STATUTORY CONTRACT IN SINGAPORE: IS THERE A QUA MEMBER REQUIREMENT?

• Author: LEOW CHYE SIAN
• Citation: (1999) 11 SAcLJ 455
• Published date: 01 December 1999
• Date: 01 December 1999

Teo Choon Mong Frank v Wilh Schulz Gmbh & Anor 1

Introduction

Suppose an article of association of a company provides that a member is entitled to nominate a director. The other members or the company refuses to allow him to exercise that right. Can he enforce the provision in the article entitling him to nominate a director? In this article the writer seeks to answer this question. In doing so, one needs to examine the scope of section 39 of the Singapore Companies Act2 (hereinafter referred to as “the Act”) which is in pari materia with section 20 of the English Companies Act 1948. Section 39 of the Act makes the memorandum and articles of association of the company binding between the company and the members, and between members and members.

In the case of Teo Choon Mong v Wilh Schulz Gmbh & Anor3 the Singapore Court of Appeal considered the terms of the shareholder agreement and articles of association, both of which were, in the court’s view, of vital importance in the case. The court had a great opportunity to consider the issue of whether there is a qua member requirement before one can enforce a statutory contract under section 39 of the Act. To put in another way: Does the section give the memorandum and articles of association contractual effect only in so far as they confer rights or obligations on the member in his capacity of member?

Facts

The appellant entered into a joint venture with the respondents to set up a manufacturing plant in Malaysia through the vehicle of a company, Forgetech Sdn Bhd (Forgetech). By a shareholder agreement dated 24 January 1994, the parties agreed, inter alia, that they were each entitled to nominate a director to the board of Forgetech and this included the right to remove that director and nominate another in his stead. Accordingly, Wolfgang Schulz representing the first respondent, Volker Johnen representing the second respondent and the appellant were appointed as directors of Forgetech. The appellant was also appointed managing director of Forgetech for a period of five years commencing 1 January 1996.

The relationship between the appellant and the respondents turned sour and on 20 January 1997 the respondents sought to take over control of the plant and terminate the appellant’s position as managing director. The appellant commenced an action against the respondents in the High Court of Sabah and Sarawak at Kuching and obtained ex parte an interim injunction restraining the respondents from doing so. This injunction was suspended and during this period of suspension the respondents proceeded to call an extraordinary meeting to remove the appellant from his office as a director of Forgetech. The appellant thereupon commenced an action in the High Court in Singapore and applied for an injunction to restrain the respondents’ proposed action until trial. The High Court dismissed the application and the appellant appealed to the Court of Appeal.

The Decision

LP Thean JA, in allowing the appeal held that it was clear from the shareholder agreement and the relevant articles of association that each party to the joint venture was entitled to nominate one director and to remove him and nominate another in his stead. It followed that the right to remove the appellant as director vested in him alone. It would have gone against the express wording of the articles of association and the shareholder agreement to allow the respondents to remove the appellant as a director of Forgetech. By removing the appellant as director when they were not entitled to do so, the respondents have repudiated the relationship established by the shareholder agreement and the articles of association. The respondents should have been restrained from removing the appellant as a director of Forgetech.

Comments

It is interesting to note that the court held that based on the articles of association that incorporated the terms of the shareholder agreement the member was entitled to nominate a director. Does this mean that for a member to enforce a statutory contract under section 39 of the Act there is no qua member requirement? Before we proceed further with our discussion, the writer would like to point out that the discussion on the issue of whether there is a qua member requirement under Section 39 of the Act is equally relevant and applicable to the scenario of a statutory contract between a member and the company on the one hand and that of a situation of a statutory contract between members themselves.4

Section 39 of the Act provides that:

“… the memorandum and articles shall when registered bind the company and the...