Encus International Pte Ltd (in compulsory liquidation) v Tenacious Investment Pte Ltd and others

• Jurisdiction: Singapore
• Judge: Judith Prakash J
• Judgment Date: 31 March 2016
• Neutral Citation: [2016] SGHC 50
• Plaintiff Counsel: Smitha Menon, Daniel Tan Shi Min and Yu Kanghao (WongPartnership LLP)
• Docket Number: Originating Summons No 1118 of 2014
• Date: 31 March 2016
• Hearing Date: 13 October 2015,12 October 2015,18 January 2016
• Subject Matter: Avoidance of transactions,Equitable mortgage,Insolvency law,Unfair preferences,Entire agreement clauses,Transactions contrary to anti-deprivation principle,Contractual terms,Credit and security,Contract,Transactions at an undervalue,Implied terms
• Year: 2016
• Citation: [2016] SGHC 50
• Defendant Counsel: Eugene Quah, Abigail Cheng and Lydia Ni (RHTLaw Taylor Wessing LLP)
• Court: High Court (Singapore)
• Published date: 28 April 2016

Judith Prakash J: Introduction

The plaintiff, Encus International Pte Ltd (“the Company”), is a company in liquidation. By this application, it seeks to recover a valuable asset, namely, shares in another company. The Company seeks a declaration that the transfer of these shares to the first defendant has to be annulled as an unfair preference or as a transaction at an undervalue or because it was carried out in breach of the anti-deprivation principle.

In May 2013, the Company transferred 1,772,728 ordinary shares in a company called DKE Precision Pte Ltd (“DKE”) to the first defendant, Tenacious Investment Pte Ltd, as nominee for the second to sixth defendants. I shall henceforth refer to the shares as the “DKE Shares” and to the second to sixth defendants and one Mr Tan Piak Khiang (“Mr Tan”) as the “Investors”. The transfer was purportedly effected pursuant to a Conditional Share Transfer Agreement (“CSTA”) dated 26 January 2012 and made between the Company and the Investors.

On 5 June 2013, the Company was placed under judicial management and on 25 October 2013 a winding-up application was filed. The Company was placed in liquidation on 14 November 2013. Mr Wong Joo Wan (“the Liquidator”) was appointed liquidator of the Company.

Background

The Company and its subsidiaries carried on the businesses of sheet metal fabrication, sub-assembly, product design and engineering. At some point, the Company entered into a 50:50 joint venture with another party which resulted in the formation of DKE. The value of the Company’s 50% shareholding in DKE lay in a profitable subsidiary in China.

At all material times, Mr Tan was the executive director of the Company. Sometime in January 2011, Mr Tan approached the third and fourth defendants seeking an injection of funds as the Company was experiencing financial difficulties. The third and fourth defendants later brought the second, fifth and sixth defendants into the negotiations with Mr Tan in relation to a possible investment in the Company. In the transactions that ensued, Mr Tan was part of the investing group and a party to the CSTA. He, however, is not challenging the Liquidator’s efforts to recover the DKE shares and, therefore, is not one of the defendants herein.

On or about 12 April 2011, the parties agreed to terms stated in an Investment Term Sheet (“the Term Sheet”) which the third defendant circulated by e-mail. The Company and the Investors were, at this time, represented by the same solicitors, M/s Drew & Napier LLC (“D&N”). The Term Sheet stated, inter alia, that the Investors would invest $8.8m (“the Investment”) in the Company and would receive some form of security which would be surrendered (“the Share Transfer”) if the Company failed to meet certain profitability targets in 2013 (“the Performance Standard”).

Subsequently, on 28 April 2011, the Investors and the Company entered into a convertible loan agreement (“the CLA”) under which the $8.8m would be disbursed as a loan that would be convertible into shares in the Company at a fixed rate of $0.25 per share (“the Encus Shares”). It was contemplated that the CLA would be accompanied by a charge over the DKE Shares (“the Share Charge”). The CLA provided that conversion of the loan into the Encus Shares would be mandatory upon completion of a whitewash procedure aimed at ensuring that the giving of security would comply with s 76 of the Companies Act (Cap 50, 2006 Rev Ed). The CLA contained an entire agreement clause.

At the time the CLA was signed, some of the Investors, including Mr Tan, had already lent the Company $2,216,680.98. Between 29 April 2011 and 16 May 2011, the Investors lent the Company further sums totalling $6.1m. On 5 September 2011, the Investors lent the Company $483,319.02 (thus bringing the total loan amount up to $8.8m).

After the CLA was signed, the parties had further negotiations for the purpose of completing and executing the Share Charge. Although a number of whitewash procedures were successfully carried out in order to allow execution of the Share Charge, in the end it was not concluded, as the Investors no longer wanted it.

