27 February 2018

Parakou Investment Holdings Pte Ltd & Anor v Parakou Shipping Pte Ltd (in liquidation) and other appeals [2018] SGCA 3

The case of Parakou Investment Holdings Pte Ltd & Anor v Parakou Shipping Pte Ltd (in liquidation) and other appeals concerned claims by the liquidator (“Liquidator”) of Parakou Shipping Pte Ltd (“Parakou”) against its directors (“Directors”) and their related companies (collectively, “Defendants”).

The Singapore Court of Appeal found that the Directors had breached their fiduciary duties by causing Parakou to dispose of its assets through a series of transactions while the company was insolvent. The court granted the Liquidator the option to elect between damages and an account of profits jointly and severally against the Defendants.

Facts

Parakou was incorporated in 1995 with one Mr Liu Cheng Chan (“CC Liu”) and his wife, Mdm Chik Sau Kam (“Chik”) as its shareholders and directors. Mr Liu Por (“Liu Por”), the son of CC Liu and Chik, and Mr Yang Jianguo (“Yang”), a friend of the Lius, became directors in 2008. CC Liu and Chik stepped down as directors and divested themselves of their shares in 2008.

By 2007, Parakou had an outer port limit services business, a ship management business and a ship chartering business.

In 2008, the Directors caused Parakou to enter into a charterparty in respect of a vessel which Parakou was to charter from Galsworthy Limited (“Galsworthy”). The vessel was intended to be sub-chartered on a back-to-back basis to Parakou’s customer. However, when it became clear following a collapse in the freight market in September/October 2008 that Parakou’s customer would no longer be sub-chartering the vessel, the Directors then caused Parakou to allege that there was no binding charterparty with Galsworthy. In turn, Galsworthy asserted there was a binding charterparty, and that Parakou would be liable for breach for an estimated US$41 million (“Galsworthy Claim”). Galsworthy then commenced arbitration proceedings against Parakou in early 2009 (“London Arbitration”). Parakou commenced court proceedings in Hong Kong against the owners and demise charterers of the vessel for an indemnity in respect of any liabilities it might incur in the London Arbitration (“HK Court Proceedings”) (collectively, “Legal Proceedings”).

Facing the above large claim by Galsworthy, the Directors caused Parakou to carry out a series of rapid disposals of Parakou’s assets and businesses within a period of less than two months, from November to December 2008, including: (a) the sale of 10 vessels and two uncompleted hulls (collectively, “Vessels”) to Parakou Investment Holdings Pte Ltd (“PIH”), of which CC Liu was the majority shareholder; (b) bonus payments to the Directors (“Bonus Payments”); (c) increases in the monthly salaries of Liu Por and Yang with effect from January 2009 (“Salary Increases”); (d) the repayment of debts Parakou had owed to PIH (“PIH Repayments”) and to Parakou Shipping SA (“PSSA Repayment”), a company wholly owned by CC Liu; and (e) salary payments to six employees of Parakou Shipmanagement Pte Ltd (“PSMPL”) from January 2009 (“Employees’ Salary Payments”), which had been incorporated in November 2008 to take over Parakou’s outer port limit services and ship management businesses.

In the London Arbitration, the tribunal held that there had been a valid charterparty and ordered Parakou to pay interim damages of US$2.7 million to Galsworthy with further damages to be assessed. At around the same time, the HK Court Proceedings were struck out. Parakou entered provisional liquidation in March 2011 and creditors’ voluntary liquidation in April 2011. In May 2011, the tribunal in the London Arbitration assessed further damages of US$39 million to be paid by Parakou to Galsworthy.

Proceedings in the Singapore High Court

The Liquidator commenced proceedings in the Singapore High Court against the Directors, claiming that the various transactions entered into by Parakou around the time of its insolvency were part of an unlawful means conspiracy designed
to strip Parakou of its assets and were in breach of the Directors’ fiduciary duties, and that the related companies (which were owned and controlled by the Directors) were dishonest assistants and/or knowing recipients with regard to these wrongdoings. The Defendants argued that the various impugned transactions were carried out as part of a purported “restructuring plan”.

The High Court judge (“Judge”) found primarily for the Liquidator based largely on the inexplicable haste with which the transactions had been entered into. The Judge found there had been no genuine plan to restructure Parakou. However, he exonerated the Defendants from liability for certain transactions. In particular, the Judge held that the directors had not breached their duties by prolonging the London Arbitration for more than two years and in commencing the HK Court Proceedings.

