Pacrim Investments Pte Ltd v Tan Mui Keow Claire and Another

• Jurisdiction: Singapore
• Judge: Andrew Ang JC
• Judgment Date: 25 October 2004
• Neutral Citation: [2004] SGHC 240
• Docket Number: Originating Summons No 165 of 2004 (Notice of Appointment to hear Originating
• Date: 25 October 2004
• Published date: 27 October 2004
• Year: 2004
• Plaintiff Counsel: Peter Pang (Peter Pang and Co)
• Citation: [2004] SGHC 240
• Defendant Counsel: Johnny Cheo (Cheo Yeoh and Associates LLC),On further arguments, Lim Chor Pee (Chor Pee and Partners)
• Court: High Court (Singapore)
• Subject Matter: Whether moratorium valid restriction on transfer of shares,Shares,Section 77(1) Bankruptcy Act (Cap 20, 2000 Rev Ed),Whether secretary having power to register transfer without authority from board of directors,Credit and Security,Insolvency Law,Whether appropriate to make secretary defendant in action under circumstances,Allotment of shares subject to moratorium restricting subsequent transfer of shares,Pledge of shares in company created in plaintiff's favour to secure payment of commission to plaintiff,Moratorium existing outside company's articles of association,Whether pledge amounting to equitable mortgage of shares,Transfer,Powers,Section 121 Companies Act (Cap 50, 1994 Rev Ed),Bankruptcy effects,Companies,Purported transfer of beneficial interest in shares breaching moratorium made before bankruptcy of shareholder,Plaintiff entitled to transfer shares upon default,Plaintiff company suing defendant company secretary for refusing to register transfer of shares,Whether subsequent transfer of shares in breach of moratorium effective,Secretary,Whether such transfer would be void,Bankruptcy,Pledges and pawns

25 October 2004

Andrew Ang JC:

1 This was an originating summons taken out by the plaintiff for:

(a) an order that the first defendant (as company secretary) register the transfer of 50 million shares in the second defendant (Mediastream Ltd) (“MSL”); and

(b) damages to be assessed.

I dismissed the application and now set out the grounds of my decision.

Background

2 Pursuant to an acquisition agreement dated 14 May 2002 (“the Aquisition Agreement”), MSL acquired all the shares held by Desmond Poh (“DP”) and his wife Cho Wee Min (“Cho”) in Allandes Corporation Pte Ltd (“Allandes”). These shares constituted 100% of the issued share capital of Allandes. Low Ee Chin (“Low”), the managing director of the plaintiff, had introduced DP to MSL and had acted as advisor to DP and Cho in the transaction.

3 As part of the consideration for the acquisition of Allandes, at completion on 22 September 2002, MSL issued and allotted to DP and Cho 210 million shares in MSL valued at $2.6m. The Acquisition Agreement included a covenant by DP and Cho in favour of MSL in the following terms:

The Vendors [DP 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 the Purchaser [MSL] has been obtained, such consent not to be unreasonably withheld.

The rationale for the moratorium was given by Thia Peng Heok (“Thia”), a director of MSL, in his affidavit of 4 March 2004 (at para 24) as follows:

(1) A major part of the acquisition is the expertise and technical knowledge of DP in the Modular Cabin Business of [Allandes]. Accordingly, it was necessary to ensure that DP and Cho would remain as substantial shareholders and be committed to MSL (and through it [Allandes]);

(2) It would take about 1 year to evaluate [Allandes’] performance as well as to ensure that the warranties given by DP and Cho under the Acquisition Agreement [are] true. In particular, this relates to [Allandes’] recovery of the monies owing by companies owned by DP and Cho.

4 On 29 September 2002, DP created in favour of the plaintiff, a pledge over 70 million shares in MSL (“the Pledge”) to secure payment of a commission of $2.4m to the plaintiff for broking and arranging the sale of DP’s and Cho’s shares in Allandes to MSL. It does not appear from the evidence that there had been any attempt to obtain MSL’s consent for the same. According to Low, it had been agreed between DP and the plaintiff that the payment of the commission would be deferred for one year but no later than 22 September 2003 (the last day of the moratorium period). Upon default, the plaintiff would be entitled to transfer the 50 million MSL shares into its name or that of a nominee, and to sell the same to pay for the brokerage. According to Low, in September 2002, soon after the Pledge was given, 20 million MSL shares were “taken back by DP to raise funds to pay for part of the brokerage to the plaintiff”. (This was somewhat curious in view of the agreement between the plaintiff and DP that payment would be deferred for one year. However, nothing seems to turn upon it.)

5 By a letter of 17 July 2003, MSL rescinded the Acquisition Agreement on the ground that DP and Cho had made fraudulent misrepresentations concerning the financial state of Allandes in reliance upon which MSL had been induced to enter into the Acquisition Agreement. MSL commenced legal proceedings against DP and Cho seeking a declaration that the Acquisition Agreement had been validly rescinded and for delivery up of the MSL consideration shares that had been issued and allotted to DP and Cho pursuant to the Acquisition Agreement.

