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Grounds publishedDecided 30 Dec 2008
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Court of Appeal

Yamashita Tetsuo v See Hup Seng Ltd

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[2008] SGCA 49Case no. CA 157/2007

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  1. Introduction

  2. [1] This action, commenced before the District Court by the appellant, Mr Tetsuo Yamashita, raises a point of construction as to a deed of settlement dated 29 September 2003 (“the Deed”) entered into between See Hup Seng Ltd (“the Company”), the respondent herein, and one of its major shareholders and creditors, SHS Holding (Pte) Ltd (“SHSH”). The appellant was the assignee of certain rights of SHSH under the Deed.

  3. [2] The Company is listed on the main board of the Singapore Exchange Ltd (“SGX”). Apart from SHSH, another major shareholder of the Company was Mr Thomas Lim (“Lim”), who, at the time the Deed was entered into, was also the chairman of the Company.

  4. Factual background

  5. The efforts to rescue the Company

  6. [3] In 2003, the Company was on the verge of insolvency. SHSH was a creditor of the Company to the tune of $4,043,337.50. In order to salvage the Company, there was a need to inject fresh capital and make arrangements as to the debts owed by the Company to its creditors. Meadow Springs Enterprises Ltd (“Meadow Springs”) emerged as the white knight which was prepared to rescue the Company by investing in it. To that end, an elaborate arrangement (“the rescue plan”) was worked out. As part of this arrangement, on 29 September 2003, Meadow Springs entered into an agreement with SHSH to acquire some 30,813,440 shares which the latter owned in the Company (“the S&P Shares”), representing approximately 28% of the Company’s issued share capital, at the price of $0.0475 per share on condition that the Company’s debts then owing to SHSH (which debts were repayable upon demand) were restructured. Thus, the Deed, which was intended to effect the debt restructuring, came into being as an indispensable part of the rescue plan. A similar deed was also entered into between Lim and the Company in relation to the debts owed by the Company to him.

  7. [4] Furthermore, as part of the rescue plan, Meadow Springs also entered into the following agreements on 29 September 2003:

  8. (a) a call and put option agreement with Lim in respect of all of his 36,112,500 shares in the Company (“the TL Shares”), which constituted approximately 32.82% of the Company’s issued share capital; and

  9. (b) a call and put option agreement with SHSH and Linguafranca Co Ltd (“Linguafranca”) in respect of the shares that each of them owned in the Company (collectively, “the SHSH-LF Shares”), which, taken together, came up to 22,924,060 shares and represented approximately 20.83% of the Company’s issued share capital.

  10. The actual text of these two call and put option agreements (“the Agreements”) was not disclosed in these proceedings. However, according to the official announcement made by the Company to SGX via MASNET on 29 September 2003, which was tendered to the court,[note: 1] the effect of the Agreements was as follows. First, under the call option aspect of the Agreements, Meadow Springs was entitled, within six months of the date of the Agreements (the “Call Option Period”), to acquire the TL Shares and the SHSH-LF Shares from Lim and from SHSH and Linguafranca respectively at the price of $0.0475 per share. Second, under the put option aspect of the Agreements, Lim as well as SHSH and Linguafranca were entitled, within a period of five market days immediately after the expiry of the Call Option Period, to require Meadow Springs (if it did not exercise the call option) to buy the said two lots of shares at the same price of $0.0475 per share. Third, Lim and SHSH, being the holders of 10,833,750 detachable warrants and 16,121,250 detachable warrants respectively, which warrants could be converted into the same number of shares in the Company at the price of $0.11 per share, had a right (if the warrants were converted) to offer to sell to Meadow Springs, within seven months from the date of the Agreements, the 10,833,750 shares and the 16,121,250 shares respectively at a price to be determined in accordance with a prescribed formula. If Meadow Springs did not accept the offer, Lim and SHSH could sell those shares in the open market.

  11. [5] Under the Deed, the debts owed by the Company to SHSH were apportioned into two parts, one part consisting of the sum of $1,773,337.50 (“the Warrant Liability Amount”) and the other part consisting of $2,270,000 (“the SHSH Convertible Loan”). In this appeal, we are only concerned with the SHSH Convertible Loan. Clause 5.5 of the Deed set out a feature (“the Conversion Feature”) whereby SHSH could convert the SHSH Convertible Loan, either in whole or in part, into shares in the Company at the conversion price of $0.15 per share, with “the relevant principal amount from the SHSH Convertible Loan [to] be utilised and applied to meet such conversion price” (see cl 5.5(a) of the Deed). Clause 5.5 also provided that a minimum of 25% of the SHSH Convertible Loan must be converted into shares in the Company within three years from the date of the Deed, ie, by 29 September 2006 (“the Repayment Date”). The present action centred entirely on the construction of the provisions in the Deed, which I will examine more closely in a moment.

  12. How the dispute between the Company and the appellant arose

  13. [6] In March 2004, SHSH was placed under voluntary liquidation. At the time, Lim owned 32% of SHSH, with Linguafranca owning the remaining 68%. Following its liquidation, the assets of SHSH were distributed between its two shareholders in the following proportions:[note: 2]

  14. The Warrant Liability Amount

  15. The SHSH Convertible Loan

  16. Lim

  17. $567,468 (approximately 32%)

  18. $1,796,761.60 (approximately 79%)

  19. Linguafranca

  20. $1,205,869.50 (approximately 68%)

  21. $473,238.40 (approximately 21%)

  22. [7] Subsequently, Linguafranca assigned its right to its share of the SHSH Convertible Loan (viz, $473,238.40 (“the Assigned Amount”)) to the appellant. Of course, this assignment only meant that the appellant stepped into the shoes of Linguafranca as far as the Assigned Amount was concerned, but, other than that, the rights and obligations of the original parties under the Deed would remain the same as before. By way of a notice of assignment dated 21 March 2006, the Company was informed of the assignment.

  23. [8] On 28 April 2006, the Company mistakenly notified Linguafranca’s Ms Carmen So (a representative of and the holder of a power of attorney from the appellant) that, as the option to convert the SHSH Convertible Loan into shares vested in the Company, the latter intended to convert the whole of the loan into shares in the Company. Upon the appellant’s objection, on 8 May 2006, the Company clarified as follows:[note: 3]

  24. The appellant replied stating that he would prefer that the whole of the Assigned Amount of $473,238.40 be repaid to him in cash.

  25. [9] On 17 May 2006, Lim opted to convert part of the loans due to him, amounting in total to $2,849,700.00 (which presumably included his entire interest in the Warrant Liability Amount and the SHSH Convertible Loan), into shares in the Company. The Company repaid Lim a balance sum of $75.59 in cash to avoid creating an odd lot of shares. With this conversion, approximately 79% of the SHSH Convertible Loan had been converted into shares in the Company by the Repayment Date.

  26. [10] On 22 May 2006, the chief financial officer of the Company notified the appellant (through his solicitors) that he would be entitled to repayment of only 75% of the Assigned Amount if he chose not to convert that entire amount into shares in the Company. Further correspondence ensued between the parties, but the differences between them remained. On the Repayment Date (ie, 29 September 2006, three years from the date of the Deed), the Company repaid the appellant only the sum of $354,928.80 (ie, 75% of $473,238.40). This set the stage for the present proceedings, in which the appellant sought, inter alia, an order that the Company pay him the sum of $118,309.60, being the difference between the Assigned Amount (viz, $473,238.40) and the actual sum repaid (viz, $354,928.80).

