Ng Kek Wee v Sim City Technology Ltd [2014] SGCA 47

In Ng Kek Wee v Sim City Technology Ltd, the Singapore Court of Appeal considered the operation of section 216 of the Companies Act (“section 216”) and, in particular, the extent to which section 216 may operate to provide a remedy to a majority shareholder who alleges that the managing director of the company had acted in breach of his fiduciary duties to the company.

The Court of Appeal held that the underlying purpose of section 216 is to address and remedy commercially unfair practices against shareholders who lack the power to stop (and remedy) such prejudicial conduct. As the majority shareholder had majority voting power, which it could have used to take control of the company and subsequently take such steps as appropriate to address the wrongs it had suffered, it was disentitled from claiming relief under section 216. Given the availability of such a course of action, the majority shareholder could not be said to have been “powerless”.

Facts

Singalab International Pte Ltd (“Singalab International”) was incorporated as a joint venture between the respondent (“SCT Ltd”), the appellant (“NKW”) and two other minority shareholders. SCT Ltd owned 53.625% of the shares to NKW’s 15%. However, NKW was appointed as Singalab International’s managing director and put in charge of running its businesses. In 2004 and 2005, two companies, Singalab Pte Ltd (“SPL”) and Beans Factory Hong Kong Co Limited (“Beans HK”), which had previously been owned by a company of which NKW was also managing director, were acquired by Singalab International and became its wholly owned subsidiaries.

In 2009, SCT Ltd noticed a number of irregularities relating to SPL and brought an action in the High Court claiming relief under section 216 based on the following wrongs that it alleged NKW had committed:

  • A transfer of SPL’s shares to NKW in 2006 and the transfer of Beans HK’s shares to a third party in 2008 (together the “Transfers”). SCT Ltd alleged that the Transfers had been made without its (and the other two shareholders’) knowledge or agreement.
  • Mismanagement of SPL’s accounts and finances.
  • Diversion of SPL’s business and assets to a company owned and controlled by NKW.

High Court decision

The High Court Judge found, on the evidence, that NKW had committed the above wrongs. On the basis of this finding, the Judge held that SCT Ltd had shown it was the victim of commercial unfairness and was therefore entitled to a remedy under section 216.

NKW did not challenge the Judge’s finding that he had committed the wrongs, but appealed on the basis that the Judge was wrong to have found commercial unfairness on the facts and that, as SCT Ltd’s claim could not properly be classified as being for a personal wrong against SCT Ltd (but rather a corporate wrong against Singalab International), SCT Ltd was not entitled to rely on section 216 to circumvent the proper plaintiff rule.

Determining commercial unfairness under section 216

In determining whether or not there was commercial unfairness in this case, the Court of Appeal had two issues to consider: NKW’s conduct in relation to the affairs of Singalab International’s subsidiaries and whether SCT Ltd was disentitled to relief under section 216 because it was a majority shareholder of Singalab International.

NKW’s conduct of the subsidiaries’ affairs

NKW argued that, in determining whether there was commercial unfairness in the context of SCT Ltd’s interest in Singalab International, the Judge should not have taken into account the conduct of SPL’s affairs. The Court of Appeal disagreed and held that, when interpreting the words “affairs of a company” in the context of a group of companies, the Singapore courts adopt a practical rather than a narrow and legalistic approach.

When considering a claim under section 216 concerning subsidiaries, the Court of Appeal found that there should be “a requirement that commercially unfair conduct in the management of a subsidiary would be relevant so long and to the extent that such conduct affected or impacted the holding company whose member was the party claiming relief from oppression”. In this case, NKW’s conduct of SPL’s affairs would clearly have impacted Singalab International, as it was a holding company whose business essentially comprised that of its subsidiaries, and the Judge was correct to take it into account.

