Lim Kok Leong v Seen Joo Company Pte Ltd and others

Tan Siong Thye J:

[1] The plaintiff, Lim Kok Leong, had been a “sleeping” director of the first defendant, Seen Joo Company Pte Ltd (“the Company”) since 1997. He had not been involved in the management, or the day to day operations, of the Company.

[2] On 1 July 2014, the plaintiff sought to inspect the accounting and other records of the Company for the last five years. This was not acceded to. Thereafter, his other similar requests were also unsuccessful. Accordingly, the plaintiff took out an application under s 199 of the Companies Act (Cap 50, 2006 Rev Ed) (“the CA”) to compel the Company and its directors to allow him access to the Company’s accounting and other records. I granted his application.

[3] The defendants were dissatisfied with my decision and they lodged an appeal against it. I shall now give the reasons for my decision. As a preliminary point, the background facts of this judgment are taken from the defendants’ submissions. The plaintiff did not dispute the facts.

[4] The Company was incorporated in 1996. It was in the general wholesale business, which included trading in electronic components, as well as electrical and network cables and accessories. It was a family run business. Prior to the Company’s incorporation, the business was a partnership founded by the fourth defendant and his wife, the third defendant. During the partnership, the business was led and managed by the fourth defendant.

[5] The plaintiff worked for the partnership as a salesperson from 1990 to 1993. He then joined HLC Enterprises Pte Ltd (“HLC”) which was incorporated in 1993. The second, third and fifth defendants were shareholders of HLC and they appointed the plaintiff as the managing director of HLC. The plaintiff was also a shareholder of HLC.

[6] In 1996, after the Company was incorporated, the fourth defendant gave 10,000 shares in the Company to the plaintiff for free, in recognition of the plaintiff’s hard work for the partnership. The plaintiff was also appointed as a director of the Company. The plaintiff, however, was a sleeping director as he was not involved in the management and daily operations of the Company. This could be seen from the following:

(a) he was not present in most of the directors’ meetings;

(b) he was not present at the Annual General Meetings of the Company;

(c) he did not show any interest in the Company;

(d) he did not ask to see the accounting and other records of the Company until July 2014; and

(e) he had neither undertaken on any financial liability on the Company’s behalf nor had he signed any official documents on behalf of the Company.

[7] The defendants alleged that sometime on 26 July 2014, the plaintiff discovered that he was removed as director of HLC. Soon after, he asked to be allowed to inspect the accounting records and other records of the Company. When this was not acceded to, the plaintiff filed the present summons against the defendants on 7 July 2014, seeking to compel them to allow him inspection of the Company’s records.

[8] The issue was whether the plaintiff should be granted inspection of the Company’s records. The germane portion of s 199 of the CA, which he proceeded under, reads as follows:

[9] The plaintiff submitted that s 199(3) of the CA gave the directors an absolute right to inspect the accounting and other records of the Company. Therefore, he did not have to justify his request to inspect the records. It was presumed that the plaintiff’s request to inspect the records was made in the best interests of the Company. The onus was on the defendants to rebut this presumption, and the plaintiff argued that the defendants had failed to do so.

[10] Second, the plaintiff submitted that the defendants had also failed to show that he was acting pursuant to an improper purpose. The defendants alleged that the plaintiff had breached his fiduciary duty to the Company as he was in two other entities, namely Acmetec Corporation Pte Ltd (“Acmetec”) and Tricess Enterprise (“Tricess”) that had similar businesses as the Company. The plaintiff argued that he had ceased his involvement in those two ventures more than ten years ago. Thus that allegation was without basis.

[11] Third, the plaintiff submitted that although he was a sleeping director, s 199(3) of the CA did not prohibit him from the inspection of the accounting and other records of the Company.

[12] The defendants submitted that the plaintiff’s right to inspect the accounting records flowed from his office as a director. Any refusal by the Company could not confer a civil right of action on a director against itself, much less against another director.

[13] Second, the plaintiff’s request was not made bona fide. For the past 18 years, since the plaintiff had been made a director of the Company, he made no request to inspect the records. Now, all of a sudden, he wanted to inspect the accounting records for the last five years. The application against the defendants was frivolous and unmeritorious.

