Law Chin Eng and Another v Hiap Seng & Co Pte Ltd (Lau Chin Hu and others, applicants)

Kan Ting Chiu J:

[1] The plaintiffs are two directors/shareholders of a company, Hiap Seng & Co Pte Ltd (“the company”). They are applying for leave under s 216A of the Companies Act (Cap 50, 2006 Rev Ed) to bring an action in the name of the company against three other directors/shareholders of the company.

[2] All the individual parties are members of the same family, although the family name is spelt variously as Law, Lau and Lew. The patriarch of the family, Lew Huat Leng, set up a business with the name of Hiap Seng & Co in the 1940s. The company was incorporated in 1976 and it eventually took over and expanded on the business of Hiap Seng & Co. The patriarch died in 1980.

[3] The plaintiffs are Law Chin Eng (“LCE”) and Lau Chin Whatt (“LCW”). I shall refer to them individually as the first plaintiff and second plaintiff respectively. The three directors/shareholders who are the proposed defendants are Lau Chin Hu (“LCH”), Lew Kiat Beng (“LKB”) and Law Chin Chai (“LCC”), and they have been directors of the company since 1979. I shall refer to them individually as the first to third proposed defendants respectively.

[4] The plaintiffs, the first proposed defendant and the third proposed defendant are the sons of Lew Huat Leng. LKB, the second proposed defendant, is their nephew and the son of the patriarch’s deceased eldest son, Lim Chin Hwa. Lim Chin Hwa managed the company up to his death in 2001, when his son LKB took over. Each of the four surviving sons, as well as the estate of Lew Chin Hwa holds 16.82% of the shares of the company, while LKB holds 15.9%. The company is a family company with the shareholders split into two camps in this application.

[5] The proposed action is founded on the proposed defendants’ breach of fiduciary duties to the company as its directors. In para 8 of the draft statement of claim, six heads of complaints of breaches of fiduciary duties were set out:

The second plaintiff filed an affidavit which set out the circumstances in which the alleged breaches were committed and discovered. In the affidavit, the second plaintiff revealed that the IRAS investigations related to the company’s fictional transactions with Drilbo had resulted in the company having to make payment of $2,562,614.85 in unpaid taxes and $4,573,167.33 as a composition fine.

[6] All three proposed defendants opposed the application. The first and third proposed defendants are represented by one firm of solicitors while the second proposed defendant is represented by another firm.

[7] The plaintiffs’ and the proposed defendants’ arguments on the application are centred around the requirements of s 216A(3), that:

[8] The proposed defendants resisted the plaintiffs’ application on the ground that it was another chapter in the longstanding feud between the plaintiffs and the proposed defendants, which had already resulted in a pending action in Suit No 839 of 2006 (“S 839”). They contended firstly that this application was not made in good faith; secondly, that the proposed action was not in the interests of the company; and thirdly, that winding up the company was an appropriate remedy to the plaintiffs’ grievances.

[9] S 839 was taken out by the same plaintiffs as in this action. The defendants are LCH, LCC, LKB, the company, and a company named Winstant Holding Pte Ltd. In the suit, the plaintiffs alleged that there was an undocumented “Lau Family Trust” set up for the benefit of the members of the family, which covered a range of assets the plaintiffs alleged were acquired from the assets of the family which they call the “Family Assets”. They claim to be beneficiaries under the trust.

[10] S 839 in its original form also included a claim that LCH, LCC and LKB had breached their fiduciary duties as directors of the company. Tan Lee Meng J struck out those claims on the grounds that: the wrongs pleaded were done to the company; the resultant loses were suffered by the company; and the company had a cause of action in respect of these alleged wrongs. Thus, under “the proper claimant rule” otherwise known as the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189, the proper plaintiff was the company and not LCE and LCW as shareholders and directors of the company. The appeal from Tan J’s judgment was dismissed by the Court of Appeal.

[11] Section 216A received the attention of the Court of Appeal in Pang Yong Hock v PKS Contracts Services Pte Ltd [2004] 3 SLR 1 (“Pang Yong Hock”). The Court referred to earlier decisions of the High Court in Teo Gek Luang v Ng Ai Tiong [1999] 1 SLR 434 (“Teo Gek Luang”) and Agus Irawan v Toh Teck Chye [2002] 2 SLR 198 (“Agus Irawan”) with approval. In Teo Gek Luang, Lai Kew Chai J held at [15] that when an application under s 216A was made:

Similarly, in Agus Irawan, where the question was where the burden to prove good faith lay, Choo Han Teck JC held that it was for the party opposing the s 216A application to show that it was not made in good faith.

