Pang Yong Hock and Another v PKS Contracts Services Pte Ltd

• Jurisdiction: Singapore
• Judge: Chao Hick Tin JA
• Judgment Date: 19 April 2004
• Neutral Citation: [2004] SGCA 18
• Date: 19 April 2004
• Subject Matter: Legislative intention behind s 216A Companies Act (Cap 50, 1994 Rev Ed),Whether appropriate to grant leave under s 216A of Companies Act,Derivative action,Shareholders owning 50% of company's shares wanting to commence proceedings in name and on behalf of company,Companies,Oppression
• Docket Number: Civil Appeal No 103 of 2003
• Published date: 27 April 2004
• Defendant Counsel: Hee Theng Fong and Yu Siew Fun (Hee Theng Fong and Co)
• Court: Court of Appeal (Singapore)
• Plaintiff Counsel: Gregory Vijayendran and Linda Wee (Wong Partnership)

19 April 2004

Tay Yong Kwang J:

1 This appeal arose out of Originating Summons No 1597 of 2002 which was an application by the appellants, Pang Yong Hock (“Pang”) and Lee Kim Swee (“Lee”), under s 216A of the Companies Act (Cap 50, 1994 Rev Ed) for leave to commence proceedings in the name of the respondent (“the company”) against two of its directors, Koh Hwee Meng (“Koh”) and his wife, Tan Sok Khin (“Tan”), for alleged breaches of their duties as directors of the company. The originating summons was heard by Choo Han Teck J who delivered an oral judgment dismissing it. We dismissed the appeal by Pang and Lee for the reasons that follow.

The factual background

2 The company was registered in Singapore in August 1996. It is involved in the business of building construction, specialising in interior decoration, repair and redecoration, as well as additions and alteration works. The shareholders and their respective shareholdings are as follows:

(a) Pang 22%

(b) Lee 28%

(c) Koh 20%

(d) Tan 30%.

Each of the two factions therefore holds 50% of the shares of the company.

3 The four shareholders are also directors of the company. However, there is no deadlock at the board of directors’ level as there is a fifth director, Lim Chong Huat, the husband of Tan’s niece, whose allegiance is naturally with the Koh-Tan faction.

4 The Pang-Lee faction alleged that in March 2002, Pang stumbled upon a series of payment records documenting payments made to various parties including the company’s subsidiary, PK Summit Pte Ltd (“PK Summit”). Pang and Lee alleged that they were not aware of such payments. Pang and Koh are directors of PK Summit. Until March 2003, Koh also held 77.5% of the shares of PK Summit. Pang and Lee therefore began to suspect that Koh and Tan were abusing their powers as directors of the company although they did not have evidence of any wrongdoing.

5 Pang questioned Koh and Tan about the said payments and asked that he be allowed to inspect the company’s documents but was denied this request. Koh, purporting to act on behalf of the company, then terminated Pang’s employment as Project Controller of the company. Subsequently, Pang was also removed as a signatory for the company’s bank account. Pang and Lee alleged that all this was done in bad faith to prevent Pang from making further inquiries into the company’s affairs.

6 In August 2002, Pang and Lee obtained an order of court pursuant to ss 199(3) and 396(2) of the Companies Act to inspect the accounting and other records of the company and of PK Summit. The court authorised the appointment of Mr Chee Yoh Chuang, an auditor, to act on behalf of Pang to inspect the said records. After his inspection, Mr Chee prepared a report on the nature of the transactions undertaken by the company and by PK Summit and the completeness of the records supporting those transactions.

7 On 7 October 2002, Pang and Lee gave 14 days’ notice to the directors of the company, as required by s 216A(3)(a) of the Companies Act, to bring an action against Koh and Tan in respect of payments made by the company to PK Summit and of transactions concerning other companies. On 24 October 2002, a reminder was sent to the directors. However, the company did not convene a directors’ meeting to discuss the same. On 6 November 2002, Pang and Lee commenced their originating summons, the subject of this appeal.

The decision of the trial judge

8 On 27 January and 27 February 2003, Choo J made preliminary orders appointing Mr Chan Ket Teck of PricewaterhouseCoopers as a special accountant to perform an independent review of the accounting records of the company on terms of reference subsequently agreed between the parties. The special accountant prepared a report on 14 April 2003.

9 On 2 September 2003, Choo J dismissed the originating summons. He found the special accountant’s report to be sufficiently detailed and that it indicated there were strong prima facie grounds for a fuller inquiry but not necessarily against Koh and Tan only.

