Panweld Trading Pte Ltd v Yong Kheng Leong

• Judgment Date: 19 March 2012
• Date: 19 March 2012
• Docket Number: Suit No 107 of 2010
• Court: High Court (Singapore)

Panweld Trading Pte Ltd

Plaintiff

and

Yong Kheng Leong and others (Loh Yong Lim, third party)

Defendant

[2012] SGHC 57

Steven Chong J

Suit No 107 of 2010

High Court

Companies—Directors—Breach of fiduciary duties—Director paying salary to non-employee

Limitation of Actions—Particular causes of action—Breach of fiduciary duty—Whether director who misapplied company assets might invoke limitation defence—Section 22 (1) Limitation Act (Cap 163, 1996 Rev Ed)

Limitation of Actions—Particular causes of action—Trust property—Accessory liability—Whether limitation defence applied—Sections 6 (7) and 22 Limitation Act (Cap 163, 1996 Rev Ed)

Limitation of Actions—Particular causes of action—Trust property—Recipient liability—Whether limitation defence applied—Sections 6 (7) and 22 Limitation Act (Cap 163, 1996 Rev Ed)

The company (‘the Plaintiff’) brought a claim for breach of fiduciary duty against one of its two directors who was also its 20% shareholder (‘the 1st Defendant’). The Plaintiff claimed that the 1st Defendant had placed his wife (‘the 2nd Defendant’) on payroll and had paid her salaries over 17 years even though she was never an employee of the Plaintiff. The Plaintiff's claim against the 2nd Defendant was based on dishonest assistance and knowing receipt. As against the 1st and 2nd Defendants, the Plaintiff sought to recover the wrongfully paid salaries totalling $873,959.20 (‘the Salary Claim’). It was not in dispute that the money had been paid to the 2nd Defendant, though the 1st and 2nd Defendants took the position that the 2nd Defendant was truly an employee of the Plaintiff. This formed one of the key factual issues at trial.

It was common ground between the parties that the claim against the 1st Defendant for breach of fiduciary duties was not time-barred under the Limitation Act (Cap 163, 1996 Rev Ed). The 2nd Defendant however argued that, even if liability against her was established, the bulk of the claim against her would have been time-barred, except for the last six years preceding the commencement of this action, so that the maximum amount recoverable against her was $338,410. This contention was vigorously challenged by the Plaintiff, and formed the key legal issue at trial. The Plaintiff's position was that the claim against the 2nd Defendant fell within s 22 (1) Limitation Act, such that the whole claim against her remained alive notwithstanding the lapse of time.

The court allowed the Plaintiff's claim, holding that the 1st Defendant had breached his fiduciary duty by misapplying the Plaintiff's funds. Pursuant to s 22 (1) Limitation Act, the 1st Defendant was barred from invoking the limitation defence, and was liable for the full measure of $873,959.20. Although both accessory liability and recipient liability were established vis-Ã -vis the 2nd Defendant, the court held that she was only jointly liable to the extent of $338,410 as the bulk of the claim against her was time-barred pursuant to s 6 (7) Limitation Act.

The court dismissed the third party action brought by the 1st Defendant against the Plaintiff's other director (‘the Third Party’). The 1st Defendant had argued that, in the event where he was found liable under the Salary Claim, he would be entitled to an indemnity or contribution from the Third Party because those payments were made with the Third Party's express approval. This was found to be without merit since the Third Party had not been aware of the salary payments made to the 2nd Defendant.

Aside from the Salary Claim, the Plaintiff also sued the 1st Defendant's son (‘the 3rd Defendant’) for wrongful payment of a month's salary. Further, it sought to recover (a) unauthorised expenses claimed and paid to the 1st Defendant; (b) rental from the Plaintiff's tenant, which were allegedly credited to the 1st Defendant's director's account; (c) repayment of secret commissions purportedly paid by the 1st Defendant to the Plaintiff's customers; and (d) monies paid based on allegedly inflated invoices raised by the fourth defendant, Sanware Engineering Services, on the 1st Defendant's instructions. By the conclusion of the trial, the claim against the 3rd Defendant was dropped and the parties reached a settlement in relation to claims (a) to (d). Consequently, the only live issues the court had to determine related to the Salary Claim.

Held, allowing the claim against the 1st Defendant for the full measure of $873,959.20 and restricting the claim against the 2nd Defendant to $338,410:

(1) The 1st Defendant breached his fiduciary duties to the Plaintiff by making salary payments to the 2nd Defendant, who was never an employee of the Plaintiff: at [37], [38] and [39].