[15] Fourth, there was no legitimate basis to use the plaintiff’s removal as a HLC director as a ground to inspect the accounting records of the Company, although the directors of HLC and the Company might be similar. HLC and the Company were separate legal entities.

[17] I allowed the plaintiff’s application for the reasons set out below.

[18] In my view, s 199(1) of the CA imposes a statutory obligation on “every company and the directors and managers of the company” to keep and maintain accounting and other records of the company. Failure to comply with this statutory duty would expose not just the company but also every company officer to a penal sanction under s 199(6), which is a fine not exceeding $2,000 or to imprisonment for a term not exceeding three months, and also to a default penalty.

[19] Following from s 199(1), s 199(3) is the critical provision in this case. It clearly states that the company’s records “… shall at all times be open to inspection by the directors.” The word “shall” denotes that Parliament has prescribed a mandatory obligation on the part of the Company to allow the plaintiff to inspect the Company’s records under s 199.

[20] This appears to be the position taken by the cases that have discussed s 199 of the CA. In Wuu Khek Chiang George v ECRC Land Pte Ltd [1999] 2 SLR(R) 352 (“Wuu’s case”) at [26], it was held by the Court of Appeal that a director’s right to inspect the accounting and other records of the company under s 199(3) is an absolute one:

[21] Flowing from this, the Court of Appeal in Wuu’s case at [27] held that:

[22] This statutory right of inspection by a director of the company also existed under the common law as explained in Wuu’s case at [25]:

[23] On the abovementioned portions of Wuu’s case, I found that the plaintiff had an absolute right as a director of the Company to inspect the accounting and other records, notwithstanding the fact that he was a sleeping director. The plaintiff’s directorship was recognised by the defendants, who also acknowledged that a director could inspect the company’s accounting and other records regardless of whether he was active or inactive. The right flowed from his office as a director of the company: Welch and another v Brittania Industries Pte Ltd [1992] 3 SLR(R) 64 (“Welch”) at [29]. However, the defendants submitted that the plaintiff had previously not shown any interest in the Company. Thus there was no nexus between the plaintiff’s discharge of his director’s duties and his application to inspect the Company’s accounting and other records.

[24] In my view, the defendants’ argument was flawed. The defendants had conceded at the hearing that even a “sleeping” director could ask to inspect the accounting and other records of the Company. It was disingenuous to then argue that the plaintiff should not be allowed to inspect those records as he had been disinterested in the past. It was clear to me that the Court of Appeal in Wuu’s case drew no distinction between the different categories of directors. In W&P Piling Pte Ltd (in liquidation) v Chew Yin What and others [2007] 4 SLR(R) 218, Lai Siu Chiu J held (at [80]) that:

[25] Furthermore the purpose of the right to inspect was given a wide interpretation. In Hau Tau Khang v Sanur Indonesian Restaurant Pte Ltd and another (Hau Tau Thong, non-party) and another matter [2011] 3 SLR 1128 (“Sanur Restaurant”), Steven Chong J held at [22]–[23] that:

[26] The defendants also questioned the timing of the inspection, which was soon after the plaintiff discovered that he was removed as HLC’s director. However they were unable to show how the plaintiff’s request for inspection was mala fide or would be injurious to the Company. Walter Woon on Company Law (Tan Cheng Han gen ed) (Sweet & Maxwell, Rev 3rd Ed, 2009) (“Walter Woon”) at para 10.46 commented that it is extremely difficult for a company to refuse inspection:

[27] It was therefore my view that the plaintiff had the legal right to inspect the accounting and other records of the Company even though he was a passive director.

[28] I am of the view that the defendants could refuse the plaintiff access to the accounting records if they could show that the plaintiff wanted them for an improper purpose. This point was dealt with in Wuu’s case at [33]:

[29] Walter Woon expressed the same views at para 10.46:

[30] However, the defendants could not show that the plaintiff wanted the accounting records for an improper purpose. It is trite law that the onus to prove that the plaintiff had an improper purpose lay on the defendants. This was explained in Wuu’s case at [34]:

[31] The defendants alleged that the plaintiff had breached his fiduciary duty as he was involved in two other enterprises with a similar type of business as the Company. The defendant’s first allegation was that the plaintiff was a director of Acmetec. The second allegation was that the plaintiff was the sole proprietor of Tricess. In short, the defendants alleged that the former directorships of the plaintiff showed that the plaintiff was trying to act against the Company’s interest or, alternatively, intended to breach his fiduciary duty to the Company.

