Wu Yang Construction Group Ltd v Mao Yong Hui and another

• Jurisdiction: Singapore
• Judgment Date: 13 December 2007
• Date: 13 December 2007
• Docket Number: Civil Appeal No 60 of 2006
• Court: Court of Appeal (Singapore)

Wu Yang Construction Group Ltd

Plaintiff

and

Mao Yong Hui and another

Defendant

[2007] SGCA 55

Chan Sek Keong CJ

,

Kan Ting Chiu J

and

Andrew Ang J

Civil Appeal No 60 of 2006

Court of Appeal

Civil Procedure–Mareva injunctions–Whether court having jurisdiction to grant injunction–Whether dispute referable to arbitration existing–Applicable principles in granting Mareva injunctions–Section 12 (7) International Arbitration Act (Cap 143A, 2002 Rev Ed)–Order 69A Rules of Court (Cap 322, R 5, 2004 Rev Ed)–Companies–Shares–Allotment–Company diversifying business by buying over business of another company as going concern–Allotment of shares forming purchase consideration–Whether company financing dealings in its own shares–Whether transaction in breach of s 76 Companies Act (Cap 50, 1994 Rev Ed)–Relevance of whether transaction in commercial interests of company–Section 76 (1) (a) Companies Act (Cap 50, 1994 Rev Ed)–Companies–Shares–Parties having standing to invoke s 76 Companies Act (Cap 50, 1994 Rev Ed)–Prescribed persons under s 76A (3) Companies Act (Cap 50, 1994 Rev Ed)–Sections 76A (2) Companies Act (Cap 50, 1994 Rev Ed)

The appellant and the first defendant below (“ZJL”) had business dealings with each other. The managing director and controlling shareholder of ZJL was the second defendant below (“CJY”). CJY was also the sole shareholder of the third defendant below (“Kingsea”), a British Virgin Islands company.

In 2002, the fifth defendant below (“VGO”) decided to diversify its business into the food and beverage industry. Kingsea's wholly-owned subsidiary, Spring Wave Ltd (“Spring Wave”) was carrying on such a business through a few subsidiaries in China, two of them being HKFC and KSWDLC. VGO entered into a sale and purchase agreement with Kingsea (“the S&P Agreement”) to acquire the entire issued share capital of Spring Wave and a shareholder's loan of RMB42.1m. The purchase consideration was agreed at RMB55m, to be satisfied by the allotment of 134,705,882 new VGO shares of S$0.01 each, credited as fully paid, at an issue price of S$0.085 per share. The initial understanding was that the completion of the transaction was subject to the consolidated net asset value (“NAV”) of Spring Wave being confirmed at RMB55m.

Under the S&P Agreement, Kingsea gave six main warranties which it undertook to make good. The two warranties relevant to the present appeal were: (a) “the concession warranty” that KSWDLC would acquire an exclusive right to extract a minimum of 85 tons of spring water per day from a certain spring, failing which Kingsea would pay RMB2.513m to HKFC; and (b) “the Agang debt warranty” that the long-term debt of RMB4,456,723 owed by KSWDLC to Agang Group Co Ltd would be forgiven and waived by the creditor, failing which Kingsea would pay KSWDLC such amount as to satisfy the debt.

Pursuant to an audit, the NAV of Spring Wave was found to be RMB4,404,000 lower than the initial RMB55m. Despite that, parties agreed to complete the transaction, but on terms that only 123,918,506 new VGO shares would be issued on completion to reflect the lower NAV; and that the remaining new VGO shares would only be issued after Kingsea had injected cash or other assets into HKFC to make up the shortfall in the NAV. Upon completion of the transaction on 17 March 2003, VGO issued 123,918,506 new VGO shares but kept 44,437,379 of those shares in escrow to secure five of Kingsea's unfulfilled warranties under the S&P Agreement.

As a result of Kingsea's continuing breach of the warranties, Kingsea deposited two further lots of 9,068,861 and 5,832,998 of the new VGO shares as additional security. After that deposit, the number of VGO shares held in escrow was 59,339,238 (“the Escrow Shares”). To remedy its breach of the concession warranty and the Agang debt warranty, Kingsea agreed to assist VGO to dispose of HKFC's interest in KSWDLC, failing which Kingsea would pay VGO the sum of RMB6,969,723. HKFC's interest in KSWDLC was eventually disposed of for RMB16m, but Kingsea was still in breach of its other warranties.

In 2005, VGO demanded payment from Kingsea for the latter's breach of warranties since 2003. When Kingsea failed to make payment, VGO exercised its power of sale under the S&P Agreement and sold the Escrow Shares to the fourth defendant below (“Mao”).