6 A bankruptcy order was made against DP on 29 August 2003 pursuant to a bankruptcy petition filed on 12 December 2002.

7 On 23 September 2003, the day following the date of expiry of the moratorium, a share transfer (of 20 million of the MSL shares pledged to the plaintiff) in favour of one Cheng Woei Fern was submitted for registration and this was followed the next day by a transfer of the remaining 30 million shares in MSL in favour of Low. The first defendant declined to register the transfers, holding that the transfers had to be referred to the Official Assignee in view of the bankruptcy of the registered owner, DP. Later, when the plaintiff applied to register the transfers a second time, a further reason was given (through the defendants’ solicitors by letter of 21 October 2003) that MSL had on 17 July 2003 rescinded the Acquisition Agreement of 14 May 2002. At the hearing, counsel for the defendants submitted (a) as a preliminary issue, that there was no basis to make the company secretary a party to the action; and (b) that although the plaintiff had described the arrangement between DP and itself as a pledge, it was in law an equitable mortgage and that, as such, it was a breach of the moratorium. Accordingly, the transferees of the shares did not acquire good title to the shares and were not entitled to have the transfers registered.

Preliminary issue

8 The secretary of a company is its administrative officer. He ensures that the company complies with the many regulatory provisions governing the company; these include the keeping of registers, service of notices of meetings, taking of minutes and the filing of prescribed forms. It is his function to carry out or implement decisions of the board of directors, but he has no power to participate in the management of the company’s affairs. Accordingly, he cannot negotiate or conclude contracts on the company’s behalf save on instructions of the board in connection with the administration of the company’s organisation. Nor can he register transfers of shares without the board’s authority: Chida Mines (Limited) v Anderson (1905) 22 TLR 27.

9 The company secretary was therefore wrongly made a defendant in this action. Nevertheless, as MSL itself was made the second defendant I decided, in the interest of expedition in the legal process, to consider the application on the merits (or lack thereof) even though the relevant prayer in the originating summons was for an order directed specifically at the company secretary.

The plaintiff’s position

10 The plaintiff argued that the creation of the Pledge did not breach the moratorium. Alternatively, the plaintiff alleged that MSL’s Thia had represented to DP and Cho that they could pledge the MSL shares to raise financing. This was denied by Thia in his first affidavit filed on 4 March 2004 and the plaintiff did not pursue it at the hearing.

11 The plaintiff further argued that rescission as a remedy was not available to MSL for reasons which, given my decision herein, it is unnecessary to go into.

12 DP swore an affidavit in support of the plaintiff in which he asserted that the Pledge only matured on 23 September 2003 and hence did not contravene the terms of the moratorium. He further averred that at the time of the Pledge, he only parted with possession of the shares and there was no transfer of interest in the shares. According to DP, it was only upon his default in the payment of the commission on 23 September 2003 that the plaintiff could exercise its right to sell or transfer the shares to recover the sum secured by the Pledge.

13 Low also swore an affidavit averring that:

[T]here was no disposal of the shares until the expiry of the moratorium period [on 22 September 2003] when the transfer and registration of the shares were applied [for] on the 26 September 2003 and the 16 October 2003 …

Consistently with DP, he also contended that when DP pledged the 70 million shares on 29 September 2002, he only parted with possession of the shares and that it was only after expiry of the moratorium that, upon application for the transfer and registration of the shares, there was a disposal of the same.

Pledge or equitable mortgage?

14 There are ample authorities to support the defendants’ contention that the Pledge actually amounted to an equitable mortgage. In Harrold v Plenty [1901] 2 Ch 314, Cozens-Hardy J held that the deposit of a share certificate by way of security for a debt amounted to an equitable mortgage. Citing this case as authority, Professor Roy Goode, in his book Legal Problems of Credit and Security (3rd Ed, 2003), states at para 1–47, p 33:

[I]t would seem that English law does not recognise a pledge of registered securities. A contrary position is taken in the United States, where even registered securities are pledgeable if they are certificated. By contrast, decisions in English cases assume that even where the delivery of the certificate to the creditor is accompanied by a completed or blank transfer the interest of the transferee is purely equitable until the transfer has been registered, and that pending registration he is an equitable mortgagee or chargee, not a pledgee. This assumption accords with commercial realities.

Likewise, Sykes and Walker in The Law of Securities (5th Ed, 1993) at p 782 state:

[A] deposit of a share certificate has always been held to constitute an equitable mortgage.

They go on to explain that although

[t]he term “pledge” has been applied to deposits of share certificates, whether negotiable securities or not, … this was in cases concerning priority issues. In the relevant cases there was also handed over a blank transfer of the shares; accordingly, no reason arose for deciding the nature of the transaction effected by the deposit.

In Singapore, the Court of Appeal in Chase Manhattan Bank NA v Wong Tui Sun [1993] 1 SLR 1, had occasion to decide whether certain arrangements made between a stockbroking company and one of its bankers created a pledge of the shares (which did not require registration pursuant to s 131 of the Companies Act (Cap 50, 1990 Rev Ed)) or an equitable mortgage which, for want of registration under the Companies Act, was void against the...