10 The paper trail showed that contracts were signed with PK Summit, a shell company with no employees, and the work under those contracts was carried out by the company’s own employees. Pang alleged a sum of $385,086.90 was paid by the company to PK Summit without any value having been given by PK Summit. The report referred to unusual transactions between the company and AA Pyrodor Development Pte Ltd (“AAP”), an entity in which the company and Koh are shareholders. The special accountant was of the view that the margin earned by AAP in the works carried out under a sub-contract from the company was unusually low. There were also payments made to two suppliers of labour where the description in the invoices lacked the details necessary to enable the special accountant to determine the reasonableness of the amounts paid. Further, there were payments made to relatives of the directors and to Tan which were not fully accounted for.

11 Choo J opined, having perused the detailed disputes concerning the various payments and the alleged breaches of directors’ duties on the part of Pang, Lee, Koh and Tan, that the allegations and counter-allegations could not be satisfactorily proved or disproved by affidavit evidence alone. He accepted from the report that there were aspects of the conduct of the company that required a more thorough inquiry but was of the view that that was only evidence that a fuller inquiry was required. The parties before us referred to this ground compendiously as the “affidavit evidence reason”.

12 The judge next dealt with what was termed the “counter-suits reason”. He held that granting leave to Pang and Lee to sue in the name of the company was not the best solution as the court would also have to grant leave to Koh and Tan to pursue their counter-allegations against them. Although Koh and Tan had not made an application under s 216A of the Companies Act, the court would only be burdened with a late application by them. The judge was of the view that “the prospect of two sets of directors each suing and counter-suing in the name of the company is inappropriate, if not farcical”.

13 Pang was at the material times also a director and shareholder of PK Summit. In view of Pang’s and Lee’s positions in the company and Pang’s position in PK Summit, there was a duty on their part to inquire, if not investigate fully, all reasonable suspicions of impropriety by other directors as soon as they arose. The judge felt that Pang and Lee were slack in picking up the matters they were complaining about and he took into account their “sudden burst of allegations” in his overall assessment on whether their application ought to be granted. The parties referred to this ground as the “delay reason”.

14 Finally, the judge held that winding up the company was a much more sensible and desirable solution since the company was not doing well and “the inability of the two factions to co-exist itself portends no future for this partnership in a company’s clothing”. A professional liquidator would be able to investigate the company’s affairs and take the appropriate action after studying the special accountant’s report and the affidavits filed in the originating summons. This was the “winding up reason”.

The appeal

15 The thrust of the appellants’ case was that Choo J erred in concluding that Pang and Lee failed to satisfy the requirements of s 216A of the Companies Act. Subsections (2) and (3) of that section provide:

(2) Subject to subsection (3), a complainant may apply to the Court for leave to bring an action in the name and on behalf of the company or intervene in an action to which the company is a party for the purpose of prosecuting, defending or discontinuing the action on behalf of the company.

(3) No action may be brought and no intervention in an action may be made under subsection (2) unless the Court is satisfied that —

(a) the complainant has given 14 days’ notice to the directors of the company of his intention to apply to the Court under subsection (2) if the directors of the company do not bring, diligently prosecute or defend or discontinue the action;

(b) the complainant is acting in good faith; and

(c) it appears to be prima facie in the interests of the company that the action be brought, prosecuted, defended or discontinued.

It was not in dispute that sub-s (3)(a) was complied with. The contentions centred on the conditions specified by sub-ss (3)(b) and (3)(c).

16 In Teo Gek Luang v Ng Ai Tiong [1999] 1 SLR 434, a director holding 25% of the issued and paid-up capital of a company applied under s 216A of the Companies Act for leave to commence a representative action, in the name and on behalf of the company, against its managing director to recover a sum of money allegedly withdrawn unlawfully by him. Lai Kew Chai J held that the plaintiff’s delay in making the application, the less than happy circumstances under which she left the employ of the company, and her personal disputes with the managing director, were not sufficient to evidence bad faith on her part. The judge adopted the approach stated by the Ontario Court of Appeal in Richardson Greenshields of Canada Ltd v Kalmacoff (1995) 123 DLR (4th) 628 that before granting leave, the court should be satisfied that there was a reasonable basis for the complaint and that the action sought to be instituted was a legitimate or arguable one. He also held that the court at the leave stage was not called upon to adjudicate on the disputes of facts and inferences but was to rely merely on affidavit evidence. As he concluded that there was “some substance in her complaint”, Lai J granted the plaintiff leave to...