Tang Yoke Kheng (trading as Niklex Supply Co) v Lek Benedict and Others

JudgeChao Hick Tin JA
Judgment Date13 May 2005
Neutral Citation[2005] SGCA 27
Docket NumberCivil Appeal No 100 of 2004
Date13 May 2005
Published date16 May 2005
Plaintiff CounselP Suppiah and Elengovan Krishnan (P Suppiah and Co)
Citation[2005] SGCA 27
Defendant CounselDaniel John and Lim Fung Peen (Lim Ang John and Tan LLC),Daryll Ng and Nicole Tan (Haridass Ho and Partners)
CourtCourt of Appeal (Singapore)
Subject MatterProof of evidence,Appellant creditor alleging respondents using new company to put old company's assets out of reach from creditors,Winding up,Essential elements of fraud,Fraudulent trading,Section 340(1) Companies Act (Cap 50, 1994 Rev Ed),Respondents using new company to carry on business of old company against which winding up proceedings pending,Standard of proof,Whether respondents causing old company to conduct business with intent to defraud creditors,Evidence,Whether civil standard of proof of balance of probabilities applicable in civil cases involving fraud,Whether subjective or objective standard of honesty applicable when determining whether fraudulent intent existing,Companies

13 May 2005

Choo Han Teck J (delivering the judgment of the court):

1 This was an appeal by the appellant who had brought an action under s 340(1) of the Companies Act (Cap 50, 1994 Rev Ed) against the defendants in this suit. The company in question was Amrae Benchuan Trading Pte Ltd (“the Company”) and the first and second respondents were its directors and shareholders. The third respondent was an employee of the Company. The appellant traded in Bohemian crystalware under the name of “Niklex Supply Company” (“Niklex”) and was the erstwhile principal supplier to the Company.

2 In the course of time, the Company owed substantial trade debts to the appellant. The appellant sued for the recovery of the debts and a consent judgment was entered in Suit No 21 of 2002 against the Company in the sum of $1,070,000. The appellant managed to recover $59,710.46 by way of a Sheriff’s sale, leaving $1,010,289.54 of the judgment debt unsatisfied. The appellant then obtained a winding-up order against the Company on 19 September 2003. On 25 September 2003, the appellant commenced Suit No 864 of 2003 (the subject of this appeal). Various allegations of fraud were made, including the claim that the respondents caused the Company to continue trading with the appellant after they knew, in 1999, that the Company was insolvent; and secondly, that the respondents dissipated or caused the Company to dissipate its assets. This was allegedly done in several ways. One of the allegations was that the Company wrongfully gave loans to the respondents in 2000 and 2001. Another was that the first and second respondents caused the Company to pay salaries and bonuses to them in 2000 and 2001 (when the Company was already insolvent). Ultimately, the appellant reduced her claim to the allegation that the three respondents set up a company called Axum Marketing Pte Ltd (“Axum”), which they bought off the shelf in June 2001, and began trading through it the following month, and caused the Company to transfer goods (purchased by the Company from the appellant) to Axum. The total value of goods transferred by the Company to Axum amounted to $1,268,983.02. The appellant’s claim against the third respondent was for conspiracy, and the aiding and abetting of the s 340(1) offence by the first and second respondents.

3 In the course of the trial, the appellant adduced evidence to support her core allegation of the incidents and circumstances that she alleged constituted a breach of s 340(1) of the Companies Act. The evidence was considered and evaluated by the trial judge who formed the view that the evidence failed to prove fraud and thus dismissed the appellant’s action. The appellant appealed against that judgment. The appellant’s principal contention was that the trial judge had failed to enquire into the most relevant issue, namely, whether Axum was created to be used as an instrument of fraud, that it was used to profit the respondents by selling goods taken from the Company without payment; thus leaving the appellant as the creditor of the Company without payment and with no real recourse against the Company. The appellant averred that the trial judge misdirected himself in law in holding that the acquisition of Axum was done in good faith, and therefore there was no breach of s 340(1) of the Companies Act.