  27. The relevant provisions of the Deed

  28. [11] I will now set out the clauses in the Deed which are germane to the issue in hand:

  29. The decisions below

  30. [12] At first instance, the district judge held that, on a true construction of the Deed, the SHSH Convertible Loan was repayable in full (ie, 100% of the loan was to be repaid), except that at least 25% of the repayment should take the form of conversion into shares in the Company at the price of $0.15 per share and not more than 75% of the repayment should take the form of cash repayment. She reasoned, relying on cll 5.3 and 5.4 of the Deed, that, as the Company was obliged to repay the full amount of the SHSH Convertible Loan if any of the events stated in those two clauses occurred (ie, if things did not work out), the parties to the Deed could not reasonably have intended that the Company would be obliged to repay less than 100% of the loan if everything worked out satisfactorily. Since Lim had already converted approximately 79% of the SHSH Convertible Loan into shares in the Company by the Repayment Date, the appellant was entitled to full repayment of the Assigned Amount instead of only 75% thereof as contended by the Company.

  31. [13] The Company, being dissatisfied with the ruling of the district judge, appealed to the High Court, which reversed the decision of the District Court (see Yamashita Tetsuo v See Hup Seng Ltd [2008] 2 SLR 1040 (“the GD”)). The High Court judge who heard the appeal (“the Judge”) held that the appellant was entitled to be repaid only 75%, and not 100%, of the Assigned Amount. In coming to this view, the Judge relied very much on cl 5.2 of the Deed, which, to his mind, meant that, on the Repayment Date, only 75% of that part of the SHSH Convertible Loan which had not been converted into shares in the Company as at that date (“the Unconverted Principal Amount”) would be repaid in cash and the remaining 25% of that amount would be forfeited. He held that full repayment of the SHSH Convertible Loan (ie, repayment of 100% of the original principal sum of $2,270,000 (“the Original Principal Amount”)) was only possible if any of the circumstances set out in cll 5.3 and 5.4 of the Deed occurred. He reasoned at [53] and [55] of the GD as follows:

  32. [14] In the opinion of the Judge, this 25% reduction in cash repayment in respect of the Unconverted Principal Amount (if any), which he termed a “haircut”, was clearly justifiable as it was “in exchange for the valuable convertibility feature [ie, the Conversion Feature]” (see [56] of the GD) and was not an unreasonable commercial result. Noting that the Conversion Feature was “very similar” (id at [59]) to an option to purchase shares, the Judge elaborated on the value of such an option in these terms (see [60] of the GD):

  33. The arguments tendered by the parties in this appeal

  34. [15] The appellant submitted that the Judge was wrong in construing the Deed – in particular, cl 5 thereof – to mean that the appellant was entitled to cash repayment of only 75% of the Assigned Amount on the Repayment Date. His main points were the following:

  35. (a) the Judge did not correctly appreciate the nature of a convertible loan;

  36. (b) the Judge did not have sufficient regard to the factual matrix in which the Deed was entered into; and

  37. (c) there was no basis for the Judge to hold that it was reasonable for the holder of the SHSH Convertible Loan to take a 25% “haircut” as the price or premium paid for the Conversion Feature.

  38. [16] The appellant’s basic contention was that cl 5.2 of the Deed, read with cl 5.5, reflected a scheme under which at least 25% of the SHSH Convertible Loan was to be converted into shares in the Company by the Repayment Date; once that mandatory minimum requirement was met, the Unconverted Principal Amount as at the Repayment Date (assuming that less than 100% of the Original Principal Amount had been converted into shares by that date) was repayable in full.

  39. [17] In contrast, the Company submitted that the Judge had correctly understood the nature of a convertible loan. It argued that the Judge, having carefully considered the Deed as a whole and, in particular, the relevant clauses quoted at [11] above, was correct in coming to the conclusion that, under cl 5.2 of the Deed, the appellant was not entitled to ask for cash repayment of 100% of the Assigned Amount. The Company pointed out that the Judge’s comments on the 25% “haircut” were made in response to the appellant’s argument that it would be unfair, in cases of cash repayment, for 25% of the Unconverted Principal Amount as at the Repayment Date to be forfeited. It was in that context that the Judge stated that he did not think there was anything commercially wrong or outrageous about such an arrangement. The Company also averred that there was no basis for the appellant to contend that cl 5.2 of the Deed was the counterpart of cl 5.5(b)(iv) as neither provision referred to the other, and that the appellant’s argument ignored the fact that, under cl 5.5, a minimum of 25% of the SHSH Convertible Loan had to be converted into shares in the Company by the Repayment Date.

  40. Principles governing the construction of documents

  41. [18] It is settled principle that a document should be construed as a whole. This rule was alluded to by Lord Watson in Chamber Colliery Company, Limited v Twyerould [1915] 1 Ch 268, where he said that it was a “well-known rule” (at 272) that (ibid):

  42. [19] In addition, a document must also be construed in the context of its “factual matrix” or “surrounding circumstances” (per Lord Wilberforce in Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 (“Reardon Smith Line Ltd”) at 997 and 995 respectively). This principle was further considered in the more recent House of Lords decision of Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, where it was reiterated that a document ought to be construed in the light of its factual matrix. Lord Hoffmann summarised the position as to the interpretation of a document in these terms (id at 912–913):

  43. [20] In the recent case of Sandar Aung v Parkway Hospitals Singapore Pte Ltd [2007] 2 SLR 891, this court had the occasion to review the principles governing the construction of documents, and this was what it stated at [29]:

  44. [21] All said, the object of construing a contract is to ascertain the objective intention of the parties as reflected in the words used when viewed in the context of the factual matrix of the contract in question. I am conscious that, in Reardon Smith Line Ltd ([19] supra), Lord Wilberforce said (at 996) that “when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties”. Thus, there should not be too much reliance on literal interpretation. Instead, regard should be had to the commercial purpose of a transaction. The court, upon examining all the circumstances surrounding the transaction, could even conclude that the parties must, whatever the reasons, have used the wrong words (see Chitty on Contracts (H G Beale gen ed) (Sweet & Maxwell, 29th Ed, 2004) vol 1 at para 12-118). But, there is no suggestion in the present case by either party that any wrong words were used in the Deed. Having said that, I would add that it is not the function of a court to rewrite the bargain between the parties (see MAE Engineering Ltd v Fire-Stop Marketing Services Pte Ltd [2005] 1 SLR 379 at [27]). While I recognise that the line between construing a contract to determine the real objective intention of the parties and rewriting a contract can, in particular circumstances, be a fine one, the court should be astute not to impose, under the guise of construing a document, its own sense of fairness or reasonableness on a transaction entered into between two commercial parties who are well capable of taking care of their respective interests and who have obviously engaged in much bargaining before concluding the arrangement finally arrived at (as was the case in this appeal).

  45. My analysis

  46. Overview

  47. [22] While I would, at the outset, state that the Deed is certainly not a model of excellent drafting, its overall sense seems reasonably clear. I recognise, however, that its sense would have been even clearer if a couple of linkages had been expressly provided for.

  48. [23] Clause 1.1 of the Deed defines the term “SHSH Convertible Loan” to mean “the loan of principal amount of S$2,270,000 referred to in clause 2.2(ii)”. Clause 2.2(ii) provides that the sum of $2,270,000 (ie, the Original Principal Amount) constitutes and is deemed to be a loan owing by the Company to SHSH which can be either utilised (in terms of being converted into shares in the Company) or repaid as set out in cl 5. Clause 5.2 provides that “[s]ubject to [c]lause 5.3 ... 75% of the SHSH Convertible Loan shall be repaid in cash on the Repayment Date”. Clauses 5.3 and 5.4 provide for repayment of 100% of the SHSH Convertible Loan (ie, repayment of 100% of the Original Principal Amount) if certain eventualities occur. None of those eventualities in fact occurred in the present case and, therefore, cll 5.3 and 5.4 have no application in this appeal. Clause 5.5(b)(iv) provides that at least 25% of the SHSH Convertible Loan shall be converted into shares in the Company at the price of $0.15 per share by the Repayment Date. The crux of the matter is how cl 5.2 should be construed in this context. Reading all the relevant clauses in the context of the arrangement between the parties, it is reasonably plain to me that cl 5.2 means that only 75% of the Unconverted Principal Amount is to be repaid in cash on the Repayment Date. At [35]–[38] below, I will examine why it is not unreasonable to forfeit 25% of the Unconverted Principal Amount where the Original Principal Amount has not been fully converted into shares in the Company by the Repayment Date.

