Ei-Nets Ltd and Another v Yeo Nai Meng

JurisdictionSingapore
JudgeChao Hick Tin JA
Judgment Date17 November 2003
Neutral Citation[2003] SGCA 48
Docket NumberCivil Appeal No 46 of 2003
Date17 November 2003
Year2003
Published date17 December 2003
Plaintiff CounselMichael Hwang SC (instructed), Nicholas Narayanan and Jeffrey Ong (J Koh and Co)
Citation[2003] SGCA 48
Defendant CounselK Shanmugam SC, Jessie Tan (instructed) and Rey Foo Jong Han (K S Chia Gurdeep and Param)
CourtCourt of Appeal (Singapore)
Subject MatterDefamation,Employment Law,Whether appellants entitled to terminate contract before expiry of three-year period stipulated in contract,Contract of service,Misconduct,Damages,Whether defence of qualified privilege applicable,Whether director guilty of misconduct or neglect of duties,Qualified privilege,Directors,Tort,Unfair dismissal,Whether transfers requiring formal resolution by Board of Directors,Whether dismissal of director without approval of Board of Directors wrongful,Companies,Whether contract was for fixed term of three years,Whether transfers breaching s 76 Companies Act (Cap 50, 1994 Rev Ed),Whether quantum of damages awarded for limited publication of reports excessive,Loans,Termination with notice,Inter-company loans between related companies

Delivered by Chao Hick Tin JA

1 This appeal relates to two consolidated actions in which the respondent (“Yeo”) claimed damages for wrongful dismissal from employment against EI-Nets Ltd (“Ei-Nets”), as well as damages for defamation against Ei-Nets and Liau Beng Chye (“LBC”). He succeeded before the High Court in both actions and was awarded substantial damages in respect of each. EI-Nets and LBC, being dissatisfied with the decisions below, have appealed to this Court.

The background

2 The facts giving rise to the actions were somewhat involved. They may, however, be briefly stated as follows. Yeo was a shareholder in a company called Plan-B Technologies Pte Ltd (“Plan-B”). Plan-B in turn wholly owned another company called Plan-B Speed.com Pte Ltd (“Speed”). Speed, in turn, owned 74% of the issued and paid-up capital of a third company, Suntze Comunications Engineering Pte Ltd (“Suntze”). Speed then had a paid-up capital of $600,000/-, with each share bearing a par value of $1/-.

3 Yeo was at all material times an Executive Director of Plan-B and the Managing Director of Speed. As regards Suntze, its Managing Director was Mr Lawrence Tan Wai Liang (“Tan”).

4 In late 1999, a public listed company, Strike Engineering Ltd (“Strike”), was interested in investing in Speed. Negotiations proceeded. This led to the execution on 18 November 1999 of a Sale, Purchase and Subscription Agreement (“SPS Agreement”) between Plan-B, Strike and Speed. Under this Agreement, Plan-B and Strike would each eventually own 4.6 million shares in Speed. This was to be brought about in the following stages:-

First stage

Plan B was to transfer all its 600,000 shares in Speed to Strike in exchange for 11,574,000 ordinary shares of Strike with a par value of $0.05, and which had a market worth of $5 million. Strike would further subscribe for another 2 million new shares in Speed at par value.

Second stage

Thirty days after the completion of stage one, Plan-B would subscribe for 2.6 million shares in Speed at par value. Sixty days from the completion of stage one, Plan-B and Strike would each subscribe for another 2 million shares in Speed also at par value.

5 At the time, another company, Ei-Nets.Com Ltd (“Ei-Nets”) was wholly owned by Armorcoat International Pte Ltd (“Armorcoat”). LBC was a major shareholder and director of Armorcoat. On 7 January 2000, Plan-B and Strike entered into a Memorandum of Understanding (“MOU”) with Armorcoat and Ei-Nets with the object of having Ei-Nets listed on the Stock Exchange. Under the MOU, it was envisaged that when both Plan-B and Strike had fulfilled their terms under the SPS Agreement, they would transfer their total shareholding of 9.2 million in Speed to Ei-Nets in exchange for shares in Ei-Nets.

6 The MOU further provided that a formal Share Exchange Agreement (“SE Agreement”) would be entered into between the parties as soon as possible and, in any event, no later than 31 January 2000.

7 Due to one reason or another, the execution of the SE Agreement was delayed and it was only signed on 22 May 2000. This Agreement provided that the completion date would be 15 June 2000. By recital B to the Agreement, the parties thereto had appreciated that the obligations of Strike and Plan-B under the SPS Agreement to acquire 4.6 million shares each in Speed had not yet been carried out in full.

8 There was delay on the part of Plan-B and Strike in fulfilling their obligations under the SPS Agreement. The first stage of the SPS Agreement was performed only on 9 May 2000. By 15 June 2000, the original date specified for completion under the SE Agreement, the second stage under the SPS Agreement had yet to be carried out; this only occurred on 28 June 2000.

9 The upshot was that, by mutual consent, the completion of the SE Agreement was postponed to 19 July 2000. Before that, on 14 July 2000, Plan-B and Strike executed the share transfer forms to transfer their respective Speed shares to Ei-Nets.

