totalled $314,584.84, a sum that was far in excess of the cash balance.
[54] Additionally, there were other invoices amounting to $51,548.72 which were payable by the Company but which were not dated. The plaintiffs claimed that, assuming these invoices were due for payment when presented to the Company, the total amount of debt due and payable by the Company on all the invoices as at 30 April 2003 would have been $366,133.56. As such, applying the balance sheet test, the Company was clearly insolvent.
[55] The plaintiffs also asserted that on 30 August 2003, the liabilities of the Company had exceeded its assets. The Company’s debts as at that date amounted to $274,764.34. Other invoices issued and presented against the Company on or before 31 August 2003 for which payment terms were not stated amounted to $42,018.65. Assuming that these were due when issued and presented to the Company for payment, the total amount due and payable by it as at 31 August 2003 was $316,782.99. As against this amount, the Company’s available cash on 31 August 2003 was, as shown by its financial statements for the year ended August 2003, only $176,841.00 and therefore it was not in a position to pay the liabilities.
[56] Additionally, by 31 August 2003, the claim from Soon Li Heng for $629,550 had already been received (4 July 2003). Soon Li Heng was pressing for payment and a demand letter for the amount had been sent out on 30 July 2003 when the Company failed to meet the claim. Legal action was, obviously, imminent even if the writ may not have been served by 31 August 2003.
[57] The Company’s financial statements did not disclose Soon Li Heng’s claim. It appeared from the evidence that the auditors were not informed of this claim and this was probably the reason why it was not captured as a liability or a contingent liability in the 2003 financial statements. If this claim were to be included as part of the Company’s indebtedness as at 31 August 2003, then there would be no doubt as to the Company’s insolvent position on that date.
[58] The Directors submitted that the plaintiffs’ reliance on the cash flow and balance sheet tests to establish the Company’s insolvency was erroneous as these two tests are not determinative of insolvency. They relied on the evidence of their expert witness, Chee Yoh Chuang (“Mr Chee”), who was a partner of Stone Forest Corporate Advisory and had more than 20 years experience in insolvency related accounting services, to state their position on the solvency of the Company as on 30 April 2003 and 31 August 2003.
[59] Mr Chee had relied on two tests for insolvency, namely a “net worth” test and a “liquidity” test. In the course of cross-examination, however, he agreed that these tests were in essence the “balance sheet” and “cash flow” tests respectively. Mr Chee also agreed that the net worth test operates by seeing “whether the book value of the company is positive or negative from its balance sheet” – identical to the balance sheet test, and that the liquidity test works by determining if the current assets are less than current liabilities - identical to the cash flow test. As such both the plaintiffs and the defendants were relying on the same tests to determine the Company’s solvency. In addition, Mr Chee had relied on a third test, that of “whether the company has enough money in hand to pay the liabilities that are due”.
[60] However, Mr Chee had reached the conclusion that the Company was solvent on 30 April 2003 and 31 August 2003 on the basis of the same tests which the plaintiffs had used – the cash flow and balance sheet tests. As the plaintiffs submitted, however, during cross-examination, it appeared that Mr Chee’s conclusions were flawed and he had to retract his position.
[62] Further, in the course of cross-examination, Mr Chee had candidly agreed that he could have done a better job of assessing the Company’s financial statements:
[63] In addition, with regards to the liquidity test, Mr Chee had derived a positive current ratio as at 30 April 2003 by matching the Company’s current assets as at 30 April 2003 against the figure for current liabilities that he had lifted from the statement of claim. Mr Chee was aware that the plaintiffs’ figure for current liabilities was derived from invoices that were due and payable by the Company as of 30 April 2003, or from invoices that were on cash terms. However, he had not taken into account the fact that the current assets’ figure in the Company’s balance sheet might have included amounts that the Company could not immediately use to pay off its current liabilities.
[64] In particular, Mr Chee had not checked the credit terms of the Company’s invoices that formed the basis for the “trade receivables” figure. This could possibly have led to him comparing trade receivables that were not yet due against payments that were already due and owing by the Company as of 30 April 2003. He did not verify whether the trade receivables were indeed collectible as of that date. Further, he had neglected to take into account the fact that a performance bond of $40,000 that was only refundable to the Company after 18 June 2005 was included as a current asset under “other receivables and deposits”. Mr Chee admitted that such bond deposits which could not be collected immediately could not be used to pay off debts as of 30 April 2003. This greatly affected the accuracy of Mr Chee’s liquidity test results.
