- Singapore Court of Appeal Sets Out Test for Exercise of Discretion to Order Buy-out in Lieu of Winding-up
- January 12, 2017 | Author: Tham Wei Chern
- Law Firm: Duane Morris & Selvam LLP - Singapore Office
- The Court of Appeal held that in deciding whether to exercise its discretion under section 254(2A) of the Companies Act, the correct approach is to determine first whether the test for ordering a winding up under section 254(1)(f) or s 254(1)(i) has been met.
In its recent judgment in Ting Shwu Ping (Administrator of the estate of Chng Koon Seng, Deceased) v Scanone Pte Ltd and another appeal  SGCA 65, the Singapore Court of Appeal set out the test to be applied in deciding whether to exercise its discretion under section 254(2A) of the Companies Act to order a buy-out instead of a winding-up where a party has applied to wind up the company under section 254(1)(f) (where the directors have acted in the affairs of the company in their own interest rather than the interests of members as a whole) or section 254(1)(i) (where it is just and equitable) of the Companies Act.
In doing so, the Court of Appeal affirmed the decision of the High Court Judge below. We have previously covered the High Court decision in our article, “Singapore High Court Sets Out Test for Exercise of Discretion to Order Buy-out in Lieu of Winding-up.”
In this case, the appellant, who was the administrator of the estate of Mr Chng Koon Seng, applied to wind up Autopack Pte Ltd and Scanone (Pte) Ltd (the “Companies”) on just and equitable grounds. The primary relief sought was for the court to order a buy-out under section 254(2A) of the Companies Act, to be carried out by an independent valuer.
Mr Chng was one of two equal shareholders in the company. He and the other shareholder, Mr Chan Key Siang, had previously signed a memorandum of understanding that in the event a partner wanted to sell his shares, the remaining partner had a right of first refusal with the price to be agreed, failing which, it would be determined by the company’s auditor.
After Mr Chng passed away on 7 April 2014, the appellant became a director of the defendants. She contended that this was because she wanted to learn about the companies to ascertain whether she would be able to carry on the “partnership” and earn a living. The defendants denied this and asserted that this was only to allow her to access confidential and sensitive financial information to be able to make a proper offer to sell the shares owned by Mr Chng to Mr Chan.
Mr Chan and the appellant entered into negotiations on the buy-out of Mr Chng’s shares in August 2014, but were not able to come to an agreement on the value of the shares. The appellant wanted the value of the shares to be determined by a valuer, while Mr Chan wanted the company auditor to value the shares in accordance with the defendant companies’ memorandum and articles of association.
The appellant was subsequently removed as a director of the defendants, and she subsequently commenced proceedings to wind up both defendants.
In the High Court, the appellant’s claim was dismissed. The High Court held that the appellant’s claim was an abuse of process and that there was no merit in her applications for winding up the Companies on the just and equitable ground.
The Court of Appeal held that in deciding whether to exercise its discretion under section 254(2A) of the Companies Act, the correct approach is to determine first whether the test for ordering a winding up under section 254(1)(f) or s 254(1)(i) has been met.
Thereafter, the court would have to determine whether in all circumstances of the company it would be more equitable to allow a buy-out. Relevant considerations would include whether the company was still viable, and the inquiry might involve a comparison of the consequences for the parties in the event of a winding-up versus that of a buy-out. The Court of Appeal also stated that a little more guidance could or should be given in the abstract and that appropriate principles were likely to develop on a case-by-case basis.
In formulating its test, the Court of Appeal rejected the High Court judge’s three-part test, which comprised:
- Whether the application was an abuse of process - i.e., was it brought for a collateral purpose.
- Whether the application qualifies for an order of winding-up under sections 254(1)(f) and 254(1)(i) of the Companies Act.
- Thereafter, the court would consider an order for buy-out in the context of its remedial discretion.
The Court of Appeal nevertheless considered the situations in which a winding-up application might amount to an abuse of process. In this respect, the Court of Appeal found:
- It is not an abuse of process if a winding-up petition is brought with the purpose of seeking a buy-out under section 254(2A) of the Companies Act.
- It is not an abuse of process if a winding-up petition is brought under sections 254(1)(f) and 254(1)(i) of the Companies Act even if a buy-out under section 216 of the Companies Act is available, as the winding-up remedy would not normally be available under section 216 of the Companies Act. However, if a section 254(2A) remedy is sought, the court may, depending on the facts, infer that the filing of a winding-up application was motivated by a collateral purpose. The mere fact that the section 216 buy-out remedy is available does not mean that the court will automatically infer that there is an abuse of process.
- The existence of a procedure for a share buy-out in a company’s articles does not automatically bar winding-up applications. However, it will have a significant impact on the court’s analysis of whether “sufficient cause” has been demonstrated to justify a winding-up and on whether the application was brought with a collateral purpose such as to amount to an abuse of process.
- The death of a partner in a company that is a quasi-partnership does not always give rise to just and equitable grounds for winding-up a company.
- In the absence of any express provision in a company’s articles of association that would enable the heirs of a deceased quasi-partner to enjoy the same rights and benefits of the deceased, all such rights and privileges would end with the deceased’s death. Rights under a quasi-partnership are, generally, not transmissible.
- There was no loss of trust and confidence between Mr Chan and the appellant as there was no mutual trust and confidence existing between them in the first place in relation to the incorporation or running of the Companies.
- The refusal of Mr Chan to pay dividend while paying his wife and himself a salary was a prima facie basis for justifying an application for winding-up under just and equitable grounds. This, however, was subject to whether Mr Chan’s willingness to buy the appellant’s shares in accordance with the buy-out mechanism in the Companies’ Articles that negated any unfairness of the situation of the appellant.
- Mr Chan’s delayed invocation of the Companies’ Articles would not be held too strongly against him for the following reasons:
- Mr Chan was already trying to settle the matter with the appellant without having to resort to the legal rights spelt out in the Articles.
- Mr Chan’s late invocation of the Articles did not suggest that he and Mr Chng had an alternative understanding about how their shares would be transferred upon their deaths.
- Mr Chan did not benefit substantially from prolonging the buy-out discussions given the trouble the appellant was putting him through.
- Even if Mr Chan was trying to take advantage of the appellant by getting the shares for less, this should not affect the court’s analysis of whether the mechanism in the Articles should be adopted given Mr Chan and Mr Chng’s consent to it when the Companies were incorporated, and the appellant had the means of ascertaining for what the Articles provided.
- There was no grounds for doubting the impartiality or competence of the auditor. The fact that Mr Chan and the auditor had a longstanding relationship was not sufficient grounds to reject the buy-out mechanism in the Articles. The appellant was also not denied access to information sufficient to detect an egregiously unfair valuation.
The Court of Appeal’s judgment clarifies that it is a two-stage test in determining whether to exercise its discretion to order a buy-out in lieu of a winding-up. First, the application must meet the requirements of a winding-up under the relevant provisions, and second, the court will look at all the facts to determine if it is equitable for it to exercise its discretion to order a buy-out.
While there are no clear-cut rules for the situations in which the courts will order a buy-out, they will likely be in cases where a winding-up would result in the destruction of an ongoing company’s business, or where it would result in both shareholders getting significantly more compared to if the company were wound up.