Sin Kheng Chuan v Sin Kheng Hooi (P-02(NCVC)-1378-08/2016)

SAW PHEK LEAN … PERAYU-PERAYU DAN SIN KHENG HOOI … RESPONDEN (Dalam Perkara Guaman Sivil No: 22NCVC-848-12/2012 Dalam Mahkamah Tinggi Malaya di Pulau Pinang Antara Sin Kheng Hooi … Plaintif

Dan

Sin Kheng Chuan Saw Phek Lean … Defendan-Defendan CORAM: ABANG ISKANDAR ABANG HASHIM, JCA BADARIAH SAHAMID, JCA MARY LIM THIAM SUAN, JCA 2 GROUNDS OF JUDGMENT Introduction [1] This is an appeal against the decision of the learned trial Judge, delivered on 30.06.2016 after full trial, which allowed the Plaintiff’s claim against the Defendants in respect of 75,075 trust shares in Sin Kean Boon Capital Sdn Bhd, (‘SKBC’). [2] For ease of reference parties will be referred to as they were in proceedings before the High Court. The salient facts are derived from the learned trial Judge’s ‘Alasan Penghakiman’ with necessary modifications. Background Facts [3] The Plaintiff and the 1st Defendant are brothers. The 2nd Defendant is the wife of the 1st Defendant. [4] The 1st Defendant is the registered proprietor of 99% of the shares in SKBC. The Plaintiff is the registered proprietor of the remaining 1% of the shares of SKBC. The 1st Defendant and the Plaintiff are the two directors of SKBC. However, on 1.04.2006, the Plaintiff was asked to resign as director and the 2nd Defendant was appointed as director in his place. [5] On 3.12.1994 a trust (‘the said Trust’) was made by the late Sin Kean Boon together with the 1st Defendant as original trustees of the said Trust for the benefit of the Plaintiff and the Plaintiff’s children. On the demise of Sin Kean Boon, the 1st Defendant became the sole trustee of the said Trust. 3 [6] The said Trust consists of 75,075 ordinary shares of RM1.00 each in SKBC. At all material times the issued share capital of SKBC consists of 231,000 ordinary shares at RM1.00 each. The total authorised share is 500,000 ordinary shares. [7] The Trust is valid for 20 years commencing from 3.12.1994 until 3.12.2014. The value of the said Trust in the year 1995 was estimated to be at around RM10 million. In 1997, the value of the said Trust was estimated at RM38,000,000. With the passage of time the value was expected to rise to at least RM50,000.000. [8] According to the terms of the said Trust, the funds of the said Trust are for the benefit of the beneficiaries of the said Trust i.e. the Plaintiff and the Plaintiff’s children. [9] On 30.11.2010, the Plaintiff had filed an action against the Defendants in the Penang High Court in Civil Suit No. 22-811-2010. After Appearance was entered, parties negotiated and the abovementioned suit was withdrawn when parties entered into a Settlement Agreement. [10] The Settlement Agreement dated 25.03.2011 was entered into between the Plaintiff and the 1st Defendant. A sum of RM 1.38 million was paid to the Plaintiff in full and final settlement of disputes between the parties in respect of the said Trust and the civil action in Civil Suit No. 22- 811-2010. 4 Plaintiff’s Claim [11] The Plaintiff’s claim against the 1st Defendant is primarily for breach of fiduciary duties as a Trustee of the said Trust, in particular in obtaining undue benefit from the proceeds of the same. The Plaintiff’s claim against the 2nd Defendant is premised on a breach of fiduciary duties as a constructive Trustee of the said Trust. Issues to Be Tried [12] The agreed issues to be tried before the High Court are as follows:

Whether the 1st Defendant as sole Trustee of the 75,075 shares held by the 1st Defendant has administered the said Trust and obtained unjust enrichment from the said Trust?

Whether there was pressure, coercion, undue influence and misrepresentation by the 1st Defendant in the administration of SKBC and the Plaintiff’s 75,075 shares?

Whether the accounts of the said Trust were prepared and given to the Plaintiff?

