PREPARED BY:

Amelia Tay Liying

Arun Kumar

Christopher Yong Jian Wei

Liew Kailin

Ryan Quek San Koon

G1

CO M PA N Y L AW
WRIT TEN REPORT
 WRITTEN REPORT | COMPANY LAW

CONTENT

Q U E S T I O N 1 ................................................................................................................................. 2

Q U E S T I O N 2 ................................................................................................................................. 4

Q U E S T I O N 3 ................................................................................................................................. 6

Q U E S T I O N 4 ................................................................................................................................. 7

Q U E S T I O N 5 ................................................................................................................................. 9

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QUESTION 1

There are 2 issues at hand, the Holsum acquisition and the Winsum Guarantee.

Issue 1: Holsum acquisition

1) Is the acquisition valid?

Under s157A of the Companies Act(CA), the board of directors may acquire Holsum if: (i) the CA does
not prescribe such an acquisition to be made in a general meeting; and (ii) it is assumed that BHPL’s
constitution do not restrict the board from making such a decision.

2) Is the acquisition in the bona fide interest of BHPL?

Firstly, directors have a duty to act bona fide for BHPL under Common Law. Additionally, s157 CA
imposes on directors the duty to act honestly and with due diligence in executing their duties.

On facts, it appears that the directors may have breached this duty by acquiring Holsum, who deals with
food distribution in which BHPL has no capability in, at a 40% premium. However, directors can adopt
a long-term view of the company’s interests when making decisions (Intraco Ltd v Multi-Pak Singapore
Pte Ltd [1995]). It is arguable that BHPL’s acquisition of Holsum could ensure the stability of food
supplies to BHPL’s restaurants in the long run and has commercial value. Hence, this acquisition is
made bona fide for the company as the benefit of such vertical integration may justify the acquisition,
albeit at 40% premium.

3) Conflict of interest?

Directors have a duty to avoid conflicts of interest (Boardman v Phipps[1966]). By way of Siao Pao’s
wife holding 20% of Hansum’s shares, s156(1) and s156(8) CA will apply to Siao Pao(SP). Thus, SP has
to disclose this interest.
although
SP may rely on the exception under s156(3) CA, however, we believe that the 20% shareholding is not
a controlling interest, it is sufficient to constitute a material interest (Yeo Geok Seng v PP [2000]).
Accordingly, SP will still be guilty for not disclosing his interests.

Additionally, the acquisition places SP in a position where his loyalty to BHPL may be in conflict with
his personal interest, i.e. the personal gain from the acquisition at a 40% premium. This conflict may
have clouded his judgement in approving the acquisition. Hence he has a duty to either avoid the
conflict of interest (Bray V Ford [1896]) or disclose it and seek approval from BHPL. Under common
law, SP’s failure to do either results in his breach of duty.
for
Hence, BHPL can bring a claim the personal gain made by SP as it belongs to the company in equity
(Furs Ltd v Tomkies[1935]).
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Issue 2: Guarantee of Winsum’s loan

1) Restricted financial transaction

As SP’s wife is likely to be considered as his associate for the purposes of s7(4A) CA, SP, through his
wife’s 20% shareholding in Hansum, is therefore deemed interested in 55% of the shares in Winsum.
Therefore, the guarantee of Winsum’s loan by BHPL would constitute a restricted financial transaction
under s163(1)(b) CA due to SP’s interest in Winsum.

Thus any director (assumed only SP), who was aware of the connection and yet approved the guarantee
is guilty of an offence.

2) Breach of director’s duties

SP’s interest in Winsum and his failure to disclose it reflects his breach of duty to avoid a conflict of
interest under s156(1) CA.

Despite his knowledge of Winsum’s poor financial health, SP failed to inform the board and proceeded
with the approval of the guarantee. Thus SP may be considered to have breached his duty to act bona
fide in the interest of company as it is possible that a reasonable man in his position, may not have
considered extending the guarantee. However, it debatable that a reasonable man may have considered
the potential risk of default as another “cost” of acquiring Holsum. Nonetheless, SP, an officer of the
company, ought to have assisted the board in making an informed decision.
No. S 163 does not allow the company to sue. It only imposes criminal liability on directors who
authorised the transaction .
Regarding Winsum’s guarantee, it is arguable that BHPL can bring an action against SP under s163CA,
s156(1) CA and under common law. As the guarantee is likely to remain enforceable under s163(6) CA,
it is possible that BHPL would be able to sue SP for damages arising from the guarantee to Winsum.
The company can choose to ratify the wrong as well, and this is likely given that the board is mainly
controlled by SP’s family members.

