Ho Kang Peng v Scintronix Corp Ltd (formerly known as TTL Holdings Ltd) [2014] SGCA 22

The Singapore Court of Appeal in Ho Kang Peng v Scintronix Corp Ltd (formerly known as TTL Holdings Ltd) upheld the decision of the High Court and found that the appellant had breached his fiduciary duty by making unauthorised payments in the name of the company. While the Court of Appeal accepted the appellant's argument that the payments were meant to procure business for the company, it held that such  unauthorised and irregular payments were not made in the company's best interests.

Facts

The appellant ("Ho") was at the relevant time the chief executive officer and a director of the respondent (the "Company"). The Company is a listed company in Singapore. Ho was from November 2005, CEO, executive director and executive chairman of the Company. He stepped down as the CEO and executive chairman in March 2008, but remained as non-executive director of the Company until October 2008.

The Company claimed against, among others, Ho for breach of fiduciary, statutory and contractual duties as a director. The High Court found that Ho had breached his fiduciary duties by failing to seek the Company's approval for the remuneration packages of certain contracted advisors and by authorising payments to a Taiwanese company ("Bontech"). These payments were made pursuant to a supposed consulting agreement between the Company and Bontech for unspecified services (the "Bontech Agreement").

The Bontech Agreement was signed by Ho on behalf of the Company in August 2006. Notwithstanding the fact that no services were rendered by Bontech to the Company, the latter nevertheless made eight payments totaling almost S$170,000 to Bontech (the "payments"). The payments were allegedly handed over to one of the Company's Shanghai-based directors ("Oh"). Ho's evidence in this regard was that Oh had passed the payments over to an individual based in Shanghai known only as "Mr Lee", in exchange  for Mr Lee's undertaking to procure business worth RMB$4 million monthly from a major client of the Company incorporated in China ("Pioneer").

It was not disputed that there was no formal resolution of the Board authorising Ho to enter into the Bontech Agreement or to make the payments thereunder. Ho however pointed to a resolution of the remuneration committee dated March 2005 relating to payments to be made to three directors based in Shanghai including Oh for "outstation allowances" (the "resolution"). Ho contended that these "outstation allowances" were meant for onward payment to Mr Lee so as to procure the Pioneer business.

Decision of the High Court

The High Court found that the Bontech Agreement was fictitious as no consultancy services were in fact provided. The court also found that there was insufficient evidence to support Ho's claim that the Bontech Agreement and the payments were meant to procure the Pioneer business. The court held that Ho had failed to show that the payments were made in the Company's best interests and therefore that he had breached his fiduciary duty to the Company.

Before the Court of Appeal

A key issue before the Court of Appeal was the purpose for which the payments under the Bontech Agreement were made, and whether they were in the Company's interest.

Purpose of the payments

After considering all the evidence, the Court of Appeal found that the payments were indeed meant to establish personal relationships and secure business from Pioneer for the Company. The court also found that the Bontech Agreement (and the payments made thereunder) was meant to replace the "outstation allowances" arrangement. The court further held that all these payments were effectively bribes. The gaps in Ho's evidence and the shady and undocumented way in which the payments were effected only served to underscore the abnormal nature of the arrangements and payments, and were wholly  in line with their less than proper character.

Having found that the payments were for the purposes of securing business from Pioneer for the Company, the court then went on to consider whether Ho's actions in signing the Bontech Agreement and authorising the making of the payments so as to procure business deals for the Company were done in the interests of the Company.

The Company's interests

At the outset, the court noted that these actions did benefit the Company financially (at least in the short term). However, the issue here was whether a director who creates a sham contract and makes unauthorised and irregular payments out of a company's funds for the purpose of securing business for the company can be said to be acting bona fide in the interests of the company.

The court was clear that the answer must be in the negative, as such a director would not be acting honestly even if he claims to be furthering the company's financial interests in the short term. The term "interests of the company" is not just profit maximisation (and certainly not profit maximisation by any means). It is as much in the interests of the company, comprising its shareholders, to have its directors act within their powers and for proper purposes, to obtain full disclosure from its directors and not to be deceived by its directors. A director who causes a company to make payments which are in effect gratuities, thereby running the unjustified risk of subjecting the company to criminal liability, is not acting in the company's interests.

Even if the payments had been initiated by the previous management in the form of the "outstation allowances", Ho had failed to exercise reasonable diligence by continuing this inappropriate practice. As the CEO, Ho had a duty to exercise reasonable diligence and should have queried these practices and their implications on the Company when he joined the Company. This he did not do and, the court held, had therefore breached his fiduciary duties.

Whether the Company was precluded from claiming against Ho

Ho further alleged that the Company was precluded from claiming against him because the Company's management knew the purposes of the payments and their knowledge ought to be attributed to the Company. While Ho did not make clear why the Company's knowledge (if any) should preclude it from claiming against him, the court noted that he appeared to be suggesting that (a) the Company had accordingly implicitly authorised his acts; or (b) the Company was implicated in his act and cannot sue upon its own improper act according to the principle of ex turpi causa non oritur actio (the "Ex Turpi Causa rule").

The court held that, in order for the Company to be held to have authorised a person's acts, the primary rules of attribution ought to apply. These may be found in the Company's articles of association or in general principles of company law. Both a decision of a majority of directors at a board meeting and an informal decision taken by all the directors would be attributable to the Company. In the present case, it is not disputed that there was never any board approval of the Bontech Agreement, the payments or the "outstation allowance" arrangement. Ho was also unable to show that all the directors had consented or acquiesced to the same. Thus, the Company could not be said to have authorised Ho's acts. As for the Ex Turpi Causa rule, while a company should be bound by the improper acts of the directors at the suit of an innocent third party, this rule would not apply where the suit is at the instance of the company itself against the directors for their breach of duties.

As such, the court rejected Ho's argument that the Company was precluded from claiming against him.

Judgment

For the reasons stated above, the Court of Appeal dismissed Ho's appeal.