Tam Tak Chuen v Eden Aesthetics Private Limited and another

• Jurisdiction: Singapore
• Judge: Judith Prakash J
• Judgment Date: 20 January 2010
• Neutral Citation: [2010] SGHC 24
• Plaintiff Counsel: Ang Cheng Hock SC and Tham Wei Chern (Allen & Geldhill LLP)
• Docket Number: Originating Summons No 658 of 2009
• Date: 20 January 2010
• Hearing Date: 16 October 2009,14 October 2009
• Subject Matter: Companies
• Published date: 21 January 2010
• Citation: [2010] SGHC 24
• Defendant Counsel: See Chern Yang and Chan Kin Yew (Premier Law LLC)
• Court: High Court (Singapore)
• Year: 2010

Judith Prakash J: Introduction

This matter came before me as an application (“OS 658”) by the plaintiff (“Dr Tam”) for leave to commence derivative proceedings on behalf of the defendants (namely Eden Aesthetics Private Limited (“EA”) and Eden Healthcare Pte Ltd (“EH”)) against one Dr Khairul Bin Abdul Rahman (“Dr Khairul”) and a company owned by Dr Khairul, KAR Pte Ltd (“KAR”), in respect of the alleged breach by Dr Khairul of his director’s duties owed to EA and EH. In response to this application, Dr Khairul applied to wind up EA (by CWU 112 of 2009) (“CWU 112”) and EH (by CWU 111 of 2009) (“CWU 111”) on the ground that it was just and equitable to do so. After hearing the parties’ submissions, I allowed Dr Tam’s application and stayed the two winding up applications. Dr Khairul has since appealed.

Factual Background

The facts were not in dispute. From 1998, Dr Tam and Dr Khairul were in medical practice together. Initially, they practised in partnership under the style of “Eden Family Clinic” but subsequently, they incorporated EA and EH to own their medical practice. Most of the business income of Eden Family Clinic was booked under EH. The rest of Eden Family Clinic’s business was booked under EA. In 2005 and 2006, the Eden Family Clinic business earned more than $1m annually. Dr Tam and Dr Khairul were the directors of both EA and EH and were equal shareholders in those companies.

All was well until sometime in 2004 when cracks in their relationship began to appear. The full details of the breakdown of the relationship and the consequences of the same are contained in my judgment in Tam Tak Chuen v Khairul bin Abdul Rahman and Others [2009] 2 SLR (R) 240 (“Tam Tak Chuen”). Briefly, Dr Khairul suspected Dr Tam of having an illicit affair with one of the nurses working in the clinic and did not believe Dr Tam’s repeated denials. In October 2006, Dr Khairul installed a closed circuit camera in the clinic for the sole purpose of obtaining evidence of Dr Tam’s activities. He obtained such evidence in December 2006.

In the meantime, on 14 November 2006, Dr Khairul incorporated KAR with himself as its sole shareholder and director. KAR’s main activities comprised “clinic and general medical services” and “specialised medical and surgical services” which were the same categories of business that EA and EH were involved in.

On 4 March 2007, Dr Khairul confronted Dr Tam with the video footage and threatened him with public disclosure. He then demanded that Dr Tam’s shares in both EA and EH be sold to him at a gross undervalue (“the share transfers”). Dr Tam acceded to this demand and executed share transfers of his shares in EA and EH in favour of Dr Khairul that same night. Shortly thereafter, however, Dr Tam changed his mind and decided to rescind the transactions. On 6 March 2007, Dr Tam made a police report against Dr Khairul for extortion, blackmail and criminal intimidation, and also informed Dr Khairul that he regarded the share transfers and his resignation as director as invalid. On 26 November 2007, Dr Tam commenced an action against, inter alia, Dr Khairul to set aside the share transfers and his removal as director. In the result, Dr Tam prevailed (see Tam Tak Chuen).

Following the judgment, Dr Tam obtained a court order to compel Dr Khairul to provide him with a copy of the financial documents of EA and EH by 31 March 2009. Upon receiving these documents, Dr Tam discovered that in April 2007, Dr Khairul had transferred the business of Eden Family Clinic from EH and EA to KAR. As a result of the transfer, KAR received $1,109,129 and $1,492,864 in revenue in 2007 and 2008 respectively, while Dr Khairul was paid $540,000 in directors’ fees (excluding directors’ salary) in 2008. EH’s and EA’s combined revenue which had been $1,796,104 in 2005 and $1,415,908 in 2006 dropped to $71,695 in 2007. Of this $71,695 only $2,930.25 came from consultant fees. The rest came from a one-off sale of closing stocks.

On 9 June 2009, Dr Tam filed this application and two months later, on 7 August 2009, Dr Khairul filed CWU 111 and CWU 112. The action that Dr Tam wanted to commence against Dr Khairul and KAR was for the purpose of recovering damages for any losses suffered by EA and EH as a result of the diversion of their businesses and also an account of profits made by Dr Khairul and KAR arising out of the transfer of the Eden Family Clinic business to KAR.

All the applications came on for hearing before me at the same time. In respect of this application, the nominal defendants, EA and EH, were not represented and took no part in the argument. Dr Khairul, however, had filed an affidavit to oppose the application and he and KAR obtained permission to appear as “Non-Parties” in order to resist it.

The derivative action

Section 216A(3) of the Companies Act (Cap 50, 2006 Rev Ed) (“the Act”) sets out three requirements which must be fulfilled before a shareholder can be granted leave to pursue an action on behalf of the company:

(3) No action may be brought and no intervention in an action may be made under subsection (2) unless the Court is satisfied that —

(a) the complainant has given 14 days’ notice to the directors of the company of his intention to apply to the Court under subsection (2) if the directors of the company do not bring, diligently prosecute or defend or discontinue the action;

(b) the complainant is acting in good faith; and

(c) it appears to be prima facie in the interests of the company that the action be brought, prosecuted, defended or discontinued.

I found that all three requirements had been met. Sufficient notice

All the parties before me agreed that Dr Tam had in fact provided notice (pursuant to s 216A(3)(a)) to the directors of EA and EH of his intention to commence derivative proceedings against the Non-Parties. Initially, Dr Khairul raised the objection that Dr Tam had not allowed EA and EH to seek independent legal advice so that they could consider whether to commence proceedings against him. At the hearing, however, this objection was not proceeded with. That was a correct decision since such an objection is not supported by the language of s 216A(3)(a). Further, the rationale of s 216A is to confer authority on a complainant to commence an action on behalf of a company against a director of that company in circumstances when the directors do not wish to do so or when there is a deadlock which effectively prevents any action being taken by the company. The inability or refusal of the company to sue its director thus has nothing to do with obtaining independent legal advice.

Acting in good faith

Counsel for the Non-Parties argued vigorously that Dr Tam had not discharged the burden of establishing that he was acting in good faith by bringing this application.

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