4 There are some facts that were found and considered by the trial judge, which we need to set out to complete the narrative of the commercial episode involving the parties. The business between the appellant and the Company was conducted by the first and second respondents on behalf of the Company, and one Chan Chon Tuck (“Chan”) on behalf of the appellant. The business relationship began in 1990 and spanned a period of ten years through 2000 during which time, the Company paid the appellant a total of about $5.2m in trade debts. In 1994, Chan asked for a 50% stake in the Company from the first and second respondents, on the ground that the Company owed him a huge debt on account of his generosity towards it in its business dealings with the appellant. The first and second respondents acceded to Chan’s request, and eventually, Chan was also given access to the Company’s books and financial records, which he inspected regularly. By 1998, the relationship between the first and second respondents and Chan was no longer the warm and trusting one they had shared before. It was about this time that the first and second respondents discovered that Chan had been charging exorbitant prices to the Company for the goods supplied by the appellant. Chan was also unreliable in the delivery of goods ordered from the appellant. Consequently, as the Company was not able to compete in the market, it ended with a $1.5m debt to the appellant. Strangely, in 1999 Chan asked for his stake in the Company to be increased to 70% and also to be paid a salary. Even stranger, was the first and second respondents’ agreeing to the increase although they did not agree to pay the salary Chan had demanded.

5 The Company made its last purchase of goods from the appellant in December 1999. These goods were delivered between February and April 2000. The first and second respondents also met Chan in February 2000 during which they discussed various issues relating to their business, in particular, the Company’s debts to the appellant. From about that time on, the first and second respondents also began to obtain supplies from other sources, and in June 2001, Axum was bought off the shelf to be used as a company through which the first and second respondents carried on their business. The appellant’s principal claim was that between July 2001 and June 2002, the Company sold $1,268,983.02 worth of goods to Axum at 10% more than what it paid for them. The evidence as to the reasons why the first and second respondents needed to have a new company (Axum) appeared to be, first, a fear that the appellant might wind up the Company because of the debts it owed to the appellant. There were also problems concerning the business relationship between the Company and the appellant, mainly, it seemed, because the friendship between Chan and the first and second respondents was falling apart. That, in turn, led to disagreements as to how the Company was to be run. It would be noted from the trial judge’s grounds of decision, that the first and second respondents’ allegation that Chan had a 70% stake in the Company, was not refuted. The evidence also showed that the Company had given credit notes amounting to $114,246.73 for goods rejected by Axum. Axum had, by the material time, paid up $713,831.38 of the debt it owed the Company. The trial judge accepted that the money received by the Company was used to pay directors’ fees accrued over the years rather than to pay the appellant. On these facts, the trial judge could either infer that the Company indulged in fraudulent trading, or that it had merely exercised undue preference to one creditor over another. The trial judge inferred that it was the latter.

6 The crux of the appellant’s case is contained in para 13(3) of the Re-Amended Statement of Claim that averred as follows:

The [first and second respondents] together with the [third respondent] incorporated on or about 4.6.2001 a company called Axum Marketing Pte Ltd (Axum) and caused the subject company to transfer goods bought from the [appellant] to the said Axum for the purported value of $1,268,983.02. No payments have been made by this company [Axum] to the said subject company.

The appellant maintained that her claim was not based on a conspiracy to defraud, but on the statutory cause of action under s 340(1) of the Companies Act. Section 340(1) provides as follows:

If, in the course of the winding up of a company or in any proceedings against a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the Court, on the application of the liquidator or any creditor or contributory of the company, may, if it thinks proper to do so, declare that any person who was knowingly a party to the carrying on of the business in that manner shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court directs.

Mr Suppiah, counsel for the appellant, argued that the trial judge was wrong to conclude that the evidence did not establish fraudulent trading, and instead, he came to the conclusion that it was only an instance of undue preference.

Elements of fraud

7 The approval by Lord Lane CJ in R v Grantham [1984] QB 675 at 682 (“Grantham”) of the trial judge’s summing up in that case, is often cited as a starting point in the definition of fraud in s 340(1) situations. It has been relied upon in Rahj Kamal bin Abdullah v PP [1998] 1 SLR 447 (“Rahj Kamal”) at [35]. In Rahj Kamal, the appellant was convicted for fraudulent trading. He was a director of a company that had been soliciting and collecting funds from the public in return for a promise of a large return of profits. There was no issue that the scheme itself was not bona fide, and the critical issue was whether the appellant knew about the company’s activities. He denied complicity and knowledge, but the court found otherwise. His appeal to the High Court was dismissed. Rahj Kamal was a criminal case, and there is, therefore, a separate issue regarding the onus of proof. We shall revert to that point shortly. But first, Francis Allen J, the trial judge in Grantham, whom Lord Lane CJ quoted at 681 of his judgment, stated that:

… A man intends to defraud a creditor either if he intends that the creditor shall never be paid or alternatively if he intends to obtain credit or carry on obtaining credit when the rights and interests of the creditor are being prejudiced in a way which the defendant himself knows is...

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