[12] The Court of Appeal explained at [19] of Pang Yong Hock that s 216A was enacted:

[13] Regarding the “good faith” requirement in ss (3)(b), the Court held at [20] that:

[14] It went on at [21] to state that in deciding on the “interests of the company” requirement in ss (3)(c), a court must:

The interests of a company are, of course, not to be measured only in monetary terms. A company may engage in litigation over matters with no monetary implication, e.g. its employment policy.

[15] The Court added at [22] that in deciding whether to approve an application for leave to commence a derivative action:

[16] The first proposed defendant averred in his affidavit that the proposed derivative action was motivated by the second plaintiff’s personal vendetta against the proposed defendants. The first proposed defendant then went on to set out a history of the alleged acrimony going back to the mid-1990s.

[17] The second proposed defendant in his affidavit deposed that the second plaintiff had, in 2004, wanted the proposed defendants to buy him out of the company on his terms. The proposed defendants found his terms unreasonable and rejected them. The second proposed defendant contended that the sole motivating factor in this application was to coerce the proposed defendants to accept those terms.

[18] There is no doubt that there had been serious disagreements between the plaintiffs (particularly the second plaintiff) and the proposed defendants (particularly the second proposed defendant) for more than a decade. There is still a strong degree of distrust and personal hostility between them. But such sentiments, however deep, do not constitute bad faith. As the Court of Appeal had explained in Pang Yong Hock at [20]:

[19] The good faith requirement for making an application for leave to bring an action in the name of a company is satisfied when the applicant is shown to be acting in the interests of the company. As the purpose of derivative actions is to promote the interests of the company, a personal dislike for the proposed defendants will not defeat such an application unless the application is merely an extension of that animosity and is not made with the intention to promote or protect the company’s interests.

[20] The derivative action provisions in our Companies Act are modelled on the provisions in the Canada Business Corporations Act R.S.C. 1985, c. C–44. Section 216A(2) and (3) of our Act are similar to s 239(1) and (2) of the Canadian act. For this reason, decisions on the relevant Canadian provisions are useful guides to the construction of our provisions. In Intercontinental Precious Metals Inc. v Cooke [1994] 4 WWR 66, a decision of the British Columbia Supreme Court, Tysoe J ruled that the fact that there is a shareholder battle does not lead to the inference that an application is motivated by bad faith. In Primex Investments Ltd v Northwest Sports Enterprises Ltd [1996] 4 WWR 54, another decision of the British Columbia Supreme Court, Tysoe J held that in a situation where an applicant was acting out of self-interest in wanting to prosecute a derivative action in the name of a company, and the applicant’s self-interest coincided with the interests of the company, the applicant’s self-interest did not mean that his application was made in bad faith.

[21] A derivative action can be struck out if it is not prosecuted in good faith. In Barrett v Duckett & Ors [1995] 1 BCLC 243 (“Barrett”), the English Court of Appeal struck out a derivative action brought by a shareholder of a company against her former son-in-law and his wife by a subsequent marriage. Peter Gibson LJ found, at 245, that:

[22] The learned judge found that personal rather than financial considerations appeared to be impelling the plaintiff to pursue the action, and he was convinced that the plaintiff was not pursuing the action bona fide on behalf of the company. He struck out the action with the concurrence of Beldam LJ and Russell LJ.

[23] In the present case, there is a history of hostility between the plaintiffs and the proposed defendants. However, the plaintiffs cannot be said to be motivated by personal rather than financial considerations in pursuing their disputes with the proposed defendants and the company.

[24] If the proposed action succeeds, there will be benefits to the company, and to them as shareholders of the company. Their good faith in making the application cannot be impugned by their grievances over the proposed defendants’ rejection of their claims in respect of the Lau Family Trust and the Family Assets.

[26] It is therefore necessary to look at each complaint set out in [5], and ascertain if it is in the company’s interests to have it litigated. I will refer to each complaint as it is enumerated in para 8 of the draft statement of claim.

