Cheng Benety v Tang Kin Fei

• Judgment Date: 04 November 2011
• Date: 04 November 2011
• Docket Number: Civil Appeal No 148 of 2010
• Court: Court of Appeal (Singapore)

Chang Benety and others

Plaintiff

and

Tang Kin Fei and others

Defendant

[2011] SGCA 59

Chan Sek Keong CJ

,

Andrew Phang Boon Leong JA

and

VK Rajah JA

Civil Appeal No 148 of 2010

Court of Appeal

Companies—Directors—Meetings—Company's articles providing for quorum at board meetings only if certain directors present—Directors declining to attend meetings as defensive tactic and other directors proceeding to pass board resolutions in their absence—Whether lack of quorum in such instance was procedural or substantive irregularity—Whether such irregularity caused substantial injustice—Section 392 (2) Companies Act (Cap 50, 2006 Rev Ed)

The shareholders of PPL Shipyard Pte Ltd (‘the Company’) are Sembcorp Marine Ltd (‘SCM’) and PPL Holdings Pte Ltd (‘PPLH’). The appellants (‘Appellants’) and respondents (‘Respondents’) were all directors of the Company. The three Appellants were PPLH's nominees while the six respondents were SCM's nominees. A dispute arose between SCM and PPLH regarding the beneficial ownership of shares of the Company. Part of the dispute involved allegations by SCM that the first and second Appellants had breached their duties to the Company by disclosing confidential information to a third party (‘the SCM complaints’). As a result, SCM commenced proceedings (‘the Suit’) against PPLH and its wholly-owned subsidiary, E-interface Holdings Ltd.

In light of the Suit, the Respondents convened a series of meetings to,inter alia, appoint Wong Partnership to advise the Company on the Suit and the SCM complaints. Article 98 of the Company's articles of association and cl 5.3 of the Shareholders' Agreement provided that at least one of PPLH's nominee directors had to be present to constitute a quorum for a board meeting. As a defensive tactic, the Appellants declined to attend the meetings, resulting in the lack of quorum. Nonetheless, the Respondents passed the resolutions and commenced an action to validate them under s 392 (2) of the Companies Act (Cap 50, 2006 Rev Ed). The Appellants resisted the action arguing that the lack of quorum was a substantive irregularity which could not be cured under s 392 (2). They also argued that in any event, the resolutions should not be validated as they would cause substantial injustice. The Respondents argued that the irregularities were clearly procedural and may therefore be validated pursuant to s 392 and that no substantial injustice would be caused if there was such validation.

The trial judge validated the resolutions relating to the appointment of Wong Partnership to advise the Company on the Suit and to accept service on the Company's behalf.

On appeal, the Appellants argued that the Respondents had breached both the Shareholders' Agreement and Art 98 in proceeding with the meetings when no director from PPLH was present (‘the Quorum irregularity’) and not adjourning the meetings when there was no quorum (‘the Adjournment irregularity’). The Appellants asserted that the Respondent's actions involved substantive irregularities which were not capable of being validated under s 392 and even if they were procedural irregularities, substantial injustice would be caused to them if the resolutions were validated. The Respondents relied on their arguments below.

Held, allowing the appeal:

(1) The Quorum irregularity was, in view of s 392 (1), a procedural irregularity. Consequently, the Adjournment Irregularity, which arose from the Quorum irregularity, was also procedural: at [43].

(2) The quorum requirement was not merely an ordinary one specifying a minimum number but also one which related to the issue of representation on the board of directors. The importance of this requirement is evident as it was not only provided for in the articles of association but also in the Shareholders' Agreement. Where such a quorum requirement is breached, there will prima facie be substantial injustice to the side which exercised its deadlock rights: at [48].

(3) The resolutions passed by the Respondents purported to appoint Wong Partnership to not only represent and advise the Company in the Suit but also to investigate the SCM complaints. The Respondents thus placed the Appellants, who were the subject of the allegations, in a disadvantageous position: at [49].

(4) The validation of the resolutions had the effect of overriding an agreement which the Respondents had made with the Appellants regarding the scope of Wong Partnership's appointment. This constituted, without more, a substantial injustice to the Appellants, who were deprived of the bargain that they had struck with the Respondents and Wong Partnership: at [50] and [52].

