Chip Thye Enterprises Pte Ltd (in liquidation) v Phay Gi Mo and Others

JudgeBelinda Ang Saw Ean J
Judgment Date09 December 2003
Neutral Citation[2003] SGHC 307
Citation[2003] SGHC 307
Defendant CounselRavi Chelliah and Lee Hwai Bin (Chelliah and Kiang),Pey Ciew Chang, fourth defendant, in person
Published date29 December 2003
Plaintiff CounselNicholas Loh and Christopher Yong (Legal21 LLC)
Date09 December 2003
Docket NumberSuit No 103 of 2002
CourtHigh Court (Singapore)
Subject MatterDirectors,Companies,Relevant test for insolvency,Dividends declared in absence or excess of profits,Duties,Liabilities,Insolvency Law,Dividend declaration when company insolvent,Whether constitutes breach of directors' duties,Avoidance of transactions,Allegation that transactions carried out whilst company solvent

1 This action is brought by the Plaintiff, Chip Thye Enterprises (Pte) Ltd (in Liquidation), acting through its liquidator against the Defendants, some of whom were the shareholders and former directors of the Plaintiff.

History and Dispute

2 The Plaintiff was incorporated on 20 January 1973. It was a family owned company engaged in the building construction business. Phay Gi Mo, the 1st Defendant (“D1”) and Pey Lim Cheng, the 2nd Defendant (“D2”) are brothers and they managed the business. D2 as the chairman and director was the major shareholder (46.7%) of the company. D1 was the managing director with a 33.3% share in the equity of the company. The 4th Defendant, Pey Ciew Chang (“D4”) is the son of D2 and he held a 6.7% interest in the company and was a director from 1982 until 15 April 1994. D1 is the uncle of D4.

3 The estate of Lee Tiang Chin, deceased is the 3rd Defendant (“D3”). Lee Tiang Chin was the wife of D2. D2 is now the personal representative of her estate. Prior to her death, Lee Tiang Chin held a 13.3% stake in the Plaintiff. By Order of Court dated 21 June 2002, the proceeding against D3 was allowed to continue against D2 as personal representative of the estate as if he was substituted as a party.

4 The Plaintiff was the main contractor of a condominium and bungalow development at Tanglin Hill. The owner and developer of the Tanglin Hill project was Capital Realty Pte Ltd (“Capital Realty”). The Plaintiff subcontracted the entire building contract to Articon Construction Pte Ltd (“Articon”).

5 It is common ground that the Plaintiff allowed its name to be used by Articon to tender for the Tanglin Hill project as Articon did not have the required CIDB rating to tender for such a large project. For lending its name to secure the contract, Articon was to pay to the Plaintiff what was described by D1 as administrative expenses in the sum of $150,000. Articon’s loan facility of $4.7 million being its working capital requirements for the Tanglin Hill project was guaranteed by a corporate guarantee from the Plaintiff. The Plaintiff executed in favour of Overseas Union Bank (“OUB”), a Deed of Assignment whereby the Plaintiff assigned all its rights, title and interest to and in all payments arising out of the Tanglin Hill project. The project was completed at the end of 1997. Articon was wound up by an Order of Court dated 28 May 1999.

6 The close relationship between the Plaintiff and Articon was not denied. The Plaintiff had a 35% shareholding in Articon and another 16.6% were held by D4. D4 was a director of Articon from 1983 to 1999.

7 In Civil Appeal no. 50 of 2000 reported in [2000] 4 SLR 548, the Court of Appeal allowed Capital Realty’s appeal for the repayment of an outstanding loan in the sum of $500,000. The appellate court found that the various payments made by Capital Realty were loans to the Plaintiff and judgment was entered against the Plaintiff. The Plaintiff defaulted on the judgment and Capital Realty on 13 February 2001 petitioned for the company to be wound up. The Plaintiff was wound up by Order of Court on 23 March 2001.

8 The Plaintiff was named as main contractor in contemporaneous documents such as letters from the quantity surveyor and the architect. Chao JA delivering the judgment of the Court of Appeal made the following observations at 558: “The documentary evidence further showed that during the course of the [Tanglin Hill] project, the respondents [Chip Thye] and Articon did not draw a clear distinction between themselves. Letters addressed to one would be responded to by the other. Payments for invoices directed at the respondents [Chip Thye] would be settled by Articon and vice versa.” It was noted in the report that although D1 was not a director of Articon, nevertheless he was a cheque signatory to the bank account of Articon.

9 The liquidator’s contention is that once the Plaintiff was insolvent, D1 and D2 as directors owed a duty to keep its property inviolate in order to pay its creditors. This breach of duty of the directors of the Plaintiff, in failing to act bona fide in the interests of its creditors during the Plaintiff's insolvency, forms the basis for the action against D1 and D2. The complaint against D1 and D2 involved breaches of directors' duties and arising in consequence of the fiduciary character of their duties, obligations as trustee of the Plaintiff’s assets in respect of six specific improper transactions (“improper transactions”). Initially the improper transactions numbered in total seven until one allegation concerning audit confirmations to Articon was withdrawn during the course of the trial. The liquidator of the Plaintiff, Khoo Ho Tong (“KHT”), contends that most if not all the improper transactions resulted in the Defendants benefitting exclusively at the expense of the Plaintiff and its creditors and at the time when the Plaintiff was insolvent.

10 D1 and D2 contend that the transactions in question were done or made when the company was solvent. There was nothing improper about the transactions.