Whether the Settlement Agreement is enforceable?

Whether the 2nd Defendant was a constructive Trustee of the Plaintiff in respect of the Plaintiff’s 75,075 shares in SKBC from 23.3.2011? 5 Findings and Decision of the High Court [13] The findings and decision of the learned trial Judge may be summarised as follows:

The 1st Defendant as sole Trustee of the said Trust for the benefit of the Plaintiff and his children, had breached his fiduciary duties as Trustee and had obtained unjust enrichment from the said Trust.

The Settlement Agreement between the 1st Defendant and the Plaintiff was void and unenforceable on the grounds that the 1st Defendant as sole Trustee of the said Trust had exercised coercion and undue influence in the administration of SKBC and the Plaintiff’s 75,075 Trust shares.

The 1st Defendant had made a misrepresentation in Clause 1 (iii)

(b) of the Settlement Agreement, that the amount stated therein was the amount in the audited accounts of SKBC for the year 1995.

The Settlement Agreement is void and unenforceable.

The 2nd Defendant is liable as a constructive Trustee in respect of the Plaintiff’s Trust shares of 75,075 shares of SKBC. 6 The 1ST and 2nd Defendants’ Grounds of Appeal [14] In the Memorandum of Appeal, the 1st and 2nd Defendants’ grounds of appeal may be summarised as follows. The 1st Defendant Breach of Trust [15] The learned trial Judge had erred in law and in fact in her failure to appreciate the following:

While the Plaintiff’s pleaded case is premised on the 1st Defendant’s breach of trust of 75,075 shares in SKBC of which the 1st Defendant is Trustee, her ladyship had relied on the loan to the 1st Defendant and the disposal of 24.5% shares of SKB Group Bhd as evidence of the 1st Defendant’s breach of trust to the Plaintiff.

The loan to the 1st Defendant as well as the disposal of 24.5% equities of SKBC, if at all, were wrongs committed against SKBC. Thus, the proper party to sue is not the Plaintiff but SKBC itself by way of a derivative action.

There is no evidence that the proceeds of sale of the 24.5% equities of the SKB Group of RM29,531,146.20 was appropriated by the 1st Defendant. On the contrary, the Annual returns and Directors’ report showed it was utilised to reduce the borrowings of SKBC. 7 The Settlement Agreement [16] The learned trial Judge had erred in law and fact when she set aside the Settlement Agreement between the 1st Defendant and the Plaintiff. The reasons are as follows:

The relationship between the 1st Defendant and the Plaintiff’s family was already bad.

The Plaintiff understood the contents of the Settlement Agreement.

There was no misrepresentation in respect of clause 1 (iii)(b) of the Settlement Agreement on account of the failure to verify the amount of RM1,796,879.93 in the audited account of year 1995 of SKBC as this figure was not disputed by the Plaintiff or the 1st Defendant.

The learned trial Judge had erred in her finding that the Plaintiff was unaware that in 2011 the 1st Defendant owed RM40,939,688.00 which comprise proceeds from the sale of shares of the SKB Group and in her conclusion that had the Plaintiff known that the actual price of his shares was RM12 million, the Plaintiff would not have sold his Trust shares for RM1.5 million. 8 The 2nd Defendant Constructive Trustee [17] The learned trial Judge had erred in law and in fact in finding the 2nd Defendant liable as a constructive Trustee for the 75,075 shares in SKBC for the following reasons:

The mere fact that the 2nd Defendant is a director of SKBC and has access to all records of SKBC and has knowledge of the loan to the 1st Defendant is insufficient to make the 2nd Defendant liable as a constructive Trustee of the said Trust shares of the Plaintiff.

After the 2nd Defendant became a director of SKBC, in 2012, the sum of RM40,903,577.00 was written off as “bad debts”, as reflected in in the audited account for 31.12.2012.