[65] Mr Chee had also failed to take into account amounts reflected as owing by the Company to the Directors as a current liability. Mr Chee admitted that the Company would be clearly insolvent on his liquidity test if the amounts owing to the Directors were included as current liabilities as at 30 April 2003 as they had been by the Company’s auditors. However, he had chosen to reflect the amount owing to the Directors as a non-current liability instead. Mr Chee stated that he chose to treat these debts as “quasi-capital”. Mr Chee justified the use of this term on the basis that the Directors could withhold demanding repayment of the amounts due to them as long as they wanted to and, therefore, advances made by them should not be treated in the same way as other indebtedness. When questioned, however, he readily admitted that “quasi-capital” was a term he had come up with himself and that he had not come across any previous situation in which this term had been used to describe amounts owing to a director and caused the same to be removed from the current liabilities.
[66] Mr Chee testified that he was unaware of Mr Leow’s position that the latter had borrowed large sums of money to fund the Company’s needs. Mr Chee agreed that the lenders to the Directors may have imposed repayment terms for those loans and that this could mean that the Directors would not be able to withhold demanding repayment from the Company. When he was shown the Directors’ testimony that they had used money repaid to them by the Company between 30 April 2003 and 31 August 2003 to repay some $120,000 worth of third party loans, Mr Chee agreed that this would mean that the amount owing to the Directors on 30 April 2003 had to be treated as a current liability. As a result, application of Mr Chee’s liquidity test meant that the Company was insolvent as at 30 April 2003.
[67] In addition, the application of the third test was flawed because Mr Chee had assumed that the Company could use its collections from invoices issued after 30 April 2003 to pay debts that were already due as at that date. If this assumption is applied then, as Mr Chee agreed, a company which has a cash flow could only become insolvent if its creditors demanded payment. Such a position would not comply with the well-established solvency principle that a solvent company is one that is able to pay its debts as and when they fall due. More crucially, Mr Chee failed to take into account new liabilities incurred by the Company that would become due and payable after 30 April 2003 and the impact these would have on the Company’s cash flow. Therefore, Mr Chee had considered only a future in-flow of funds and ignored future out-flows. This omission skewed his analysis.
[68] Crucially, Mr Chee had admitted the following during cross-examination:
[69] With respect to the Company’s position at 31 August 2003, Mr Chee had concluded in his AEIC that the company was technically insolvent under both the net worth and liquidity tests, which suggested that the Company might not be able to settle its obligations as and when they fell due. However, Mr Chee had maintained that the Company would have a positive net-worth if the amount reflected as owing to the Directors was excluded as a current liability, and reflected as “quasi-capital”. I find it difficult to accept this because, as mentioned earlier, this was an avant-garde and irregular method of accounting. Further, Mr Chee had admitted that if this had been left as a liability and not revised, and the net worth test had then been applied properly, the Company would have had a negative net worth as of 31 August 2003.
[70] It also appeared that Mr Chee had not taken into account the debt owed by the Company to Soon Li Heng. Indeed, he had admitted when questioned, that if the auditors had been notified of the Soon Li Heng claim, and a notional S$500,000 was put into the books as part of that claim, the Company would have had a huge deficit in terms of its net worth.
[71] Lastly, Mr Chee had assumed that the Directors were able to fund the Company’s financial needs. In making this assumption, he had relied on letters of representation signed by Mr Leow and Mdm Ong, confirming that they would continue to support and finance the Company and would provide additional funds to meet its debts as and when they fell due.
[72] Upon questioning, Mr Chee admitted that the letter of representation was of limited value without a proper study of the Directors’ bank accounts and other financial means and further admitted that he had not made such a study. In addition, he had erroneously calculated Mr Leow’s contribution to the Company between September 2003 and August 2004 as being $255,955.23 instead of $176,564.93, thus coming to the inaccurate conclusion that the Directors had the financial ability to make good the Company’s shortfall of $251,258. Further, Mr Chee admitted that it was “possible” that his assumption that the Directors could fund the Company was inaccurate because he did not take into account new liabilities in the Financial Year 2003-2004 which the funds allegedly put into the Company by the directors might have been used to pay.
[73] I have concluded that because of the difficulties in Mr Chee’s evidence that the Directors cannot rely on it to support their stand that the Company was financially solvent as at 30 April 2003 and 31 August 2005.
