Insolvency Law

• Citation: (2007) 8 SAL Ann Rev 251
• Date: 01 December 2007
• Published date: 01 December 2007

Introduction

15.1 The relatively low volume of insolvency law cases continued in 2007, but still a number of interesting issues were thrown up for decision by the courts. Bankruptcy and liquidation accounted for most of the cases, with three lone cases dealing with schemes of arrangement, fraudulent trading and unfair preferences respectively. As in 2006, there were no cases on judicial management or private receivership. There were two important Court of Appeal decisions, one laying down the law in Singapore with regard to the grant of injunctive relief against threatened winding-up proceedings (Metalform Asia Pte Ltd v Holland Leedon Pte Ltd[2007] 2 SLR 268) and the other dealing with discharge from bankruptcy (Jeyaretnam Joshua Benjamin v Indra Krishnan[2007] 3 SLR 433). Novel questions of law were decided by the High Court in relation to garnishee orders against liquidators (Re Jiangshan Investment Consortium Ltd[2007] 3 SLR 614) and the extension of time for filing a proof of debt under a scheme of arrangement (Re Reliance National Asia Re Pte Ltd[2008] 1 SLR 569). There were also a number of cases from the High Court and the Subordinate Courts dealing with bankruptcy offences (and defences thereto), the most important of which must be the High Court decisions in PP v Low Kok Heng[2007] 4 SLR 183 (defence of innocent intention) and Ganesh s/o M Sinnathamby v PP[2008] 1 SLR 495 (sentencing of discharged bankrupts for offences committed during bankruptcy). Finally, the District Court decision of Loh Chong Yong Thomas v Standard Chartered Bank[2007] SGDC 82 (which is under appeal) should be noted for its discussion of the law relating to the capacity and locus standi of a bankrupt to maintain a legal action in his name.

Liquidation

Injunction against commencement of winding-up proceedings

15.2 The principles upon which a court will restrain the commencement of winding-up proceedings were reviewed and clarified by the Court of Appeal in Metalform Asia Pte Ltd v Holland Leedon Pte Ltd[2007] 2 SLR 268. In this case, the respondent had sold its business

of the manufacture of hard disk top covers to the appellant and subsequently also sold steel to the appellant for the purpose of the business. The appellant owed an undisputed debt of around US$17m as a result of its purchases of steel from the respondent and the respondent served a winding up demand against the appellant for the payment of this sum. The appellant then applied for an injunction against the commencement of winding-up proceedings. The main basis was that the appellant had a cross-claim of about $35m against the respondent for breaches of warranties under the contract for the sale of the business. A sum of $25m had been retained from the purchase consideration paid by the appellant to the respondent for the business and was held in escrow as security for any claims for breaches of warranties. Notwithstanding this, the appellant contended that it had a bona fide counterclaim based on substantial grounds which exceeded the quantum of the undisputed debt. It further contended that the respondent had a collateral motive in threatening to file a winding-up application, and that the filing of a winding-up application would cause irreparable harm to the appellant company which had an ongoing business. The High Court ruled against the appellant in Metalform Asia Pte Ltd v Holland Leedon Pte Ltd[2006] 3 SLR 133 (see (2006) 7 SAL Ann Rev 273 at paras 15.2—15.3).

15.3 The Court of Appeal allowed the appeal and granted an injunction against the commencement of winding-up proceedings by the respondent. Referring to authorities from various jurisdictions, the court embarked on a useful and comprehensive discussion of the law. The court reaffirmed the well-established position that a creditor who has an undisputed debt against a company is entitled to a winding-up order as a matter of right. However, where the company disputes the debt on substantial grounds, the court will restrain a creditor from commencing winding-up proceedings, or stay or dismiss the winding-up application if it has been filed. The court also opined that the position was no different where the company has a cross-claim of substance against the creditor which is equal to or exceeds the creditor”s debt; the court will not allow the creditor to enforce his right by way of winding-up proceedings. Further, in either case, in order to obtain relief against the winding-up proceedings, the company does not have to show that the winding-up application is bound to fail, but only that it is likely that a winding-up order will not be made. In this regard, the court preferred to follow the Australian authorities, as opposed to the New Zealand authorities which favoured the ‘bound to fail’ standard. The court emphasised that the commercial viability of a company should not be put in jeopardy by the premature filing of a winding-up application against it where it has a serious cross-claim based on substantial grounds. A winding-up application may adversely affect the reputation and the business of the company and may also set in motion a process that may create cross-defaults or cut the company off from

