Cheah Geok Tuan (alias Seah Geok Tuan) and Another v Lie Khin Sin and Another

• Jurisdiction: Singapore
• Judge: Choo Han Teck J
• Judgment Date: 11 November 2005
• Neutral Citation: [2005] SGHC 210
• Date: 11 November 2005
• Subject Matter: Dividends and bonus shares issued during option period transferred to vendor,Credit and Security,Loans of money,Agreement for sale of shares with buyback option,Whether agreement amounting to loan under guise of sale and purchase of shares,Vendor paying stamp duties,Money and moneylenders
• Docket Number: Suit No 213 of 2005
• Published date: 19 December 2005
• Defendant Counsel: Loo Ngan Chor and Yeo Lih Wei (Lee and Lee)
• Court: High Court (Singapore)
• Plaintiff Counsel: Bernard Doray and Foo Soon Yien (Bernard Rada and Lee Law Corporation)

11 November 2005 Judgment reserved.

Choo Han Teck J:

1 When is an elephant a bird? The principal issue in this case concerned the nature of a disputed contract: Was it an investment agreement or a loan? The contract was given a descriptive name – “Purchase of 154,103 Asia General Holdings Ltd shares with Buy Back Option”. But the plaintiffs claimed that it was in substance a loan agreement. It is important to set out the contract in full because of the nature and importance of the issue in dispute. The agreement was written out as follows:

May 11, 2001

To: Mdm NG SIOK LAY
107 MARSHALL ROAD
SINGAPORE

RE: PURCHASE OF 154,103 ASIA GENERAL HOLDINGS
LIMITED SHARES WITH BUY BACK OPTION.

Kindly confirm by signing below that you have agreed to transfer the subject shares at terms and condition set out below:-

1. CONSIDERATION: S$255,000. However, for stamp duty purposes, the sum will be stated as S$693,463.50 on the Transfer Form.

2. All STAMP DUTIES RELATING TO THIS TRANSACTION SHALL BE BORNED [sic] BY YOU.

3. ALL THE DIVIDEND AND BONUS ISSUES IF ANY DURING THE OPTION PERIODS SHALL BE TRANSFERRED OR PAID (NET OF COST) TO YOU ACCORDINGLY SOONESS [sic].

4. OPTION TO BUY BACK: DATE OF EXERCISED [sic] – AUGUST 15, 2001

CONSIDERATION PAYABLE: S$297,750.00

5. FURTHER 3 MONTHS EXTENTION [sic] OF OPTION TO BUY BACK (UP TO NOV. 15) FOR CONSIDERATION PAYABLE TO ME OF S$45,000.00

6. AND FURTHER 3 MONTHS EXTENTION [sic] OF OPTION TO BUY BACK PERIOD WITH SAME TERMS AS POINT 5 ABOVE.

Yours truly,

__________Sgd_________

LIE TURNG PHUNG KEN

AGREE:_____Sgd_______ WITNESS:_____Sgd________

NG SIOK LAY ONG KHIAM POH

2 The agreement was ostensibly a signed contract between the second plaintiff and the second defendant. The second plaintiff is the wife of the first plaintiff and the second defendant is the son of the first defendant. It was obvious from the evidence that the two contracting parties were not the real parties to the transaction that actually took place. The second plaintiff was a necessary party because the subject matter of the transaction was shares in Asia General Holdings Ltd and the second plaintiff was the registered owner of the shares. The second defendant became a party because his father decided that he (the second defendant) should sign the contract as a trustee. The defendants’ evidence at trial was that the second defendant signed as trustee for one Darma Tanuwidjaya (“Darma”), allegedly, his uncle.

3 The contract, as it appeared on the written agreement, was straightforward. The contract title stated that it was a purchase of 154,103 shares in Asia General Holdings Ltd. The purchase price, described as the “consideration” was $255,000. The contract was signed on 11 May 2001 and stipulated a date for the vendor to buy back the shares at $297,750, namely, on 15 August 2001. The buyback or redemption sum of $297,750 was calculated after a deduction of 5% from each of the $15,000 instalments (that came to $2,250). The agreement also gave the “vendor” a three months’ extension to repurchase the shares, provided that she pays another $45,000 (which works out to $15,000 a month). Finally, another three months’ extension for the repurchase would be granted on the payment of yet another sum of $45,000.

4 The plaintiffs’ case was that the document was only the security arrangement for a loan of $300,000, of which $45,000 was deducted upfront as interest for the first three months of June, July and August at $15,000 a month. However, the plaintiff received a cheque for only $250,000 because the first defendant had used $5,000 for payment of stamp fees. The stamp fees came up to $1,387 so a separate cheque for $3,613 being the balance was subsequently given to the first plaintiff. The three remaining terms were also relevant. Firstly, the agreement provided that the stamp duties payable for the transfer would be paid by the vendor. Conventionally, however, the obligation of paying the stamp duty in a sale of shares transaction is the obligation of the purchaser. Secondly, it was provided that the consideration would be stated as $693,463.50 for the purposes of stamp duty. The plaintiffs say that the defendants found this to be necessary because the loan amount was much lower than the real value of the shares, and therefore, the appearance of legitimacy for the transaction that the defendants wanted, namely, a properly stamped contract, might be frustrated by a rejection from the stamp office. In any case, the plaintiffs say that they did not know that the defendants had inscribed the figure $693,463.50 until after the event. Thirdly, it provided that all dividends and bonus issues during the interim would be transferred to the vendor. This was also contrary to conventional practice. In a conventional sale of shares with a buyback option, dividends and bonus issues belong to the purchaser. He could, of course, sell the bonus issues to the vendor as part of the buyback option. But in the present case, the transfer of bonus issues back to the vendor was subject only to cost.

