Miao Weiguo v Tendcare Medical Group Holdings Pte Ltd

• Judge: Sundaresh Menon CJ,Andrew Phang Boon Leong JCA,Judith Prakash JCA,Quentin Loh JAD,Chao Hick Tin SJ
• Judgment Date: 15 December 2021
• Court: Court of Three Judges (Singapore)
• Docket Number: Civil Appeal No 28 of 2021

Miao Weiguo

and

Tendcare Medical Group Holdings Pte Ltd (formerly known as Tian Jian Hua Xia Medical Group Holdings Pte Ltd) (in judicial management) and another

[2021] SGCA 116

Sundaresh Menon CJ, Andrew Phang Boon Leong JCA, Judith Prakash JCA, Quentin Loh JAD and Chao Hick Tin SJ

Civil Appeal No 28 of 2021

Court of Appeal

Companies — Members — Funds having been wrongfully transferred from shareholder company to subsidiary company and then to third parties — Shareholder company bringing claim against third party for dishonest assistance of breaches of duty by its director — Whether principle of reflective loss prevented shareholder company from claiming against third party — Whether principle of reflective loss only applied to claims brought by shareholders for diminution in value of their shareholding or distributions from company

Trusts — Accessory liability — Third party allowing bank accounts to be used for transfer of funds from shareholder company to director's bank accounts — Whether third party liable for dishonest assistance of director's breaches of duties

Held, allowing the appeal in part:

(1) There were four elements to the cause of action in dishonest assistance: (a) the existence of a trust or fiduciary obligation; (b) a breach of trust or a fiduciary obligation; (c) assistance was rendered for the breach; and (d) the assistance was dishonest. In assessing whether assistance was dishonest, the analysis was a two-stage one: (a) first, what did the defendant know about the transaction; and (b) second, did participation in the transaction with this knowledge offend ordinary standards of honesty: at [45] and [46].

(2) While Mr Miao argued that the respondents had not established that Mr Gong had breached his duties to Tendcare as the US$2m transferred from Tendcare to TJHK was into a different account than the one from which US$2m was transferred by TJHK to QHC, this was not necessary for the respondents' claim to succeed. The breach of Mr Gong's duty owed to Tendcare in relation to the transfer of money from TJHK to QHC did not require that the US$2m from Tendcare to TJHK be identical to the US$2m transferred from TJHK to QHC. The Judge's finding that the two transfers could be linked was not against the weight of evidence: at [52] to [55].

(3) Even if parts of the US$2m Transfer might have raised questions, the respondents had not shown that Mr Miao knew or believed that the US$2m QHC Loan was not a genuine loan agreement. Further, the inference could not be drawn that Mr Miao knew that the US$2m QHC Loan was derived from the pre-IPO funds and that the loan was inconsistent with the purpose for which the funds were raised: at [74] and [79].

(4) Given the state of Mr Miao's knowledge, it was not possible to conclude that his participation in the transaction would offend ordinary standards of honesty. The Judge's finding of liability in relation to the US$2m Transfer was therefore reversed: at [80] and [81].

(5) As for the US$4m Transfer, the dispute turned on whether Mr Miao knew that the transfer of US$4m to QHC and then to Hongjia and Asia Hausse was ultimately for Mr Gong's benefit, or whether Mr Miao should be believed when he claimed that he thought that the transfers were for the purchase of hospitals in the PRC. In the first place, the Judge was entitled to conclude that there would have been proper arrangements for the transfer of funds into the PRC and that Mr Miao would have known or have been able to find out about those arrangements: at [86] and [88] to [91].

(6) As for Mr Miao's claim that he was told by Mr Cheung that the US$4m Transfer was for the purpose of purchasing hospitals in the PRC, the evidence did not support this claim. Instead, the evidence established that Mr Cheung had told Mr Miao that the transfers were for moneys to be sent to Mr Gong's personal bank account and that Mr Cheung did not know that the purpose of the transfers was for the purchase of hospitals as Mr Miao alleged: at [99] to [103].

(7) Mr Miao's participation in the transaction offended ordinary standards of honesty. Despite the absence of any apparently legitimate purpose for the transaction, Mr Miao willingly let QHC's and his bank accounts be used for transfers of significant sums of money. Further, a sham loan agreement had to be used to disguise the transaction, which was suggestive of impropriety. Therefore, the Judge did not err in finding that the cause of action in dishonest assistance against Mr Miao in relation to the US$4m Transfer was made out: at [105] and [109].

