Debotosh Lodh v Boustead Services Pte Ltd and another

• Jurisdiction: Singapore
• Judge: Vinodh Coomaraswamy J
• Judgment Date: 18 March 2019
• Neutral Citation: [2019] SGHC 52
• Court: High Court (Singapore)
• Docket Number: Originating Summons No 842 of 2018
• Published date: 13 December 2019
• Year: 2019
• Hearing Date: 01 August 2018
• Plaintiff Counsel: N Sreenivasan SC and Lim Min (Straits Law Practice LLC)
• Defendant Counsel: Josephine Choo, Kerry Chan and Melvin Lin (WongPartnership LLP)
• Subject Matter: Injunction,Purposes for grant,Protection of contractual rights
• Citation: [2019] SGHC 52

Vinodh Coomaraswamy J: Introduction

The plaintiff brings these proceedings to restrain a threatened breach of contract. The plaintiff is a shareholder of and a director of the second defendant. The plaintiff’s case is that he has an express contractual right to hold office as a director of the second defendant so long as he remains a shareholder of the second defendant. I shall refer to that alleged right as the “directorship right”. In these proceedings, the plaintiff seeks a final injunction against the defendants to prevent his removal as a director in breach of the directorship right.

Together with the originating summons which commenced these proceedings, the plaintiff filed an application seeking an urgent interlocutory injunction¹ to restrain his removal until his application for final relief had been determined. He sought the interlocutory injunction to forestall his removal at an extraordinary general meeting (“EGM”) of the second defendant which was then imminent.² When the application for the interlocutory injunction came up for hearing, the defendants quite sensibly agreed to postpone taking any steps to remove the plaintiff as a director of the second defendant until the plaintiff’s application for final relief had been determined.³

I have found that the directorship right does not exist and, accordingly, have dismissed the plaintiff’s application with costs. The plaintiff has appealed. I now set out the grounds for my decision.

The background facts The parties

The first defendant is an engineering company. It is also the majority shareholder of the second defendant.⁴ The second defendant runs a highly-profitable subset of the first defendant’s engineering business installing, distributing, selling, and marketing control systems such as instrumentation, automation and fire and gas detection systems.⁵

Both defendants are members of the Boustead group of companies. The ultimate holding company of the group is a listed company, Boustead Singapore Ltd.⁶ The group’s Chairman and Group Chief Executive Officer is Mr Wong Fong Fui (“Mr Wong”).⁷ Mr Wong is also the single largest deemed shareholder of Boustead Singapore Ltd. The group’s Chief Financial Officer until January 2018 was Mr Loh Kai Keong (“Mr Loh”).⁸ Both men are directors of both defendants.⁹

The plaintiff is a senior and long-standing employee of the Boustead group. He is also one of the minority shareholders of the second defendant and one of its five directors.¹⁰

The plaintiff was employed by the group in one capacity or another from 1987 to 2017. The plaintiff began his relationship with the group when the first defendant employed him to manage its controls division in 1987. He later took over management of the first defendant’s electric motors division. The division was subsequently renamed the controls & electrics (“C&E”) division¹¹ and hived off to the second defendant. From 2002 until 2015, the plaintiff was the second defendant’s managing director. From 2015 until he retired in 2017, the plaintiff was the second defendant’s Executive Chairman.¹²

Transfer of the first defendant’s business division

In 1998, the plaintiff and three other members of the senior management team of the C&E division (“the management team”) proposed a management buyout of the division to the Boustead group. The three other members of the management team are Mr VRM Sundaram, Mr Prasun Chakraborty, and Mr Raghavan Nair Gopakumar.¹³ It can be inferred that the reason for the proposal was to enable the management team to acquire for themselves the entire benefit of profits which they generated for the Boustead group by their skill and effort.

Eventually, in or about 2001, the parties reached an in-principle agreement under which the management team would be allocated 40% of the profits of the C&E division, with the Boustead group retaining the remaining 60%. Under this proposal, the first defendant was to transfer the entire business of the C&E division to a new legal entity.¹⁴ The intention was that the first defendant would own 60% of the new entity and the management team would own the remaining 40%.

In 2002, the first defendant nominated the second defendant to be the legal entity to be the transferee of the C&E division. At that time, the second defendant was a wholly-owned subsidiary of the first defendant. On 1 April 2002, the first defendant transferred the entire business of its C&E division to the second defendant. At the same time, the employment contracts of the management team were also transferred to the second defendant.¹⁵

When the transfer took place on 1 April 2002, the management team acquired no shares in the second defendant. That is because, at that time, there was only an informal, in-principle agreement as to how the management team would participate in the profits of the C&E division after the transfer.

