Yong Kheng Leong v Panweld Trading Pte Ltd

• Jurisdiction: Singapore
• Judgment Date: 22 October 2012
• Date: 22 October 2012
• Docket Number: Civil Appeal No 34 of 2012
• Court: Court of Appeal (Singapore)

Yong Kheng Leong and another

Plaintiff

and

Panweld Trading Pte Ltd and another

Defendant

[2012] SGCA 59

Chan Sek Keong CJ

,

Andrew Phang Boon Leong JA

and

Sundaresh Menon JA

Civil Appeal No 34 of 2012

Court of Appeal

Companies—Directors—Duties—Director-shareholder placing wife on payroll of company—Wife receiving salary—Whether director-shareholder's wife was genuine employer of company—Whether payments were approved by only other shareholder—Whether director-shareholder liable for breach of fiduciary duty

Limitation of Actions—Equity and limitation of actions—Director breaching fiduciary duties—Whether claim should be characterised as one for equitable compensation instead of constructive trust—Whether doctrine of limitation by analogy applicable—Section 6 (7) Limitation Act (Cap 163, 1996 Rev Ed)

Trusts—Accessory liability—Requisite mental state—Wife receiving company funds paid in breach of husband's fiduciary duty as director—Whether wife liable for dishonest assistance and knowing receipt

Trusts—Constructive trusts—Director with power to dispose of company's property but no longer in possession of funds misappropriated from company—Whether Class 1 or Class 2 constructive trustee

The company brought a claim for breach of fiduciary duty against one of its two directors who was also its 20% shareholder (‘the 1st director-shareholder’) for placing his wife (‘the wife’) on the company's payroll and paying her salaries over 17 years even though she was never an employee. The company's claim against the wife was based on dishonest assistance and knowing receipt. As against both the 1st director-shareholder and his wife, the company sought to recover the sums wrongfully paid.

It was not disputed that the monies had been paid to the wife, though the 1st director-shareholder and his wife took the position that the wife was a genuine employee of the company and that the payments were made with the express approval of the only other director-shareholder of the company (‘the 2nd director-shareholder’). The 1st director-shareholder and his wife initiated a third party claim against the 2nd director-shareholder on the basis that the 1st director-shareholder should be entitled to an indemnity or contribution from the 2nd director-shareholder to the extent that the payments had been made with the 2nd director-shareholder's approval. At the close of trial, it was accepted on behalf of the 1st director-shareholder and his wife that the claim against the 1st director-shareholder would not be time-barred if made out. It was, however, contended that the claim against the wife would not come within the ambit of s 22 (1) of the Limitation Act (Cap 163, 1996 Rev Ed) (‘the Limitation Act’) and would at least, in part, be time-barred pursuant to ss 6 (1) (a), 6 (1) (d) and 6 (2) of that statute.

The Judge found that: (a)the wife was never a genuine employee of the company; and (b)there was no express agreement between the two director-shareholders for the wife to be put on the company's payroll. Accordingly, the 1st director-shareholder had breached his fiduciary duty to the company. The Judge agreed that the claim against him fell within s 22 (1) of the Limitation Act and was thus not subject to any limitation period.

As for the wife, the Judge found that she knew the funds in question had been paid to her in breach of her husband's fiduciary duty. She was therefore held liable for the dishonest assistance she gave to her husband, as well as her knowing receipt of the proceeds of his unlawful actions. As the six-year limitation defence under s 6 (7) of the Limitation Act applied, the amount recoverable against her was confined to the funds wrongfully paid out in the six years immediately preceding the action.

As for the third party claim, the Judge found that it was wholly misconceived and dismissed it. If the 2nd director-shareholder had agreed to the salary payments, then the 1st director-shareholder would not be liable in the first place. On the other hand, if the 2nd director-shareholder had never agreed to the payments, there would then be no basis to seek any recourse against him.

The 1st director-shareholder and his wife filed the present appeal. It was argued, inter alia, that: (a) the Judge erred in failing to find that the 2nd director-shareholder had at least impliedly assented to the payments to the wife by virtue of his knowledge of the relevant facts; (b) notwithstanding the concession below, the Judge erred in finding that the limitation period did not apply to the claim against the 1st director-shareholder, because the company's claim should properly have been characterised as one for equitable compensation (instead of a constructive trust), to which the doctrine of limitation by analogy should have applied so as to impose a six-year time bar on the claim; (c) the Judge erred in finding that the wife was liable on the basis of knowing receipt and/or dishonest assistance; and (d) the Judge erred in dismissing the third party claim against the 2nd director-shareholder.

