Pacific Recreation Pte Ltd v S Y Technology Inc and Another Appeal

• Judge: Chan Sek Keong CJ
• Judgment Date: 16 January 2008
• Neutral Citation: [2008] SGCA 1
• Citation: [2008] SGCA 1
• Defendant Counsel: Foo Maw Shen and Ong Wei Chin (Yeo Wee Kiong Law Corporation)
• Published date: 17 January 2008
• Plaintiff Counsel: Chia Ho Choon and Leow Yuan An Clara Vivien (KhattarWong)
• Date: 16 January 2008
• Docket Number: Civil Appeals Nos 136 and 137 of 2006
• Court: Court of Appeal (Singapore)
• Subject Matter: Evidence,Deed of indemnity as security for financial assistance under void contract,Determining existence of substantial and bona fide dispute,Contract,Winding up,Conflict of Laws,Court deciding case on ground not raised by parties,Companies,Guarantees and indemnities,Factors pointing away from implied choice of Chinese law but not towards Singapore law,Whether indemnity's enforceability independent of underlying contract's validity,Duties of solicitor engaging foreign law expert,Choice of law,Admissibility of evidence,Applicable standard,Whether there was breach of audi alteram partem principle,Foreign law,Applicable principles,Deed without express choice of law clause,Whether court could evaluate evidence,Judges,Courts and Jurisdiction,Credit and Security,Whether there was implied choice of Singapore or Chinese law,Requirements for expert report,Duties of foreign law expert,Which law having closest and most real connection with contract,Contracts of indemnity,Order 40A rr 2, 3 Rules of Court (Cap 322, R 5, 2006 Rev Ed),Natural justice,Expert opinion

16 January 2008

V K Rajah JA (delivering the grounds of decision of the court):

1 S Y Technology Inc, the respondent in the present appeals (“the respondent”), applied to wind up Pacific Associates Pte Ltd (“PAPL”) and Pacific Recreation Pte Ltd (“PRPL”) in Companies Winding Up Nos 69 and 68 of 2006 respectively. These applications were granted by the court below: see S Y Technology Inc v Pacific Recreation Pte Ltd [2007] 2 SLR 756 (“the GD”). Both PAPL and PRPL appealed. We dismissed both appeals and now give our reasons. For the purposes of these grounds of decision, PAPL and PRPL will be collectively known as “the appellants”.

Factual background

2 The appellants’ managing director is Mr Lee Chong Ming (“Mr Lee”), who is currently resident in Canada. Mr Lee and the appellants owned shares in Laien Holdings Pte Ltd (“Laien”) when it was first incorporated. Laien is the parent company of Shanghai Pacific Club Co Ltd (“Shanghai Pacific”), a company incorporated in the People’s Republic of China.

3 Shanghai Pacific required additional financing for a project to develop a club in Shanghai (“the project”). Mr Lee approached Mr John Shih, the director and sole shareholder of the respondent, an American company, and eventually obtained the required financial assistance for the project from the respondent.

4 On 21 January 2003, the respondent, Shanghai Pacific and Mr Lee entered into an agreement, drafted in Chinese, which spelt out the financing arrangements (“the 2003 contract”). The 2003 contract stipulated, inter alia, that:

(a) To facilitate the granting of a loan by the Shanghai branch of the Industrial and Commercial Bank of China (“ICBC Shanghai”) in Chinese renminbi to Shanghai Pacific for the purpose of completing the project, the respondent would place US$6m with US Bank National Association (“the US Bank”) and would procure standby letters of credit for that amount from the US Bank to ICBC Shanghai as security for the loan.

(b) To guarantee Shanghai Pacific’s repayment of the loan from ICBC Shanghai, Mr Lee would pledge a total of 20 million shares in Laien (“the pledged shares”) to the respondent. These shares were held by Mr Lee and the appellants in various proportions. The respondent was entitled to realise the rights under the pledged shares 30 days after Shanghai Pacific breached its repayment obligations.

(c) Any dispute arising from the 2003 contract was to be resolved by the parties through consultation, but, if such consultation failed, the dispute was to be referred to the China International Economic and Trade Arbitration Commission (“CIETAC”) for resolution through arbitration.

5 Five supplementary agreements in Chinese (“the supplementary agreements”) were subsequently entered into between the same three parties (ie, the respondent, Shanghai Pacific and Mr Lee). One of the supplementary agreements, dated 10 September 2003 (“the September 2003 supplementary agreement”), varied the 2003 contract to allow the respondent to provide financing by way of two standby letters of credit for the sums of US$4m and US$1m respectively (“the standby letters of credit”), in addition to a cash loan of US$1m, which was to be paid into an escrow account. It bears emphasis that the appellants were not parties to either the 2003 contract or the September 2003 supplementary agreement.

