Eng Gee Seng v Quek Choon Teck and Others

• Jurisdiction: Singapore
• Judge: Chan Seng Onn J
• Judgment Date: 18 September 2009
• Neutral Citation: [2009] SGHC 205
• Docket Number: Suit No 679 of 2007
• Date: 18 September 2009
• Published date: 05 October 2009
• Year: 2009
• Plaintiff Counsel: Ang Cheng Hock SC/Tham Wei Chem/Eunice Chew (Allen & Gledhill LLP)
• Citation: [2009] SGHC 205
• Defendant Counsel: Cheng Wai Yuen Mark/Chin Wei Lin (Rajah & Tann LLP),Foo Maw Shen/Terence Tan/Looi Hooi Ying (Rodyk & Davidson LLP)
• Court: High Court (Singapore)
• Subject Matter: Companies,Minority,Oppression

18 September 2009

Chan Seng Onn J:

The claim

1 The plaintiff brought a claim under s 216 of the Companies Act as a minority shareholder in the 3^rd defendant (“DA”) against the oppressive conduct of the 1^st and 2^nd defendants (the “defendants”), who were together the majority shareholders of DA.

2 Section 216 of the Companies Act (Cap 50, 2006 Rev Ed) states:

Personal remedies in cases of oppression or injustice 216. —(1) Any member or holder of a debenture of a company or, in the case of a declared company under Part IX, the Minister may apply to the Court for an order under this section on the ground — (a) that the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the members or holders of debentures including himself or in disregard of his or their interests as members, shareholders or holders of debentures of the company; or (b) that some act of the company has been done or is threatened or that some resolution of the members, holders of debentures or any class of them has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the members or holders of debentures (including himself). [emphasis added]

3 The plaintiff pleaded at [6] of his statement of claim that the defendants had since January 2005 conducted the affairs of DA in a manner which was oppressive to the plaintiff and in disregard of (a) the plaintiff’s interest as a shareholder of DA; and (b) the terms of the shareholders’ agreement.

4 The plaintiff relied on the following grounds:

(a) That DA was a quasi-partnership between the plaintiff and the defendants (“the partners”). It was set up in the early 1990s to establish a duck abattoir under licence from the Agri-Food & Veterinary Authority of Singapore (“AVA”) to slaughter live ducks provided by its shareholders’ individual duck businesses. (b) That DA was incorporated on an oral agreement or mutual understanding between the partners that all the three parties were to have: (i) equal shareholding and ownership of DA; (ii) equal rights of management of DA; (iii) equal share in the revenue of DA, irrespective of the revenue from duck feathers that each partner contributed to DA from the ducks sent by each partner to be slaughtered at the slaughterhouse operated by DA. The revenue would be shared equally among the partners by way of, inter alia, directors’ fees, dividends and/or loans; (iv) to pay the same slaughtering fees per duck (i.e. a flat rate slaughtering fee per duck) irrespective of the number of ducks sent by each partner to be slaughtered. (c) In breach of this understanding, the plaintiff was removed as a director and thereafter excluded from the management of DA. The plaintiff subsequently received no directors’ fees, salaries or dividends. Furthermore, the slaughter fee structure was changed such that it was no longer a flat rate but one that disadvantaged the plaintiff.

Background

5 DA’s revenue was derived directly from the duck slaughtering fees and the sale of duck feathers. It was not disputed that the partners each paid a flat slaughtering fee per duck from the time that DA was incorporated in August 1990 until December 2003. Prior to the plaintiff’s removal as a director, the partners shared DA’s revenue by way of directors’ fees, salaries and loans and once, by way of dividends. The directors’ fees received by each partner (including the plaintiff) from 1^st September 1993 to 31 August 2005 (i.e. from Financial Year (“FY”) 1994 to FY 2005) were the same from year to year regardless of the number of ducks sent for slaughter by each partner, until the year in which the plaintiff was removed as a director (i.e. FY 2006).

The law

6 Having set out a brief overview of the case before me, I now consider the law on minority oppression in relation to quasi-partnerships.