  49. Analysis of the key provisions of the Deed

  50. [24] I will now elaborate on my reasons for construing cl 5.2 of the Deed in the manner outlined at [23] above. As noted in that paragraph, cl 5.2 is expressly stated to be “[s]ubject to” cl 5.3. Under cl 5.3, “100% of the SHSH Convertible Loan” (ie, 100% of the Original Principal Amount) is to be repaid on the Repayment Date if:

  51. (a) the necessary approval for the exercise of the Conversion Feature has not been obtained; or

  52. (b) SHSH is unable to exercise the Conversion Feature by reason of that feature being invalid or unenforceable or not in full force and effect.

  53. The necessary approval is referred to in cl 5.6, and it includes the approval of the shareholders of the Company as well as that of SGX. As the necessary approval for the exercise of the Conversion Feature was obtained in the present case (as evinced by Lim’s conversion of approximately 79% of the SHSH Convertible Loan into shares in the Company (see [9] above)), cl 5.3 was not triggered and, as mentioned in the preceding paragraph, it is not relevant for the purposes of this appeal. The only faintly significant aspect about cl 5.3 is that it expressly refers to “100% of the SHSH Convertible Loan”. Arguably, one can make the point that, if the term “SHSH Convertible Loan” in cl 5.3 means the whole of the Original Principal Amount, then there would be no need for this clause to expressly include the words “100% of”. I do not think, however, that too much should be placed on this technical point. It may be that the drafters of the Deed were not absolutely consistent in the way in which they denoted the whole of the Original Principal Amount. It is the overall scheme of things as reflected in the express provisions of the Deed that is crucial.

  54. [25] Clause 5.4 is an overriding provision as far as cl 5 (taken as a whole) is concerned as it expressly provides at the outset that, “[n]otwithstanding anything in ... [c]lause 5” [emphasis added], if any of the events mentioned in cl 5.4 occur (viz, if, stated broadly, (a) any step is taken to wind up the Company, or (b) the Company’s obligations under the Deed cease to be valid, binding or enforceable, or (c) the Company breaches any of the provisions of the Deed, or (d) execution is levied on or issued against the Company), then “the whole of the SHSH Convertible Loan shall become due and payable immediately in cash” [emphasis added]. As none of the events specified in cl 5.4 occurred in the present case, this clause was not triggered, and it is thus not really relevant in this appeal except in so far as it uses the word “whole” when referring to the SHSH Convertible Loan. In this regard, the same point made in relation to the words “100% of the SHSH Convertible Loan” in cl 5.3 (see [24] above) may be made here.

  55. [26] At this juncture, I would pause to address what may appear to be a very important question, namely: Why did the parties agree that there should be repayment of 100% of the SHSH Convertible Loan if any of the events spelt out in cll 5.3 and 5.4 occurred? It seems to me that the answer is simple enough. In relation to cl 5.3, if the necessary approval for the exercise of the Conversion Feature were not obtained, then, contrary to what the Deed envisaged, the Company would not have the authority to issue shares and the Conversion Feature would become academic. Further, even if shares were purportedly issued (despite the lack of approval), such shares would not be allowed to be traded on SGX. In that eventuality, there being no fault on the part of SHSH, it is completely understandable why Meadow Springs (which was effectively the party in control of the Company as a result of the rescue plan) should think it fair that the Company should repay the Original Principal Amount in full to SHSH on the Repayment Date.

  56. [27] Turning to cl 5.4, if any of the eventualities set out in that clause had indeed occurred, the Company (which, as just mentioned, was effectively under the control of Meadow Springs) would have been in serious trouble. In that scenario, it would not have mattered to Meadow Springs whether 100% or less of the SHSH Convertible Loan was repayable because the debts owed by the Company would simply have become paper debts in that the Company would not, in any case, have been in a position to repay those debts. In short, the rescue plan would have failed. This explains why cl 5.4 even provides (by the use of the overriding expression, “[n]otwithstanding anything in ... [c]lause 5”) – should this eventuality indeed materialise – for the full repayment of the SHSH Convertible Loan irrespective of whether some portion of it has already been converted into shares in the Company under cl 5.5.

  57. [28] I note that the district judge, in reliance on cll 5.3 and 5.4, thought that those two clauses showed that it was always the intention of the parties that there should be full repayment of the SHSH Convertible Loan less the amount (if any) utilised for conversion into shares in the Company. The appellant made the same point before this court. As will be shown later (at [36]–[42] below), the appellant has not correctly understood the rationale for the arrangement set out in the Deed. In any event, it is not correct for the appellant to say that, under cl 5.4, the amount to be repaid under the SHSH Convertible Loan is the Original Principal Amount reduced by the sum (if any) utilised for conversion into shares. That is certainly not what is expressly provided for in cl 5.4 (see [27] above).

  58. [29] I now turn to the very important cl 5.5. In essence, the following substantive matters were provided for in this clause. First, under cl 5.5(a), SHSH could convert either the whole or part of the SHSH Convertible Loan into shares in the Company at the price of $0.15 per share. Second, whatever amount of the SHSH Convertible Loan was utilised for conversion into shares was deemed to have been “fully and effectually repaid” (see cl 5.5(a)) to SHSH. Third, upon each exercise of the Conversion Feature, SHSH was required to give appropriate notice to the Company, and such notice had to relate to a minimum of 150,000 shares or an integral multiple thereof unless the notice related to the entire balance of the SHSH Convertible Loan which could be converted into shares (see cll 5.5(b)(i)–5.5(b)(iii)). Fourth, under cl 5.5(b)(iv), SHSH was required to convert at least 25% of the SHSH Convertible Loan into shares in the Company at the aforesaid price of $0.15 per share by the Repayment Date; if less than that portion of the loan had been converted into shares as at that date, the shortfall (ie, the difference between 25% of the SHSH Convertible Loan and that part of the loan which had already been converted into shares in the Company) would automatically be converted into shares on the Repayment Date. In the present instance, since approximately 79% of the SHSH Convertible Loan (viz, the portion assigned by SHSH to Lim) had already been converted into shares in the Company as at the Repayment Date, cl 5.5(b)(iv) had no application.

  59. [30] Before this court, the appellant sought to read cl 5.2 together with cl 5.5(b)(iv). He argued that the 25% reduction or “haircut” envisaged in cl 5.2 where there was cash repayment on the Repayment Date had all to do with cl 5.5(b)(iv) in that, once 25% or more of the SHSH Convertible Loan had been converted into shares in the Company, the remainder of the loan (ie, the Unconverted Principal Amount) was to be repaid in full in cash on the Repayment Date. But, in my view, this is not what is provided for in cl 5.2. For the appellant’s argument to be tenable, cl 5.2 would have to be significantly amended to something along the following lines:

  60. [31] I would point out that the appellant did not suggest before this court that SHSH (or the appellant as its assignee) was entitled to cash repayment of 75% of the Original Principal Amount irrespective of how much of the Original Principal Amount had already been utilised for conversion into shares in the Company. This implicitly recognised that the words “the SHSH Convertible Loan” in cl 5.2 would mean the Unconverted Principal Amount and not the Original Principal Amount. In this regard, it must be borne in mind that there is no other clause in the Deed which provides for repayment of the Unconverted Principal Amount (if any).

