Client Update: Singapore High Court finds a director of a holding company in breach of his fiduciary duties by usurping subsidiary’s business

In OOPA Pte Ltd v Bui Sy Phong [2021] SGHC 142 (“OOPA”), the Singapore High Court held that in the context of group companies, a director of a holding company can be in breach of his fiduciary duties owed to the holding company if he usurps a business opportunity of the subsidiary, even if the holding company does not intend to carry out the business itself. The Court also declared a constructive trust in favour of the Plaintiff over a portion of the shares of a company that the director had used to obtain gain from his breach of fiduciary duty, as opposed to merely awarding damages.

Brief Facts

The Plaintiff, OOPA Pte Ltd is a company incorporated in Singapore that wholly owns a Vietnamese subsidiary company, OnOnPay Vietnam Mobile Services JSC (“OnOnPay”). The Defendant, Mr. Bui, was the entrepreneur behind the Plaintiff, and also a shareholder and director of the Plaintiff.

OnOnPay began to undertake a new Central Supply Business (“CSB”). The shareholders and directors of the Plaintiff, including the Defendant, agreed to incorporate a new Singaporean company, Telio Pte Ltd (“Telio”), for the purposes of this new CSB venture.

The Defendant then incorporated Telio as planned, and was its sole shareholder, pending the Plaintiff’s decision on how the shares of Telio should be split. However, before such a decision was reached, without the knowledge or consent of the Plaintiff’s other shareholders, the Defendant applied for Telio to enter into an accelerator program and signed a term sheet and a convertible note agreement with a venture capital firm Surge Ventures (“Surge”), cutting the Plaintiff off from both the shareholding of Telio and the profits of the CSB. The Plaintiff then commenced proceedings in Court to assert its rights over Telio and the CSB, and alleged that the Defendant had breached his fiduciary duties to the Plaintiff.

Directors of holding companies can be in breach of fiduciary duties if they usurp the subsidiary’s business

The Court held that if a subsidiary’s maturing business belonging to and being pursued by the holding company, is usurped by a director of the holding company, then the director would be in breach of his fiduciary duties owed to the holding company. In that vein, the Court found that the Defendant breached his fiduciary duties owed to the Plaintiff.

In making this finding, although the subsidiary, OnOnPay, was the one running the CSB, the Court found that the Plaintiff owned and pursued the CSB because

• the Plaintiff wholly owned the subsidiary, OnOnPay;
• the Plaintiff, through a board resolution, approved the transfer of the CSB from OnOnPay to Telio; and
• the Plaintiff wholly owned the intellectual property of OnOnPay, which included the CSB.

The Court reiterated that even if a holding company does not intend to carry out the business itself but rather through its subsidiary, the holding company can still be deemed as pursuing the business.

Constructive trust can be declared over shares of a company used to obtain gain from a director’s breach

The Court held that an express trust was created in favour of the Plaintiff over the initial shares of Telio issued to the Defendant upon its incorporation (“Initial Shares”) since the Defendant and the Plaintiff had a common intention that Telio was to be incorporated on behalf of the Plaintiff for the purposes of the CSB.

Even if an express trust had not been found, the Court noted in obiter that it would have declared a constructive trust over the Initial Shares in favour of the Plaintiff. This is because the Initial Shares represented the gain that the Defendant had obtained from his breach of fiduciary duty to the Plaintiff; by incorporating Telio for the purpose of taking over the CSB as an opportunity that belonged to the Plaintiff.

As for the shares in Telio that were subsequently issued to the Defendant by virtue of Telio’s involvement with Surge without the knowledge of the Plaintiff (“Subsequent Shares”), the Court found no express trust. However, since the Subsequent Shares were the fruits of the Defendant’s breach of fiduciary duty, the Court declared a constructive trust over them in favour of the Plaintiff.

Accordingly, the Court ordered that all shares of Telio held by the Defendant be transferred to the Plaintiff and any dividends derived from them be accounted for.

Conclusion

OOPA illustrates how a director of a holding company can be found to be in breach of his fiduciary duties when he usurps the subsidiary’s business opportunity, even if the holding company does not intend to carry out the business itself.

The case also highlights the seriousness of a such a breach, evident through the willingness of the Court to declare a constructive trust over all gains the Defendant obtained through the breach, as opposed to merely awarding damages.

This client update is authored by Partner Keith Han and Intern Sakthi Vel Raman. If you require assistance in any matters related to breach of fiduciary duties, please do not hesitate to contact.

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