Falmac Limited v Cheng Ji Lai Charlie

• Jurisdiction: Singapore
• Judge: Belinda Ang Saw Ean J
• Judgment Date: 23 May 2013
• Neutral Citation: [2013] SGHC 113
• Court: High Court (Singapore)
• Docket Number: Suit No 935 of 2009
• Year: 2013
• Published date: 27 August 2014
• Hearing Date: 19 September 2012,17 September 2012,20 July 2011,19 July 2011,18 September 2012,08 November 2012,18 July 2011,20 September 2012
• Plaintiff Counsel: Winston Quek Seng Soon (Winston Quek & Co)
• Defendant Counsel: Harpal Singh (KhattarWong LLP)
• Subject Matter: Companies,Directors,Duties
• Citation: [2013] SGHC 113

Belinda Ang Saw Ean J: Introduction

The plaintiff, Falmac Limited (“Falmac”), was a Catalist Sponsor-supervised company at the time it was de-listed by the Singapore Exchange Securities Trading Ltd (“SGX-ST”) on 22 August 2011. Prior to de-listing, Falmac’s business operations were mainly carried out in Tianjin, People’s Republic of China, through two subsidiaries, namely Falmac Machinery (Tianjin) Ltd (“Falmac Machinery”) and Falmac Textile (Tianjin) Co Ltd (“Falmac Textile”). For ease of reference, I shall refer to the two subsidiaries collectively as the “Tianjin subsidiaries”. Each subsidiary owned a factory in Tianjin (hereafter collectively referred to as “the Tianjin factories”).

This Writ of Summons was filed on 30 October 2009. It named five individuals who constituted Falmac’s board of directors during the relevant period in question as the defendants (hereafter collectively referred to as “the former board”). The first defendant, Cheng Ji Jiang (“Ji Jiang”), the third defendant, David Lu Hai Ge (“David Lu”), and the fifth defendant, Yu Wei Ying (“Wei Ying”) were independent directors of Falmac. The second defendant, Charlie Cheng Ji Lai (“D2”) was, at all material times, a director and the Chief Executive Officer of Falmac. The fourth defendant, Fei Xue Jun (“Fei”), was a director and shareholder of Falmac.

Falmac did not serve proceedings against Ji Jiang, David Lu and Wei Ying, and the proceedings against Fei were formally discontinued on 13 July 2010. The present action continues against D2.

Mr Winston Quek (“Mr Quek”) represents Falmac. During the first tranche of the trial, D2 was represented by Mr L Devadason (“Mr Devadason”) who was assisted by Mr Harpal Singh (“Mr Singh”). Mr Devadason fell seriously ill shortly thereafter and Mr Singh took over the conduct of the proceedings.

Overview of the proceedings

In this action, Falmac pleaded a number of breaches of fiduciary duties on the part of D2 involving a range of transactions, dealings and matters. It was alleged, amongst other things, that Falmac under the stewardship of D2 made losses yearly and was heavily indebted to banks and other creditors, and that D2 had managed, conducted and administered Falmac’s affairs without due care and diligence to the extent that the company became financially crippled and could not pay its employees’ salaries.¹

At the end of the first tranche of the trial on 20 July 2011, Falmac’s core complaint was that D2 still controlled the Tianjin subsidiaries through his nominee, Leon Zhao whose appointment as the legal representative of the Tianjin subsidiaries was unauthorised as it was without the knowledge and consent of Falmac (“the unauthorised legal representative argument”). Falmac averred that Leon Zhao’s appointment enabled D2 to continue to control the Tianjin subsidiaries for his own personal interest and to the detriment of Falmac. As a result, Falmac lost effective control of its principal assets which were the Tianjin subsidiaries.² Attempts by two new Falmac board members to gain access to the Tianjin factories in late October 2009 were unsuccessful. To Falmac, this incident demonstrated Falmac’s loss of physical control of the Tianjin factories.

According to Falmac, Leon Zhao was a total stranger. Not only was his appointment as the legal representative of the Tianjin subsidiaries unauthorised, the change of legal representative was not disclosed to Falmac’s shareholders.³ In addition, Falmac was unable to remove Leon Zhao as legal representative. Consequently, it was compelled to write off the entire value of the Tianjin subsidiaries in its financial statements for the financial year ended 31 December 2009 (“the 2009 financial statements”). Falmac holds D2 responsible for the loss of the Tianjin subsidiaries by reason of D2’s breach of fiduciary duty and/or breach of trust.⁴

Sometime after the first tranche of the trial, Falmac obtained leave of court to re-amend its Statement of Claim (Amendment No 1) on 17 November 2011. With the new amendments (ie, Statement of Claim (Amendment No 2) filed on 21 November 2011), the case against D2 took on a different dimension, namely that D2 had disposed of the Tianjin subsidiaries to a company known as Sino Vision (HK) Ltd (“Sino Vision”) in contravention of s 160(1) of the Companies Act (Cap 50, Rev Ed 2006) and in breach of his fiduciary duties owed to Falmac (collectively referred to as “the s 160 complaint”). Falmac is therefore seeking damages based on the net asset value of the Tianjin subsidiaries, or alternatively for damages to be assessed. ⁵

D2 has denied any wrongdoing. His pleaded defence is that the appointment of Leon Zhao as the legal representative of the Tianjin subsidiaries was not unlawful as it was approved by the former board, and that the appointment was recognised and accepted by the authorities in China. In relation to the s 160 complaint, D2’s defence is that the debt-for-share transaction was approved by the former board in the interest of Falmac. However, the former board had no role in the implementation of the debt-for- share transaction.

