Sinwa SS (HK) Company Ltd v Morten Innhaug

• Jurisdiction: Singapore
• Judgment Date: 24 May 2010
• Date: 24 May 2010
• Docket Number: Originating Summons No 960 of 2009
• Court: High Court (Singapore)

Sinwa SS (HK) Co Ltd

Plaintiff

and

Morten Innhaug

Defendant

[2010] SGHC 157

Andrew Ang J

Originating Summons No 960 of 2009

High Court

Civil Procedure–Originating processes–Plaintiff taking out common law derivative action by way of originating summons–Whether originating summons or writ of summons applicable–Whether court should cure procedural errors–

Companies–Directors–Breach of fiduciary duties–Derivative action–Common law derivative action–Action premature–Plaintiff not disclosing real motive for bringing action–Whether application should be allowed–

Companies–Directors–Breach of fiduciary duties–Derivative action–Common law derivative action–Whether 50% shareholder should be allowed to pursue common law derivative action–Rule in Foss v Harbottle–Fraud on minority exception–Whether other 50% shareholder having control of company

The plaintiff ( Sinwa ) and the defendant ( MI ) were 50:50 shareholders in Nordic International Limited ( NIL ), a ship-owning company. The shareholders' agreement signed between the two parties ( the Shareholders' Agreement ) entitled both shareholders to appoint two directors each to the Board of Directors of NIL and that the decisions of the Board should, save for certain specific instances, be made by majority vote. At the same time, the two parties also agreed that all technical matters relating to ships and/or charter parties should be solely decided by directors appointed by MI while all matters relating to accounting and/or finances should be solely decided by directors appointed by Sinwa. In addition, the Shareholders' Agreement also provided that in the event of a deadlock, MI may require Sinwa to sell its shares in NIL to MI at a fair value. Pursuant to this Shareholders' Agreement, MI appointed himself as one of the directors of the company.

In the course of its business, NIL chartered a vessel to BGP Geoexplorer Pte Ltd ( BGP ) pursuant to a time charter ( the Time Charter ). BGP later assigned its rights (as it was entitled to do) under the Time Charter to another company, Nordic Geo Services Limited ( NGS ), which MI had control over. MI, quadirector of NIL, also purported to accept the assignment. A few months after the assignment, NGS requested to NIL that it be allowed to pay a lower rate of charter hire as the vessel was laid up at anchorage without employment. Sinwa did not agree and, consequently, NGS stopped paying charter hire.

Sinwa alleged that MI had breached his duties as a director of NIL by procuring the assignment of the Time Charter, causing BGP or NGS to withhold payment of charter hire to NIL and impeding Sinwa in its attempts to commence legal proceedings on behalf of NIL against BGP to recover charter hire. Various other secondary allegations were also made against MI. In the circumstances, Sinwa refused to recognise the assignment and eventually applied for leave to commence a derivative action against MI on behalf of NIL in respect of the alleged breaches of director's duties. On his part, MI argued that Sinwa, in taking out a derivative action, was not doing so in the best interests of NIL but was in fact seeking to force MI, on pain of litigation, to purchase Sinwa's shares in NIL at a price higher than fair value.

Held, dismissing the application:

(1) By starting the action by way of an originating summons instead of a writ of summons, Sinwa had erroneously adopted the procedure applicable to a statutory derivative action. Furthermore, Sinwa failed to join NIL as a defendant and the title of the action did not reflect that the action was being brought in a representative capacity. While the procedural errors committed by Sinwa could be cured by the court, the court would not exercise its discretion to do so as Sinwa's application for leave to take out a derivative action would fail in any case: at [15] to [19].

(2) There were two requirements to satisfy before the court would consider granting leave to a minority shareholder to start a derivative action on behalf of a company against a majority shareholder. The first was that the company had a reasonable case against the defendant; the second concerned the locus standi of the plaintiff to bring the action. Even if these requirements were met, the court still had the discretion to decide whether or not to grant leave to commence a derivative action: at [20].

(3) With respect to the first requirement, it must be demonstrated that the company was entitled, prima facie, to the relief claimed. This meant that the plaintiff had to show that the company had a reasonable, or legitimate, case against the defendant for which the company might recover damages or otherwise obtain relief. Prima facie on the evidence, none, save one, of Sinwa's allegations against MI was made out. In respect of the sole exception,viz, the allegation that the defendant had breached his duty as a director of NIL by refusing to support legal proceedings take out against BGP, NIL might have a reasonable case against MI: at [21] and [46].

