State Bank of India Singapore v Rainforest Trading Ltd

• Jurisdiction: Singapore
• Judgment Date: 04 August 2011
• Date: 04 August 2011
• Docket Number: Originating Summons No 958 of 2010
• Court: High Court (Singapore)

State Bank of India Singapore

Plaintiff

and

Rainforest Trading Ltd and another

Defendant

[2011] SGHC 182

Steven Chong J

Originating Summons No 958 of 2010

High Court

Credit and Security—Mortgage of personal property—Chose in action—Whether allegations of fraud raised by defendants were made out against plaintiff—Whether deposit of share certificates accompanied by signed blank share transfer form gave rise to equitable mortgage—Whether equitable mortgage carried implied power of sale—Whether restrictions imposed by articles of association of private company affected equitable mortgagee's power of sale—Exercising implied power of sale in compliance with articles of association

In 2007, the plaintiff, State Bank of India Singapore (‘SBI SG’) entered into a facility agreement to make available a loan of US$80 m to Baytech Inc (‘Baytech’) , a wholly owned subsidiary of Teledata Informatics Limited (‘Teledata’) . The loan was extended to finance Teledata's acquisition of majority control of e Sys Technologies Pte Ltd (‘e Sys’) , a wholly owned subsidiary of Rainforest Trading Limited (‘Rainforest’) . In 2006, the defendants and Teledata had entered into a share subscription agreement for the acquisition of 51% of equity shares in Rainforest, the underlying transaction, following which the facility agreement was entered into by SBI SG and Baytech. As security for the facility agreement, the defendants deposited five share certificates representing 51% of e Sys's share capital and a signed blank share transfer form with SBI SG (‘the Pledged Shares’) .

Held, allowing the claim:

(1) An event of default had occurred under the facility agreement: at [40].

(2) As the present application was not interlocutory in nature, pursuant to O 41 r 5 of the Rules of Court (Cap 322, R 5, 2006 Rev Ed) , the defendants were precluded from making allegations in its affidavits outside the personal knowledge of the deponents: at [42] to [44].

(3) None of the wide ranging allegations levelled by the defendants in relation to the purportedly fraudulent conduct of Teledata, Baytech and SBI SG were made out against SBI SG: at [47] to [77].

(4) The deposit of share certificates together with a signed blank share transfer form, often loosely described as a pledge of shares, actually gave rise to an equitable mortgage over the shares: at [78] to [85].

(5) The equitable mortgage over the Pledged Shares carried an implied power of sale which was exercisable by SBI SG as an event of default had occurred under the facility agreement: at [96].

(6) An equitable mortgage by its nature typically arose by operation of law in the absence of formal documentation. SBI SG was entitled to perfect its security in the Pledged Shares by exercising its power of sale in compliance with the e Sys articles of association: at [97] to [99].

(7) In order to facilitate the sale of the Pledged Shares in compliance with the e Sys articles of association, the parties were to agree on the appointment of a joint independent auditor to determine a fair value of the Pledged Shares within three weeks from 4 August 2011, failing which the parties could seek the court's assistance to appoint one on their behalf: at [117].

[Observation: Pursuant to r 59 of the Legal Profession (Professional Conduct) Rules (Cap 161, R 1, 2010 Rev Ed) the graver the allegation of fraud, eg, bribery, the greater the need for counsel to address the issue of reasonable credible evidence to support it: at [45] and [46].]

Deverges v Sandeman, Clark & Co [1902] 1 Ch 579 (folld)

Elders Forestry Ltd v Bosi Security Services Ltd [2010] SASC 223 (folld)

France v Clark (1881) 26 Ch D 257 (folld)

Hammonds and Another, Executors of Blight v Barclay and Others, Assignees of Fentham a Bankrupt (1802) 2 East 227; 102 ER 356 (folld)

Harrold v Plenty [1901] 2 Ch 314 (folld)

Hunter v Hunter [1936] AC 222 (folld)

Kong Swee Eng v Rolles Rudolf Jurgen August [2011] 1 SLR 873 (folld)

MUI Bank Bhd v Alkner Investments Pte Ltd [1990] 3 MLJ 385 (folld)

Ocean Jade, The [1991] 1 SLR (R) 354; [1991] SLR 583 (folld)

Pacrim Investments Pte Lte v Tan Mui Keow Claire [2008] 2 SLR (R) 898; [2008] 2 SLR 898 (folld)

Rossage v Rossage [1960] 1 WLR 249 (folld)

Sing Eng (Pte) Ltd v PIC Property Ltd [1990] 1 SLR (R) 792; [1990] SLR 81 (folld)

Stubbs v Slater [1910] 1 Ch 632 (folld)

Xiamen International Bank v Sing Eng (Pte) Ltd [1993] 2 SLR (R) 176; [1993] 3 SLR 228 (folld)

Companies Act (Cap 50, 1988 Rev Ed) s 194

Companies Act (Cap 50, 2006 Rev Ed) s 128 (2)

Conveyancing and Law of Property Act (Cap 61, 1994 Rev Ed) ss 24 (1) (a) , 30 (2)

Legal Profession (Professional Conduct) Rules (Cap 161, R 1, 2010 Rev Ed) r 59

Rules of Court (Cap 322, R 5, 2006 Rev Ed) O 41 r 5, O 41 r 5 (1) , O 41 r 5 (2)

Pradeep Pillai and Koh Junxiang (Shook Lin & Bok LLP) for the plaintiff

Samuel Chacko and Christopher Yeo (Legis Point LLC) for the defendants.

