Fong Wai Lyn Carolyn v Airtrust (Singapore) Pte Ltd

Judgment Date11 April 2011
Date11 April 2011
Docket NumberOriginating Summons No 505 of 2010 (Summonses Nos 2592, 2593, 2619, 2620 and 5602 of
CourtHigh Court (Singapore)
Fong Wai Lyn Carolyn
Plaintiff
and
Airtrust (Singapore) Pte Ltd and another
Defendant

[2010] SGHC 88

Judith Prakash J

Originating Summons No 505 of 2010 (Summonses Nos 2592, 2593, 2619, 2620 and 5602 of 2010)

High Court

Civil Procedure—Anton Piller orders—Applicant executed search order in questionable manner—Supervising director conflicted—No real possibility that defendant would conceal or destroy relevant evidence—Whether order should be set aside

—Civil Procedure—Injunctions—Whether Erinford injunction ought to be granted

—Civil Procedure—Mareva injunctions—Applicant failed to disclose material facts of importance—No real risk that defendants would dispose of or dissipate assets—Whether order should be set aside

—Companies—Members—Derivative action—14 days' notice of intention to commence application for leave not given by applicant—Whether court ought to exercise powers under s 216A (4) Companies Act (Cap 50, 2006 Rev Ed) to excuse applicant from meeting requirement—Section 216A (4) Companies Act (Cap 50, 2006 Rev Ed)

—Companies—Members—Derivative action—Shareholder and former director of company seeking leave to commence proceedings in name and on behalf of company—Whether appropriate to grant leave under s 216A Companies Act (Cap 50, 2006 Rev Ed)—Whether applicant had provided sufficient notice—Whether applicant able to show reasonable bases for complaints and intended action a legitimate or arguable one—Whether applicant acting in good faith—Whether it appeared to be prima facie in company's interest that action be brought—Section 216A (4) Companies Act (Cap 50, 2006 Rev Ed)

In May 2010, the plaintiff (‘Ms Fong’) sought leave to bring a statutory derivative action under the Companies Act (Cap 50, 2006 Rev Ed) (‘CA’) in the name of and on behalf of the first defendant (‘Airtrust’). She claimed that the second defendant (‘Ms Kao’) had breached the fiduciary duties she owed to Airtrust (‘AT’) as a director. Ms Fong also sought ex parte freezing and search orders (‘the ex parte orders’) against both defendants. After the ex parte orders were granted, the defendants applied to set them aside on the grounds that there had been a material failure by Ms Fong to make full disclosure of material facts in the ex parte applications and there was no real possibility or risk that the defendants would destroy the relevant evidence or dissipate assets. Ms Fong subsequently applied for an Erinford injunction.

A preliminary objection made to the leave application was that Ms Fong did not give the requisite 14 days' notice of her intention to commence an application for leave to AT's directors. Ms Fong explained that she feared that had notice been given, Ms Kao would instigate the concealment of AT's assets while Ms Kao argued that these reasons were contrived.

In the leave application, Ms Fong made two broad categories of claims. First, that Ms Kao had allowed AT to enter into transactions with companies in which Ms Kao or her relatives had an interest (‘the Offshore Companies’). Secondly, that Ms Kao had actively diverted business opportunities from AT to several of the Offshore Companies. These opportunities and benefits (eg, service fees) would have accrued to AT had Ms Kao not put in place certain arrangements. The relevant Offshore Companies were KSCCI, Ribands, Mega-Bond, the Comeco Entities, Wrangwell and IOM.

Ms Kao argued that Ms Fong's complaints had no reasonable bases. She advanced four general defences to this end. First, all the Offshore Companies were set up with Peter Fong's approval or on his instructions. Peter Fong was AT's founder, and its controlling mind and will up till 2008. Secondly, the Offshore Companies were either fully or partially owned by third parties who had consented to Ms Kao dealing with the Offshore Companies in the way she did. Thirdly, both Peter Fong and the third parties acquiesced in Ms Kao's involvement in the Offshore Companies. Finally, the transactions were ultimately undertaken for AT's benefit. These explanations were contained in Ms Kao's affidavits which were filed in reply to Ms Fong's leave application. Hence, Ms Kao also argued that there was no reasonable basis for Ms Fong's claims as the bulk of evidence Ms Fong relied upon was in fact derived from Ms Kao herself.

