Falmac Limited v Cheng Ji Lai Charlie: Breach of Fiduciary Duty and s160 Companies Act

In Falmac Limited v Cheng Ji Lai Charlie, Falmac Limited sued Cheng Ji Lai Charlie in the High Court of Singapore, alleging breaches of fiduciary duties and violations of s160 of the Companies Act. Falmac claimed that Charlie, as a director, caused the company to lose control of its Tianjin subsidiaries and transferred shares without shareholder approval. Charlie counterclaimed for unpaid salary and director's fees. The court dismissed Falmac's action, finding no breach of duty, and allowed Charlie's counterclaim for $1,339,033.25 plus interest.

1. Case Overview

1.1 Court

High Court

1.2 Outcome

Falmac's action against D2 is dismissed. There is judgment in favour of D2 in the total sum of $1,339,033.25 together with interest thereon at the rate of 5.33% per annum from the date of the Writ to payment.

1.3 Case Type

Civil

1.4 Judgment Type

Judgment reserved

1.5 Jurisdiction

Singapore

1.6 Description

Falmac Limited sues Cheng Ji Lai Charlie for breach of fiduciary duties and violating s160 of the Companies Act. The court dismissed Falmac's action and allowed Charlie's counterclaim.

1.7 Decision Date

2. Parties and Outcomes

Party NameRoleTypeOutcomeOutcome TypeCounsels
Cheng Ji Lai CharlieDefendantIndividualCounterclaim AllowedWon
Falmac LimitedPlaintiffCorporationClaim DismissedDismissed
Cheng Ji JiangDefendantIndividual
David Lu Hai GeDefendantIndividual
Yu Wei YingDefendantIndividual
Fei Xue JunDefendantIndividual

3. Judges

Judge NameTitleDelivered Judgment
Belinda Ang Saw EanJudgeYes

4. Counsels

Counsel NameOrganization
Harpal SinghKhattarWong LLP
L DevadasonKhattarWong LLP
Winston Quek Seng SoonWinston Quek & Co

4. Facts

  1. Falmac was a Catalist Sponsor-supervised company de-listed by the SGX-ST on 22 August 2011.
  2. Falmac's business operations were mainly carried out in Tianjin, People’s Republic of China, through two subsidiaries.
  3. D2 was a director and the Chief Executive Officer of Falmac.
  4. Falmac alleged D2 breached fiduciary duties, causing financial losses and loss of control over Tianjin subsidiaries.
  5. Falmac claimed D2 unlawfully changed the legal representative of the Tianjin subsidiaries to Leon Zhao.
  6. Falmac alleged D2 transferred Falmac’s shares in the Tianjin subsidiaries to Sino Vision without shareholder approval.
  7. D2 counterclaimed for unpaid salary, director's fees, and other sums owed under his employment contract.

5. Formal Citations

  1. Falmac Limited v Cheng Ji Lai Charlie, Suit No 935 of 2009, [2013] SGHC 113
  2. Falmac Limited v Cheng Ji Lai Charlie, Originating Summons No 1125 of 2013 and Summons No 1410 of 2014, [2014] SGCA 42

