Singapore High Court in winding up proceedings orders parties to file submissions on whether buyout order should be made pursuant to section 254(2A) of Companies Act
30 October 2019
Seah Chee Wan & Anor v Connectus Group Pte Ltd [2019] SGHC 228
In Seah Chee Wan & Anor v Connectus Group Pte Ltd, the Singapore High Court considered whether Connectus Group Pte Ltd (“Company”) should be wound up on the ground of insolvency pursuant to section 254(1)(e) of the Companies Act (“Act”) or, in the alternative, on the ground that it was just and equitable to do so pursuant to section 254(1)(i) of the Act.
While the court declined to wind up the Company on the basis of cash-flow insolvency, the court found that there were grounds which made it just and equitable to wind up the Company. Although such grounds were found, the court ordered parties to file submissions on whether a buyout order should be made pursuant to section 254(2A) of the Act and, if so, on what terms.
Background to the application
The shareholders of the Company at the time it was incorporated were Alex Seah (“AS”), Stacey Seah (“SS”), APBA Pte Ltd (“APBA”), and Lim Tien Ho (“LTH”). APBA was substantially owned and controlled by Paul Ng (“PN”). AS, SS and LTH held 23.4% of the shares each while APBA held 29.8% of the shares. PN had requested for slightly more than a 25% stake so that he could block any special resolutions.
Around the time of incorporation, AS, SS, APBA and LTH entered into a shareholders’ agreement (“SHA”). Among other things, the SHA provided that each of the shareholders was entitled to appoint a director to the board of the Company unless his shareholding fell below 15%. Each of the shareholders had appointed a director sitting on the board. APBA appointed PN.
LTH eventually sold all his shares to PN who later sold them to Sharon Ong (“SO”), who was the wife of Edwin Lim (“EL”). EL was appointed the Chief Executive Officer of the Company while SO was appointed a director. In effecting the share transfer of the shares from PN to SO, a document was executed by PN, APBA, AS and SS, which stated, among other things, that they agreed to waive the SHA completely and immediately.
The company began to face cash flow difficulties and the management at the board level was deadlocked. There were disagreements between AS and SS in one group and PN and SO in another as to the running of the Company’s business operations.
APBA commenced a separate application pursuant to section 182 of the Act for leave of court to convene an extraordinary general meeting of the Company without the requisite quorum for the removal of AS and SS from the board. The court declined the application as the court found that AS and SS had the right to participate in the management of the company as directors.
Shortly thereafter, AS commenced an application to wind up the Company. While the company had ongoing business operations in Singapore and China at the time of the application (respectively, “Singapore operations” and “Chinese operations”), the Singapore operations ceased sometime after the application commenced.
Court declines winding up order pursuant to section 254(1)(e)
The court determined that the Company was cash-flow insolvent as the Company was in default of its shareholder loans. Hence a prima facie case for winding up pursuant to section 254(1)(e) of the Act was found.
The court noted that PN did not question the terms of the loans when they were entered into, and as such rejected APBA’s contention that the shareholder loans were made without board approval, notwithstanding the lack of documentary evidence of the same. Due to the lack of evidence, the court rejected APBA’s contention that AS inappropriately used funds connected to the Chinese operations.
While a prima facie case for winding up was found, the court declined to wind up the Company. In exercising its discretion, the court took into account that the Chinese operations, of which the Company had a 66.67% stake, were thriving. The court also noted that APBA had declared its intention to inject more capital into the Company and to repatriate cash from the Chinese operations to Singapore to pay off creditors and revive the Singapore operations eventually. Further, the court considered that there was insufficient evidence to conclude whether the Company was balance-sheet insolvent.
Just and equitable to wind up Company pursuant to section 254(1)(i)
On AS’ alternative ground, the court found that it was just and equitable to wind up the Company pursuant to section 254(1)(i) of the Act.
The court determined the Company to be a quasi-partnership. Each of the shareholders had board representation and was deriving remuneration and benefits from the business. Further, the court found that based on the evidence presented before the court, the Company was formed on a relationship of mutual trust and confidence between the parties, even after a change in one of the shareholders. The court found a quasi-partnership notwithstanding the inequality in shareholding and the lack of an express agreement between the parties.
In coming to its conclusion, the court found that there was a breakdown in the relationship of trust and confidence between the parties. Among other things, the court noted that PN had stated that he had the objective of removing AS from involvement in the Chinese operations. The court further noted that there was management deadlock at the board level as the directors could not agree on the course of action for the Company in response to its financial difficulties.
Orders made for parties to file submissions
Although the court had found that AS had established that there were grounds which made it just and equitable to wind up the Company, the court ordered parties to file submissions on whether an order should be made for APBA to buy the shares of AS and SS pursuant to section 254(2A) as the parties had discussed a buyout of shares at some stage and the parties recognised that the Company’s shares still had value.
The court also stated that if APBA no longer had any interest in buying the shares of AS and SS, the court would then grant the order for the Company to be wound up pursuant to section 254(1)(i).
Key takeaways
First, this decision highlights the court’s discretion to refuse a winding up order on the grounds of insolvency, even after finding that a company is cash-flow insolvent. In a case where the company’s or its subsidiaries’ business is “thriving”, and where such business or shareholder’s support is capable of generating enough cash to eventually pay off creditors, the court may well decline to wind up a temporarily insolvent but commercially viable company. This decision makes sense especially in this difficult economic climate, although it does mean that lenders and other creditors should take care in commencing liquidation proceedings based solely on cash-flow insolvency.
Second, this decision highlights the court’s emphasis of substance over form when finding whether a quasi-partnership exists. Care must be taken when setting out the terms of shareholder agreements and in the participation of corporate governance, especially when a small number of shareholders are involved.
Third, central to this decision was the court’s power to order a buy-out of shares instead of winding up a company on the just and equitable ground under section 254(1)(i). The court noted that this would be done where a company is still viable and it would be a more efficient solution for the majority to buy out the minority (or vice versa). In cases where warring shareholders wish to take control and run a company without further interference from other shareholders, this alternative solution exists to provide a more commercial outcome than liquidation.