Singapore Court of Appeal upholds shareholder’s oppression claim following diversion of contracts and employees to another business
28 May 2020
Ascend Field Pte Ltd & Ors v Tee Wee Sien and another appeal [2020] SGCA 14
In Ascend Field Pte Ltd v Tee Wee Sien, the Singapore Court of Appeal had the opportunity to consider an oppression claim under section 216 of the Companies Act (“section 216”) in the context of a quasi-partnership. The case provides an illustration of the types of acts that can amount to oppression of a shareholder, and provides clarity on the proper plaintiff in a conspiracy claim in the context of a minority shareholder dispute.
Facts
Mr Tee and Mr Ng established Ascend Field Pte Ltd (“AFPL”) in June 2011. AFPL was effectively run by Mr Ng from its inception and was awarded several cleaning contracts by real estate development businesses owned by Mr Ching, a business partner of Mr Tee’s. Mr Ng and Mr Tee were equal shareholders at all times. Prior to the incorporation of AFPL, Mr Ng and his wife, Ms Kor, were running Yi Fang Xiang Services (“YFX”), a sole-proprietorship firm set up by Ms Kor, which also provided cleaning services.
In early 2016, Mr Tee and Mr Ching grew concerned about Mr Ng’s management of AFPL and they agreed with Mr Ng to restructure AFPL’s operations. Nonetheless the relationship between Mr Ng and Mr Tee broke down and Mr Tee uncovered evidence that Mr Ng had deployed AFPL’s employees, equipment and resources for YFX’s benefit. Cleaning contracts were also allegedly diverted from AFPL to YFX.
Mr Tee sought relief under section 216, claiming among other things that Mr Ng’s conduct in diverting AFPL’s contracts, employees and resources to YFX constituted oppression under section 216. Mr Tee also pleaded a claim of conspiracy by unlawful means by Mr Ng, YFX and Ms Kor against Mr Tee and/or AFPL in respect of the diversion of AFPL’s contracts, employees and resources to YFX.
In the High Court, the judge found that Mr Ng wrongfully diverted five of AFPL’s contracts to YFX from April to July 2016 and ordered the defendants to account for the profits derived from the five diverted contracts. However, the judge disallowed Mr Tee’s oppression claim in respect of other cleaning contracts allegedly diverted to YFX. The judge also found that there was a reciprocal arrangement for AFPL and YFX to assist each other and ordered an account of the benefit derived by AFPL and YFX from their uncompensated use of each other’s employees. Mr Tee’s conspiracy by unlawful means claim succeeded only in respect of the five contracts that were found to have been wrongfully diverted to YFX. The judge ordered AFPL to be wound up.
Decision of Court of Appeal
The Court of Appeal reiterated that section 216 encapsulates four limbs: (a) oppression, (b) disregard of a shareholder’s interests, (c) unfair discrimination, and (d) prejudice. The common element supporting these four limbs is commercial unfairness, which is found where there has been a visible departure from the standards of fair dealing which a shareholder is entitled to expect. In assessing commercial unfairness, the court should bear in mind that the essence of a claim for relief under section 216 lies in upholding the commercial agreement between the shareholders of the company. In the case of quasi-partnerships, this agreement can be found in the legitimate expectations of the shareholders.
The Court of Appeal found that AFPL was established as a quasi-partnership based on the relationship of mutual trust and confidence between Mr Ng and Mr Tee. The terms of the informal understanding between them were crucial in determining if any unfairness was occasioned by Mr Ng’s management of AFPL. In this regard, the Court of Appeal found an informal understanding that Mr Tee and Mr Ching would provide financial support for AFPL, and that Mr Ching would arrange for cleaning contracts from his businesses to be awarded to AFPL. Further, Mr Ng would run AFPL’s operations but would seek Mr Ching and Mr Tee’s approval for major decisions. The Court of Appeal also found that Mr Ng and Mr Tee had likely reached an understanding that YFX would be shut down after AFPL was incorporated. Nevertheless, the evidence showed that Mr Tee was aware of and tolerated YFX’s continued existence after 2012. The Court of Appeal took the view that Mr Tee’s modified legitimate expectation from May 2015 onwards as understood and accepted by Mr Ng was that YFX would continue running but Mr Ng would not be in a position of conflict of interest in relation to it.
