Tembusu Growth Fund II Ltd and another v Yee Fook Khong and another

• Judge: Ang Cheng Hock J
• Judgment Date: 20 May 2020
• Neutral Citation: [2020] SGHC 104
• Citation: [2020] SGHC 104
• Court: High Court (Singapore)
• Published date: 23 May 2020
• Docket Number: Suit No 326 of 2018
• Plaintiff Counsel: Daniel Chia Hsiung Wen, Ker Yanguang and Wong Ru Ping Jeanette (Morgan Lewis Stamford LLC)
• Defendant Counsel: Chan Ming Onn David, Zhang Yiting and Lin Ruizi (Shook Lin & Bok LLP)
• Subject Matter: Contract,Breach,Remoteness of damages,Contractual terms,Rules of construction,Express terms,Equity,Estoppel,Promissory estoppel
• Hearing Date: 23 August 2019,21 August 2019,22 August 2019,10 January 2020,19 August 2019,28 November 2019,20 August 2019

Ang Cheng Hock J:

This case arises from an investment made in a business in China and the arrangements made between the parties for the investor to realise his investment. Parties entered into a series of agreements to facilitate the investor’s exit, but disputes have arisen as to what parties’ obligations actually entail. The issues that are raised before me include questions as to contractual interpretation, promissory estoppel, causation of loss and remoteness of damages.

Facts The parties

The first plaintiff is a Singapore-incorporated private equity fund in the business of investing in companies across Asia.¹ It is managed by Tembusu Partners Pte Ltd (“Tembusu”). Andy Lim (“Mr Lim”) is the Chairman of Tembusu and also a member of its investment committee.²

The second plaintiff is a China-incorporated company in the business of providing consulting services.³ It is wholly owned by Tembusu. The second plaintiff and its employees also help to manage and oversee the first plaintiff’s investments in China.

The first defendant is an entrepreneur who has various interests in online media companies in Hong Kong and China.⁴ He is the founder of OOB Media HK Ltd (“OOB HK”), a company incorporated in Hong Kong. He is the sole director and holder of 96% of the share capital of OOB HK.

OOB HK is an investment holding company and has an associated company incorporated in China known as OOB Media (Sichuan) Co., Ltd (“OOB Sichuan”).⁵ OOB Sichuan is listed on the National Equities Exchange and Quotations (“NEEQ”) exchange in Beijing, China. OOB HK holds shares in OOB Sichuan through its wholly-owned subsidiary incorporated in China known as Tone Rich (Shanghai) Co., Ltd (“Tone Rich”).

The second defendant is the Chief Executive Officer of Metro Education Pte Ltd (“Metro”), a Singapore-incorporated company that is in the business of providing tertiary education services in China.⁶ The second defendant is the registered owner of about 33% of the total share capital in Metro, of which 13.8% of the total share capital is held on trust for the first defendant.⁷ The second defendant is a party to this action only because he signed an agreement where he agreed to a charge of the first defendant’s 13.8% beneficial shareholding in Metro as security for the latter’s payment obligations.

Background to the dispute

From 2012 to 2014, the first plaintiff invested in OOB HK pursuant to a subscription agreement, which was later supplemented, and eventually became an approximately 38.64% shareholder in OOB HK.⁸ Then, on 28 January 2014, the first plaintiff entered into a Convertible Loan Agreement with OOB HK (the “Convertible Loan Agreement”), under which the first plaintiff provided a loan of RMB 5 million to OOB HK with a maturity period of 12 months.⁹ The Convertible Loan Agreement provided that the first plaintiff could elect to convert the loan of RMB 5 million into shares of OOB HK, at a pre-agreed valuation, by 31 March 2014.¹⁰ Failing such conversion, OOB HK was required to repay the loan and accrued interest to the first plaintiff by the stipulated repayment date of 12 months from 28 January 2014. As it transpired, the first plaintiff elected not to convert the loan into equity, but OOB HK did not repay the loan and accrued interest by the due date.¹¹ No explanation was provided for why OOB HK failed to make repayment of the loan.

Pursuant to an agreement in Chinese titled “Entrusted Shareholding Agreement” dated 15 June 2015, it was agreed that the first plaintiff’s 38.64% shareholding in OOB HK would be converted to a proportionately equivalent amount of shares in OOB Sichuan.¹² In this way, the first plaintiff’s shareholding in OOB HK was “transferred” to a shareholding in OOB Sichuan. The first plaintiff’s shares in OOB Sichuan were held by the second plaintiff. OOB Sichuan was listed on the NEEQ in September 2015.

On 12 October 2015, the first plaintiff and the first defendant entered into a “Share Transfer Agreement”, under which the first defendant agreed to buy 90% of the second plaintiff’s shareholding in OOB Sichuan for the sum of S$10 million, payable in RMB at the equivalent exchange rate.¹³ It is not in dispute that this agreement was not performed.

