Low Hua Kin v Kumagai-Zenecon Construction Pte Ltd (in liquidation) and Another

JurisdictionSingapore
JudgeChao Hick Tin JA
Judgment Date28 July 2000
Neutral Citation[2000] SGCA 38
Docket NumberCivil Appeal No 124 of 1999
Date28 July 2000
Year2000
Published date19 September 2003
Plaintiff CounselAlvin Yeo SC and Nandakumar Ponniya (Wong Partnership)
Citation[2000] SGCA 38
Defendant CounselAnthony Lee and Rodney Keong (Bih Li & Lee)
CourtCourt of Appeal (Singapore)
Subject MatterDuties,Whether sale of shares ultra vires,Primary duty of provisional liquidator,Provisional liquidator,Breach of fiduciary duty,Whether act of provisional liquidators break chain of causation,Winding up,Whether provisional liquidators negligent is not seeking third party advise before sale of shares,Directors,Companies,Whether loss suffered by company's loss caused by director's breach of duty

(delivering the grounds of judgment of the court): This appeal arose from the decision of GP Selvam J in OS 62/96, which was a misfeasance summons taken out by the liquidators of the respondent companies against the appellant under s 341 of the Companies Act (Cap 50, 1994 Ed). We dismissed the appeal, and now give our reasons.

The facts

The relevant facts that gave rise to this appeal were briefly these. The appellant started out as a lecturer in the then University of Singapore in the early 1970s or thereabouts. In 1972, the appellant while still a lecturer, was, with the consent of the university, engaged by a Japanese corporation, Kumagai Gumi Co Ltd (`Kumagai`), as a consultant and advisor. Kumagai had been doing business in Singapore as building contractors. Their relationship developed further and in 1976, the appellant resigned from the university and became a full time consultant and advisor to Kumagai.

In 1979, with the consent of Kumagai, the appellant incorporated his own company called Zenecon Pte Ltd (`Zenecon`) which, at all material times, was under his control.
He was a director and the chairman of Zenecon and held the controlling shares. The other shareholders were his wife and brother; one Jason Lim was the company secretary.

In 1983, Kumagai and Zenecon decided to enter into a joint venture.
On 25 April 1983, they executed a shareholders` agreement and memorandum of understanding whereby they agreed to incorporate a joint venture company for the purposes of engaging in the business of, inter alia, construction, civil and structural engineering and property development. Pursuant to their agreement, Kumagai-Zenecon Construction Pte Ltd (`K-Z`), the first respondent in this appeal, was incorporated on 3 June 1983. As provided in the agreement, Zenecon held 51% of the shares in K-Z, while Kumagai held the remaining 49% of the shares. Under the agreement, Kumagai was to supply the necessary technical expertise and working capital, while Zenecon was to assume the responsibility for the day-to-day management of the company. Both parties to the joint venture appointed three nominee directors to the board of K-Z respectively. The appellant was appointed the managing director.

In November 1984, with the agreement of Kumagai, a subsidiary of K-Z called Kumagai Property Marketing Pte Ltd (`KPM`) was formed for the purpose of marketing the housing development projects undertaken by K-Z.
This company is the second respondent. Soon after the incorporation, K-Z was allotted 9,000 shares of KPM, and one Lim Thye San, the brother-in-law of the appellant, who was then the property manager of KPM, was allotted 1000 shares. These 1000 shares were subsequently acquired by the appellant. The directors of KPM consisted of the appellant and his nominees, and there were no nominees from Kumagai on the board of this company. The appellant was appointed the representative to represent K-Z at general meetings of KPM. All these were carried out with the approval of Kumagai.

Subsequently, the appellant began to run KPM as if it were wholly owned by him.
Without any prior consultation with Kumagai, he proceeded to make use of the company to purchase shares in certain public listed companies with a view to gaining control in these companies. For that purpose, he caused the name of KPM to be changed to Kumagai Investments Pte Ltd and also the objects clause in the memorandum of association of KPM to be altered so as to include the investing in shares as part of its business.

Among the shares of companies he directed or caused KPM to buy were the shares in a listed company called Pacific Can Investment Holdings Ltd (`Pac Can`).
In May 1991, a total of some 7,321,000 shares in Pacific Can were purchased by KPM pursuant to the appellant`s directions. To finance the purchase of these shares KPM had to borrow moneys from the bank. On 10 May 1991, KPM entered into a loan agreement with Arab Bank plc (`Arab Bank`) under which a loan facility up to an amount of US$6m was provided by the bank to KPM, and as security for the loan the shares purchased were charged to the bank. Kumagai was not informed of these transactions. It only learnt of the change of name and purchase of the shares from newspaper reports. In August 1991, KPM bought 278,000 more shares in Pac Can, and this purchase was again made without Kumagai`s knowledge. In all, a total of 7,599,000 shares in Pac Can were bought by KPM at the direction of the appellant. There were other share transactions in which KPM was involved, but they were irrelevant for the purpose of this appeal.