In other words, AFPL’s dealings with YFX should only benefit AFPL; YFX was not to compete with AFPL or to gain a commercial advantage at AFPL’s expense. The Court of Appeal noted that it was not surprising that this departed from the initial informal understanding between Mr Ng and Mr Tee as some degree of informality and flexibility in arrangements is to be expected in quasi-partnerships.
The Court of Appeal also emphasised that breach of fiduciary duties by a director does not by itself constitute oppression of a shareholder. Oppression is made out only when an injury is caused to the shareholder which is distinct from the injury caused to the company and such injury amounts to commercial unfairness. The commercial unfairness in turn must have its basis in a breach or violation of the shareholder’s legitimate expectations of the manner in which the company is to be run. The Court of Appeal’s decision is an important reminder that the litmus test for oppression remains that of commercial unfairness.
Decision on oppression claim
The Court of Appeal found that Mr Ng was under a continuing obligation to ensure that all contracts in YFX’s name were transferred to AFPL, up until the time Mr Tee found out about Ms Kor’s continued ownership of YFX and agreed to it in May 2015. By allowing YFX to continue to run existing contracts and take on new ones after AFPL was incorporated up to end April 2015, Mr Ng was preferring the interest of YFX over that of AFPL and acting contrary to Mr Tee’s legitimate expectations. Mr Tee’s appeal in respect of the contracts which YFX had after AFPL’s incorporation up to end April 2015 was allowed.
The Court of Appeal also allowed Mr Tee’s oppression claim in respect of two cleaning contracts acquired by YFX in April 2014 and December 2015. Mr Ng had been approached in his capacity as director of AFPL to submit quotations for those cleaning projects. He decided to cause AFPL to forgo the contracts and to tell Ms Kor about the contracts, thereby enabling YFX to bid for and eventually acquire them. The Court of Appeal found that Mr Ng had a significant conflict of interest in relation to AFPL and YFX. Mr Ng effectively diverted the contracts from AFPL to YFX. This was both a breach of his fiduciary duty to AFPL and a distinct personal wrong against Mr Tee, who had invested in AFPL with the legitimate expectation that Mr Ng could be trusted to manage AFPL without placing himself in a conflict of interest.
The Court of Appeal also affirmed the High Court’s findings that the five AFPL contracts from April to July 2016 were wrongfully diverted from AFPL to YFX.
Insofar as AFPL’s workers and resources were diverted to YFX without fair compensation and AFPL’s “service fee” payments to YFX for its use of the latter’s employees exceeded fair value, these actions also amounted to oppressive conduct. Mr Ng also reneged upon his agreement with Mr Tee and Mr Ching to implement internal restructuring controls when he removed Mr Tee as a bank signatory in June 2016; this was another personal wrong committed against Mr Tee.
In view of the above, the winding-up order was upheld.
Finally, the Court of Appeal observed that a company in an oppression action should be separately represented from the alleged oppressor, even where the latter continues to manage the company. This serves to safeguard the interests of the company.
Decision on claim in conspiracy
The Court of Appeal, however, allowed the appeal against the High Court’s finding of unlawful means conspiracy in respect of Mr Ng’s diversion of the five contracts from AFPL to YFX from April to July 2016. The Court of Appeal reasoned that the conspiracy, if any, was directed at AFPL, not Mr Tee. The personal wrong that Mr Tee suffered in his capacity as a shareholder that he sought to redress under section 216 was not equivalent to the loss to AFPL that formed the basis of the claim in unlawful means conspiracy. Any such loss that Mr Tee sustained would have been wholly reflective of the wrong done to the company. AFPL would have been the proper plaintiff to bring such an action.
Further, only Mr Ng and Ms Kor could have been parties to a conspiracy since YFX was not a legal person but simply Ms Kor’s business name. It was not possible for Ms Kor and Mr Ng to have conspired in any way with YFX.