6 As security for the respondent’s assistance, Mr Lee issued a letter of indemnity to the respondent dated 25 February 2003 stating, inter alia, that the respondent would be repaid prior to any other creditor of Laien. Later, a document entitled “DEED OF INDEMNITY” dated 22 September 2003 (“the Deed”) was executed by the appellants and Mr Lee in favour of the respondent. The material terms of the Deed, which was in English, were as follows:

In consideration of your arranging for the issue of the standby letters of credit, we hereby jointly and severally agree and undertake as follows:-

1. we shall irrevocably and unconditionally continue with the pledge of our entire interest in [Laien] comprising 20,000,000 shares, to you as security for the Standby Letters of Credit and hereby further agree that you may at any time register such shares in your name;

2. we shall at all times keep you fully and effectively indemnified and hold you harmless from and against any and all liabilities, claims, damages, costs, charges and expenses to which you may be exposed or which you may incur, suffer, sustain or for which you may render yourself legally liable as a consequence of or in connection with the Standby Letters of Credit and against all actions, suits, proceedings, claims, demands of any nature whatsoever which may be taken, made or threatened against you or incurred or become payable by you or which may arise directly or indirectly by reason of any act, deed, matter or thing done or permitted or omitted to be done by you in connection with the Standby Letters of Credit and all other costs, charges and expenses in connection therewith, including legal costs on a full indemnity basis;

3. we shall indemnify you against any liability and reimburse you in full for all costs and expenses incurred by you in defending any proceedings, whether civil or criminal in connection with the Standby Letters of Credit and whether or not judgement is given in your favour;

4. we shall procure that [Shanghai Pacific] and [Laien] shall not discharge any liabilities to any creditors unless and until the loans in relation to which the Standby Letters of Credit have been issued have been fully repaid and the Standby Letters of Credit have been discharged and that such creditors of [Laien] and/or [Shanghai Pacific] shall not institute any legal proceedings to recover any debt owing by [Laien] or [Shanghai Pacific], as the case may be, to them; and

5. we shall procure that [Shanghai Pacific] and [Laien] shall not incur any additional liabilities unless and until the loans in relation to which the Standby Letters of Credit have been issued have been fully repaid and the Standby Letters of Credit have been discharged.

…

If and to the extent that any part or provision in this Letter of Indemnity is invalid, illegal or unenforceable, it shall not affect the validity, legality or enforceability of any other part or provision and this Letter of Indemnity shall be interpreted and construed to give it the fullest possible effect in law.

The Deed did not include a clause on the governing law.

7 Pursuant to the 2003 contract, through a memorandum of deposit and pledge dated 28 July 2003, Mr Lee and the appellants deposited the share certificates relating to the pledged shares with the respondent.

8 The loan of RMB7.85m from ICBC Shanghai to Shanghai Pacific was due and payable on 15 June 2004, and another loan of RMB30m was due and payable on 18 August 2004. Shanghai Pacific was unable to repay those loans. Consequently, on 25 June 2004 and 12 August 2004, ICBC Shanghai presented the US Bank with the requisite documents to draw down the US$1m and US$4m, respectively, due under the standby letters of credit. The respondent was then called upon to reimburse the US Bank the sum of US$5m. It complied with this request. This in turn led to the chain of events which culminated in the present proceedings.

9 On 24 April 2006, with a view to invoking s 254(2)(a) of the Companies Act (Cap 50, 2006 Rev Ed), the respondent’s solicitors sent a letter of demand to the appellants pursuant to the Deed demanding from each of them payment of the total sum of US$4,623,999.97. This sum was the net amount paid by the respondent to the US Bank after taking into account the sum of US$404,435.57 which ICBC Shanghai returned, as well as the bank charges incurred by the respondent in connection with the financing arrangement.

10 The appellants failed to comply with the letter of demand, and on 9 June 2006 the respondent initiated winding-up proceedings against the appellants. In the meantime, arbitration proceedings at CIETAC between the parties to the 2003 contract (“the CIETAC arbitration”) were initiated by Mr Lee on 15 May 2006. In his request for arbitration, Mr Lee asserted that the 2003 contract was not legally binding as it had not been registered in accordance with Art 40 of a Chinese statute entitled “Interim Measures on the Management of Foreign Debts”, and the obligations imposed on him and the appellants in respect of that contract (ie, their obligations under the Deed) had therefore been discharged. It should be noted that this particular Chinese provision was enacted only in April 2005, well after the 2003 contract and the Deed had been entered into and after ICBC Shanghai’s calls on the standby letters of credit had been settled in full.

11 CIETAC accepted the request for arbitration on 15 May 2006. The following day, the appellants’ solicitors in Singapore informed the respondent’s solicitors that since the outcome of the CIETAC arbitration would have an impact on the appellants’ liability under the Deed, it was “premature and inappropriate” for the respondent to pursue its purported claim under the Deed until after the CIETAC arbitration had been resolved. The appellants’ solicitors further stated that, in their view, the letter of demand dated 24 April 2006 was “premature and any petition for winding up based on such Demand [would] be irregular”.

The decision below

12 The judge in the court below (“the learned judge”) did not agree with the appellants that there was a substantial and bona fide dispute as to whether they were liable to pay the respondent the amount demanded. She ordered the immediate winding up of the appellants.

13 In particular, the learned judge found that:

(a) The appellants did not deny that ICBC Shanghai had called upon the standby letters of credit and had received payment thereunder. They did not deny that the respondent had been obliged to make payment to the US Bank of the amounts drawn down under those letters of credit. The...