Decision of the Singapore Court of Appeal

Before the Court of Appeal, the parties challenged most of the findings that went against them in their respective appeals.

There was no genuine plan to restructure Parakou

The Court of Appeal affirmed the finding of the Judge that there had been no genuine plan to restructure Parakou. The Court of Appeal noted that the only document evidencing the alleged restructuring was a board resolution of March 2008 (“Resolution”) which was only produced in 2009 “under suspicious circumstances”. The Court of Appeal observed that the Resolution also lacked crucial details about the alleged restructuring plan. The Court of Appeal agreed with the Judge that the “restructuring plan” was an afterthought raised by the Defendants to justify the disposals of Parakou’s assets from November to December 2008.

The Galsworthy Claim should be taken into consideration in determining Parakou’s insolvency status

The Judge had taken into account the Galsworthy Claim in finding that Parakou was insolvent on the basis that it was a contingent liability that was reasonably likely to materialise. The Court of Appeal upheld the Judge’s conclusions in this regard, and also dismissed the Directors’ argument that the amount considered should have been the S$3 million that Liu Por and Yang had offered in settlement, instead of the much higher full sum claimed by Galsworthy. This was because allowing the Directors to determine the value of a claim using a settlement sum was inherently self-serving; further, the evidence indicated that the Directors had anticipated a claim larger than S$3 million. As Parakou was insolvent as of November 2008, the Directors were under a duty to consider the creditors’ interests when making decisions.

The commencement and/or continuance of the Legal Proceedings were in breach of the Directors’ fiduciary duties

On appeal, the Liquidators successfully challenged the Judge’s finding that that the directors had not breached their duties in prolonging the London Arbitration and in commencing the HK Court Proceedings. The Court of Appeal rejected the Defendant’s arguments that they had commenced and continued the Legal Proceedings to incentivise Galsworthy to negotiate a settlement with it. Instead, the Court of Appeal was persuaded, in view of the contemporaneous correspondence between the Directors and their English, Hong Kong, and Singapore lawyers, respectively, that the primary purpose of the Directors in prolonging the London Arbitration and in commencing the HK Court Proceedings (which were eventually struck out by the Hong Kong court as an abuse of process) was to evade the two-year statutory period for insolvency clawbacks (which expired in December 2010). Moreover, the Court of Appeal held that the amount of legal costs incurred in the Legal Proceedings (S$6.2 million) was also not in the creditors’ best interests. The Court of Appeal accordingly allowed the Liquidator’s appeal on this issue, and held that the Defendants had breached their duties in commencing and continuing the Legal Proceedings.

The Bonus Payments, Salary Increases, PIH Repayments, PSSA Repayment and Employees’ Salary Payments were made in breach of the Directors’ fiduciary duties

The Court of Appeal also affirmed the findings of the Judge that there was no legitimate reason for Parakou to have made the Bonus Payments and the Salary Increases, as Parakou was not obliged to make these payments and received no consideration for them. The Court of Appeal held that there was also no legitimate reason for Parakou to have made the PIH Repayments and the PSSA Repayment. The Court of Appeal also agreed with the Judge that the six employees no longer worked for Parakou, or at the very least, also worked for PSMPL, at the time when Parakou made the Employees’ Salary Payments. The Directors were therefore in breach of their fiduciary duties in respect of these payments.

Remedies

The Court of Appeal agreed with the Liquidator that the remedy of an account of profits is available against a fiduciary who procures an unlawful benefit for a corporate vehicle in which he has a substantial interest, particularly where the corporate vehicle is a “mere cloak” for his unlawful conduct. The Court of Appeal accordingly held that, in each successful claim brought by the Liquidator against the Defendants, the Liquidator could elect between damages and an account of profits jointly and severally against the respective Defendants who had been held liable for that claim.

Comments

This case underscores the duties which directors owe to the company’s creditors when a company is insolvent or close to insolvency. Even where an impugned transaction falls outside of the statutory clawback period, a director who caused the insolvent company to enter into such a transaction can still be liable for a breach of fiduciary duties. The judgment also makes clear that directors who breach their fiduciary duties may be liable not only for damages, but also be liable as constructive trustees for an account of profits.

Allen & Gledhill Partners Edwin Tong, SC and Kenneth Lim represented the successful Liquidator.


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