Insolvency Law

Date01 December 2001
AuthorLEE ENG BENG LLB (NUS), BCL (Oxon), Advocate & Solicitor (Singapore)
Citation(2001) 2 SAL Ann Rev 239
Published date01 December 2001

14.1 In 2001, the Singapore courts again delivered an impressive collection of judgments on insolvency law. Interestingly, unlike many of the previous years, the majority of the cases were not on the subject of the winding up of companies. The bulk of this year”s judgments explored issues in the realm of bankruptcy law; indeed, there might be a record number of judgments on bankruptcy law in 2001 compared to any other year in the history of the Singapore courts. Certainly, these cases will be a valuable contribution to the growing local jurisprudence on the current Bankruptcy Act (Cap 20, 2000 Ed) which was enacted fairly recently in 1995.

14.2 Also notable is the fact that one of the two Court of Appeal decisions on insolvency law last year (Daewoo Singapore Pte Ltd v CEL Tractors Pte Ltd[2001] 4 SLR 35) dealt with schemes of arrangement, an area of insolvency law which has received scant attention from the Singapore courts. The other Court of Appeal decision (Hinckley Singapore Trading Pte Ltd v Sogo Department Stores (S) Pte Ltd[2001] 4 SLR 154) is only the second occasion on which the Court of Appeal has expressed its views on legal issues arising under the judicial management regime (the other occasion being Electro Magnetic (S) Ltd v Development Bank of Singapore Limited[1994] 1 SLR 734).

14.3 On a separate note, several important insolvency law judgments issued in 2000 have not been reported, in particular, the decisions in Panorama Development Pte Ltd v Fitzroya Investments Pte Ltd (Originating Summons 1365/2000, HC, unreported judgment dated 18.11.2000), Re Boonann Construction Pte Ltd (Originating Petition 17/1999, HC, unreported judgment dated 6.7.2000) and Manjit Kaur Monica v Standard Chartered Bank (Originating Summons (Bankruptcy) 60/2000, HC, unreported judgment dated 6.10.2000). Hopefully, these cases and the other significant but as-yet unreported cases of 2001 (including Goh Chin Soon v Oversea-Chinese Banking Corporation Ltd (Originating Summons (Bankruptcy) 114/2000, HC, unreported judgment dated 30.1.2001)) will eventually be reported.

Service of winding up demands

14.4 The most common mode of proving that a company is unable to pay its debts and should be wound up under s 254(1)(e) of the Companies Act

(Cap 50, 1994 Ed) is by showing that, pursuant to s 254(2)(a), the company has failed to comply with a demand for a debt due of more than $10,000 within 21 days of it being left at the registered office of the company. It appears that, generally, the law deems it sufficient for a creditor to leave the demand at the address of the registered office of the company as lodged with the Registry of Companies. Such service will be effective despite the fact that, at the time of the service of the demand, the directors of the company had resolved to change the address of the registered office (see Re Third Lojebo Pty Ltd[1982] VR 379 at 383—385). Even where the company has physically moved its office to another address, a service on the previous address would be valid unless the company has lodged the notice of change of registered office with the Registrar of Companies (Re Shangri-la Cruise Pte Ltd[1990] SLR 799). Conversely, if at the time of service the notice of change of registered office has been duly lodged, the service would be ineffective, even if the change has not been entered in the register (see Pioneer Concrete (M) Sdn Bhd v Celini Corp Sdn Bhd[1998] 3 MLJ 810).

14.5 Re Specialty Laboratories Asia Pte Ltd [2001] 2 SLR 563 is a somewhat unusual case which illustrates that the leaving of a winding up demand at the registered office of a company, as determined from the records of the Registry of Companies, is not always beyond challenge. The petitioning creditor in this case had left a winding up demand at the registered office of the company as reflected in the records of the Registry of Companies and, after the demand was not complied with, presented a winding up petition against the company.

14.6 At the hearing of the petition, one of the opposing creditors challenged the service of the winding up demand on the ground that the registered office of the company had been changed without a resolution of the board of directors. It transpired that, prior to the service of the demand, one of the two directors of the company (“Mr Peter”) had lodged a notice of change of registered office with the Registry of Companies without any supporting directors” resolution. In fact, the other director of the company did not know of the change of registered office and in fact returned the winding up demand and the winding up petition. The other feature of relevance was that the petitioning creditor was the 60% shareholder of the subject company, and Mr Peter was in control of both the petitioning creditor and the subject company.

