Tembusu Growth Fund Ltd v ACTAtek, Inc and others

• Jurisdiction: Singapore
• Judge: Vinodh Coomaraswamy J
• Judgment Date: 19 October 2017
• Neutral Citation: [2017] SGHC 251
• Plaintiff Counsel: Daniel Chia and Ker Yanguang (Morgan Lewis Stamford LLC)
• Docket Number: Suit No 642 of 2012
• Date: 19 October 2017
• Hearing Date: 24 April 2017,27 January 2017,20 January 2017
• Subject Matter: Loss of chance,Remedies,Damages,Causation,Contract,Discharge,Anticipatory breach
• Year: 2017
• Defendant Counsel: S Magintharan, James Liew and Vineetha Gunasekaran (Essex LLC)
• Court: High Court (Singapore)
• Citation: [2017] SGHC 251
• Published date: 22 August 2018

Vinodh Coomaraswamy J: Introduction

Tembusu Growth Fund Ltd (“Tembusu”) is a venture capital fund which invests in technology start-up companies. In January 2012, it invested S$1.5m in ACTAtek, Inc (“AI”), through a convertible loan agreement (“CLA”). In May 2012, Tembusu declared a default under the 2012 CLA. The grounds it relied on were that AI had used the proceeds of the loan extended to it under the 2012 CLA in breach of contract.

Three months after declaring the default, Tembusu brought this action against AI, its chief executive officer, Thomas Wan, and three other defendants. In this action, Tembusu sought damages for breach of the 2012 CLA and for fraudulent misrepresentation in inducing Tembusu to enter into that agreement. In response, AI and Mr Wan brought a counterclaim for damages against Tembusu. In relation to Tembusu’s claim in contract, their position was that AI did not breach any of the terms of the 2012 CLA and that it was in fact Tembusu who was in breach of contract.

I allowed Tembusu’s claim against AI and Mr Wan but dismissed its counterclaim. I also dismissed Tembusu’s claim against the three other defendants. The three exonerated defendants are of no further significance in this matter. For convenience, therefore, the term “defendants” in this judgment will be used to refer only to AI and Mr Wan.

The defendants appealed against my judgment to the Court of Appeal. Their appeal succeeded. The Court of Appeal held that AI had committed no breach of the 2012 CLA and that it was instead Tembusu who had committed an anticipatory repudiatory breach of that agreement. The Court of Appeal remitted this action to me to assess the damages which Tembusu must pay by reason of that breach.

The defendants’ principal claim in the assessment is that Tembusu’s breach derailed AI’s planned initial public offering (“IPO”) and thus caused both defendants to lose an opportunity to own shares in a listed company worth some NZ$30.5m. I have rejected the defendants’ claim. I have held that Mr Wan is not entitled to any damages whatsoever because he is not a party to the 2012 CLA. He therefore has no standing to claim contractual damages from Tembusu under that agreement. AI was Tembusu’s only counterparty to the 2012 CLA. But I have awarded it only nominal damages of S$1,000 for breach of that agreement. I find that it did not suffer any loss as a result of the failed listing. Even if it did, I find also that Tembusu’s breach did not cause the failed listing.

In the first tranche before me, both liability and quantum were in issue. The parties therefore agreed to proceed on the assessment of damages without a fresh evidential phase. They rely only on the evidence adduced at that tranche.

The defendants have appealed against my decision. I therefore now set out my reasons.

Background ACTAtek, Inc and Mr Wan

AI is a company incorporated in the Cayman Islands. It is the holding company for a group of companies referred to loosely as the ACTAtek Group. Its business is to provide identification management solutions. The group consists of wholly-owned subsidiaries of AI which are incorporated in Singapore, Hong Kong, the UK, the US and Canada.

Mr Wan is the chief executive officer and a director of both AI and its Singapore subsidiary. He co-founded the ACTAtek Group in 2007.

Tembusu invests in AI

In June 2007, Tembusu and AI entered into a CLA under which Tembusu lent US$1.5m to AI. Towards the end of 2011, Tembusu and AI agreed on a term sheet for Tembusu to extend a further convertible loan of S$1.5m.

Around the same time, in November 2011, AI, Mr Wan and Tembusu were introduced to a New Zealand company called Investment Research Group Limited (“IRG”) to discuss AI’s planned IPO. IRG is a firm of investment consultants carrying on business in New Zealand. IRG was represented in these discussions by Brent King, its managing director. Mr King explained to the parties the process for listing AI on the New Zealand Alternative Market (“NZAX”), a stock exchange designed for small to medium-sized businesses. A listing on the NZAX must be supported by a sponsor. The purpose of the sponsor is, among other things, to assess the company’s credibility and to assist the company with regulatory compliance. IRG had acted as a sponsor for other companies listed on the NZAX and was to be AI’s sponsor.

In January 2012, Tembusu and AI signed a CLA by which Tembusu agreed to extend a second convertible loan to AI. This time, the amount of the loan was S$1.5m rather than US$1.5m.

