Multi-Pak Singapore Pte Ltd (in receivership) v Intraco Ltd and Others

• Jurisdiction: Singapore
• Judge: Chao Hick Tin J
• Judgment Date: 26 February 1994
• Neutral Citation: [1994] SGHC 46
• Docket Number: Suit No 7195 of 1985
• Date: 26 February 1994
• Year: 1994
• Published date: 19 September 2003
• Plaintiff Counsel: CR Rajah and S Nithiananthan (Tan Rajah & Cheah)
• Citation: [1994] SGHC 46
• Defendant Counsel: Tan Kok Quan and Tang Khin Wai (Lee & Lee)
• Court: High Court (Singapore)
• Subject Matter: Assignment of debts in return for allotment of shares,Tort,Trusts,Assignment of worthless debts in return for allotment of shares,Constructive trusts,Whether necessary in claim against other parties acting in concert to enable breach,Allotment,Directors' fiduciary duty,Duties,Correct test to apply in absence of evidence,s 76 Companies Act (Cap 50),s 157 Companies Act (Cap 185, 1970 Ed),Duty to use reasonable diligence,Whether for sole purpose of providing financial assistance to purchase shares of company,Correct test to apply,Duty to act honestly,'Honestly',Money received in the knowledge that there was breach of duty,s 157 Companies Act (Cap 50),Predominant intention to injure,Words and Phrases,Shares,Debt assignment agreement,Conspiracy,Elements of offence,Whether assignment in breach of duty,Use of unlawful means,Directors,Financing dealings in company's shares,Breach of statutory duty by company's directors,Companies,Whether money held on constructive trust

Cur Adv Vult

The plaintiffs were in the business of a paper mill and are under receivership. Two other companies, City Carton Co Pte Ltd and Box Pak (S) Pte Ltd, were in the business of making paper cartons with the latter being a subsidiary of the former. The second and third defendants were, at all material times, directors of City Carton, Box Pak and the plaintiffs. The fourth defendant was the financial controller of City Carton and Box Pak from 1 June 1984 to March 1985 and of the plaintiffs from the same date to 31 January 1985.

City Carton and Box Pak had obtained supplies from Intraco Ltd, the first defendant herein, a public listed trading company. For some time prior to 24 May 1984 (the significance of this date will become apparent later), City Carton and Box Pak owed Intraco a total sum of $2,545,897. The relevant accounts of City Carton and Box Pak show that, at the time, they were in a very bad financial state, so much so that, of the total amount owing, Intraco had already written off $1.5m as irrecoverable.

It was clear that City Carton was insolvent (in the sense of total liabilities exceeding total assets) and was functioning solely on the continued support of its financiers and creditors and their willingness not to seek immediate repayment. Very much the same condition prevailed in Box Pak. There was only a very slim chance of unsecured creditors being paid. The evidence would appear to show that at the very most only 4-5% of the debts of unsecured creditors of these two companies could be repaid.

For about a year prior to 24 May 1984, Intraco had, together with the other creditors of City Carton, held discussions to see how City Carton, and its subsidiary Box Pak, could be rescued. Intraco`s objective in these efforts was no doubt to seek the recovery of the debts due to them from City Carton and Box Pak. Various proposals were considered to revive City Carton. At the end of 1983, one of the proposals discussed was the conversion of the debts owing by City Carton and Box Pak to Intraco into equity in those two companies (PB24-25). The conversion of other creditors` debts into equity was also explored (DB531-2 and 542-3). As late as 17 April 1984, the option contemplated was the conversion of Intraco`s receivables from City Carton into equity in that company (DB554-5).

Sometime very close to 24 May 1984, Multi-Pak became involved in the discussions. Multi-Pak was represented by the second and third defendants.

On 24 May 1984, an important event occurred, which gives rise to the present cause of action. Multi-Pak entered into an agreement with Intraco to take an assignment of the debts owing by City Carton and Box Pak to Intraco and, in consideration thereof, Multi-Pak agreed to pay Intraco the sum of $2,371,079.62 (`the assignment agreement`). It was a straight forward assignment with no other terms or conditions attached. At the time, neither City Carton nor Box Pak was in any way related to Multi-Pak. But Mr Peter Ng, the second defendant herein, was the managing director of all three companies, City Carton, Box Pak and Multi-Pak. The financial position of Multi-Pak was then rather precarious.

As this agreement is crucial to this action, and is only a very brief document, I shall set it out in full, excluding the long title:

Whereas City Carton Co Pte Ltd and Box Pak (S) Pte Ltd (hereinafter called the debtors) are indebted to the vendor in the sum of $2,545,897.83 for goods sold and delivered and the vendor has agreed with the purchaser for the absolute sale of such debt for the price of $2,371,079.62

Now this agreement witnesseth that, in consideration of the sum of $2,371,079.62 paid by the purchaser, the vendor, as beneficial owner, hereby sells to the purchaser all the said debt of $2,545,897.83 due and owing to the vendor by the said debtor and all interest due and to become due for the same and the full benefit and advantage thereof to hold the same unto the purchaser absolutely.

