Insolvency Law

• Published date: 01 December 2008
• Citation: (2008) 9 SAL Ann Rev 330
• Author: LEE Eng Beng SC LLB (Hons) (National University of Singapore), BCL (Oxon); Advocate and Solicitor (Singapore); Partner, Rajah & Tann.
• Date: 01 December 2008

Introduction

15.1 This year”s chapter on review of insolvency law cases is the shortest ever, a testimony to the rosy economy in the first three quarters of 2008. Even the most notable insolvency law case last year, namely, the Court of Appeal”s decision in The Oriental Insurance Co Ltd v Reliance National Asia Re Pte Ltd[2008] 3 SLR 121, dealt with a scheme of arrangement proposed by a solvent company to pay all its creditors in full. The case threw up the opportunity for the Court of Appeal to examine a novel issue and develop the law relating to schemes of arrangement, an area in which Singapore jurisprudence has showcased its innovativeness and taken the lead in many respects. Cross-border insolvency law also produced a few interesting cases last year, in particular, Re Projector SA[2008] SGHC 234 and Relfo Ltd v Bhimji Velji Jadva Varsani[2008] 4 SLR 657, and merits its own separate section for the first time. In the realm of bankruptcy, the decision in Re Soh Seow Poh, ex parte Hong Leong Bank Bhd[2008] SGHC 219, which deals with the principles relating to discharge from bankruptcy, makes interesting reading.

Liquidation

Winding-up application founded upon a bona fide disputed debt

15.2 In Pacific Recreation Pte Ltd v S Y Technology Inc[2008] 2 SLR 491, the respondent had, pursuant to a contract with a third party, procured the issue of standby letters of credit to secure a loan granted to the third party, in consideration of which a deed of indemnity was executed by the two appellant companies and their managing director in favour of the respondent. The standby letters of credit were drawn down and the respondent had to reimburse the issuer. The respondent then demanded for payment of the reimbursement sum from the appellants and, when the appellants failed to make payment, the respondent filed a winding-up application against the appellants. The managing director of the appellants then commenced arbitration proceedings against the respondent in respect of a purported dispute under the deed of indemnity. The appellants contended that there was a substantial and

bona fide dispute as to whether they were liable to pay the respondent the amount demanded, and that the respondent”s winding-up application was premature. The High Court rejected this argument and made a winding-up order against the appellants: S Y Technology Inc v Pacific Recreation Pte Ltd[2007] 2 SLR 756.

15.3 The appellants” appeal was dismissed by the Court of Appeal. The Court of Appeal endorsed the trite proposition that it is an abuse of process to use a winding-up application to enforce a disputed debt, as the winding-up court is generally not in the best position to adjudicate on the merits of a commercial dispute without a proper ventilation of the evidential disputes through a trial. However, a company cannot stave off a winding-up application merely by alleging that there is a substantial and bona fide dispute over the debt claimed by the applicant; there must be evidence to allow the court to conclude that the alleged dispute exists. The court can allow evidence to be adduced in order to allow it to determine whether there is a substantial and bona fide dispute. The Court of Appeal further opined that there is no obvious dividing line demarcating when a court has moved from merely asking itself whether a substantial and bona fide dispute exists to actually deciding the dispute itself. If all the relevant evidence is already before the court, the court may proceed to determine the merits of the dispute.

15.4 Citing the High Court decision in De Montfort University v Stanford Training Systems Pte Ltd[2006] 1 SLR 218 with approval, the Court of Appeal held that the applicable standard of proof is no more than that for resisting a summary judgment application, that is, the debtor company need only raise triable issues in order to obtain a stay or dismissal of the winding-up application. The Court of Appeal also referred to its own decision in Metalform Asia Pte Ltd v Holland Leedon Pte Ltd[2007] 2 SLR 268 to reaffirm that this standard of proof applies whether the company is seeking an injunction against winding-up proceedings which have not yet been commenced or is seeking to stay or dismiss a winding-up application that has already been filed.

