Goh Chan Peng v Beyonics Technology Ltd

• Jurisdiction: Singapore
• Judge: Chao Hick Tin JA,Andrew Phang Boon Leong JA,Judith Prakash JA
• Judgment Date: 27 June 2017
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeals Nos 94 and 98 of 2016
• Date: 27 June 2017

Goh Chan Peng and others

and

Beyonics Technology Ltd and another and another appeal

[2017] SGCA 40

Chao Hick Tin JA, Andrew Phang Boon Leong JA and Judith Prakash JA

Civil Appeals Nos 94 and 98 of 2016

Court of Appeal

Companies — Directors — Duties — Manufacturing company supplied baseplate component of hard drives to key customer — Director in close contact with competitors and received payments from competitors — Company lost business with key customer while competitors grew as suppliers to key customer — Whether breach of fiduciary duties in wrongfully diverting business to competitors — Whether breach of fiduciary duties in receiving payments from competitors — Whether director acted bona fide in interests of company — Whether certain expense claims valid and bona fide — Appropriate remedies to be granted — Whether relief should be granted under s 391 Companies Act (Cap 50, 2006 Rev Ed) — Section 391 Companies Act (Cap 50, 2006 Rev Ed)

Employment Law — Contract of service — Termination — Director tendered notice of resignation and company paid post-resignation salary — Whether post-resignation salary payment unjustified and reclaimable by company

Equity — Remedies — Equitable compensation — Subsidiary company suffering loss as result of breach of fiduciary duties owing to it — Whether doctrine of separate legal personality displaced — Whether concept of single economic entity recognised — Whether parent company could recover such loss

The first appellant was a director and chief executive officer (“CEO”) of several companies in the Beyonics group of companies (“Beyonics Group”), including the first and second respondents. The Beyonics Group had a precision engineering division that included Beyonics Asia Pacific Limited (“BAP”). The division supplied baseplates to a key customer, Seagate Technology International (“Seagate”). Revenue from contracts with Seagate was recognised in the accounts of BAP. In this business, there were two relevant competitors (collectively, “NedKo Group”).

Due to a disruption in supply of baseplates, Seagate was anxious to secure capacity. Against this backdrop, on 24 November 2011, Seagate approved of a collaboration between the Beyonics Group and the NedKo Group. Prior to this, the first appellant had been introduced to the CEO and managing director of the NedKo Group, and was in constant contact with them. On 18 November 2011, the first appellant met Seagate concerning the alliance and presented slides that pushed for the alliance and for a US$2.5m grant from Seagate for the NedKo Group. At the same meeting, he indicated that the Beyonics Group faced a shortage of machines and equipment.

Separately, the first appellant signed two agreements on behalf of the third appellant, a company he beneficially owned, with the two competitors in the NedKo Group. These agreements expressly provided for payment for assistance in securing business from Seagate and for securing the Seagate grant. The first appellant received payment under both agreements.

In early October 2011, the Beyonics Group was considering divesting its precision engineering division, primarily by selling a subsidiary. The first appellant favoured the NedKo Group as a possible purchaser and promised to give it a right of first refusal to buy over the subsidiary. Without the knowledge of the other directors of the first respondent, the first appellant also quoted a “friend price” to the NedKo Group that was lower than the price offered by another interested buyer. Eventually, the subsidiary was not sold to the NedKo Group.

Disagreements having arisen between the first appellant and other directors of the Beyonics Group, Mr Goh tendered his resignation on 9 January 2013. It was agreed that he was to continue receiving salary until 30 April 2013. The second respondent paid him salary of $45,900 during this period.

The Beyonics Group's business with Seagate declined steadily in 2012, and by the end of financial year 2014, it lost all Seagate baseplate business. The first respondent sued the first appellant for breach of various duties in that he had wrongfully diverted Seagate business to the NedKo Group, procured the Seagate grant and received bribes. For these, the first respondent claimed equitable compensation for loss of profit in two ways: first, as a diversion loss for work diverted to the NedKo Group and, second, as a total loss of profits from future Seagate baseplate business.