[27] This concerns a payment of $4,406,589.23 from the company’s overdraft account to the fictitious Hawker Enterprise Ltd which the company should not have made. This is a claim in the interests of the company.

[28] The complaint is that out of a sum of $487,405.99 withdrawn in 2001 for payments to the first plaintiff and the three proposed defendants, the first plaintiff did not receive his share of $53,166.75. The complaint is also that $5,000 of the sum withdrawn was unaccounted for. The first plaintiff has not deposed any affidavit or made any complaint to the company that he did not receive the payment. Neither plaintiff referred to the $5,000 allegedly unaccounted for in their respective affidavits. It is not in the interests of the company to make a claim so bereft of substance.

[29] This involves the use of $2 million of the company’s monies to purchase a property in Marsiling. The property was transferred to a company, the shareholders of which were the second proposed defendant and his brother. The property was subsequently sold for more than $18 million. It is in the company’s interests to pursue this claim.

[30] The plaintiffs are unhappy that the company purchased a property in Shenzhen without a proper valuation or the company’s approval. There is no allegation that the company sustained loss as a result of the purchase. The plaintiffs have not shown that it is in the interests of the company to pursue this matter.

[31] This complaint relates to false trades between the company and Drilbo, whereby the company made payments to Drilbo’s invoices for these transactions. It is in the company’s interests to sue the proposed defendants over these payments.

[32] These complaints relate to false transactions with two other companies, Manfield and Aichi. However, there are no allegations that the company had made payments or incurred any liabilities in these transactions. For this reason, the plaintiffs have not shown that it is in the company’s interests to sue the proposed defendants over these transactions.

[33] These were complaints concerning the forgery of the second plaintiff’s signature on company documents, the late payment of dividends to the second plaintiff, the failure to notify the plaintiffs of company meetings, the filing of the company’s annual returns before the company’s accounts were approved by the company and the failure to have the company’s accounts properly audited. The plaintiffs made no assertion that these acts and omissions had placed the company in a position where it would be in its interests to sue the proposed defendants over these matters.

[34] Complaint (f) (v) differs from complaints (i), (ii), (iii), (iv), (vi) and (vii). It relates to the first and second proposed defendants’ use of company funds to purchase a property in Hong Kong and the proposed defendants’ failure to account for this property and the income generated from it. A derivative action on this matter is in the interests of the company.

[35] This arises out of the company’s involvement in tax evasion which resulted in the company having to pay a composition fine of $4,573,167.33. Since the company incurred loss, this claim which may result in recovery of the loss from the proposed defendants is in the company’s interests.

[36] In Pang Yong Hock, the Court of Appeal did not authorise a derivative action and upheld the trial court’s ruling that the company should be wound up instead. In its decision, the Court of Appeal referred to and agreed with Peter Gibson LJ’s statement in Barrett (at 250) that:

[37] In Barrett, a winding up petition had been filed before the derivative action. In Pang Yong Hock, the winding up petition had not been filed when the trial judge had dismissed the application. However, it was filed by the time the appeal came before the Court of Appeal.

[38] The company in Barrett was in a deadlock because of disagreements between the two parties, each of whom held 50% of the company’s shares. The company had ceased trading and was probably insolvent. In Pang Yong Hock, there was a deadlock in the company because two factions of shareholders were unable to co-exist. The company had not filed its statutory accounts or held the statutory meetings.

[39] In the present case, no petition has been filed. In December 2006, the second proposed defendant gave notice for the directors of the company to resolve that the company be wound up voluntarily so that “all shareholders get their share in the company fairly”, but the proposal was not taken up and no further action was taken. The second proposed defendant did not allude to this proposal in his affidavit, and the notice came up in these proceedings only as an exhibit in the second plaintiff’s affidavit. The proposed defendants have not stated in their affidavits that they intend to wind up the company, nor have they stated that winding up is an appropriate solution to the disputes between the parties. None of the parties in the present case has asserted that the company is in deadlock or insolvent; nor have they deposed that it has ceased to trade or that it may not be able to continue to trade.

[40] While the winding up of a company may be preferable to the prosecution of derivative actions in Barrett and Pang Yong Hock, this does not apply to the present case.