10 Two important pre-conditions to the share exchange laid down in the SE Agreement were that, upon completion, Speed would have (i) S$8.6 million cash injected into it; and (ii) a Net Tangible Asset value of not less than S$6 million on 15 June 2000. The eventual outcome under the SE Agreement would be that Strike/Plan-B of the one part and Armorcoat of the other part would each hold 50% of Ei-Nets, and Speed would become a wholly-owned subsidiary of Ei-Nets.

11 The matter that gave rise to the two actions related to the manner in which Plan-B paid for the 4.6 million shares it acquired in Speed under the SPS Agreement. Plan-B paid with two cheques, one for $675,585 and the other for $2 million. The first cheque was cleared on 5 July 2000 and the second on 7 July 2000. The remaining purchase price of $1,924,415 was paid by capitalising inter-company loans of the same amount. The audited accounts of Speed treated the payment for the shares as having been made by 30 June 2000. What the appellants objected to was the capitalisation of the $1,924,415 debt.

12 We now turn to set out the facts relating to the capitalising of the inter-company loans. In September 1999, Speed purchased an IT and telecommunications portal (“Telport”) from Suntze for $2.5 million. By 30 May 2000, Speed still owed Suntze $1,390,448. At the same time, Speed also owed Plan-B $850,000 and Suntze owed Plan-B $1,074,415. On the suggestion of the accountant of Speed, one Ms Tey, the amount of $1,074,415 owed by Suntze to Plan-B was offset against the $1,390,448 owed by Speed to Suntze. The net result of this offset was that Speed owed Plan-B a total of $1,924,415 and Speed’s debt to Suntze was thereby reduced to only $316,033. The appropriate entries were made in the books of the three companies. It was clear then that Plan-B did not have the cash in hand to pay fully for the 4.6 million shares in Speed. Thus, the need to capitalise the debt of $1,924,415.

13 In late July 2000, a similar transaction took place whereby a debt of $351,388 owed by Suntze to Plan-B was transferred to Speed, resulting in Speed owing the said amount to Plan-B.

14 The terms of the SE Agreement provided that there would only be a true merger between Speed and Ei-Nets if the public listing of Ei-Nets was successful. Until then, the merger of Speed and Ei-Nets was only on a pro-forma basis for listing purposes. There was no change in the constitution of the Board of Speed.

15 There was some delay in obtaining listing of Ei-Nets. That eventually occurred in January 2001. It was only then that the Board of Speed was reconstituted and Yeo ceased to be its Managing Director. Instead, Yeo became an executive employed by Ei-Nets. It was also around this time that LBC was appointed the President and Chief Executive Officer (“CEO”) of Ei-Nets.

16 A formal contract of employment was entered into between Yeo and Ei-Nets on 3 January 2001, but back-dated to commence on 3 June 2000. Under the contract of employment, Yeo’s services were for a term of three years from 3 June 2000. Thereafter, they were to continue automatically on a year-to-year basis unless terminated by either party giving to the other six months’ notice in writing. However, Ei-Nets could, with his consent, second Yeo to one of its subsidiaries. His services could, in any case, be terminated if, “in the reasonable opinion of the Board”, he was guilty of, inter alia, misconduct or any neglect of duties.

17 For reasons not known, an employee of Ei-Nets, one Wan Tuck Wah, either in early May 2001 or shortly before then, conducted an audit of Speed’s accounts (“Wan Report”). This report was not produced to the court. According to LBC, the Wan Report led him to have misgivings about the accounts of Speed. LBC consulted a legal practitioner, Mr Lim Chor Pee (“Mr Lim”) on the Wan Report. Between them it was decided that, instead of asking the auditors of Speed, Suntze and Ei-Nets, Deloitte & Touche (“D&T”), to look into it, they should appoint one Mr JK Medora to undertake the task with two specific terms of reference – namely, to determine –

(i) whether, as on 15 June 2000, there was a cash injection of $8.6 million in the form of equity into Speed and that Speed had a NTA of not less than $6 million;

(ii) whether an amount of $351,388 was transferred in the accounts of Speed, as being owed to Plan-B instead of to Suntze.

18 Mr Medora concluded in his report (“Medora Report”) that the transfers of the inter-company loans from Suntze to Plan-B were fictitious and that the NTA of Speed on 30 June 2000 was only $1,267,147. He disregarded the capitalisation of the debt owing by Speed to Plan-B of $1,924,415 and the cheque payments received by Speed which were cleared after 30 June 2000.

19 Medora also concluded that the transfer of the loan of $351,388 from Suntze to Plan-B was fictitious as he did not see any documents evidencing the same.

20 Mr Lim, having studied the Medora Report, produced his own report (“LCP Report”) wherein he advised that the accounts of Speed should be fully investigated. Notwithstanding such a reservation, he went on to make certain conclusions. He stated that the fictitious book entries highlighted in the Medora Report appeared to be a fraudulent device resorted to by the person(s) who authorised the transaction to misappropriate the sum of $1,074,415 and that this device constituted a breach of s 76(1)(a) of the Companies Act (Cap 50). This section prohibits a company from giving financial assistance for the purpose of the acquisition of its own shares. Mr Lim also stated that Speed could initiate legal proceedings against Plan-B for money had and received resulting from the payment of non-existent debts amounting in total to $1,425,803 ($1,074,415 plus $351,388).

21 Upon receipt of the LCP Report, LBC called for a meeting of the Audit Committee of Ei-Nets on 23 May 2001. Also placed before the Committee that day were the Medora Report and an unsigned document which appeared to...

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