  61. Construction of clause 5.2

  62. [32] It can be seen that, as alluded to earlier at [23] above, both the construction of cl 5.2 contended for by the Company (which was accepted by the Judge) and that which the appellant canvassed involved reading some words such as “the balance of” in between the words “75% of” and “the SHSH Convertible Loan” in cl 5.2. It seems to me that reading some such words into this clause is essential to make sense of it. The reasoning of the Judge as set out at [39]–[40] of the GD is persuasive and, here, I quote:

  63. [33] The difficulty with the appellant’s interpretation of cl 5.2 is that the insertion of the suggested three words (viz, “the balance of”) into cl 5.2 would not in itself lead to a construction of the clause that entitles the appellant to be repaid the whole of the Assigned Amount on the Repayment Date. For such a construction to be made out, “75%” in cl 5.2 would also have to read as “100%” instead, and therein lies the difficulty with the interpretation espoused by the appellant. Recognising this, the appellant argued that cl 5.2 was linked to cl 5.5(b)(iv) (see [30] above). His reasoning was this: The reference to 75% in cl 5.2 had all to do with the requirement under cl 5.5(b)(iv) that at least 25% of the SHSH Convertible Loan must be converted into shares in the Company by the Repayment Date. That accordingly meant that 75% of the Original Principal Amount would be repaid in cash, which was why cl 5.2 provided that 75% of the SHSH Convertible Loan would be repaid in cash on the Repayment Date. With respect, this argument is a non-starter as it requires the implicit meaning of cll 5.2 and 5.5 to be stretched beyond recognition. The real insurmountable difficulty with the appellant’s contention is that cl 5.5 does not say that only 25% of the SHSH Convertible Loan may be converted into shares in the Company. On the contrary, that is the minimum which must be converted into shares in the Company by the Repayment Date. The appellant’s argument ignores the fact that the opening sentence of cl 5.5 expressly states that the whole or part of the SHSH Convertible Loan may be converted into shares. Therefore, it is not possible to link the specification of 75% of the SHSH Convertible Loan in cl 5.2 with the requirement in cl 5.5(b)(iv) that at least 25% of the loan must be converted into shares by the Repayment Date. In my view, it is significant that the drafters of the Deed did not expressly link the two clauses when they could easily have done so.

  64. [34] In essence, the appellant wanted this court to construe cl 5.2 to mean that the Company was to repay 100% of the Unconverted Principal Amount on the Repayment Date, regardless of whether that amount was 75% of the Original Principal Amount or less if more than 25% of the Original Principal Amount had been converted into shares. It seems to me that such an interpretation cannot be adopted without doing violence to cl 5.2. It would require this court to ignore the express reference in cl 5.2 to repayment of “75% of the SHSH Convertible Loan” [emphasis added] and, further, would involve rewriting the clause. If the interpretation of cl 5.2 asserted by the appellant was indeed what was intended, the parties could simply have stated in this clause that:

  65. Justification for a 25% “haircut” vis-à-viscash repayment of the Unconverted Principal Amount

  66. [35] Much has been made of the fact that, as SHSH would have to use $0.15 from the SHSH Convertible Loan to pay for each share in the Company if it were to exercise the Conversion Feature (ie, if it were to choose to receive repayment of the loan by way of being issued with shares in the Company), which price was a concession to Meadow Springs in that it was well above the sum of $0.0475 per share that SHSH obtained from selling its shares in the Company (ie, the S&P Shares defined at [3] above) to Meadow Springs, there was no reason to expect SHSH to take a further 25% reduction in repayment of the Unconverted Principal Amount as at the Repayment Date (which amount would be either 75% or less of the Original Principal Amount, depending on how much of the SHSH Convertible Loan had been converted into shares in the Company). Was it fair that the holder of the SHSH Convertible Loan, be it SHSH or its assignee, should still take a reduction of 25% of the Unconverted Principal Amount as at the Repayment Date in such circumstances?

  67. [36] Contrary to the district judge’s view (see [12] above), I do not think that a reduction of 25% in cash repayment in the scenario just mentioned (see [35] above) is an unreasonable condition. In this regard, it is vital that the Deed be considered against its factual matrix. It is imperative to bear in mind why the Deed was entered into in the first place. It is common ground that, at the time the Deed was executed, the Company was in a very bad financial state. At any moment, it could go under. If that should happen, not only would the capital which SHSH had invested in the Company be lost, but the loans that SHSH had given to the Company – which formed the subject matter of the arrangement under the Deed – would also have very little prospect of being recovered. That was the backdrop at the material time. It was in those bleak circumstances that a white knight was sought. Unless a fresh investor were to come in to rescue the Company, SHSH would very likely have lost everything which it had put into the Company. The white knight was Meadow Springs, which, as a condition for purchasing the S&P Shares from SHSH, required that the Deed be entered into. Understandably, Meadow Springs would not have wanted to get involved in the Company by investing in it if the existing creditors of the Company, including SHSH, could pull the rug from right under the Company’s feet by demanding for repayment of the outstanding debts and, in the event of the Company failing to make payment, by petitioning for the Company’s winding up. This concern had to be addressed, and the Deed provided the answer. This is reflected in cl 9.1 of the Deed, which reads:

  68. It is significant that cl 9.1 provides that the terms of the Deed may not be amended without the written consent of Meadow Springs. Obviously, at the time the Deed was entered into, SHSH was hardly in a strong position to bargain with Meadow Springs. The shots were essentially called by the latter. This explains why, in respect of the S&P Shares which it bought from SHSH, Meadow Springs paid only $0.0475 per share – a price which clearly reflected the poor financial state of the Company as at 29 September 2003 – whereas SHSH would have to use $0.15 from the SHSH Convertible Loan to pay for each share in the Company upon exercising the Conversion Feature.

  69. [37] Admittedly, in normal circumstances, selling a share at $0.0475 and buying it back at $0.15 would make no sense. No one in his right mind would do that. However, the circumstances surrounding the Deed were anything but normal. The arrangement set out in the Deed only makes sense when it is viewed against the aforesaid backdrop (see [36] above) – ie, at the material time, the shares in the Company were worth either very little or nothing at all, and the loans which SHSH had given to the Company were already bad. By selling the shares which it held in the Company (ie, the S&P Shares) to Meadow Springs at $0.0475 per share, SHSH at least recovered something instead of nothing at all. And, if Meadow Springs were to succeed in saving the Company, then SHSH would benefit even in respect of the shares which it acquired at $0.15 per share by exercising the Conversion Feature. The aim of the rescue plan was to tie the fortunes of SHSH to those of the Company. SHSH had not much of a choice in the face of commercial reality. The Deed gave SHSH an opportunity to salvage as much as it could in a bad situation. The whole arrangement set out in the Deed was a carefully balanced business arrangement between two parties (effectively, SHSH and Meadow Springs) who knew exactly what they were doing and/or what each party was up against. Both parties took business risk in the arrangement. If the rescue plan were to succeed, Meadow Springs would gain and so would SHSH. It would not make business sense for Meadow Spring to allow the Company to use the Company’s funds, which were likely to come from new sources connected with Meadow Springs, to pay off in full what were really bad debts of SHSH. It seems to me that the appellant had not properly appreciated the situation prevailing at the material time when he said that SHSH had granted indulgences or made concessions to Meadow Springs via the terms of the Deed. Similarly, and with respect, I also think that the district judge failed to give sufficient consideration to this particular factor. I would underscore that the Deed should be construed in the light of the conditions prevailing at the date it was entered into. Neither Meadow Springs nor SHSH knew for sure then if the rescue plan would succeed.

