Insolvency Law

Published date01 December 2005
Date01 December 2005
AuthorLEE Eng Beng LLB (Hons) (National University of Singapore), BCL (Oxford); Advocate and Solicitor (Singapore).

14.1 In 2005, insolvency law again proved itself to be a fertile source of litigation. The cases hailed from all areas of insolvency law, and touched on a wide range of substantive and procedural issues. Three leading cases deserve special mention: the Court of Appeal decision in Tang Yoke Kheng v Lek Benedict[2005] 3 SLR 263 (the meaning of ‘fraud’ in fraudulent trading) and the two High Court decisions in Re Bintan Lagoon Resort Ltd[2005] 4 SLR 336 (the scope of the ‘public interest’ exception to the right of the holder of a floating charge over the assets of a company to object to the making of a judicial management order) and RBG Resources plc v Credit Lyonnais[2006] 1 SLR 240 (the distribution of assets in the Singapore liquidation of non-registered foreign companies). Apart from Tang Yoke Kheng v Lek Benedict, there were three other Court of Appeal cases on insolvency law, namely, Transbilt Engineering Pte Ltd v Finebuild Systems Pte Ltd[2005] 3 SLR 550 (the uncompleted execution of a judgment against a company going into liquidation), Ng Bok Eng Holdings Pte Ltd v Wong Ser Wan[2005] 4 SLR 561 (the conveyances of property with intent to defraud creditors) and Azero Investments SA v Velstra Pte Ltd[2005] 4 SLR 792 (unfair preferences). Other notable cases include the High Court decisions in Re Wan Soon Construction Pte Ltd[2005] 3 SLR 375 (the application of the pari pasu principle and the importation of liquidation provisions in judicial management) and Neo Corp Pte Ltd v Neocorp Innovations Pte Ltd[2005] 4 SLR 681 (the right of liquidators to continue with an unfair preference action commenced by judicial managers).

Bona fide dispute or counterclaim raised by the debtor company

14.2 In De Montfort University v Stanford Training Systems Pte Ltd[2006] 1 SLR 218, the High Court reaffirmed the well-entrenched principle that winding-up proceedings should not be founded on a debt which is bona fide disputed by the company sought to be wound up, or against which the company is asserting a counterclaim of substance. In this case, the petitioner, an English university, sought to wind up the company through which it was

conducting its courses in Singapore. The petitioner claimed that it was owed certain sums by the company for services rendered, but the company contended that it had various counterclaims against the petitioner. After the presentation of the winding-up petition, the company and a related company commenced a suit against the petitioner. The company then applied to have the winding-up petition stayed or, alternatively, struck out. The petitioner resisted this application on the grounds that the company”s claims were unmeritorious and that the company was in any event insolvent.

14.3 Tay Yong Kwang J granted a stay on the ground that there was a bona fide dispute as to the petitioner”s claim against the company. The learned judge reiterated the well-established rule that it is an abuse of process to petition to wind up a company on the basis of a debt which is bona fide disputed, or where the company is asserting a counterclaim based on substantial grounds for an amount equal to or exceeding the debt upon which the petition is founded. His Honour also stated that there is no distinction in principle between a counterclaim of substance and a serious dispute regarding the petitioner”s debt, citing the leading decisions of Re Sanpete Builders (S) Pte Ltd[1989] SLR 164 (‘Re Sanpete Builders’) and Malayan Plant (Pte) Ltd v Moscow Narodny Bank Ltd[1980—1981] SLR 8.

14.4 However, Tay J disagreed with the principle (established in Re Welsh Brick Industries Ltd[1946] 2 All ER 197 (‘Re Welsh Brick Industries’) and approved by the Singapore High Court in Re Sanpete Builders) that a bona fide dispute is not necessarily established even if the court has granted the company unconditional leave to defend in an application for summary judgment. He preferred the view that if unconditional leave to defend has been given, it means that there is a bona fide dispute and the court hearing the winding up should not revisit or reopen the issues.

14.5 Tay J is not alone in expressing this view. A number of English authorities post-dating Re Welsh Brick Industries have expressed a similar sentiment (see Re Claybridge Shipping Co SA[1997] 1 BCLC 572 at 575, Alipour v Ary[1997] 1 WLR 534 at 542 and Re a Company (No 006685 of 1996)[1997] 1 BCLC 639 at 644). However, there are Australian authorities opining that the burden to establish a bona fide dispute is somewhat heavier than that in resisting an application for summary judgment (Derby Motorplus Pty Ltd v Swan Building Society(1990) 2 ACSR 239 at 244 and Re Collinda Pty Ltd(1991) 6 ACSR 123 at 126). If this is correct, it follows that the grant of unconditional leave to defend does not always amount to the existence of a bona fide dispute.