You are right to point out this possible breach, but the
reason why he may not have acted honestly in the
company's interests is that he could not honestly have
believed it is good for the company when he knew of
Winsum's poor financial health. Remember the test is
subjective so you should focus on what SP believed rather
that what a reasonable person would think.

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QUESTION 2

LKC suggested opening a restaurant in Indonesia to the board, but was rejected in view of Hong
Kie(HK)’s reasons. LKC then used Cheung Fun Holdings Ltd(CFHL), a company he controlled, to
register “Bountiful Harvest” as a trademark in Indonesia.

1) Breach of S 157(2) CA

LKC may argue that he was entitled to this business opportunity as BHPL could not have exploited this
opportunity anyway due to the board’s opposition. In Peso Silver Mines Ltd(NPL) v Cropper [1966],
the Supreme Court of Canada held that a director is allowed to take up a business opportunity that the
company has considered and rejected for bona fide reasons. On facts, such bona fides are apparent from
the board being persuaded by HK’s cogent reasons for disapproval. However, there are two problems
with this argument.

Firstly, the Canadian authority may not be persuasive in Singapore courts. The law in Singapore is
currently not settled and it may adopt the opposing English view, which adopts a strict no profit rule
(Regal Hastings v Gulliver [1942]).

Secondly, the business proposal introduced at the board meeting concerned the establishment of a
restaurant and not the registration and subsequent franchising of its trademark. The latter entails
significantly different risk and costs.
actually
As such, the question here is whether BHPL had honestly considered the possibility of operating as a
franchisor in Indonesia and rejected the opportunity. As this is clearly not the case, the registration of
the trademark and subsequent franchising of it constitutes a different corporate opportunity, one that
BHPL may have been interested in and one that rightfully belongs to the company. (Bhullar v Bhullar
[2003])

Thus LKC diversion of the opportunity to CFHL constitutes misappropriation of the company’s assets.
Additionally, as LKC indirectly gains when CFHL receives royalty payments, LKC can therefore be said
to have breached his duty not to make a secret profit under s157(2) CA.

The fact that CFHL only received royalty payments years after they registered the trademark does not
absolve LKC from his breach. This is because apart from protecting one’s intellectual property, the
registration of trademark may include potential monetary benefits, e.g. royalty payments, one receives
when he sells or licenses it to 3rd parties in the future. This argument is unclear.

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2) BHPL’s recourse

As LKC is in breach of s157(2) CA, BHPL can either sue LKC for damages or to recover any secret
profits he made (i.e. royalty payments) under s157(3)(a) CA.

Lastly, BHPL cannot ratify this breach by LKC as in Cook v Deeks [1916], a business opportunity is a
company’s property and a wrong is non-ratifiable where the wrongdoer misappropriates the company’s
property for himself.

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QUESTION 3

The issue is whether Yum Cha (YC) should be held liable for the bad transaction entered with Get-Me
and the resulting bill of $400,000 due to her negligence when reviewing the financial statements.

1) Did YC breach her duty of care and diligence?

The primary issue at hand is whether in presenting the erroneous report, YC had breached her duty of
care and diligence required under common law as well as s157(1) CA.

The objective test for standard of care and diligence as set out in Lim Weng Kee v PP[2002] is whether
a director had exercised the same care and diligence in his position would have done so. In this case,
given the proposal involved “considerable staging costs”, it is highly likely that a reasonable director in
YC’s position would not have merely cursorily reviewed it. As of such, it is highly likely that YC would
be in breach of this duty.

2) Is YC permitted to delegate functions to YS?

However, under s157C CA, directors are permitted to rely on information supplied by employees whom
the director has reasonable grounds to believe are reliable and competent if the director is:

1. Acting in good faith

2. Makes proper inquiry where circumstances indicate such a need

3. Has no knowledge that the reliance on the employee is unwarranted

Assuming that Yum Seng(YS), as an accountant, is competent in the reviewing of financial data, we
believe that YC had no knowledge that she could not rely on YS and was acting in good faith when she
got YS to review the data. However given the importance of the proposal, YC should have reviewed the
report to ensure the accuracy of it, the failure of which, we believe, constitutes a failure to make proper
inquiry and as of such, she would not be availed of the protection of s157C(1) CA.

Additionally, under common law, directors must remain alert, watchful, and have an inquiring mind in
discharging their supervisory duties. Also, the right to delegate functions does not absolve the director
duty
of the right to supervise the discharge (Vita Health Laboratories Pte Ltd v Pang Seng Meng [2004]).
Thus YC’s failure to be “alert and watchful” in the checking of the report constitutes a breach of duty
that is not nullified by the fact that she had delegated the task.