Ms Kao also argued that Ms Fong's leave application was made in bad faith because of these reasons: the court was misled by Ms Fong's failure to disclose the full version of events leading to her application; she had acquiesced in or endorsed the alleged breaches; she sought to use the fruits of the alleged breaches; and she used the leave process for either her personal gain or to fish for her case.

Held, granting the plaintiff's applications in part and granting the defendants' applications:

(1) To succeed in an application for leave to commence a statutory derivative action, the applicant had to satisfy the requirements under s 216A CA. There were two facets to these requirements. First, there was an inquiry as to whether the notice requirements had been met. If they had not been met, the court had to consider whether there was any reason why those requirements ought not to be enforced. Second, there was an inquiry as to the merits of such application. The court had to consider whether there was a reasonable basis for the complaint and whether the intended action was a legitimate or arguable one. If that was satisfied, the applicant must further prove that it was in the company's prima facie interests that such an action be brought. The intended defendant or the company itself could thus resist a leave application either on the basis that the applicant was not acting in good faith or that it was not in the company's interests that the action be brought: at [9] and [10].

(2) Section 216A (4) CA gave the court the power to dispense with notice or to make such orders as the court thought fit for the giving of notice if it was not expedient to give notice prior to the commencement of the action. In cases where the giving of 14 days' notice was not practicable, the complainant might give less notice or none at all before the application was made. Such an inquiry would be a question of fact, and the court would be entitled to look at the totality of circumstances to determine whether impracticality existed. The scope of matters to be considered thus ought not to be restricted to the state of affairs at the time of filing the application but ought also to encompass the conduct of the relevant parties after such an application had been brought to the notice of the company.

The burden fell on an applicant to show why notice, as required under s 216A (3) (a) CA, could not have been given. This notice requirement served to give the directors a chance to consider a response to the complaint provided in the notice. It provided both practical and commercial sense. If the company would be willing to pursue the complaint on its own, the leave application would become redundant, and no further legal costs would be incurred or wasted in dealing with the issue of whether leave ought to be granted.

On the whole, it was impracticable for Ms Fong to have adhered to the notice requirements. It was a key fact that after notice was served that AT did not proceed with any meaningful exercise that amounted to a bona fide and determined effort to investigate Ms Fong's claims. Hence, there was a strong inference that, had any notice been served, it would have been futile: at [13], [14], [17] and [18].

(3) An applicant intending to commence a derivative action bore the burden of showing a reasonable basis for his complaints and that the intended action was a legitimate or arguable one, ie, it had a reasonable semblance of merit and was not one which was frivolous, vexatious or bound to be unsuccessful: at [19].

(4) It would be sufficient for the court to rely on affidavit evidence filed by both sides in support of their claims to ascertain whether the action to be brought in the company's name had any semblance of merit. The scope of the court's review ought not to be restricted to the applicant's knowledge at the time the application for leave was filed or to the contents of the applicant's supporting affidavit. It was often the case that a party making the application for leave was not privy and did not have access to significant documents held by the company or its controlling directors. It was unsurprising to find that complaints in such proceedings had been partly based upon information received, belief and inference. Conversely, it would be safe to assume that the company or its directors were best placed to explain conduct that was the subject of a complaint. Given the difficulty usually faced by an applicant in gaining access to the relevant and appropriate information, it would be imprudent and inequitable to confine the scope of analysis to the applicant's supporting affidavit. Ms Fong was thus entitled to rely on Ms Kao's affidavits: at [27] and [28].

(5) The complaint concerning the service fees received by KSCCI and Ribands had a reasonable basis and contained some semblance of merit. On the face of the transactions, it was incontrovertible that Ms Kao had prima facie benefitted from the transactions through the commissions made by KSCCI and Ribands. The material inquiry therefore was regarding the entitlement to the benefit of the service fees earned, and Ms Kao's explanation did not adequately rebut Ms Fong's claims: at [37] and [38].

(6) The complaint that Mega-Bond had secured a contract from a client of AT was a serious factual question to be tried, and Ms Fong's action was not bound to be unsuccessful. Thus, the complaint had a reasonable basis and a semblance of merit: at [42] and [43].

(7) In respect of the claims regarding the Comeco Entities, Ms Kao had offered a sufficient explanation of how AT's shareholding in the Comeco Entities found its way to a...

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