Tembusu Growth Fund Ltd v ACTAtek, Inc and others

• Jurisdiction: Singapore
• Judge: Vinodh Coomaraswamy J
• Judgment Date: 05 August 2015
• Neutral Citation: [2015] SGHC 206
• Court: High Court (Singapore)
• Docket Number: Suit No 642 of 2012
• Year: 2015
• Published date: 21 October 2016
• Hearing Date: 30 July 2014,31 July 2014,07 August 2014,04 August 2014,27 November 2014,12 August 2014,05 August 2014,06 August 2014,08 August 2014,01 August 2014,29 July 2014
• Plaintiff Counsel: Daniel Chia, Kenneth Chua, Stephany Aw and Ker Yanguang (Stamford Law Corporation)
• Defendant Counsel: S Magintharan and James Liew (Essex LLC)
• Subject Matter: Contract,Breach,Misrepresentation,Fraudulent
• Citation: [2015] SGHC 206

Vinodh Coomaraswamy J: Introduction

Under two convertible loan agreements (“CLA”), entered into in 2007 and in 2012, the plaintiff lent the first defendant US$1.5m and S$1.5m respectively. The plaintiff’s case is that the defendants induced the plaintiff to enter into the 2012 CLA through fraudulent misrepresentation; alternatively, that the first defendant has breached a term of the 2012 CLA with the second defendant having induced that breach. In either event, the plaintiff says, the result is to trigger an event of default not only under the 2012 CLA, but also a cross-default under the 2007 CLA.

The plaintiff now claims damages against the defendants for fraudulent misrepresentation, breach of contract, inducement of breach of contract and conspiracy. The defendants counterclaim against the plaintiff damages for breach of contract, breach of a duty of care in tort and conspiracy by unlawful means.

I have allowed the plaintiff’s claim against the first and second defendants and have dismissed its claim against the remaining three defendants. I have also dismissed the defendants’ counterclaim in its entirety. The first and second defendants have appealed to the Court of Appeal against my decision. I now give my grounds.

The parties The plaintiff

The plaintiff is Tembusu Growth Fund Ltd (“Tembusu”), a company incorporated in Singapore. Tembusu is a venture capital fund which invests in medium sized start-up companies with growth potential.¹

Tembusu is owned and managed by Tembusu Partners, a professional fund manager.² The Chairman of Tembusu Partners is Andy Lim (“Andy”). The key employees of Tembusu are Mahim Chellappa (“Mahim”) and Lee Renhui (“Renhui”). Andy, Mahim and Renhui all played a central role in the events leading up to the dispute with the defendants. They all gave evidence at trial for Tembusu.

The defendants

The first defendant is ACTAtek, Inc (“AI”). AI is a Cayman Islands company which provides identification management solutions. It carries on business through various wholly-owned subsidiaries incorporated in Singapore, Hong Kong, UK, US and Canada.³ These subsidiaries design, manufacture and trade in electronics products. Together with AI, their holding company, these subsidiaries form a group of companies known as the ACTAtek Group.

The third defendant is ACTAtek Pte Ltd (“ASg”). ASg is a wholly-owned subsidiary of AI and is incorporated in Singapore. It is the main operating and trading company of the ACTAtek Group.⁴

The second defendant is Wan Wah Tong Thomas (“Thomas”). Thomas is both the Chief Executive Officer and a director of both AI and ASg. Thomas is in charge of AI’s day to day operations and oversees the strategic direction of the group. Thomas founded the ACTAtek Group together with Paul Hung (“Paul”) in 2007.⁵ Paul is not himself a defendant.

Thomas and Paul hold their shares in ACTAtek through the fourth defendant Hectrix, Inc (“Hectrix”). Hectrix is a Cayman Islands company which holds 80.68% of the shares in AI.⁶ The remaining shares in AI are held by a number of minority shareholders.

The fifth defendant is Thomrose Holdings (BVI) Ltd (“Thomrose”).⁷ Thomrose is a company incorporated in the British Virgin Islands. Thomas owns and controls Thomrose as his personal investment vehicle. Thomrose and Paul together own 100% of Hectrix.

Background facts The 2007 Convertible Loan Agreement

In 2007, one of AI’s minority shareholders introduced AI and Thomas to Tembusu.⁸ Tembusu saw potential in the ACTAtek Group and expressed interest in AI’s prospects.⁹ AI and Tembusu began negotiations for the latter to extend a loan of US$1.5m to fund AI’s research and development. Tembusu and AI eventually signed the 2007 CLA on 29 June 2007.

The important terms of the 2007 CLA are the following:¹⁰ By cl 2 of the 2007 CLA, Tembusu agreed to lend US$1.5m to AI to be drawn down in two equal tranches of US$0.75m each. By cl 5 of the 2007 CLA, AI granted Tembusu the option either to demand repayment of the loan with interest at 10% per annum at any time before 31 March 2008 or to convert the loan into equity in AI at any time before AI’s initial public offering (“IPO”), at the valuation and on the terms stipulated in the 2007 CLA. By cl 3 of the 2007 CLA, AI was expressly prohibited from using the funds advanced under the 2007 CLA for any purpose other than those stipulated in Schedule 3 of that agreement, unless Tembusu consented in writing and in advance. By cl 10.1.10 of the 2007 CLA, AI gave Tembusu the right to declare an event of default if any ACTAtek Group company defaulted on the repayment of any other indebtedness or if any ACTAtek Group company’s obligation to repay any other indebtedness was accelerated by reason of an event of default being declared. By cl 10.3 of the 2007 CLA, if an event of default occurred, Tembusu had the option to declare the whole of the loan extended under the 2007 CLA immediately due and payable.