[74] The Directors also submitted that the cash flow test was not, in and of itself, determinant of whether the Company was insolvent. They claimed that the balance sheet test was also not determinative of insolvency. They relied on Chip Thye - that all evidence must be taken into consideration in deciding whether a company was able to pay its debts as they fell due.
[75] In Chip Thye, Belinda Ang J held that there was no single test for insolvency and that regard should be had to all of the evidence that appeared relevant to the question of insolvency. However, in determining if the company in that case was insolvent, the learned judge had regard to the balance sheet test of insolvency which showed that the company had a negative net worth during the relevant financial years. Further, she found that there were no cash flow statements provided by the defendant to prove the company’s cash flow was healthy. The judge had also looked at the financial statements of the company and found that turnover or sales had declined sharply over the relevant financial years and that there was no likely financial assistance forthcoming from financial institutions, investors or shareholders. As such, she held that the evidence over all established insolvency. From this short account of the case, it appears that the defendants have glossed over the importance of the cash flow and balance sheet tests as the same were applied and were part of the reason for the conclusions arrived at in Chip Thye.
[76] While it is certainly true that a global consideration of all relevant factors is necessary, it is equally true that the cash flow and balance sheet tests are useful and accurate means of verifying the solvency of a company. Indeed, as the plaintiffs have submitted, in Chip Thye, the court’s first port of call was an examination of whether the Company was technically insolvent.
[77] The plaintiffs also pointed out other factors which they said they had relied on in coming to the conclusion that the Company was insolvent. These included the value of the property, plant and equipment of the Company as at 30 April 2003; the quantum of trade receivables of the Company as at 30 April 2003 and 31 August 2003; and the financial support allegedly provided by the Directors. The plaintiffs submitted that these factors could not alter the conclusion that the Company was insolvent.
[78] The defendants made an argument that they had collected significant amounts from the Company’s trade receivables in the period after 30 April 2003 and that these amounts were used to pay off its debts as at April 2003. The Directors asserted that the liabilities incurred by the Company after 30 April 2003 did not impact on its solvency as at 30 April 2003 but only on its solvency after 30 April 2003. This argument, however, to my mind, flies in the face of the defendants’ assertions that the totality of the situation ought to be taken into account and that an overtly technical analysis should not be used. Should all relevant factors and evidence be taken into consideration, then the possibility that the Company would incur further liabilities after 30 April 2003 should impact on its solvency as of that date. Otherwise, there will be a myopic and technical analysis of the Company’s financial health. Further, s 254(2) of the Act provides that both contingent and prospective liabilities ought to be taken into account in deciding if a company is able to pay its debts as and when they fall due.
[79] In their submissions, the Directors emphasised that 100% of the Company’s debts as of 30 April 2003 and 94.3% of the debts as of 31 August 2003 were eventually paid off and this meant that the Company was not insolvent because it was able to pay its debts. I do not accept this submission. The fact that all of the Company’s debts as of 30 April 2003 were eventually paid off is not determinative of whether on that date the Company was able to pay its debts as and when they fell due. In Bank of Australasia v Hall (1907) 4 CLR 1514-1528, the court distinguished between the position of a debtor who was able to pay all his debts as and when they became due and that of a debtor who would only be able to pay debts presently due at some future time. The court stated that only the first type of debtor could be said to be solvent.
[80] In the present case, the evidence of the Directors was that all the invoices due as at 30 April 2003 were fully settled only by 8 June 2004, ie, more than a year from the date on which these invoices were due and payable. The Directors did not give evidence as to whether the Company was in a position to pay off all the debts it incurred after 30 April 2003. The Company certainly could not pay off all of its debts as of 31 August 2003 since only 93% of these were eventually paid.
[81] More importantly, the Directors claimed that they were in a position to contribute their personal funds to stave off any claims as at 30 April 2003. The Directors maintained that they had an amount of $50,425.64 in various bank accounts under their names as at 30 April 2003 which was a reserve fund that could be used to pay off any urgent claims. As the plaintiffs submitted, however, there is no evidence supporting the amount that the Directors claimed to have contributed to the Company, apart from the Company’s records, in particular the Director’s Account in the General Ledger and the Cash Book. Neither Mr Leow nor Mdm Ong was able to explain how or where they were able to provide the funds recorded as contributions from them in the Company’s accounts nor why those accounts should reflect such amounts as owing to them.
[82] In the course of cross-examination, Mr Leow repeatedly gave evidence that Mdm Ong prepared the Company’s accounts, including payment vouchers and cheques, on his instructions. He also admitted that she obtained the information regarding the accounts from him. He went so far as to say that Mdm Ong would follow his instructions without question when she prepared the Company’s accounts.
