COMPANY LAW

Economic Duress Or Mere Commercial Pressure: Clarifying The Legal Test For Economic Duress

In most cases of minority oppression, the court would order the majority to buy out the shares of the minority to allow the oppressed minority to exit the company. However, in Oon Swee Gek and others v Violet Oon Inc Pte Ltd and others and other matter [2024] SGHC 13¹, a rare order was made for the minority to buy out the shares of the majority. 

Background

The claimants in this dispute are Ms. Oon Swee Gek or more widely known as Violet Oon (“Ms. Oon”), and her two children, Ms. Tay Su-Lyn (“Ms. Tay”) and Mr. Tay Yiming (“Mr. Tay”). In 2012, the claimants incorporated Violet Oon Pte. Ltd. (the “Company”).

The defendants are Mr. Murjani Manoj Mohan (“Mr. Murjani’) and Group MMM Pte Ltd (“Group MMM”). Mr. Murjani is the sole shareholder of Group MMM. The claimants and defendants each own 50% of shareholding in the Company.

Sometime in 2018, Mr. Murjani found that the claimants had been increasing their salaries without informing him. He alleged that the claimants had “overpaid” themselves and insisted for the claimants to compensate him.

In 2019, Mr. Murjani demanded the claimants to sign a new Shareholders’ Agreement (“SA”), which included a term whereby Group MMM would receive $1,550,000, consisting of $1,250,000 which the claimants were “overpaid” and interest of $300,000.

Thereafter, the claimants commenced this claim, alleging oppression under s 216 of the Companies Act 1967 (2020 Rev Ed) (the “CA”) and seeking for an order for Group MMM to sell its shares to the claimants as remedy.

The two main issues in this dispute are as follows:

  1. Whether Mr. Murjani’s outrage after discovering the increased salaries was exaggerated to intimidate the claimants and secure an unfair advantage for himself? If it was, would this amount to commercial unfairness? (“Issue 1”)
  2. If commercial unfairness was found, can the court order for the claimants to buy out the defendants’ shares? (“Issue 2”)

Commercial unfairness

S 216 of the CA provides a personal remedy for minority shareholders against majority abuse. For a minority shareholder to invoke s 216, they must show commercial unfairness. Commercial unfairness arises when there is “a visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder is entitled to expect”.2

The commercial agreement between the parties forms the starting point at which commercial unfairness is judged. This commercial agreement need not be by way of contract. It can also be an agreement arising from the informal understandings stemming from the parties’ personal relationship. Thus, in determining commercial fairness, the court can look at both the parties’ legal rights, as well as their legitimate expectations which arise from the personal relationship between the parties.3

In the present case, the Court found that there was a personal relationship between the parties. Mr. Murjani had decided to join the Company as he was personally attracted to the personal characteristics of Ms. Oon. Similarly, the claimants accepted Mr. Murjani as they found him to be very supportive of them.4

“The touchstone for the grant of remedies under s 216 of the Companies Act 1967 (2020 Rev Ed) is commercial unfairness.”

– Justice Philip Jeyaretnam, Singapore High Court

Arising from this personal relationship between the parties, the Court proceeded to find that there was a legitimate expectation of broad fairness and equality in shouldering the financial responsibilities and risk of the Company, and a legitimate expectation that the claimants would be fairly remunerated for their work in the Company with such remuneration increasing overtime.5

Decision of the Court

In relation to Issue 1, the Court held that Mr. Murjani’s conduct after discovering the increased salaries was calculated to exert economic duress on the claimants to pressure the claimants into signing a substantially unfavourable SA. This amounted to commercial unfairness.

In relation to Issue 2, the Court used its wide discretion under s 216(2) of the CA to order the defendants to sell their shares to the claimants. 

Issue 1: Economic duress and commercial unfairness

The claimants argued that the Mr. Murjani had feigned outrage over the claimants’ salary increments to pressure Mr. Tay to enter into a substantially unfavourable SA. Such conduct amounts to economic duress which supports the finding of commercial unfairness.

For the claimants to succeed in their claim of economic duress, the Court held that there are three elements the claimants must prove:6

  1. The other party had exerted pressure directed at compulsion of his will.
  2. Such pressure was illegitimate.
  3. But for the illegitimate pressure, he would not have agreed to the terms.