7 It is settled law that the test under s 216 is one of fairness. This was made clear by the Court of Appeal in Low Peng Boon v Low Janie and Others and Other Appeals [1999] 1 SLR 761 (“Low Peng Boon”) and Lim Swee Khiang and Another v Borden Co (Pte) Ltd and Others [2006] 4 SLR 745 (“Borden”). Both cases cited the Privy Council decision of Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227 (“Re Kong Thai Sawmill”) with approval. There, the Privy Council stated at 229 that “there must be a visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder is entitled to expect before a case of oppression can be made”.

8 Whether or not a particular course of conduct amounts to fair or unfair play depends on the unique factual matrix in question. There are no specific criteria governing when conduct would be regarded as unfair under s 216. Suffice to say, the courts have a wide discretion to do what is just and equitable in the circumstance.

9 Be that as it may, there must be some guidance as to how the court exercises its discretion. The principle of fairness must be applied judicially and based upon “rational principles”. In O’Neill v Phillips [1999] 1 WLR 1092 (“O’Neill”) at 1098, Lord Hoffmann said:

Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history (which I discussed in In re Saul D. Harrison & Sons Plc. [1995] 1 B.C.L.C. 14, 17-20) that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles. As Warner J. said in In re J.E. Cade & Son Ltd. [1992] B.C.L.C. 213, 227: "The court ... has a very wide discretion, but it does not sit under a palm tree". [emphasis added]

10 These “rational principles” can be found in the law of contract as complemented by principles of equity. They apply so as to reflect the principle that promises should be kept and agreements should be honoured. Thus, in the case of an ordinary company, prima facie, the company’s formal documents lay down the basis of the association exhaustively. However, there can also exist agreements, understandings or promises as between members of an association, which are not in those formal documents, but which may give rise to reasonable or legitimate expectations on the part of minority members. The onus will then be on the minority members to show that such informal or implied understandings, giving rise to certain expectations, exist. Conduct of the majority which conflicts with such expectations may be challenged for being unfair.

11 Accordingly, unfair conduct can be established by showing that 1) there are certain expectations between shareholders; and 2) that the conduct complained of is contrary to or has departed from such expectations to the extent that it has become unfair. Thus, the courts may look into shareholders’ interests and expectations to determine if and to what extent the standards of fair dealing and conditions of fair play have been departed from.

12 This approach finds its roots in Re a company (No 000477 of 1986) [1986] BCLC 376 (“Re A Company”), where Hoffmann J adopted the House of Lord’s approach in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (“Ebrahimi”). Ebrahimi concerned a quasi-partnership where it was argued that it was “just and equitable” in the circumstance to wind it up. Lord Wilberforce recognised at 379 that the “personal character arising between one individual and another” may “make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way”. Accordingly, “rights, expectations and obligations inter se which are not necessarily submerged in the company structure” could affect whether the controllers had acted in a manner which was unjust and inequitable so as to necessitate a winding up.

13 In approving the approach taken in Ebrahimi, what Hoffmann J essentially did was to apply the same principles which guide the court in respect of the UK equivalent of s 254 CA (concerning just and equitable winding up) in the context of the UK equivalent of s 216 CA. At 378, Hoffmann J said:

[T]the interests of a member are not necessarily limited to his strict legal rights under the constitution of the company. The use of the word ‘unfairly’ in section 459 [of the UK Companies Act 1985], like the use of the words ‘just and equitable’ in [the UK equivalent of s 254 of the Companies Act] enables the court to have regard to wider equitable considerations. [emphasis added]

The phrase “wider equitable considerations” was taken from Lord Wilberforce’s judgment in Ebrahimi.

14 Subsequently, Hoffmann LJ expanded on this principle that informal understandings may give rise to “legitimate expectations” in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 (“Re Saul D Harrison”) at 19:

[T]he personal relationship between a shareholder and those who control the company may entitle him to say that it would in certain circumstances be unfair for them to exercise a power conferred by the articles upon the board or the company in general meeting. I have in the past ventured to borrow from public law the term 'legitimate expectation' to describe the correlative 'right' in the shareholder to which such a relationship may give rise. It often arises out of a fundamental understanding between the shareholders which formed the basis of their association but was not put into contractual form, such as an assumption that each of the parties who has ventured his capital will also participate in the management of the company and receive the return on his investment in the form of salary rather than dividend. [emphasis added]

15 Later in O’Neill at...