A new case on statutory derivative actions cocerning a company named Megatech System & Management Pte Ltd (the Company).
The plaintiffs were members of the Company.
Their allegations made against S, a director of the Company were that he had done the following illegal acts -
(a) diverted for his personal use the recruitment fees and renewal fees received from Indian workers and a recruitment agent for employment with Megatech System;
(b) improperly deducted the foreign worker levy component from the wages paid to the Malaysian workers of Megatech System and diverted that deduction for his personal use;
(c) made purported loans to Megatech System for purpose of creating an indebtedness owing by the company to himself; and
d) sold off Megatech System’s profitable security guard business contrary to the interests of the company.
The court noted that the allegations were not as this stage proven. However, the plaintiff-members had produced supporting affidavits. Unlike some earlier cases where the applications under section 216A were dismissed, here, there was reasonable evidence by persons with direct knowledge of the wrongdoing to support the allegations. Some of the allegations, if true, would expose the Company to liability to employees. Accordingly, the allegations had some semblance of merit. It should be noted that this approach is consistent with the requirement in section 216A that the action only needs to be prima facie in the interests of the company. There is thus a very low threshold in obtaining court approval.
Monday, October 19, 2009
Wednesday, June 10, 2009
The Malayan Diariy/Vitagen case
A recent lawsuit concerning the shareholders of several companies including Malayan Diary Industries Pte Ltd which sells well known brand Vitagen resulted in the founder losing his claim (case name - Thio Keng Poon v Thio Syn Pyn).
The founder, Thio Keng Poon, sued his wife and 6 sons and daughters over his dismissal as director of several family owned companies. Among his claims was oppression under section 216 of the Companies Act. This section is often known as the oppression or unfair prejudice section. What is oppression? It covers a wide range of situations such as
a) acts of the company being unfairly discriminatory;
b) affairs of the company are being conducted in an oppressive manner; and
c) acts of the company are prejudicial against the member.
(Note that there are several other situations not mentioned in this posting).
The main theme behind all these situations is unfairness.
The alleged unfairness here was the breach of an understanding between the founder and his family that he would not be removed as director of the companies. Unfortunately, in court, his evidence was so weak that he was not able to prove his claims and the defendants won the case without even having to testify in court. A comment on this alleged understanding - for there to be an understanding, the express or implied agreement between the parties does not have to reach the legal status of a contract (which has rules regarding its formation, eg offer, acceptance, consideration, intention to create legal relations). There is therefore a far lower threshold which the founder failed to meet.
The facts on the case also showed that the founder was dismissed as director because of alleged breaches of director's duties in that he double claimed his travel expenses - eg for one trip, he would claim his travel expenses from more than 1 company in the family group. This fact would normally lead to removal of any director in any company, but this point was not fully canvassed in the court's decision.
One important point - for founders and controlling shareholders of companies, do not give your shares to your children before your death, for they may well remove you as director. However, giving shares to them is often necessary to show your love and to motivate them to work for the company. But there are ways to give them shares while protecting your own position.
The founder, Thio Keng Poon, sued his wife and 6 sons and daughters over his dismissal as director of several family owned companies. Among his claims was oppression under section 216 of the Companies Act. This section is often known as the oppression or unfair prejudice section. What is oppression? It covers a wide range of situations such as
a) acts of the company being unfairly discriminatory;
b) affairs of the company are being conducted in an oppressive manner; and
c) acts of the company are prejudicial against the member.
(Note that there are several other situations not mentioned in this posting).
The main theme behind all these situations is unfairness.
The alleged unfairness here was the breach of an understanding between the founder and his family that he would not be removed as director of the companies. Unfortunately, in court, his evidence was so weak that he was not able to prove his claims and the defendants won the case without even having to testify in court. A comment on this alleged understanding - for there to be an understanding, the express or implied agreement between the parties does not have to reach the legal status of a contract (which has rules regarding its formation, eg offer, acceptance, consideration, intention to create legal relations). There is therefore a far lower threshold which the founder failed to meet.
The facts on the case also showed that the founder was dismissed as director because of alleged breaches of director's duties in that he double claimed his travel expenses - eg for one trip, he would claim his travel expenses from more than 1 company in the family group. This fact would normally lead to removal of any director in any company, but this point was not fully canvassed in the court's decision.
One important point - for founders and controlling shareholders of companies, do not give your shares to your children before your death, for they may well remove you as director. However, giving shares to them is often necessary to show your love and to motivate them to work for the company. But there are ways to give them shares while protecting your own position.
Tuesday, June 2, 2009
Directors' right to inspect the accounts - more
Under section 199 of the Companies Act, a director is entitled to inspect the accounts and financial records of a company of which he is a director. This is a very valuable right in uncovering wrongdoing. What about members' rights to the accounts of the company?
As a member, a person is entitled to information which is mainly the annual financial statements relating to a company. However, this information is aggregated information. For example, you may find that total sales is $10 million in the past year and costs of goods sold ids $6 million, but there will be no information about individual transactions.
Information about individual transactions is extremely important in detecting fraud. There have been cases of directors buying supplies at above market price to benefit their associates and relatives, or selling goods at below market price. All these actions are breaches of fiduciary duties and offences at the minimum under section 157 of the Companies Act. It is less likely that such transactions will escape the attention of an alert director.
A director can inspect all financial documents such as contracts, delivery notes and purchase orders, etc. Detailed inspection may of course take a long time and may require outside expertise. Before making a substantial investment in a non-listed company, it may be wise to consider asking for a board seat.
If a director is refused his right of inspection by other directors, it is possible to obtain a court order for the accounting documents to be inspected by the director or his accountant. It should be noted that where there are good grounds to suspect dishonesty on the part of other directors, it may be possible for a director to apply ex parte to the High Court for a court order authorising inspection. Only the applying party's lawyers will appear in court to obtain the court order. This means that the other parties are not warned about the situation until the court order is served on them. This helps to prevent the hiding or destruction of incriminating documents.
As a member, a person is entitled to information which is mainly the annual financial statements relating to a company. However, this information is aggregated information. For example, you may find that total sales is $10 million in the past year and costs of goods sold ids $6 million, but there will be no information about individual transactions.
Information about individual transactions is extremely important in detecting fraud. There have been cases of directors buying supplies at above market price to benefit their associates and relatives, or selling goods at below market price. All these actions are breaches of fiduciary duties and offences at the minimum under section 157 of the Companies Act. It is less likely that such transactions will escape the attention of an alert director.
A director can inspect all financial documents such as contracts, delivery notes and purchase orders, etc. Detailed inspection may of course take a long time and may require outside expertise. Before making a substantial investment in a non-listed company, it may be wise to consider asking for a board seat.
If a director is refused his right of inspection by other directors, it is possible to obtain a court order for the accounting documents to be inspected by the director or his accountant. It should be noted that where there are good grounds to suspect dishonesty on the part of other directors, it may be possible for a director to apply ex parte to the High Court for a court order authorising inspection. Only the applying party's lawyers will appear in court to obtain the court order. This means that the other parties are not warned about the situation until the court order is served on them. This helps to prevent the hiding or destruction of incriminating documents.
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