8 July, 2012

 

Legal News & Analysis – Asia Pacific – Singapore – Dispute Resolution

 

eSys Technologies Pte Ltd v nTan Corporate Advisory Pte Ltd [2012] SGHC 136

 

SUMMARY

 

In this case, the Singapore High Court held that success fees are payable by a client to his advisor in an industry where fees are generally time-based.

 

BACKGROUND

 

The Plaintiff, a computer hardware distributor, engaged the Defendant to provide advice on restructuring financial arrangements when it ran into financial problems. Parties signed an engagement letter (“Engagement Letter”) and the Plaintiff paid a deposit (“Deposit”) to the Defendant.

 

Pursuant to the Engagement Letter, the Plaintiff agreed to pay the Defendant time costs and out-of-pocket expenses, as well as value-added fees (“VAFs”) which were contingent upon the Defendant performing certain types of work which resulted in value being added to the Plaintiff. The VAFs were computed at 5% of the total gross value added.

 

Subsequently, the Defendant carried out work for the Plaintiff and rendered two invoices (“Invoices”) to the Plaintiff for time costs and out-of-pocket expenses in Feb 2007. The Plaintiff terminated the Defendant’s engagement after the second invoice was rendered.

 

The Plaintiff commenced legal proceedings against the Defendant, seeking an account of the fees and expenses (“Account”) from the Defendant pursuant to the Invoices. The Plaintiff asserted that it was an implied term of the Engagement Letter that the Defendant must furnish an Account. The Plaintiff also sought the repayment of the balance of the Deposit after allowing for deduction of the amounts in the Invoices.

 

In its counterclaim, the Defendant sought a declaration that it was entitled to the VAFs as it had performed work in relation to an investment by a third party in the Plaintiff (via a special purpose vehicle) and it had also achieved a standstill arrangement with the Plaintiff’s bank creditors, thereby enabling the Plaintiff to continue trading in the interim.

 

THE HIGH COURT’S DECISION

 

After examining the evidence, the High Court found that the Defendant had performed work which resulted in value being added to the Plaintiff. The Defendant was therefore entitled to the VAFs pursuant to the Engagement Letter in respect of the investment by the third party in the Plaintiff and the standstill arrangement with the bank creditors.

 

As the quantum of the Defendant’s counterclaim exceeded the amount claimed by the Plaintiff, the High Court dismissed the Plaintiff’s claim.

 

On the facts, the High Court found that both the Plaintiff and the Defendant were mindful of the necessity of an Account being rendered. The High Court therefore found that it was an implied term of the Engagement Letter that the Defendant was obliged to provide an Account to the Plaintiff.

 

However, the High Court held that the Plaintiff should have requested for an Account within a reasonable period after the Defendant’s services were terminated instead of waiting until after 3.5 years had lapsed and the Plaintiff was “judgment proof” before requesting for an Account.

 

The High Court found that the Plaintiff had commenced legal proceedings against the Defendant only after the Plaintiff’s assets had been “hollowed out of the company” and therefore had nothing to lose if it were unsuccessful in the legal proceedings.

 

Entitlement to the VAFs

 

The High Court held that the Defendant’s entitlement to the VAFs hinged upon whether or not it had performed work which satisfied the conditions precedent set out in the Engagement Letter.

 

On the facts, the High Court held that the standstill constituted a restructuring of the Plaintiff’s liabilities vis-à-vis its bank creditors.

 

Prior to the standstill being granted, the Plaintiff’s liabilities were due and payable – this was a situation which could potentially cripple the Plaintiff. After the standstill was granted, the Plaintiff’s bank liabilities were no longer due and payable forthwith. The Plaintiff was therefore given the crucial breathing space it needed to repay its debts within the agreed period under the standstill. There was a significant shift in the temporal nature of such liabilities.

 

Based on the evidence, the High Court also held that the Defendant was entitled to the VAFs relating to its work done in respect of the third party investment in the Plaintiff (via a special purpose vehicle). In particular, the High Court dismissed the Plaintiff’s argument that the Defendant was precluded from claiming VAFs in respect of the third party investment because the injection of funds accrued to the special purpose vehicle and not the Plaintiff directly.

 

On the contrary, although there was conclusive evidence showing that the Defendant did substantial work in relation to the Plaintiff’s trade and supply creditors, no standstill took place in relation to the Plaintiff’s trade and supplier liabilities. Also, the Engagement Letter stipulated that in order for the Defendant’s claim for VAFs to succeed in respect of the Plaintiff’s trade and supplier liabilities, the Defendant’s work had to result in these liabilities being “written off, extinguished, avoided or restructured”.

 

The evidence showed that the Plaintiff, with the Defendant’s assistance, met its liabilities to its trade and supply creditors. There was therefore no value add to the Plaintiff in this instance and such work was only compensable by time costs and out-of-pocket expenses.

 

COMMENT

 

The High Court’s decision in this case signals a growing acceptance of success fees in complex advisory transactions and merits study by professional advisors.

 

Professional advisors will be encouraged by the High Court’s contextual and purposive approach in construing success fees clauses having regard to the substance and results of the work actually carried out.

 

Ultimately, the professional advisor’s recovery of success fees will depend on credible evidence substantiating all the work carried out during the transaction.

 

In this respect, careful recording of time entries and the description of the work done, as well as contemporaneous communications with the client on the same assume even greater importance in the event the client subsequently challenges the professional advisor’s entitlement to success fees.

 

 

For further information, please contact:
 
Chew Kiat Jinn, Director, Drew & Napier
kiatjinn.chew@drewnapier.com

 

Drew & Napier Dispute Resolution Practice Profile in Singapore

 

 

Leave a Reply

You must be logged in to post a comment.