  70. [38] In my opinion, it is clear that the primary objective of the arrangement set out in the Deed was to encourage SHSH to convert as much of the SHSH Convertible Loan as possible (subject to a minimum of 25% thereof) into shares in the Company by the Repayment Date. The imposition via cl 5.2 of a reduction of 25% in the amount to be repaid to SHSH in respect of the Unconverted Principal Amount as at the Repayment Date was to be the disincentive for SHSH not to exercise the Conversion Feature. It seems to me equally plain that the aim behind the arrangement set out in the Deed was to ensure that, as far as possible, all the funds which SHSH had already put into the Company, whether as capital or by way of loans, should remain in the Company and be applied towards the rescue plan instead of being given back in cash to SHSH, a substantial shareholder and creditor of the Company. The provision of a period of three years for SHSH to convert the SHSH Convertible Loan into shares in the Company was to allow SHSH time to see if the rescue plan was succeeding. If it was, then converting the SHSH Convertible Loan into shares in the Company, even at the price of $0.15 per share, would make good commercial sense. If, on the other hand, it did not appear that the rescue plan was succeeding, and if SHSH should consider it unwise to convert the SHSH Convertible Loan into shares in the Company, then SHSH would have to bear a 25% “haircut” if it wished to have cash repayment of the Unconverted Principal Amount after satisfying cl 5.5(b)(iv). I would reiterate that even this outcome (viz, a reduction of 25% in the amount repaid) would be better for SHSH than the outcome if the rescue plan had not been effected at all because, in the latter scenario, the Company would very likely have gone under and SHSH would very likely not have been able to recover any of the loans which it had given to the Company; in short, there would very likely have been total or near total loss for SHSH. The rescue plan as a whole gave hope to SHSH. If Meadow Springs were to succeed in putting the Company back on an even keel, not only would Meadow Springs benefit, but so would shareholders and creditors of the Company like SHSH as SHSH would then be able to resell the shares which it acquired by exercising the Conversion Feature (as well as the shares which it would acquire using the Warrant Liability Amount (see [43] below)) at a much higher price than that which it paid for each share. Given the prevailing circumstances at the material time, SHSH did not have much of a choice and the choice was obvious.

  71. [39] It can be seen from the preceding discussion (at [36]–[38] above) that my analysis of the justification for SHSH taking a 25% reduction in the quantum of cash repayment received in respect of the Unconverted Principal Amount as at the Repayment Date is different from the analysis adopted by the Judge, who thought that the 25% reduction or “haircut” was the price or premium paid by SHSH for the Conversion Feature. At [50] and [56] of the GD, the Judge stated:

  72. [40] I do not disagree that an option granted by a company to a person to purchase its shares at a predetermined price within a fixed period of time is a valuable security. However, in the circumstances of this case and for the reasons which I have indicated at [36]–[38] above, the 25% reduction in cash repayment of the Unconverted Principal Amount on the Repayment Date was really the disincentive for SHSH not to convert the whole of the SHSH Convertible Loan into shares in the Company by that date. Putting it in positive terms, this “haircut” was the incentive for SHSH to convert the whole of the SHSH Convertible Loan into shares in the Company by the Repayment Date.

  73. [41] I note the appellant’s contention that a lender under a convertible loan is not normally expected to take a “haircut” or a reduction in the amount which it is repaid. In this regard, the appellant relied upon the following passage from Philip R Wood, International Loans, Bonds and Securities Regulation (Sweet and Maxwell, 1995) at para 9-5:

  74. [42] I do not disagree with these comments of Philip Wood, who is clearly referring to the case where people put good money into equity-linked bonds. That scenario is, however, completely different from the scenario in the present case, where the bad debts owed by the Company were given a new lease of life via the rescue plan, with the Deed setting out the bargain between the parties effectively involved (namely, Meadow Springs and SHSH). To compare the scenario outlined by Philip Wood (as reproduced in the preceding paragraph) with the scenario in this appeal would not be to compare like with like. I have already elaborated on this (at [36]–[38] above) and do not wish to repeat my reasoning.

  75. Comparison of the repayment schemes for the Warrant Liability Amount and the SHSH Convertible Loan respectively

  76. [43] As mentioned at [5] above, the Deed designated the sum of $1,773,337.50 owed by the Company to SHSH as the Warrant Liability Amount. Under cl 3 of the Deed, SHSH could utilise this sum to pay for shares in the Company at the price of $0.11 per share on exercising the 16,121,250 detachable warrants which it held (see [4] above). It should be noted that the price of $0.11 per share was lower than the price of $0.15 per share which SHSH would have to pay for converting the SHSH Convertible Loan into shares in the Company. I would not be at all surprised if this price differential was meant to reflect what I believe to be the industry practice, viz, that a person subscribing for new shares through the exercise of warrant rights normally pays a price lower than the market price of those shares at the time the warrants were issued.

  77. [44] In respect of the Warrant Liability Amount, there was no corresponding provision for the repayment of any portion of that amount which was not used by SHSH to pay for the Company’s shares upon exercising its rights under its warrants (referred to hereafter as SHSH’s “warrant rights” for convenience). Instead, what I see being provided for under cl 4.1 of the Deed is that, if all or any portion of the Warrant Liability Amount was not applied by SHSH towards the exercise of its warrant rights within the period of seven months from the date of the Deed, that sum would be deemed “settled, satisfied, discharged and released”. In other words, whatever part of the Warrant Liability Amount that was not used to pay for shares in the Company upon SHSH’s exercise of its warrants rights would effectively be forfeited. The appellant sought to rely on this to contend that if, in relation to the SHSH Convertible Loan, it was the intention of the parties that SHSH (or its assignee) should forfeit 25% of the Unconverted Principal Amount on the Repayment Date, words similar to those used in cl 4.1 in relation to the Warrant Liability Amount would have been adopted in cl 5. However, the scheme of the SHSH Convertible Loan was not that, if any part of that loan was not converted into shares in the Company, the same would be treated as “settled, satisfied, discharged and released” (per cl 4.1). Instead, in respect of the SHSH Convertible Loan, the Deed provided that, after the requirement that a minimum of 25% of the loan be converted into shares in the Company was satisfied, only 75% of any unconverted part of the loan – ie, only 75% of the Unconverted Principal Amount – would be repaid in cash on the Repayment Date. That was what was stated in cl 5.2. As far as the Warrant Liability Amount was concerned, SHSH had no option but to convert the whole of that amount into shares in the Company. If it did not do so, the unconverted part of the Warrant Liability Amount would simply be deemed settled and discharged; in short, it would be forfeited. In contrast, in respect of the SHSH Convertible Loan, SHSH was given a bit more flexibility, albeit with an incentive for it to convert the loan into shares or, viewing it in another way, a disincentive for it not to so convert. It seems to me that the effective parties to the Deed (ie, Meadow Springs and SHSH) had carefully devised two separate and distinct schemes in respect of the SHSH Convertible Loan and the Warrant Liability Amount. Given this context, it does not really help to compare the wording used for one scheme with that used for the other since the two schemes are different to begin with.

  78. Conclusion

  79. Introduction

  80. [46] We have had the advantage of reading in draft the judgment of Chao Hick Tin JA, in which he took the position that this appeal should be dismissed. After careful reflection, we have reluctantly arrived at a different conclusion and have decided to allow the appeal. We now set out the reasons for our decision separately.

  81. [47] This appeal concerns the interpretation of a deed of settlement entered into between See Hup Seng Ltd (“the respondent”) and SHS Holding (Pte) Ltd (“SHSH”) on 29 September 2003 (“the Deed”). As at that date, SHSH was a major creditor and the fourth largest shareholder of the respondent.

  82. [48] Mr Tetsuo Yamashita (“the appellant”) was subsequently assigned rights under the Deed. A dispute arose between the appellant and the respondent over the amount that the appellant was entitled to be repaid in cash under the terms of the Deed. The appellant commenced an action against the respondent in the District Court to recover the alleged balance of $118,309.60 due to him (“the Balance Sum”). The district judge who heard the case (“the District Judge”) gave judgment for the appellant, but, on appeal, her decision was reversed by a judge of the High Court (“the Judge”) (see Yamashita Tetsuo v See Hup Seng Ltd [2008] 2 SLR 1040 (“the GD”)), who also granted the appellant leave to appeal to this court.

