Nordic International Ltd v Morten Innhaug

• Jurisdiction: Singapore
• Judge: Steven Chong J
• Judgment Date: 04 January 2017
• Court: High Court (Singapore)
• Docket Number: Suit No 875 of 2010
• Date: 04 January 2017

Nordic International Ltd

and

Morten Innhaug

[2017] SGHC 1

Steven Chong J

Suit No 875 of 2010

High Court

Companies — Directors — Duties — Joint venture between two shareholders to operate seismic survey vessel — Company chartering vessel to charterer who used it to provide seismic services to end user — Director and shareholder negotiating with charterer and end user to assign use of vessel to company he incorporated and let company take over seismic services agreement — Whether breach of fiduciary duties in procuring purported assignment — Whether breach of fiduciary duties in causing withholding of charter hire payable by original charterer — Whether breach of fiduciary duties in profiting or intending to profit from option under time charter to purchase vessel — Whether relief from liability should be granted under s 391 Companies Act (Cap 185, 2006 Rev Ed) — Whether other shareholder ratified breach of duty — Appropriate remedies to be granted — Section 391 Companies Act (Cap 185, 2006 Rev Ed)

The defendant, Mr Morten Innhaug (“Morten”), incorporated the plaintiff, Nordic International Ltd (“Nordic International”) to purchase a fishing trawler which would be converted and equipped to operate as a seismic survey vessel (“Vessel”). Nordic Maritime Pte Ltd (“Nordic Maritime”), of which Morten was a director and shareholder, was appointed to be the manager of the Vessel pursuant to a ship management agreement. Sinwa Limited, a company incorporated in Singapore, was approached to invest in this venture. Under a shareholders' agreement, Sinwa Limited and Morten would each own 50% of Nordic International's shares. Sinwa Limited novated its rights under the shareholders' agreement to Sinwa SS (HK) Co Ltd (“Sinwa”). Sinwa and Morten each nominated two directors to the board of Nordic International – Morten nominated himself as one of the directors.

At the time of the shareholders' agreement, Morten had already secured a charterparty (“Time Charter”) to charter the Vessel to a company (“BGP”). BGP had in turn contracted to provide seismic survey services to another company (“TGS”). BGP intended to use the Vessel to fulfil its obligation in the provision of seismic survey services to TGS under the seismic services agreement.

Shortly after the commencement of the Time Charter, BGP indicated its wish to Morten, in August 2008, to “cancel” the Time Charter. Morten entered into discussions with BGP and TGS to “assign” BGP's rights and obligations under the Time Charter and the seismic services agreement to Nordic Maritime, without the prior knowledge or consent of Nordic International's board of directors. BGP negotiated with TGS and obtained its agreement to the assignment. Morten incorporated another company (“NGS”), a wholly-owned subsidiary of Nordic Maritime, to take over the Time Charter and the seismic services agreement from BGP

By a tripartite memorandum of agreement (“MOA”) between BGP, Nordic Maritime and TGS, and a Notice of Assignment of Time Charter Party(“Notice of Assignment”) sent from BGP to NGS, BGP assigned to NGS its use of the Vessel and its right to receive seismic services fees from TGS. The net effect of the two purported assignments was that BGP was taken out of the equation vis-?-vis TGS, but remained liable to Nordic International for the charter hire.

TGS later terminated the seismic services agreement. Morten, in his capacity as CEO of Nordic Maritime, informed BGP that following TGS's termination, the Time Charter between BGP and Nordic International was reinstated, with the result that BGP would henceforth be liable for the charter hire. BGP took the view that following the signing of the MOA, it did not have any obligations under the Time Charter or seismic services agreement. Nordic International later commenced arbitration against BGP claiming unpaid charter hire. Morten tried initially to stop Sinwa from commencing arbitration proceedings on behalf of Nordic International against BGP. Sinwa eventually obtained leave of court to commence arbitration proceedings.

Sinwa obtained leave of court to commence a derivative action against Morten for breach of fiduciary duties in (a) procuring the purported assignment of the Time Charter to NGS without giving notice to Nordic International's shareholders or directors; (b) withholding payment or causing the withholding of the charter hire to Nordic International by reason of the purported assignment to NGS; and (c) profiting or intending to profit from the sale of the Vessel after the completion of the three-year charter period, since cl 40 of the Time Charter granted the charterer the option to purchase the Vessel at a discounted amount after completion of the three-year period.

