Pacrim Investments Pte Ltd v Tan Mui Keow Claire and Another

• Jurisdiction: Singapore
• Judge: Chan Sek Keong CJ
• Judgment Date: 28 March 2008
• Neutral Citation: [2008] SGCA 16
• Docket Number: Civil Appeal No 70 of 2004
• Date: 28 March 2008
• Published date: 01 April 2008
• Year: 2008
• Plaintiff Counsel: Lisa Chong Soo Chuan (Lisa Chong & Partners)
• Citation: [2008] SGCA 16
• Defendant Counsel: Johnny Cheo (Cheo Yeoh & Associates LLC)
• Court: Court of Appeal (Singapore)
• Subject Matter: Stocks and shares,Mortgage of personal property,Whether there was breach of moratorium,Covenant not to sell, assign or dispose of shares during moratorium period,Credit and Security,Equitable mortgage of shares during moratorium period,Words and Phrases,"Sell", "assign" and "dispose of"

28 March 2008

Chan Sek Keong CJ (delivering the grounds of decision of the court):

Introduction

1 This appeal raises a simple but important question as to the rights of shareholders to whom shares of a listed company (“listed shares”) are issued but who agree not to sell, assign or dispose of the shares for a period of time. The question is whether such a restriction extends to the use of the shares as security.

2 The judge in the court below (“the Judge”) dismissed the claim by the appellant, Pacrim Investments Pte Ltd (“Pacrim”), for damages and an order that the first respondent, as company secretary, register the transfer of 50 million shares in the second respondent, Mediastream Ltd (“MSL”), holding that the transfer had been made in breach of a restriction concerning those shares contained in an agreement between MSL and the shareholder who purported to transfer the shares to Pacrim (see Pacrim Investments Pte Ltd v Tan Mui Keow Claire [2005] 1 SLR 141 (“the GD”)). The said shares, which were subject to a restriction on their sale, assignment or disposal for one year, had been mortgaged by the shareholder to Pacrim as an equitable mortgagee to secure a debt due from the shareholder. The Judge also held that MSL was entitled to decline to register the transfers of these shares as they were presented for registration after the shareholder had been declared a bankrupt.

3 At the conclusion of the hearing of Pacrim’s appeal against the decision of the Judge, we allowed the appeal. We now give our reasons.

Background

4 The facts are straightforward. By an agreement dated 14 May 2002 (“the Acquisition Agreement”), MSL acquired the entire issued share capital of Allandes Corporation Pte Ltd (“Allandes”), which was held by Desmond Poh (“Poh”) and his wife, Cho Wee Min (“Cho”), for a total consideration of $13.8m. The consideration for the acquisition consisted of the allotment and issue by MSL of 210 million fully paid-up shares at $0.06 per share (“Consideration Shares”), and the issue of a $1.2m interest-free credit note payable over 24 months (“the Credit Note”). The Acquisition Agreement was approved by the Singapore Exchange Securities Trading Limited (“SGX-ST”), which also gave approval for the listing and the quotation of the Consideration Shares on the Stock Exchange of Singapore Dealing and Automated Quotation System (“SESDAQ”) upon their allotment and issue. On completion of the acquisition of Allandes, 55% of the Consideration Shares were issued to Poh, and the remaining 45%, to Cho.

5 The other provisions of the Acquisition Agreement which are relevant to the legal issues in this appeal are as follows:

(a) Under cl 7, Poh and Cho jointly and severally warranted (and also guaranteed) that a debt of $1.3m then owing by Allandes Properties Pte Ltd (“Allandes Properties”), a subsidiary company of Allandes, would be recoverable and be recovered within 12 months from the date of the Acquisition Agreement.

(b) Under cl 8, Poh and Cho gave a joint and several profit guarantee to MSL that the minimum profit of Allandes for the financial years ended 2002 and 2003 would be in excess of $2m for each year, but, if there was a shortfall in the guaranteed profits for any of these years, Poh and Cho would reimburse MSL the shortfall in cash (as a reduction of the consideration of $13.8m) or, alternatively, MSL would be entitled to offset the shortfall against the said consideration.

(c) Clause 9 provided for a one-year restriction, or moratorium, as is often called in the securities market, on the sale, assignment or disposal of the Consideration Shares (“the Moratorium”) from the completion date of the Acquisition Agreement (22 September 2002) in these terms:

[Poh and Cho] hereby jointly and severally undertake not to sell, assign or dispose of any of the Consideration Shares allotted and issued to them on Completion, for a period of one (1) year from Completion, unless the prior written consent of [MSL] has been obtained, such consent not to be unreasonably withheld.

