Company Law

Published date01 December 2007
Date01 December 2007
AuthorTAN Cheng Han SC LLB (National University of Singapore), LLM (Cambridge); Advocate and Solicitor (Singapore); Professor and Dean, Faculty of Law, National University of Singapore.

8.1 In HSBC (Malaysia) Trustee Bhd v Soon Cheong Pte Ltd[2007] 1 SLR 65, Justice Judith Prakash reiterated the well-known principle that the power given to directors to refuse to register a transfer of shares to a person that the directors do not approve of was open to review by the courts. However, when the court reviews the sufficiency of the reasons given for the refusal, it will only seek to ascertain if they are legitimate or not, and whether the directors have proceeded on proper principles. If the reasons assigned are legitimate, the court will not interfere with the decision on the ground that it would have come to a different conclusion. A court should be slow to question the directors” exercise of their discretion where they have acted bona fide in what they consider to be in the best interests of the company.

8.2 In the present case, her Honour accepted that the director in question had exercised his discretion properly in refusing to register the transfers of the 175 shares to the second to seventh plaintiffs who were the beneficiaries of the estate of one Chua Chai Wu, the existing registered owner of the shares. The said director did not allow the registration of the transfers to the beneficiaries as he was concerned that this would cause the defendant company to eventually have more than 50 members and to thus lose its status as a private company. Justice Prakash said that this concern was not fanciful but bona fide and legitimate. There were other trustee shareholders and elderly living shareholders who might scramble to submit similar applications for fear that the 50-member limit might be breached if the plaintiffs” application was allowed. In addition, while the director had refused to register the transfers of the 175 shares to all six of the beneficiaries, he was prepared to approve and register the transfers to a maximum of two of them. He was thus not seeking to deny the entitlement of the beneficiaries to the shares in the defendant company. He was only requesting that they consolidate their share entitlement such that only two of them would hold the shares on trust for the others. In this manner, the beneficiaries would, through their trustees, still be able to exercise their rights as shareholders of the defendant and still be entitled to dividends of the defendant. The plaintiffs” concern that they would not be involved in the defendant as individual shareholders and protect their rights as

shareholders against any abuse or mismanagement was therefore unfounded.

Power to grant relief

8.3 Section 391 of the Companies Act (Cap 50, 2006 Rev Ed) is a well-known provision that allows the court to relieve certain persons either wholly or partly from their liability for negligence, default, breach of duty or breach of trust where such persons have acted honestly and reasonably, and ought in all the circumstances of the case to be fairly excused for the negligence, default or breach. This provision applies, inter alia, to auditors of a company and in JSI Shipping (S) Pte Ltd v Teofoongwonglcloong[2007] 4 SLR 460, the question before the Court of Appeal was whether the auditors of the appellant company could be excused partially from liability for negligence under s 391(1) of the Companies Act where the company”s directors had contributed to the non-discovery of the fraud perpetrated on the company but where the defence of contributory negligence had not been pleaded.

8.4 The Court of Appeal answered this question in the affirmative and held the auditors liable for 50% of the company”s losses. The court observed that a similar provision in England had been considered in Barings plc v Coopers & Lybrand[2003] Lloyd”s Rep IR 566 and that the observations in that case on such a provision were helpful in elucidating the scope, thrust and rationale of the provision. The court stressed that relief from liability must be underpinned by the presence of the three elements of honesty, reasonableness and fairness. The auditors had been honest but were guilty of an error of judgment by reason of their failure to follow up on an inquiry due to a misguided reliance on the alleged oversight and control exercised by the parent company. As for reasonableness, auditors could be held to have acted reasonably for the purposes of the section notwithstanding that they were found to be negligent. The consideration of fault attribution would justifiably affect the degree to which the auditors could be said to have acted reasonably by relying on the oversight, review and control exercised by the directors. The determination of reasonableness for the purpose of the section was also not to be limited by the specific breach, but could encompass wider considerations such as the nature of the audit and other relevant circumstances.

8.5 The court also said that while the provision does appear to provide an alternative platform for the court to partially excuse the respondent and to attribute liability in a manner...

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