(4) With respect to the second requirement, a plaintiff might have the locus standi to bring a derivative action on behalf of a company if the fraud on the minority exception to the rule in Foss v Harbottle was made out. There were two constituent elements to this exception - fraud and control: at [47] and [48].

(5) Fraud , for the purposes of establishing the fraud on the minority exception to the rule in Foss v Harbottle, was made out on the facts of the case as MI had, prima facie, prevented legal action from being taken out against BGP for the recovery of charter hire in order to protect his own interests in NGS: at [53].

(6) In order to establish control , for the purposes of the fraud on the minority exception, the crucial question was not limited to whether the defendant had the requisite shareholding but also whether the defendant was able to prevent an action from being brought against him. However, in the instant case, the issue whether MI had requisite control could not be resolved given that, in the first place, the question was as yet unanswered who, on a proper interpretation of the Shareholders' Agreement, had the authority to decide whether the company should take out a civil action against MI: at [59].

(7) Even if the fraud on the minority exception was made out, the court might still exercise its discretion not to grant leave to a plaintiff to take out a derivative action if there were alternative remedies available or if the plaintiff was not acting bona fide in the best interests of the company: at [60].

(8) In so far as alternative remedies were concerned, the alternative remedy need not be better or more convenient before it would preclude the plaintiff from pursuing a derivative action; the alternative remedy need only be a real option for the plaintiff. In the present case, Sinwa's application was premature as the parties had not ascertained if the decision to sue the defendant was a decision to be decided by directors appointed by Sinwa or required the majority or unanimous approval of the board: at [64] and [68].

(9) Sinwa had not laid all its cards on the table and might not have disclosed its real motive for bringing a derivative action in the name of NIL. Sinwa's unhappiness with the assignment could not be easily understood as NIL would still be entitled to charter hire. Furthermore, Sinwa's refusal to allow NGS to pay a lower rate of charter hire was not reasonable as NGS was prima facie entitled to such a lower rate under the Time Charter. Hence, in bringing the application for leave to commence a derivative action, Sinwa, more likely than not, was not acting bona fide in the best interests of NIL: at [70].

Abdul Rahim bin Aki v Krubong Industrial Park (Melaka) Sdn Bhd [1995] 3 MLJ 417 (refd)

Aberdeen Railway Co v Blaikie Bros [1843-1860] All ER 249 (refd)

Agus Irawan v Toh Teck Chye [2002] 1 SLR (R) 471; [2002] 2 SLR 198 (refd)

Barrett v Duckett [1995] BCC 243 (refd)

Burland v Earle [1902] AC 83 (refd)

Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 WLR 2 (refd)

Ferguson v Wallbridge [1935] 3 DLR 66 (refd)

Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 (refd)

Furs Ltd v Tomkies (1935) 35 CLR 583 (refd)

Marc-Jay Investments Inc and Levy,Re (1975) 5 OR (2d) 235 (refd)

Nurcombe v Nurcombe (1984) 1 BCC 99 (refd)

Pang Yong Hock v PKS Contracts Services Pte Ltd [2004] 3 SLR (R) 1; [2004] 3 SLR 1 (refd)

Portfolios of Distinction Ltd v Laird [2005] BCC 216 (refd)

Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1981] Ch 257 (refd)

Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (refd)

Teo Gek Luang v Ng Ai Tiong [1998] 2 SLR (R) 426; [1999] 1 SLR 434 (refd)

Ting Sing Ning v Ting Chek Swee [2008] 1 SLR (R) 197; [2008] 1 SLR 197 (refd)

Tri-Circle Investment Pte Ltd, Re [1993] 1 SLR (R) 441; [1993] 2 SLR 523 (refd)

Companies Act (Cap 50,2006 Rev Ed) s 216A

Rules of Court (Cap 322,R 5, 2006 Rev Ed) O 2r 1

Companies Ordinance (Cap 32) (HK) s 168A

Gopinath s/o B Pillai and Lim Pei Ling June (Tan Peng Chin LLC) for the plaintiff

Joseph Tan (Legal Solutions LLC) for the defendant.

Andrew Ang J

Introduction

1 By way of this originating summons, the plaintiff sought leave to bring a derivative action on behalf of a company, of which the plaintiff was a minority shareholder, against the defendant. After hearing submissions from both parties, I dismissed the plaintiff's application. I now set out my reasons for doing so.

Background

2 While there were only two parties to this action, the factual matrix really involved seven companies and one individual. It would be convenient to identify them at this early stage, as follows:

(a) Nordic International Limited, a company incorporated in the British Virgin Islands ( NIL );

(b) Sinwa Limited, a Singapore-incorporated company ( Sinwa );

(c) Sinwa SS (HK) Co Ltd, a...