Lai Shit Har and Another v Lau Yu Man

[1] This is an appeal against the decision of the High Court judge (“the Judge”) in Lau Yu Man v Wellmix Organics (International) Pte Ltd [2007] SGHC 223 (“the second GD”), where he ordered that Wellmix Organics (International) Pte Ltd (“the Company”) be wound up pursuant to s 254(1)(c) of the Companies Act (Cap 50, 2006 Rev Ed) on the basis that the Company had suspended its business for more than a year. This winding-up order followed hard on the heels of the Judge’s refusal to grant an extension of time to the Company to make good its persistent disregard of the requirements of the Companies Act and the Companies Regulations (Cap 50, Rg 1, 1990 Rev Ed) in accordance with his earlier order in Lau Yu Man v Wellmix Organics (International) Pte Ltd [2007] SGHC 96 (“the first GD”). The appellants vigorously contested the winding-up order on the basis that the Judge failed to assess all the relevant factors in exercising his discretion to wind up the Company, including the consideration that the winding-up application was in itself an abuse of process.

[2] Having carefully considered the submissions of both parties and reviewed the evidence before us, we allowed the appeal. We now give the detailed grounds for our decision.

[3] The appellants comprise Mdm Lai Shit Har, an 85-year-old lady who is the majority shareholder of the Company, as well as Wong Yiat Hong (“Wong”), her son and the general manager of the Company.

[4] The respondent, Lau Yu Man, is a director and minority shareholder of the Company. The respondent also has a variety of business interests abroad, including a group of companies bearing the “Wellmix” name based in Hong Kong (“the Wellmix Group”). The parent company of the Wellmix Group is Cheer Union Development Ltd (“CUDL”), in which the respondent is the chairman of the board of directors. It is an assumed fact in these proceedings that the respondent controls the Wellmix Group and CUDL.

[5] The Company was incorporated on 15 October 1998 to distribute fertiliser procured from the Wellmix Group. It is not disputed that the respondent invested $100,000 in the Company in exchange for a 10% shareholding in the Company. In addition, the appellants were obliged to arrange for the injection of a further $500,000 as additional capital for the Company. However, whether or not they did so is in issue.

[6] Sadly, less than two years after the Company was incorporated, an intractable dispute emerged between the respondent and Wong as to whether the Company’s distributorship included the exclusive right to distribute Wellmix fertilisers in Malaysia. From that point on, the parties’ relationship entered into a downward spiral and soon irretrievably broke down. Litigation ensued.

[7] In 2000, the Company initiated proceedings in Suit No 600041 of 2000 against CUDL, alleging the supply of defective goods, as well as a breach of contract arising from the award of the Malaysian distributorship of Wellmix fertilisers to a company known as MATTRA. Although there was a proposed compromise in that action, where CUDL was to pay the Company $20,000 in consideration of the Company removing the word “Wellmix” from its name as well as relieving the respondent of his directorship in the Company, the compromise was never implemented. Nevertheless, the Company discontinued Suit No 600041 of 2000 on 11 May 2000.

[8] On 26 May 2001, the Company filed Suit No 642 of 2001 (“the Suit”), claiming approximately $12.8m in damages and losses for the respondent’s alleged breach of his duties as a director of the Company. The Company alleged that the respondent had breached his fiduciary duties by poaching clients of the Company, including MATTRA, for the benefit of CUDL or the Wellmix Group. The respondent robustly denied this and contended that he had been induced to become a director of the Company because of misrepresentations made by Wong.

[10] Upon hearing the winding-up application on 5 February 2007, the Judge found that the Company had suspended its business since 2001 and that it was being kept alive purely to sustain the action against the respondent – indeed, this claim was the Company’s only asset (see the first GD at [11]). The Judge also unhappily noted that the Company was in “disarray” and “not operated as a company” (ibid); it had additionally failed to maintain proper audited accounts in compliance with the Companies Act and the Companies Regulations since inception.

[11] Nevertheless, invoking his generous discretion pursuant to s 254(1)(c) of the Companies Act, the Judge considered that winding up the Company would “suppress a claim by an impecunious plaintiff (the Company … )” (ibid). In the words of the Judge (at [10]):

[13] Faced with the conflicting interests of the respondent as a contributor who wanted the Company to be put into the hands of an independent liquidator so that he could discover how his $100,000 had been utilised and whether the further $500,000 had been injected into the Company on the one hand, and of Mdm Lai as a main shareholder who desired the Company to carry on business on the other, the Judge concluded that this was a “difficult case” (at [12]). Ultimately, he accepted the suggestion of counsel for the Company and directed that the Company take steps to file its audited accounts to rectify its previous breaches and comply with the Companies Act and the Companies Regulations within four months (ending 5 June 2007). He adjourned the application and gave liberty to the respondent to apply for a winding-up order after 5 June 2007 if the Company failed to comply by that date.