Instead, the Investors – now represented by RHTLaw Taylor Wessing LLP – insisted that the security be given in the form of the CSTA, which included new conditions under which the Investors would be allowed to insist on the Share Transfer (“Transfer Events”). The third defendant explained in his affidavit filed in the proceedings that the scope of the Transfer Events in the CSTA had to be expanded beyond the non-achievement of the Performance Target to include the possibility of insolvency situations of the Company and Encus Shanghai. This was because in December 2011 the Investors had noted that the Company’s financial performance was still poor despite the Investment and that insolvency was therefore a distinct possibility.

The Term Sheet provided for a single Transfer Event which was the failure to meet the Performance Standard. In contrast, there were seven possible Transfer Events in the CSTA. Five of these new events related to insolvency. The CSTA thus effected a significant broadening of the rights of the Investors, departing materially from the original terms of the Investment.

The CSTA was executed as a deed on 26 January 2012, immediately after the loan was converted into Encus Shares.

On 3 February 2013, relying on the Company’s insolvency, the Investors invoked their right to have the Share Transfer performed. The Share Transfer was effected on 3 May 2013 and the first defendant became the registered owner of 1,772,728 DKE Shares. As stated, the Company now seeks to unwind this transfer and recover the DKE Shares for the benefit of its creditors.

Plaintiff’s case

The plaintiff’s case is that the Term Sheet was superseded by the CLA, the Share Transfer was performed pursuant to the CSTA alone, and that the Company received no consideration under the CSTA. The plaintiff further argues that the Company’s entering into the CSTA was motivated by a desire to place the Investors, as creditors, in a better position in the event of the Company’s going into liquidation. Consequently, the plaintiff argues that the Share Transfer should be unwound: as an undervalue transaction under s 98 of the Bankruptcy Act (Cap 20, 2009 Rev Ed) read with s 329(1) of the Companies Act; or as an unfair preference under s 99 of the Bankruptcy Act read with s 329(1) of the Companies Act; or as a contravention of the common law anti-deprivation rule.

Defendants’ case

Although the defendants’ case includes a number of alternatives, their primary case rests on an assertion that all the dealings between the parties were governed by a master agreement which subsumed and supplemented the CLA and CSTA. At an earlier stage in the proceedings, the defendants’ position was that the alleged master agreement was partly oral and partly written, but their final position was that the master agreement is fully embodied in the Term Sheet. Thus, since the provisions of the Term Sheet and of the (purported) master agreement are one and the same, there is no need to refer to any separate master agreement.

The defendants’ main argument regarding s 98 of the Bankruptcy Act is that the Term Sheet relates the Investment to the Company’s entry into the CSTA and that the Investment was adequate consideration for the CSTA. Regarding s 99 of the Bankruptcy Act, the defendants essentially contest every element of the section.

Regarding the anti-deprivation rule, the defendants argue that the alleged deprivation occurred before the commencement of winding-up, and is therefore not caught by the rule.

The issues

The three main issues to be decided are: Whether the CSTA was a transaction at an undervalue; Whether the Share Transfer was an unfair preference; and/or Whether the Share Transfer and/or the CSTA breached the anti-deprivation rule.

There is also a preliminary issue of whether the Term Sheet was superseded by the CLA.

Did the Term Sheet continue in force after the CLA?

Since many of the issues in dispute relate to the effect of the Term Sheet, it is worth addressing at the outset whether, on the basis that the Term Sheet was in itself a valid contract, it retained this status until the CSTA was signed. The plaintiff argues that the entire Term Sheet was “superseded” by the CLA, while the defendants contend that the Term Sheet continued in force and “[t]he CLA and the CSTA merely set out the mechanics for putting the Term Sheet into effect”. The plaintiff’s argument is based on the effect of the entire agreement clause contained in the CLA.

Clause 12 of the CLA provides that:

This Agreement constitutes the whole agreement between the Parties and supersedes any previous agreements or arrangements between them relating to the subject matter of this Agreement and it is expressly declared that no variations of this Agreement shall be effective unless made in writing and executed by the Parties. [emphasis added]

The leading case on the effect of entire agreement clauses on prior agreements is Lee Chee Wei v Tan Hor Peow Victor and another appeal [2007] 3 SLR(R) 537. In that case, the Court of Appeal held, at [35], that “an appropriately worded provision would be acknowledged and upheld if it clearly purports to deprive any pre-contractual or collateral agreement of legal effect [emphasis added]”.

Cherie Hearts Group International Pte Ltd v G8 Education Ltd [2012] SGHC 70 is another case which considered the effect of an entire agreement clause. The plaintiff in that case, a company which ran a chain of childcare centres, sought to rely on an alleged “Overarching Agreement” which provided for the acquisition of childcare centres which were not part of the plaintiff’s group as well as for certain bonus payments to be made to the plaintiff’s founders. However, the parties subsequently entered...