14.7 Lee Seiu Kin JC upheld the objection and ruled that the demand had not been validly served on the company. As the board of directors did not pass any resolution effecting the change of registered office, the change was ineffective. Further, the petitioning creditor could not rely on the “indoor management” rule established in Royal British Bank v Turquand(1856) 6 E & B 327 as it was in control of the company, and the usual presumption of regularity would not apply.

Meaning of insolvency within s 254(2)(c) of the Companies Act

14.8 Although the decision in Tong Tien See Construction Pte Ltd v Tong Tien See[2002] 3 SLR 76 (reviewed infra at paras 14.55—14.60) was not concerned with the hearing of a winding up petition, views were expressed on the meaning of insolvency within the scope of s 254(2)(c) of the Companies Act. This provision states that a company is deemed to be unable to pay its debts if it is proved to the satisfaction of the court that, taking into account the contingent and prospective liabilities of the company, it is unable to pay its debts. Relying on the decision of Chao Hick Tin J in Re Sanpete Builders (S) Pte Ltd[1989] SLR 164, Tay Yong Kwang JC held that proof that a creditor”s debt has not been paid per se does not establish an inability to pay debts within the meaning of s 254(2)(c), and that a temporary lack of liquidity is not tantamount to insolvency.

14.9 These propositions are correct, but only in the context of s 254(2)(c) which applies to “balance-sheet” insolvency. Section 254(2)(c) authorises a winding up if the existing and probable assets of the company will be insufficient to meet the liabilities, taking into account not only liability presently due but also those which are contingent and prospective (Re Great Eastern Hotel (Pte) Ltd[1988] SLR 841 at 856). It does not prescribe the test for winding up a company on the ground of “cash-flows” insolvency; this test is found in s 254(1)(e) itself. It should be noted that s 254(2)(c) is only one of the three presumptions of insolvency in s 254(2) for the purposes of establishing that a company is unable to pay its debts within the meaning of the main provision in s 254(1)(e) and should be wound up accordingly. The three presumptions in s 254(2) are additional to s 254(1)(e) and do not deprive it of its independent application (see Byblos Bank SAL v Al-Khudairy[1987] BCLC 232).

14.10 Pursuant to s 254(1)(e), therefore, a company may be wound up on the ground of its “cash-flows” insolvency and, in applying this test, the fact that a creditor”s undisputed debt has not been paid may be sufficient to establish insolvency contrary to what was stated in Tong Tien See Construction. The debt in respect of which the company is alleged to have failed to pay must be currently payable and a demand for its payment must have been made, but the demand for payment need not amount to a notice of demand under s 254(2)(a) (Re Capital Annuities Ltd[1979] 1 WLR 170). As long as the company has failed to pay an undisputed debt which is due and in respect of which a demand for repayment has been made, it is proved that the company is unable to pay its debts, even where the company appears to be or is obviously solvent (Cornhill Insurance plc v Improvement Services Ltd[1986] 1 WLR 114). This last-mentioned principle has also recently been endorsed by Choo Han Teck JC in Re Windsor Holdings Pte Ltd[2001] 2 SLR 184 (reviewed infra at para 14.12).

14.11 Further, the propositions stated in Re Sanpete Builders (S) Pte Ltd and reiterated in Tong Tien See Construction were derived from a line of Australian authorities (beginning with the decision of the Australian High Court in Sandell v Porter(1966) 115 CLR 666) dealing principally with the meaning of insolvency in other contexts such as the setting aside of preferences (as opposed to the meaning of insolvency for the purpose of determining whether to wind up a company). As the Singapore High Court recognised in Re Great Eastern Hotel (Pte) Ltd (supra), such authorities are inapplicable as a test of insolvency for putting a company into liquidation.

Court”s discretion to grant a winding up order

14.12 In Re Windsor Holdings Pte Ltd[2001] 2 SLR 184, the company against which a winding up petition had been presented was unsuccessful in persuading Choo Han Teck JC to exercise the court”s discretion to dismiss the petition. The company relied on two grounds, both of which were considered by the learned judicial commissioner as insufficient to justify the dismissal of the petition.

14.13 The first ground relied upon by the company was that the petitioning bank was the mortgagee of a property which, according to a valuation procured by the company, was worth more than the sum owed by the company to the bank. Choo JC noted that the valuation was based on the property being vacant and that, as the property had been leased to another party to operate a nursing home, vacant possession might not come cheaply. Choo JC also noted that the company had failed to persuade any other party to refinance the sums owed to the petitioning bank. In the...

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