Fong Wai Lyn Carolyn v Airtrust (Singapore) Pte Ltd and another

• Jurisdiction: Singapore
• Judge: Judith Prakash J
• Judgment Date: 11 April 2011
• Neutral Citation: [2011] SGHC 88
• Court: High Court (Singapore)
• Docket Number: Originating Summons No 505 of 2010 (Summons Nos 2592, 2593, 2619, 2620 and 5602 of 2010)
• Year: 2011
• Published date: 28 July 2011
• Hearing Date: 24 September 2010,30 September 2010,23 September 2010,02 December 2010,28 September 2010,01 October 2010,30 November 2010,27 September 2010
• Plaintiff Counsel: CR Rajah SC and Muthu Arusu (Tan Rajah & Cheah) (instructed) and Andy Leck, Daniel Chia, Tan Ijin and Liu Zeming (Wong & Leow LLC)
• Defendant Counsel: Quek Mong Hua, Julian Tay and Esther Yee (Lee & Lee),Davinder Singh SC, Bhavish Advani and Elan Krishna (Drew & Napier LLC) (instructed) and Christopher Anand Daniel and Kenneth Pereira (Advocatus Law LLP)for the second defendant.
• Subject Matter: Companies,Civil Procedure
• Citation: [2011] SGHC 88

Judith Prakash J: Introduction

On 24 May 2010, the plaintiff filed Originating Summons No 505 of 2010 (“the Leave Application”), seeking leave to bring an action in the name of and on behalf of the first defendant against the second defendant pursuant to s 216A of the Companies Act (Cap 50, 2006 Rev Ed) (“the Act”). The plaintiff claimed that the second defendant had breached the fiduciary duties which she owed to the first defendant as a director. On the same day, the plaintiff filed Summons Nos 2277 and 2278 of 2010 seeking ex parte freezing and search orders (collectively, “the ex parte orders”) against both defendants. On 26 May 2010, I granted the ex parte orders. The court papers and the relevant orders were served on the defendants on 27 May 2010. The defendants then filed various applications to wit Summons Nos 2592, 2593, 2619 and 2620 of 2010 to set aside the ex parte orders (collectively, “the Setting Aside Applications”). The defendants argued that there had been material failure by the plaintiff to make full disclosure in her ex parte applications and there was no real possibility or risk that the defendants would destroy relevant evidence or dissipate assets.

The Leave Application and the Setting Aside Applications were heard together. On 30 November 2010, I allowed the Leave Application in part and also allowed the Setting Aside Applications. The plaintiff subsequently applied for an Erinford injunction but I dismissed her application on 2 December 2010. None of the parties was wholly satisfied with my decisions and they have lodged four appeals in total against the same.

Background and parties

The first defendant, Airtrust (Singapore) Pte Limited (“AT” or “the company”), is a company doing business in the power, oil and gas industry. During the material period, its primary business was pipe trading with parties in Indonesia and the People’s Republic of China. AT’s operations were conducted through various subsidiaries collectively known as the “Airtrust Group of Companies”. The second defendant, Ms Linda Kao Chai-Chau (“Ms Kao”), has been AT’s managing director since 1996. She is also a registered shareholder of the company holding 13.6% of AT’s issued share capital. The plaintiff, Ms Carolyn Fong Wai Lyn (“Ms Fong”), was the eldest daughter of AT’s founder Peter Fong (“Peter Fong”) and his first wife. Ms Fong is also a non-executive director and a shareholder of AT. There was no dispute that Peter Fong had been AT’s controlling mind and will until his death in 2008.

At the time this action started, the other directors of AT were Evelyn Ho, Dennis Atkinson, Anthony Stiefel and Chia Quee Khee. Anthony Stiefel was Ms Fong’s nominee and was allied with her while Evelyn Ho had worked closely with Ms Kao for many years.

In the Leave Application, Ms Fong alleged that Ms Kao had committed several breaches of her fiduciary duties owed to AT during her tenure as managing director. Ms Fong alleged that Ms Kao actively diverted business opportunities away from AT and also caused AT to enter into several agreements and transactions in which she or her relatives had interests. Ms Fong thus sought the court’s leave to commence an action against Ms Kao on AT’s behalf and to conduct such action. She also applied for access to AT’s business records so that she would be able to ascertain the full nature and consequences of the alleged breaches.

Allegations and issues

During oral submissions, numerous allegations of purported breach of fiduciary duties concerning a variety of transactions that were linked directly or indirectly to AT were canvassed. However, the instances were rather disconnected and did not take place in an obvious chronological sequence. For ease of reference and to make it easier to deal systematically with the complaints, I directed Ms Fong and her counsel to prepare a list of proposed Points of Claim (“proposed POC”) that she wished to pursue.

