JTJB Legal Update March 2017

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SPOTLIGHT: INTRODUCTION OF A BUY-OUT MECHANISM FOR
SHAREHOLDERS IN AN APPLICATION FOR WINDING UP

To disgruntled shareholders: what options are available to you when your relationship with other shareholders have irretrievably broken down and an exit is most practical?

The Singapore Companies Act (Cap. 50) (“CA”) contains two main statutory exit mechanisms – s216 CA (the “oppression regime”) and s254 CA (the “winding up regime”). In 2014, the CA was amended to introduce a buy-out order under s254(2A) CA that would be available to shareholders in an application made by them to wind up the company under the winding up regime, provided they can show that it is just and equitable to wind up the company, or that the directors have acted in the affairs of the company in any manner which appears to be unfair or unjust to the members.

The Singapore Court of Appeal in the case of Ting Shwu Ping (Administrator of the estate of Chng Koon Seng, deceased) v Scanone Pte Ltd and another appeal [2016] SGCA 65 shed light on the interplay between the new buy-out mechanism under s254(2A) CA and the existing exit mechanisms available under the CA:

  • Where there is a buy-out mechanism in the Constitution of the company

There may be a finding of an abuse of process if there is a mechanism in the Constitution of a company to exit and an option to exit will negate any unfairness from the falling out between the shareholders, subject to such mechanism in the Constitution being fair. If the applicant had not attempted to invoke the share buy-out mechanism available to it under the Constitution of the company, unfairness would unlikely be established.

  • Where an alternative remedy under the oppression regime is available

An applicant is justified in presenting a winding up application even if an alternative remedy under the oppression regime is available because he would not necessarily obtain a winding up order under the oppression regime.

However, if the applicant brings a winding up application under the winding up regime with the primary objective of obtaining a buyout remedy, the court may, after an inquiry into the facts, infer that the winding up application was preferred because the applicant wished to pressure the company with the consequences that are attendant to the presentation of a winding up application. This is because the remedy of a share buy-out available under the oppression regime is not an order of last resort and courts often grant such a remedy.

  • Where the shareholder has no alternative way of seeking a buy-out

The applicant should be able to make use of the new buy-out mechanism under s254(2A) CA where sufficient cause can be found for a winding up order to be made but winding up may be unduly harsh – for example, where the company is still viable and it may not be appropriate to wind up the company. Indeed, the Court of Appeal recognized that seeking a remedy in the precise circumstances intended by statute in and of itself cannot be considered an abuse of process.

  • A lesson learnt

What may potential litigants glean from this case? Perhaps that even though a buy-out remedy is now available, where the primary objective is to obtain a buy-out order under s254(2A) CA, disgruntled shareholders will be wise to first exhaust alternative remedies so as to avoid a finding of abuse of the process by the courts. Where there is available under the Constitution of the company or other private agreement between shareholders a buy-out mechanism which would effect the exit desired by the disgruntled shareholder, then shareholders should also endeavor to comply with the transfer of shares under the Constitution or private agreement.

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This update is for general information only and is it not intended to constitute legal advice. JTJB has
made all reasonable efforts to ensure the information provided is accurate at the time of publication.

Contributed by: kay

Kay Yong
Associate
kayyong@jtjb.com

Kay’s area of practice is Corporate law. She has assisted in a range of legal matters
for corporations within various industries including cross-border acquisitions and joint
ventures, as well as corporate financing and compliance.