The key terms of the 2012 CLA were as follows: By cl 5.1, Tembusu was obliged to convert its loan into shares in AI if an IPO took place before 30 June 2013 and had an option to convert its loan into shares in AI if there was no IPO by that date. In both cases, the conversion price was to be at a 50% discount to the assessed value of AI’s shares. The important point to note here is that Tembusu had an obligation to convert its loan into shares upon an IPO rather than an option to do so. This point was critical to the Court of Appeal’s finding that Tembusu was in anticipatory repudiatory breach of the 2012 CLA (see [70]–[81] below). By cl 6.2, Tembusu had the right to appoint a non-executive director to AI’s board. Tembusu’s first nominee to AI’s board was one Daniel Lee. By cl 8.1(e), Tembusu had the right to declare a default if: (i) AI was in material breach of any of its obligations under the 2012 CLA; and (ii) AI failed to remedy that breach within 30 days of committing it, provided that the breach was capable of being remedied. By cl 8.2, a default made Tembusu’s S$1.5m loan to AI immediately repayable together with interest on it at 15% per annum compounded annually.

To satisfy a condition precedent of Tembusu’s obligation to lend under the 2012 CLA, Mr Wan prepared and delivered to Tembusu a document titled “Use of Proceeds” (“UOP”). That document set out AI’s intention as to how it proposed to use the S$1.5m loan which Tembusu was to extend to it under the 2012 CLA. Upon receipt of the UOP, Tembusu disbursed the loan.

In February 2012, AI gave IRG its formal mandate to list AI on the NZAX. IRG proceeded to prepare AI for listing. The precise steps to be completed for the listing are set out at [99] below. The important point is that the actual vehicle to be listed was to be a new special purpose vehicle to be incorporated in New Zealand, ACTAtek Ltd (“ACTNZ”). ACTNZ would acquire from AI all of the shares in all of AI’s subsidiaries at a value of NZ$30.5m in exchange for ACTNZ issuing and allotting to AI 121.4m new shares in ACTNZ.

Tembusu declares a default

In May 2012, Tembusu discovered that AI had used part of the proceeds of the 2012 CLA to repay a loan of US$260,000 which it owed to a shareholder of AI, Hectrix, Inc. Mr Wan is a shareholder of Hectrix, Inc. Although this loan pre-dated the 2012 CLA, AI had failed to disclose it to Tembusu in the negotiations for the 2012 CLA. Further, the UOP (see [14] above) had made no mention of AI’s intention to use the proceeds of the 2012 CLA to repay this loan. Tembusu was also alarmed because Mr Wan effected the repayment without approval from AI’s board. As a result, Tembusu’s nominee on the board (see [13(b)] above) was not alerted to the repayment.

Tembusu considered AI’s use of the proceeds of the 2012 CLA to repay this loan to be a breach of contract. On 16 May 2012, Tembusu’s solicitors wrote to AI declaring a default under the 2012 CLA.¹ The default was said to be: (a) the failure to disclose the Hectrix loan, constituting a breach of warranty under the 2012 CLA; and (b) AI’s use of the proceeds of the 2012 CLA to repay the Hectrix loan without Tembusu’s consent, the repayment not being a use set out in the UOP. This letter also contained a demand for AI to repay the entire principal advanced under the 2012 CLA by 23 May 2012, failing which Tembusu would commence proceedings.

AI did not repay Tembusu as demanded. In August 2012, Tembusu commenced this action.

AI’s listing on the NZAX did not take place. Whether that was caused by Tembusu is one of the principal disputes in this case and is an issue to which I will return.

The litigation

Tembusu’s claim which is relevant for present purposes was its claim in contract that AI had breached an express or an implied term of the 2012 CLA which obliged AI to use the proceeds of the 2012 CLA only for the uses set out in the UOP. Tembusu’s case was that this breach entitled it to declare a default, and that the default it had declared on 16 May 2012 had accelerated AI’s obligation to repay the S$1.5m lent under the 2012 CLA. In addition, Tembusu argued that the default under the 2012 CLA had triggered a cross default under the 2007 CLA and had accelerated AI’s obligation to repay the US$1.5m advanced under the earlier CLA as well.

The defendants ran a common defence. On Tembusu’s breach of contract claim, their principal defence was that there was no express or implied term in the 2012 CLA which restricted how AI could use Tembusu’s loan extended under that agreement. Alternatively, even if there were such a term, the breach of that term did not entitle Tembusu to declare a default.

The defendants brought a counterclaim against Tembusu for losses suffered as a result of Tembusu’s acts and omissions. The counterclaim in contract alleged that Tembusu was in breach of the 2012 CLA and had caused AI’s failure to list.

The trial of this matter took place before me on both liability and quantum. I found the defendants to be liable to Tembusu. I held that the 2012 CLA contained an implied term limiting AI’s right to use the proceeds of Tembusu’s loan and that AI’s payment to Hectrix was a material breach of that term which entitled Tembusu to declare a default. I therefore entered final judgment for Tembusu for S$1.5m and interest (being its claim under...