In considering the Leave Application I used the proposed POC as my guide to the claims against Ms Kao that I had to consider. I will make reference to the relevant portions of the proposed POC in the course of this judgment.

Law pertaining to s 216A actions

The relevant portion of s 216A of the Act states:

216A. Derivative or representative actions (2) Subject to subsection (3), a complainant may apply to the Court for leave to bring an action in the name and on behalf of the company or intervene in an action to which the company is a party for the purpose of prosecuting, defending or discontinuing the action on behalf of the company.

(3) No action may be brought and no intervention in an action may be made under subsection (2) unless the Court is satisfied that — (a) the complainant has given 14 days’ notice to the directors of the company of his intention to apply to the Court under subsection (2) if the directors of the company do not bring, diligently prosecute or defend or discontinue the action; (b) the complainant is acting in good faith; and (c) it appears to be prima facie in the interests of the company that the action be brought, prosecuted, defended or discontinued.

(4) Where a complainant on an application can establish to the satisfaction of the Court that it is not expedient to give notice as required in subsection (3) (a), the Court may make such interim order as it thinks fit pending the complainant giving notice as required.

For an applicant to succeed in an application for leave to commence a statutory derivative action, the applicant must satisfy the Act’s requirements. There are two facets to these requirements. First, there is an inquiry as to whether the notice requirements have been met. If they have not been, the court must consider whether there is any reason why those requirements ought not to be enforced.

Second, there is an inquiry as to the merits of such application. The court must consider whether there is a reasonable basis for the complaint and whether the intended action is a legitimate or an arguable one. If that is satisfied, the applicant must further prove that it is in the prima facie interests of the company that such an action be brought. The corollary is that the intended defendant or the company itself can resist a leave application either on the basis that the applicant is not acting in good faith or that it is not in the interests of the company that the action be brought.

The analysis thus proceeded along the following lines: (a) whether Ms Fong had provided sufficient notice; (b) whether Ms Fong was able to show a reasonable basis for the complaint and that the intended action was a legitimate or an arguable one; (c) whether Ms Fong was acting in good faith; and (d) whether it appeared to be prima facie in the interests of the company that the action be brought.

Notice

Ms Fong gave notice of her intention to commence an application for leave to commence derivative proceedings against the Ms Kao for breaches of fiduciary duties to AT’s Board of Directors on 1 June 2010. However, the Leave Application was filed on 24 May 2010, seven days before notice was actually given. Obviously, the 14 days’ notice requirement had not been met. Consequently, the issue was whether the court ought to exercise its powers under s 216A(4) of the Act to excuse Ms Kao from the notice requirement.

Section 216A(4) gives the court the power to dispense with notice or to make such orders as the court thinks fit for the giving of notice if it is not expedient to give notice prior to the commencement of the action. In Woon’s Corporations Law (LexisNexis, Looseleaf Ed, 1994, Issue 34 (March 2010 release)) (“Woon’s Corporations Law”) (at para 602) the learned authors opined that “[i]n cases where the giving of 14 days’ notice is not practicable, the complainant may give less notice or none at all before the application is made” [emphasis added]. The burden thus falls on an applicant to show why notice, as required under s 216A(3)(a) of the Act, could not have been given.

Counsel for Ms Kao, Mr Davinder Singh SC, contended that this notice requirement served to give the directors a chance to consider a response to the complaint provided in the notice. I accepted Mr Singh’s suggested rationale as 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.

Ms Fong’s reasons for not giving the 14 days’ notice were that she feared that Ms Kao would instigate the concealment of AT’s assets and that there was some basis to suggest that AT’s information technology (“IT”) system had already been tampered with. The notice, if served, would have likely alerted Ms Kao to the impending discovery of her wrongdoing and spurred her and her associates on to destroy, conceal or forge evidence. Similarly, it would likely have caused Ms Kao to move funds out of AT and into companies she controlled and would have frustrated AT’s efforts to find out what had happened or to seek recovery from her.

Ms Kao, in response, argued that these reasons were contrived. Given that (a) there was an agreement to perform an audit, (b) an offer had been made to make Ms Fong and Anthony Steifel signatories to several of AT’s bank accounts, (c) there had in fact been no tampering with the IT system and (d) there was no risk of dissipation of assets, there was no reason why the notice requirement ought not to be followed. Further, had the 14 days’ notice been given, an audit would have taken place. These grounds on which both Ms Fong and Ms Kao relied were substantially the same as those raised in their submissions in the Setting Aside Applications (which I will deal with in greater detail below). In any event, counsel for Ms Fong, Mr CR Rajah SC, pointed out...