Despite this, at the same time as the transfer, four things happened. First, the plaintiff and Mr Chakraborty were appointed directors of the second defendant.¹⁶ Second, the plaintiff was appointed the second defendant’s managing director. Third, the management team paid the first defendant the sum of $200,000 as a deposit against the price of the shares in the second defendant which the first defendant intended to transfer to them,¹⁷ with the balance to be paid when the actual transfer took place.¹⁸ And finally, the parties agreed that, even though the management team held no shares in the second defendant at that time, the team’s entitlement to 40% of the second defendant’s profits would take effect from 1 April 2002.¹⁹

The parties formalise their relationship

From 1 April 2002 and into 2003, the first defendant and the management team continued to negotiate the terms of the team’s participation in the second defendant. In March 2003, the terms were agreed. A formal agreement was signed on 21 April 2003²⁰ by the first defendant, the second defendant, and each member of the management team.

The plaintiff refers to the 21 April 2003 agreement as a joint venture agreement²¹ and characterises the parties’ relationship as that of joint venturers.²² The defendants deny that the parties were ever joint venturers²³ and characterises the agreement simply as a shareholders’ agreement.²⁴ The labels are not important. I will refer to the agreement simply and neutrally as “the Agreement”, as the defendants do.²⁵ And I shall refer to the parties’ relationship simply as a collaboration.

It was only upon completion under the Agreement in April 2003 that the management team acquired 40% of the shares in the second defendant from the first defendant at a price of $400,000. After taking into account the part-payment of $200,000 made in 2002, that left a further $200,000 which the management team was obliged to pay the first defendant in April 2003. The team duly did so.

Thus, the management team acquired 40% of the second defendant at total price of $400,000. Under the terms of the Agreement, that 40% of the second defendant was allocated to the management team in the following proportions: (i) the plaintiff acquired 25% of the second defendant; (ii) Mr Sundaram acquired 6%; (iii) Mr Chakraborty acquired 6%; and (iv) Mr Gopakumar acquired 3%.²⁶

As shareholders of the second defendant, the management team became entitled to participate in the second defendant’s profits from the date they acquired their shares. But, as agreed in 2002 (see [11] above), the Agreement records expressly that the management team’s entitlement to 40% of the second defendant’s profits had taken effect on 1 April 2002.²⁷

The Agreement provides expressly that the second defendant’s board is to comprise five directors, with three directors nominated by the first defendant and two directors drawn from the management team.²⁸ The Agreement names Mr Wong as one of the three directors nominated by the first defendant. It also names the plaintiff and Mr Chakraborty as the two directors to be drawn from the management team. In addition, the Agreement expressly provides that the plaintiff is to hold office as the second defendant’s managing director.

Giving effect to these provisions of the Agreement did not require any changes to the second defendant’s board. The plaintiff and Mr Chakraborty had already been appointed directors on 1 April 2002.²⁹ The evidence also shows that they have held these positions uninterrupted from 1 April 2002 to the date of these proceedings.³⁰ And Mr Wong had been a director of the second defendant even before 1 April 2002.

One of the matters which the Agreement expressly envisaged was that the second defendant would incorporate a subsidiary in India to carry on the controls business there.³¹ The second defendant eventually did establish this subsidiary and eventually did expand its controls business to India. The status of the Indian subsidiary has become a bone of contention between the parties.

The share sale agreement

In 2006, the parties to the Agreement entered into a share sale agreement (“the SSA”).³² The SSA was meant to restructure the second defendant’s shareholding for tax and accounting purposes. It was not the purpose of the SSA to alter the terms of the parties’ collaboration underlying the Agreement.

Under the SSA, the management team collectively transferred 300,000 shares in the second defendant, representing 18.75% of its shares, back to the first defendant in exchange for a payment of just over $465,000.³³ As a result of the transfer: (i) the first defendant’s shareholding in the second defendant increased from 60% to 78.75%; (ii) the plaintiff’s shareholding fell from 25% to 15.625%; (iii) Mr Chakraborty’s shareholding fell to 3.75%; (iv) Mr Gopakumar’s shareholding fell to 1.875%; and (v) Mr Sundaram sold all his shares back to the first defendant and exited entirely as a shareholder of the second defendant, although he remained an employee.³⁴

Because...