Previously, the law on economic duress was that after the claimants proved the first two elements, the burden shifted onto the defendants to prove that the pressure did not contribute to the claimants’ decision.7

However, the Court held that the burden of proof should not shift, and that the claimant has to prove all three elements in order to succeed. This is because the party exerting economic duress would not have knowledge as to what operated in the victim’s mind. Further, economic duress is not as serious and reprehensible as compared to physical duress, and thus the burden of proof should not be elevated to that of physical duress.8

In the present case, the Court held that the claimants had proved all three elements for economic duress. Mr. Murjani had employed various tactics to pressure Mr. Tay into acceding to his demands. For instance, Mr. Murjani threatened to sue the claimants and wind up the Company. He also exaggerated the claimants’ salary increments. Despite relying on the same spread sheets as Mr. Tay that revealed overpayments amounting to $300,000, Mr. Murjani concluded that the claimants owed $1,250,000. 9  

“… he appears to be someone equipped with an ability to manipulate others emotionally without spelling things out.”

– Justice Philip Jeyaretnam, Singapore High Court

Such threats were illegitimate, given that Mr. Murjani himself was clearly aware that any suit would be unmeritorious. He conceded at trial that the salary increments were reasonable and that the total overpayments only amounted to $330,000. He was merely finding a way for the Company to pay Group MMM a sum of money.10

Mr. Tay was clearly unsettled and intimidated by Mr. Murjani’s threats. This is evidenced by how Mr. Tay offered an additional top up of $300,000 to compensate Mr. Murjani. Mr. Tay was fearful that if he did not cede to Mr. Murjani’s demands, Mr. Murjani would wind up the Company and this would expose the claimants to their personal guarantees.11

It was clear to the Court that if not for the immense pressure felt by the claimants, they would not have entered into the SA.12

“…I find that he knew full well he was exaggerating the overpayments to put pressure on Mr. Tay. He was contriving a way for the Company to require to pay Group MMM a balancing amount.”

– Justice Philip Jeyaretnam, Singapore High Court

The SA was manifestly one-sided, benefitting only Mr. Murjani. Through the SA, the defendants would get at least $1,550,000 from the claimants. They would be featured in the materials associated with the Company. Mr. Murjani would become CEO. In contrast, two of the claimants would lose their directorships. They would also have to pay $1,550,000 to the defendants, and their failure to pay would result in the debt being converted to equity for the defendants.13

Given the circumstances, the Court concluded that Mr. Murjani exerted economic duress against the claimants, which amounted to commercial unfairness. Thus, the claimants succeeded in proving their claim under s 216 of the CA.

Issue 2: Remedies under s 216 of the CA

The Court held that s 216(2) of the CA provided the court with wide discretion to make any order the court thinks fit to bring the matters complained of to an end. While s 216(2)(d) specifically stipulates for an order for the purchase of company shares, there is no restriction as to who should purchase the shares.14

The Court considered that while the SA has been set aside, this would not be a complete remedy for the claimants, as the parties would still have to continue working together, despite their sour relationships. It would not serve the Company’s interest if its shareholders were constantly fighting and being in deadlock.15

Thus, a share buyout was necessary in the present case. The Court recognised that ordering the defendants to sell their shares would interfere with their property rights. However, the Company was a family business and represented Ms. Oon’s legacy. Further, Mr. Murjani would not be prejudiced by such an order. Therefore, the Court held that a minority buy-out would be appropriate in these circumstances.16

Comments

This case is significant as it clarifies the law on economic duress in that economic duress does not have the same level of culpability as physical duress. Therefore, the test for economic duress should not be elevated to that of physical duress. Accordingly, there is no shift in the burden of proof. The party alleging economic duress would have to prove the “but-for” test (i.e. if not for the illegitimate pressure exerted by the defendant, the claimant would not have agreed).

This case is also unique as it is one of the rare cases where a minority buy-out was ordered by the Court. In most minority oppression cases, the court would typically order the majority to buy out the minority as the minority would usually not want to stay in the company any longer. However, in the present case, the Court ordered for the minority claimants to buy out the majority defendants given the special importance the Company had to the claimants and the unique circumstances of the case.

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References

[1] Oon Swee Gek and others v Violet Oon Inc Pte Ltd and others and other matter [2024] SGHC 13.
[2] Ibid, at [26].
[3] Ibid.
[4] Ibid, at [30]- [31].
[5] Ibid, at [47].
[6] Ibid, at [60].
[7] Ibid, at [52] – [55].
[8] Ibid, at [56] – [57].
[9] Ibid, at [63].
[10] Ibid, at [68] – [74].
[11] Ibid, at [75] – [76].
[12] Ibid, at [88].
[13] Ibid, at [85] – [86].
[14] Ibid, at [121] – [122].
[15] Ibid, at [123] – [124].
[16] Ibid, at [126].

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Infinity Legal LLC thanks and acknowledges Intern Valencia Wan for her contribution to this article.

[Last Updated: 15 February 2024, 4:37pm]