|(2004) 5 SAL Ann Rev 302
|01 December 2004
|01 December 2004
14.1 The law of corporate liquidation has been a steady contributor of cases for this series of reviews but, being a well-trodden area of insolvency law, it has never been the highlight until this year. Refreshingly, this year”s review features some very interesting cases on corporate liquidation law, containing many important pronouncements of law made by the Singapore High Court for the first time. Specifically, the High Court delivered leading judgments on private examinations of company officers by liquidators (), the opening and operation of private bank accounts by court-appointed liquidators ( ), the remuneration of liquidators and other insolvency practitioners ( ), the commencement of winding up proceedings against a company already in voluntary winding up ( ), and the meaning of commencement of voluntary liquidation ( ).
14.2 In contrast, there was a dearth of case law on judicial management and receivership, and a lone (but noteworthy) decision on schemes of arrangement (). The law of bankruptcy, however, had its fair share of decisions, including a key decision on the rules governing service of bankruptcy process ( ). Also, as in recent years, there is a good crop of cases on vulnerable transactions, including a Court of Appeal decision deliberating on the meaning of ‘transaction’ for the purpose of transactions at an undervalue ( ), two related High Court decisions which discusses the law on conveyances of property with intent to defraud creditors ( and ), and another High Court decision on unfair preferences ( ). Finally, with regard to directors” duties and liabilities in insolvency, the decision in
deserves a mention for its discussion on the law of fraudulent trading.
14.3 In, (‘ ’) V K Rajah JC (as he then was) caveated that, in view of the changes in English and Australian insolvency legislation, real caution must now be exercised in evaluating the relevance of recent English and Australian authorities in insolvency matters. There was still an ‘umbilical cord of jurisprudence’, particularly with England, that continued to offer guidance in the fleshing-out of applicable principles in insolvency law in general, but such guidance must be reviewed against the backdrop of commercial practices and policy considerations in Singapore (at ).
14.4 In(supra para 14.3), Rajah JC also opined that insolvency proceedings were not an exclusively private matter between the debtor and the creditors; the community also had an important interest in such proceedings. Subsequently, in , V K Rajah J (as he had by then become) elaborated on the nature of winding up and bankruptcy proceedings. Rejecting an argument that bankruptcy proceedings were akin to enforcement and attachment proceedings, the learned judge pointed out that bankruptcy and winding-up proceedings involve the initiation of a process to alter the legal status of an insolvent debtor and are a collective and representative action on behalf of all creditors to ensure equal distribution of the available assets of an insolvent debtor.
14.5 Andrew Ang JC (as he then was) allowed the petitioning creditor into withdraw and another creditor to be substituted as the petitioning creditor. This was because the petitioning creditor had been paid in full at the time of the hearing to decide whether the winding-up order should be set aside. The learned judicial commissioner declined to set aside the winding-up order, but
ordered that the winding-up order not be extracted until after the substitute petitioning creditor had filed papers in connection with the substitution within seven days.
14.6 The substitution of a petitioning creditor is itself an unremarkable procedural exercise, but this reviewer would like to highlight that a petitioning creditor who allows himself to be substituted on account of having received payment in full should be aware that the payment itself might be impugned if a winding-up order is made upon the petition of the substituted petitioning creditor. Because of the substitution, the commencement of winding up remains the date when the petition was filed. In the event that a winding-up order is made, s 259(1) of the Companies Act (Cap 50, 1994 Rev Ed) would apply from that date and invalidate any disposition of the company”s property from that date unless sanctioned by the court. The payment made by the company to the original petitioning creditor would, ironically, be rendered void by the petition filed by the original petitioning creditor himself. It is also unlikely that the court will grant a validation order under s 259(1) given that the payment was made to a creditor ahead of other creditors and would contravene the pari passu principle.
14.7 As such, a petitioning creditor who is offered full payment of his debt should make it a condition that the payment is made by a third party and not from the assets of the company. If he accepts payment from the company, and his application for withdrawal of the winding-up petition is rejected because another creditor successfully applies to be substituted as the petitioning creditor, the original petitioning creditor may run the risk of having to disgorge the payment back to the company.
14.8 In(supra para 14.5), a winding-up order had been made against a company but, before its extraction, the court granted a stay of winding up under s 279(1) of the Companies Act. An application to set aside the winding up order was then made by the company on the basis that it intended to apply for a judicial management order and that funds would be procured to propose a scheme of arrangement. Andrew Ang JC rejected the application and lifted the stay.
14.9 There were ample grounds supporting Ang JC”s decision. The company was clearly insolvent. No information relating to the proposed scheme of arrangement was provided by the company. No creditors
supported the company”s application to set aside the winding-up order. On the contrary, the creditors who opposed the company”s application held more than 25% in value of the unsecured debts owed by the company, and would have been able to vote down any scheme of arrangement proposed by the company. Further, the creditors who signed a standard letter prepared by the company stating that they ‘would like to consider the Company”s proposal for repayment’ were in the minority and their claims had been inflated by the company. The learned judicial commissioner therefore concluded that allowing the company to drag on and to seek in vain to enter into a scheme of arrangement would fritter away its scant financial resources at the expense of creditors.
14.10 In(‘ ’), Assistant Registrar Vincent Leow (‘AR Leow’) stated that winding up was a drastic remedy and that the court would hesitate before imposing the draconian measure of winding up the company unless this was the fairest course of action after taking into account the interests of all parties including the creditors, contributories, suppliers, employees, customers and shareholders. This reviewer would respectfully disagree. The judicial sentiment that winding up is draconian has been expressed in cases involving solvent companies in which feuding shareholder factions raise allegations of oppressive and unfairly prejudicial conduct under s 216 of the Companies Act or argue that the company should be wound up on the just and equitable ground under s 254(1)(i) of the Companies Act.
14.11 In the case of insolvent companies sought to be wound up by their creditors, different considerations apply with respect to the exercise of the court”s discretion to make a winding-up order. That an unpaid creditor of an insolvent company is entitled to a winding-up order ex debito justitiae is a proposition laid down well over a century ago (11 ER 1383 at 1389) and followed by many Commonwealth courts, including the Singapore courts ( at 354, —; at 176, ). The fact that a winding up order is a draconian remedy means that the court will proceed cautiously if there is any doubt as to the petitioner”s claim (see at 156). However, if the petitioner is an undoubted creditor, the well-entrenched practice is that the court will grant a winding-up order, unless there are specific countervailing considerations such as opposition from other creditors, procedural defects, or bona fide disputes as to the petitioner”s claim or substantial counterclaims against theat 402;
petitioner. It is not the law or prevailing practice that the court will consider whether a winding-up order is...
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