Thus YC is likely to have breached her duty of care and diligence to BHPL and under s157(3) CA is
liable to BHPL for the damages suffered. BHPL may also ratify the breach on grounds that YC’s main
intentions for approving the transaction was just to be “helpful”.

Yes I think she has been negligent. But as I mentioned in class, it is not clear if this negligence
resulted in BHPL's loss since the loss is caused by Hoi Sin's poor performance rather than the P a g e 6 | 11
company's poor financials.
 WRITTEN REPORT | COMPANY LAW

QUESTION 4

By accepting a job offer from MoF, Siew Mai(SM) would be working for a rival company. The ensuing
section discusses whether action can be taken against SM for a breach in director’s duties for her
acceptance of the job offer and her assistance of MoF to develop business plans.

1) Is SM still considered a director? Perhaps what you meant to say is that she is still a director of the
company since she has not been formally removed from the board.

While SM is no longer included in most major decisions, s4(1)CA states that she will still be regarded
as a director due to her legal title. Thus SM will have to fulfil all legal responsibilities of a director.

2) Does accepting employment offer constitute a breach?

Per the case of Industrial Development Consultant v Cooley [1972], a director who accepted an
business
employment opportunity while serving as a managing director was held to have breached his fiduciary
duty not to profit without the knowledge and approval of his principal despite stating that he was
contract
negotiating for the job in a personal capacity. Likewise in this case, SM’s failure to disclose and
subsequent acceptance of MoF’s job offer constitutes a breach in her duty as a director.

Additionally, under s156(6) CA, as SM’s acceptance of a job in another F&B company results in her
holding an office which may cause a conflict of interest with her duty as a director of BHPL, the failure
to disclose this makes her liable of an offence.

Thus BHPL may either sue SM for damages or for any profit that she has made on the grounds of her
breach of duty. While the company may choose to ratify her breach for the non-disclosure, this is
I think the mere acceptance of a job offer would not place her in a position of
unlikely given SM’s bad terms with the shareholders. breach. For otherwise, no director can look for another job while he is a
director, which would be unreasonable. However, the fact that she has
actually started working for a competing company may mean that she has
3) Does providing assistance to MoF constitute a breach?
placed herself in a position of conflicting duties which she has failed to
disclose and is therefore in breach of her duty as a director.

Common law cases held that preparatory step taken by directors to set up competing businesses or join
a competitor will not amount to a breach of duty, should there be no actual competitive activity
(Framlington Group v Anderson [1995]). Hence, while SM provided assistance to MoF before her stint
as a director at BHPL ended, she had only taken preparatory steps of drawing up business plans. With
the restaurant scheduled to open at a later date, it is unlikely that she had participated in any form of
competitive activity. Therefore, she did not breach a duty by providing assistance, and applying the
court’s rule in Framlington, she is not obliged to disclose her actions.

Also, it was held in Poon Huat Seng v Goh Cheng Chua [1994] that a fiduciary duty would only prevent
a director from using confidential information which he learnt during his term as a director. As such,
while much of SM’s general knowledge could have been gained from her directorship, she is not in
breach of duty if she did not use knowledge specifically related to BHPL to draw up the business plan.

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The question is what amounts to mere preparatory
steps. Some cases say that once the director has
formed the firm intention to compete with the
company, then I what is done would amount to more
than preparatory steps.
 WRITTEN REPORT | COMPANY LAW

However, given the fact that SM drew up the business plans for the new outlet, we will assume that she
had been the one to propose the location to MoF. The issue here is that as the location’s slated use is in
line with BHPL’s current line of business as well as being in close physical proximity to BHPL’s best
performing restaurant, it is likely to constitute a corporate opportunity for BHPL and one that it is likely
to be interested in . Thus SM would be obligated to pass the information to BHPL for consideration.
Her failure to disclose this information and subsequent diversion of the corporate opportunity to MoF
would constitute a breach of her director duty (Bhullar v Bhullar [2003]).

Thus SM, in assisting MoF, is likely to have breached her duties as a director and BHPL can use this as
grounds with which to sue her for damages. Ratification is not available given that it is a
misappropriation of company’s property (Cooks v Deeks [1916]).
This is not strictly a corporate opportunity since it is really an employment opportunity. It is not
an investment opportunity that BHPL could have exploited. So perhaps the more relevant issue
is whether SM has failed to act honestly in BHPL's interest by actively promoting a rival
company's interests while still a director of BHPL.

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QUESTION 5

In general, the first 4 questions are looking at what breach is done to BHPL, and the actions it may bring Check
grammar,
against the directors, namely whether to either sue or ratify. Now, we shall EDB’s other options, should clarity.
BHPL choose to ratify the breach instead of suing the directors.