The second respondent's claim was only against the first appellant. It sought repayment of certain alleged unjustified expense claims, and sought to recover the post-resignation salary of $45,900 on the basis that it was paid in ignorance of the first appellant's various breaches of duty that he should have disclosed.

The trial judge found for the first and second respondents, and held that the first appellant breached his fiduciary duties to both respondents. The expenses were unjustified and the post-resignation salary could be recovered, and both diversion and total losses were awarded. The appellants submitted in their appeal in Civil Appeal No 94 of 2016 (“CA 94”) on liability that (a) payments made to the first appellant were not secret profits; (b) even if he breached his duties, he should be relieved from liability under s 391 of the Companies Act (Cap 50, 2006 Rev Ed); (c) the first respondent had no standing to recover the diversion and total losses as these losses were suffered by BAP since revenue from Seagate was recognised in BAP's accounts; (d) the various impugned expenses were legitimate; and (e) the post-resignation salary was not recoverable as it was the subject of an agreement for good consideration. In the respondents' appeal in Civil Appeal No 98 of 2016 (“CA 98”) on quantum, they submitted that the trial judge erred in the quantification of the total loss suffered.

Held, allowing the appeal in CA 94 in part and dismissing the appeal in CA 98:

(1) The test for whether a director acted bona fide in the best interests of a company had both subjective and objective elements, the former lying in the court's consideration as to whether a director had exercised discretion bona fide in what he (and not what the court) considered was in the interests of the company and the latter relating to the court's assessment as to whether an intelligent and honest man in the position of the director could have reasonably believed that the transactions were for the benefit of the company: at [35] and [36].

(2) The first appellant did not act bona fide in the best interests of the first respondent. The Beyonics Group could have handled the business itself without the alliance as it had sufficient production capacity, and the first appellant's actions to assist the NedKo Group were not in the first respondent's best interests. His action in relation to the sale of the subsidiary was also not objectively defensible: at [39] to [46].

(3) Further, the first appellant's actions were tainted by the receipt of payments for his assistance to the NedKo Group, which were correctly characterised as bribes or unauthorised secret commissions that breached the no-profit rule. Where a director was found to have placed himself in a position of conflict of interest, he would not be permitted to assert that his action was bona fide or thought to be in the interests of the company: at [47] to [49] and [51] to [57].

(4) The defence under s 391 of the Companies Act was not available to the first respondent; he had not acted honestly and reasonably and it was not fair in the circumstances that he should be excused for his breaches that were many and egregious: at [59].

(5) There was no legal basis to support the claims for both diversion and total losses because the revenue for the Seagate business was recognised in the accounts of BAP, which was the entity that suffered the relevant loss. The holding company in a group of companies could not claim for loss suffered by a subsidiary just because as a holding company it was in a position to direct and control the application of cash and profits of its subsidiaries. BAP's losses could not legally be transformed into the losses of the first respondent, the parent company of BAP, simply because consolidated accounts were prepared for the whole group. Recognising the concept of the single economic entity was contrary to both principle and authority, and would undermine the doctrine of separate legal personality that was the bedrock of company law in Singapore and throughout the common law world: at [70] to [75].

(6) The relevant test in relation to the validity of commercial transactions entered into by directors that owe fiduciary duties was a three-part one: (a) was the transaction reasonably incidental to the carrying on of the business; (b) was it a bona fide transaction; and (c) was it done for the benefit and to promote the prosperity of the company. The various impugned expenses were all improperly claimed, save for one transaction in relation to the purchase of fountain pens. The first appellant's explanation that it was to reward long-serving staff members was a reasonable one: at [77] and [80] to [84].

(7) The post-resignation salary of $45,900 could be reclaimed by the second respondent, but on a different ground from what was relied on by the trial judge. An employee in breach of fiduciary duties was still entitled, as a matter of law, to his contractual salary. The breaches could not in themselves support a claim for reimbursement. However, there was no good consideration for the agreement to pay post-resignation salary in the form of a forbearance to sue, as it was not requested by the second respondent that the first appellant forebear from suing it: at [87] to [92].

(8) As the first respondent was not entitled to claim both diversion and total losses from the first appellant, the cross-appeal on quantification was dismissed: at [93] and [96].

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