  83. Background

  84. [49] We shall first set out what we consider to be the relevant factual background of the present appeal since we accord a somewhat different emphasis to some of the salient facts summarised in Chao JA’s judgment. The respondent, a Singapore-incorporated company, is listed on the main board of the Singapore Exchange Ltd (“SGX”). As at September 2003, the respondent was in serious financial difficulty. According to its auditors’ report for the year ended 31 December 2003, the respondent incurred losses of $8,475,000 and its net liabilities totalled $5,008,000; as a group, the respondent and its subsidiaries incurred losses of $3,621,000 and had net liabilities of $8,508,000.

  85. [50] Against this backdrop, Meadow Springs Enterprises Ltd (“Meadow Springs”) emerged as a white knight and agreed to lead a corporate rescue of the respondent. As part of the rescue package (“the Rescue Plan”), Meadow Springs entered into a sale and purchase agreement with SHSH to acquire some 30,813,440 of the respondent’s shares from the latter at the price of $0.0475 per share. (For convenience, we shall hereafter refer to these 30,813,400 shares as “the S&P Shares”; we shall also use the terms “Share” and “Shares” to denote, respectively, a share and shares in the respondent.) Meadow Springs’ purchase of the S&P Shares was based on the premise that the respondent’s debts then owing to SHSH and to one Mr Thomas Lim (“Lim”), the respondent’s chairman at that time, would be restructured. Meadow Springs was rather concerned because those debts were repayable on demand, and the respondent was plainly not in a position to settle them if repayment were demanded.

  86. [51] In the Deed, the respondent acknowledged that it owed SHSH a total sum of $4,043,337.50 (“the SHSH Liability Amount”). Clauses 2.1 and 2.2 of the Deed provided that the SHSH Liability Amount would be deemed “settled, satisfied, discharged and revised” (per cl 2.1) following its split into two loans, namely:

  87. (a) a loan of $1,773,337.50 owing by the respondent to SHSH with effect from 29 September 2003 on the terms and conditions stated in cl 4 of the Deed (“the Warrant Liability Amount”); and

  88. (b) a loan of $2,270,000.00 (“the Original Principal Sum”) owing by the respondent to SHSH with effect from 29 September 2003 on the terms and conditions stated in cl 5 of the Deed (“the SHSH Convertible Loan”).

  89. Under cl 3 of the Deed, SHSH could, within a period of seven months from 29 September 2003 (“the Loan Tenure”), exercise certain warrants which it held (“the Warrants”) by converting them into Shares at the price of $0.11 per Share, with the Warrant Liability Amount to be applied towards the payment of the relevant sum. Clause 4.1 stated that:

  90. In respect of the SHSH Convertible Loan, a similar feature to convert the loan into Shares (“the Conversion Feature”) was provided for in cl 5.5 of the Deed, as follows:

  91. We shall return to these provisions later in this judgment.

  92. [52] Sometime later, in or around March 2004, SHSH was placed in voluntary liquidation. At that time, Lim owned 32% of SHSH and the remaining 68% was owned by Linguafranca Co Ltd (“Linguafranca”). Both Lim and Linguafranca also concurrently held substantial equity in the respondent. As at 15 March 2004, Lim, who had by then been re-designated as the executive vice-chairman and managing director of the respondent (cf his position as at September 2003 (see [50] above)), held 27.28% of its issued share capital (cf Lim’s shareholding of 32.82% as at 29 September 2003, the date of the Deed (see [4] above)) and was its largest shareholder. Linguafranca was the third largest shareholder of the respondent and held 11.70% of its issued share capital.

  93. [53] Pursuant to the liquidation of SHSH, its assets were apportioned between Lim and Linguafranca. In particular, SHSH’s rights under the Deed were allocated between them in the following proportions:[note: 4]

  94. The Warrant Liability Amount

  95. The SHSH Convertible Loan

  96. Lim

  97. $567,468 (about 32%)

  98. $1,796,761.60 (about 79%)

  99. Linguafranca

  100. $1,205,869.50 (about 68%)

  101. $473,238.40 (about 21%)

  102. [54] Subsequently, Linguafranca assigned all its rights, title and interest in the SHSH Convertible Loan to the appellant. The respondent was informed of the assignment by way of a notice of assignment dated 21 March 2006.[note: 5]

  103. [55] Soon after, the parties’ divergent positions on how the Conversion Feature was meant to operate became apparent. On or about 28 April 2006, the respondent informed Linguafranca’s Ms Carmen So, who was a representative of and the holder of a power of attorney from the appellant, that it intended to convert the whole of the SHSH Convertible Loan into Shares, and that the appellant could not choose otherwise because he had no option as to whether or not the loan would be thus converted. Following a letter sent by the appellant’s solicitors to the respondent on 4 May 2006 objecting to the respondent’s stance, the respondent clarified on 8 May 2006 that:[note: 6]

  104. The appellant’s reply, through his solicitors, was that he preferred “to have his portion of the [SHSH] Convertible Loan amounting to S$473,238.40 repaid in cash as soon as possible”.[note: 7]

  105. [56] Lim opted, on or about 17 May 2006, to convert part of the loans due to him (specifically, a sum of $2,849,700), which apparently included all his interest in the Warrant Liability Amount and the SHSH Convertible Loan, into Shares. To avoid creating an odd lot of Shares, a balance sum of $75.59 was repaid by the respondent to Lim in cash. With this conversion, approximately 79% of the SHSH Convertible Loan, which was the portion of the loan allotted to Lim (see [53] above), was converted into Shares.

  106. [57] On 22 May 2006, the respondent’s chief financial officer informed the appellant’s solicitors that the appellant would be repaid in cash 75% of his share of the SHSH Convertible Loan, that is, $354,928.80. The next day, the appellant’s solicitors replied stating that, as more than what we shall hereafter term “the Minimum Conversion Amount” – ie, 25% of the Original Principal Sum, which is the minimum amount that must be converted into Shares pursuant to cl 5.5(b)(iv) of the Deed – had already been thus converted, the appellant was entitled to and was requesting for cash repayment of his entire share of the SHSH Convertible Loan (ie, the full sum of $473,238.40). Further correspondence between the respective parties’ solicitors ensued. After the appellant received the sum of only $354,928.80 on 29 September 2006, which was the repayment date specified in the Deed (“the Repayment Date”), his solicitors issued a letter of demand to the respondent on 2 October 2006 for the Balance Sum. When this payment was not forthcoming, the appellant filed an originating summons in the District Court for, inter alia, an order that the respondent pay him the Balance Sum.

  107. The relevant clauses of the Deed

  108. [58] Before we proceed further, we shall set out the critical (and problematic) clauses of the Deed, some of which we have already referred to earlier (see [51] above):

  109. [59] Clause 5.2 of the Deed has caused particular difficulties; indeed, the dispute that engendered this action could have been readily avoided if this clause had been crafted with a greater degree of exactitude by the professionals involved. There are, in the final analysis, two competing interpretations. Briefly, the first is that cl 5.2 provides that up to 75% of the Original Principal Sum of $2,270,000 would be repaid in cash on the Repayment Date. The second interpretation is that only 75% of what we shall term “the Outstanding Principal Sum” – ie, that part of the Original Principal Sum (if any) which has not been converted into Shares as at the Repayment Date – would be repaid in cash on that date.