Held, allowing the claim:

(1) A director had the duty to act bona fide in the best interests of the company. The no-conflict rule obliged a director, as a fiduciary, to avoid any situation where his personal interest conflicted or might have conflicted with that of the company whose interest he was bound to protect, such that there was a risk he might prefer his interest over that of the company. The no-profit rule obliged a director not to retain any profit which he made through the use of the company's property, information or opportunities to which he had access by virtue of being a director, without the fully informed consent of the company. The rule against self-dealing prohibited a director from entering, on behalf of the company, into an arrangement or transaction with himself or with a company or firm in which he was interested: at [52], [53], [54] and [55].

(2) In procuring the purported assignment of the Time Charter between Nordic International and BGP to NGS, Morten substituted NGS for BGP such that NGS effectively became the charterer of the Vessel from Nordic International, so that NGS (and he) could earn the seismic services fees due from TGS. By entering into this self-dealing transaction in which he placed his own interests above that of Nordic International, he was in breach of the no-conflict rule. The making of the profit from the seismic services agreement would be in breach of the no-profit rule. The way he allowed BGP to exit the commercial arrangement between Nordic International, BGP and TGS without any payment of compensation could not be said to be in the best interests of Nordic International. It was evidently in his own best interest: at [62] to [79] and [84].

(3) As a result of the purported assignment, BGP denied any liability to pay the charter hire from December 2008 in reliance on the MOA. Morten further obstructed Nordic International's attempt to recover the outstanding charter hire from BGP. This was not in the best interests of Nordic International. He did not act in the best interests of Nordic International since he had multiple contradictory reasons for stopping it from going after BGP. First, he was concerned that it would end any possibility of his own future dealings with BGP. Second, BGP would then go after NGS for the same loss under the Notice of Assignment. Third, he was hoping to go after BGP for the unpaid charter hire himself after buying out Sinwa's shares. It was apparent that as a result of his personal motivation to benefit from the seismic services agreement with TGS, Morten found himself in an entirely unsatisfactory position of being unable to discharge his duty as a director to act in the best interests of Nordic International: at [81], [82] and [84].

(4) By procuring the purported assignment, Morten also stood to profit by gaining the option to purchase the Vessel at a discounted price after the completion of the charter period. Once again, he placed his own financial interest above that of Nordic International and was in breach of the no-profit rule and the broader no-conflict rule: at [70] and [84].

(5) A director would only be relieved from liability for breach of duty under s 391 of the Companies Act if he had acted honestly, acted reasonably, and if it were fair to excuse him for his default. Morten did not act honestly. He deliberately chose to exclude the Sinwa directors of Nordic International from discussions to ensure they would not object to the purported assignments. There was clearly an intent on his part to gain an improper benefit or advantage in unilaterally undertaking the negotiation of the purported assignments with BGP. He did so to secure the substitution of NGS for BGP in the commercial arrangement between Nordic International, BGP and TGS, with a view to advancing his own self-interest. Further, he did not act reasonably in the way he tried to stop Nordic International from pursuing its legitimate claim against BGP for the outstanding charter hire. This was not an appropriate case to grant relief under s 391: at [86], [88] and [89].

(6) Ratification of the transaction brought about by a breach of fiduciary duty was not the same as releasing the errant director from liability for breach of duty. A director could only be released from liability with the informed consent of the shareholders. Sinwa's conduct showed that it had at best ratified the assignment of the Time Charter. There was never any intention to excuse Morten from breach of his fiduciary duty: at [91], [92], [93] and [94].

(7) Although Morten ceased to make further profit from the seismic services agreement after it was terminated by TGS in December 2008, there was enough evidence that Morten had earned some profit from the assignments of the Time Charter and the seismic services agreement. An account of profits was thus ordered in respect of Morten's breach in procuring the purported assignment of the Time Charter: at [97].

(8) Until the conclusion of the arbitration that Nordic International had commenced against BGP, it would not be certain whether Morten's breach in causing the withholding of the charter hire had caused Nordic International any loss. An assessment of the appropriate amount of equitable...