The proceeds of the disposal of the Plaintiff’s Trust shares never reached the 2nd Defendant’s hands. OUR JUDGMENT [18] On careful perusal of the Appeal Records, as well as the oral and written submissions of counsels, we are of the considered view that there was no error in the learned trial Judge’s findings of fact or law to warrant appellate intervention. We therefore affirmed the decision of the learned trial Judge and dismissed the appeals of the 1st and 2nd Defendants/ Appellants with costs. The grounds of our decision are set out below. 9 Claim against the 1st Defendant Breach of Fiduciary Duty [19] In the trial Judge’s findings, the 1st Defendant had breached his fiduciary duty of care as sole Trustee to the said Trust. In her ‘Alasan Penghakiman’, her Ladyship had supported her findings by the following evidence. [20] On 1.11.1999 the Plaintiff and the 2nd Defendant had entered into a Sale and Purchase Agreement in respect of the 75,075 shares of SKBC which comprise the assets in the said Trust of which the 1st Defendant was the sole Trustee. The 1st Defendant had purchased the Plaintiff’s 75,075 shares for RM1.5 million, which is far below its market value. [21] According to documentary evidence, between 8.1.1996 to August 1999, a total of 6,319,943 shares in the SKB Group owned by SKBC was sold by the 1st Appellant for a sum of RM29,531,146.20. As a result, thereof the Plaintiff was entitled to the sale proceeds to the extent of his 75,075 shares. The Plaintiff’s share of the sale proceeds was calculated to be at RM9,597,621.70. (RM29,531.20 divided by 231,000 shares = RM127.84 RM127.84 x 75,075 shares = RM9,597,621.70) [22] In addition, from the documentary evidence of the accounts of SKBC for the year ending 31.12.1998, 24.5% of SKBC shares were sold in 1998. This was the main investment for the 75,075 Trust shares of the Plaintiff in SKBC. The 1st Defendant had admitted in his testimony that the 1st Plaintiff was not informed of this disposal. Neither did the 1st Defendant 10 show any accounts to the Plaintiff in connection with the share sale which would have accumulated in the said Trust from 1994 to 2014. The 1st Defendant had appropriated the entire proceeds of the said disposal of shares in the sum of RM29,531,146.20. [23] From the evidence, the learned Trial Judge found that the 1st Defendant had not deposited the Plaintiff’s portion of the proceeds of the said disposal in any Trust account. No explanation was given by the 1st Defendant for his failure to do so. [24] In his cross examination the 1st Defendant had admitted that at the material time the 1st Defendant was in a dominant position as registered owner of 230,999 shares in SKBC (99%). Thus the 1st Defendant had the opportunity to take advantage of his position as Director of SKBC and sole Trustee of the Plaintiff’s 75,075 Trust shares to control and manage the affairs of SKBC to his advantage. [25] The 1st Defendant owned 99 % shares in SKBC. The Plaintiff, on the other hand, only owned one share in SKBC. The 1st Defendant and the Plaintiff were the only directors of SKBC. Thus, the Plaintiff had acted as a mere “rubber stamp” to the 1st Defendant in approving the “back dated” resolutions of SKBC. [26] We have carefully considered the abovementioned supporting evidence referred to by the learned trial Judge in arriving at the decision that the 1st Defendant had breached his fiduciary duty as Trustee to the said Trust. The 1st Defendant had also obtained an unjust enrichment in the form of sale proceeds from the disposal of the Plaintiff’s portion of SKBC shares which the learned trial judge calculated to be in the sum of 11 RM9,597,621.70. We have no reason to depart from the trial Judge’s finding in this respect. [27] We are also of the view that the 1st Defendant is the proper party against which the Plaintiff has brought this action as the 1st Defendant is the sole Trustee of the said Trust (which comprise 75,075 shares in SKBC) and the Plaintiff’s cause of action against the 1st Defendant is for a breach of fiduciary duty and unjust