  110. The law on interpretation of contracts

  111. [60] The differing decisions in the proceedings below over the construction of cl 5.2 of the Deed have thrown into sharp relief not only the ambiguity surrounding that clause in particular, but also – given the pivotal role of cl 5.2 to the overall interpretation of the Deed – the ambiguity inherent in the Deed as a whole. The present impasse over the Balance Sum, in our view, should not be resolved simply by looking at the literal text of the Deed in isolation, given its apparent ambivalence.

  112. [61] In Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR 1029 (“Zurich Insurance”), this court undertook a comprehensive review of the legal principles relating to the interpretation of contracts. While there was extensive discussion of the parol evidence rule, the court’s judgment also covered a broad spectrum of issues concerning the interpretation of contracts, several of which are pertinent for the purposes of the instant case and which we shall outline at [62]–[65] below.

  113. [62] First, it is trite law that the court’s fundamental task, when interpreting a contract, is to ascertain the objective intention of the parties (see Zurich Insurance at [125]–[126]).

  114. [63] Second, in Zurich Insurance (at [47]–[65]), this court examined the shift from the literal approach to the contextual approach vis-à-vis the interpretation of contracts, and affirmed that the contextual approach had a legitimate residence in Singapore law, albeit within the statutory limits of the Evidence Act (Cap 97, 1997 Rev Ed). The court stated (id at [122]):

  115. [64] The contextual approach involves, in appropriate cases, a consideration of (inter alia) the commercial purpose of the contract in question. Sir Kim Lewison in his masterly treatise, The Interpretation of Contracts (Sweet & Maxwell, 4th Ed, 2007), aptly notes (at para 7.16) that the modern emphasis given to:

  116. In this regard, we note that the signatories to the Deed were the respondent, which was then struggling to stay afloat, and one of its major shareholders-cum-creditors, viz, SHSH. Yet, in all probability, it was a non-signatory – Meadow Springs, the prospective white knight – that wielded the greatest bargaining power during the negotiations leading up to the execution of the Deed. Indeed, this is made apparent by cl 9.1, which states that the Deed was entered into “at the request of” Meadow Springs and could not be amended, modified, superseded or vitiated without Meadow Springs’ prior written consent. We also note that the Deed was one of several agreements concluded on 29 September 2003 amongst the respondent, Meadow Springs, Lim, Linguafranca and SHSH for the purposes of restructuring the respondent’s liabilities (see further [110] below).

  117. [65] Third, in Zurich Insurance ([61] supra), this court clarified the use of extrinsic evidence as an aid in contractual interpretation. The following excerpt from a summary of the preferred interpretative approach in Singapore, as restated by the court, addresses issues that are relevant to (but not decisive in) this appeal (id at [132]):

  118. The decisions below

  119. The District Judge’s decision

  120. [66] The District Judge held that, on a true construction of the Deed:[note: 8]

  121. It appears to us that what the District Judge meant by “the loan” in the above extract was the full amount of the SHSH Convertible Loan, ie, the Original Principal Sum of $2,270,000.

  122. [67] The District Judge highlighted that cll 5.3 and 5.4 of the Deed made provisions for the Original Principal Sum to be repaid in full in the event that SHSH was unable to exercise the Conversion Feature, or in the event of (inter alia) winding-up proceedings being initiated against the respondent, the respondent breaching the terms of the Deed or execution being issued against the respondent’s property. In her opinion, since the respondent was obliged to repay the Original Principal Sum in full if any of those events occurred, the parties to the Deed could not reasonably have intended that the respondent would be obliged to repay less than 100% of that sum if everything worked out well.

  123. [68] The District Judge’s view was that the respondent’s interpretation – viz, that 25% of the Outstanding Principal Sum would be extinguished on the Repayment Date – “[would lead] to a fairly unreasonable result and if the parties did intend that result, it would be necessary that they make their intention abundantly clear ... (see The Fina Samco [[1995] 2 Lloyd’s Rep 344]).”[note: 9] In this regard, the District Judge noted that, while cl 4 of the Deed made it clear that any portion of the Warrant Liability Amount that had not been applied towards the exercise of the Warrants would be deemed to be satisfied and discharged upon the expiry of the Loan Tenure, there was no equivalent provision in respect of the discharge of 25% of the Outstanding Principal Sum on the Repayment Date.

  124. The Judge’s decision

  125. [69] The Judge arrived at an altogether different interpretation of the Deed and reversed the District Judge’s decision on several grounds.

  126. [70] First, the Judge, adopting a narrow interpretation of cl 5.2, opined that the clause was “a stand-alone clause made subject only to cl 5.3 ... and [had] nothing to do with cl 5.5(b)(iv)” (see the GD at [35]). Second, he held that the term “SHSH Convertible Loan” in cl 5.2 could not mean the Original Principal Sum since cl 5.5(a) provided that any portion of that sum which had been converted into Shares would be “deemed fully and effectually repaid” (see cl 5.5(a)). The corollary of this, in the Judge’s view, was that the words “SHSH Convertible Loan” in cl 5.2 must refer to “the outstanding principal amount remaining after ... conversion” [emphasis in original] (see the GD at [38]), ie, the Outstanding Principal Sum defined at [59] above. It followed that cl 5.2 should be construed as providing that “75% of the outstanding principal amount (as ascertained on the [R]epayment [D]ate) [would] be repaid in cash, and not 75% of the original principal amount of the loan” [emphasis in original] (see the GD at [38]). The Judge thus concluded that cl 5.2 had made it “abundantly clear” (id at [53]) that 25% of the Outstanding Principal Sum would be extinguished on the Repayment Date.

  127. [71] In the Judge’s view, the wording of cl 5.2 (see [54] of the GD):

  128. This was because cl 5.2, unlike cl 5.5(b)(iv), stated that a fixed percentage of 75% of the SHSH Convertible Loan was to be repaid in cash on the Repayment Date.

  129. [72] According to the Judge’s interpretation of cl 5.2, SHSH would be entitled to cash repayment of 100% of the Original Principal Sum only if any of the scenarios set out in cll 5.3 and 5.4 occurred (see the GD at [53]). Since none of those events had taken place in the present case, cl 5.2 must be “the sole operative clause specifying what amount of the [SHSH Convertible] [L]oan [should] be repaid in cash on the [R]epayment [D]ate” [emphasis in original] (ibid).

  130. [73] In the Judge’s view, a premium was normally paid to obtain the benefit of a convertibility feature in a loan (see the GD at [58]). A convertible loan, the Judge noted, was “very similar” (id at [59]) to a call option or a call warrant, and the market for such financial products as well as the prices attached to them were indicative of their intrinsic value. Similarly, the Conversion Feature had an “intrinsic commercial value” (id at [58]) and, thus, the SHSH Convertible Loan should be treated as being more valuable than a simple non-convertible loan. In this instance, the payment for the Conversion Feature took the form of “a 25% reduction in the amount of the unconverted loan [ie, the Outstanding Principal Sum] redeemable in cash at the [R]epayment [D]ate” (id at [63]). The Judge reasoned that (id at [56]–[57]):

  131. [74] Since the Judge considered the Conversion Feature to be sufficiently valuable to command a premium, he interpreted the provision in cl 5.3 for cash repayment of “100% of the SHSH Convertible Loan” as a logical outcome if the Conversion Feature were not available. The Judge explained that this was because (see [56] of the GD):

  132. [75] The view that the Judge settled on meant that the argument by the appellant that he should not be treated differently from Lim, who had received full repayment of his entire interest in the SHSH Convertible Loan when he opted to convert that interest into Shares (which repayment included a cash payment of $75.59 in lieu of 503.9 Shares that the respondent had not allotted so as to avoid creating an odd lot of Shares (see [56] above)), was a non-starter (see the GD at [45]).