15.5 On the facts, the only substantive question was whether the governing law of the deed of indemnity was Chinese law or Singapore law. This was simply a matter of construing the relevant documents already before the court. The Court of Appeal did not agree with the decision of the court below that the deed was governed by US law, as the choice was only between Chinese law and Singapore law. After examination of the law in this area, the Court of Appeal decided that the governing law was Singapore law and that the deed was an indemnity rather than a guarantee. As such, the validity and enforceability of the deed were entirely separate from the validity of the contract between the respondent and the third party, and the arbitration commenced by the managing director of the appellants in relation to the contract between

the respondent and third party was, therefore, irrelevant to the liability of the appellants under the deed. Another argument raised by the appellants that the respondent”s letter of demand had not given credit for the value of shares pledged to the respondent was also dismissed by the court, as there had not been any enforcement of the pledge. Accordingly, the Court of Appeal concluded that the appellants had failed to establish a substantial and bona fide dispute over the debt demanded by the respondent and dismissed the appeal.

15.6 The principles stated in Pacific Recreation Pte Ltd v S Y Technology Inc[2008] 2 SLR 491 were extensively cited and followed by the High Court in Jurong Shipyard Pte Ltd v BNP Paribas[2008] 4 SLR 33. Although this was a case involving an application by a company for an injunction restraining a bank from commencing winding-up proceedings on the ground that there was a substantial and bona fide dispute, the High Court held that the same principles were applicable.

15.7 The company had entered into forex transactions with the bank under a master agreement to hedge its foreign currency exposure and subsequently discovered that substantial losses had been incurred as a result of alleged unauthorised transactions entered into by its chief financial officer. The company and the bank then entered into negotiations to close out the outstanding forex transactions and executed a close-out agreement. The bank then served a statutory demand for the payment of the agreed value of the unauthorised transactions and the company applied for an injunction to restrain the bank from commencing winding-up proceedings.

15.8 The first issue before the court was whether an unsigned statement made by the company”s chief financial officer, on which the company relied to show that he had colluded with the bank on the allegedly unauthorised transactions, could be admitted into evidence. Lee Seiu Kin J decided that an application to restrain the commencement of winding-up proceedings is a form of interlocutory proceedings and that hearsay evidence was, therefore, admissible under O 41 r 5 of the Rules of Court (Cap 322, R 5, 2006 Rev Ed). The learned judge then proceeded to consider all the evidence and concluded that the close-out agreement did not impose any obligation on the company to pay the demanded debt which was independent from the master agreement. The company had also raised triable issues in respect of whether the bank knew or ought to have known that the chief financial officer lacked the authority to carry out the transactions, and the effect of such actual or constructive notice, if proved, on the company”s obligation to pay the alleged debt. In the circumstances, the court granted the injunction sought by the company.

Exercise of court”s discretion to make a winding-up order

15.9 In Re Projector SA[2008] SGHC 234, a case involving a winding-up application against a foreign company, the opposing creditors argued that the application constituted an abuse of process, as the motive was to frustrate the enforcement of a judgment obtained by one of the opposing creditors. This argument did not find favour with Justice Tan Lee Meng, for the reason that there was nothing wrong with a creditor commencing winding-up proceedings against a company for the purpose of protecting its position under the insolvency legislation and thwarting the efforts of judgment creditors to execute their judgments against the company”s assets.

Limitation period

15.10 Pursuant to s 6(3) of the Limitation Act (Cap 163, 1996 Rev Ed), an action upon any judgment cannot be brought after the expiration of 12 years from the date on which the judgment became enforceable. In Desert Palace Inc v Poh Soon Kiat[2009] 1 SLR 71, the High Court approved the proposition established in the English decision of Ridgeway Motors (Isleworth) Ltd v ALTS Ltd[2005] 1 WLR 2871, namely, that the commencement of winding-up proceedings based on a judgment debt does not amount to an action upon a judgment. Accordingly, a judgment creditor is not barred from commencing winding-up proceedings (and, presumably, bankruptcy proceedings or judicial management proceedings) against the judgment debtor even after the expiration of 12 years from the date on which the judgment became enforceable. It should be noted that this rule applies only to a judgment creditor. In contrast, a person who has not obtained a judgment for his claim against a company and who is time-barred from doing so is no longer a ‘creditor’ of the company. Unlike a judgment creditor, such a person is neither entitled to file a winding-up application against the company or to prove his claim in the liquidation of the company.

Appeal against rejection of proof of debt

15.11 In Fustar Chemicals Ltd v Liquidator of Fustar...