11 D2 did not testify at the trial. D1 and D4 said that he is old and suffers from ill health. Their approach was that whatever D1 had to say, it would equally apply to D2. It was also the Defendants’ stance towards the alleged improper transactions that D1 and D2 acted on the advice of the auditors. The difficulty with the argument is that without calling the auditors the truth of what was said is not proven. The Defendants are left with their bare assertion which, at best, is hearsay evidence and is not admissible.

The Law on Directors’ Duties

12 The three broad categories of director’s duties are: fiduciary, duties of skill, care and diligence, and statutory duties. The general principle is that directors have a duty to act in the best interest of the company as a whole. The directors owe fiduciary duties to the company, not to the individual shareholders.

13 When a company is insolvent, the interests of the creditors become the dominant factor in what constitutes the “benefit of the company as a whole.” See West Mercia Safetywear Limited (In Liq.) v Dodd [1988] BCLC 250 which was followed and applied by Tay Yong Kwang JC (as he then was) in Tong Tien See Construction Pte Ltd (in liquidation) v Tong Tien See & Ors [2002] 3 SLR 76.

14 Dillon LJ in West Mercia approved the speech of Street CJ in Kinsela v Russell Kinsela Pty Ltd (in liq) [1986] ACLR 395 at 401, where Street CJ said:

“In a solvent company the propriety interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholder’s assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.”

15 The duty is owed to creditors present or future: Winkworth v Edward Baron Development Co Ltd & Ors [1986] 1WLR 1512 at 1516.

16 Lai Siu Chiu J in Federal Express Pacific Inc. & Another v Meglis Airfreight Pte Ltd and 5 Ors, Suit No. 96 of 1998, 20 February 1998 (unreported) at paragraph 17 of her Grounds of Decision after reviewing some of the cases referred to above including Nicolson v Permakraft [1985] 1 NZLR 242 (3 ACLC 453) and Brady v Brady [1988] 2 All ER 617 said:

“Whatever is the scope of the directors’ fiduciary duties towards creditors, it is clear from the authorities above that they do owe such duties to the company’s creditors when the company, through their actions, is insolvent, potentially insolvent or put in a situation where its creditors will be prejudiced and the company is or likely to be unable to satisfy its debts with these creditors.”

Test of Insolvency

17 There is support in the cases for the view that the test for putting a company into liquidation under s254(1)(e) read with subsection (2)(c) of the Companies Act (Cap.50) is one of fact to be decided in the light of all the circumstances of the case: Re Sanpete Builders (S) Pte Ltd [1989] 1 MLJ 393. Insolvency is established as a fact in a number of ways: Societe General v Statoil Asia Pacific Pte Ltd, Suit no. 786 of 1999, 20 April 2000, decision of Rajendran J (unreported). The court would look, for instance, at the accumulated losses to see if it were in excess of its capital; nature of the assets of company or were they book debts; current liabilities over current assets; prospect of fresh capital or financial support from shareholders and incoming payments from any source to discharge the debts including credit resources. See Chao JC (as he then was) in Re Sanpete Builders (S) Pte Ltd at 400.

18 These cases expanded the tests of insolvency enunciated by Grimberg JC in Re Great Eastern Hotel (Pte) Ltd [1998] SLR 841. The tests of insolvency applied were termed by the learned Judicial Commissioner as the practical and theoretical tests. The practical test answers the question “Has the company failed to meet a current demand for a debt already due?” and the theoretical test looks at whether there is a deficit after balancing overall liabilities against assets.

19 The question to ask is “when was the company unable to pay its debts as they fell due?”. It is to be answered by focusing on the company’s financial position taken as a whole by reference to whether a person would expect that at some point the company would be unable to meet a liability. The various tests such as quick assets test, balance sheet test or cash flow test are all...

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    ...in what constitutes the “benefit of the company as a whole": Chip Thye Enterprises Pte Ltd (in liquidation) v. Phay Gi Mo and Others [2003] SGHC 307; Liquidators of Progen Engineering Pte Ltd v. Progen Holdings Ltd [2010] 4 SLR 1089; [2010] SGCA The director's duty to creditors when the com......
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    ...expect that at some point the company would be unable to meet a liability: Chip Thye Enterprises Pte Ltd (in liquidation) v Phay Gi Mo [2004] 1 SLR 434 at [19]. A temporary lack of liquidity does not amount to insolvency: Tong Tien See Construction Pte Ltd v Tong Tien See [2001] 3 SLR(R) 88......
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10 books & journal articles
  • THE DUTY TO MAINTAIN EQUALITY IN COLLECTIVE CREDITOR ACTIONS
    • Singapore
    • Singapore Academy of Law Journal No. 2008, December 2008
    • 1 December 2008
    ...Holding (Australia) Pty Ltd) v Tong Tien See Construction Pte Ltd[2002] 3 SLR 241. See also Chip Thye Enterprises Pte Ltd v Phay Gi Mo[2004] 1 SLR 434; W&P Piling Pte Ltd v Chew Yin What[2007] 4 SLR 218. 3 In both law and equity: see, for example, Cockshott v Bennett(1788) 2 TR 763; Mare v ......
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    • Singapore
    • Singapore Academy of Law Journal No. 2005, December 2005
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    • Singapore
    • Singapore Academy of Law Annual Review No. 2010, December 2010
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    ...Mercia Safetywear Ltd v Dodd [1988] BCLC 250, Walker v Wimborne [1975-1976] 137 CLR 1 and Chip Thye Enterprises Pte Ltd v Phay Gi Mo [2004] 1 SLR(R) 434), the Court of Appeal held that directors have a fiduciary duty to take into account the interests of the company“s creditors when making ......
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