Dynasty Line Limited (in liquidation) v Sukamto Sia & Anor and another appeal  SGCA 21
In Dynasty Line Limited (in liquidation) v Sukamto Sia & Anor and another appeal, the Singapore Court of Appeal dismissed the appeal against the decision of the High Court, finding that there had been a breach of fiduciary duties by the appellant directors under the laws of the British Virgin Islands (the "BVI").
The case is instructive for the Court of Appeal's guidance about directors' duties to shareholders and creditors. The Court of Appeal noted that under BVI law - and indeed, in Singapore law too - a director of a company is affixed with fiduciary duties. This called for the consideration of the company's best interests having regard to the position of its shareholders as well as of its creditors.
In determining whether the directors had breached their fiduciary duties, the Court of Appeal took a broad assessment of the surrounding circumstances of the case to determine the company's financial health, which included a consideration of all claims, debts, liabilities and obligations of the company. Under such an assessment, where a company is in robust financial health, its directors are entitled to pay greater heed to what is best for the shareholders. However, where there are mounting concerns over the company's financial health, then the directors will need to pay more heed to the creditors' interest. In this respect, the creditors' interests are not to be considered in a technical way, as if such considerations are irrelevant or capable of being ignored unless the company is found to be technically insolvent. Instead, once there are reasons to be concerned that the creditors' interests are or will be at risk because of difficult financial circumstances, the directors ignore those interests at their peril.
Dynasty Line Limited ("Dynasty") was the personal investment vehicle of Sukamto Sia ("Sia"), its sole shareholder, and was incorporated under the laws of the BVI. Dynasty purchased a significant quantity of shares in a Hong Kong-listed company (the "shares") from seven individuals (the "Vendors"), including Low Tuck Kwong ("Low"). These shares were Dynasty's only asset. However, only approximately 28% of the purchase price for the shares was ultimately paid. Despite this, the shares were transferred to Dynasty in full. Dynasty pledged all the shares to various banks as security (the "security transactions") for loans to Sia and his associates (the "borrowers"), who subsequently defaulted on the loans. The banks then sold the shares to satisfy the debts owed to them.
The Vendors began proceedings in Hong Kong to recover the balance of the purchase price and obtained judgment in their favour. Provisional liquidators were appointed six years later and commenced proceedings in Hong Kong on behalf of Dynasty against Sia and his co-director ("Lee") for, inter alia, breaches of fiduciary duties in relation to their dealings with the shares. The Hong Kong Court of Appeal allowed Sia's application to stay this action on the ground that Hong Kong was not the appropriate forum.
Low then commenced liquidation proceedings against Dynasty in the BVI, and the BVI High Court wound up Dynasty in 2009. Liquidators were appointed and began proceedings in the Singapore High Court against Sia and Lee for breaches of fiduciary duties under BVI law as directors of Dynasty. Sia filed a counterclaim against Low for a breach of a settlement agreement and against Dynasty, Low and the liquidators for conspiracy to injure him (the "counterclaim"), also under BVI law. The claim and the counterclaim were both dismissed by the Singapore High Court. Both parties appealed.
High Court decision
In response to the arguments before it, the High Court found that Dynasty's claim was not time-barred and was also not barred by laches. The court also found that Sia and Lee did not breach fiduciary duties as directors of Dynasty. This was because the court found that Low and Sia had entered into a collateral agreement which afforded flexibility in the payment of the share purchase price (the "alleged collateral agreement"). As a result, the court held that Dynasty was neither insolvent nor on the verge of insolvency at the time of the security transactions, and therefore Sia and Lee owed their primary duties to the shareholders and not to the creditors of Dynasty. The pledging of the shares was, for these reasons, not improper.