5 The contract was witnessed by Ong Khiam Poh who is also known as Peter Ong. In this regard, a typewritten telefax dated 9 May 2001 sent by the first defendant to Peter Ong is relevant. The telefax stated:

SPOKEN TO DARMA & WILL DO THE DEAL WITH SOME MODIFICATION ON TERM PROPOSED BY YOU & SUBJECT TO TAKE A LOOK AT THE CO’S AUDITED ACCOUNT.

INSTEAD OF TWO MONTH INTEREST PRE-DEDUCTED FROM THE ADVANCE, WILL DEDUCT THE WHOLE THREE MONTH [sic] IE. $45,000. HOWEVER, 3 MONTHS INTEREST (15%) ON THE $15,000 WILL ALSO BE DEDUCTED FROM THE REPAYMENT IE. INSTEAD OF REPAYING $300,000, WILL REPAY $297,750 ($15,000 x 15%) AT THE END OF THIRD MONTH, MATURING DATE.

BORROWER WILL PAY $45,000 FOR THE EXTENTION OF 3 MONTHS OPTION TO BUYBACK THE SHARES IF REQUIRED.

IF NEED FURTHER CLARIFICATION, PL CALL.

In reply, Peter Ong wrote in his own hand the words: “Dear Mr K.S. Lie, Mr William Seah [the first plaintiff] accepts your proposal, confirm.” and sent it back to the first defendant. The first plaintiff and Peter Ong testified in court that this telefax contained the terms of the loan that Peter Ong, a mutual friend, brokered between the first plaintiff and the first defendant. The language of this telefax was the language of a loan. It referred to the deduction of the three months’ interest, and more importantly, referred to the “borrower”. Although it also referred to an extension of time for a “buyback”, the issue before me was whether the contract was a loan agreement made to appear like a sale and buyback agreement. Hence, it was not unexpected to see features of a sale and buyback document. The more important question was whether there were features of a loan. It was not disputed that the contract was made pursuant to this telefax of 9 May 2001.

6 It will now be appropriate to examine the oral evidence of the respective parties. The first plaintiff’s evidence was as follows. Sometime in March 2001 he asked Peter Ong to help him raise $300,000 for his business. He handed Peter Ong a copy of the annual report of the Asia General Holdings Ltd for the year 1999 and a copy of a share certificate in that company for 154,103 shares in the name of the second plaintiff. He also gave Peter Ong a copy of a certificate of stamp duty indicating that on 22 March 2000 the second plaintiff had sold 25,000 shares in the Asia General Holdings Ltd for $175,000 or $7.00 a share. Peter Ong then told the first plaintiff that he had given these documents to the first defendant who was prepared to consider giving a loan to him. Peter Ong then arranged a meeting in which the first plaintiff, the first defendant and himself met at the Orchard Hotel. The first plaintiff told the first defendant at this meeting that he had 30,000 shares to sell at $8 a share. The first defendant said that he was not interested in buying the shares.

7 About two months later, in May 2001, the first plaintiff told Peter Ong to ask if the first defendant would consider lending him $300,000 instead at a fair interest rate and with two months’ interest deducted upfront. Peter Ong telephoned the first plaintiff on 9 May 2001 and told him about the terms that the first defendant wanted. The first plaintiff accepted the terms although at that time he had not been told that he had to bear the cost of transfer of the shares now that the shares had to be formally transferred by the second plaintiff.

8 On 11 May 2001, the first plaintiff met the first defendant and Peter Ong at the first plaintiff’s office. The first defendant arrived with various documents including two unsigned letters dated 11 May 2001 by the second defendant to the second plaintiff, and a letter of acknowledgement dated May 2001 from the second plaintiff addressed to the second defendant. The first plaintiff asked the first defendant not to register the transfer of the shares so as to avoid incurring unnecessary expenses, but the first defendant insisted on effecting the transfer. The first plaintiff then obtained the signatures from his wife, the second plaintiff, and gave them together with the share certificate No B8355 for 154,103 shares in Asia General Holdings Ltd to the first defendant on 15 May 2001. The first defendant produced a letter dated 14 May 2001 addressed to the second defendant and asked that the first plaintiff sign it. It was a letter acknowledging that the first plaintiff had received the sum of $438,463.50 on behalf of the second plaintiff. The first plaintiff subsequently realised that this amount added to the sum of $255,000 paid to the second plaintiff amounted to the figure of $693,463.50 which was the consideration stated in the transfer form.

9 The first plaintiff paid a total of six months’ interest at $15,000 a month, and then stopped paying altogether after he had unsuccessfully tried through letters of 10...