enrichment by the misappropriation of the proceeds of the disposal of the Plaintiff’s 75,075 shares in SKBC. Thus, the 1ST Defendant’s contention that in the circumstances the proper suit is by way of derivative action commenced by SKBC is misconceived. Undue Influence [28] Pursuant to the Settlement Agreement dated 25.3.2011 between the Plaintiff and the 1st Defendant, the Plaintiff had received RM1,380,000.00 from the 1st Defendant, purportedly as full and final settlement of disputes between the parties in respect of the Trust shares. [29] The findings of the learned High Court Judge were premised on the following evidence. [30] The 1st Defendant had admitted writing a letter to the Plaintiff instructing the Plaintiff to withdraw the civil suit against the Defendant. The Plaintiff was also directed by the 1st Defendant to advise the Plaintiff’s solicitors accordingly. [31] It is not disputed that the Plaintiff’s Trust shares were in the sole control of the 1st Defendant. The Plaintiff had alleged that the 1st 12 Defendant had threatened to sever family relations, bankrupt the Plaintiff and leave nothing for the Plaintiff and his children after the Trust comes to an end in 2014. [32] The Settlement Agreement was prepared by SD3 (Daphne Choy Gaik Choo) a solicitor from the firm of Choy & Associates. In her testimony, the learned High Court Judge had made a finding that there was a material discrepancy between SD3’s testimony in her examination in chief and in cross examination in respect of what transpired when the Plaintiff came to SD3’s office to sign the Settlement Agreement on 25.3.2011. [33] In her Witness Statement, SD3 had stated that she had given the Plaintiff three copies of the Settlement Agreement and asked the Plaintiff to read the same. SD3 then asked the Plaintiff whether he understood the contents of the Settlement Agreement. On the Plaintiff confirming that he understood the contents of the Settlement Agreement, SD3 had instructed the Plaintiff to initial on every page of the Settlement Agreement. SD3 had confirmed that she did not explain to the Plaintiff the contents of the Settlement Agreement. Neither did the Plaintiff inform SD3 that he did not understand the contents of the Settlement Agreement. [34] However, in cross-examination SD3 had stated that the Plaintiff had read the contents of the Settlement Agreement aloud to SD3 and the Plaintiff had stated he understood the contents of the Settlement Agreement before signing the same. [35] The learned High Court Judge had made a finding that in the light of the material discrepancy in the abovementioned evidence and the 13 absence of any explanation thereto, the evidence of SD3 that the Plaintiff had understood the contents of the Settlement Agreement before he signed the same, was not credible. [36] We find there was no error in the trial judge’s evaluation of the reliability of the evidence of SD3 who was a material witness in respect of whether the Plaintiff had understood the contents of the Settlement Agreement. [37] It was not disputed that the Plaintiff was not represented by any solicitors. SD3 had testified that she had prepared the Settlement Agreement on the instructions of the 1st Defendant only. Before the Settlement Agreement was signed on the 25.3.2011, SD3 had never met or communicated with the Plaintiff. On the same date, the Settlement Agreement had been finalised and was ready to be signed by the Plaintiff. [38] In addition, the learned High Court Judge had referred to clause 3 of the Settlement Agreement, which as he found to be as unreasonable as it did not reflect what actually had transpired. The said clause 3 provides as follows: “3. The 1st Party confirms that he understands the contents of the Agreement herein and elects to not appoint his own independent legal (adviser or solicitors to advise him on this agreement”. (‘The 1st Party’ refers to the Plaintiff) [39] What is meant by ‘undue influence’? According to section 16 (1) of the Contracts Act, 1950: 14 16(1) “A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.