[83] Mdm Ong’s testimony corroborated her husband’s evidence, as she also stated that she prepared the Company’s accounts solely on Mr Leow’s instructions and would not question or verify what Mr Leow had told her. Further, if Mr Leow gave her money without stating specifically that it was a payment from one of the Company’s debtors, she would simply record it as a loan by Mr Leow to the Company. In the light of evidence such as this, I have considerable doubts about the accuracy of the Company’s accounting records.
[84] Quite apart from the records, the oral evidence of the Directors cast doubts on the alleged loans that they had made to the Company. When questioned as to how he could have provided a $48,000.00 loan to the Company, as was recorded in the Ledger, at a time when he only had $5,000 in the bank, Mr Leow’s reply was:
Further, an amount of $936.32 was received by the Company and recorded as a cheque deposit made by Mr Leow on 11 February 2003. However, there was no corresponding withdrawal of the same amount from Mr Leow’s account on or around that date. Mr Leow could not explain how it was that this amount was recorded as a contribution from him or why the amount was not rounded off to the nearest dollar. His reply was that the plaintiffs should “check with [his] wife”.
[85] When Mdm Ong was cross-examined on these records, her only response was that she could not remember how the transactions she was questioned about had come about. She admitted further that she would not be able to help the court by explaining where the funds that the Directors had contributed to the Company had come from.
[86] The Directors submitted that they had further financial resources which they could have used to support the Company and therefore it could not be considered insolvent. First, they asserted that there were significant amounts of cash on the persons of both Mr Leow and Mdm Ong and in their home. They said that the Company’s bank statements showed that significant cash deposits were made into the Company’s account. In order to have deposited the amounts (ranging between $9,200 and $65,000) in cash, Mr Leow would have carried them on his person or kept them at home at some point in time before he deposited them. The Directors’ assertion that they had significant amounts of cash at all times was therefore not inherently incredible.
[87] Whilst I accept that the Directors may have carried around substantial amounts of cash from time to time, there is no evidence that this cash belonged to them rather than to the Company. Mr Leow often collected payment in cash from the Company’s debtors and he also cashed cheques from the Company’s account. If the cash in his possession was taken from his own bank account, then he could have produced evidence of this. There was no evidence of any other business that the Directors carried on apart from that of the Company which could have generated the cash in hand. I therefore have to infer that any cash that did not come from the personal bank accounts came from either the Company’s debtors or the Company’s bank account. Further, if the Directors did have sufficient cash with them to pay the Company’s debts as they fell due, the question arises as to why they did not and why it took a year before all the debts which were due as at 30 April 2003 were settled.
[88] The Directors also said that they were able to support the Company because they could have borrowed sums of up to $200,000 from Mr Leow’s friends. However, any loan that Mr Leow took from his friends and then on-lent to the Company to settle the Company’s debts would itself have increased the Company’s indebtedness. I have rejected the Directors’ contention that directors’ loans were to be considered as “quasi-capital” instead of as normal loans. On that basis, the fact that Mr Leow could have borrowed more and more money from his friends would not result in the Company being considered solvent.
[89] On the totality of the evidence, I am satisfied that the Company was insolvent both on and after 30 April 2003 and was also insolvent on 31 August 2003.
Did the Directors know that the Company was insolvent?
[90] The plaintiffs’ position is that the Directors were clearly aware of the Company’s insolvency on 30 April 2003 and thereafter. The plaintiffs submitted that the Directors were aware of the Company’s general financial position at all times and would have been aware by 30 April 2003 that the Company would have difficulty paying its debts as they fell due. In the alternative, the plaintiffs submitted that it must have been obvious to the Directors by 31 August 2003 that the Company could not pay its debts.
[91] Before I deal with the evidence, I would like to comment on the quality of the testimony given by the Directors in relation to their dealings with the Company and its moneys. Neither Mr Leow nor Mdm Ong was a convincingly truthful witness in relation to many areas of their evidence. They were frequently evasive and avoided the questions that were being asked. Often too, their evidence was contradictory and they had a tendency to change their stories as they were pressed during the cross-examination. Some things that they said were inconsistent with other parts of their evidence. I have mentioned portions of their testimony in earlier paragraphs of this judgment which illustrate the difficulty of accepting much of the same at face value.