According to D2, Business Corporate Services Pte Ltd (“BCS”) and Peter Choo Chee Kong (“Choo”) were interested in Falmac for a reserve takeover. In this case, the plan was to use Falmac as the “shell” company for the reverse takeover. Divesting Falmac of all its debt-ridden and loss-making businesses (ie, the Tianjin subsidiaries) was thus part of the overall strategic restructuring of Falmac.⁶

D2’s overall position in his Closing Submissions is that he is being made a scapegoat for the divestment of the Tianjin subsidiaries now that the reverse takeover has fallen through and the white knights (ie, BCS and Choo) have lost money in the process. It is D2’s contention that Falmac needed an excuse for disposing the Tianjin subsidiaries for a consideration of S$2 to Unitex Global Limited (“Unitex”). Thus, apart from the Tianjin subsidiaries being loss-making, the easy way out was to blame D2 by alleging loss of effective control of the Tianjin subsidiaries.

In this action, D2 counterclaims against Falmac for various payments due to him such as unpaid salary as Falmac’s Chief Executive Officer and unpaid director’s fees.

At this juncture, I propose to comment on the state of the pleadings after the last round of late amendments in November 2011. First, the unauthorised legal representative argument (see [6] above) and the s 160 complaint (see [8] above) appear to be advanced as discrete stand-alone pleas. Falmac has not in its pleadings linked the unauthorised legal representative argument to the s 160 complaint and the subsequent registration of Sino Vision as the legal owner of Falmac’s shares in the Tianjin subsidiaries. Falmac has not gone further to assert, and it is not Falmac’s pleaded case, that D2 continues to be in effective control of the Tianjin subsidiaries despite the registration of Falmac’s shares in Sino Vision’s name. Falmac is neither disavowing the Sino Vision transaction, nor arguing that Sino Vision’s involvement was a sham or disguise to cover up D2’s unlawful appropriation of the Tianjin subsidiaries. Simply put, it is not Falmac’s pleaded case that D2 has an interest in Sino Vision, and hence D2 has control of the Tianjin subsidiaries through Sino Vision and Leon Zhao. In the absence of any plea of a causal link between the unauthorised appointment of Leon Zhao on 1 September 2009 and the s 160 complaint they remain discrete stand-alone pleas.

Second, it is difficult for the court to work out exactly what fiduciary obligation D2 had not observed, and the consequences of any deviation from the same. Mere recitals of the various duties of a director in paragraphs 4 and 5 of Statement of Claim (Amendment No 2), and mere statements of conclusion that D2 had breached fiduciary duties owed to the company do not suffice. The pleadings did not expressly identify the particular obligation that D2 had supposedly breached as a fiduciary to the facts in support of the complaint in question. Falmac’s Opening Statement referred to a director’s duty to act honestly (ie, to act bona fide) at all times in the interests of the company. This was similar to the plea that D2 owed to Falmac a fiduciary duty of good faith. An allegation of breach of duty of good faith is essentially a charge of dishonesty. Like fraud, dishonesty must be distinctly alleged and proved, and it is not permissible for a charge of dishonesty to be inferred from the pleaded facts alleged against D2 in respect of either the unauthorised legal representative argument or the s 160 complaint.

Third, liability in the main action must therefore be decided on the narrow formulation of the claims as pleaded and upon the existence of cogent facts in evidence to support these claims.

Finally, the declaration sought by Falmac in this court – that D2 was in breach of his duties as a director – does not seem to be sought in respect of any loss suffered by Falmac or to claims that might have been made to Falmac. There is a separate claim for damages to be assessed. This claim, which is for common law damages, is not intended as “the other relief” that follows a declaration of right but is to recover compensation for breach of fiduciary duty owed to Falmac. Accordingly, Falmac has to show that there is a causal connection between the breach of fiduciary duty (ie, the relevant wrong) and the relevant loss, if proved. Plainly, it is only in respect of the unauthorised legal representative argument and the s 160 complaint that Falmac is claiming damages based on the net asset value of the Tianjin subsidiaries and the expenses incurred in attempting to recover the Tianjin subsidiaries. For the other alleged claims described in [59] below, the sum total of the evidence is that Falmac did not suffer any pecuniary loss. As Falmac is not asking this court to declare contested...