Chaly Chee Kheong Mah and Others v The Liquidators of Baring Futures (Singapore) Pte Ltd

• Jurisdiction: Singapore
• Judge: Chao Hick Tin JA
• Judgment Date: 07 July 2003
• Neutral Citation: [2003] SGCA 28
• Docket Number: Civil Appeal No 145 of 2002
• Date: 07 July 2003
• Year: 2003
• Published date: 17 December 2003
• Plaintiff Counsel: Haridass Ajaib, Randhir Ram Chandra, Serena Yogalingam (Haridass Ho & Partners)
• Citation: [2003] SGCA 28
• Defendant Counsel: V K Rajah, Lee Eng Beng (Rajah & Tann)
• Court: Court of Appeal (Singapore)
• Subject Matter: Whether indemnity costs awarded against liquidators of company entitled to priority against other claims in winding up,Whether relevant term in articles of association incorporated into contract between company and accounting firm appointing the latter as its auditors,Insolvency Law,Interpretation of terms,Winding up,Contractual terms,Scope of indemnity,Incorporation of terms,Contract,Priority,Whether indemnity extends to costs incurred in defending actions

Delivered by Chao Hick Tin JA

1 The appellants are partners in an accounting firm known as Deloitte & Touche (D&T). D&T was appointed by Baring Futures (Singapore) Pte Ltd (BFS) as its auditors in 1986. In 1994, D&T ceased to be the auditors of BFS and Coopers & Lybrand, Singapore [C&L(S)] was appointed in its place. The parent company of BFS is Baring plc of London (PLC). Both BFS and PLC are now under liquidation. The respondents to the present appeal are the liquidators of BFS. The issues in this appeal concerned in the main the terms of appointment of D&T as auditors of BFS.

Background

2 The facts giving rise to the present proceedings are as follows. Due to the fraudulent activities of a rogue trader in BFS, massive losses were incurred, which in 1995 led to the collapse of the entire Barings group.

3 The liquidators of BFS, PLC and their related company, Bishopscourt Ltd (BL) (‘the three companies’), instituted proceedings in London to recover damages from D&T and C&L(S) and C&L(London) for negligence in the discharge of their duties as auditors of BFS. A settlement was eventually reached with C&L(S) and C&L (London) under which part of the moneys received, amounting to some £24 million, would be set aside to enable the three companies to continue their proceedings against D&T.

4 The action in London instituted by BFS against D&T (the BFS action) is nearing completion. However, the PLC action against D&T was struck out by the English High Court and an appeal has been lodged against that order although the appeal process is currently being stayed.

5 In the meantime, pursuant to a complaint received, the Singapore Public Accountancy Board (PAB) initiated an inquiry against a partner of D&T, Mr Chaly Chee Kheong Mah, who was responsible for the audit of BFS. But eventually the PAB ruled on 16 November 2001 that Mr Mah had not been guilty of any professional misconduct.

6 The sufficiency or otherwise of the £24 million fund set aside would depend on whether, if D&T were to succeed in defending the BFS action, they would be entitled to costs on the indemnity or the standard basis. Because of this, D&T brought two motions seeking certain reliefs which, in essence, raised the following three main issues for the consideration of the court:-

(i) whether Article 110 of the Articles of Association of BFS was incorporated into the contract between BFS and D&T when the latter was appointed auditors.

(ii) If Article 110 formed a term of the contract, did the indemnity provided therein extend to costs incurred by D&T in defending the BFS action?

(iii) whether any indemnity costs which might be awarded to D&T in the BFS action would be entitled to any priority against other claims in the winding up of BFS.

7 Lai Kew Chai J gave a negative answer to all the three issues enumerated above and refused the reliefs prayed for in both motions.

Incorporation issue

8 To better appreciate the issue as to whether Article 110 had been incorporated into the terms of appointment of D&T as auditors, it is necessary for us to set out the circumstances under which the appointment was made.

9 The appointment originated from a letter of 6 October 1986 from the solicitors of BFS to D&T, the material part of which reads:-

“The Company wishes to appoint your firm as its auditors and this is a formal request to seek your consent.

The Company was incorporated on 17^th September 1986 with an authorised capital of …(illegible in part)… shares of S$1/- each were issued and fully paid up.

We enclose a copy each of the following documents for your information:-

1. Certificate of Incorporation (FORM 9)

2. Memorandum and Articles of Association

3. FORM 49 showing the particulars of the

directors.

We look forward to your early reply.”

10 On 15 October 1986 the Board of Directors of BFS passed a resolution to appoint D&T, subject to its consent, as auditors and the appointment was to last until the first Annual General Meeting of BFS at a remuneration to be thereafter determined.

