Hau Tau Khang v Sanur Indonesian Restaurant Pte Ltd and another (Hau Tau Thong, non-party) and another matter

• Judge: Steven Chong J
• Judgment Date: 25 April 2011
• Neutral Citation: [2011] SGHC 97
• Subject Matter: Discovery of documents,Accounts,Application,Companies,Directors,Powers,Civil Procedure
• Year: 2011
• Docket Number: Registrar’s Appeal Nos 491 and 492 of 2010 (Originating Summons No 879 and 1197 of 2010)
• Published date: 03 May 2011
• Citation: [2011] SGHC 97
• Plaintiff Counsel: Tony Yeo and Esther Foo (Drew & Napier LLC)
• Defendant Counsel: Adrian Wong and Nelson Goh (Rajah & Tann LLP) as counsel, Jasmine Foo (Andrew Chua & Co) as instructing solicitors
• Court: High Court (Singapore)
• Hearing Date: 28 January 2011

Steven Chong J: Introduction

These are two appeals against the decisions of the Assistant Registrar (“AR”) in Originating Summons No 1197 of 2010 (“OS 1197”) and SUM 5515 of 2010 (“SUM 5515”), where Hau Tau Thong (“the appellant”) applied, as director, to enforce the right to inspect the company’s accounts pursuant to s 199(3) of the Companies Act (Cap 50, 2006 Rev Ed) (“CA”) (the “right to inspect”) and for specific discovery of the company’s accounts under O 24 r 5 of the Rules of Court (Cap 322, R 5, 2006 Rev Ed) (“Rules of Court”) respectively. The applications, initiated as alternatives to each other, were both dismissed by the AR.

Central to both appeals are the issues whether there are any restrictions on the right to inspect and if so, what these are. The appellant readily accepted that he was exercising the right to inspect so as to defend against an intended derivative action instituted by another director, Hau Tau Khang (“the respondent”), for alleged breaches of fiduciary duties arising from the company’s accounts. In the respondent’s view, this was an exercise of the right to inspect for an improper purpose, an exception following, inter alia, the decision of Oxford Legal Group Ltd v Sibbasbridge Services plc and anor [2008] EWCA Civ 387 (“Oxford Legal”). He contended that the purpose of the right to inspect was for discharge of present or prospective director’s duties pertaining to the company accounts or at least director’s duties in general. In view of this, it would also be improper to use the right to justify the past conduct/performance of director’s duties. Lastly, he claimed the appellant was attempting to use the right to inspect to subvert the discovery process.

Factual background

The appellant and the respondent are co-directors with equal shareholdings in the companies, Sanur Indonesian Restaurant Pte Ltd (“SIRPL”) and Sanur Holding Pte Ltd (“SHPL”) (collectively referred to as “the Companies”). The Companies were engaged in the business of running a chain of restaurants serving Indonesian cuisine under the trade name of “Sanur”. At all material times, the appellant, as the elder brother, was the managing director overseeing the business operations of the Companies though both the appellant and the respondent were co-signatories of all the Companies’ bank accounts.

Sometime in 2003, the relationship between the brothers began to deteriorate. In 2006, they entered into an agreement to keep the restaurants in operation with a view to selling the business and the properties of the Companies and eventually of an orderly winding up of the Companies (“the 2006 Agreement”). Both sides later accused the other of unreasonable behaviour in managing the winding down process. Specifically, the respondent claimed the appellant deliberately allowed the offer for renewal of the lease for their flagship restaurant at Ngee Ann City to lapse. The respondent also discovered some irregularities in SIRPL’s accounts but when he sought an explanation from the appellant, the latter was allegedly evasive. By 2009, all the Sanur restaurants had ceased operations, though both brothers remained as directors of the Companies. In October 2009, the appellant and his wife started another Indonesian restaurant, Pepes, at the same location at Ngee Ann City.

The respondent claimed that while investigating into the affairs of the Companies, he was stonewalled by Ms Cecilia Tan, the Office Manager. The respondent then terminated the services of Ms Tan in September 2009 and took possession of the keys to the Companies’ documentation cabinets. There is some dispute over the manner and circumstances under which he came to acquire possession of the keys. However, that is not strictly relevant for the purposes of the appeals. Having had access to the Companies’ accounts, the respondent apparently discovered that the cash deposits did not match the daily cash sales of the restaurants. Unknown to the appellant, the respondent then engaged the services of Stone Forest Corporate Advisory Pte Ltd (“Stone Forest”) to conduct a forensic examination of the accounts of the Companies so as to investigate the alleged cash discrepancies. Thereafter, a report was issued by Stone Forest (“Stone Forest Report”) in which it was reported that “based on the monthly sales summary for all 3 restaurants, the total amount of cash sales not deposited into Sanur’s bank accounts amounted to S$153,525.45”.

