State Bank of India Singapore v Rainforest Trading Ltd and another

• Jurisdiction: Singapore
• Judge: Steven Chong J
• Judgment Date: 04 August 2011
• Neutral Citation: [2011] SGHC 182
• Court: High Court (Singapore)
• Hearing Date: 19 May 2011,20 May 2011
• Docket Number: Originating Summons No 958 of 2010
• Plaintiff Counsel: Pradeep Pillai and Koh Junxiang (Shook Lin & Bok LLP)
• Defendant Counsel: Samuel Chacko and Christopher Yeo (Legis Point LLC)
• Subject Matter: Credit and Security
• Published date: 09 April 2013

Steven Chong J: Introduction

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.

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

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.

The first defendant, Rainforest Trading Limited (“Rainforest”), is a company incorporated in the British Virgin Islands.

The second defendant, eSys Technologies Pte Ltd (“eSys”) (now known as Haruki Solutions Pte Ltd), is a private company incorporated in Singapore. eSys 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.

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.

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

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 eSys and former director of Rainforest
Ms Emily Chay (“Ms Chay”)	Former Chief Financial Officer of eSys
Mr Vikas Goel (“Mr Goel”)	Former Managing Director of eSys and former sole director of Rainforest

Underlying transaction: Share Subscription Agreement

On 10 November 2006, Mr Ram and Mr Padma of Teledata and/or Baytech, met with Ms Chay and Mr Goel of eSys, wherein it was proposed that Teledata was interested in investing in eSys. A Share Subscription Agreement (“SSA”) dated 29 November 2006 was thereafter entered into between Mr Goel, eSys and Teledata.

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

Terms of SSA and Supplemental Agreements

The salient terms of the SSA are as follows: 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 eSys to Rainforest in return for 49% of the shareholding of Rainforest. Teledata would invest approximately US$65 million in equity in Rainforest and would extend a further loan of US$40 million to Rainforest. Rainforest was to utilise the monies and extend loans of up to US$60 million to eSys. Teledata would hold 51% of the shares in Rainforest upon payment of the requisite sums.

The defendants stated that the SSA dated 29 November 2006 was subsequently revised by supplemental agreements on 29 November 2006 (twice), 9 February 2007 (once) and 14 February 2007 (once). Under the amended SSA, the defendants stated that it was agreed by Mr Goel and eSys that Baytech was to be appointed as Teledata’s nominee for the purposes of subscribing to shares in Rainforest pursuant to the SSA. SBI SG denied knowledge of any amendments having been made to the SSA dated 29 November 2006. However, in an email chain between Mr Ram and Mr Uthayacharan, the advocate and solicitor representing SBI SG , Mr Uthayacharan specifically raised queries to Mr Ram in relation to the supplemental agreement to the SSA dated 9 February 2007. From the email chain, it would appear that contrary to SBI SG’s assertion, SBI SG was aware of the supplemental agreements to the SSA. However, for reasons as explained in [53] below, nothing turns on this.

In or around December 2006, payments due and owing under the SSA from Teledata to eSys had not been made. Mr Padma and Mr Ram informed Ms Chay and Mr Goel that Teledata had applied for a loan to finance the acquisition of the shares in Rainforest and that the payments due and owing under the SSA would be made soon thereafter. It was at this point that SBI SG entered into the picture, in the provision of a sizeable loan facility to Baytech.

The Facility Agreement

Sometime in or around December 2006, Teledata decided to obtain financing from SBI SG and negotiations were underway between the parties as evidenced by the “indicative quote” dated 31 January 2007 from SBI SG to Teledata. However, as Baytech was the special purpose vehicle of Teledata for the purposes of this loan facility, SBI SG’s letter of offer dated 31 January 2007 was addressed to Baytech instead. Upon conclusion of the negotiations, SBI SG entered into a Facility Agreement dated 22 February 2007 (“the Facility Agreement”) with Baytech. Pursuant to the terms of the Facility Agreement, SBI SG agreed, inter alia, to make available a US Dollar term loan facility in aggregate sum of US$80 million to Baytech. The “Final Maturity Date” was defined as 36 months from the date of drawdown and the entire loan facility was drawn down by Baytech in one tranche on 23 February 2007.

Pursuant to cl 3.1, the stated purpose of the Facility Agreement was clearly to finance the acquisition of 51% of the shares in Rainforest though the SSA was not specifically referred to in the Facility Agreement:

The Borrower [Baytech] shall apply all amounts borrowed by it under the Facility for control of the majority share holding in [eSys] by acquisition of 51% of the equity shares in [Rainforest], British Virgin Islands.

A number of securities were provided to SBI SG pursuant to cl 4 of the Facility Agreement to secure Baytech’s liability in the event of default: Corporate Guarantee by Teledata. Personal Guarantee of Mr Padma. An extension of all charges on all collateral securities in respect of Teledata held by the State Bank of India, Overseas Branch, Chennai. First charge on all the fixed assets of Teledata. First charge on all the fixed assets of Teledata Marine Solutions Limited and Teledata Technology Solutions Limited upon demerger. Pledge of 51% of the paid up share capital of eSys to be acquired out of the facility, which pledge shall be completed and duly registered as a charge in favour of SBI SG within 30 days of the execution of the Facility Agreement. Pledge of 51% of the paid up share capital of Rainforest, which pledge shall be completed and duly registered as a charge in favour of SBI SG within 30 days of the execution of the Facility Agreement.

In accordance with cl 4, as security for the Facility Agreement, both Teledata and Mr Padma signed corporate and personal guarantees respectively dated 1 October 2008 in favour of SBI SG. More importantly, for the purposes of this dispute, pursuant to cl 4(iv), 10,200,000 shares in eSys (representing 51% of eSys’s share capital) (“the Pledged Shares”) were “pledged” by Rainforest to SBI SG.

The Pledged Shares

By letter dated 5 April 2007 addressed to SBI SG, Rainforest delivered Share Certificates Nos 10, 11, 12, 13 and 14 of eSys, (“the Share Certificates”) together with a signed blank share transfer form to SBI SG. The letter signed by Mr Goel as “Sole Director of Rainforest” read as follows:

This has reference to the facility of Foreign Currency Loan of USD 80 million granted by your Bank to Baytech Inc (wholly owned subsidiary of Teledata....)

The above facility has been granted to Baytech Inc pursuant to the facility agreement entered into between your branch and Baytech Inc, British Virgin Islands.

As per the terms of the facility agreement, we have to pledge the shares of [eSys] standing in the name of [Rainforest] with your office and we have handed over the following share certificates standing in the name of the company to your office vide our separate letter.

...

We have also noted the above pledge of shares in our Books in [SBI...