On 24 June 2016, the first plaintiff and OOB HK signed a Loan Extension Agreement to extend the payment deadline of the RMB 5 million and accrued interest due to the first plaintiff from OOB HK to 31 December 2016 (the “Loan Extension Agreement”).¹⁴ The Loan Extension Agreement was signed because of OOB HK’s continued failure to pay back the RMB 5 million loan owing under the Convertible Loan Agreement.¹⁵ The Loan Extension Agreement also provided for the interest rate to be increased to 20% per annum in the event that payment was not made by the extended deadline.

By December 2016, OOB HK had still not paid the sums due to the first plaintiff under the Convertible Loan Agreement, as amended by the Loan Extension Agreement. On 16 December 2016, the second plaintiff and the first defendant entered into another agreement titled the “Shares Sale and Purchase Agreement” (“the SSP Agreement”).¹⁶ Under this agreement, the second plaintiff agreed to sell its shares in OOB Sichuan to the first defendant for the sum of S$10 million. These shares were held by the second plaintiff on behalf of the first plaintiff. The sum of S$10 million was broken down into instalments to be paid in RMB at monthly intervals throughout 2017, with a further sizable payment of S$4.41 million, being the last instalment, due before 25 December 2017.¹⁷ It was provided in the SSP Agreement that this instalment of S$4.41 million was made up of “the balance payment of the SGD 10mn, purchase price of shares + RMB 5mn, loan + interest”.

It was also provided at clauses 4 and 5 of the SSP Agreement respectively as follows: 4. The shares are effectively sold to the purchaser with the signing of the agreement and the seller agrees to effect and do everything needed to officially transfer the shares when given notice to do so by the purchaser.

[and]

5. The purchaser will charge the shares back to Tembusu once the share transfers are registered and they will remain charged until such time those shares are paid in full.

The reason given by the first defendant for these clauses was that he had told the plaintiffs that he needed all the second plaintiff’s shares in OOB Sichuan in order to use them as collateral to raise funding to make payment to the plaintiffs.¹⁸ However, at the same time, the plaintiffs were not willing to make an outright transfer because they would then lose their security for the repayment. Hence, the mechanism as set out in clauses 4 and 5 was agreed to in the SSP Agreement. It also bears noting that there is an acceleration clause in that agreement (at clause 6), which provides for all the instalment payments to become due and payable immediately upon default of any instalment payment.

In all, the first defendant made 9 separate payments to the second plaintiff from December 2016 to August 2017.¹⁹ All, except for the first payment of RMB 50,000, fell substantially short of the amount due under each instalment as provided for in the SSP Agreement. The parties are at loggerheads as to who is at fault for these short payments, and whether the second plaintiff was in breach of the SSP Agreement by failing to transfer all its shares in OOB Sichuan to the first defendant as required by clause 4 of that agreement. The details of the opposing positions of the parties will be dealt with later in the course of this judgment.

On 7 July 2017, the plaintiff’s Chinese lawyers sent a letter to the first defendant demanding payment of the sum of RMB 10,375,000, being the amount allegedly then due to the plaintiffs.²⁰ In response, the first defendant made five separate payments to the second plaintiff totalling the sum of RMB 1 million.²¹

In late August and early September 2017, the parties, including the second defendant, met to negotiate the terms of a new agreement.²² This was at the insistence of the plaintiffs.²³ The first defendant was asked to provide a payment schedule that would reflect a realistic possibility of compliance.²⁴ While negotiations were in progress, OOB Sichuan shares were suspended from trading on the NEEQ on 11 September 2017 at the request of the first defendant.²⁵ The suspension was lifted only on 29 December 2017.²⁶

Eventually, the plaintiffs and defendants entered into an agreement, which was called a “Term Sheet” dated 20 September 2017 (the “Term Sheet”). It was not disputed that the agreement was executed in counterparts in Singapore and China on that date and that the parties did not physically meet to sign the agreement.²⁷

Under the Term Sheet, the first defendant agreed to pay the plaintiffs the amount of RMB 33,375,000 plus S$4.41 million in instalments as it had already agreed to purchase the shares in OOB Sichuan from the second plaintiff.²⁸ A schedule was annexed to the Term Sheet and set out the instalments payable at monthly intervals starting on 30 September 2017 and ending on 30 December 2018. The monthly instalments ranged from RMB 500,000 to RMB 7 million, with many of the instalments being in the amount of RMB 1 million. The last instalment was the sum of RMB 10,875,000 plus S$4.41 million.²⁹

It was also provided under the Term Sheet that the defendants agreed to a charge being created over the first defendant’s 13.8% shareholding in Metro, which was held on trust by the second defendant, to secure payment of the “Outstanding Amount”. This was defined as the amount due at any time under the schedule of instalment payments in Annex A to the Term Sheet. The Outstanding Amount would be immediately due and payable to the plaintiffs if the payment schedule was not adhered to.

After the execution of the Term Sheet, the first defendant made payment of the first two...