6 July, 2016
Since July 2015, the Singapore courts have the power, in the context of winding up applications commenced on: (a) the just and equitable ground or (b) where the directors have acted in a manner that is unfair or unjust to the other members, to order the interests in shares of one or more members to be purchased by the company or one or more of the company’s members under section 254(2A) of the Companies Act, if it is just and equitable to do so.
In the recent judgment in Ting Shwu Ping and another v Autopack Pte Ltd and another matter [2016] SGHC 7, the Singapore High Court 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.
Facts
In this case, the first plaintiff, 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, 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 first plaintiff became a director of the defendants. The plaintiffs 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 to only 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 first plaintiff entered into negotiations on the buy-out of Mr Chng’s shares in August 2014, but they were unable to come to an agreement on the value of the shares. The first plaintiff 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 first plaintiff was subsequently removed as a director of the defendants, and she subsequently commenced proceedings to wind up both defendants.
Judgment
The High Court held that the buy-out option under section 254(2A) of the Companies Act was not meant as a back-door approach for disgruntled shareholders to apply for a buy-out at will, and that the court’s discretion to order a buy-out in winding-up applications should be tightly circumscribed.
The High Court held that the test to meet in an application under section 254(2A) of the Companies Act for a buy-out is as follows:
The court must first determine whether the winding-up is an abuse of process—i.e., if it is commenced for a collateral purpose of being able to exit the company at will, the application will be dismissed. If the court is of the view that had the new provision not been enacted, the applicant would not have commenced a winding-up application, this would be an indication, though not necessarily conclusive, that the application is an abuse of process and not genuine.
If the court is of the view that there is no abuse of process, the court must determine, based on the facts of the present case, whether the application qualifies for an order of winding-up, either under section 254(1)(f) or section 254(1(i) of the Companies Act (winding-up on the basis that the directors have acted in a manner that is unfair or unjust to the other members, or on the basis of just and equitable grounds).
Only if both requirements are met, will the court then go on to consider an order for buy-out in the context of its
remedial discretion.
Applying the facts, the High Court found that the first plaintiff’s objective was never to participate in the management of the defendant companies, and that she was appointed a director of the defendant companies to facilitate the sale of Mr Chng’s shares. The dispute was therefore merely on the value of the shares and not whether the company should be wound up over and above allowing a share transfer to take place.
In addition, a winding-up application was not in the interests of either side and not in the plaintiffs’ interest, as the break-up value would be much lower than if the company was valued as a going concern. Thus, the High Court found that the winding-up application was an abuse of process.
The High Court also found that there was no merit in the plaintiffs’ application for a winding-up either on just and equitable grounds or on the basis that the directors had acted unfairly or unjustly toward other members.
The High Court therefore dismissed the plaintiffs’ application.
Practical considerations
This judgment clarifies that although the courts now have a discretion to order a buy-out in lieu of a winding-up under certain circumstances, such discretion will be exercised only in very limited situations. It is not meant to be a route for disgruntled shareholders to force a buy-out.
For further information, please contact:
Wei Chern Tham, Director, Duane Morris & Selvam
wctham@selvam.com.sg