[92] As mentioned above, Mr Leow maintained that his wife would be more familiar with the Company’s finances as he did not go through the records often. When cross-examined, however, Mdm Ong’s testimony on this point was inconsistent and contradictory. When questioned as to whether she would be able to tell how much money the Company owed on any particular day, Mdm Ong had given a negative reply. She explained she would only calculate all outstanding bills in the Company’s “Outstanding file” once a year, when the Company’s finances were due for auditing. When questioned if she had “never checked what was owing”, Mdm Ong confirmed that she “never check[ed]”.
[93] The very next day, however, Mdm Ong testified that she prepared “purchase journals” for the Company for each year. She said that these purchase journals were prepared using Excel spreadsheets programmed with formulae which would calculate how much the Company owed to its creditors for each of its projects whenever she entered figures for invoices received or sums paid out on those invoices. When asked if, just by looking at the purchase journal, she would automatically know how much was unpaid for each project the Company was involved in, Mdm Ong replied in the affirmative. This contradicted her testimony of the previous day when she had claimed that she would not have any idea as to how much the Company owed its creditors.
[94] Further, contrary to her husband’s earlier evidence, Mdm Ong had testified that Mr Leow looked at the bills in the “Outstanding file” once every one or two months, and by looking at these bills “he should know” the amount of money he owed creditors. This was in stark contrast to Mr Leow’s adamant insistence that he knew nothing about the accounts. As such, it appears that both Mr Leow and Mdm Ong had knowledge of the accounts of the Company, and their deliberate evasiveness was so as to conceal the fact that they had known the Company could not pay its debts as they fell due as at 30 April 2003 and 31 August 2003. To believe the Directors’ assertions of ignorance would also be to believe that they were negligent and incompetent in their running of the Company’s affairs and, bearing in mind that this business had been carried on by them for decades, that is a difficult belief to justify.
[95] In addition, the plaintiffs submitted that the Directors did not have a legitimate reason to avoid payment of the Soon Li Heng claim nor did they have the necessary means to pay it. The Directors’ response was that they held the view that they had a good case against Soon Li Heng as an application for summary judgment had been dismissed. They maintained that the claim was disputed in good faith. The Directors therefore submitted that on 31 August 2003, it would have been premature to treat the Soon Li Heng claim as a payable. However, the Directors admitted that their expert witness, Mr Chee, had accepted that the claim ought to have been disclosed as a contingent liability at least. As noted previously, contingent liabilities are to be taken into consideration when determining a company’s solvency. The Directors were also aware that Soon Li Heng had completed the work and that on 24 August 2003 the Company had received a substantial payment from the HDB for work done on the Fernvale project. Under the sub-contract, the Company had to pay Soon Li Heng within three to seven days of receipt of payment from the HDB. The Directors must have been aware from the HDB’s payment that it was generally satisfied with the work done and therefore that some amount of money at least was payable to Soon Li Heng in respect of the project. The Company put a counterclaim and this was, in substance, its main defence to Soon Li Heng’s claim. Given, however, that that counterclaim was subsequently found to be totally baseless, the Directors (or Mr Leow, at least, since he was aware of what went on at the site) could not have reasonably believed that the counterclaim had much chance of success.
[96] The Directors made the argument that the fact that they continued to run the Company as a going concern from 30 April 2003 up to end 2004 showed that they were ignorant that the Company was insolvent from 30 April 2003 onwards. In this connection, the Directors contended that they continued to provide the Company with financial support during this period as follows:
Mr Kon agreed that according to the Company’s documents the Directors had provided the above financial support to the Company during the entire period during which the impugned transactions were taking place.
[97] The important question here is whether the Company’s documents can be relied on as accurately reflecting the financial support given by the Directors. The records relied on are the Director’s Account in the Company’s General Ledger, where Mdm Ong recorded amounts allegedly owed by the Company to her husband and the Company’s Cash Book, which reported cash payments made by the Company from its cash-in-hand. I have already referred to the way in which these accounts were kept by Mdm Ong (see [83] above). That evidence did not give me confidence in the accuracy of the record-keeping. I have also highlighted some of the evidence which showed the difficulty that the Directors had in explaining where the funds recorded as contributions from them in the Company’s accounts actually came from. Mr Kon’s position was that on the state of the documents, there was not enough documentary proof that the moneys had in fact come from the Directors. His view was that these moneys could simply have emanated from third parties or been part of the Company’s trade receivables. The Plaintiffs submitted that Mr Leow could simply have told Mdm Ong that money that had been paid to the Company by third parties were loans from him and she would have recorded the same as money owing to him on Mr Leow’s say-so without further checking or verification. Likewise, Mr Leow could have told her that he had made a payment on the Company’s behalf and she would record this as more money owing to Mr Leow even if such payment had nothing to do with the Company.