[14] The Company failed to file its audited accounts. On 6 June 2007, counsel for the respondent requested the Registry to restore the winding-up application for hearing. About one month later, on 4 July 2007, the Company filed Summons No 2865 of 2007 requesting an extension of time to file its audited accounts as well as a further adjournment of the winding-up application.

[15] The Judge heard both applications on 16 July 2007. He subsequently explained his approach in assessing the competing views as follows (see the second GD at [7]):

The Judge accordingly refused to grant an extension of time and, after hearing the winding-up application in open court, ordered the Company to be wound up pursuant to s 254(1)(c) of the Companies Act (ibid).

[16] We note at this juncture that although the appellants appealed against this order, they did not appeal against the Judge’s orders on 5 February 2007 or the findings contained in the first GD.

[17] In their written submissions, the appellants identified two issues – the first related to whether the Judge had wrongly refused to grant an extension of time for the Company to comply with the Companies Act and the Companies Regulations and the second was whether the Judge had erred in winding up the Company on 16 July 2007. It was unnecessary for us to consider the first issue because our determination on the second issue resolved the entire matter.

[18] As we saw it, the real issues that surfaced in this appeal were as follows:

(a) whether the winding-up application was an abuse of process; and

(b) whether the Judge erred in ordering the Company to be wound up without holistically evaluating the merits of the case.

[20] As a secondary point, we also think it is important to underscore the duty of a judge, in appropriate cases, to assess all the material evidence and consider all the relevant issues before him before exercising his discretion to wind up a company. Based on the grounds of decision given by the Judge and the notes of argument, we found that the Judge failed to adequately appraise and appreciate the merits of the winding-up application before he made the winding-up order.

[21] Although there was no appeal against the Judge’s initial decision made on 5 February 2007, we felt it was also necessary to review this decision together with the second decision of 16 July 2007. Both decisions were closely intertwined. In the second GD, the Judge quoted extensively from the first GD and it was evident that his earlier findings heavily influenced his subsequent decision. Further, the Judge seemed to suggest in the second GD that his decision of 16 July 2007 inevitably flowed from the appellants’ failure to comply with the order made on 5 February 2007 (see [15] above). In these circumstances, it was only appropriate for us to consider both the Judge’s first and second decisions in this appeal.

[22] The court has inherent jurisdiction to prevent an abuse of its processes. In Chee Siok Chin v Minister for Home Affairs [2006] 1 SLR 582 at [34] (“Chee Siok Chin”) the Singapore High Court set out four categories of the type of proceedings that would amount to an “abuse of process”, one of which was “proceedings where the process of the court [was] not being fairly or honestly used but [was] employed for some ulterior or improper purpose or in an improper way” [emphasis in original]. Chee Siok Chin has most recently been followed in NCC International AB v Alliance Concrete Singapore Pte Ltd [2008] 2 SLR 565 at [71].

[23] In the present context, it has also been recognised that a winding-up application brought for a collateral purpose may be summarily dismissed as being an abuse of process. In Re Mechanised Construction Pte Ltd [1989] SLR 533, a winding-up order was sought on the basis that the company was unable to pay its debts. The debt was allegedly owed pursuant to a sales contract whereby the creditor company agreed to supply, fabricate and install structural steelworks for the debtor company in connection with a school construction project. Unfortunately there were delays in completing the works and the debtor company eventually ceased making payments. The debtor company, inter alia, challenged the value placed on the amount of work done and also took issue with the slow progress of the works; on the other hand, the creditor company alleged that it had been given the site late and was not bound by previous timelines. Chao Hick Tin JC found that the application was brought for the improper purpose of enforcing payment of a debt which was bona fide disputed and dismissed the petition as an abuse of process.

[24] Here, the remarkable timing of the winding-up application unequivocally affirmed that it must have been brought solely for the collateral purpose of either seriously delaying or wholly derailing the Suit.