  133. The issues on appeal

  134. [76] The appellant put the following issues before this court:

  135. (a) whether the lender under a convertible loan typically had to take a “haircut” – ie, a reduction in the amount to be repaid, as compared to the principal sum advanced – as payment for the benefit of the convertibility feature contained in the loan;

  136. (b) whether, in the present case, the terms of the Deed required the lender (ie, SHSH) to take a 25% “haircut” on the amount of cash repayment which it would receive on the Repayment Date vis-à-vis the Outstanding Principal Sum so as to pay for the benefit of the Conversion Feature;

  137. (c) whether the Judge’s construction of the Deed was consonant with the relevant factual matrix; and

  138. (d) whether the post-contractual conduct of the parties (if relevant) could justify the Judge’s construction of the Deed.

  139. Interpretation of clause 5.2 of the Deed

  140. Construing clause 5.2 in the context of clause 5 as a whole

  141. [77] A literal reading of cl 5.2 of the Deed would detract from a sensible interpretation of cl 5 in its entirety. On its face, cl 5.2 only contemplates a single scenario, viz, where exactly $567,500 (25% of $2,270,000), which is the Minimum Conversion Amount, has been converted into Shares by the Repayment Date. However, conversion of more than the Minimum Conversion Amount by that date is quite clearly envisaged under cl 5.5 (see the express statement therein that “SHSH may ... convert the SHSH Convertible Loan in whole or in part into Shares” [emphasis added]), while cl 5.5(b)(iv) makes special provision for the scenario where less than the Minimum Conversion Amount has been converted into Shares by the Repayment Date.

  142. The parties’ submissions

  143. [78] To make sense of cl 5.2, the parties, not surprisingly, took up opposing positions on the meaning of “SHSH Convertible Loan” in that particular provision. The respondent’s position was that those words did not refer to the Original Principal Sum, but to a “‘moving’ balance”[note: 10] that would be reduced accordingly as the Conversion Feature was exercised. This was similar to the Judge’s interpretation that “SHSH Convertible Loan” referred to “the outstanding principal amount (as ascertained on the [R]epayment [D]ate)” [emphasis in original] (see the GD at [38]) – ie, the Outstanding Principal Sum defined at [59] above.

  144. [79] The appellant, on the other hand, maintained that “SHSH Convertible Loan” in cl 5.2 should be interpreted according to its definition in cl 1.1, namely, “the loan of principal amount of S$2,270,000 referred to in clause 2.2(ii)”. He argued that the Judge had read cl 5.2 “too much in isolation from the rest of the Deed”[note: 11] despite taking cognisance of the canon of construction that a contractual document must be construed as a whole. The appellant submitted that:

  145. (a) the statement in cl 5.2 that that particular provision was “[s]ubject to [c]lause 5.3” did not mean that cl 5.2 was subject to cl 5.3 only;

  146. (b) clause 5.2 was clearly also subject to cl 5.4, which provided for immediate and full cash repayment of the Original Principal Sum if the events specified therein occurred; and

  147. (c) since the Judge considered that the words “SHSH Convertible Loan” in cl 5.2 meant “the outstanding principal amount remaining after ... conversion” [emphasis in original] (see the GD at [38]), he had treated cl 5.2 as being subject to cl 5.5(a) in addition to cl 5.3 despite his assertion that “cl 5.2 [was] ... subject only to cl 5.3” [emphasis added] (id at [35]).

  148. According to the appellant’s approach, in situations where more than the Minimum Conversion Amount had been converted into Shares by the Repayment Date, the operation of cl 5.2 – which was not subject to cl 5.3 only – would be “tempered by”[note: 12] cll 5.5(a) and 5.5(b)(iv), and the amount repayable in cash on the Repayment Date would be correspondingly adjusted so that SHSH would not be repaid more than the Original Principal Sum.

  149. [80] The appellant asserted that cll 5.3 and 5.4 of the Deed “reinforce[d] the expectation of full repayment”[note: 13] [emphasis in original omitted]. In his view, cl 5.3 mandated that, if the Conversion Feature was not available, 100% of the Original Principal Sum would be repaid in cash on the Repayment Date. As for cl 5.4, its effect was that, irrespective of whether the Conversion Feature was available, the occurrence of any of the events stated therein (ie, in cl 5.4) would cause 100% of the Original Principal Sum to become due and payable immediately in cash. The appellant’s argument proceeded as follows:[note: 14]

  150. The appellant submitted that, if the parties to the Deed had indeed intended that cl 5.2 would effectively extinguish 25% of the Outstanding Principal Sum on the Repayment Date, they would have stated so expressly in the Deed, just as they had taken the effort to state in cl 4, in “very explicit (and compendious) language”[note: 15], that any portion of the Warrant Liability Amount which had not been applied towards the exercise of the Warrants within the Loan Tenure would be extinguished, as follows (see cl 4.1 of the Deed):

  151. The appellant further pointed out that cl 5.5(a) likewise employed comparable language to make it clear that the amount to be repaid to SHSH under the SHSH Convertible Loan would be correspondingly reduced whenever any part of the Original Principal Sum was converted into Shares, as follows:

  152. In contrast, cl 5.2 did not use any terms such as “settlement”, “satisfaction”, “discharge”, “release” or “repayment” in respect of 25% of the Outstanding Principal Sum.

  153. [81] The respondent’s counter-arguments were that, first, cl 5.2 of the Deed was the governing clause relating to repayment of the SHSH Convertible Loan in all circumstances that were not covered by cll 5.3 and 5.4. The respondent submitted that, that being so, “[c]lause 5.2 [could not] be as the Appellant assert[ed] ... the mere counterpart [of] clause 5.5(b)(iv)”.[note: 16] In the respondent’s view, cll 5.3 and 5.4 would trigger full repayment (ie, repayment of 100% of the Original Principal Sum) only “if there was no viable conversion feature or if the [respondent’s] business fail[ed]”[note: 17] [emphasis in original omitted]; those clauses did not support the appellant’s contention that full repayment would be made under other circumstances.

  154. [82] In its submissions on this point, the respondent referred to the Judge’s grounds for allowing its appeal in the proceedings below. The Judge had stated in the GD:

  155. Our analysis

  156. [83] We are of the view that the appellant’s interpretation of cl 5.2 of the Deed presents the more satisfactory solution.

  157. [84] Dealing first with the contention as to how narrowly (or otherwise) the words “[s]ubject to [c]lause 5.3” in cl 5.2 should be construed, we regard those words as setting out a precondition for cl 5.2 to come into operation; ie, if the Conversion Feature is unavailable due to (inter alia) the respondent being unable to obtain the requisite approval for its exercise, cl 5.2 and most of the remaining provisions of cl 5 (which deal with conversion of the Original Principal Sum into Shares in one way or another) will cease to be operative as they will be redundant, save for cl 5.3 (because of the opening words of cl 5.2 as well as the express words in cl 5.3, “[i]n the event [that] the [respondent] is unable to obtain all relevant approvals for the Conversion Feature”) and cl 5.4 (because of the words, “[n]otwithstanding anything in ... [c]lause 5”). Clauses 5.3 and 5.4 stand on their own, regardless of whether or not the Conversion Feature is available.

  158. [85] In other words, the phrase “[s]ubject to [c]lause 5.3” in cl 5.2 is intended to avoid any doubt that, if the Conversion Feature does not work out, cl 5.2 will have no effect; instead, the operative clause in that scenario will be cl 5.3, which provides for repayment of “100% of the SHSH Convertible Loan” – ie, 100% of the Original Principal Sum – in cash. Seen in this light, the words “[s]ubject to [c]lause 5.3” are not intended to additionally preclude cl 5.2 from being read in the light of the other sub-clauses of cl 5, in particular, cl 5.5.

  159. [86] Before this court, the respondent argued that cl 5.2 was the only repayment provision in the Deed. We are not persuaded by this arid argument, which is shorn of context. On the Repayment Date, one of three possible scenarios would materialise, namely:

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