Re IDEAGLOBAL.COM Ltd

• Jurisdiction: Singapore
• Judge: Lee Seiu Kin JC
• Judgment Date: 22 April 2000
• Neutral Citation: [2000] SGHC 65
• Date: 22 April 2000
• Docket Number: Originating Summons No 289 of 2000
• Plaintiff Counsel: Nish Shetty (Wong Partnership)
• Published date: 19 September 2003
• Court: High Court (Singapore)
• Subject Matter: Companies,Contravention of s 163(1) of Companies Act (Cap 50, 1994 Rev Ed),Whether court has jurisdiction to grant relief under s 391 from prosecution for an offence,ss 163(1) & 391(2) Companies Act (Cap 50, 1994 Rev Ed),Loan made to another company owned by director,Application for relief under s 391(2) of Companies Act (Cap 50, 1994 Rev Ed),Directors

: This is an application for relief under s 391(2) of the Companies Act (Cap 50) (`the Act`). After hearing counsel for the applicant, I dismissed the application on 17 April 2000 and set out below my grounds of decision.

Background facts

According to the affidavit filed by Mr Olivier Mougin on its behalf, the applicant is a company (`the Company`) that provides financial information and analyses to major financial institutions in Singapore and abroad. It was incorporated on 5 July 1995 and commenced operations in January 1996. Mougin said that the Economic Development Board had granted the Company `Pioneer Service` status under the Economic Expansion Incentives (Relief from Income Tax) Act which would render its revenue from its operations in Singapore free from income tax for six years. Mougin did not state the date of such grant. I understand from counsel that the situation is as follows. It takes some time for the tax free status to become effective and in mid-1998 when the relevant events occurred the tax free status had not been formally granted yet. Mougin did not exhibit in his affidavit the documents relating to the `Pioneer Service` status, nor indeed did he describe it in any detail. However in view of my holding on the position in law, it is not necessary to procure the information and documents. I am content to assume the facts as stated in Mougin`s affidavit and as clarified by counsel.

According to Mougin, the Company was profitable at an early stage and had operated since inception on a self-financing basis. The Company had no substantial creditors and no outstanding shareholders` loans. In fact a sizeable cash balance was built up after a few years and the management proposed to return a substantial part of it to the shareholders in the form of dividends. The manner in which they went about achieving this is summarised in paras 11 to 16 of Mougin`s affidavit:

11 On 15 May 1998, an extraordinary general meeting was convened to approve inter alia the payment of the sum of USD4m by way of tax exempt dividends to the shareholders of the applicant company. The EGM was convened in consultation with the Company`s advisors, particularly the company`s legal advisors. ...

12 The proposed payment of a tax-exempt dividend totalling USD4m was approved by the shareholders at the EGM. Further to the approval, a dividend of USD4m was paid out on 3 June 1998.

13 On or about 26 June 1998, it was brought to the Company`s attention by their advisors that there were insufficient tax credits at that point in time for the dividend declared and paid. This would have meant that the dividend paid out would not have been tax-exempt and the shareholders would have been exposed to adverse tax consequences.

14 The Company then sought advice from its legal advisors and tax advisers on how to resolve the issue as the dividend had already been declared and paid...The Company was advised that the payment to the shareholders could be treated as an `Advance` or a loan to the shareholders pending receipt of the tax credits from the authorities. This advance could then be set off against the tax exempt dividends, once declared.

15 The Company accepted this advice and with the help of the Company`s legal advisors, the Company sought from its shareholder approval to treat the payments made as advances. This was done by way of a memorandum to that effect. ...

16 Based on the advice given, a second payment of a total of USD7.75m was made on 4 August 1998. This sum was also to be treated as an advance pending the receipt of exempt income balance from the IRAS. ...

It turned out that one of the shareholders of the Company, Pinewood Investments Pte Ltd (`PIPL`), was owned and controlled by a director of the Company, Mr Shirish Modi, who is also its chairman and CEO. When Modi entered into employment with the Company he was offered an option to purchase shares at 1996 prices. Modi exercised this option in 1998 but chose to purchase the shares in the name of PIPL. This fact was known to all the other shareholders of the Company as well as to its legal advisors and the company secretary.