Held, dismissing the appeal:

(1) Even if the 2nd director-shareholder had some knowledge as to the payments, there was no basis (at least on the evidence that was led below) to find such an agreement or common understanding as could found a claim to any relief. The Judge's decision that the payments authorised by the 1st director-shareholder in favour of his wife were made in breach of his fiduciary duties as a director of the company was thus upheld: at [26] to [29].

(2) The new case advanced that the 1st director-shareholder should be allowed to rely on the limitation defence was untenable based on the findings of fact that appear to have been made by the Judge that this was a defalcation by a director who was using his wife as his proxy. In any event, if that were not the case, the company would be prejudiced if the 1st director-shareholder was allowed to pursue the new case on appeal. The Judge's finding that the 1st director-shareholder should be made liable for the full measure of the misappropriated sums was thus upheld: at [32] to [34].

(3) As the wife knew that she was not a genuine employee of the company, she therefore either knew, or wilfully avoided knowing, that the only reason the payments were made into her bank account was because her husband was channelling funds from the company to her in breach of his fiduciary duty. This was not a one-off transaction such that it might be said the wife had just been careless or was misled as to the reason she was paid. On the contrary, the wife received substantial salary payments, filed returns, and paid income tax on the same, for an extended period of 17 years, knowing all the while that she was not a genuine employee of the company. Significantly, she stood to gain, and did in fact gain, substantial benefits from the arrangement. The Judge's finding of liability on the part of the wife was thus upheld: at [82].

(4) The Judge was correct in dismissing the third party claim because if the 2nd director-shareholder had agreed to the salary payments, then the 1st director-shareholder would not be liable in the first place. On the other hand, if the 2nd director-shareholder had not agreed to this, then there would be no basis for seeking any indemnity or contribution from him: at [84].

[Observation: The alternative formulation of equitable compensation was inappropriate in the present scenario. There could well have been an additional admissible claim for equitable compensation. But equitable compensation was a claim for damages for breach of a fiduciary duty; it was not the primary, much less the only remedy where one was concerned with the misappropriation of trust property. In situations like the present, case law supported the imposition of liability on the errant director as a constructive trustee: at [43].

There are two distinct types of constructive trusts. The first category (referred to as ‘Class 1 constructive trusts’) would potentially be denied any limitation defence, whereas those in the second category (referred to as ‘Class 2 constructive trusts’) generally could avail themselves of any defence of limitations. If a person held property in the position of a trustee and dealt with it in breach of that trust, he would be a Class 1 constructive trustee; whereas a wrongdoer who fraudulently acquired property over which he had never previously been impressed with any trust obligations, might, by virtue of his fraudulent conduct, be regarded as a Class 2 constructive trustee by virtue of equity's reach. In the present case, the 1st director-shareholder as a director of the company had trustee-like responsibility for its assets. He was, by virtue of his directorship, lawfully able to deal with the company's assets, albeit in accordance with his fiduciary duties. When he disposed of the company's assets unlawfully, whether to his wife or to himself through his wife, he was undoubtedly a Class 1 constructive trustee because he had dealt with that property in breach of the trust and confidence that had been placed in him as a director: at [36], [46] and [48].

Only Class 1 (and not Class 2) constructive trusts fell within the ambit of s 22 of the Limitation Act. Since fraud by the 1st director-shareholder was made out on the facts, s 22 (1) (a) was satisfied and the time bar prescribed in s 22 of the Limitation Act was therefore excluded: at [51] and [53].

The omission of the phrase ‘ (if necessary by analogy)’ in s 6 (8) of the Limitation Act (Cap 10, 1970 Rev Ed) and subsequent equivalent provisions could not possibly have been intended to signify that the doctrine of limitation by analogy would no longer apply in Singapore. The Law Revision Commissioners did not have the power to effect any substantive change and the omission could not validly have affected or altered the scope and meaning of s 6 (6) of the Limitation Ordinance...