[32] I found these allegations unmeritorious. The defendants had accepted that the plaintiff was a director of Acmetec from 16 January 2003 to 3 August 2004. Hence, it had been about ten years since the plaintiff was Acmetec’s director. As for the sole proprietorship of Tricess, this was from 1989 to 1991. His involvement in Tricess had ceased about 23 years ago. I failed to see how the plaintiff’s past directorships could, in any way, evidence his intention to act to the detriment of the Company or show that his intentions to breach his fiduciary duty to it. They were bare and baseless allegations.

[33] I therefore held that the defendants had failed to show that the plaintiff had an improper purpose, or was acting mala fide, when he applied to inspect the accounting and other records of the Company.

[34] The defendants submitted that the plaintiff’s right to inspect the accounting and other records came from his office as a director, relying on the proposition in Wuu’s case at [33]. Therefore, the plaintiff’s right to inspect the accounting and other records of the Company was only against the Company as it was the Company that was obliged to keep records. Furthermore, company directors owed a fiduciary duty to the company and not to other directors or shareholders. Thus the plaintiff’s right could be enforced against the Company but not against the other directors.

[35] The plaintiff, on the other hand, submitted that it was proper for him to proceed against the Company and all the directors. This was to ensure that the order of the court also bound the Company’s directors. The plaintiff cited Sanur Restaurant as an example in which the plaintiff sued not just the company but also its directors.

[36] It is clear from s 199(1) of the CA that every company and its directors and managers should keep and maintain the accounting and other records of the company. The penal sanction under s 199(6) of the CA is applicable against the company and every company officer. The dispute, however, is whether company officers should be joined in an action under s 199 of the CA. The plaintiff’s position was yes. The defendants disagreed.

[37] Having regard to the submissions of the parties, I noted that the plaintiff cited the case of Sanur Restaurant as authority for the proposition that an action could also be taken against the company and its directors. However, the issue of whether it was appropriate to include the directors in the action was neither challenged nor discussed in Sanur Restaurant. Conversely, the defendants relied on Wuu’s case at [29], and submitted that the Court of Appeal in Wuu’s case followed the position in Conway and others v Petronius Clothing Co Ltd [1977] 1 WLR 72 (“Conway”). In the defendants’ view, Slade J held in Conway at 86 that s 147 of the Companies Act 1948 (c 38) (UK) (“the UK Act”) imposed a statutory obligation on companies to allow its account books open for inspection by the directors. But it did not follow that s 147(3) conferred any civil right of action against any director of the company who refuses to grant permission for inspection to take place. I am of the view that Conway did not stand for the proposition that directors could not be included in the action. I shall explain this in greater detail below.

[38] Section 199 of the CA was taken from s 147 of the UK Act and s 161A of the Companies Act 1961 (No 6839 of 1961) (Vic) (“the Australian Act”). Prior to those two provisions, the right to inspect a company’s records existed as a common law right: Conway at 89–90. The right stems from a director’s need to be able to perform his director’s duties properly and it is absolute to that extent: Woon’s Corporation Law (LexisNexis, Looseleaf Ed, 2014, July 2013 release) (“Woon’s Corporation Law”) at para 51. No reasons need to be given by the director when he seeks inspection. Edman v Ross (1922) 22 SR (NSW) 351 (“Edman”) at 360–361 held that:

[39] It seems that the courts in UK and Australia approached s 147 of the UK Act and s 161A of the Australian Act, which are in pari materia with s 199 of the CA, differently. However, both jurisdictions arrived at the same conclusion that the director has a right to inspect the accounting and other records of the company provided it is done bona fide.

