Illegality founded on an Originating Summons: Dissecting the CA decision of Lextrend v Sotella (April 2026)

Image credit: Merchant of Venice, Shylock (Edgar Wreford (right) performing as Shylock during a 1955 production of The Merchant of Venice at the Theatre Royal, Bristol, England, available at https://www.britannica.com/topic/Shylock)

Facts

The Grounds of Judgment are available here [Lextrend & 3 ors v Sotella Fund [W-02(NCVC)(A)-433-03/2024].

Sotella is a Singaporean company. It subscribed to Redeemable Preference Shares (RPS) in Lextrend through a Share Subscription Agreement (SSA). There were 2 additional documents executed (a Letter of Agreement and Supplemental Agreement). The CA termed these 3 documents the Principal Agreements.

A large parcel of land was pledged as “security” in the event Lextrend fails to redeem and pay the redemption sums on the RPS (BSA Lands).

Long and short, Lextrend failed to pay. Sotella then initiated 3 sets of proceedings:

a.       Arbitration;

b.      OS No. 1182 seeking specific performance to transfer the BSA Lands;

c.       Writ 104 and 562, claiming unpaid redemption sums. 

The CA’s findings

i. The Agreements had to be read in conjunction and in totality

The CA made a finding that a Deed of Undertaking and Memorandum of Deposit were to be read holistically and were contingent upon the SSA. The CA observed that the HC “…[failed] to appreciate the inherent connection between the MOD, DOU and Principal Agreements as part of the same commercial transaction along with the contingent nature of the MOD and DOU in relation to the Principal Agreements, the requirement to interpret these agreements as part of a cohesive commercial transaction and the legal principles governing the interpretation of interrelated contracts and their application to the present case”

The CA observed that contracts must be read holistically and in toto and not in silo (see paras. 57-64).

ii. Had the Redemption obligations arisen?

Having determined the proper way to interpret the agreements, the CA went on to hold that the redemption obligations had not materialised. The CA applied the business efficacy rule and held that the Agreements must be read alongside Section 72 of the Companies Act 2016 (paras. 65-73).

iii. Multiplicity and overlap of proceedings

The Court also observed that these issues were all better dealt-with in arbitration. There was a multiplicity of proceedings (paras. 74-77).

iv. Saving the best for last: A finding is made that the SSA is a camouflage for a moneylending transaction

In a scorpion sting (after having thoroughly dissected the Sotella-cricket with its chelae), the CA then addressed the issue of whether the SSA was a moneylending transaction (paras. 78-116). The CA made these observations:

1. There were 6 pre-determined “instalment” repayment dates;

2. These dates were regardless of the financial state of Lextrend;

3. This indicated a debt-repayment structure rather than a genuine equity arrangement;

4. There was a fixed, time-yield repayment of 14.7% per annum;

5. The SSA whilst appearing superficially as an equity subscription was in fact a loan bearing interest (para. 81);

6. Sotella would gain no equity rights and would gain no dividend entitlement;

7. Sotella is insulated from business risk;

8. This pointed towards a creditor awaiting a fixed return;

9. The term “investment returns” were a camouflage for loan interest;

10. Payments were to be made regardless of profit, which conflicted with Section 72(4) of the Companies Act 2016 (which mandates that redemption shall be made out of profits, a fresh issue of shares or capital);

11. The principal loan amount was USD14m, with the final repayment being USD29.785m. This was double the initial payment with an interest rate of 14.7% (paras. 89-92);

12. The agreement was rendered void (para. 90);

13. The presumption of moneylending under Section 10OA of the Moneylenders Act 1951 would arise (para. 96);

14. The true transaction was a loan labelled as an “equity transaction subscription” (para. 98);

15. Additional clauses allowing for further 8% interest and “anti-illegality” clauses further demonstrated the illegality (paras. 101-117).

    
    

    The CA concluded:

[116] It is further trite that the court will not lend its aid to that which is illegal in nature and therefore repugnant to public policy.

Final consideration: Failure to respond to a LOD

Sotella then alleged that Lextrend’s failure to respond in writing equated to an admission.

The CA refused this submission. The CA concluded that not responding to a LOD may be weighed against the overall evidence but it’s not an automatic admission of the claim (para. 123, applying Medium Enterprise v Lim Woon Katt [2016] 9 CLJ 73).

Upshot

The CA held the entire transaction to be an illegal moneylending arrangement and thus, void.

The grant of specific performance was reversed as equity would not aid an illegal transaction.

The appeal was allowed and the entire decision of the HC reversed.

Is this the death knell of private equity?

No, don’t be silly. All one has to do would be to follow the law.

The CA never said one cannot make a profit; that profit just has to be in-line with the Companies Act 2016 and its various strictures on preference shares.

When one tries to be too clever (and flips the proverbial at statute), that’s when trouble comes a-calling.

The FC will certainly weigh-in on this in due course. Stay tuned.

GAVIN JAYAPAL

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