Tan Hong Joo and others v Full House Building Construction Pte Ltd and another

• Jurisdiction: Singapore
• Judge: Woo Bih Li JAD
• Judgment Date: 28 November 2023
• Neutral Citation: [2023] SGHC(A) 39
• Court: High Court Appellate Division (Singapore)
• Docket Number: Civil Appeal No 56 of 2023
• Hearing Date: 28 November 2023
• Citation: [2023] SGHC(A) 39
• Year: 2023
• Plaintiff Counsel: Lee Kok Weng, Mark (Li Guorong), Sarah Yeo Qi Wei and Tan Han Ru, Amelia (WMH Law Corporation)
• Defendant Counsel: Wong Thai Yong (Wong Thai Yong LLC)
• Subject Matter: Contract,Contractual terms,Warranties,Rules of construction
• Published date: 28 November 2023

Audrey Lim J (delivering the judgment of the court ex tempore):

This appeal concerns the effect of a settlement agreement dated 20 April 2018 (“SA”) which was intended to resolve matters in dispute in HC/S 895/2017 (“Suit 895”), HC/OS 67/2016 (“OS 67”) and HC/CWU 11/2018 (“CWU 11”) (collectively “the Disputes”). Particularly, Suit 895 and OS 67 relate to the first respondent, Full House Building Construction Pte Ltd (“FH”).

Background

The first appellant (“THJ”) and the second respondent (“THC”) were equal shareholders and directors of FH when it was incorporated. Later, the second appellant (“Goh”) and the third appellant (“Ooi”) were appointed FH’s directors, and Goh also obtained a minority shareholding in FH when THJ transferred some of his shares to her. Goh is the wife of THJ.

Subsequently the relationship between the parties soured and THC filed an application against FH to inspect its documents in OS 67. He also commenced Suit 895 against FH, THJ, Goh and Ooi for oppression and for leave to commence a derivative action. On the other hand, THJ commenced CWU 11, to wind up another company in which both he and THC were the shareholders and directors. During the on-going disputes, THC was removed as FH’s director in March 2017, leaving THJ, Goh and Ooi (“the Appellants”) as the directors.

To resolve their disputes, parties went through mediation which resulted in the SA. In gist, the SA provided that THC would purchase the shares of THJ and Goh in FH for $3.6m and the Appellants would step down as FH’s directors.

After the shares were transferred to THC (and paid for), THC and/or FH (“the Respondents”) took issue with the following (and which are the subject of this appeal): First, the Appellants, as FH’s directors, had wrongfully caused FH to reimburse their legal fees amounting to $251,163.78, which they had personally incurred in defending Suit 895 (“Reimbursement Claim”). The Appellants did this by passing a directors’ resolution (“the Resolution”) under Art 114 (“Art 114”) of FH’s Articles of Association to enable them to be so indemnified (“Indemnification Decision”). The reimbursement was a breach of cl 24 of the SA (“Clause 24”). Also, the preconditions to indemnifying the directors for legal costs under Art 114 were not fulfilled. Second, the Appellants had wrongly warranted under cl 18 of the SA (“Clause 18”) that FH’s trade receivables were not less than $3.3m as of 28 February 2018 (“the Warranty”) when the receivables were below that minimum sum (“Warranty Claim”). This was a breach of the Warranty as outstanding debts owed to FH by BL Construction Pte Ltd (“BL”) and Buildforms Construction (Pte) Ltd (“Buildforms”), which had been included in FH’s receivables, were extremely unlikely to be recoverable, and hence could not objectively have been considered “receivables” within Clause 18.

The salient terms of the SA are as follows: 1. Without any admission of liability on the part of any Party, the Parties agree to a full and final settlement of any and all claims or liabilities arising from or in connection with [Suit 895, CWU 11 and OS 67] … this Agreement is and is intended by the Parties to be a complete settlement of any and all differences and disputes, of whatever nature, and whether known or unknown, between the Parties …

…

10. No issue or objection shall be taken with the running and management of [FH] ... or its affairs prior to the date of signing of the Agreement …

…

18. … the Current Directors warrant that as of 28 February 2018, the trade payables of [FH] is not more than [$2m], the trade receivables are not less than [$3.3m], the cash in bank balances are not less than [$3.4m], and there are no bank borrowings other than hire purchases and a mortgage.

…

24. Each Party shall bear his/her own costs for [S 895] and [OS 67].

Further, Art 114 of FH’s Articles of Association provides as follows:

Every director … and other officer … of the company shall be indemnified out of the assets of the company against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in connexion with any application under the Act in which relief is granted to him by the Court in respect of any negligence, default, breach of duty or breach of trust.

At the trial below, the Appellants argued as follows: Clause 24 merely mirrored that of a court making no order as to costs. It did not impose any positive obligation on any party to personally bear the costs of his own legal defence in Suit 895, or any negative obligation to refrain from seeking or accepting reimbursement of such costs from another party. Also, the preconditions in Art 114 should be interpreted as including situations where legal proceedings are resolved by settlement. Additionally, cl 10 of the SA (“Clause 10”) precluded any challenge to management decisions the Appellants had made whilst in charge of FH. There was a realistic prospect of recovering the outstanding debts from BL and Buildforms in full, such that their inclusion as part of FH’s receivables could not be said to have been wrong. The decision to include the debts as part of FH’s receivables was also a management decision which could not, pursuant to Clause 10, be challenged.

The Appellants also made several counterclaims against the Respondents, but they are not the subject of the present appeal.

The decision below

The trial judge (“Judge”) allowed the Reimbursement Claim and found as follows: Clause 24 did not preclude FH from reimbursing the Appellants’ legal fees. The effect of Clause 24 was simply that no party to Suit 895 could be legally compelled to reimburse the legal costs of another; it did not prohibit a party to the SA from receiving voluntary reimbursement of his legal fees. However, Art 114 only permitted the indemnification of a director against costs incurred in defending proceedings which were resolved by way of judgment in his favour, by his acquittal, or in which relief is granted to him under the Companies Act. This precondition was not fulfilled as Suit 895 was resolved by the SA. Thus, the Appellants could not invoke Art 114 to justify the Indemnification Decision. The Appellants could not rely on Clause 10 to prevent the Respondents from bringing the Reimbursement Claim. The Resolution passed was plainly inconsistent with the Articles of Association and ultra vires the directors’/Appellants’ powers, and hence could not be considered a management decision deserving of the court’s deference or the protection of Clause 10.

The Judge also allowed the Warranty Claim, and found as follows: BL’s debt of $514,959.15 (the “BL Debt”), out of $614,959.15, could not be considered as part of FH’s receivables as of 28 February 2018 as it was “very unlikely” that FH would ever recover the BL Debt. It also appeared unlikely that the Appellants were genuinely under any subjective belief that they would recover the full debt from BL. Buildforms’ debt of $31,458 (the “Buildforms Debt”) could not be considered as part of FH’s receivables, in light of the Appellants’ instructions to its auditors that $31,458 be debited from its financial statements for the financial year 2016 as “provision for impairment of trade receivables (from [Buildforms]) which are...