In the agreement above, `the vendor` refers to Intraco and `the purchaser`, Multi-Pak.

On 6 June 1984, a cheque for $2,371,079.62 was issued by Multi-Pak to Intraco in payment of the assignment. The cheque was signed by the second and third defendants, as directors of Multi-Pak.

It would appear that, at about that period of time, Intraco began discussions with Multi-Pak with a view to becoming a shareholder in Multi-Pak. On 28 May 1984, a letter of confirmation of allocation of shares was issued by Multi-Pak to Intraco as follows:

This serves to confirm that 20,000 shares of $100 each have been allocated to your company. These shares have been allocated at par and shall be payable fully in cash within one month from the date of allotment.

It was only on 11 June 1984 that Multi-Pak passed a resolution to allot the shares to Intraco. It would seem that, as of 14 June 1984, Intraco`s board had yet to formally approve the taking up of the $2m shares (PB67-68 and DB572-3). But, on 6 June 1982, Intraco`s company secretary wrote to Multi-Pak to confirm that its board had approved the subscription of the $2m shares in Multi-Pak. Having examined an internal memorandum from Mr Leslie Tan, a senior manager at Intraco, to the executive committee (PB60-61), it is clear to me that the approval then was that of the executive committee, not of the board. It is probable that the formal board approval came a little later. It was only on 20 June 1984 that Multi-Pak notified the Registry of Companies of the allotment to Intraco. What is significant is that, as of 24 May 1984, there was neither approval of the board nor of the executive committee of Intraco to take up the $2m shares in Multi-pak.

As part of the agreement to subscribe for the $2m shares in Multi-Pak, Intraco also agreed to lend $371,079.62 to Multi-Pak. Two cheques were accordingly issued by Intraco to Multi-Pak for the said two sums.

On 21 June 1984, a coordinated effort was made by both Multi-Pak and Intraco to deposit the said two cheques and the earlier cheque issued by Multi-Pak to Intraco for $2,371,079.62, into their respective accounts with the Standard Chartered Bank. The two cheques issued in favour of Multi-Pak were deposited first, followed immediately by the cheque issued in favour of Intraco for the assignment of the debts. All three cheques were banked in through the same teller. It is clear to me that this manner of banking in the cheques was made in an attempt to avoid any allegation that Intraco was using the money of Multi-Pak to buy its own shares, thus infringing s 76 of the Companies Act (Cap 185, 1970 Ed). I should mention here that an earlier attempt by the plaintiffs to include s 76 of the Companies Act as a ground to challenge the propriety of the payment of $2,371,079.62 to Intraco was unsuccessful as it was made after the limitation period had expired: see decision of the Court of Appeal in Multi-Pak Singapore Pte Ltd v Intraco Ltd .

Sometime in January 1985, it soon became apparent that the concerted efforts to save Multi-Pak and City Carton could not succeed. It appears that the banks could not agree. On 24 January 1985, Arab Bank appointed three auditors from M/s Price Waterhouse as receivers and managers of Multi-Pak pursuant to a power under a debenture. Thereafter, all the efforts to revive Multi-Pak and City Carton came to a grinding halt.

By this action, the receivers on behalf of Multi-Pak are suing Intraco, the two former directors of Multi-Pak (the second and third defendants) and the financial controller of Multi-Pak (the fourth defendant) for the return of the $2,371.079.62 paid to Intraco. The action is based on three grounds, namely, constructive trust, conspiracy and resulting trust. I should mention, at this juncture, that the second to the fourth defendants are not parties to these proceeding because they have not been served with the papers. The present proceeding is entirely between Multi-Pak and Intraco.

Constructive trust

The main ground advanced by the plaintiffs for the return of the money is based on constructive trust. Counsel for the plaintiffs submitted that, in law, where officers of a company, in breach of their fiduciary duties, misapply the funds of the company, and the funds then come into the hands of a stranger, as in this case Intraco, with actual or constructive knowledge of the misapplication or of the facts and circumstances underlying the transaction, the stranger becomes a constructive trustee for the misapplied funds. He further submitted that funds of a company are trust funds to be used by those in charge only for the purposes of the company.

In Barnes v Addy , an attempt was made to make two solicitors of a trustee, who acted in breach of a trust, constructive trustees, without success. Lord Selborne LC laid down the principles on constructive trust as follows:

Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a court of equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.

In Russel v Wakefield Waterworks Co , at p 479, Jessel MR said:

In this court, the money of the company is a trust fund because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust

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