6. Timeline

DateEvent
Three of the named defendants were on Falmac’s board: D2, David Lu and Fei.
Falmac issued 44,975,120 ordinary shares of $0.01 each at par for cash for an aggregated cash consideration of $1,700,000.
Falmac issued 34,448,000 ordinary shares of $0.01 each at an issue price of $0.311 per share as settlement for its partial outstanding loans of $10,713,430 owing by the Company and the Group to the creditor banks.
D2 appointed as Falmac’s Chief Executive Officer.
Wei Ying appointed as director.
Fei appointed executive chairman of the board.
Lu Jing retired from the board.
Ji Jiang appointed a director.
Fei stepped down as executive chairman.
Choo emailed D2 expressing his seriousness in Falmac and that he needed D2 to work with him.
Choo e-mailed D2 regarding issues to settle with him during his coming visit in Singapore.
Choo wrote to D2 regarding CNMC giving Fei a good chance to make money.
Choo wrote to D2 regarding SGX calling to ask why Peter Choo is not buying Falmac.
D2 informed Choo of Tianjin Kanbo’s interest to buy the Tianjin subsidiaries at S$1.
Choo e-mailed D2 regarding CNMC Goldmine progressing well.
Wong from BCS sent D2 five draft agreements via e-mail.
The former board passed a resolution to transfer the entire equity in the Tianjin subsidiaries to Sino Vision by way of converting debts for shares in the Tianjin subsidiaries.
D2 resigned as the Chief Executive Officer of Falmac.
The three independent directors on the former board also resigned from their positions.
Falmac entered into two separate Equity Transfer Agreements with Sino Vision to transfer Falmac’s shares in the Tianjin subsidiaries to Sino Vision.
BCS requisitioned an Extraordinary General Meeting to remove D2 and Fei as directors of Falmac and appoint a new board of directors.
The Edge published an article containing certain controversial statements apparently made by D2.
A trading halt on Falmac’s shares was called.
SGX-ST reprimanded Falmac for lack of public disclosure in breach of the Listing Rules.
Trading of Falmac’s shares was suspended.
D2 sent a draft announcement to the SGX-ST to clarify his comments in the article.
SGX-ST asked Choo to assist on the draft announcement.
D2 resigned as the legal representative of the Tianjin subsidiaries in favour of one Leon Zhao.
D2 and Fei passed a resolution appointing the firm of M/s Bih Li & Lee to apply for an injunction on behalf of Falmac to stop the convening of the EOGM.
D2 and Fei were removed as directors of Falmac and a new board of directors was constituted.
The Chinese authorities approved the change of legal representative to Leon Zhao.
Choo and Kuan made a trip to China to visit the Tianjin factories and to obtain the financial records of the Tianjin subsidiaries.
Falmac brought the present suit against the former board.
Falmac published its 2008 annual report.
Falmac passed two shareholder’s resolutions removing Leon Zhao as the legal representative of the Tianjin subsidiaries in favour of one Pua Yeow Seng.
Falmac’s AGM was held.
The new board passed a resolution to divest the Tianjin subsidiaries.
Falmac applied for time extension until 30 April 2011 to submit the resumption proposal.
The new board announced that it intended to divest Falmac’s shareholding in the Tianjin subsidiaries.
The new board provided the clarification sought by SGX-ST.
Falmac announced the execution of the contract with CNMC to acquire all the shares in CNMC on 8 March 2010.
Falmac announced in the Straits Times that the appointment of Leon Zhao was unauthorised.
Deadline for AGM to be held.
Proceedings against Fei were formally discontinued.
Deadline for submitting a resumption proposal to lift the suspension.
Falmac amended its Statement of Claim to include allegations that D2 had unlawfully changed the legal representative of the Tianjin subsidiaries.
Falmac commenced legal proceedings in China against D2 and Leon Zhao, seeking to invalidate the change of legal representative of the Tianjin subsidiaries.
The Tianjin subsidiaries filed civil indictments against Leon Zhao for the return of the company seals, business licences and other documents.
All the legal proceedings in China were withdrawn.
Falmac announced the agreement of Falmac and CNMC to extend the Long-Stop Date under the CNMC contract from 31 December 2010 to 31 March 2011 with a further option to extend the Long-Stop Date by another three months to 30 June 2011.
Falmac submitted its resumption proposal in relation to the CNMC contract to acquire 100% of the share capital of CNMC to SGX-ST.
Falmac signed a sale and purchase agreement with Unitex.
The first tranche of the trial took place.
SGX-ST duly de-listed Falmac.
Falmac obtained leave of court to re-amend its Statement of Claim (Amendment No 1).
Statement of Claim (Amendment No 2) filed.
Judgment reserved.
The appeal to this decision in Originating Summons No 1125 of 2013 and Summons No 1410 of 2014 was dismissed by the Court of Appeal.

7. Legal Issues

  1. Breach of Fiduciary Duty
    • Outcome: The court found that Falmac had not proven its case that D2 breached his fiduciary duties.
    • Category: Substantive
    • Sub-Issues:
      • Failure to act honestly
      • Failure to use reasonable diligence
      • Conflict of interest
  2. Violation of Section 160 of the Companies Act
    • Outcome: The court found that Falmac had not proven that D2 was in breach of s 160 of the Companies Act.
    • Category: Substantive
    • Sub-Issues:
      • Disposal of company undertaking without shareholder approval
  3. Validity of Employment Contract
    • Outcome: The court found that the Employment Contract was valid and had full binding effect on Falmac.
    • Category: Substantive
    • Sub-Issues:
      • Lack of formal board approval

8. Remedies Sought

  1. Damages based on the net asset value of the Tianjin subsidiaries
  2. Damages to be assessed
  3. Declaration that D2 was in breach of his duties as a director
  4. Salary arrears
  5. Director's fees
  6. Loan repayment
  7. Credit card expenses reimbursement
  8. Tax reimbursement
  9. Severance compensation
  10. Indemnity

9. Cause of Actions

  • Breach of Fiduciary Duty
  • Violation of Section 160 of the Companies Act
  • Breach of Employment Contract