(d) Clause 16 stated, inter alia, that the Acquisition Agreement embodied all the terms and conditions agreed upon among the parties as to the subject matter of the agreement and that the agreement was not to be altered, changed, supplemented or amended except in writing signed by the parties.

6 On 29 September 2002, Poh deposited the share certificates for 70 million Consideration Shares, together with blank transfers duly signed by him, with Pacrim as a “pledge” to secure the brokerage fee payable by Poh to Pacrim in respect of MSL’s acquisition of Allandes. (Pacrim’s managing director, Low Ee Chin (“Low”), had arranged for the acquisition of Allandes by MSL.) Low acknowledged the receipt of the share certificates and the blank transfer forms in a note dated 29 September 2002, which read as follows:

I, [Low] … , hereby acknowledge having received from you, [Poh] … , the amount of 7 x 10,000,000 shares in [MSL] (certificates numbers 000057 to 000063 inclusive) together with duly executed blank transfer forms as a pledge to secure the commission payable to [Pacrim] in the sum of $2,400,000 … arising from the brokerage and generally arranging for the sale of [Allandes] to [MSL].

7 In his affidavit dated 5 February 2004, Low deposed that Poh had asked Pacrim for time to pay the brokerage fee and it had been agreed that payment would be deferred “for one year which, in any event, was to be no later than 22 September 2003 (the last day of the moratorium period)”,[note: 1] failing which Pacrim would thereafter be entitled to transfer the 70 million Consideration Shares to itself or its nominees and sell those shares to recover the brokerage fee. Subsequently, Pacrim released 20 million Consideration Shares to Poh to raise funds to pay part of the brokerage fee, leaving Pacrim with 50 million Consideration Shares. This statement has not been challenged by MSL.

8 By a letter dated 17 July 2003, MSL purported to rescind the Acquisition Agreement on the ground that Poh and Cho had made fraudulent misrepresentations concerning the financial affairs of Allandes, in reliance upon which MSL had been induced to enter into the Acquisition Agreement. MSL commenced actions against Poh and Cho seeking a declaration that the Acquisition Agreement had been validly rescinded and the delivery-up of the Consideration Shares.

9 On 29 August 2003, Poh was adjudged a bankrupt pursuant to a bankruptcy petition filed on 12 December 2002.

10 On 23 September 2003 and 24 September 2003, two transfers of 20 million Consideration Shares and 30 million Consideration Shares respectively (“the Transfers”) were submitted by Pacrim to MSL for registration. MSL declined to register the Transfers as it took the position that the Transfers had to be referred to the Official Assignee. Subsequently, when Pacrim applied to register the Transfers a second time, MSL again declined to register them on the ground that it had rescinded the Acquisition Agreement on 17 July 2003. This led to Pacrim’s action against, inter alia, MSL in the court below.

11 Pacrim relied on a number of grounds in support of its case that MSL was under a duty to register the Transfers as the Consideration Shares, being listed shares, were freely transferable. However, its main ground was that the “pledge” of the 70 million Consideration Shares was not in breach of the Moratorium.

12 The Judge, after analysing the terms of the “pledge” and the distinction between a pledge and an equitable mortgage, held that the “pledge” was in substance an equitable mortgage and, as such, its creation was a breach of the Moratorium (see the GD at [17] and [19]). The Judge did not explain why the creation of an equitable mortgage was a breach of the Moratorium, although it may be inferred from his analysis that a pledge is a possessory security and does not pass any interest in the secured asset, whereas an equitable mortgage passes an equitable interest in the security to the mortgagee. An equitable mortgage of shares would therefore amount to either an “assignment” or a “disposal” of the shares since the deposit of shares as security cannot amount to a “sale”.

13 In the GD at [20], the Judge referred to a share as a legal chose in action which could be assigned or transferred subject to equities existing between the original parties at the date when notification of the assignment was given. He stated (at [21]–[24] of the GD) that if a contract contained a prohibition against the assignment of a chose in action, a purported “assignment” in breach of the prohibition would confer no interest on the assignee. It would therefore appear that the Judge also decided that the deposit of the share certificates for the 70 million Consideration Shares, together with the signed blank transfers (see [6] above), was, in law, an “assignment” of the shares.

14 The Judge gave a second reason for dismissing...