Dayco Products Singapore Pte Ltd (in liquidation) v Ong Cheng Aik
|Belinda Ang Saw Ean J
|02 September 2004
| SGHC 192
| SGHC 192
|Francis Goh (Ari Goh and Partners)
|06 September 2004
|Ashok Kumar and Eugene Thuraisingam (Allen and Gledhill)
|02 September 2004
|Suit No 1463 of 2001
|High Court (Singapore)
|Whether director breached fiduciary duties by failing to disclose personal interest in transactions of company,Directors,Whether director liable to compensate company in damages,Duties,Whether director liable to account for unauthorised profits made as a result of failure to disclose personal interest in transactions of company,s 156(1) Companies Act (Cap 50, 1994 Rev Ed),Liabilities,Breach of fiduciary duties,Companies
2 September 2004
Belinda Ang Saw Ean J:
1 This action raises the questions whether the defendant, Ong Cheng Aik, as managing director of the plaintiff, failed to disclose his personal interest in some transactions with the plaintiff and, if so, is he liable to account to the plaintiff for the unauthorised profits made by him? Alternatively, did the failure to disclose his interest render him liable to compensate the plaintiff in damages?
2 The plaintiff, Dayco Products Singapore Pte Ltd, a company in voluntary liquidation, was at all material times a trading company engaged in the business of supplying aftermarket automotive belts and hoses in Asia. It is the plaintiff’s case that the defendant, without the knowledge and approval of the board or shareholders, caused the plaintiff to enter into various transactions for the sale of the plaintiff’s goods to the defendant’s own companies, Mark IV Singapore Pte Ltd (“Mark IV Singapore”) and Asia Pacific Automotive Pte Ltd (“APA”). The pleadings assert a positive duty to act in good faith and in the best interests of the plaintiff. The pleadings also assert the negative fiduciary duty of avoiding a position of conflict between personal interest and duty. It was argued that the defendant breached his fiduciary duties as he failed to make adequate and frank disclosure of his personal interest in the sale transactions on account of his directorships and shareholdings in Mark IV Singapore and APA. The defendant does not dispute his interest in Mark IV Singapore and APA, but denies that he is liable on the grounds alleged.
3 The trial was conducted over several days. A total of nine witnesses testified at the trial. In the first tranche, Mr Michael Khoo SC represented the defendant. Mr Francis Goh came into the matter for the defendant after the hearing was restored. Mr Ashok Kumar, assisted by Mr Eugene Thuraisingam, represents the plaintiff.
4 I should mention that the defendant made an unmeritorious attempt in his Closing Submissions to resuscitate the failed preliminary argument that questioned the liquidator’s authority to bring this action. That preliminary point was concluded at the early stages in favour of the plaintiff and it was on that footing that the trial proceeded on the substantive issues.
5 I begin with a narration of some of the background facts. The plaintiff was, at all material times, the wholly owned subsidiary of Dayco Products Inc, a company incorporated in Delaware, USA. The ultimate holding company was Mark IV Industries Inc, a company incorporated in Buffalo, USA. The subsidiaries of Mark IV Industries Inc were arranged into two separate divisions, the industrial division and the automotive division. Dayco Europe SRL (“Dayco Europe”), Dayco Products Inc and the plaintiff, all of whom were involved in the automotive business, were grouped in the automotive division. Dayco Products Inc changed its name to Dayco Products LLC on 13 September 2000.
6 At the relevant times, John Purden (“Purden”) was the vice president and general manager of Dayco Europe for the geographical area of Europe, South America, Asia and Australia. The defendant was in charge of the day-to-day management of the plaintiff. The defendant reported directly to Purden, who in turn reported to Kurt Johansson. Kurt Johansson was the head of the Mark IV automotive division. He was a director of Dayco Europe and an officer of Mark IV Industries Inc, and he reported to the board of directors of Mark IV Industries Inc on the affairs of the plaintiff.
7 The board of the plaintiff comprised the defendant, Tan Meow Kheng (the defendant’s wife), William P Montague, Sal H Alfiero and Gerald S Lippes. It is not disputed that Tan Meow Kheng was a director in name for “administrative reasons”. The other three foreign directors were not resident in Singapore. Purden explained in his Supplemental Affidavit of Evidence-in-Chief, that Dayco Product Inc did not have its own board of directors and was controlled by Mark IV Industries Inc.
8 It is common ground that on 28 June 1999, the defendant was told that the plaintiff’s operations would be closed down by 31 December 1999 and the company would thereafter be voluntarily liquidated. In its place, a sales representative office of Dayco Europe would be set up. The defendant was to stay on after 31 October 1999 on a full-time basis to close down the company and transfer the existing business to the sales representative office to be headed by Josephine Yap (“Yap”) who was the sales administration manager of the plaintiff. The sales representative office was set up in January 2000. In April or May 2001, the sales representative office changed its name to Dayco Aftermarket SRL.