Court of Appeal decision
Alleged collateral agreement
The Court of Appeal found that there was no collateral agreement, as the term for payment for the shares to be made on an ad hoc basis was too uncertain to be enforceable. The court also noted that the terms of the alleged collateral agreement as pleaded in Sia's pleadings were inconsistent with those found by the High Court and those formulated by his counsel before the Court of Appeal. The Court of Appeal further stated that payment on an ad hoc basis would be contradictory to the terms of the sale and purchase agreements entered into for the purchase of the shares, which provide for a specific payment schedule. This inconsistency would render the evidence of the alleged collateral agreement inadmissible before the High Court in accordance with the provisions of section 94(b) of the Evidence Act.
Breach of fiduciary duties
The Court of Appeal noted that under BVI law and Singapore law as well, a director of a company is affixed with fiduciary duties. It was therefore necessary to consider Dynasty's best interests having regard to the position of its shareholders and creditors.
In determining whether Sia and Lee had breached their fiduciary duties, the Court of Appeal held that it was not concerned with whether Dynasty was technically insolvent or whether it would have been appropriate to liquidate Dynasty, and a strict application of the "going concern" and "balance sheet" test would be of limited utility. Instead, the Court of Appeal took a broad assessment of the surrounding circumstances of the case to determine Dynasty's financial health, which would include a consideration of all claims, debts, liabilities and obligations of the company.
Under such an assessment, where a company is in robust financial health, its directors are entitled to pay greater heed to what is best for the shareholders. However, where there are mounting concerns over the company's financial health, then the directors will need to pay more heed to the creditors' interest. In this respect, the creditors' interests are not to be considered in a technical way, as if such considerations are irrelevant or capable of being ignored unless the company is found to be technically insolvent. Instead, the Court of Appeal held that once there are reasons to be concerned that the creditors' interests are or will be at risk because of difficult financial circumstances, the directors ignore those interests at their peril.
In the present case, the court found that the security transactions imperiled Dynasty's ability to satisfy its liabilities, and severely compromised its ability to meet its obligations under the various sale and purchase agreements. The court further found that Sia knew or must have known that by pledging the shares as collateral for loans taken out for his own benefit and the benefit of his associates, he had directly jeopardised or prejudiced Dynasty's ability to repay the liabilities that it owed to its creditors. The court therefore held that Sia breached his fiduciary duty by wholly disregarding the interests of Dynasty's creditors.
Similarly, the court found that Lee, having signed the documents relating to the first security transaction, must have made enquiries as a director of Dynasty and therefore would have known that Dynasty was pledging a significant portion of the shares as security for a loan facility to Sia. Lee too had breached his fiduciary duties.
Limitation Act and the doctrine of laches
On the issue of limitation, the Court of Appeal proceeded on the basis that Singapore law on limitations was applicable as the traditional rule is that the law of the forum governs procedural issues and the barring of a remedy on the expiration of the limitation period is generally considered a procedural issue.
The court agreed with the High Court's finding that Dynasty's claim was not time-barred under the Limitation Act as it fell within the exception in section 22(1)(a) as Sia and Lee dealt with Dynasty's property in fraudulent breach of trust and confidence placed upon them as directors. The court was satisfied that Sia and Lee's actions would not have been countenanced by the ordinary standards of reasonable and honest people.
The court also found that there was no unreasonable delay in bringing the action as Low had health issues and financial difficulties in addition to the time necessary to compile the information required, take legal advice and wind up Dynasty.
For the reasons set out above, the court dismissed Sia's appeal, finding that Sia and Lee had breached their fiduciary duties. However, Lee's liability for breach only extended to the first security transaction because there was no evidence that he knew of the other security transactions. In addition, the court dismissed Sia's counterclaim in conspiracy, finding that that had not been made out on the facts.
The Court of Appeal's judgment makes it clear that directors are not free to discount the interests of the company's creditors just because the company is not technically insolvent. If the company is solvent, but in poor financial health, directors will need to take into account the interests of the company's creditors, failing which, they may be liable for breach of their fiduciary duties. Directors therefore need to be very careful in making their decisions, especially when the company's financial health is not robust.