Parakou Investment Holdings Pte Ltd and another v Parakou Shipping Pte Ltd (in liquidation) and other appeals

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ
• Judgment Date: 17 January 2018
• Neutral Citation: [2018] SGCA 3
• Docket Number: Civil Appeals Nos 55, 56, 57 and 58 of 2017
• Date: 17 January 2018
• Published date: 20 January 2018
• Plaintiff Counsel: Siraj Omar and Premalatha Silwaraju (Premier Law LLC),Sim Chong, Yap Hao Jin and Tee Lim Min Joan (Sim Chong LLC),Lok Vi Ming SC, Lee Sien Liang Joseph, Justin Chan and Natalie Joy Huang Kim Lian (LVM Law Chambers LLC)
• Defendant Counsel: Edwin Tong SC, Kenneth Lim Tao Chung, Chua Xinying, Yu Kexin, Nigel Yeo Kok Quan, Rebecca Chia Su Min and Wong Pei Ting (Allen & Gledhill LLP)
• Court: Court of Appeal (Singapore)
• Hearing Date: 07 November 2017
• Subject Matter: Directors,Avoidance of transactions,Companies,Transactions at an undervalue,De facto,Insolvency law,Duties,Shadow directors

Andrew Phang Boon Leong JA (delivering the judgment of the court): Introduction

Parakou Shipping Pte Ltd (“Parakou”) is a company in liquidation. These appeals involve claims by its liquidator (“the Liquidator”) against its directors (“the Directors”) and their related companies (collectively, “the Defendants”) in respect of various transactions entered into by Parakou around the time of its insolvency. The Liquidator claims that the transactions were designed to strip Parakou of its assets and were in breach of the fiduciary duties of the Directors, and that the related companies were dishonest assistants and/or knowing recipients with regard to these wrongdoings. The Defendants assert, on the other hand, that these transactions were part of a pre-existing plan to restructure Parakou.

The High Court judge (“the Judge”) found primarily for the Liquidator based largely on the inexplicable haste with which the transactions had been entered into (see Parakou Shipping Pte Ltd (in liquidation) v Liu Cheng Chan and others [2017] SGHC 15 (“the Judgment”)). However, he exonerated the Defendants from liability for certain transactions which preserved the profits of Parakou and reduced its losses. The parties now challenge most of the findings that went against them in their respective appeals.

For the reasons set out below, we dismiss the appeals save for one narrow point each in favour of the Liquidator and the Defendants. At this particular juncture, it would be apposite to first set out the relevant background to the present appeals.

Background

Parakou was incorporated in 1995 with Mr Liu Cheng Chan (“C C Liu”) and his wife, Mdm Chik Sau Kam (“Chik”), as its shareholders and directors. Mr Liu Por (“Liu Por”), the son of C C Liu and Chik, became a shareholder in 2005, Vice-President in 2006, and a director in 2008. Mr Yang Jianguo (“Yang”), a family friend of the Lius, was appointed President in 2006 and became a shareholder and a director in 2008. C C Liu and Chik stepped down as directors and divested themselves of their shares in 2008.

By 2007, Parakou had the following three lines of business: an outer port limit services business (“the OPL Business”), which was to provide offshore supply vessel services to ships in and around Singapore; a ship management business (“the Ship Management Business”); and a ship chartering business (“the Chartering Business”).

In or around 2008, Parakou purportedly entered into a charterparty with Galsworthy Limited (“Galsworthy”) for a ship named the Canton Trader, which Parakou planned (in turn) to sub-charter to Ocean Glory Shipping Ltd (“Ocean Glory”).

On 15 September 2008, however, the collapse of the global financial services firm, Lehman Brothers, triggered a worldwide financial crisis. The freight market plummeted. This severely affected the Chartering Business of Parakou.

On 30 October 2008, Parakou received an email warning it to “pay sharp attention to the financial condition” of Ocean Glory, which had re-delivered a vessel that it had chartered from another entity “earlier than the minimum period with extremely short notice”.

On 31 October 2008, Parakou received the original copies of the charterparty for the Canton Trader from Galsworthy. However, Parakou never signed the charterparty. Galsworthy eventually brought and succeeded in an action against Parakou in respect of this charterparty (“the Galsworthy Claim”).

Thereafter, Parakou engaged in the conduct that forms the subject matter of these proceedings, which conduct we broadly categorise as “the Disputed Transactions” and “the Legal Proceedings”.

The Disputed Transactions

In November 2008, Parakou sold 10 vessels and two uncompleted hulls (collectively, “the OPL Vessels”) to Parakou Investment Holdings Pte Ltd (“PIH”). At all material times, C C Liu, Chik, and Liu Por were directors and shareholders of PIH, with C C Liu holding 70% of the shares in PIH.

With effect from 30 November 2008, Parakou terminated 12 ship management agreements (“SMAs”) that it had entered into with 12 companies (“the 12 Pretty Entities”). The 12 Pretty Entities were controlled by C C Liu, Chik, Liu Por, and another son of C C Liu. Thereafter, the 12 Pretty Entities entered into contracts on substantially the same terms with Parakou Shipmanagement Pte Ltd (“PSMPL”). PSMPL had been incorporated on 18 November 2008 to take over the OPL Business and Ship Management Business of Parakou. The parties do not dispute that these acts effected a “transfer” of the SMAs from Parakou to PSMPL.