14.6 The view expressed by Tay J has much to commend it. There is no reason why a dispute which is sufficient to justify the grant of unconditional leave should not be sufficient to resist a winding-up petition. This is particularly so given that a winding-up order carries more drastic consequences than a summary judgment. Further, if one adopts two different burdens, the reality is that the substantive difference between the two burdens will be minute and difficult to determine.

14.7 However, one hesitates to lay down an absolute rule that a bona fide dispute is always established if unconditional leave to defend has been granted. Ultimately, whether a winding-up order should be made involves an exercise of judicial discretion, and the court should examine all the circumstances before deciding on the exercise of the discretion. There could be special cases where it is clear that there is no bona fide dispute even though unconditional leave to defend has been granted. For instance, if, after the grant of unconditional leave to defend, clear evidence verifying the petitioner”s claim comes to light, the court hearing the winding-up petition should not be bound to dismiss it. It is therefore submitted that the position advocated by Tay J should only be a general guideline as to the exercise of judicial discretion which is capable of being displaced in exceptional circumstances.

Stay of winding-up proceedings

14.8 In United Overseas Bank Ltd v Ng Huat Foundations Pte Ltd[2005] 2 SLR 425, a petitioning creditor applied to have an insolvent company wound up while the company applied for a stay of the winding-up proceedings. The company”s earlier application to the court for an order convening a meeting of creditors to consider a scheme of arrangement had been dismissed by Lai Kew Chai J (see para 14.63 below), and the company had filed an appeal against the dismissal of its application. The company contended that the winding-up proceedings should be stayed pending the hearing of the appeal.

14.9 Andrew Phang Boon Leong JC (as he then was) noted that the company was woefully insolvent and had used any and every means to stave off its winding up. The learned judicial commissioner examined the reasons of Lai J for dismissing the company”s scheme of arrangement application and concluded that the company”s appeal was doomed to failure. He found that the company was using the appeal as yet another delaying tactic and was engaging in a blatant abuse of the process of the court. Further, even if the company was wound up, the liquidator would not be precluded from

continuing with the various actions and appeals on behalf of the company. In the circumstances, Phang JC made a winding-up order against the company and dismissed the company”s application for a stay of the winding-up proceedings. Costs were also ordered against the company. While the court was sympathetic towards the petitioner”s application that costs should be ordered against one Mdm Lee, the alleged alter ego of the company, the court was of the view that there was insufficient evidence to justify such a draconian course of action.

Liquidation of foreign companies

14.10 There are two types of foreign companies recognised under the Companies Act (Cap 50, 1994 Rev Ed) which may be conveniently described as registered foreign companies and non-registered foreign companies. If a foreign company wishes to establish a place of business or commence carrying on business in Singapore, it is required to be a registered foreign company under s 368 of the Companies Act. However, registration is not required if a foreign company is engaging in certain activities which are statutorily defined not to amount to the carrying on of business, for instance, the conduct of litigation, the holding of directors” or shareholders” meetings, the maintenance of bank accounts, the investment of funds and the holding of property (see s 366(2) of the Companies Act). Therefore, if a foreign company is intending to conduct only such activities in Singapore, it need not be registered and can remain a non-registered foreign company.

14.11 The court has the jurisdiction to wind up an ‘unregistered company’ under s 351 of the Companies Act if any of the grounds stated therein are made out. Section 350(1) of the Companies Act defines an ‘unregistered company’ to include a foreign company and any partnership, association or company consisting of more than five members but does not include a company incorporated under the Companies Act. It follows that the court has the jurisdiction to wind up a foreign company in Singapore, whether registered or non-registered. However, the court will not exercise the jurisdiction unless there is a sufficient nexus between the foreign company and Singapore to justify the making of a winding-up order (Re Griffin Securities Corporation[1999] 3 SLR 346). The winding up of a foreign company in Singapore is termed an ‘ancillary liquidation’, as opposed to a ‘principal liquidation’ which is conducted in the place of incorporation of the foreign...

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