(8) The shareholder had a unique status in relation to the company. The reflective loss principle had emerged in the specific sphere of company law, and applied only to claims based on a diminution in the value of a shareholding or in distributions to shareholders as a result of a loss suffered by the company due to a wrong done to it. Subsequent cases, however, had extended the scope of the reflective loss principle and associated it with the broader concern of preventing double recovery: at [120], [130], [131] and [135].

(9) In Townsing Henry George v Jenton Overseas Investment Pte Ltd (in liquidation)[2007] 2 SLR(R) 597 (“Townsing”), the Court of Appeal had identified the rationale for the reflective loss principle both as a variant of the proper plaintiff rule, which provided that where actionable loss was suffered by the company, it was the company that was the proper plaintiff to bring the claim, and also on the basis of preventing double recovery or prejudice to creditors and other shareholders. This led to the adoption of a rule preventing shareholders from claiming for any loss, whether suffered as shareholder or in any other capacity, if the company had an actionable claim for the same loss, but subject to a policy exception which allowed recovery if the need to prevent double recovery or prejudice to creditors and other shareholders did not arise: at [146] and [149].

(10) Subsequently, in Marex Financial Ltd v Sevilleja[2021] AC 39 (“Marex”), the UK Supreme Court revisited the reflective loss principle. The majority held that the reflective loss principle was a rule of company law and was limited to shareholders' claims based on a diminution of the value of shares or distributions they received as the result of actionable loss suffered by the company. The minority held instead that there was no principle of reflective loss, and that concerns of double recovery could be addressed by other means: at [157] and [160] to [166].

(11) There were two categories of issues with the present law in Singapore under Townsing. The first arose from a tension between the two principles that were identified as underlying the reflective loss principle. The second was that the scope of the reflective loss principle stated in Townsing was too broad, which risked distorting the law of obligations and was also difficult to apply: at [170] and [172] to [174].

(12) Double recovery was a general concern which the law had always found ways of dealing with. Hence, double recovery did not need to concern the court when considering the basis of the reflective loss principle: at [176] to [184].

(13) The need to prevent double recovery was not a justification for the reflective loss principle, as it was not a sufficient justification for a blanket prohibition against recovery, it could not explain the contours of the reflective loss principle, and it required an assumption (which could not be made in many cases) that there was always an overlap between the loss caused to the company and the loss suffered by the shareholder. Further, if the rationale was to prevent double recovery, the scope of the principle would become uncontrollable: at [186] to [190].

(14) While the minority's position in Marex had significant force, the difficulty was that these arguments assumed that the private law claims held by the shareholder were and should be kept distinct from the shareholder's unique status under company law. This assumption was not warranted. A rule against such claims could be well justified on the basis of the policy of company law even if the denial of recovery appeared unjust from a purely private law perspective: at [197].

(15) The fundamental nature of a share lay in the right it represented to participate in the company. The reflective loss principle was justified by the rule in Foss v Harbottle(1843) 2 Hare 461, which consisted of two aspects: (a) first, the proper plaintiff in a wrong done to the company was, prima facie, the company (ie, the proper plaintiff rule); and (b) second, the principle that the management of a company's affairs was entrusted to the decision-making organs of the company (the “corporate management principle”): at [199].

(16) The reflective loss principle was the corollary of the proper plaintiff rule as it properly situated the shareholder's loss in the context of the company's loss. The shareholder had joined the fate of his investment to that of the company. Notably, a shareholder did not have a right to a dividend nor a right to a particular value of shares. The shares also did not represent a proportionate part of the company's assets and a shareholder was not entitled to payment upon liquidation unless there was a surplus. What a shareholder ultimately received was subject entirely to the company's fortunes. Wrongs done to the company were part and parcel of the company's fortunes, and when the risk of such wrongs eventuated, the shareholder could not be heard to complain about a loss caused to the value of his investment: at [200].

(17) The reflective loss principle also ensured that the corporate management principle was maintained. To allow such claims would prevent the company from dealing with the wrongs done to it in the manner that it deemed fit. If shareholders were dissatisfied, they would have to take up the matter through the proper channels: at [202].

(18) The reflective loss principle was...