Panweld Trading Pte Ltd v Yong Kheng Leong and others (Loh Yong Lim, third party)

• Judge: Steven Chong J
• Judgment Date: 19 March 2012
• Neutral Citation: [2012] SGHC 57
• Citation: [2012] SGHC 57
• Court: High Court (Singapore)
• Published date: 09 April 2013
• Docket Number: Suit No 107of 2010
• Plaintiff Counsel: Foo Maw Shen, Daryl Ong and Wong Ping Siang (Rodyk & Davidson LLP)
• Defendant Counsel: Singa Retnam (Kertar & Co) and Nirmala Ravindran (Low Yeap Toh & Goon),Siva Krishnasamy and James Selvaraj (Tan Lee & Partners),Burton Chen and Winston Yien (Tan Rajah & Cheah)
• Subject Matter: Companies,directors,breach of fiduciary duties,Limitation of actions,trust property,accessory liability,knowing receipt
• Hearing Date: 02 November 2011,04 November 2011,24 October 2011,10 November 2011,27 October 2011,25 October 2011,08 November 2011,28 October 2011,31 October 2011,01 November 2011,09 November 2011,09 February 2012,03 November 2011

Steven Chong J: Introduction

This case arose from the alleged mismanagement of a company by a director who was also its 20 percent shareholder. There were only two directors at the material times, and the other director owns the balance 80 percent shareholding. This case gives new meaning to the phrase “family-run business”. It is alleged by both directors that each had placed their wives, daughter and son and even a mistress on the company’s payroll even though none of them were ever truthfully employees in the strict sense of the word.

So what brought about the disharmony which led to this action? In or around March 2009, the minority shareholder informed the majority shareholder that the company needed a bank loan to secure a performance bond for a potential project as the funds of the company were running low and that the company’s expenses had increased. This prompted the majority shareholder to look into the company’s finances as he had always been under the distinct impression that the company’s finances were healthy. Certified public accountants, BDO LLP (“BDO”) were engaged to conduct a forensic examination of the accounts. The investigations eventually exposed many alleged financial misdeeds by the minority shareholder, including the fact that his wife was paid salaries for 17 years, even though she had never reported for work. When the minority shareholder was confronted that his wife was a “phantom” employee who has been receiving salaries from the company without any proper basis, he retorted by alleging that the majority shareholder had likewise placed his wife and even his mistress on the payroll albeit over a shorter period.

As the salary payments were made over 17 years, not unexpectedly, limitation of action became a key legal issue in this dispute. In this regard, it is common ground between the parties that if the minority shareholder/director is found to be in breach of his fiduciary duties in causing the company to pay salaries to the “phantom” employee, the claim against him would not be statute barred. However, it is contended by the minority shareholder’s wife who received the salary payments that she would nonetheless be entitled to invoke the limitation defence, notwithstanding that limitation may not be available to her husband. This raises an interesting question of whether there is any rational basis to justify the availability of the limitation defence to an accessory in circumstances when the principal wrongdoer is unable to rely on it.

The Parties

The plaintiff, Panweld Trading Pte Ltd (“Panweld”), is a local private company and is in the business of manufacturing spray painting booths as well as other repair and engineering works.

The 1st defendant, Yong Kheng Leong (“Mr Yong”), was appointed as a director of Panweld on or around 15 May 1985 and remained so until his resignation on 21 May 2009. There is some dispute as to whether he was Panweld’s Managing Director, which he denies¹, but nothing really turns on his disputed status as Managing Director. However, it is not disputed that Mr Yong was at least its General Manager.²

The 2nd defendant, Lim Ai Cheng (“Mdm Lim”), and the 3rd defendant, Yong June Meng Gary, are the wife and son of Mr Yong respectively, while the 4th defendant, Sanware Engineering Services (“Sanware”), was one of Panweld’s suppliers of spare parts and machinery. All dealings between Sanware and Panweld were conducted through Mr Yong.

The third party, Mr Loh Yong Lim (“Mr Loh”), was and still is a director of Panweld and the majority shareholder, who owned 80 percent of the shares in Panweld until December 2001, when he transferred 20 percent of his shareholding to his son, Mr Loh Chiang Tien. Mr Loh’s son was also appointed a director of Panweld in April 2002. The balance 20 percent was and still remains held by Mr Yong. The Third Party claim was brought by Mr Yong against Mr Loh on the basis that if he is found to be liable to Panweld for the salary payments to Mdm Lim, he should be entitled to an indemnity/contribution from Mr Loh because the payments were made with his knowledge and approval.³ The Third Party action would logically be a non-starter if I find that Mr Loh was not aware and/or did not approve the salary payments to Mdm Lim. In my view, the Third Party action was ill-advised because if Mr Loh had approved the payments, Mr Yong would not be liable. On the other hand, if there was no approval, there can be no recourse against Mr Loh for any indemnity. In either event, there is no merit in the Third Party action.

In the course of the trial, the claim against the 3rd defendant for the wrongful payment of a month’s salary was sensibly dropped as it only involves a very small sum of money.