[25] First, the winding-up application was brought after a very substantial delay from the time when the ground relied on for winding up had surfaced and long after the initiation of the Suit. The principal ground that the respondent relied on for winding up the Company, that the Company had suspended its business for a whole year, had come into existence in 2002 – a year after the Company suspended its business in 2001 (see [10] above). Yet, the respondent only brought the winding-up application on 26 August 2006, approximately four years later. Counsel for the respondent proffered two reasons for the delay in making the winding-up application. The first was that the financial disarray of the Company was discovered only in August 2006 when the respondent obtained inspection of the Company’s records. We did not find this explanation persuasive because the respondent had only attempted to gain access to the Company’s records very late in the day – the letters exhibited by the respondent in which he sought disclosure of the Company’s accounts are dated 13 October 2005 and 20 October 2005. This was despite the respondent having been aware as early as 27 December 2002 that the Company’s accounts were not properly kept, when the respondent’s then solicitors, M/s Tan Lee & Partners, sent a letter to the company secretary of the Company. In that letter, the respondent’s solicitors stated that the respondent had received a reminder from the Registry of Companies to file the annual returns of the Company before 4 February 2003, failing which proceedings would be brought against the respondent as an officer of the Company. The subsequent correspondence confirmed that the issue was never resolved. The second reason given to us was that the respondent had only been advised of the option of winding up the Company after a change of solicitors on 19 July 2006. We do not doubt that the respondent was so advised, but it could not justify such a late application in circumstances which clearly demonstrated that the only motive for winding up the Company was to prevent or delay the Suit from proceeding as scheduled.

[27] In addition to the timing of the application, the respondent’s statement in his reply affidavit filed on 2 October 2006 was further confirmation that the winding-up application was brought for a collateral purpose. The respondent stated at para 14 of his reply affidavit[note: 1] that:

In our view, if the respondent’s genuine concern was that the Company was being used as an oppressive vehicle against him, the proper cause of action would be a minority oppression action under s 216 of the Companies Act and not a winding-up application. This statement plainly and, perhaps, unwittingly reveals the true intention of the respondent in bringing the winding-up application, which was to smother the Suit.

[30] It was, in our view, on the facts of this matter plainly incumbent on the Judge to evaluate the merits of the winding-up application before making the winding-up order at the second hearing. Such an evaluation required the Judge to carefully consider and assess all the relevant issues before him.

[31] A case on point, which we drew counsel’s attention to, was In the Matter of the Companies Ordinance, Cap 32 and in the Matter of Power Point Engineering Limited [2000] HKCFI 800; [2000] HKCU 501 (“Re Power Point Engineering”), a decision of the High Court of Hong Kong. That case similarly concerned a contributories’ petition to wind up a company on, inter alia, the basis that the company had suspended its business for a whole year under s 177(1)(b) of the Companies Ordinance (Cap 32) (HK), which is the equivalent of s 254(1)(c) of the Companies Act. The company was a joint venture set up by the two petitioning contributories and the opposing contributory to assume the role of a sub-contractor in certain large-scale government projects. It commenced work for the main contractor on the projects on 1 April 1998 but was then instructed to stop work two weeks later on 15 April 1998. The company engaged in no further business after that. Subsequently, the main contractor awarded the sub-contracting work to another company that had been newly formed by the girlfriend and wife respectively of the two petitioners on 28 April 1998.

[32] The court first considered the chronology of events and noted, in relation to s 177(1)(b) of the Company’s Ordinance, that although it was plain that the company had not carried on business since 15 April 1998, it still had to “enquire into the reasons why [the company] had to cease business” [emphasis added] (at [45]). On the facts of the case, the court concluded that compelling circumstances existed requiring the court to carefully appraise the exercise of its discretion to make a winding-up order. The court found that the suspension of the company’s business was solely attributable to the petitioners’ breach of fiduciary duty – they had acted in concert with the main contractor to oust the company from the projects – and held at [46] that:

In addition, the court considered that although the company had indeed lost its substratum and there was a deadlock between the contributories, there was another reason for it not to wind up the company, namely, that winding up the company would prevent the company from making a claim against the petitioners for their breach of fiduciary duty (at [47]):

[33] We agree with the principles relied on in Re Power Point Engineering. We recapitulate. Although the statutory grounds for winding up a company may have been technically established, the court retains the residual discretion to consider all the relevant factors, including the utility, propriety and effect of a winding-up order as well as the overall fairness and justice of the case, before deciding whether or not to wind up the company. In the context of s 254(1)(c) of the Companies Act, this may include, in appropriate cases, careful consideration as to whether the petitioner could have been responsible in any meaningful way for the company’s suspension of business and whether winding up the company would prevent the company from pursuing misfeasance proceedings against the petitioner. In most cases, this enquiry will be a brief one, but in some, the court is duty-bound to evaluate the evidence and weigh all the factors before making a determination.