further sources of financing, thereby exacerbating its financial condition. Accordingly, the court will give the company the opportunity to prove its claim as long as it is satisfied on the evidence that there is a distinct possibility that the cross-claim may exceed the undisputed debt. The ‘bound to fail’ standard would apply only in the case of an application by a shareholder to wind up the company on the ‘just and equitable’ ground.

15.4 On the facts, the Court of Appeal purported to affirm the High Court”s finding that the company had a genuine cross-claim based on substantial grounds. However, it should be pointed out that the High Court had in fact found that the cross-claim was not based on substantial grounds. The Court of Appeal must, therefore, be regarded as having disagreed rather than agreed with the High Court on this point. In any case, this point is of limited relevance given that the application was based solely on affidavit evidence and not the oral testimony of witnesses. The court also dismissed the respondent”s contention that, because there was a sum of $25m held in escrow to meet the appellant”s claims for breaches of warranties, the appellant”s cross-claim did not exceed the undisputed debt owed by the appellant to the respondent. The Court of Appeal reasoned that the escrow sum was merely a security and did not reduce the appellant”s claim. There was also no basis to suggest that the respondent had elected to look to the escrow sum to meet its cross-claim. The court further opined that, while there was no collateral purpose on the part of the respondent in threatening to wind up the appellant, the filing of a winding-up application against the company was likely to cause irreparable harm to the company”s business and reputation. In the circumstances, there was no special circumstance why the respondent should not be restrained from filing a winding-up application against the appellant.

15.5 While this reviewer agrees fully with the principles of law enunciated by the Court of Appeal, there is some discomfort with the application of the principles to the facts. With respect, this reviewer would suggest that the decision is somewhat unfair to the respondent. The respondent had an undisputed debt of US$17m against the appellant and also had $25m of its money locked up in an escrow account to meet the appellant”s claim for breaches of warranties. Yet, it was prevented from winding up the appellant on account of the appellant”s purported $34m cross-claim for breaches of warranties. Just as a matter of simple arithmetic, the decision does not seem quite right.

15.6 The Court of Appeal”s analysis that the escrow sum was merely a security and did not reduce the company”s cross-claim cannot be faulted. However, that is not the real issue. The real issue is whether a company can rely on a cross-claim to stave off a winding up based on an undisputed debt, when the cross-claim is partially secured against a

fund or asset and the unsecured part of the cross-claim is actually less than the undisputed debt. It is not easy to see why the company should be entitled to do so. A cross-claim of substance which is equivalent to or exceeds a creditor”s undisputed debt allows the company to resist a winding up because, if the cross-claim is established, no sum may actually be due to the creditor. To the extent that the cross-claim is secured, this reasoning does not apply.

15.7 The appellant must have felt the force of this argument, for it is recorded by the Court of Appeal in its judgment that the appellant had offered to release $10m from the escrow account to the respondent in order to notionally equalise the respondent”s debt with the cross-claim. A similar offer to release money from the escrow account had been made by the appellant in the High Court. The High Court had found that the appellant was not entitled to make such an offer as this would amount to the appellant re-writing the terms of the bargain with the respondent and substituting its security for the cross-claim. In any case, before the Court of Appeal, the respondent rejected the offer, for reasons which are not fully elaborated on in the Court of Appeal”s judgment. The Court of Appeal did not think it necessary to inquire as to whether it was right for the respondent to reject this offer, in view of its decision that the escrow sum did not reduce the appellant”s cross-claim. However, as submitted above, the fact that the escrow sum did not reduce the appellant”s cross-claim should not mean that the appellant should be allowed to rely on the full cross-claim to seek injunctive relief against the respondent. It is suggested that a fair approach would have been for the Court of Appeal to grant injunctive relief on...