[40] In the UK, Slade J appeared to take the view that s 147 of the UK Act was primarily to impose penal sanctions on companies and directors. There was no statutory provision that empowered the court to compel the company or director to allow a director to inspect the accounts (see Conway at 88–89):

[41] Nevertheless, Slade J in Conway acknowledged that the director has a right to inspect accounting and other records of the company under the common law [89]:

[42] Slade J commented on the possibility of a “civil right of action” in his judgment: Conway at 86. That was relied on by the defendants in their submission that “[a]ny refusal by a company of such an inspection does not confer a civil right of action on a director against a company, much less another director”. Given the ambiguity of the reference to civil action in Conway, it is opportune for me to express my views on the issue.

[43] In my opinion, Slade J used the term “civil right of action” in the context of parties obtaining an inspection order from the court. To fully appreciate his statement it is necessary to consider other aspects of his judgement. I shall first set out the relevant passage at 86:

[44] Slade J’s discussion of the issue about a director’s civil right of action comes later: see Conway at 87–90. It is evident that Slade J was referring specifically to whether the director could get an inspection order from the court under s 147 of the UK Act: at 87. This is because he contrasted s 147 with s 27 of the UK Act. The former did not have a specific provision empowering the court to grant an inspection order. The latter did. The passage that follows reads (Conway at 87):

[45] Slade J then goes on to explain the difference between s 27 and s 147 at 87–88. In his view, the difference existed because in enacting s 147, legislature had thought it unnecessary to include an explicit provision empowering the court to grant inspection orders. It would have been clear if s 147 indicated that the court had a right to order inspection. Slade J held that the right was one that arose from common law, and the relevant portions of his judgement are as follows (Conway at 87–89):

[46] In summary, Slade J in Conway explained that in enacting s 147 of the UK Act, the legislature did not intend for any new statutory rights to be conferred on the directors. The right to inspect was still the common law position and was merely codified by s 147. The significance of it being a common law right was that the court retained the discretion in deciding whether or not to grant the inspection order (see Conway at 90):

[47] The Australian and New Zealand positions appear to be different. The courts there seemed to favour the interpretation that the right to inspection had become a statutory one. In Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150 (“Berlei”) at 163, Mahon J held that:

[48] Similarly, in Australia, Murray J in Deluge Holdings Pty Ltd v Bowlay (1991) 6 ACSR 36 (“Deluge”) at 38 held that:

In Welch at [26], I note that Kan Ting Chiu JC shared the same view in relation to the Australian and New Zealand approach. In short, the UK courts have treated the right to inspect as a common law right, while the Australian and New Zealand courts appear to favour seeing it as a statutory right.

[49] The present Singapore position seems to be a hybrid between Conway and Berlei. In Wuu’s case, the Court of Appeal recognised two things. First, it recognised that s 199 acknowledged the director’s common law right to inspection of the company’s documents. It held at [25]:

[50] Second, while there was nothing in s 199 to suggest that the right at common law had been modified (see Wuu’s case at [31] and Sanur Restaurant at [14]), Mahon J was correct in Berlei to hold that the court did not have a residual discretion to refuse inspection. At [32], the Court of Appeal held as follows:

[51] In short, the Court of Appeal said two things: first, that the common law position was left unchanged and second, that the court had no residual discretion to refuse a director inspection if he was exercising that right properly. In my view, Wuu’s case was simply a reflection of the difference in the way Slade J and the Court of Appeal conceived of the common law right to inspection. Both agreed that s 147 of the UK Act and s 199 of the CA respectively left the common law position untouched. The right to inspection was to be effected unless it was exercised for an improper purpose.

[52] The above highlighted the differences in the UK, Australian/New Zealand and Singapore approaches towards s 147 of the UK Act, s 161A of the Australian Act/the New Zealand equivalent and s 199 of the CA respectively. As a matter of practice, there is little difference. First, D D Prentice highlights in his article, “A Director’s Right of Access to Corporate Books of Account” (1978) 94 LQR 184 at p 196 that:

[53] In Australia and New Zealand, the right to inspect the company records is subject to the director seeking to comply with his statutory and fiduciary obligations towards his company. Mahon J held in Berlei at 164–165 that:

[54] The example given by Mahon J seems to suggest that if the right to inspect was being used for an improper purpose, that right would not be given effect to. The Australian position, which may appear to use a different test, also seems to be that if there appears to be “substantial harm” to the company, the balance of convenience would not favour the making of an inspection order: Deluge at 41.

