Wong Kai Wah v Wong Kai Yuan & Anor [2014] SGHC 147

In Wong Kai Wah v Wong Kai Yuan & Anor, the Singapore High Court considered an application for leave to bring a derivative action in the name and on behalf of the second defendant company (“Sing Huat”) against the first defendant under section 216A of the Companies Act (“section 216A”). The court found that the requirements of section 216A had been met and granted the plaintiff leave to bring a derivative action.

Background

Sing Huat was incorporated in 1971 as a private company limited by shares. It was a family company. The plaintiff and the first defendant were brothers and were shareholders and the only two directors of Sing Huat. As directors of Sing Huat, both the plaintiff and the first defendant were required to sign the audited accounts of Sing Huat before they could be presented to the shareholders at the company’s Annual General Meeting. The plaintiff and the first defendant had signed Sing Huat’s audited accounts for the previous financial years without issue, but the first defendant had since November 2010 refused to sign not just Sing Huat’s audited accounts for the financial year 2009 (“FY2009”), but also the audited accounts for Tapmatic and World-Wide, two other family companies of which the first defendant and the plaintiff were directors (together with Sing Huat, the “family companies”).

Many attempts were made to persuade the first defendant to sign, including the offer of an independent audit and detailed explanations by experts. Despite all attempts, the first defendant continued to refuse.

The first defendant’s reason for not signing Sing Huat’s audited accounts was that he “strongly objected” to Tapmatic holding stocks in the same warehouse as Sing Huat and challenged the accuracy of the accounting of the stocks of the family companies, which were all held in Sing Huat’s warehouse. In response to this objection, the plaintiff had gotten the auditors of Tapmatic and World-Wide to brief the first defendant on the stock-taking procedures. The plaintiff had also proposed a special independent stock audit which would be paid for by Sing Huat. However, the first defendant continued to refuse to sign the audited accounts unless it was resolved that Tapmatic and World-Wide would no longer hold stocks.

In addition, the first defendant alleged that the plaintiff owed Sing Huat the amount of S$445,540. The plaintiff and the first defendant had “loaned”, in equal proportions, S$891,081.07 to Sing Huat in July 2008. Sing Huat returned them half of the “loan” amount each in June 2009. The first defendant contended that this was part of a practice instituted by the brothers’ father whereby, at the start of every financial year, the directors would inject monies into Sing Huat to finance Sing Huat’s operations for that year, and would be repaid at the end of that financial year, only to re-inject the sums into Sing Huat again at the start of the next financial year. In line with this practice, the first defendant had “returned” to Sing Huat his share (S$445,540) of the repayment by Sing Huat to the brothers. The first defendant alleged that the plaintiff had not “returned” the plaintiff’s share. The plaintiff’s position was that he had not re-extended the loan to Sing Huat for FY 2009 because of a separate agreement for the plaintiff to purchase the shares held by the first defendant and their mother in Sing Huat. The first defendant’s allegation in this regard was the subject of a separate application by the first defendant for leave to commence a derivative action in the name and on behalf of Sing Huat against the plaintiff. The first defendant’s application had been disposed of by another High Court Judge without leave having been granted.

The plaintiff alleged that the first defendant had willfully and without justification refused to approve and sign Sing Huat’s audited accounts in his capacity as director. It was alleged that this refusal to sign the audited accounts had caused Sing Huat to incur additional taxes, fines and potential criminal liability. He therefore began an application for leave to bring a derivative action in the name of Sing Huat and on its behalf against the first defendant under section 216A.

Requirements of section 216A

The High Court noted that it must determine whether the plaintiff has satisfied the requirements set out in section 216A to commence a derivative action. The court found that the plaintiff had satisfied the requirement to provide 14 days’ notice to the directors of Sing Huat of his intention to apply to court. The remaining requirements were to show that the plaintiff was acting in good faith and it wasprima facie in the interests of Sing Huat that the action be brought.

Was the plaintiff acting in good faith?

The court found that the plaintiff was indeed acting in good faith, having determined that the plaintiff’s complaint was one that had a reasonable semblance of merit and that there was no direct personal gain to be had by the plaintiff in the commencement of the section 216A action. The court also found that whilst it was perfectly in a director’s right to withhold assent to sign the audited accounts on good grounds, it was not reasonable in the first defendant’s case for him to have had continued to withhold his assent for more than three years when the contemporaneous and objective evidence had contradicted the first defendant’s bare assertions that there were problems with the common warehousing of the family companies’ stocks. It was thus reasonable and arguable for the plaintiff to construe the first defendant’s refusals as improper in his capacity as a director of Sing Huat.

The court also dismissed the first defendant’s reliance on the alleged debt owed by the plaintiff to Sing Huat as a proper reason for not signing the audited accounts.

Would a derivative action benefit Sing Huat?

The court found that the party which would benefit the most from the section 216A action was Sing Huat.

The court found it to be “plain” that a section 216A action would be in the interest of Sing Huat because it was a solution to the differences between the plaintiff and the first defendant which had deadlocked Sing Huat for several years and caused Sing Huat to breach its obligations under section 62(1) of the Income Tax Act (to file a return of income) as well as section 197(1) of the Companies Act (to lodge annual returns). This, in turn, had resulted in damage to Sing Huat in the form of summonses having been issued by the tax and corporate regulatory authorities against Sing Huat and against the plaintiff as director. The section 216A action was necessary to break the impasse.

Judgment

Having found the plaintiff had satisfied the requirements in section 216A, the court allowed the plaintiff’s application for leave to commence a derivative action. The first defendant had indicated that it would appeal against the court’s decision.