The legal issue

The problem confronting the Company and its directors is that there is a loan extended by the Company to PIPL, which is owned by one of the directors of the Company, putting them in breach of s 163(1) of the Companies Act. Subsections (1) and (7) of s 163 provide as follows:

(1) Subject to this section, it shall not be lawful for a company (other than an exempt private company) -

(a) to make a loan to another company; or

(b) to enter into any guarantee or provide any security in connection with a loan made to another company by a person other than the first-mentioned company,

if a director or directors of the first-mentioned company is or together are interested in shares in the other company of a nominal value equal to 20% or more of the nominal value of its equity share capital.

...

(7) Where a company contravenes this section, any director who authorises the making of any loan, the entering into of any guarantee or the providing of any security contrary to this section shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $20,000 or to imprisonment for a term not exceeding 2 years.`

It would appear that the Company had contravened s 163(1) and by virtue of s 163(7), the directors who authorised the loan would have committed an offence and be liable on conviction to a fine up to $20,000 or to imprisonment of up to two years. The Company`s position is that the loan was made pursuant to legal advice, albeit given wrongly, and without knowledge that s 163(1) would be contravened. The directors and the Company had acted bona fide throughout for the legitimate purpose of tax avoidance. Had they known that this would contravene any law, they would not have proceeded with this course of action. No person had been prejudiced by this action. Hence the Company and directors prayed for relief to be granted under s 391 of the Act, which provides as follows:

Power to grant relief

(1) If in any proceedings for negligence, default, breach of duty or breach of trust against a person to whom this section applies it appears to the court before which the proceedings are taken that he is or may be liable in respect thereof but that he has acted honestly and reasonably and that, having regard to all the circumstances of the case including those connected with his appointment, he ought fairly to be excused for the negligence, default or breach the court may relieve him either wholly or partly from his liability on such terms as the court thinks fit.

(2) Where any person to whom this section applies has reason to apprehend that any claim will or might be made against him in respect of any negligence, default, breach of duty or breach of trust he may apply to the Court for relief, and the Court shall have the same power to relieve him as under this section it would have had if it had been a court before which proceedings against him for negligence, default, breach of duty or breach of trust had been brought.

(3) The persons to whom this section applies are -

(a) officers of a corporation;

(b) persons employed by a corporation as auditors, whether they are or are not officers of the corporation;

(c) experts within the meaning of this Act; and

(d) persons who are receivers, receivers and managers or liquidators appointed or directed by the Court to carry out any duty under this Act in relation to a corporation and all other persons so appointed or so directed.`

The relief sought is against prosecution of the directors of the Company under s 163(7) for contravention of s 163(1) of the Act. The first question is that of jurisdiction, ie whether the Court has powers to grant relief under s 391 from prosecution for an offence. Section 391(1) relates to proceedings that have actually been brought against a person and provides that the court may relieve him in whole or in part from liability in that action. That is not the case here, where no proceedings against any director have been taken out. The Company is applying under s 391(2), where an action is apprehended. However the difficulty faced by the Company is that s 391(2) relates to a ` claim ` that might be made against a person ` in respect of any negligence, default, breach of duty or breach of trust `. Although the terms `default` and `breach of duty` could conceivably relate to an offence, the others, namely, `negligence` and `breach of trust` clearly do not. Taken as a group, these words do not suggest that criminal breaches are within their contemplation. More importantly, the word `claim` clearly has no application to a prosecution for an offence.

Counsel argued that s 391(2) should be read together with s 391(1) because the same powers of relief are vested in both subsections. The first subsection relates to the situation where proceedings have been taken out against the applicant and the second where the applicant apprehends that such proceedings may be taken out. Therefore the word `claim` in sub-s (2) should bear the same meaning as the word `proceedings` in sub-s (1). A necessary further argument would be that the word `proceedings` is wide enough to cover a prosecution for an offence. The difficulty I have with this argument is that it is equally logical to say that the word `claim` in sub-s (2) indicates that the intention of the legislature was to limit the word `proceedings` in sub-s (1) to matters in which the word `claim` is appropriate, ie to civil proceedings in which any party would have grounds to make a claim against the applicant. Subsection (2) also uses the word `proceedings` to describe the action referred to in sub-s (1) and therefore it cannot be said that the use of the word `claim` was not deliberate.

Counsel submitted that s...