[55] Therefore, it is clear that the right to inspect is not an absolute one in the sense that the director can inspect the records whatever the circumstances may be. In Singapore, the director’s exercise of his right is subject to his fiduciary duty to the company. He is not allowed to use it for any improper purpose: Wuu’s case at [33].

[56] What then, is the legal position in relation to the second to sixth defendants? Should they have been joined to the proceedings? I was of the view that, having regard to the legislative purpose of s 199, it was justifiable to include the directors as defendants as they were personnel specifically mentioned under s 199(1) of the CA. While the common law position with respect to the right to inspect has not been changed, it is my view that in Singapore, by virtue of s 199, the right to inspect has been extended statutorily against the fellow directors of the company as well.

[57] I first address the defendant’s reliance on Conway for the proposition that the second to sixth defendants should not be joined in the proceedings. In my view, the defendant’s reliance on that case was misconceived. Conway was not strictly concerned with whether directors could be joined to legal proceedings so that they were bound under the judgment. It was concerned with the nature of the director’s right to inspect the documents under s 147 of the Companies Act 1987. Nowhere did the court in Conway express the view that other directors should not be joined to the proceedings. All it did was to confirm the position that the right to inspect was subject to the judge’s discretion as it was a right that originated from common law. Therefore, Conway did not stand for the proposition that the second to sixth defendants should not be joined to the action.

[58] The Company’s directors were officers of a company. They were persons whom s 199 intended to be held responsible for compliance, which includes making records of the company available for inspection by the directors. In my view, while the common law right of a director to inspect the company’s documents is preserved and remains unchanged under s 199, this provision also provides a statutory right for an aggrieved director to compel his fellow directors to produce the documents. This is due to a significant difference in the way s 199 is worded when compared to s 147 of the UK Act and s 161A of the Australian Act. I shall first reproduce the relevant portions of these statutes.

[59] The relevant portions of s 147 of the UK Act are set out as follows:

[60] The relevant portions of s 161A of the Australian Act are set out as follows:

[61] I note that the UK and Australian provisions above are worded differently from s 199 to the extent that the duty to maintain proper company records applies only to the company and does not extend to the directors and managers. The position is different under s 199(1) of the CA, which statutorily extends the responsibility personally to the directors and managers of the company. The relevant portions of s 199 are set out as follows:

Therefore while I note that the Court of Appeal in Wuu’s case held that s 147 of the UK Act was in pari materia with s 199 of the CA, it is my view that the Court of Appeal’s comments were only made insofar as both sections concerned the nature of the right of inspection.

[62] The UK and Australian provisions are clear that the duty to maintain proper accounts applies only to the company. However, the wording of s 199 in Singapore extends that duty to the directors and managers as well. In my view, for a harmonious reading, s 199 has to be read as a whole (Haw Par Bros (Pte) Ltd v Dato Aw Kow [1971–1973] SLR(R) 813 at [12]) as well as to understand the common law right of a director to inspect the company’s documents (see Welch at [30]; Arthur Bokenham (1708) 88 ER 957 at 958). Parliament must have intended to statutorily extend an aggrieved director’s right to inspect the company records such that he can get a court order to compel his fellow directors to produce the records. This possibility of extending the right to inspect to fellow directors was alluded to in Conway at 88 when Slade J appeared to consider the possibility of s 147(3) of the UK Act applying to the “directors of a company”. After all, a company can only operate through it directors and managers.

[64] For the above reasons, I allowed the plaintiff’s application to inspect the accounting and other records of the Company. The defendants further submitted, in the alternative, that should the court grant the plaintiff’s application, they urged that the plaintiff observe three conditions, namely:

(a) The plaintiff must preserve the confidentiality relating to the information.

(b) The plaintiff must bear the costs of retrieving and transporting the documents for his own inspection.

(c) The plaintiff must complete the inspection within six weeks.

[65] The plaintiff agreed to the first two conditions but disagreed with the third. Instead of six weeks, he wanted a total of ten weeks (ie, two weeks for every year) for his auditor to inspect all the documents. In light of their disagreement, I ordered that the inspection be completed within eight weeks.