Golden Harvest Films Distribution (Pte) Ltd v Golden Village Multiplex Pte Ltd [2007] 1 SLR (R) 940; [2007] 1 SLR 940 (refd)

Goodwealth Trading Pte Ltd, Re [1990] 2 SLR (R) 691; [1990] SLR 1239 (refd)

Kwa Ban Cheong v Kuah Boon Sek [2003] 3 SLR (R) 644; [2003] 3 SLR 644 (refd)

Pembury Pty Ltd,Re (1991) 4 ACSR 759 (refd)

Oriental Insurance Co Ltd, The v Reliance National Asia Re Pte Ltd [2008] 3 SLR (R) 121; [2008] 3 SLR 121 (refd)

Sum Hong Kum v Li Pin Furniture Industries Pte Ltd [1996] 1 SLR (R) 529; [1996] 2 SLR 488 (refd)

Thio Keng Poon v Thio Syn Pyn [2010] 3 SLR 143 (refd)

Whitehouse v Capital Radio Network Pty Ltd [2004] TASSC 12 (refd)

Companies Act (Cap 50, 2006 Rev Ed) ss 392 (1) , 392 (2) (consd) ; ss 392,392 (1) (a) ,392 (1) (b) ,392 (2) ,392 (6) (c)

Companies Act 1893 (Qld) s 3

Corporations Act 2001 (Cth) s 1322

Insolvency Act 1874 (Qld) s 179

Lim Teong Jin George SC and Foo Say Tun (Wee, Tay&Lim LLP) for the appellants

Thio Shen Yi SC and Karen Teo (TSMP Law Corporation) for the respondents.

Andrew Phang Boon Leong JA

(delivering the grounds of decision of the court):

1 This is an appeal against the decision of the trial judge (‘the Judge’) in Tang Kin Fei v Chang Benety [2011] 1 SLR 568 (‘the Judgment’), where the Judge validated certain resolutions passed at several inquorate directors' meetings of a company, PPL Shipyard Pte Ltd (‘the Company’), under s 392 of the Companies Act (Cap 50, 2006 Rev Ed). We allowed the appeal and now give the detailed grounds for our decision.

Facts

Parties to the dispute

2 The Company was incorporated in 1997 and is in the business of designing and constructing offshore drilling rigs. According to the appellants (‘the Appellants’), its business was largely built up by the efforts of first Appellant, Benety Chang (‘Chang’) as well as and the second Appellant, Anthony Aurol (‘Aurol’).

3 Prior to 2001, the majority shareholders of the Company were PPL Holdings Pte Ltd (‘PPLH’), a wholly-owned subsidiary of Baker Technology Ltd (‘Baker’), a public listed company which held 97% of the shares. The remaining 3% of the shares in the Company were held by E-Interface Holdings Ltd (‘E-Interface’).

4 On 29 March 2001, 50% of the shares of the Company were sold by PPLH to Sembcorp Marine Ltd (‘SCM’).

5 On 13 November 2001, E-Interface became a wholly-owned subsidiary of PPLH.

6 In 2003, SCM increased its shareholding in the Company to 85%. As the majority shareholder, SCM nominated six of the nine directors of the Company.

7 The Appellants and respondents (‘Respondents’) are all directors of the Company. The three Appellants were PPLH's nominees while the six Respondents were SCM's nominees. Two of the Appellants, Chang and Aurol, are also directors of PPLH.

8 Aurol was removed as a director of the Company on 8 June 2010 on the ground that he had allegedly passed on the Company's confidential information to Yangzijiang Shipbuilding (Holdings) Ltd (‘Yangzijiang’), a company which subsequently took over Baker. The other two Appellants, Chang and Douglas Tan, are still directors of the Company.

Background

9 For a better picture of the dispute between the parties, reference must first be made to the shareholders' agreement entered into between PPHL and SCM on 9 April 2001 (‘the Shareholders' Agreement’). It provided for the appointment of six directors, with PPLH and SCM appointing three directors each. Clause 5.3 of this agreement provided that the quorum for a director's meeting is two, provided that at least one director from PPLH and SCM are present. Following the Shareholder's Agreement, Art 98 of the Company's articles of association was amended to take into account the agreed arrangement that for there to be a quorum, at least one director from each side must be present at a meeting of the board of directors.

10 The arrangements in the Shareholders' Agreement and articles of association regarding the quorum for a meeting of the board of directors were not changed after SCM became the majority shareholder of the Company by amassing 85% of the Company's shares in 2003, although (as already noted) the number of directors was increased to nine, with six appointed by SCM.

11 The chain of events leading to the passing of the resolutions in dispute began on 16 April 2010, when Yangzijiang issued a binding letter of offer to Baker to acquire all its shares in PPLH for US$155 m (‘the Offer’). A term of the Offer was that Chang and Aurol were to give undertakings to Yangzijiang that they would not voluntarily resign from their executive positions with the Company for a period of two years with effect from 1 January 2011.

12 On 17 April 2010, Baker disclosed the Offer to the market, and stated that the consideration for the purchase was arrived at by taking into account, inter alia, a certain net book value of the Company for the financial year 2009. Subsequently, Baker accepted the offer.

13 PPLH argued that SCM wanted to scuttle the deal for the sale of its shares to Yangzijiang. SCM tendered a cheque for $59,433,522 as payment for the 15% shareholding of PPLH in the Company but PPLH rebuffed this attempt to purchase its stake in the Company.

14 The SCM-appointed directors took steps to strengthen their...