Chua Kien How v Goodwealth Trading Pte Ltd and Another

JudgeChan Sek Keong J
Judgment Date29 April 1992
Neutral Citation[1992] SGCA 29
Docket NumberCivil Appeal No 46 of 1990
Date29 April 1992
Published date19 September 2003
Plaintiff CounselPatrick Wee (Chua Hay & Wee)
Citation[1992] SGCA 29
Defendant CounselChia Ee Lin (Ricquier Chia & Co)
CourtCourt of Appeal (Singapore)
Subject MatterJust and equitable grounds,Whether there was a loss of the substratum of the company,Construction of memorandum of association to determine object or substratum of company,s 254(1)(i) Companies Act (Cap 185, 1970 Ed),Whether there was a deadlock between directors,Winding up,Companies,Cessation of only business company had ever carried out

Cur Adv Vult

This is an appeal against the decision of Yong Pung How CJ ordering the winding-up of Goodwealth Trading Pte Ltd (`the company`) on the ground that it was just and equitable to do so under s 254(1)(i) of the Companies Act (Cap 185, 1970 Ed) (`the Act`). [See [1991] 2 MLJ 314 .]

The petitioner bought the company as a shelf company in 1984 for the purpose of carrying on the business of a restaurant at Shaw House, Orchard Road, Singapore after he had acquired a lease of the site.
He then invited three other persons to join him in the business. They were the original directors and shareholders. The business commenced in December 1984 under the name of Chui Garden Noodle House and specialized in the sale of Hong Kong noodles.

The monthly rent for the premises was $94,957.50.
In the first year of business, the company lost money. By August 1985, the company was in arrears of rent in the amount of $329,830, against which it had paid to the landlords a rental deposit of $284,872.50. The landlords were willing to reduce the monthly rent to $70,000 provided the arrears were paid. The company was unable to pay the arrears and the landlords issued a writ of distress which was executed on 30 April 1986. The other shareholders wanted to terminate the business and wind up the company, but the petitioner, who was the managing director, was keen to carry on the business.

The petitioner invited his friend, Chua Kien How (`Chua`), who was known to the landlords` general manager, to continue the business with him.
Chua became a shareholder in May 1986 after he had successfully sorted out the problem of the arrears with the landlords by giving his personal guarantee to the landlords in the amount of $280,000, whereupon the writ of distress was withdrawn. At about the same time, the other shareholders sold their shares in the company to Chua and the petitioner at the nominal price of one cent per share.

Following his entry into the company, Chua became a co-director with the petitioner and also the chairman of the board of directors.
However, the company was jointly managed by the petitioner and Chua, with the petitioner being in charge of the day-to-day management of the business of the company, and Chua being a joint signatory of the company`s cheques.

What the petitioner and Chua had agreed between themselves as to their respective shareholdings in the company when they decided to buy out the other shareholders became a bone of contention between them in 1987 after the company had made a successful turnaround in its business.
The petitioner`s version was that he and Chua agreed to become 50:50 shareholders. However, under the restructuring agreement signed by them, it was provided that Chua would acquire from the other shareholders enough shares to give him a majority shareholding in the company. The petitioner`s explanation for agreeing to Chua becoming the majority registered shareholder was that Chua had represented to the petitioner that the landlords were not prepared to withdraw the writ of distress unless Chua became the majority shareholder. The petitioner agreed to that condition provided that Chua agreed to hold the shares, numbering 76,800, which, together with his own shares, would give Chua the majority shareholding in the company, in trust for him and to transfer them back to him when the guarantee had lapsed. The petitioner alleged that Chua had agreed to this arrangement.

Chua denied that he had made any representation to the petitioner regarding the landlords` requirement.
His version was that it was agreed from inception that he would be the majority shareholder on account of his exposure under the guarantee he had given to the landlords. As it later turned out, the landlords did not call on Chua`s guarantee.

The business of the company had picked up and become profitable.
In February 1987, Chua executed a transfer of 76,800 shares to the petitioner, which, if it had been registered, would have equalized their shareholdings in the company. The consideration stated in the transfer form was $768, ie at one cent per share. The petitioner`s account of this was that he had requested Chua to transfer the said shares to him as Chua`s guarantee had lapsed. However, when the transfers were presented for registration, Chua sent a telex on 13 March 1987 to the company`s solicitors to stop the registration on the ground that he had not been paid the consideration by the petitioner. In this action, Chua gave an additional reason for having stopped the transfer. It was that he had agreed to the transfer provided that the landlords agreed to release him from the guarantee and that the landlords had refused to do so. Chua did not adduce any documentary evidence to support his allegations.

