Show Theatres Pte Ltd (in liquidation) v Shaw Theatres Pte Ltd and another application

• Jurisdiction: Singapore
• Judge: Tan Lee Meng J
• Judgment Date: 28 March 2002
• Neutral Citation: [2002] SGHC 61
• Docket Number: Companies Winding Up No 319 of (Summonses in Chambers Nos 601418 and 601420 of 2001)
• Date: 28 March 2002
• Published date: 19 September 2003
• Year: 2002
• Plaintiff Counsel: Lee Eng Beng and Lynette Lee (Rajah & Tann)
• Citation: [2002] SGHC 61
• Defendant Counsel: Tan Kok Quan SC, Tang Khin Wai and Dawn Chew (Tan Kok Quan Partnership)
• Court: High Court (Singapore)
• Subject Matter: Whether Companies (Application of Bankruptcy Act Provisions) Regulations ultra vires Bankruptcy Act,Whether transaction falls within stipulated five -year period for impugning transactions at undervalue,'Associate',regs 2–5 Companies (Application of Bankruptcy Act Provisions) Regulations (Cap 50, Rg 3, 1996 Ed),ss 99(3), 100 & 101(4) Bankruptcy Act (Cap 20, 2000 Ed),Words and Phrases,s 101(4) Bankruptcy Act (Cap 20, 2000 Ed),Insolvency Law,Whether loans for special designated purpose thereby creating Quistclose trust,ss 329(1) & 411(g) Companies Act (Cap 50, 1994 Ed),Unfair preferences,Whether transaction falls within relevant period for impugning transactions on basis of unfair preference,Repayment by company of shareholders' loans,Liquidator claiming transaction at undervalue,Purchase of shares by company from shareholder,Transactions at an undervalue,Liquidator claiming unfair preference,s 329(1) Whether transaction at undervalue,ss 98(3) & 100 Bankruptcy Act (Cap 20, 2000 Ed),regs 2, 4 & 5 Companies (Application of Bankruptcy Act Provisions) Regulations (Cap 50, Rg 3, 1996 Ed),Whether relevant time two years or six months,Avoidance of transactions,Whether shareholders associates of company,Companies Act (Cap 50, 1994 Ed),reg 6 Companies (Application of Bankruptcy Act Provisions) Regulations (Cap 50, Rg 3, 1996 Ed)

Judgment

GROUNDS OF DECISION

1. In SIC No 601418 of 2001 and SIC No 601420 of 2001, which were heard together, the liquidator of Show Theatres Pte Ltd ("ST") sought to reverse the effect of three transactions entered into by the company with its two shareholders, Shaw Theatres Pte Ltd ("Shaw") and Eng Wah Investments Pte Ltd ("Eng Wah"), prior to the presentation of the winding-up petition. In SIC No 601418 of 2001, the liquidator asserted that the purchase by ST of 500,000 Chinatown Point shares from Shaw was a transaction at an undervalue. In SIC No 601420 of 2001, the liquidator contended that the question of an unfair preference arose with respect to the repayment by ST of shareholders’ loans to Shaw and Eng Wah in 1999

A. BACKGROUND

2. ST, whose principal business was the owning, leasing and management of cinemas, was incorporated on 13 December 1993. Shaw and Eng Wah were its only shareholders. Shaw held 375,000 shares and Eng Wah held 125,000 shares. Two directors of ST, Mr Shaw Vee Chung Harold and Mr Shaw Vee King, are directors of Shaw while ST’s other director, Mr Goh Keng Beng, is a director of Eng Wah.

3. ST was wound up on 17 November 2000 as it was unable to pay its debts, which amounted to more than $8.6m. After perusing ST’s records and accounts, the liquidator questioned the propriety of a number of transactions between ST and its two shareholders on the ground that they fell within the scope of sections 98 and 99 of the Bankruptcy Act, read with section 329(1) of the Companies Act (Chapter 50), which provides as follows:

Subject to this Act and such modifications as may be prescribed, any transfer, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company which, had it been made or done by or against an individual, would in his bankruptcy be void or voidable under section 98, 99 or 103 of the Bankruptcy Act 1995 (read with sections 100, 101 and 102 thereof) shall in the event of the company being wound up be void or voidable in like manner.

B. THE CHINATOWN POINT SHARES

4. SIC No 601418 of 2001, which concerns ST’s purchase from Shaw of 500,000 Chinatown Point shares will first be considered. ST paid Shaw $1.20 for each share and $600,000 for the 500,000 shares. The liquidator asserted that the shares were worth $480,000 or $0.96 each at the material time and sought to recover the sum of $120,000 from Shaw on the ground that the transaction was at an undervalue.

5. For the liquidator to succeed in his claim, the following must be established:

(a) ST was insolvent when it bought the Chinatown Point shares.

(b) The purchase of the said shares was made within the period of 5 years before the presentation of the winding-up petition against ST (see section 100 of the Bankruptcy Act).