[98] I agree that the evidence does not establish on a balance of probabilities that the Directors made the contributions to the Company that they asserted they did.
[99] The Directors also relied on the fact that they had given written undertakings to support the Company financially. Two undertakings were signed by the Directors – the first was in relation to the Company’s financial statements for the financial year ended 31 August 2003, while the second was in relation to the financial statements for the year ended 31 August 2004. These letters however did not really show that the Directors were prepared to support the Company because the first letter was only signed by the Directors on 25 October 2004, more than a year after the close of the 2003 financial year, whilst the letter for the year ended 31 August 2004 was only signed on 25 April 2005. In fact, the latter letter was issued after Mr Leow’s statutory declaration on 4 March 2005 stating that the Company could not continue its business because of its liabilities.
[100] Mr Leow’s credibility was also sorely shaken when he was questioned on the topic of the letters of undertaking. In the span of five minutes, he changed his position on whether he understood the contents of the letter of undertaking no less than four times. He had first testified that he “roughly” understood the meaning of the letter, but then changed his position to say that he did not read the letter when he signed it. However, he then reverted to the stand that he “roughly” knew its meaning, and finally, when questioned by me, he affirmed that he did know the meaning of the letter. When asked to confirm his position at the start of the hearing on the next day, Mr Leow changed his testimony again, this time saying that the auditor did not explain the letters to him and that he was “not very certain” about their meaning. Overall, I cannot find that Mr Leow knew what he was signing and committing himself to. This means that the letters really are valueless as evidence that the Directors ran the Company as a going concern.
[101] The third factor raised by the Directors was that the Company had continued tendering for projects from the HDB in 2003 and 2004. Unfortunately, the Company did not succeed in any of the tenders and they thus had no impact on the Company’s financial position. In any event, the evidence of continuing tendering is equivocal – the Directors may have been trying to save the Company from its insolvent position. The fact that tenders were sent out did not mean that the Directors were unaware that the Company was in a parlous financial position or that they thought the Company was solvent. The same thing goes for the Company’s ongoing subcontracting works for China Construction. The fact that there was such an ongoing contract did not mean that the Company was solvent. It made an overall loss in financial year 2003. Therefore whatever profits it made from its ongoing contracts that year did not, and could not, take it from an insolvent position to a solvent position. The Company was not a going concern simply because it was still doing some work.
[102] On a consideration of the evidence therefore, I do not accept the Directors’ contentions that they were not aware of the Company’s financial difficulties or its insolvent position. In my judgment, both the Directors knew that the Company could not pay its debts as the same fell due and the actions that they took after 30 April 2003 must be considered in the light of such knowledge.
Should the Directors be made to repay moneys taken from the Company?
[103] The plaintiffs’ case was that during their investigations of the Company’s affairs, they found that the Directors had caused the Company to make a number of payments to Mr Leow between May 2003 and August 2004. According to the plaintiffs’ closing submissions, these payments totalled $537,738. The plaintiffs also made reference to the statement of claim (Amendment No 3) which included a table giving me the particulars of the impugned payments. The payments in the table totalled $544,239.17. The difference between the two figures is the amount of $6,501.17 which was particularised in item 10 of the table as being a cash amount paid out on 31 August 2003. In court, Mr Kon confirmed that the plaintiffs were no longer claiming reimbursement of that amount.
[104] The table in the statement of claim is set out below. Hereafter, I will refer to the individual items which are challenged as Payments and will identify them by the serial numbers in the table.
[105] The plaintiffs’ case is that the Payments formed part of a series of irregular and fraudulent transactions which had the effect of siphoning moneys from the Company and out of the reach of its creditors. They submitted that the Directors had masterminded the scheme to defraud the Company’s creditors. The Payments were documented by way of payment vouchers from the Company which were either made out in favour of Mr Leow or which were marked as “cash payments”.
[106] In their defence, the Directors said that the Payments were made in good faith and/or in the knowledge that the Company was not insolvent and/or in the belief that the Company was not insolvent. I have found that the Directors knew that the Company was insolvent during the period when these Payments were made and therefore the onus must lie on the Directors to explain the reason for the Payments and why it was that they were each made in good faith for the Company’s business.
