Case Commentary Company Law Equity Insolvency Law Just & Equitable Winding Up Shareholders' Disputes Singapore Singapore Court of Appeal Decisions

Case Commentary: Perennial (Capitol) Pte Ltd and Anor v Capitol Investment Holdings Pte Ltd and Ors [2018] SGCA 11 [Insolvency Law] [Just & Equitable Winding Up Applications] [Shareholders’ Disputes] [Management / Shareholder Deadlock]

A review of - and commentary concerning - the Singapore Court of Appeal's decision in Perennial (Capitol) Pte Ltd and Anor v Capitol Investment Holdings Pte Ltd and Ors [2018] SGCA 11, concerning what constitutes "deadlock" in the context of an application to wind up a company on just and equitable grounds where shareholders have fallen out.

The recent Singapore Court of Appeal decision in Perennial (Capitol) Pte Ltd and Anor v Capitol Investment Holdings Pte Ltd and Ors [2018] SGCA 11 (the “Judgment“) is notable – in this author’s view – for two reasons. A copy of the Judgment is available on Singapore Law Watch here.

Meaning of “Deadlock” In The Context Of Applications To Wind Up Companies On Just & Equitable Grounds

First, the apex Court endorsed the view that the definition of what constitutes “deadlock” between shareholders did not require “true or absolute” deadlock in the sense of equal shareholding between two parties which had fallen out.

What is required to constitute “deadlock” – at least for the purposes of determining whether “unfairness” exists such as to justify an order to wind up a company on just and equitable grounds (Section 254(1)(i) of the Companies Act, Cap. 50) – is that a shareholder’s inability to exit the company (or inability to exit an untenable relationship, in the words of the Judge in the court below).

In this respect, Judith Prakash JA – delivering the Court of Appeal’s judgment – noted at [45] of the Judgment as follows:-

A close examination of the cases reveals that the Judge was right in finding at [40]–[44] of the GD, that in situations of deadlock between the shareholders of a company, unfairness stems from the shareholders’ inability to exit rather than the deadlock per se.

[emphasis added in underline]

It is therefore pleasing to see an emphasis on substance rather than form in determining whether “deadlock” exists, rather than just a consideration of management or shareholder impasse.

The Availability of a Viable Exit Mechanism Will Vitiate Purported “Unfairness” In A Section 254(1)(i) Application

Second, the Court held that the existence of an exit mechanism – subject to certain exceptions (as set out in the Singapore Court of Appeal’s decision in Ting Shwu Ping (administrator of the estate of Chng Koon Seng, deceased) v Scanone Pte Ltd and another appeal [2017] 1 SLR 95 (“Ting Shwu Ping“) at [107(b)] – would negate any “unfairness”, since the parties had a pre-arranged, agreed method to exit the company.

For completeness, the exceptions cited by the Court in Ting Shwu Ping and again endorsed by the Court in this case were where – although an exit mechanism exists:-

(a) the disaffected shareholder had a legitimate expectation that he was entitled to have his shares valued in some other way;

(b) there was relevant bad faith or impropriety in the respondents’ conduct which had affected the value of the shares; or

(c) the articles provided an arbitrary or artificial method of valuation.

See [24] of the Judgment.

In the present case, the exit mechanism came in the guise of Article 22(A) of the respondent companies memorandum and articles of association (now collectively known as the companies’ constitution), which provided:-

22.(A) Every Member who desires to transfer any share or shares (hereinafter called “the vendor”) shall give to the Company notice in writing of such desire (hereinafter called “the transfer notice”). Subject as hereinafter mentioned, a transfer notice shall constitute the Company the vendor’s agent for the sale of the share or shares specified therein (hereinafter called “the said shares”) in one or more lots at the discretion of the Directors to the Members other than the vendor at a price to be agreed upon by the vendor and the Directors or, in case of difference, at the price, which the Auditor of the Company for the time being shall, by writing under his hand, certify to be in his opinion the fair value thereof as between a willing seller and a willing buyer, and such sum shall be deemed to be the fair value, and in so certifying the Auditor shall be considered to be acting as an expert and not as an arbitrator and accordingly the Arbitration Act, Cap. 10 shall not apply. A transfer notice shall not be revocable except with the sanction of the Directors.”

It should be remembered that a company’s articles of association constitute a statutory contract between the company and its members, and its members inter se.

It was therefore held that the existence of Article 22A constituted an acceptable exit mechanism which precluded the appellants (plaintiffs in the winding up applications) from alleging unfairness as a basis to justify their application for winding up orders pursuant to Section 254(1)(i) of the Companies Act (Cap. 50).

In this respect, the Court held at [59] of the Judgment as follows:-

It was abundantly clear – and this was an observation made by the Judge too at [86] of his decision – that applying the principles in Ting Shwu Ping led to the conclusion that the just and equitable ground under s 254(1)(i) had not been made out on the present facts. That the shareholders of the respondent companies were mired in a deadlock was not disputed by Chesham. However, given that Art 22 allowed a shareholder to “exit” the respective companies, there was no situation of “lock-in” on which a finding of unfairness could be made.”

[emphasis added in underline]

Consequently, the appeal was determined by the fact that the articles of association, as the underlying contractual basis governing the parties’ rights, provided an adequate exit mechanism notwithstanding that the joint venture agreement between the parties, although containing an alternative exit mechanism, was in draft and had yet to be signed.

Summary

Insofar as legal principle is concerned, the decision is a welcomed one as it demonstrates that the Singapore Courts will take a practical approach to what constitutes “deadlock” in the context of shareholder fall-outs and applications to wind up companies on just & equitable grounds.

As a matter of practice, it is a cautionary tale for joint venture partners to pay particular attention to the articles of association determined at the time the joint venture company is incorporated, if no contemporaneous shareholders’ agreement is executed.

This is because the articles will take precedence until such time as a shareholders’ agreement is signed and the articles consequently amended to reflect the parties’ intentions.

As observed by the Court at [67] of the Judgment:-

We certainly did not think it appropriate that shareholders be allowed to march into the court with a winding-up application because they held the view that it was unfair for them to be bound to apply a contractual mechanism that they had agreed to when drafting their company’s constitution.”

The case is therefore a reminder of the importance of a company’s constitution, which is the default contractual agreement binding the parties in a joint venture until and unless a subsequent joint venture agreement is signed and the articles of association consequently modified.

It would accordingly be prudent to ensure that a joint venture / shareholders’ agreement is executed concurrently with the incorporation of the joint venture vehicle, and that the contents of the JV or shareholders’ agreement are reflected in the articles of association.

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