At the conclusion of the trial, the claim against Sanware was amicably settled in circumstances which I will elaborate upon below.

The claims

When the trial started, Panweld pursued five independent heads of claim against the various defendants. All heads of claim arose from the alleged mismanagement of Panweld by Mr Yong. The largest claim relates to salaries paid to Mdm Lim from 1992 to 2009 amounting to the total sum of $873,959.20. Panweld claims that Mdm Lim was a “phantom” employee and was therefore wrongfully paid.

The other four claims comprise: the sum of $226,636 being rental paid by Panweld’s tenant, Sun Power Engineering, which were wrongly credited to Mr Yong’s director’s account with Panweld; the sum of $178,810.01 being unauthorised expenses claimed and paid to Mr Yong; the sum of $35,238.68 being secret commissions purportedly paid by Mr Yong to Panweld’s customers; and the sum of $95,261 being the amount which was refunded and received by Mr Yong in respect of inflated invoices raised by Sanware on the instructions of Mr Yong.

At the close of the trial on 9 February 2012, the parties reached a settlement on the above four claims, without admission of liability, on the following terms: Panweld shall retain the sum of $265,000 which was paid by Mr Yong to Panweld prior to the commencement of the action; Mr Yong withdraws his counterclaim in this action; Mr Yong relinquishes all his rights in respect of the balance sum standing in his director’s account with Panweld; as a consequence of the above settlement, Sanware is released from all further liabilities with no order as to costs against Sanware; and the costs in respect of the four claims shall follow the event of the remaining claim for the salaries paid to Mdm Lim.

Salaries paid to Mdm Lim

This decision will therefore only deal with the remaining claim of the salaries which were paid and received by Mdm Lim. It is not in dispute that for 17 years, from 1992 to 2009, Mdm Lim was paid a total sum of $873,959.20 as a “marketing executive” of Panweld.⁴ Mdm Lim’s salary payments were duly recorded in Panweld’s monthly payroll records. In addition, payments for Mdm Lim’s Central Provident Fund (“CPF”) contributions were regularly made by Panweld. Further, income tax returns (“IR8A”) were also prepared by Panweld’s accountants, Mr Quek Siew Ping (“Mr Quek”) and his predecessor, the late Mr Michael Loh, on behalf of Mdm Lim in respect of her salaries.

Panweld claims that Mdm Lim was a “phantom worker” in the sense that she was not an employee of Panweld as she had never reported for work at the office, nor rendered any service to Panweld.⁵ Panweld claims that Mr Yong had acted in breach of his fiduciary duty as a director of Panweld in channelling funds belonging to Panweld in the guise of the salary payments to Mdm Lim.⁶ Panweld also claims that, by reason of Mdm Lim’s knowing receipt of the wrongful salary payments and/or dishonest assistance in Mr Yong’s breach, she holds those sums on constructive trust for and on behalf of Panweld.⁷

Both Mr Yong and Mdm Lim deny liability on several grounds: Mdm Lim was employed as a marketing executive of Panweld with the knowledge and approval of Mr Loh⁸; Mdm Lim had in fact rendered services to Panweld as a marketing executive⁹; and the bulk of Mdm Lim’s salary was in fact paid from Mr Yong’s salary increments, car allowance and bonuses.¹⁰

At the close of the trial on 9 February 2012, Counsel for Mr Yong and Mdm Lim, Mr Singa Retnam (“Mr Retnam”) accepted that, in the event that the salary payments are found to have been paid in breach of Mr Yong’s fiduciary duties, the claims against Mr Yong would not be barred by the Limitation Act (Cap 163, 1996 Rev Ed) (“the Limitation Act”). This is certainly the correct position to take, as will be elaborated upon later. However, Mr Retnam argued that even if Mr Yong is found to have acted in breach of his fiduciary duties, Mdm Lim is nonetheless entitled to avail herself of the defence of limitation under s 6 of the Limitation Act, ie, even if Mdm Lim is found to be liable to account as a constructive trustee, time had begun to run against Panweld from the dates of each payment and, consequently, the bulk of the claim against her is time barred, except for the last six years preceding the commencement of this action from 2004 to 2009. In this connection, it is agreed by both parties that if Mdm Lim is found not to fall within s 22(1) of the Limitation Act, the recoverable amount would be restricted to $338,410 instead of $873,959.20.

The evolving defences raised by Mr Yong and Mdm Lim

It is perhaps apposite to commence this inquiry by first examining the pleaded defence of Mr Yong and Mdm Lim and to see how it has evolved over time. It is pertinent to highlight that the defence, which was jointly filed by Mr Yong and Mdm Lim, underwent several changes. When the defence was first filed on 11 March 2010, Mr Yong claimed that Mr Loh had placed his wife (“Mrs Loh”) and mistress (“Sook Min”) on the payroll in March 1995, even though neither of them were employees of Panweld in any meaningful way.¹¹ When Mr Yong expressed...