Trustee of Laguna National mired in conflict of interest; shouldn’t be involved in club’s winding up, court told

THE trustee of Laguna National Golf and Country Club appears to be mired in a conflict of interest and was derelict in its duties to noteholders, and should not be involved in the winding-up of the club, the court heard on Monday (Feb 6).

The trustee, British and Malayan Trustees (BMT), had “turned a blind eye to many issues” and would not disclose information when asked to, giving rise to doubts that they would be objective and cooperate with liquidators, argued senior counsel Tan Chee Meng, who is acting for Lim How Teck. 

Pioneer club member Lim had filed a petition to wind up the club after it failed to pay back millions owed to noteholders. The 30-year-old notes, issued to finance the construction of the club, were due for redemption in June 2021. They amounted to S$70.6 million, according to the club’s 2020 financial statements. Club owner Peter Kwee had written to the trustee the day before the redemption date, saying the club was unable to fulfil the redemption due to its “current financial position”.

Laguna is fighting Lim’s petition, filed Apr 4, 2022, with a clause in the notes agreement that says only the trustee may pursue action to enforce the rights of noteholders against the company, unless the trustee fails to do so when bound to. 

Senior counsel Tan pointed to evidence that the trustee had neglected its duties both “during the life of the unsecured notes” and after the company’s default on the payment of those notes in 2021. 

The court heard yesterday that the company was insolvent as early as 2016 and according to quarterly reports, the company’s total equity figure – difference between the club’s share capital and other reserve, and accumulated loss – began plunging from Mar 31, 2015, and went “permanently into negative figures” by Dec 31, 2016. 

By the company’s last quarterly report in December 2021, its equity was around negative S$89.23 million. The company was also making large losses every quarter and was permanently in the red following Mar 31, 2017. 

Tan argued further that the trustee had been aware of the losses as there were occasions where comments such as “reliance on the director to provide financial support” were noted in the quarterly reports. Owner and club chairman Kwee was aware of the deadline for note redemption and was considering various options such as membership conversions. 

“The company was essentially intimating as early as in or around November 2017 that it was looking for alternatives to satisfy its primary contractual obligations of paying the subscribers of the unsecured notes,” said Tan. “It is an indication of a material failure in respect of its obligation to honour the unsecured notes.” 

In such a situation, the trustee could have declared an Event of Default (EOD), and noteholders informed earlier that their notes would not be redeemed. 

“If we have acted sooner, we could have been able to protect the assets and recover assets on the basis that the company is in default and money given to the related companies of Kwee,” said Tan.

In 2016, Laguna sold the land lease of the club to Laguna Hotel Holdings (LHH), another of Kwee’s companies, for S$130.4 million but the club received only S$50 million in cash. Some S$38.1 million was “presumably routed back” to LHH on the basis of an alleged loan, and a further S$37.8 million owed to the club from the hotel remained outstanding. 

“A tracking of the audited annual reports over the years will show that even as at Dec 31, 2020, over S$20 million remains outstanding from LHH to the Company on an unsecured and interest-free basis,” said senior counsel Tan. 

He noted that the report also showed that of the S$50 million received by the club, some S$8.1 million was used for payments on behalf of a related corporation, and some S$8.8 million used to repay loans from related parties/business associates. 

“In essence, all the monies received by the company for the lease and property sale were drained from the company,” said Tan. 

The company’s financial statements are also in doubt, with neither lawyers acting for Lim nor Laguna able to reconcile certain differences in figures cited in the hearing yesterday.  

BMT said it became aware of the renewal of the lease for the land on which the club property stood around 2012, and noted that if the club failed to secure a lease extension, it would have resulted in an EOD and its business operations would cease. It also claimed that it took active steps to enquire into the transfer of the lease.  

But the court heard that the trustee only started clarifying the controversies surrounding the lease and property sale to LHH after noteholder Thomas Khoo asked BMT to inform him of any non-compliances by the club. 

Lim, in an affidavit filed Dec 29, also pointed to letters from Khoo to the trustee BMT in 2017, 2018 and 2020, asking for information on the club’s finances, the propriety of the lease transfer, and the number of outstanding unsecured notes that were not yet redeemed as of the club’s financial year 2019 audited account.  

BMT had replied that it was aware of the “disposal/sale you refer to in your letter and these were discussed in the meeting we had with the management of (the Company)”, and that “if you would like further information in regards to this issue, we would suggest you may wish to contact the Issuer”.

In response to Khoo’s 2020 letter asking for information on outstanding unredeemed notes, BMT said it did not intend to make available these records to Khoo, as a clause in the Trust Deed did not require it to do so, even though it and Laguna were aware that the redemption date of the notes is Jun 11, 2021. 

Chong Kuan Keong, representing Laguna in court on Monday, said that until 12 months before the due date of the notes, there was no basis to allege that the trustee should call the EOD based on insolvency, going by the current assets and liabilities at the time, he said. 

Based on facts and duties required of the trustee, there was firstly, “no breach that Lim had pointed to court on part of the trustee”, and secondly, the trustee had “discretion to take action” and to exercise judgement.

BMT “did go and find out from the company whether the assignment would be in the interest of the company and hence the interest of the noteholders”. “The trustee said they found nothing wrong,” said Chong. 

The hearing has been adjourned to Monday (Feb 13) at 3pm.