Case Note

• Published date: 01 December 2016
• Author: LEE Suet Lin Joyce LLB (Hons) (National University of Singapore), LLM (University of Virginia); Associate Professor, Nanyang Business School, Nanyang Technological University.
• Date: 01 December 2016

RESERVE MANAGEMENT POWERS OF THE GENERAL MEETING

Chan Siew Lee v TYC Investment Pte Ltd

[2015] 5 SLR 409

Given the evolution of the division of powers between the board and general meeting over the years and devolution of significant management powers to the board, the Singapore Court of Appeal has, in Chan Siew Lee v TYC Investment Pte Ltd[2015] 5 SLR 409, declared its opinion on the doctrine of reserve management powers for the general meeting. It would appear from the decision that the issue of the general meeting's reserve management powers is effected through implication of the power on the basis of necessity. The Court of Appeal has provided guidance on how necessity is to be ascertained and new insights on the nature of the statutory contract.

1 The recent Singapore Court of Appeal case of Chan Siew Lee v TYC Investment Pte Ltd1 (“TYC”) had the occasion to consider the issue of whether the shareholders in a general meeting had reserve management powers and, if it did, the extent of the reserve management powers.

2 The Singapore Companies Act2 has, over the years, variously assumed limited roles for the company's general meeting. Beyond the specific powers conferred on the general meeting under the Companies Act, the general meeting has the right to remove directors, and in cases where wrongs have been committed against the company, a member may, in limited circumstances, pursue these claims in a derivative action and seek a remedy for the company.

3 In addition, the general meeting may have specific powers conferred on it under the company's constitution. This sets out the

agreement that divides a company's power between the board and the general meeting. Both the board and the general meeting are generally regarded as “organs” of the company. The term “organ” ordinarily suggests the individual collective body's authority to act as the company, rather than as an agent which derives its authority from another corporate source. The doctrine of reserve management powers may hint at the board being an agent of the general meeting. Thus it is difficult to reconcile the doctrine of reserve management powers with the modern view3 on the division of powers between the board and the general meeting, where each organ is regarded as sovereign and exercises powers conferred on it under the Companies Act and the constitution without interference from the other.

4 Given the evolution of the division of powers between the board and general meeting over the years and devolution of significant management powers to the board, it is timely that the Court of Appeal has declared its opinion on the doctrine of reserve management powers. It would appear from the decision that the issue of the general meeting's reserve management powers is effected through implication of the reserve management power on the basis of necessity. The Court of Appeal has also provided guidance on how necessity is to be ascertained.

I. The decision

5 The case involved a family holding company, TYC Investment Pte Ltd (“TYC”). The board consists of two directors, Henry Tay (“HT”) and Jannie Chan (“JC”). HT and JC hold 46% and 44% of the voting rights in TYC. Their children hold the remaining 10% of the voting rights in TYC, with their son, Michael, holding 5% of the voting rights in TYC.

6 Articles 3 and 8 of TYC's articles of association confer on HT and JC extensive management powers as “permanent Governing Directors”, including the power to appoint and remove fellow directors subject to the unanimous agreement of both HT and JC.

7 When HT and JC divorced in 2012, they entered into various agreements as part of their divorce settlement. TYC is a party to one of the agreements (“the TYC deed”). In addition, Art 16 of TYC's articles of association entrenches the terms of the TYC deed in the articles by

stating that any amendment to the TYC deed requires the unanimous consent of all the shareholders of TYC.

8 HT and JC had agreed on a payment voucher system for TYC after JC was alleged to have made unauthorised payments out of TYC's bank accounts. A payment clause (“the Payment Clause”) was included in an agreement to which TYC was bound and which provides as follows:

Payment voucher system for all future payments for TYC. Neither [HT] nor [JC] will sign a cheque on TYC's bank accounts unless the other has signed a voucher approving.

9 JC subsequently relied on the payment clause to refuse to approve certain payments which HT wanted TYC to make. HT then called an extraordinary general meeting. Resolutions were passed by HT and Michael, who together hold 51% of the votes at the general meeting, to approve those payments which were withheld and to authorise HT to unilaterally sign cheques and vouchers to make payments on behalf of TYC. In addition, resolutions were passed to enable TYC to appoint solicitors and to commence proceedings against JC for various matters, one of which was for a declaration that the company's shareholders had reserve powers of management to approve specific payments where the board of directors was deadlocked.

10 The Court of Appeal held that whether there is a reserve management power vested in the general meeting depends on whether it is necessary to imply such a reserve management power. The concept of necessity is predicated on the condition that the board must be deadlocked or is unable or unwilling to act. If a management power is indeed to be reserved to the general meeting, its scope is limited only to the extent of what is necessary to enable the company to function.

11 Based on the fact that the board of TYC was deadlocked, the Court of Appeal ruled that it was necessary to imply a reserve management power for the general meeting to authorise payments to third parties but not to commence proceedings in the company's name.

II. Deadlock at the board

12 The Court of Appeal in TYC has stated categorically that reserve management powers will not be implied in favour of the general meeting unless the board is deadlocked. When reviewing the 11 cases cited by the High Court concerning deadlock, the Court of Appeal was of the opinion that only one case necessitated implying a reserve management power to the general meeting. With regard to the other ten cases, the Court of Appeal was of the view there were no “real or intractable” deadlocks.4 The bar as to what constitutes a deadlock is undoubtedly high, which means the cases where a reserve management power will be implied will be few and far between.

13 Among the cases which the Court of Appeal considered to involve no real or intractable deadlock was Quin & Axtens Ltd v Salmon5 (“Quin & Axtens”), a case in which the Court of Appeal was of the view that the deadlock could have been resolved by reconstituting the board.

14 Quin & Axtens concerned a company that had two managing directors, Salmon and Axtens, who each held a substantial portion of the company's ordinary shares. Article 75 of the articles provided that the business of the company should be managed by the directors, who might exercise all the powers of the company “subject to such regulations (being not inconsistent with the provisions of the articles) as may be prescribed by the company in general meeting”. Article 80 stated that no resolution of a meeting of the directors having for its object the acquisition or letting of certain premises should be valid if either Salmon or Axtens dissented. The directors resolved to acquire and to let various properties, but Salmon dissented. An extraordinary general meeting was then held at which the members, by a majority, passed a resolution to do the same. The House of Lords, upholding the decision of the Court of Appeal, held that the members' resolutions were inconsistent with the articles and granted an injunction restraining the company from acting on them. Lord...