(2) The 2nd Defendant was liable as a knowing recipient as she had received the salaries knowing that she was not a legitimate employee of the Plaintiff and that the only reason she was receiving the payments was because of the 1st Defendant's breach of fiduciary duty. As she had facilitated in the breach by acting as a convenient conduit through which the 1st Defendant could siphon money out of the Plaintiff with impunity, she was also liable as a dishonest assistant: at [38] and [39].

(3) While the reference to ‘trustee’ under the Limitation Act included implied and constructive trusts, not all constructive trusts fell within ‘trustee’ under s 22 (1) Limitation Act. Whether or not a limitation defence could be invoked depended on the nature of the constructive trust in question: at [63], [76], [78] and [79].

(4) There were, for purposes of limitation, two classes of constructive trusteeships; Class 1 comprised trusts that arose before the occurrence of the transaction impeached, whereas Class 2 comprised trusts that arose by reason of the transaction impeached. While Class 1 constructive trusteeships fell within s 22 (1) Limitation Act and are never time-barred, Class 2 constructive trusteeships were not ‘trusts’ within s 22 (1), and were therefore subject to the limitation defence: at [61], [65], [66] and [73].

(5) As evidence of Class 2 constructive trusteeships were more prone to conflicts and destruction over time, as compared to proof of the existence of an express trust or pre-existing fiduciary relationship, considerations of fairness required that time should run in favour of Class 2 constructive trustees: at [72].

(6) It had to be recognised that Class 2 ‘constructive trusts’ were not in fact ‘trusts’ in the true sense of the word, but were rather a formula for equitable relief, ie, while the defendant is liable to account as if he were a constructive trustee, he was not in fact ‘trustee’ in the true sense of the word. In light of this, the traditional use of ‘constructive trust’ language in relation to Class 2 situations was misleading and unfortunate since there were no real trust to speak of: at [74], [82] and [96].

(7) It was rightly accepted by the parties that the claim against the 1st Defendant for breach of fiduciary duty was not time-barred. The 1st Defendant was a trustee of the monies before he wrongfully paid them to the 2nd Defendant, ie, he was a Class 1 constructive trustee. Pursuant to s 22 (1) Limitation Act, he was thus barred from invoking the limitation defence and was liable for the full measure of the monies misapplied totalling $873,959.20: at [16], [57], [68], [96] and [97].

(8) Knowing recipients and dishonest assistants were Class 2 constructive trustees and could plead the limitation defence. Unlike the 1st Defendant, the 2nd Defendant, as stranger to the trust, was not a ‘trustee’ within s 22 (1) Limitation Act. The claim against her was thus partially time-barred such that the amount recoverable against her was capped at $338,410: at [80], [88], [93], [96] and [97].

(9) The Plaintiff's argument that s 22 (1) Limitation Act applied to dishonest assistants because liability of the dishonest accessory should be of the same measure as the wrongdoing principal was rejected. Although ‘a party or privy’ in s 22 (1) (a) Limitation Act might have suggested that no limitation applied to dishonest assistance claims, such an approach would have given rise to the anomalous situation where dishonest assistants were entitled to invoke the limitation defence if the breach of trust had been committed innocently, but not if the breach had been committed fraudulently, even though the dishonest assistant would have behaved equally badly in both situations. The better view was that dishonest assistants fell outside s 22 (1) (a) Limitation Act and could plead the limitation defence in both instances: at [83] and [84].

(10) As knowing receipt and dishonest assistance claims were claims for equitable relief, the limitation defence that was available to the 2nd Defendant was rooted in s 6 (7) Limitation Act. Although neither the 1st Defendant nor 2nd Defendant specifically pleaded s 6 (7), there was no prejudice caused to the Plaintiff since it had been fully aware of the limitation defence raised. More importantly, the focus on the limitation contest had been on the applicability of s 22 (1) Limitation Act, to which all relevant parties had made substantial submissions: at [62].

(11) For consistency, ‘trust’ bore the same meaning under both ss 22 (1) and 22 (2) Limitation Act. Section 22 (2) applied to trustees who had parted with trust property negligently or innocently, and was not applicable to Class 2 constructive trustees like the 2nd Defendant: at [95].

[Observation: Shareholders might, by resolution, prospectively release a director from his fiduciary duties, or retrospectively exonerate him from the consequences of his breach of any such duty. Pursuant to the principle laid down in In re Duomatic Ltd[1969] 2 Ch 365, a shareholders' resolution to this effect would not be necessary if all the shareholders had in fact assented to a particular course of action, which a general meeting of a company could have carried into effect, even...