Judgment reserved.

Steven Chong J

Introduction

1 The case before me concerns an application by a bank to enforce a ‘pledge’ of shares in a private company. Initially, the application sought an order for the enforcement of the ‘pledge’ without further notice to the defendants and without reference to the articles of association of the company. Typically, the articles of association of private companies would provide for the exercise of pre-emption rights in respect of the sale of shares to other members of the company. How would such a pre-emption right operate when the private company is a wholly owned subsidiary? When questions as regards the difficulties posed by the plaintiff's application were raised by the court, the original application was abandoned and in its place various declaratory reliefs were sought.

2 In their attempt to resist the application, various allegations of fraud were raised by the defendants against the bank. Fraud is ‘easy’ to allege and not infrequently is raised in affidavits without any basis to support the allegation. This judgment will also address counsel's duty to act responsibly when raising allegations of fraud. Counsel and the clients they represent should be reminded that legal proceedings cannot be used as a ‘licence’ or a ‘shield’ to cast serious allegations of fraud without any credible basis.

Background facts

Dramatis personae

3 The plaintiff, State Bank of India, Singapore (‘SBI SG’) , is a banking institution which is governed and regulated in Singapore by the Monetary Authority of Singapore.

4 The first defendant, Rainforest Trading Limited (‘Rainforest’) , is a company incorporated in the British Virgin Islands.

5 The second defendant, e Sys Technologies Pte Ltd (‘e Sys’) (now known as Haruki Solutions Pte Ltd) , is a private company incorporated in Singapore. e Sys is a wholly owned subsidiary of Rainforest and is engaged in the business of distributing computers, components, related products as well as the provision of technical, advisory and consultancy support, research and development and services for users of high technology products.

6 Teledata Informatics Limited (‘Teledata’) (now known as Agnite Education Limited) is a publicly listed company incorporated in India which engages in the business of development of marine software, logistics software and utility software products as well as the provision of services for users of high technology products.

7 Baytech Inc (‘Baytech’) is a company incorporated in the British Virgin Islands and is a wholly owned subsidiary of Teledata. While Teledata and/or Baytech are not parties to these proceedings, they play material roles in the factual matrix preceding the present application.

Key personnel

8 The following individuals feature prominently in the dispute at hand:

Mr Aravind Kumar (‘Mr Kumar’)	Senior Vice President, Credit Administration of SBI SG
Mr Gopalakrishnan Venkatramanan (‘Mr Ram’)	Teledata representative
Mr K Padmanabhan (‘Mr Padma’)	Director and sole shareholder of Baytech and Managing Director of Teledata
Mr Akash Deep Sharma (‘Mr Sharma’)	Director of e Sys and former director of Rainforest
Ms Emily Chay (‘Ms Chay’)	Former Chief Financial Officer of e Sys
Mr Vikas Goel (‘Mr Goel’)	Former Managing Director of e Sys and former sole director of Rainforest

Underlying transaction: share subscription agreement

9 On 10 November 2006, Mr Ram and Mr Padma of Teledata and/or Baytech, met with Ms Chay and Mr Goel of e Sys, wherein it was proposed that Teledata was interested in investing in e Sys. A share subscription agreement (‘SSA’) dated 29 November 2006 was thereafter entered into between Mr Goel, e Sys and Teledata.

10 The acquisition of majority control of e Sys by Teledata was implemented via the acquisition of shares in Rainforest, a special purpose vehicle set up by e Sys. Consequently, on 29 December 2006, e Sys passed directors' resolutions to approve the transfer of its entire issued and paid up share capital to Rainforest. e Sys's share capital consisted of 20 million fully paid up ordinary shares. In the result, e Sys became a wholly owned subsidiary of Rainforest.

Terms of SSA and Supplemental Agreements

11 The salient terms of the SSA are as follows:

(a) Rainforest, a special purpose vehicle, was to be incorporated in the British Virgin Islands for the purpose of the SSA. Mr Goel would conduct a share swap by transferring all of his shares in e Sys to Rainforest in return for 49% of the shareholding of Rainforest.

(b) Teledata would invest approximately US$65 m in equity in Rainforest and would extend a further loan of US$40 m to Rainforest.

(c) Rainforest was to utilise the monies and extend loans of up to US$60 m to e Sys.

(d) Teledata would hold 51% of the shares in Rainforest upon payment of the requisite sums.

12 The defendants stated that the SSA dated 29 November 2006 was...