Farouq Bin Abdul Aziz alias Farouk Abdol Aziz Hamzah v Lim Tien T'ser Arthur Douglas and Another

• Jurisdiction: Singapore
• Judge: Earnest Lau Chee Chong
• Judgment Date: 17 February 2005
• Neutral Citation: [2005] SGDC 37
• Published date: 08 March 2005
• Year: 2005
• Citation: [2005] SGDC 37
• Plaintiff Counsel: Pillai (Tan Peng Chin LLC),Bernard Sahagar (Lee Bon Leong and Co)
• Court: District Court (Singapore)

17 February 2005

District Judge Earnest Lau:

Introduction

1. Around 30 March 2002, the plaintiff and the defendants incorporated a company called The Financial Advisory Pte Ltd (“the company”). All three parties were the company’s only shareholders and directors. They each held 50,000 ordinary shares issued at par value. The company received payment for these shares in 2 instalments: $100,000 in April 2002 (i.e. $50,000 from the plaintiff and $25,000 each from the defendants) and $50,000 from the plaintiff in July 2002 giving a paid up capital of $150,000. This meant the plaintiff paid the company $75,000 more than the defendants (“excess capital”).

2. The object of the company was to provide financial advisory services to the public. But it never started any business activity because it did not possess the requisite financial adviser’s license. By October 2002, the company became dormant as the relationship between the parties broke down. The plaintiff sued the defendants to recover the excess capital pleading a personal loan agreement for $75,000 or alternatively, restitution for unjust enrichment. In defence, the defendants said the excess capital was a loan made by the plaintiff to the company at the time of incorporation or alternatively, to be treated as a company loan with no personal liability on their part.

3. After trial, I gave judgment to the plaintiff and ordered the defendants each to pay $25,000 to the plaintiff as restitution for unjust enrichment. The defendants have appealed.

Chronology of events

4. A brief chronology of undisputed facts is as follows:

(a) Between 1999 to 2001, the plaintiff worked for the defendants at various banks selling financial products. They were last colleagues at Standard Chartered Bank (Stanchart) where the 1^st defendant led the Unit Trusts and Insurance Products division, with the 2^nd defendant as the Head of Sales.

(b) In early 2002, the plaintiff and 2^nd defendant moved to Maybank. The 1^st defendant was by then, unemployed. Around this time, the parties agreed to start a financial advisory business at the suggestion of the 1^st defendant. At all material times, the 1^st defendant master-minded this venture.

(c) The parties executed no documents specifying their roles and responsibilities. They only shared a broad understanding that the plaintiff would contribute financial support and market the business to the Malay community, whilst the defendants would work amongst the finance houses using their expertise.

(d) On 30 March 2002, the company was incorporated: see the Defendants’ Bundle of Documents (DBD) at page 2. The incorporation documents at DBD pages 7-8 further show that at the point of incorporation:

(i) the authorized capital was $300,000;

(ii) the issued share capital was 150,000 shares; and

(iii) all three parties were directors and each a subscriber of 50,000 shares to be paid in cash.

(e) At all material times, the company was under the majority control of the defendants. Its core business was to offer financial advice to the public. The parties knew the Monetary Association of Singapore (“MAS”) required all financial advisory companies to hold a license before commencing business activity. To get a license, a company must have a minimum paid-up ordinary share capital of $150,000.

(f) Between 1 April 2004 and 12 April 2004, the company received $25,000 from each defendant, and $50,000 from the plaintiff as payment for their subscribed shares. This raised the company’s paid-up share capital to $100,000 (DBD page 127).

(g) From April 2004, the company paid each party over $5,000 per month (comprising salary, CPF contribution and director’s allowance). The company also incurred rental at $2,300 per month for the business premises.

(h) Meanwhile, the company needed the remaining 50,000 issued shares to be paid-up before it could qualify for the MAS license. The plaintiff agreed to pay this sum for the defendants only if the parties executed a written shareholders’ agreement. The plaintiff’s wife (a family law polytechnic lecturer) prepared the first draft agreement - see the Plaintiff’s Bundle of Affidavit (PBA) at page 8 and also Plaintiff’s Bundle of Documents (PBD) at pages 17-28. The defendants rejected this draft as they wanted a practicing solicitor prepare the shareholders’ agreement.

(i) On 27 June 2002, they met Mr. Ong Bock Kee (“Mr. Ong”), a solicitor from M/s Thomas Tham & Company who prepared a second draft agreement (PBD pages 29-32). The defendants also rejected this draft.

(j) By 16 July 2002, the company’s bank balance fell to $11,970.31. At that point, the plaintiff paid $50,000 into the company at the defendants’ request.

