Shen Yixuan v Maxz Universal Development Group Pte Ltd and Others

Kan Ting Chiu J:

[1] The plaintiff Shen Yixuan is a shareholder of Treasure Resort Pte Ltd (“Treasure Resort”), the second defendant in this action. In October 2006, Treasure Resort issued to Maxz Development Group Pte Ltd (“Maxz”), the first defendant, 4,000,000 Treasure Resort shares.

[2] The plaintiff instituted these proceedings to have the allotment set aside on two grounds. Firstly, he alleged that the allotment was fraudulent because there was no consideration for the allotted shares. Secondly, he alleged that the allotment should be set aside because Treasure Resort has contravened s 76(1) (a) of the Companies Act (Cap 50, 2006 Rev Ed) by giving financial assistance to Maxz to acquire the allotted shares.

[3] On the basis of these allegations, the plaintiff prayed for

in para 17(1) of the Statement of Claim.

[4] In response to his claims, the defendants applied to strike out the whole Statement of Claim. The defendants’ application was heard in two tranches. In the first tranche, the application was dismissed. Then the defendants applied for further arguments to be made. In the resumed hearing, Mr Harpreet Singh SC, counsel for Maxz, Treasure Resort and two other defendants directed his submissions at the plaintiff’s allegations in respect of s 76(1) (a), and at para 17(1) of the Statement of Claim.

[5] To get a clear picture of the issues raised in the arguments, it is useful to refer to s 76 and s 76A. Section 76(1) reads:

[6] Section 76A lays down the effect of a contravention of s 76 on a contract or transaction. Section 76A(1) states that:

The effect of this provision is that contracts and transactions made in contravention of s 76(1) (b) and (c) are void.

[7] Section 76A(2) deals with contraventions of s 76(1), ie s 76(1) (a), for the giving of financial assistance. This provision states that an affected contract or transaction is voidable at the option of the company which gave the financial assistance, and that if the company intends to avoid the contract or transaction, it shall give notice in writing to the other party.

[8] A member of a company may also take action to avoid a contract or transaction. Section 76A(3) provides that:

[9] While a contract or transaction will not be avoided unless a notice is issued, the issuance of a notice will not avoid a contract or transaction, and it only sets the process of avoidance in motion.

[10] Mr Singh’s main argument is that the plaintiff does not have the locus standi as a shareholder of Treasure Resort to apply in his own name to set aside the share allotment as he is seeking to do in this action. While the plaintiff may apply under s 76A(3) for leave to give notice in the name of Treasure Resort to Maxz to avoid the allotment (which he has not done), he cannot apply to have the allotment set aside in these proceedings which are instituted in his own name.

[11] The part that a member can play to set aside the allotment should be considered carefully. Even at the first stage, when he applies under s 76A(3) for authority to issue the notice to avoid in the name of the company, that authority would only be given after the company has been heard.

[12] There are reasons for a court to withhold the authority, inter alia:

there may be a dispute whether financial assistance was given. Unless the court is satisfied that there is some prima facie evidence of that, the authority would not be given,

even if financial assistance was given, the management of the company may decide that it is not in the company’s interest to avoid the contract or transaction. But if a member issues the notice in the name of the company and the recipient accepts the notice, the company is bound by the acceptance, or

there may be third-party interests involved which militate against the setting aside of the contract or transaction.

[13] Even after authority is granted to a member to issue a notice of avoidance in the name of a company, there are other related issues to resolve. If the recipient of the notice refuses to accept that the contract or transaction is avoided, what can the member do? Does the authority to issue the notice in the name of the company extend to the institution of legal proceedings for a declaration that the contract or transaction is avoided? Section 76A(3) is silent on that. Should the member obtain leave to sue in the name of the company under s 216A which deals specifically with derivative or representative actions? These issues have not, to my knowledge, been determined.

[14] Interesting as these questions are, they are academic in the present context as no notice of avoidance has been issued by or in the name of Treasure Resort to avoid the allotment.

[15] Mr T M Tan, counsel for the plaintiff, did not address the lack of the notice to avoid the allotment directly. Instead he pointed out that the plaintiff can apply to court for relief under s 216(1) which states:

and that under s 216(2) (a), the court may:

which he argued is wide enough for the cancellation of a share allotment.

[16] Having shown that a member can apply under s 216(1) (a) to cancel a share allotment, the question remains whether the plaintiff has made such an application. It is to be noted that s 216(1) (a) and (b) refer to oppression, unfair discrimination and prejudice in the affairs of a company. However, the plaintiff did not invoke s 216(1) (a) or (b) in para 17(1) of his Statement of Claim where he prayed for the share allotment to be cancelled:

[17] Consequently, the effect of the submission is that the plaintiff may apply under s 216 to cancel a share allotment, and not that the plaintiff has made such an application.

[18] Mr Tan also submitted that the court can grant the plaintiff leave under s 216A for leave to bring an action in the name of Treasure Resort to cancel the allotment.

[19] A member can apply to seek relief under s 216A if the court is satisfied that the requirements of s 216A(3) are satisfied. Again, while a member may apply under this provision, the plaintiff had not applied for or obtained leave under the provision. Even if he had applied for and obtained leave, he has to commence proceedings in the name of Treasure Resort for that purpose, and he cannot have the allotment set aside in the present proceedings.

[20] In the circumstances, I ordered that the plaintiff’s claims in respect to the breach of s 76(1) (a) and the cancellation of the share allotment be struck out.

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