On another front, between June and November 2003, ZJL borrowed RMB30m from the appellant and the transaction was documented in nine agreements governed by Chinese law. On 12 August 2004, CJY confirmed to the appellant that Kingsea held 31,764,784 shares in VGO and he pledged those shares to the appellant to guarantee the repayment of the amount owed by ZJL. The last of the nine agreements provided that CJY would transfer all his shareholdings in VGO to offset the amounts owed to the appellant. CJY signed a share transfer registration document in Chinese, which was not registrable in Singapore.

On 23 March 2005, one day after VGO had sold the Escrow Shares to Mao, the appellant made an ex parte application to, inter alia, restrain CJY and Kingsea from dealing with the Escrow Shares, and for those shares to be transferred to the appellant. The title of the application recited that it was filed in support of an intended arbitration. The trial judge granted the freezing order (Mareva injunction), which was served on VGO the following day. VGO then notified the appellant of the sale of the Escrow Shares to Mao.

VGO and Mao then applied to court to intervene in the action and to vary the freezing order by excluding the Escrow Shares from that order on the ground that VGO had sold the Escrow Shares to Mao, who had priority to the shares over the appellant.

At the hearing of that application, counsel for the appellant raised two new issues out of the blue: (a) that the 123,918,506 shares issued by VGO were allotted in breach of s 76 of the Companies Act (Cap 50, 1994 Rev Ed) (“CA”) in that VGO had provided financial assistance to Kingsea for the latter to acquire those shares; and (b) that Mao had conspired with VGO to keep the Escrow Shares out of the reach of the appellant, and therefore Mao's claim to those shares should be postponed to that of the appellant's.

The trial judge varied the freezing order by releasing the Escrow Shares on the grounds that there was insufficient evidence of a conspiracy between VGO and Mao and that VGO had not provided financial assistance to Kingsea in breach of s 76 of the CA. The appellant appealed. The respondents in turn raised other preliminary issues for determination by the court, the relevant ones being: (a) whether the freezing order had been properly granted under s 12 (7) of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (“IAA”); and (b) whether the appellant had any locus standi to invoke s 76 of the CA.

Held, dismissing the appeal:

(1) The court below did not have the jurisdiction to grant the freezing order. The appellant did not have an underlying cause of action against CJY and Kingsea in Singapore and there was no dispute referable to arbitration. If no substantive relief was claimed against a party, a freezing order could not be issued against that party: at [26] to [28].

(2) Section 76A (3) of the CA prescribed the parties who could invoke s 76 of the CA. The appellant was not a prescribed person under s 76A (3) and thus had no locus standi to invoke s 76 against VGO: at [29].

(3) Section 76 of the CA was based on s 54 of the Companies Act 1948 (c 38) (UK). The provision was enacted to prevent abuses in the form of persons or syndicates indirectly using the funds of the target company to acquire control of the target company by first obtaining bank loans to finance their purchase of the target company, and then, after gaining control of the target company, using the target company's funds to repay those bank loans. Such practices might deplete the assets of the target company and thereby offended the rule on capital maintenance, which protected the interests of creditors: at [45].

(4) Section 76 also required the court to determine, assuming financial assistance was indeed given, whether it was given for the purpose of or in connection with the acquisition of shares in the target company. The expression “financial assistance” suggested any form of material assistance to which a monetary value could be ascribed, without which the party acquiring a company's shares would have been unable to acquire the shares. The financial assistance could be direct or indirect. The provision was breached even where the assistance given was merely in connection with the acquisition of the target company's shares: at [46].

(5) As a matter of commercial logic or reality, it was not necessarily against the interests of the target company if a controlling interest in the target company was obtained via the target company itself giving financial assistance. A poorly-managed company with under-utilised assets could be a tempting target of acquisition by entrepreneurial managers who could make better use of the company's assets or enhance the value of the company's business to the shareholders. That would certainly be in the interests of the target company, as well as its shareholders and its creditors. However, because of the express language used in the English equivalent of s 76 of the CA, the English courts had held that even if a transaction was in the commercial interests of the target company, that did not thereby prevent it from offending the English equivalent of s 76 if the main purpose or one of the purposes of the transaction was to provide financial assistance to the intended purchaser to enable the latter to acquire shares in the target company: at [47].

(6) The court's holding on the scope of s 76 (1) of the Companies Act (Cap 50, 1990 Rev Ed) in Intraco Ltd v Multi-Pak Singapore Pte Ltd [1994] 3 SLR (R) 1064 was entirely unnecessary to the determination of...