Prosperity bred cupidity.
According to the petitioner, from March 1987, Chua began to initiate steps to take over the control of the company. He first transferred 150,000 of his own shares to his wife, which made her the third shareholder in the company. It was, however, not disputed that the petitioner had agreed to the transfer. In February 1988, he attempted to transfer some of his other shares to his brother, CAB. He also attempted to remove the secretary of the company. Between August 1988 and October 1989, Chua convened 12 directors` meetings, one after another, with a view to appointing CAB as an additional director of the company. Each attempt was frustrated by the petitioner refusing to attend the meeting and denying it the quorum. Chua also requisitioned several general meetings but again could not get a quorum. There was adduced in evidence a copy of a signed minute by Chua of a general meeting having been validly held at which CAB was appointed a director. However, Chua later treated the said meeting as having no effect.

As a result of these disputes, the petitioner and Chua did not communicate with each other in the management of the company except through a mutual friend.
The company was able to continue its business on a day-to-day basis, but no corporate decision could be or was made. Hence, as found by Yong Pung How CJ, the company was served, on 18 May 1989, with a summons for failure to submit its tax returns and audited accounts to the Comptroller of Income Tax for the year of assessment 1988. On 25 May 1989, the company was served with another summons for failing to hold an annual general meeting and to lodge its annual return within the time prescribed by the Companies Act.

In early April 1989, the landlords served the company with six months` notice to determine the tenancy of the restaurant premises by 31 October 1989 as the landlords wanted to redevelop the site.
After the notice was given, the petitioner wanted to wind up the company. Chua was also agreeable as in July 1989 and September 1989 he spoke to the restaurant manager to dismiss the staff and sell the kitchen equipment. Chua and the petitioner gave to the chefs from Hong Kong, whose services were vital to the continuation of the restaurant business that was then carried on by the company, notices of termination of service on 30 October 1989. On that day, the restaurant closed its door and on 31 October 1989 all the restaurant fixtures, fittings and furniture, the kitchen and other operating equipment were sold by public auction. The restaurant manager ceased employment on 30 November 1989 and the audit clerk left on 31 December 1989. During this period of notice, no corporate decision was made to continue the restaurant business at any other location.

On 10 November 1989, the petitioner commenced an action against Chua for a declaration that the said 76,800 shares were held in trust by Chua for him and an order for their transfer to him.

On 15 November 1989, the petitioner commenced the winding-up action under appeal.
The winding-up petition recited the origin of the business, Chua`s subsequent participation and involvement in its business and management, the dispute between the petitioner and Chua in relation to the ownership of the 76,800 shares, and the attempts of Chua to take control of the company. Paragraphs 15 and 16 of the petition set out the grounds on which the petitioner sought the winding-up order. They read:

(15) On 5 April 1989, the company received notice to quit the premises at #01-02 Shaw House, Orchard Road from the landlord which notice to quit expired on 31 October 1989. The company`s only business is that of a restaurant operated at the aforesaid premises. Since the handing-over of vacant possession of the said premises to the landlord, the company has ceased business altogether.

(16) The dispute between your petitioner and the said Chua arising from the aforesaid has resulted in a complete deadlock in the company. It has become impossible for all concerned to conduct the business of the company. In the circumstances, it is just and equitable to wind up the company.

Although these paragraphs were not as well-drafted as they ought to have been, they are sufficient to show that the grounds on which the petitioner relied were: (i) the loss of the substratum of the company, and (ii) the deadlock between the two directors in the management of the company.

As regards the first ground, Yong Pung How CJ stated the law as follows [at pp 319-320]:

A company`s substratum is the main object which it was formed to achieve. If its main object was to carry on a certain business, and it is no longer able to carry on that business, its substratum is gone, and any member may petition for a winding-up order on the just and equitable ground. A memorandum of association invariably contains a long list of ancillary objects, with a correspondingly long list of powers which the company may exercise to achieve these objects. But the fact that the majority of shareholders may wish to keep the company in existence, and to exercise the powers to carry on a different kind of business, or even a similar business, will not

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2 books & journal articles
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