(a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or

(b) ………………. [40] We are of the considered view that from the above evidence before the trial court, there was credible and cogent evidence to support the learned Trial Judge’s findings that the 1st Defendant who was in a dominant position to the Plaintiff, had exerted undue influence on the Plaintiff in signing the Settlement Agreement. The 1st Defendant, being the sole Trustee of the said Trust was indisputably in a fiduciary relation to the Plaintiff. In addition the circumstances surrounding the Settlement Agreement were such as to place the Plaintiff at a disadvantage. The Plaintiff had not understood the contents of the Settlement Agreement as the same was not explained to him by SD3. This was exacerbated by a most unusual clause (clause 3 abovementioned) which effectively precluded the Plaintiff from the benefit of independent legal advice. Coupled with this was SD3’s testimony that the Settlement Agreement was prepared entirely on the instructions of the 1st Defendant. 15 [41] Given the above circumstances, the learned trial Judge’s finding that there was undue influence emanating from the 1st Defendant to induce the Plaintiff to sign the Settlement Agreement was neither perverse nor plainly wrong so as to warrant our appellate intervention. Misrepresentation [42] The learned trial Judge had also made a finding that the 1st Defendant had made a representation in Clause 1 (iii) (b) of the Settlement Agreement, which provides as follows: “1. The 1st Party of the one part and the 2nd Party of the other part hereby agree that the abovementioned Dispute between the parties is settled on terms as follows: i)…… ii)…… iii) the 1st party agrees upon receipt of the settlement sum to do the following: a) ……. b) To make no further claims whatsoever and/or however in respect of and/or arising from the Trust dated 3 December 1994, the Share Sale Agreement of 1 November 1999 between the parties, and the shares held by the 1st Party in SKB Capital including the amount of RM1,796,879.93 16 which was the sum stated as due to the 1st Party since 1995 in SKB Capital’s audited accounts;” (Emphasis added) [43] It was the finding of the learned trial Judge that there was a misrepresentation that the amount above stated was the amount in the audited accounts of SKBC for the year 1995, when SD3 had not referred to the relevant audited account, but merely stated the abovementioned figure on the instructions of the 1st Defendant. [44] The learned High Court Judge had referred to the documentary evidence of the audited accounts of SKBC for the years 1995 to 1999, 2008 and 2011. The audited accounts showed the amounts stipulated as being loans to a Director. In his cross examination, the 1st Defendant had admitted that the ‘Director’ referred to was the 1st Defendant himself. [45]The learned trial Judge had considered the evidence that in 2011, the amount owing by the 1st Defendant was RM40,939,688 which comprise the proceeds of the share sale of SKBC in the SKB Group. The Plaintiff was not informed when he signed the Share Sale Agreement on 1.11.1999 where the sale price was RM1.5 million. Neither was the Plaintiff informed that the 1st Defendant had appropriated the entire proceeds of the share sale transaction. Had the Plaintiff been made aware that the value of his share was RM13,305,398.00 million, the Plaintiff would not have sold his shares to the 1st Defendant for a meagre RM1.5 million. (RM40,939,688.00 divided by 231,000 = RM177.00 Rm177.00 x 75,057 shares = RM13,305,398.00) 17 [46] It is our considered view that the learned trial Judge had properly referred to the audited accounts as well as the testimony of SD3 in order to arrive at the finding that there was a misrepresentation by the 1st Defendant to the Plaintiff on the true value of his shares. We also agreed with the trial Judge’s observation that had the Plaintiff known that the true value of his shares was in excess of RM13 million, it is inconceivable that he would have agreed to accept the paltry sum of RM1,380,000.00 in the Settlement Agreement. Thus there was a misrepresentation by the 1st Defendant to the Plaintiff that had induced the Plaintiff to sign the Settlement Agreement. [47] Premised on the above, the learned trial Judge made a finding that the share sale transaction between the Plaintiff and the 1st Defendant was unjust. The 1st Defendant had exerted undue influence on the Plaintiff and utilised his position as the sole Trustee of the said Trust to unjustly enrich himself. Thus, the Settlement Agreement is void and unenforceable as the same was signed by the Plaintiff as a consequence of undue influence and misrepresentation perpetrated by the 1st Defendant upon the Plaintiff. [48] On evaluation of the abovementioned evidence we find no reason to depart from the abovementioned findings of the learned trial Judge. Claim against the 2nd Defendant Constructive Trustee [49] The learned trial Judge had found the 2nd Defendant liable as a constructive Trustee of the Plaintiff’s 75,075 Trust shares in SKBC. The findings of the learned trial Judge was premised on the following evidence. 