(k) On 18 July 2002, the company appropriated this $50,000 towards the previously unpaid shares belonging to the defendants (DBD page 128). This increased the company’s paid-up ordinary share capital to $150,000. Most of this $50,000 payment was used to remunerate the parties for the months of July, August and September.

(l) On 10 September 2002, the parties consulted Mr. Rama Kasi (“Mr. Rama”), a solicitor from M/s Raj Kumar & Rama. He prepared two draft shareholders’ agreements. The first is at PBD page 105. This was sent to the parties on 23 September 2002 for amendments. The final draft agreement is at DBD pages 31-43.

(m) From late September 2002 to early October 2002, the plaintiff did not report to work. On 10 October 2002, the parties met at Borders’ Café to discuss the future of the company. By a letter dated 15 October 2002, the plaintiff demanded for repayment of $75,000 from the defendants as a personal loan (DBD page 30). By a letter dated 16 October 2002, Mr. Rama sent his final draft agreement to the parties seeking their confirmation that the agreement was in order so that arrangements may be made for its execution (DBD 31-43). On 21 October 2002, the defendants replied to the plaintiff stating that the $75,000 was agreed to be a loan by the plaintiff to the company. Shortly thereafter, the plaintiff instituted litigation proceedings against the defendants.

The Plaintiff’s Claim

5. The plaintiff’s claims against the defendants on two grounds.

(a) $75,000 based on a personal interest-free loan agreement made on or about April 2002. I will refer to this as the “personal loan agreement”.

(b) $75,000 or such other sums based on restitution for unjust enrichment and/or constructive or resulting trust.

The Defendant’s Defence

6. The defence rests on two alleged agreements:

(a) As for the personal loan claim, the defendants say the plaintiff agreed to make a loan not to them but to the company. This loan agreement was allegedly made at the time the company was incorporated. I will refer to this as the “company loan agreement”: see paragraph 1 (iii) of the Amended Defence.

“Paragraph 1(iii) Amended Defence

iii. At the time of incorporation of the company, the plaintiff agreed to loan the sum of $75,000 to the company to meet the working capital needed and the requirements of the Financial Advisers Act 2001, which required the company to have a paid up capital of $150,000”.

(b) As for the unjust enrichment and/or constructive trust claim, they repeat paragraph 1 of their Amended Defence. They further say there was an agreement to treat the excess capital as a loan to the company. I will refer to this as “capital conversion agreement” because it discloses a scheme to convert paid-up ordinary share capital into loan capital: see paragraph 2 of the Amended Defence.

“Paragraph 2 Amended Defence

…at all material time the plaintiff agreed that the sum of $75,000 excess working capital is a loan to the company repayable by the company”

(c) It is undisputed the phrase “$75,000 excess working capital” refers to the money that paid for 75,000 ordinary shares held by parties in equal proportions.

My judgment

7. On 22 September 2004, I dismissed the plaintiff’s claim on the personal loan agreement but gave judgment to him for restitution by ordering the defendants each to pay the sum of $25,000 plus costs fixed at $15,000 including reasonable disbursements to be taxed or agreed.

The Appeal

8. On 7 October 2004, the defendants asked me for leave to appeal against the restitution order. They argued that restitution for unjust enrichment cannot apply because there is no wrongdoing by the defendants. Alternatively, they submitted that the plaintiff made an agreement with the defendants not to recover any moneys from them personally if the company did not make profits.

9. I denied the defendants leave to appeal. Wrongful conduct is not a necessary ingredient in a case of restitution for unjust enrichment. Moreover, the defendants never pleaded that there was an agreement for the defendants to repay the plaintiff if the company made profits. All along, their case was that the company would be the party liable to repay the plaintiff for a loan received from him.

10. On 11 November 2004, the defendants obtained leave to appeal from the High Court. On 18 November 2004, they filed a Notice of Appeal appealing against my entire decision. For this reason, I now render my written grounds of decision.

The Plaintiff’s Evidence

11. The plaintiff called no witnesses apart from himself. His affidavit of evidence-in-chief (AEIC) states as follows:

(a) The defendants approached him for a personal loan so that the company could have a minimum capital of $150,000 to qualify for the requisite MAS license. He eventually paid a total of $100,000 into the company in return for only 50,000 paid up shares. The $100,000 was paid in 2 tranches: $50,000 in April 2002 and $50,000 in July 2002. He did not remit the full $100,000 in one payment because he wanted the defendants to acknowledge their loan from him in a formal agreement. As such, after the first payment in April 2002, the 2^nd defendant suggested to the plaintiff that his wife should prepare the first draft agreement for execution. This would save the parties costs...