(c) The value of the shares was significantly less than the $600,000 paid by ST (see section 98(3) of the Bankruptcy Act).

6. It is common ground that ST was insolvent at the material time. However, there was disagreement as to when the shares were bought by ST and what was their value at the material time.

When was the agreement concluded

7. Shaw claimed that the agreement for the purchase and sale of the Chinatown Point shares was concluded in July 1995, more than 5 years before the petition to wind up ST was presented on 24 October 2000. If this is so, the transaction falls outside the 5-year period stipulated in section 100 of the Bankruptcy Act for impugning transactions at an undervalue. However, the liquidator submitted that the shares were purchased by ST in 1997 and that the transaction falls within the 5-year period stipulated in section 100 of the Bankruptcy Act.

8. Mr Goh Keng Beng, who negotiated the transaction on ST’s behalf, had no doubt that the agreement for the sale and purchase of the Chinatown Point shares was concluded in July 1995. In para 12 of his affidavit dated 28 August 2001, he stated as follows:

12. Thereafter, the formal agreement was only entered into in December 1996 as parties had to obtain the necessary approval from the other shareholder of Chinatown Point, City Centrepoint Pte Ltd ("City Centrepoint") and several condition precedents had to be satisfied….

13. The negotiations on the draft Sale and Purchase Agreement began in July 1995….. At that time, the condition precedents which had to be satisfied were stated as "conditions subsequent" because the lease agreement with City Centrepoint had not yet expired and thus not due for renewal.

14. Between July 1995 and the execution of the Sale and Purchase Agreement in December 1996, several drafts of the Sale and Purchase Agreement were negotiated upon and amendments were made. Due to the time lapse between the agreement and the execution of the Sale and Purchase Agreement, these "conditions subsequent" became [conditions precedent] as the lease agreement expired in November 1996. However, the terminology used in the executed Sale and Purchase Agreement remained as "conditions subsequent" and was never amended.

9. The liquidator, who did not agree with Mr Goh, pointed out that the agreement for the sale and purchase of the Chinatown Point shares, which was dated 12 March 1997, expressly provided that "the parties have executed this agreement the day and year first above written". Where a document is dated, the date is prima facie evidence of the date on which it was executed (see, for instance, Andersen v Weston (1840) 6 Bing NC 296). While the prima facie presumption may be rebutted, no convincing explanation was furnished to rebut the presumption. Discussions for the sale of the Chinatown Point may have started in 1995. However, any assertion that the contract was concluded in 1995 is untenable, if only because the terms of the draft sale and purchase contract prepared in July 1995 were very different from the agreement executed by the parties on 12 March 1997. In fact, in the original draft, Chinatown Point Theatres Pte Ltd was a party to the contract but it was not a party to the executed agreement. It should also be noted that the directors’ resolution to purchase the shares was passed in January 1997 and the funds required for the purchase were provided by Shaw and Eng Wah in March 1997.

10. If all the circumstances are taken into account, there can be no doubt that the agreement for the sale and purchase of the Chinatown Point shares was concluded in March 1997. As such, the transaction in question was concluded within the 5-year period referred to in section 100 of the Bankruptcy Act.

Whether the transaction was at an undervalue

11. Whether or not the transaction was at an undervalue will next be considered. The liquidator noted that no valuation report had been produced to justify the price paid by ST for the shares and that in Chinatown Point’s audited balance sheet as at 31 March 1997, the Book Net Tangible Assets showed that the shares in question were worth only around $0.96 per share. Furthermore, the investment in the Chinatown Point shares was totally written off in ST’s financial statements as at 31 March 1998.

12. In McDonald and Anor v Hanselmann [1998] 28 ACSR 49, 53, where transactions at an undervalue were considered by the Supreme Court of New South Wales, Young J rightly said that value is not a matter to be decided in a vacuum and that the relevant question is "whether there was a bargain of such magnitude that it could not be explained by normal commercial practice". It is also pertinent to note that regulation 6 of the Companies (Application of Bankruptcy Act Provisions) Regulations 1995 provides that the court shall not make an order referred to in section 98 of the Bankruptcy Act in respect of a transaction at an undervalue if it is satisfied that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business; and that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company.

13. Shaw contended that the price of $1.20 per share was fair, reasonable and commercially justifiable because of the benefits which ST expected to derive from the purchase of Chinatown Point shares. Shaw’s counsel, Mr Tan Kok Quan SC, pointed out that Shaw, which owned 65% of ST, had to provide ST with much of the funds required for the purchase of the shares. More importantly, it must be noted that it was Eng Wah’s nominee director on the ST Board, Mr Goh Keng Beng, and not Shaw’s nominee directors on the ST Board, who negotiated the purchase of the Chinatown Point shares from Shaw. Eng Wah must have considered it in ST’s interest to purchase the Chinatown shares from Shaw. In his affidavit dated 25 July 2001, Mr Goh, who confirmed that the shares were purchased after he had discussions with the...