Singapore Court Rules on Buyout Provisions Under the Companies Act

December 16, 2016

The seminal ruling dictates when a buyout order under the new Section 254(2A) may be made as an alternative remedy to a winding up order.

Ting Shwu Ping (Administrator of the estate of Chng Koon Seng, deceased) v. Scanone Pte Ltd & Anor [2016] SGCA 65 centered on the widow of a former shareholder of Autopack and Scanone (the Companies) who, following her husband’s death, brought proceedings to wind up the Companies on “just and equitable” grounds under Section 254 of the Companies Act.

The Companies resisted the applications on the basis of abuse of process—in  particular, because there were buyout provisions in the Companies’ articles of association (providing for the exit of a shareholder with the price of the shares to be determined by the Companies’ auditors) that the widow did not avail herself of.

The High Court ruled against the widow, and she appealed to the Court of Appeal.

The Court of Appeal made the following key observations about the applicability of Section 254(2A):

  • Section 254(2A) is an alternative remedy which may be sought when a winding up application is made.
  • It could constitute an abuse of process if an applicant seeks a Section 254 (2A) relief to force a buyout while a minority oppression remedy is available.
  • The test for a just and equitable winding up under Section 254(1)(f) or (i) must first be satisfied before the court considers whether a buyout remedy is appropriate.
  • Should the applicant succeed in showing that Section 254(1)(f) or (i) was satisfied and that there was no abuse of process, the key question when considering whether a buyout would be more appropriate than a winding up could be distilled  into
    • if the company is still viable—comparing  the position if the company is or is not wound up, and
    • whether there were other avenues that the applicant shareholder could take that are not as drastic as a Section 254 application.

On the facts of the case, the Court of Appeal agreed with the Companies that the widow’s application for a just and equitable winding up was not justified and dismissed the appeals.

The case represents the first instance that the Singapore Court of Appeal examined the effect of the new provisions on allowing a buyout of shares in a Section 254 application.

Before the Companies Act was amended to include the Section 254(2A) relief, the Singapore courts (as in the case of Sim Yong Kim v. Evenstar Investments Pte Ltd [2006] 3 SLR(R) 827) would typically grant a winding up order but would stay it for 30 days to allow parties to come to a “settlement” that usually includes the contemplation of a buyout of shares. With the express power to order a buyout now available under Section 254(2A), Singapore courts no longer need to adopt this order-and-stay approach.

What appears to have weighed heavily in the Court of Appeal’s consideration against the application in Ting Shwu Ping was that the Companies’ articles of association provided for a fair and independent buyout mechanism.

Moving forward, shareholders should consider introducing buyout provisions (where appropriate) in their contractual or constitutional documents to provide more certainty in the parties’ positions when their relationship comes to an end. Contested winding up applications are usually damaging to all parties and potentially result in expensive and unpredictable litigation over a company’s future.