9 The parties had referred to the transactions in question as the sale of “Returned Goods”, the “Bonded Warehouse Stock” and finally, the “Excess Singapore Stock”. It is not disputed that by 26 July 1999, the plaintiff and the defendant agreed to the following:
(a) To sell the Returned Goods and Bonded Warehouse Stock at a lump sum price of US$150,000 to the plaintiff’s Hong Kong and/or Singapore distributors.
(b) To sell the Singapore inventory, ie Excess Singapore Stock, “at a maximum discount of 50% of inter-company costs”.
(c) Any offers other than (a) and (b) would have to be approved by the plaintiff.
10 The Returned Goods represented stock previously sold to the plaintiff’s distributor in Seoul, South Korea, Shin Young Trading, whose sole proprietor was An Wea Don (“AWD”). AWD was a casualty of the Asian financial crisis and, with the devaluation of the Korean won, he had difficulties paying the plaintiff for the stock he had bought. There was still an outstanding sum of US$599,032 due and owing to the plaintiff. The plaintiff agreed in a letter dated 18 August 1999, to take back the stock and to refund him his earlier payment of US$144,344. The Bonded Warehouse Stock, on the other hand, represented stock warehoused in Singapore pending shipment to AWD.
11 The plaintiff alleged that the defendant knowingly misrepresented the true value of the Returned Goods and Bonded Warehouse Stock, and induced the plaintiff to sell them to Tong Chieh Trading (Hong Kong) Co Ltd (“Tong Chieh”). The sale to Tong Chieh, evidenced by the plaintiff’s invoice no 903621 dated 31 August 1999, was a “sham” arranged by the defendant to conceal the true nature of the sale from the plaintiff so that the defendant could deal with the goods for his own benefit. The defendant used APA’s name and dealt with these goods through Mark IV Singapore. The Returned Goods remained in South Korea and were treated as part of Mark IV Singapore’s initial capital injection for an 80% shareholding in a new Korean company that was subsequently renamed Shin Young Trading Co Ltd. In the case of the Bonded Warehouse Stock, Mark IV Singapore, in reality, sold the stock to Shin Young Trading Co Ltd for a profit.
12 The Excess Singapore Stock was from the plaintiff’s inventory in Singapore. The allegation was that the defendant arranged for the Excess Singapore Stock to be sold to APA, without disclosing his directorship and shareholding in APA. Mark IV Singapore paid for the goods and later sold them at a profit to the plaintiff’s distributors in the Philippines and Singapore.
13 There is no difficulty here with the formulation of the law on this topic and in the analysis of the facts. A director, being a fiduciary, cannot exercise his powers for his own benefit or gain without clearly disclosing his interest and obtaining the necessary consent. The English Court of Appeal in Gwembe Valley Development Co Ltd v Koshy (No 3)
The requirement of the general law is that, although disclosure does not have to be made formally to the board, a company director must make full disclosure to all the shareholders of all the material facts. The shareholders in the company, to which he owes the fiduciary duty not to make an unauthorised profit from his position, must approve of, or acquiesce in, his profit. Disclosure requirements are not confined to the nature of the director’s interest: they extend to disclosure of its extent, including the source and scale of the profit made from his position, so as to ensure that the shareholders are ‘fully informed of the real state of things’, as Lord Radcliffe said in Gray v New Augarita Porcupine Mines Ltd
14 Separately, s 156(1) of the Companies Act (Cap 50, 1994 Rev Ed) and sometimes the articles of a company, permit a director who is interested in a proposed transaction to take the benefit of the transaction if he discloses his interest to the board and takes no part in the decision of the board on the transaction. If the director makes that disclosure and abstains from taking part in the decision, the validity of the transaction is not impaired.
15 A failure to adequately disclose will render the director accountable to the company for the profits made from the transaction. The law governing the liability to account by one in a special fiduciary relationship with another has been authoritatively declared by the House of Lords in Boardman v Phipps
16 The defendant submits that there can be no breach of fiduciary duties as alleged because Purden had acquiesced in the sales as he was aware of the defendant’s interest in APA and Mark IV Singapore. Purden was the person whom the defendant primarily looked to for information, advice and instructions relating to the conduct of the affairs and business of the plaintiff. The defendant had talked to Purden about his plans after the closure of the plaintiff’s Singapore office, and the reasons for the incorporation of APA and Mark IV Singapore. As such, Purden was under a duty to communicate to the...
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