On the perils of skipping due diligence.

Joel Sng of Honestbee entered into 2 sale and purchase agreements ("SPAs") with a hedge fund ("HF"). Under the SPAs, HF agreed to purchase 86,865 shares in Honestbee from Sng for USD 5.1m. HF paid in full, but Sng did not deliver the shares.

HF sued Sng, and applied for summary judgment.¹ Sng (naturally) resisted the application for summary judgment. Sng succeeded before an Assistant Registrar, but HF appealed. The High Court Judge who heard the appeal granted final judgment in favour of HF.²

There is much to unpack in the judgment, but I will confine myself to 3 observations and 1 take-away.

OBSERVATIONS:

1) When HF did not receive the shares (after it had already made payment), it sent multiple chasers. HF eventually received a share certificate for 86,865 preference shares, but the Judge held that this share certificate could not have been genuine, as Honestbee's ACRA records showed that it had only issued 13,725 shares. Sng did not disavow the share certificate, which his signature appeared on, and the Judge found that his "silence was telling".

2) Sng claimed that it would be unjust to allow HF to recover the USD 5.1m from him, as he had channelled the sum into Honestbee's operations. However, the Judge found that this claim was untruthful, as he had used around S$3.6m out of the sum to redeem the mortgage for his property (Sng claimed that he had then re-mortgaged his property for a loan which he advanced to Honestbee, but did not provide any evidence of this). Sng also claimed to have lent Honestbee a total of around S$6.9m, but bank statements showed that Honestbee repaid him S$4m.

3) Sng denied the authenticity of the SPAs and claimed that he had not signed them. However, this defence was diametrically opposed to his alternative defence - that he had fulfilled his obligations under the SPAs - and Sng could not hedge his bets. Further, there was prior correspondence in which Sng (i) did not deny signing the SPAs; and (ii) referred to the share sale.

TAKE-AWAY:

HF entered into the SPAs for the shares without doing any due diligence. If it had done so, it might have realised that Honestbee's other shareholders had (i) certain rights of first refusal; and (ii) tag-along rights, and it might have sought the necessary confirmations / waivers before proceeding with the SPAs. If Sng had failed to furnish such confirmations / waivers, that may well have raised a red flag.

We do not know why HF did not perform due diligence, but there was at least 1 document which valued Honestbee at USD 330m. Based on that valuation, HF would be paying USD 5.1m for around USD 91.9m worth of shares. Perhaps HF thought this was a gamble worth making - but if so, you win some, and you lose some.

I suspect that the Honestbee saga is far from over. Watch this space.