18 [50] The 2nd Defendant was the wife of the 1st Defendant, who was the sole Trustee of the said Trust as well as the registered proprietor of 99% of the shares of SKBC. The 2nd Defendant admitted that at all material times she was aware that 75,075 shares in SKBC were the subject of the said Trust in favour of the Plaintiff and his children for twenty years. [51] In her evidence, the 2nd wife of 1st Defendant (see para 3) had admitted that the sum of RM150,000.00 that was paid to the Plaintiff as part payment for the Settlement Agreement dated 23.3.2011, came from the joint account of the 1st and 2nd Defendants. [52] The evidence from the 1st and 2nd Defendants were that a sum of RM40,939,688.00 was taken out of SKBC by the 1st Defendant as a loan to himself as a director of SKBC. This sum comprises the entire proceeds of the sale of SKBC’s shares in the SKB Group. It is to be noted that this sum included the Plaintiff’s Trust shares of 75,075 shares in SKBC. [53] In addition, the learned trial Judge had found that the documentary evidence of the audited accounts for the year ending 31.12. 2012 showed that the exact sum of RM40,903,577.00 had been written off as “bad debts”. At that time the 2nd Defendant had already been appointed as a director of SKBC to replace the Plaintiff. In her cross examination, the 2nd Defendant had admitted knowledge of this. [54] The learned trial Judge had also found that in their testimonies, the 1st and 2nd Defendants had alleged that the RM40,903,577.00 had been written off as “bad debts” on the advice of their tax agent. However, the said tax agent was never called to confirm this piece of crucial evidence. 19 [55] In any event, section 133 of the Companies Act 1965 prohibits a company from giving loans to its directors. Thus, the loan of RM40,903,577.00 to the 1st Defendant was in contravention of the abovementioned section. [56] As a director of SKBC from her appointment to the position on 1.04.2006 the 2nd Defendant had access to all the records of SKBC as well as knowledge of the loan to the 1st Defendant, the amount of which comprised the Plaintiff’s portion of 75,075 Trust shares. Thus the 2nd Defendant is a constructive Trustee of the 75,075 Trust shares of the Plaintiff in SKBC from 26.3.2011. [57] Constructive trusts are imposed by the court as a result of the conduct of the trustee. While English law provides there is no clear and all-embracing definition of a constructive trustee, the concept has been developed in circumstances that it would be unconscionable to deny the beneficial interest of a party. Be that as it may, “All the commentators accept that the following three situations give rise to the imposition of a constructive trust: first, where advantages have been obtained by fiduciaries breaching their duty of loyalty, secondly, where there has been a disposition of trust property in breach of trust, and, thirdly, where advantages have been obtained by fraudulent or unconscionable conduct.” (Parker & Mellows, The Modern Law of Trusts, 8th Edn, London Sweet & Maxwell 2003 at p. 313.) [58] The learned trial Judge had made findings that the 2nd Defendant who was a director of SKBC was a fiduciary of SKBC shares which includes 20 the Plaintiff’s 75,075 shares. There has been a disposition of the Plaintiff’s share of the proceeds of sale of the Trust shares in breach of Trust and this was obtained by the unconscionable conduct of the 1st and 2nd Defendants. Thus, we find no reason to depart from the trial Judge’s findings of fact or of law. We therefore affirmed the decision of the learned trial Judge in respect of the liability of the 2nd Defendant as a constructive Trustee to the said Trust. [59] For all the reasons stated above we had affirmed the decision of the learned trial Judge in respect of the 1st and 2nd Defendants/Appellants and we had dismissed both the 1st and 2nd Defendants’ appeals with costs subject to allocatur fees and we had also ordered that deposit to be refunded to the appellants. Dated: 14 March 2019. (DATUK DR. BADARIAH SAHAMID) COURT OF APPEAL PUTRAJAYA 21 For the Appellant: Mr. SC Tan Tetuan SC Tan Peguambela & Peguamcara Unit 7, 9th Floor, Hexagon Tech Park 105, Jalan Gurdwara 10300 Pulau Pinang For the Respondent: Mr. Mura Raju (together with Mr. K. Govindaraju) Tetuan G. Raju & Company Peguambela & Peguamcara No. 78, Tingkat 1 Lebuh Gereja 10200 Pulau Pinang 22