[107] The Payments were made to Mr Leow. When he was asked in court to explain them, he maintained that he could not recall anything about any of the Payments and repeatedly stated that his wife would be able to help the court. In her AEIC, Mdm Ong attempted to explain the Payments. She did this by splitting the Payments into several overlapping categories as follows:
(a) the Directors would pay their employees’ salaries in cash first and the Company would reimburse them later;
(b) the Directors may have withdrawn cash from the Company which they had then used to pay the Company’s employees’ salaries;
(c) Mr Leow may have borrowed money from his friends and/or other contractors and repaid them by way of cash cheques; and
(d) some of the Payments involved cheques that were not issued by Mr Leow.
[108] It should be noted that not all the Payments made were explained by Mdm Ong as belonging to one or more of the categories set out above. Some Payments were not explained at all. Other Payments fell into more than one of her categories. For example, she said that Payment no 6 was meant as a repayment of a loan given by one Mr Piak Boon Seng (category (c)) and also that the cash cheque for this amount was not issued to Mr Leow (category (d)). In court, Mdm Ong was questioned extensively about the various Payments and she had quite a lot of difficulty in explaining them.
[109] In their submissions, the Directors relied heavily on the assertion that Mr Leow had contributed significant funds to the Company and these contributions were recorded under the Directors’ account in the Company’s general ledger or in the cash book. At the end of the financial year, after netting off the cash payments to Mr Leow against the cash payments made by him to the Company, the balance on the cash book was carried back to the Directors’ account under the general ledger as a pure accounting operation and treated as a partial repayment of the Directors’ loans. The records showed that the Payments were taken account of in the Directors’ account in the Company’s general ledger. They did not disappear off the radar and they were not off balance sheet items. The first plaintiff had conceded that all of the impugned Payments were openly recorded in the Company’s documents.
[110] The Directors also submitted that the plaintiffs could not prove fraud by shifting the burden to the Directors to provide explanations for the Payments. They had to prove fraud by convincing evidence. Secondly, Mr Leow was legally entitled to repay himself the Directors’ loans because these loans were, on the Company’s audited statements, stated to be “with no fixed terms of repayment” and were therefore repayable only on demand. In this regard, Mr Kon had agreed that the Directors could choose whether to postpone payment or to pay themselves in respect of such loans.
[111] In my opinion, the fact that the Payments were recorded in the Company’s records could not by itself mean that the Payments were used for the Company’s purposes. There had to be supporting documents to show what the Payments were for. The problem in this case was that there were insufficient accompanying documents which established that the moneys were taken for the Company’s purposes and not for other uses. This is why the explanation of the Directors as to who were the persons who handled the funds was very important. If the Directors were able to explain what had happened to the various Payments and how they were used in the Company’s business, then there would be no reason to impugn these Payments. In the absence of satisfactory explanation, however, the court might have no option but to draw an adverse inference. Whilst it is always preferable to have direct evidence of fraud, sometimes fraud can be established by inference if the circumstances are strong enough.
[112] Dealing with Mdm Ong’s explanations, first, she said that Payments nos 8, 9, 13, 15, 25, 27 and 29 fell into two categories. They were either reimbursements to the Directors of employees’ wages which they had paid in cash or they were cash withdrawals which the Directors had taken from the Company in order to pay wages. In this regard, I note that the Company was a small family run business in the contracting industry and that it is not uncommon in this industry to pay workers in cash especially as many may be daily-rated workers. There must, however, surely be some record of the wages paid and receipts for them signed by the workers. In any case, some of the sums taken seemed far too large to simply be moneys used to pay salaries.
[113] Looking at the table, Payment no 8 was by way of a cash cheque for $200,000. I find it difficult to conceive that Mr Leow advanced $200,000 for salaries and had no documentation to support those payments. There is no evidence that the sum represented only one month’s wage bill and it is highly unlikely that Mr Leow paid several months’ wages from his own resources and only sought reimbursement when the figure reached $200,000. Mdm Ong’s explanation of this payment is therefore incredible. This cheque was dated 25 August 2003. The next Payment, item no 9, was a cash cheque for $5,000 dated 26 August 2003. There was no indication of what additional salaries Mr Leow had paid between 25 and 26 August 2003 to require him to be reimbursed with a further $5,000 just after he had received $200,000.