Between 12 and 24 November 2008, Parakou repaid debts of S$9,812,543 that it had owed to PIH (“the PIH Repayments”). These payments were approved by Liu Por and Yang.

On 5 December 2008, Parakou repaid debts of S$3,046,200 to Parakou Shipping SA (“the PSSA Repayment”). Parakou Shipping SA was wholly owned by C C Liu, and controlled by C C Liu as well as Chik. This payment was approved by Yang.

On 9 and 15 December 2008, Parakou set off a total of S$1,732,239 of debts that PIH owed to it in respect of the purchase of the OPL Vessels against debts that it owed to PIH for charter hire (“the PIH Set-Off”). This set-off was approved by Liu Por and Yang.

On 12 December 2008, Parakou paid a total of S$267,128 in bonuses to all four of the Directors (“the Bonus Payments”). Around the same time, Parakou increased the monthly salaries of Liu Por and Yang by S$2,000 each with effect from 1 January 2009 (“the Salary Increases”). Pursuant to these increases, Liu Por and Yang received a total of S$108,000 between January 2009 and March 2011.

On 22 December 2008, C C Liu and Chik transferred their shares in Parakou to Liu Por and Yang, and appointed them as directors in Parakou. With effect from 31 December 2008, C C Liu and Chik resigned as directors in Parakou.

On 23 December 2008, Parakou released 39 employees who had been affected by the termination of the SMAs with the 12 Pretty Entities. This decision was effected by way of a board resolution signed by Liu Por and Yang (“the 23 December 2008 Resolution”). These 39 employees were subsequently hired by PSMPL in January 2009. Nevertheless, Parakou continued to pay the salaries of six of these employees from January 2009 to December 2010. These payments total S$309,377 (“the Six Employees’ Salary Payments”).

Between January 2009 and December 2010, Parakou paid S$240,000 to PIH in respect of space that PIH had leased from a third party and then sub-tenanted to Parakou. This transaction gave rise to a claim by the Liquidator below (but which was not pursued by the parties on appeal) that Parakou had overpaid S$213,270 in rent (“the Excess Rent Payments”).

The Legal Proceedings

In the midst of the Disputed Transactions, on 11 February 2009, Parakou informed Galsworthy that it would not execute the charterparty for the Canton Trader. Galsworthy then commenced arbitration proceedings against Parakou in London (“the London Arbitration”). In response, Parakou commenced court proceedings in Hong Kong against the owners and/or demise charterers of the Jin Kang (formerly, the Canton Trader) for an indemnity in respect of any liabilities that it might incur in the London Arbitration (“the HK Court Proceedings”).

During the London Arbitration, Liu Por and Yang admitted that if a valid charterparty did in fact exist between Parakou and Galsworthy, Parakou would be liable for damages of at least US$2,670,000. Shortly thereafter, the tribunal issued a decision finding that there had been a valid charterparty and ordering Parakou to pay interim damages of US$2,673,279 to Galsworthy with further damages to be assessed (“the First Award”). Around the same time, the HK Court Proceedings commenced by Parakou were struck out as a collateral attack on the London Arbitration and as an abuse of process.

In March 2011, Parakou entered provisional liquidation.

In April 2011, Parakou entered creditors’ voluntary liquidation.

In May 2011, the London tribunal assessed further damages of US$38,579,000 against Parakou (“the Second Award”).

Parakou incurred a total of S$6,223,238 in legal fees for both the London Arbitration and the HK Court Proceedings.

The decision below

The Judge found at the outset that there had been no restructuring plan. The board resolution of March 2008 (“the March 2008 Resolution”) on which the Defendants relied in support of their case that there had been such a restructuring plan did not, in his view, hold up against the other objective evidence.

The Judge held that most of the Disputed Transactions were in breach of the statutory and/or the fiduciary duties of the Directors: The sale of the OPL Vessels was a transaction at an undervalue under the Companies Act (Cap 50, 2006 Rev Ed) read with the Bankruptcy Act (Cap 20, 2009 Rev Ed), as well as a breach of the fiduciary duties of the Directors. The gross sale price was S$9,905,600. This was S$1,192,900 less than what they could have fetched had the Directors not rushed the transaction and not sold the OPL Vessels to a related company. The transfer of the SMAs to the 12 Pretty Entities was a transaction at an undervalue because Parakou received no consideration for the transfer. Even so, the transfer of the SMAs was not a breach of the fiduciary duties of the Directors because the Ship Management Business had been loss-making for Parakou. The Bonus Payments were undervalue transactions as well as breaches of the fiduciary duties of the Directors. The bonuses were paid to the Directors even though Parakou was not contractually obliged to do so. Further, Parakou received no consideration for making the Bonus Payments. The Six Employees’ Salary Payments were transactions at an undervalue as well as breaches of the fiduciary duties of the Directors. The six employees had left Parakou by the time the Six Employees’ Salary Payments were made. Further, Parakou received no...