In August 2010, the respondent applied for leave of court to commence a derivative action on behalf of the Companies against the appellant for alleged breaches of fiduciary duties pursuant to Originating Summons No 879 of 2010 (“OS 879”). The breaches alleged against the appellant included financial irregularities in SIRPL’s accounts based on the Stone Forest Report.

In response to OS 879, the appellant instituted a separate application in OS 1197 pursuant to s 199(3) of the CA to exercise his right as a director to inspect SIRPL’s accounts. In the alternative, the appellant made a second application vide SUM 5515 in OS 879, for specific discovery of the Companies’ accounts.

The decision of the Assistant Registrar

Before the learned AR, the appellant accepted that his motivation behind both applications was to gain access to the Companies’ accounts in order to prove his defence in OS 879 and exonerate himself from the allegation of financial irregularities and/or breaches of fiduciary duties.

The AR agreed with the respondent’s submission that the right to inspect under s 199(3) was restricted to enabling a director to carry out his duties. As she found that the application was intended to seek “ammunition” to defend the appellant against the potential derivative action, she dismissed the application. As for SUM 5515, the AR found that the application was premature given that leave had not been granted for the commencement of OS 879.

The appeals

The appellant appealed against both decisions. Before me, parties agreed that if the appellant succeeded in his appeal in Registrar’s Appeal No 492 of 2010 (“RA 492”) against the AR’s decision to dismiss the application under s 199(3) of the CA, there was no need to deal with Registrar’s Appeal No 491 of 2010 (“RA 491”) as it involved the same set of documents.

The appeals concern the following documents (collectively referred to as “the Companies’ accounts”): The accounting and other records of the Companies that sufficiently explained the transactions and financial position of the Companies. Transaction records of SIRPL’s DBS cheque book for the period 1 July 2006 till end November 2007. Daily cash deposit slips for SIRPL’s outlet at Causeway Point for the period 1 July 2006 to March 2009 and for the period 1 July 2006 to September 2009 for the Centrepoint outlet.

Before embarking on an examination of the substantive merits of the appeals, I believe it is helpful to begin my analysis by considering the relevant principles applicable to the right of inspection under s 199(3) of the CA. It should be noted that the exercise of the right of inspection, unlike an application for specific discovery under O 24 r 5, does not require the director to establish either relevance or necessity. Therein lies the critical difference in these two “discovery” regimes.

The origin and nature of the right to inspect

An appropriate starting point will be to consider the precise terms of s 199 of the CA which states, inter alia, as follows:

Accounting records and systems of control

(1) Every company and the directors and managers thereof shall cause to be kept such accounting and other records as will sufficiently explain the transactions and financial position of the company and enable true and fair profit and loss accounts and balance-sheets and any documents required to be attached thereto to be prepared from time to time, and shall cause those records to be kept in such manner as to enable them to be conveniently and properly audited.

...

(3) The records referred to in subsection (1) shall be kept at the registered office of the company or at such other place as the directors think fit and shall at all times be open to inspection by the directors.

(4) If accounting and other records are kept by the company at a place outside Singapore there shall be sent to and kept at a place in Singapore and be at all times open to inspection by the directors such statements and returns with respect to the business dealt with in the records so kept as will enable to be prepared true and fair profit and loss accounts and balance-sheets and any documents required to be attached thereto.

(5) The Court may in any particular case order that the accounting and other records of a company be open to inspection by a public accountant acting for a director, but only upon an undertaking in writing given to the Court that information acquired by the public accountant during his inspection shall not be disclosed by him except to that director. (6) If default is made in complying with this section, the company and every officer of the company who is in default shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $2,000 or to imprisonment for a term not exceeding 3 months and also to a default penalty.

[emphasis added]

From the wording, it is immediately apparent that s 199(3) of the CA is couched in mandatory terms. This was observed by the Court of Appeal in Wuu Khek Chiang George v ECRC Land Pte Ltd [1999] 2 SLR(R) 352 (“George Wuu”) at [25]. Less obvious is the origin of this right. Over the years, many judges have disagreed on this including, Slade J in Conway v Petronius Clothing Co Ltd [1978] 1 All ER 185 (“Conway”) who was a proponent of the view that the right was conferred at common law (see 201), and Mahon J in the New Zealand decision of Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150 (“Be...