Lau Lee Sheng and others v Envy Asset Management Pte Ltd (in liquidation) and others and another appeal

1 The appeals arose from the collapse of the Envy group of companies (“Envy Companies”), which operated a Ponzi scheme involving purported nickel trading (“Purported Nickel Trading”). The appellants were employees of the Envy Companies who secured investors and received commissions, profit-sharing payments and referral fees in return. The liquidators of the Envy Companies commenced proceedings to claw back certain payments made to the appellants, primarily the commissions, profit-sharing payments and referral fees. The claims were brought on the basis inter alia that the payments were conveyances or transactions undertaken to defraud creditors under s 73B of the CLPA and s 438 of the IRDA, and transactions at an undervalue under s 224 of the IRDA, as in force at the relevant time, ie, when the relevant payments were made. The Judge found that the appellants had to repay the payments, subject to deductions for any excess tax payments they had made on the relevant payments and ordered accordingly.

2 This was the employees’ appeal against the Judge’s decision. The appellants in CA 25 were the first, second and fourth defendants below (“CA 25 Appellants”). The appellant in CA 39 was the third defendant below (“CA 39 Appellant”). The CA 25 Appellants and the CA 39 Appellant (collectively, the “Appellants”) appealed against the Judge’s decision to order the claw back of the: (a) commissions and profit-sharing payments; and (b) referral fees (collectively, “Challenged Payments”). In addition, the CA 39 Appellant also appealed against the Judge’s decision not to allow an insolvency set-off under s 219 of the IRDA.

3 The sums in dispute in the present appeals were as follows:

4 The court rejected the Appellants’ argument that “profit” in the employment contracts should be read as “declared profit” rather than “actual profit”. The court held that “profit” must mean the actual profit that was made and that it was difficult to perceive a situation where the profits that were declared by a company did not reflect the profits that were actually made by the company. It was inconceivable that the parties agreed that payment would be made from anything other than profits actually made. As no profits were generated from the Purported Nickel Trading, the Envy Companies had no contractual obligation to pay commissions and profit-sharing payments: at [67]–[74].

5 The court also rejected the CA 25 Appellants’ alternative argument that the Challenged Payments could be characterised as contemporaneous settlement payments in discharge of putative claims they had against the Envy Companies. This argument failed because it was not pleaded, and in any event the putative claims were never in the contemplation of the CA 25 Appellants at the time of the transactions and could not have been discharged by the Challenged Payments: at [75]–[82].

6 The argument that the introduction of investors and investments could constitute extra-contractual consideration was also rejected. This argument constituted an impermissible attempt to rewrite the contractual bargain: at [83]–[89].

7 The court therefore found that the commission and profit-sharing payments made before 30 July 2020 were prima facie voidable under s 73B of the CLPA: at [90].

8 The court rejected the CA 39 Appellant’s argument that the sum of $909,473.16 in commissions and profit-sharing payments which she had directed to be reinvested in the Purported Nickel Trading should not be clawed back as it was never paid out to her. There was a conveyance of property for the purpose of s 73B(1) of the CLPA: Envy Asset Management (“EAM”) had purported to discharge its obligation to pay the CA 39 Appellant the sum of $909,473.16 by channelling this sum, on the CA 39 Appellant’s instructions, into an investment in her name. Although there was no physical transfer of moneys to the CA 39 Appellant, that did not change the legal character of the act vis-à-vis the CA 39 Appellant as an act of payment. There was also a diminution of the value of the estate as a result of the conveyance: at [91]–[101].

9 The referral fees that were paid to Mr Koh before April 2020 (“Pre-April 2020 Referral Fees”) were calculated as a percentage of the amount invested by the referred investor, and were not predicated on profits actually made from the Purported Nickel Trading: at [102]–[103].

10 The Judge erred in finding that the Pre-April 2020 Referral Fees were agreed upon on the pretext that the Purported Nickel Trading was real and genuine. Per the terms of Mr Koh’s employment, EAM’s obligation to pay the Pre-April 2020 Referral Fees arose upon Mr Koh procuring the investor’s investment, and not on EAM deploying the investment in the Purported Nickel Trading. Mr Koh had discharged his end of the bargain by procuring investors and investments. The Pre-April 2020 Referral Fees were therefore supported by consideration as EAM was contractually obligated to pay the same to Mr Koh: at [104]–[107].

11 The burden of proof under s 73B(3) of the CLPA is on the defendant to show that the consideration given is of adequate value. The court was satisfied that in the circumstances of this case, there was sufficient evidence that consideration of adequate value was furnished by Mr Koh. The Envy Companies, including EAM, had represented that they achieved 15% profit on each investment and in one particular instance, estimated that they could achieve roughly a profit of 13.2% in returns to the investor. Seen in this context, the investment Mr Koh had procured constituted adequate consideration for the Pre-April 2020 Referral Fees which were computed at a relatively nominal percentage of 0.8% to 2.75% of the amount invested. Accordingly, Mr Koh was entitled to rely on the defence under s 73B(3) of the CLPA, and the claw back of the Pre-April 2020 Referral Fees ordered by the Judge was set aside: at [108]–[118].

12 A more fundamental issue was whether the moneys received from the investors who were introduced by Mr Koh provided value for the Envy Companies as the moneys were used for a Ponzi scheme. The court expressed the preliminary view that consideration of adequate value could possibly be given in the form of referral services paid for procuring investors whose investments were ultimately channelled into a Ponzi scheme. However, the court left this issue open for future reconsideration as the parties did not fully pursue this issue: at [116]–[117].

13 The Appellants provided no consideration, whether contractual or extra-contractual, for the commissions and profit-sharing payments. On this basis, the court agreed with the Judge that these payments were gratuitous payments to employees and therefore constituted gifts under s 438(2)(a) of the IRDA made with the intent of defrauding creditors. Therefore, the commissions and profit-sharing payments made on 30 July 2020 and thereafter were clawed back as transactions defrauding creditors under s 438 of the IRDA: at [119]–[122].

14 The court found that the Judge did not err in in declining to exercise the discretion not to order a claw back of the Challenged Payments (save for the excess income tax paid by the Appellants on these payments). The Appellants had not adduced cogent evidence of the prejudice that they would suffer if a claw back was ordered. The court was therefore not in a position to assess whether the prejudice to the Appellants was sufficient to displace the policy objective of reconstituting the estate. No exceptional circumstances were established, and the court accordingly dismissed the appeal on this issue: at [140]–[145].

15 The court found that the Judge did not err in holding that an insolvency set-off under s 219 of the IRDA was not available to the CA 39 Appellant because of an absence of mutuality of the parties and of the debts. The moneys ordered to be clawed back represented sums that were due to the estate because the transactions contravened the statute. These were not a result of business activities that created a debtor/creditor relationship in favour of the company. The true beneficiaries of the moneys clawed back were the creditors of the Envy Companies and not the Envy Companies themselves: at [152]–[155].

16 Further, at the date of the making of the winding up application, the cause of action under s 438 of the IRDA had not crystallised. Even when it did crystallise upon the making of the winding up order, the cause of action vested in the liquidators. Likewise, the court’s tentative view was that the Envy Companies did not have a claim under s 73B(1) of the CLPA as they were the transferors under the relevant conveyances. Thus, there was also no mutuality of parties at the relevant time: at [156].

17 Permitting an insolvency set-off in the present case would be a violation of the pari passu principle. The court was therefore of the view that an insolvency set-off was not available to the CA 39 Appellant: at [157].