[114] Payment no 13 was a cash cheque for $37,000. This perhaps could have represented a payment for salary or overtime, but Mdm Ong did not point to her payroll to cross-reference the wages due. Payment no 15 was a cash cheque dated 5 March 2004 for $10,000. There was the same lack of evidence in relation to this as in relation to Payment no 13. The next Payment, no 25, was for $12,000 and again lacked supporting evidence. Payments no 27 (5 July 2004) for $1,000 and Payment no 29 (6 August 2004) for $6,000 were for smaller sums but were still not supported by reference to the Company’s payroll. In all cases there was a lack of supporting documentation to show how Mr Leow was being reimbursed for payments he had made for the Company.
[115] Thus, while I accept in principle that the Company could have advanced cash to Mr Leow to pay wages, it is not possible for me to find that these advances were made for wage payments (either as reimbursement for past wages or for current wages) because of the lack of correlation between the amounts taken and wages paid. In addition, it is entirely possible that whilst Mr Leow used some part of the funds for wages, the remainder thereof was applied for other uses which were not explained. In all these circumstances, I find that these Payments have not been substantiated as having been made bona fide for the Company’s business and therefore Payments no 8, 9, 13, 15, 25, 27 and 29 must be repaid by Mr Leow.
[116] On the next set of transactions, Payments 2, 3, 4, 5, 6, 18, 19, 21, 22 and 24, Mdm Ong’s explanation was that these were repayments of loans given by third parties. She named the third parties as being Mr Tan Koon Leck, Mr Piak Boon Seng and Mr Piak Beng Teck. Mdm Ong agreed in cross-examination, however, that there was no evidence apart from Mr Leow’s word that the Company had taken loans from these third parties through him. I will deal first with those Payments that were paid into third party accounts.
[117] In respect of Payment no 2, a cash cheque for $30,000, the voucher stated that the payee was Mr Leow and the particulars of the payment indicated that it was “cash loan return”. The cheque itself was paid into a bank account in the joint names of Piak Boon Seng and Piak Beng Teck. Mdm Ong said this cheque was for “money borrowed from them previously and now returned to them”. Payment no 5 was a sum of $10,000 paid by cheque no 567964 on 25 June 2003. The voucher described the payee as “cash – Leow Boon Cher” and the particulars were simply “Cash loan return”. However, the back of the cheque shows that it was paid into the same account in the names of both Piak Boon Seng and Piak Beng Teck as Payment no 2 had been.
[118] In respect of Payment no 3, a cash cheque for $30,000 dated 21 June 2003, the voucher said “payee cash – Leow Boon Cher” and the particulars in the voucher stated “loan return cash”. Mdm Ong said this was repayment of a loan extended by Tan Koon Leck. The account the cheque was paid into was not an account belonging to either Director.
[119] Payment no 6 was a cash cheque for $80,000. The voucher stated “Payee cash” and gave no other details. According to the back of the cheque, it was cashed by Mr Piak Boon Seng on 20 August 2003. On 30 March 2004, Mr Piak Boon Seng was paid $1,000 (Payment no 21) by way of a cash cheque (no 568350) and on 5 April 2004, he received another $1,000 (Payment no 22) by way of another cash cheque (no 568354).
[120] In respect of Payment no 4, a cheque was drawn in favour of Mdm Ong herself for $17,540 but the voucher said that the payee was “cash – Leow Boon Cher” and the particulars gave the same description as for Payments 2 and 3. Mdm Ong was asked to explain this Payment and her reply was “When I entered them into the account, so when I – when the money came, I’ll put it under Leow Boon Cher, so when the money go out, I also take it from Leow Boon Cher”. She then confirmed that this was an instance when Mr Leow had borrowed money from her to pay the Company’s expenses and the payment voucher represented his payment to her. I find this explanation difficult to accept. It was open to Mdm Ong to lend money to the Company directly and documenting it properly would not have been difficult since she was in charge of the accounts. Her explanation seemed convoluted and incredible.
[121] Payment no 18 was a cash cheque (no 568358) for $1,000. Under “Particulars” in the payment voucher, Mr Leow’s name appeared. There is no indication at the back of the cheque where the money went so it was probably paid to him in cash.

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Kon Yin Tong and another v Leow Boon Cher and others

Laws this judgment relies on

Grounds of decision

The parties

The dispute

The plaintiffs’ narrative

The law

Insolvency

Sham or fraudulent transactions

The law on unfair preference and undervalue transactions

Unfair preference transactions

Was the Company insolvent on either or both of the specified dates?

Did the Directors know that the Company was insolvent?

Should the Directors be made to repay moneys taken from the Company?