Case update: winding up under the “just and equitable” ground

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

In the recent decision of Ting Shwu Ping (Administrator of the estate of Chng Koon Seng, deceased) v Scanone Pte Ltd [2016] SGCA 65, the Court of Appeal (“CA”) examined for the first time the Court’s power to wind up a company on “just and equitable” ground since the recent amendment to s.254 of the Companies Act (“Act”). The amendment introduced a new sub-section, s.254(2A), which granted the Court powers to order a shareholder buy-out as an additional remedy to making a winding up order. The question before the CA was whether this additional remedy should affect the Court’s approach towards an application made to wind up a company on the “just and equitable” ground.

Background

The appeals relate to the winding up applications filed in respect of two companies, who were the Respondents. The Appellant applied to wind up the companies under s.254(1)(i) of the Act on the basis that it would be “just and equitable” to do so. The Appellant also stated that, as an alternative to winding up, the Court could exercise the power under s.254(2A) of the Act to compel a buyout of shares in the companies belonging to herself and the estate of her late husband, who was a former member and director of the companies.

The CA’S Decision

At the outset, the CA compared s.254(2A) with s.216 of the Act, which sets out the rights of members in cases of oppression or injustice. The CA at [36] noted that the categories of conduct covered by s.216 are “described in a limited fashion” whereas the phrase “just and equitable” in s.254(1)(i) is more general and cannot be confined to any particular type of conduct. Put another way, the s.254(1)(i) jurisdiction is broader than the s.216 jurisdiction. Notwithstanding, the CA emphasised that the degree of unfairness required to invoke the “just and equitable” jurisdiction should be as onerous as that required to invoke the “oppression jurisdiction” under s.216. The addition of the buy-out remedy under s.254(2A) does not alter this burden.

The CA set out the following guidelines on the operation of s.254(1)(i) and s.254(2A):

• an applicant may apply for and succeed in obtaining a winding up order under s.254(1)(i) even if a s.216 oppression remedy was available (see further below);
• the test for ordering winding up under s.254(1)(f) or (i) must be met before the remedy under s.254(2A) may be granted; and
• s.254(2A) is not intended to be a direct buy-out remedy – in making an application under s.254(1)(f) or (i), applicants are still applying for a winding up and not a buy-out remedy.

The CA also considered the issue of when is it an abuse of process for an applicant to bring a winding up petition with the primary objective of obtaining s.254(2A) remedy. In this regard, the CA held at [48] that three distinct situations must be examined:

• whether the alternative s.216 remedy is available;
• whether the company’s articles of association contain shareholders’ buy-out rights and a s.254(2A) remedy would effectively allow the circumvention of that procedure; and
• whether the shareholder has any alternative way of seeking a buy-out.

Whether the alternative s.216 remedy is available

The first situation covers the case where a shareholder has recourse to a buy-out remedy under s.216 of the Act but opted to present a winding up petition instead for the purpose of obtaining a s.254(2A) remedy. The question is whether this would be considered an abuse of process.

The CA held that the answer is prima facie no. The Court clarified that an applicant is justified in presenting a winding up application even if an alternative remedy under s.216 is available to him because he would not necessarily obtain a winding up order under s.216. The Court stated that a shareholder has a right to have recourse to all statutorily available remedies.

However, if a shareholder brings a winding up application with the primary objective of obtaining a buy-out remedy under s.254(2A), then depending on the facts of the case, the CA stated that the Court may have basis to infer that the filing of a winding up application rather than a s.216 application was motivated by a collateral purpose and therefore should be struck out.

Whether the articles of association contain shareholders’ buy-out rights

The second situation considers whether seeking a s.254(2A) remedy would be an abuse of process, notwithstanding the presence of sufficient cause to justify an application under s.254(1)(i), if the articles lay down a procedure for share buy-out.

In a nutshell, the CA held that the fact that the company’s articles stipulate a shareholder exit procedure cannot in and of itself be conclusive of the issue (i.e. it does not operate as an automatic bar). The CA further held that the existence of a shareholder exit procedure may affect the exercise of the Court’s s.254(1)(i) and s.216 jurisdiction in the following manner (see [75]):

• it may negate any unfairness arising from shareholder disputes or exclusion – unfairness has to be assessed in light of the shareholder’s ability to exit the company as provided for in the articles;
• it may render the winding up application an abuse of process because the existence of a viable alternative under the articles gives rise to the question of whether the shareholder has a collateral purpose in bringing the application for the same share buy-out remedy available.

Whether the shareholder has any alternative way of seeking a buy-out

The third situation deals with the circumstances when an applicant has no other recourse to a buy-out remedy, and presents a winding up petition with the main objective of obtaining a s.254(2A) remedy.

In this regard, the CA clarified that where there is sufficient cause for a winding up order to be made (e.g. a loss of mutual trust and confidence), but where a winding up order may be unduly harsh in the circumstances (e.g. the company is viable), an applicant cannot be faulted for bringing a winding up petition with the knowledge that his application may fall within the category of cases to which s.254(2A) would apply and for seeking such a remedy. In other words, such an application would not be considered to be an abuse of process.

Conclusion

The CA’s decision provide useful guidance to dissatisfied shareholders as their statutory rights under s.254(1)(i) in situations where the shareholder is seeking to exit the company.

The decision highlights that the winding up application under s.254(1)(f) or (i) cannot be brought for the primary objective of obtaining a buy-out remedy. It also serves as an important reminder to shareholders that they should consider their rights under s.216 of the Act and the articles of association before bringing any winding up application with a view of seeking a buy-out.