1) Ratification of Breach

The decision to sue is a management one and the power is vested in the board of directors, except where
the power is required by the CA or constitution to be exercised in general meeting (s157A CA). Hence,
shareholders in the company cannot pass a resolution to change this decision.

It is also important to note that most of the directors hold substantial shares in the company (s81 CA).
Thus, EDB will have difficulties in bringing an action if the simple majority of the shareholders choose
to ratify the breach by way of an ordinary resolution (2nd limb of Foss v Harbottle[1843]). Due to the
“Proper Plaintiff” rule arising from Foss v Harbottle, it is important to note that directors or
shareholders cannot bring the action in their personal capacity and as such, only BHPL can bring an
action against the directors.

BHPL is more likely to sue the respective directors with regards to the breaches in Question 2 and 4 due
to reasons as stated in earlier questions.

This may differ for Question’s 1 and 3. For (1), the main breaching party, is SP, whose family holds 100%
of executive director votes and holds 75% shares in the company and therefore is likely to use this power
to forgive SP. In (3), we have seen that YC was trying to help her boss with the transaction. Therefore
It is necessary to explain that the
there might be goodwill among the HK and his family to forgive the YC’s breach. wrongdoers' control means that the
company would be deprived of any
proper remedy for the wrong. That is
why a shareholder is exceptionally
2) Derivative Action allowed to apply to court for leave to
bring a derivative action.
As mentioned in Woon, p.380-381, the common law Derivative Action (DA) pales in comparison to
the statutory action due to its messy and ad hoc nature. As such our focus will be to utilise the Statutory
DA.

There is a clear 2 step process for a member of the company to bring a DA against breaching directors
(s216A). Application of leave, followed by the complainant being allowed to bring an action if the court
grants him leave.

There are 3 conditions to be met for the court to grant EDB leave: A selfish motive is not
bad faith so long as the
I. A 14 day notice (s216A(3)(a)). We will assume that this condition can be easily met. selfish motive is aligned
with the company's
II. Complainant must act in good faith (s216A(3)(b)). EDB is not acting in purely selfish intentions.
interests.

There are bound to be ill feelings as EDB is a shareholder and its investment is being eroded by

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these breaches. However, this is not sufficient to say there is bad faith as long as he is
commencing a personal action for relief (Re Bellman and Western approaches Ltd [1981])
III. Prima Facie in the interest of the company (s216A(3)(c)). We can see that EDB wishes to bring
these actions so that the company will merit from them. In both (1) and (3) there are heavy
financial burdens placed on BHPL due to the respective breaches. As such this condition has
been fulfilled as well. Not clear. To show that the action is beneficial to company, it is usually necessary to
show some evidence that the action is likely to result in an award of substantial award in
money or moneys's worth.
Thus there are reasonable grounds for the court to grant leave to EDB to bring DA against the directors.

3) Possible Exceptions

In (1), we see that EDB holds 5% of shares. 20% (majority of the minority) belongs to CFHL. If this
application is not supported by CFHL, the courts might deem that there is an underlying business
reason for their abstinence and may not give power to EDB, to bring the action (Smith v Croft[1988]).

In (3), we do not note any ill intent when YC breached her duties. According to the we must then
consider if the shareholders have the right to forgive her breach. As seen from Pavlides V Jensen[1956],
ratification of negligent breaches are allowed. If so, the courts may not approve of the legal intervention
on EDB’s part.

General comments: Good effort. Your understanding is generally sound. However, your
reasoning is sometimes unclear. So I would encourage you to pay more attention to how you
express your understanding. It is likely that you do have the correct understanding but have not
given sufficient thought to how best to articulate your thoughts.

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CASES

Intraco Ltd v Multi-Pak Singapore Pte Ltd [1995]

Boardman v Phipps[1966]

Yeo Geok Seng v PP [2000]

Bray V Ford [1896]

Furs Ltd v Tomkies[1935]

Peso Silver Mines Ltd (NPL) v Cropper [1966]

Regal Hastings v Gulliver [1942]

Cook v Deeks [1916]

Vita Health Laboratories Pte Ltd v Pang Seng Meng [2004]

Lim Weng Kee v PP [2002]

Industrial Development Consultant v Cooley [1972]

Framlington Group v Anderson [1995]

Poon Huat Seng v Goh Cheng Chua [1994]

Bhullar v Bhullar [2003]

Foss v Harbottle [1843]

Re Bellman and Western approaches Ltd [1981]

Smith v Croft [1988]

Pavlides V Jensen [1956]

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