SCT Ltd’s position as majority shareholder of Singalab International

The Judge found that SCT Ltd’s majority shareholding in Singalab International did not prevent it from claiming relief under section 216. The Court of Appeal considered whether relief under section 216 is available only to minority shareholders. In this regard, the Court of Appeal observed that there is no requirement in the section that only minority shareholders may rely on it to claim relief. Instead, the key issue under section 216 is whether the claimant lacks the power to stop the allegedly oppressive act. The Court of Appeal considered section 216 ‘s underlying purpose and found that, where a shareholder’s position provides him with the power to remedy any prejudice or discrimination he has suffered, the defendant’s conduct, at law, will be considered as being commercially unfair to him (within the context of section 216). In this regard, the Court of Appeal noted that it “would be contrary to the purpose and intent of section 216 of the Companies Act to permit a shareholder to seek relief where he possesses the power to exercise self-help by taking control of the company and bringing to an end the prejudicial state of affairs”.

The Court of Appeal found that whether a shareholder claiming relief in a particular case has control or not is a question of fact, which depends on all the relevant circumstances. In this case, as majority shareholder of Singalab International, SCT Ltd could have, and actually did, voted its representatives onto the board of directors. Once it had control of the Board, it could have removed NKW from it or had the company commence a claim against NKW for the assets he had misappropriated. In the Court of Appeal’s view, the “fact that [SCT Ltd] has the majority voting power and was able to use it take control of [Singalab International] disentitles it from claiming relief under section 216”.

Wrongs done to the company and personal wrongs suffered by a shareholder

NKW submitted that the wrongs he committed were wrongs against the company, Singalab International, and not wrongs suffered by SCT Ltd in its personal capacity as a shareholder of Singalab International. He argued that SCT should have undertaken a derivative action instead and should not be allowed to circumvent the proper plaintiff rule and reflective loss principle through use of a section 216 claim.

Under the proper plaintiff rule, in an action for a wrong done to a company, the proper plaintiff isprima facie the company itself. The reflective loss principle provides that where a “shareholder’s loss merely reflects the company’s loss that would be made good if the company has enforced its full rights, the proper party to recover the reflective loss is the company and not the shareholder”.

The Court of Appeal found that the distinction between personal and corporate wrongs is often unclear and a wrong done to a company could affect its shareholders’ interests. However, the Court of Appeal was of the view that section 216 should not be relied upon for wrongs, which are essentially corporate wrongs (i.e. wrongs against the company). This was because the presence of section 216A of the Companies Act, which provides for a statutory derivative action, suggests that Parliament intended for section 216 to be used for personal wrongs and section 216A for corporate wrongs. In addition, the Court of Appeal was of the view that allowing section 216 to remedy what was essentially a corporate wrong would amount to a circumvention of the proper plaintiff rule.

In the Court of Appeal’s view, it would be appropriate to bring a claim under section 216 when a “complainant is relying on the unlawfulness of the wrongdoer’s conduct as evidence of the manner in which the wrongdoer had conducted the company’s affairs in disregard of the complainant’s interest as a minority shareholder and where the complaint cannot be adequately addressed by the remedy provided by law for that wrong”. However, the Court of Appeal declined to make any definitive pronouncements on the distinction between a corporate wrong and a personal wrong, as that was not necessary given that the Court of Appeal was able to decide the appeal on the ground discussed earlier (i.e. that SCT Ltd’s position as the majority shareholder disentitled it from claiming under section 216).

Judgment

For the reasons addressed above, the Court of Appeal allowed NKW’s appeal, thereby effectively dismissing SCT Ltd’s claim against NKW. However, even though NKW was effectively the successful party in the litigation, the Court of Appeal declined to award costs in NKW’s favour so as to record its disapproval of the wrongful acts NKW had committed.

Comment

The Court of Appeal’s decision is useful, as it clarifies the ambit and scope of section 216 of the Companies Act. It is also a timely reminder to litigants to ensure that, before a claim is pursued, the facts and circumstances are properly analysed and there is careful consideration as to what the most appropriate cause of action would be. Further, depending on the facts, an aggrieved shareholder should consider what self-help remedies may be available to him instead of immediately applying to court for assistance. This is important because there is a risk of adverse and costly ramifications if the wrong cause (or course) of action is pursued