[34] This matter was one of those situations requiring a detailed and close enquiry because the factual matrix gave rise to mixed issues of fact and law apropos:

(a) whether the winding-up application was an abuse of process (as in the case of Re Mechanised Construction Pte Ltd described at [23] above);

(b) whether the respondent could have been responsible for the Company’s business being suspended (as was the case in Re Power Point Engineering described at [31]–[32] above); and

(c) whether the Company’s claim against the respondent in the Suit was a bona fide claim (see Pacific Recreation Pte Ltd v S Y Technology Inc [2008] 2 SLR 491 at [17] and [23] where this court explained that a bona fide dispute was one in which there were triable issues).

If the answer to any of the above issues was in the affirmative, that would be good reason for the Judge to prevent the winding-up application from proceeding further or to dismiss it entirely.

[35] Although these issues were initially adverted to by the appellants (but, quite naturally, not by the respondent) in the court below, the Judge unfortunately failed to adequately consider them. This was evident from both the first GD and the second GD where the Judge made no reference to any of the issues, save for a comment on the last-mentioned issue (at [11] of the first GD, quoted at [2] of the second GD):

Apparently, the Judge did not consider whether the Company’s claim against the respondent was a bona fide one because the parties did not properly assist him on such an issue.

[36] The notes of argument provide a further insight into the Judge’s uncertainty. On 5 February 2007, the Judge stated[note: 2] that:

The issue of the bona fides of the Company’s claim was indeed very relevant to the winding-up application. As was held in Pacific Recreation Pte Ltd v S Y Technology Inc at [20]–[21], there is no obvious line demarcating an enquiry into whether a bona fide dispute exists and a decision on the merits of the dispute itself; deciding whether or not a bona fide dispute exists may sometimes involve deciding on the merits of the dispute itself. Here, however, the Judge need only have considered whether a bona fide dispute existed.

[37] Instead, after denying the appellants an extension of time to comply with his first order, the Judge proceeded to wind up the Company without more (see [14] to [15] above). This apparently was the consequence of counsel agreeing that a winding-up order would immediately ensue from the refusal to grant an extension of time. In turn, this situation only arose because of the Judge’s earlier order that the Company file its audited accounts. We would observe that although this order was made at the suggestion of counsel for the appellants, the Judge should not have taken it up as it only served to delay the trial of the Suit. The Company, to the knowledge of the respondent, had suspended its business for more than six years. If the respondent was interested in the accounts of the Company, he would have asked for them much earlier. In fact, he was only interested in winding up the Company to prevent the Suit from being heard.

[38] Counsel for the respondent relied on Pham Thai Duc v PTS Australian Distributor Pty Ltd [2005] NSWSC 98 (“Pham Thai Duc”) and sought to persuade us that, as in that case, a winding-up order had to be given to ensure fairness in the present situation. We disagree.

[39] In Pham Thai Duc, the Supreme Court of New South Wales exercised its discretion to wind up a company on the just and equitable ground that the relationship between the petitioner and the opposing contributory, who were the only shareholders and directors of the company, had irretrievably broken down. In doing so, the court considered the effect of appointing a liquidator on potential claims by the company and the issue of the petitioner’s fault and held (at [16]–[18]) as follows:

[41] On the issue of fault, the court in Pham Thai Duc found that both the petitioner and the opposing contributory had contributed to the breakdown upon which the winding-up application was based. In those circumstances, it was not deterred by this factor in exercising its discretion to wind up the company. In contrast, the Judge here made no finding as to whether or not the respondent or the appellants had caused the Company to suspend its business. Indeed, he could not do so on the available evidence. Rather than advancing the respondent’s case, Pham Thai Duc also illustrates the fundamental point that, in appropriate cases, a court is bound to assess all the relevant evidence and make findings on the material issues before it exercises its discretion.

[42] In the result, we were of the view that the Judge failed to properly evaluate the merits of the winding-up application before making a winding-up order. He did not consider the very live issues of whether the winding-up application was an abuse of process, whether the respondent could have caused the Company’s business to be suspended, and whether the Company had a bona fide claim against the respondent. We are not suggesting that it is incumbent on a judge to invariably examine all such issues when the ground relied on for the winding up of a company has been satisfied. However, when the basis for the winding up is inextricably linked to critical facts that may have preceded the existence of the ground relied on, a court may have to review the whole matter holistically.

[note: 1]See Appellant’s Core Bundle vol 4 at p 847.

[note: 2]See Appellant’s Record of Appeal vol 9 at pp 1627–1628.