The relationship between Kumagai and the appellant became strained and very soon various disputes between them erupted.
On 29 January 1992, Kumagai filed a petition seeking reliefs under s 216 of the Companies Act (Cap 50, 1990 Ed) in respect of K-Z. Kumagai also presented a petition for the winding up of K-Z under s 254(1)(i) of the Companies Act on the ground that it was just and equitable to do so by reason of the breakdown in the relationship between the two shareholders, Kumagai and Zenecon. Soon after the filing of these petitions, an order of court by consent was made on 11 February 1992 appointing Don Ho and Wee Aik Guan of Deloitte and Touche as provisional liquidators of K-Z.

On 15 April 1992, Arab Bank made a margin call on KPM requiring the company to pay up a sum of $220,000.
KPM failed to meet this demand. On 22 April 1992, the bank indicated its intention to sell sufficient amount of shares to satisfy the margin shortfall, unless the shortfall was paid by 2.30pm that day. This impending crisis was averted only after the bank agreed to accept a partial payment of $30,000 from KPM. Subsequently, another margin call was made and KPM was requested to pay up a sum of $150,000. It became clear by this time that KPM was in dire financial straits. As at 23 April 1992, its bank balance stood at a meagre sum of $3,649.37.

The provisional liquidators of K-Z therefore started to make arrangements to sell the shares en bloc.
Their solicitors wrote to the solicitors for KPM on 23 April 1992 informing the company of an offer that had been made to purchase all the Pac Can shares at 78 cents per share. The provisional liquidators took the view that as KPM had no income, no potential source of income or any other funds to meet further margin calls or even the next interest payment, the best solution in the circumstances was to sell the shares en bloc. A copy of this letter was extended to the solicitors for the appellant. The appellant on his part was not receptive to the proposal of selling the shares en bloc. Through his solicitors, he informed the provisional liquidators that he agreed to the sale of only such amount of the shares as was necessary to meet the margin call. At the same time, he also demanded to know the identity of the intended purchaser of the shares.

The offer to purchase the shares at 78 cents per share was not taken up, and it lapsed.
The provisional liquidators, nevertheless, continued to seek the appellant`s co-operation to sell the shares en bloc. The appellant`s response was that he did not think it was in the best interests of KPM to sell its entire shareholding in Pac Can, but made no alternative suggestion as to how to resolve the crisis. The provisional liquidators meanwhile explained that a piecemeal sale of the shares was not feasible, as it would only depress the share price further which in turn would trigger a further margin call. In light of the fact that KPM had no available funds or source of income, it was unlikely that they would be able to meet any margin call, whether then or in the future. It was also significant that the newspapers at or around that time were rife with rumours of an on-going boardroom tussle in Pac Can, a situation which looked set to push the company`s share prices down even further. Moreover, Pac Can had also recorded dismal profits in the financial year ending 30 September 1991.

On 12 June 1992, the appellant and his associates were removed as directors of KPM.
K-Z, acting through the provisional liquidators, appointed two of their nominees to the board of KPM in place of the appellant and his associates.

The situation with Arab Bank meanwhile did not improve.
On 22 June 1992, KPM defaulted on an interest payment amounting to $42,076.39. By a letter dated 24 June 1992, the bank gave notice that the failure to pay the interest constituted an event of default under the loan agreement and demanded payment from KPM of the entire outstanding sum inclusive of interest amounting in total to $3,074,040.37, in default of which they said that they would exercise all their rights under the loan agreement without further reference to the company.

Following this, the provisional liquidators through their solicitors wrote to the solicitors for Kumagai and Zenecon, the shareholders of K-Z, informing them of the action proposed to be taken by the bank and enquiring whether they or either of them would be prepared to make the necessary advances to enable KPM to discharge the loan.
Both the shareholders declined to do so.

Thereafter, the provisional liquidators after discussion with the bank decided that the best course to adopt was to sell the entire block of Pac Can shares in a `married deal` transacted on the stock exchange.
However, as the Pac Can shares represented substantially the whole of the assets of KPM, approval for the sale of all the shares had to be obtained from its shareholders at a general meeting under s 160 of the Companies Act. Accordingly, on 25 June 1992, the secretary of KPM sent to the shareholders of KPM a notice calling for an extraordinary general meeting of the company to be held on 10 July 1992 for the purpose of passing an ordinary resolution authorising the directors to sell the shares. The secretary also requested shareholders to consent to shorter notice of the meeting so that the matter could be resolved...

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4 books & journal articles
  • NAVIGATING THE MAZE
    • Singapore
    • Singapore Academy of Law Journal No. 2016, December 2016
    • 1 December 2016
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    • 1 December 2000
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  • Equity and Trust
    • Singapore
    • Singapore Academy of Law Annual Review No. 2000, December 2000
    • 1 December 2000
    ...a mere employee who was only playing a minimal role in the company. Low Hua Kin v Kumagai-Zenecon Construction Pte Ltd [2000] 2 SLR 501; [2000] 3 SLR 529 (CA) is also significant with regard to whether the principles of causation are applicable once it is shown that there has been a breach ......
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    • Singapore
    • Singapore Academy of Law Annual Review No. 2000, December 2000
    • 1 December 2000
    ...were sold. On appeal, the decision of Selvam J was affirmed (see Low Hua Kin v Kumagai-Zenecon Construction Pte Ltd (in liquidation)[2000] 3 SLR 529). Section 156 of the Act imposes certain duties of disclosure on directors. Under s 156(1), every director of a company who is in any way, whe......

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