10. Practice Areas

  • Commercial Litigation

11. Industries

  • Manufacturing
  • Investment

12. Cited Cases

Case NameCourtAffirmedCitationJurisdictionSignificance
Bristol and West Building Society v MothewCourt of AppealYes[1998] 1 Ch 1England and WalesCited for the distinguishing obligation of a fiduciary is the obligation of loyalty.
Lim Weng Kee v Public ProsecutorHigh CourtYes[2002] 2 SLR(R) 848SingaporeCited for the interpretation of the duty to act honestly as referring to the common law duty of a director to act bona fide in the interests of the company.
Townsing Henry George v Jenton Overseas Investment Pte Ltd (in liquidation)Court of AppealYes[2007] 2 SLR (R) 597SingaporeCited for the s 157 (1) duty to act honestly in discharge of his duties as a director is equivalent to the common law duty to act bona fide.
ECRC Land Pte Ltd v Ho Wing On ChristopherHigh CourtYes[2004] 1 SLR(R) 105SingaporeCited for the principle that the court should be slow to interfere with commercial decisions taken by directors.
Paragon Finance Plc v BB ThakerarCourt of AppealYes[1999] 1 All ER 400England and WalesCited for the principle that fraud must be distinctly alleged and as distinctly proved.
Lim Weipin and another v Lim Boh Chuan and othersHigh CourtYes[2010] 3 SLR 423SingaporeCited for the definition of public documents.
Goh Ya Tian v Tan Song Gou and othersCourt of AppealYes[1981]-[1982] SLR(R) 193SingaporeCited for meaning and effect of agreed bundles of documents at trial.
Auston International Group Ltd and another v Ng Swee HuaCourt of AppealYes[2009] 4 SLR(R) 628SingaporeCited for the principle that the company’s annual accounts can provide a legal basis upon which the respondent could convert them into the Conversion Shares.
Greene King plc v Harlow District CouncilHigh CourtYes[2004] 1 WLR 2339England and WalesCited for the principle that statements made in the appellant’s annual report can be used to determine if the appellant company was a “proprietor of a food business”.
SAL Industrial Leasing Ltd v Hydtrolmech Automation Services Pte Ltd and othersHigh CourtYes[1997] 3 SLR(R) 676SingaporeCited for the general principle of company law is that the directors must act collectively through resolutions at proper board meetings, unless specifically authorised to act individually.
SAL Industrial Leasing Ltd v Lin Hwee GuanHigh CourtYes[1998] 3 SLR(R) 31SingaporeCited for the principle that where all the directors informally assent to an agreement which is signed by one of the directors on behalf of the company, such assent is as binding as a board resolution and the agreement will be binding on the company.
Kwee Seng Chio Peter v Biogenics Sdn BhdHigh CourtYes[2003] 2 SLR(R) 482SingaporeCited for the principle that where the board of directors informally acquiesces to an individual director’s acceptance of a contract on behalf of the company, this is sufficient to vest authority in that director.
Scintronix Corp Ltd (formerly known as TTL Holdings Ltd) v Ho Kang Peng and anotherHigh CourtYes[2013] SGHC 34SingaporeCited for the principle that there is no general requirement that the remuneration of a normal employee must be formally approved by the board of directors.
Goh Kim Hai Edward v Pacific Can Investment Holdings LtdHigh CourtYes[1996] 1 SLR(R) 540SingaporeCited for the principle that payment to an executive director as compensation for the loss of his employment was compensation for the loss of office as an officer of the company within the meaning of s 168 of the Companies Act.

13. Applicable Rules

Rule Name
Listing Rules Rule 1304(1)
Listing Rules Rule 1303(3)
Listing Rules Rule 720
Listing Rules Rule 210(5)(c)
Listing Rules Rule 221
Listing Rules Rule 704(8)
Listing Rules Rule 704(7)
Listing Rules Rule 707(1)

14. Applicable Statutes

Statute NameJurisdiction
Companies Act (Cap 50, Rev Ed 2006) s 160(1)Singapore
Companies Act s 157(1)Singapore
Companies Act s 155Singapore
Companies Act s 175(1)Singapore
Companies Act s 201(1)Singapore
Companies Act s 201(3A)Singapore
Companies Act s 201(15)Singapore
Companies Act s 5Singapore
Companies Act s 199Singapore
Companies Act s 168(1)Singapore
Evidence Act (Cap 97, 1997 Rev Ed) s 67(1)Singapore
Evidence Act s 67(1)(e)Singapore
Evidence Act s 67(4)Singapore
Evidence Act s 78Singapore
Evidence Act s 64Singapore
Evidence Act s 66Singapore
Evidence Act s 76Singapore
Evidence Act s 80(g)Singapore
Evidence Act s 65 (e)Singapore
Evidence Act s 116 (f)Singapore

15. Key Terms and Keywords

15.1 Key Terms

  • Tianjin subsidiaries
  • Legal representative
  • Sino Vision
  • Debt-for-share transaction
  • Reverse takeover
  • EOGM
  • Resumption proposal
  • Unitex SPA
  • Employment Contract
  • AGM

15.2 Keywords

  • fiduciary duty
  • companies act
  • directors
  • shareholders
  • subsidiaries
  • listing rules
  • reverse takeover
  • employment contract

17. Areas of Law

Area NameRelevance Score
Fiduciary Duties85
Company Law75
Corporate Law70
Director's Duties70
Corporate Governance60
Business Litigation40
Contract Law30
Bankruptcy20
Appeal15

16. Subjects

  • Company Law
  • Directors' Duties
  • Breach of Fiduciary Duty
  • Corporate Governance