11 On the same day, D&T wrote to the Board of BFS accepting the offer in these terms:-

“We are pleased to confirm our consent to act as auditors for your company pursuant to s 10 subsection 7 of the Companies Act, Cap 185.

Until advised to the contrary, please accept this letter as our consent to act in future years.”

12 Also on the same day, D&T wrote a second letter to the Board of BFS which began with these words:-

“Following our appointment as auditors of the company we are writing to confirm our responsibilities as auditors, and also our understanding of the other services that we should perform.”

13 In the letter, under the subheading “Audit”, D&T set out how it would go about its audit functions. Next under the subheadings, “Accounting and other Services” and “Taxation Services”, it described the services which it could provide. Finally, under the subheading “Fees”, D&T stated:-

“Our fees are computed on the basis of the time necessarily occupied on your affairs by partners and staff of different seniority depending on the degree of responsibility, scope and skill involved.

Our fees and the related out-of-pocket expenses will be charged separately for each of the main classes of work mentioned above. We shall bill our fees and out-of-pocket expenses on a periodic basis during the engagement and we shall agree the frequency and amount of such billing with you and you agree to observe our payment terms.”

14 The letter ended with the following paragraph:-

“We shall be grateful if you will kindly sign and return to us the duplicate of this letter as acknowledgement of your understanding of the terms of our engagement which will continue to apply until varied by a subsequent letter. However, if there are any aspects of our letter which are not in accordance with your requirements, we shall be pleased to discuss them with you.”

15 In coming to its decision that Article 110 had not been incorporated into the contract of appointment of D&T, the High Court had taken into account the following:-

(i) In general, articles of association only bind the company and its members inter se and not third parties, including auditors.

(ii) A copy of the Articles of Association of BFS was only forwarded to D&T for information.

(iii) In the second letter of D&T to BFS of 15 October 1986, it was stated that the letter set out the “terms of our engagement”. This was unlike the case where there was no separate document setting out the terms of appointment.

16 The High Court had also relied very much on the following passage of Warrington LJ in In re City Equitable Fire Insurance Company [1925] CH 407 at 521:-

“ (where) auditors are engaged without any special terms of engagement … then if the articles contain provisions relating to the performance by them of their duties and to the obligations imposed upon them by the acceptance of the office, I think it is quite plain that the articles must be taken to express the terms upon which the auditors accept their position. Of course, if the terms of their employment are expressed in a separate document, then that document must be taken to define the conditions of their engagement, and it would not be proper to assume any implied terms either from the provisions of the articles or elsewhere.”

17 The case of City Equitable Fire Insurance arose out of the collapse of a notable reinsurance company brought about by the fraud of its Chairman, who was convicted and sentenced for his wrongdoings. The liquidator later brought actions against the directors and the auditors for their default or negligence. He failed before the High Court and appealed only against that part of the decision which held that the auditors were not liable because of the protection afforded to them under Article 150 of the articles of association unless they were guilty of “wilful neglect or default”. The bulk of the discussions in the case addressed the issue of what would constitute “wilful neglect or default”. The other two members of the quorum did not address the issue as to how Article 150 had become incorporated into the contract with the auditors. They assumed so.

18 In our opinion, we do not think Warrington LJ was in any sense laying down any strict principle of law in that pronouncement. He was merely offering a commonsensical approach that where there were no written terms of appointment, then it was sensible to assume that the parties intended to contract on the terms of the articles. In every such case it will always be a question of construction. By saying that “if the terms of their employment are expressed in a separate document” we do not think Warrington LJ intended to suggest that so long as a document record only some terms of the contract that would necessarily preclude the relevant terms in the articles from being applicable to the auditors.

19 Another pertinent case is Isaacs’ Case [1892] 2 CH 158 where the articles of association of the concerned company provided that the qualification of a director would be the holding of shares of the nominal amount of £1000, and that a first director might act before acquiring his qualification but should in any case acquire it within one month from his appointment, and, unless he should do so, he would “be deemed to have agreed to take the said shares from the company, and the same should be forthwith alloted to him accordingly.” One, H.I., who signed the memorandum and articles of association and was alloted one share, was also appointed one of the first directors. H.I. never applied for nor were any qualification shares alloted to him. The question that came up for a decision was whether H.I. should be placed in the list of contributories in respect of the qualification shares which he should have applied for and been alloted. Stirling J said (at 164):-

“I think, then, that where a man has accepted the office of director, and acted as such, there ought to be inferred an agreement between him and...