Tembusu duly disbursed the US$1.5m to Tembusu under the 2007 CLA. Tembusu did not exercise its right to demand repayment of the loan on or before 31 March 2008. On and after 1 April 2008, therefore, pursuant to cl 5 of the 2007 CLA, its only means of earning a return on this investment in AI was through conversion of its loan into equity upon AI’s IPO.

Discussions leading up to the 2012 CLA

Between 2009 and 2011, AI and Tembusu discussed from time to time the possibility of a further investment from Tembusu. Nothing came of those discussions.

On 23 March 2011, Daniel Wong (“Daniel”) of AI informed Renhui that AI was negotiating with Ingram Micro (“Ingram”), the world’s largest distributor of computer and technology products, for Ingram to be a promoter and distributor of the ACTAtek Group’s products.¹¹ On 20 April 2011, Thomas told Mahim that this opportunity represented a chance for AI to “expand exponentially”, but only if AI secured the necessary funding to work with an entity as large as Ingram.¹²

So it was that Tembusu and AI began to discuss in earnest the possibility of AI raising additional funds to help AI progress towards its planned IPO. In late June 2011, the parties met to discuss this matter. Renhui followed up on the meeting with an email to Thomas asking for details on how the proceeds were going to be used and for a copy of the signed contract between Ingram and AI.¹³

Nothing of significance then happened until 30 September 2011, when Thomas met Mahim and Renhui at an industry dinner. Thomas asked Mahim to consider a second investment by Tembusu in the sum of US$500,000.¹⁴ To follow up, on 3 October 2011, Thomas emailed Mahim as follows:¹⁵

Further to our short conversation during the ... dinner, to assist me to come up with a forecast, is Tembusu ready to invest USD750k or other amount to ACTAtek?

I like to wrap this up asap. ... The ACTAtek operation is solid and with real and solid customers. The fact that we need the cashflow for inventory, sales/marketing investment has been mentioned. All we need now is the fund to leverage upon Ingram Micro’s network. So our plan is based upon cash available.

Mahim responded on the same day to say that Tembusu would require more details on the use of the proceeds in order to give the proposed investment serious consideration. Thomas responded on 3 October 2011 that US$400,000 would be used for inventory financing and US$100,000 would be used for sales and marketing related expenses to “drive the add-on sales from Ingram and other distributors”.¹⁶

A series of further discussions between the parties led to term sheets being exchanged. Tembusu proposed to lend S$1m to AI.¹⁷ Eventually, the loan amount was increased to S$1.5m.¹⁸

On 25 November 2011, Mahim asked Thomas for a detailed statement of how AI intended to use the proceeds of the investment by Tembusu.¹⁹ On 13 December 2011, Mahim asked Thomas for detailed financial projections so that this additional investment in AI could be put before Tembusu’s investment committee for approval. Thomas instructed Daniel to send AI’s financial forecast for the years 2011 to 2013 to Tembusu. Daniel did so on 14 December 2011. This forecast had the following note on page two:

Note:
Utilisation of proceed: SGD1.5mil
Sales & Marketing Expenses	SGD 500k
R&D expenditure	SGD 300k
IPO	SGD 200k
Working Capital	SGD 500k
	SGD 1.5mil

Tembusu circulated drafts of an agreement to Thomas in December 2011 and carried out further financial due diligence. Thomas then introduced into the discussions the issue of AI’s liabilities to Thomas and Paul. These liabilities included unpaid salary due from AI and shareholders’ loans extended to AI.²⁰ Tembusu’s position was that none of the $1.5m that it was going to lend AI should go towards paying unpaid salary or towards repaying existing shareholders’ loans. Tembusu did, however, agree to consider allowing the shareholders’ loans to be converted into equity. But Tembusu and Thomas could not agree on the terms of the conversion. Tembusu proposed deferring the discussion of the shareholders’ loans and unpaid salary and going ahead with the S$1.5m loan on the terms already agreed.²¹ AI agreed to do so.

Parties sign the 2012 Convertible Loan Agreement

Under the 2012 CLA, which is dated 6 January 2012, Tembusu agreed to lend S$1.5m to AI. The important terms of the 2012 CLA are as follows:²² By cl 5, the loan was convertible into shares in AI upon AI’s IPO at a 50% discount to the issue price of AI’s shares or, if there was no IPO, at a 50% discount to the value of the shares assessed by two independent accountants. By cl 3.1(d)(ii) of the 2012 CLA, it was an express condition precedent to Tembusu’s obligation to lend the S$1.5m to AI that AI deliver to Tembusu details of how it intended to use the proceeds of the loan and...