Insolvency Law

• Published date: 01 December 2006
• Author: LEE Eng Beng LLB (Hons) (National University of Singapore), BCL (Oxford); Advocate and Solicitor (Singapore).
• Date: 01 December 2006

Introduction

15.1 2006 experienced markedly fewer insolvency law cases than the previous several years, perhaps due to the improved economic climate. In fact, there were no decisions last year on judicial management or private receivership. Nonetheless, there were a number of important judicial pronouncements during the year, particularly in the area of the duties and liabilities of liquidators. Worthy of special mention is the Court of Appeal”s decision in Ho Wing On Christopher v ECRC Land Pte Ltd[2006] 4 SLR 817, which contains a detailed and closely-reasoned exposition of the estate costs rule and a liquidator”s duty to observe the rule. There was also a series of interesting decisions on the law relating to unfair preferences and transactions at an undervalue, including the Court of Appeal”s decision in Neo Corp Pte Ltd v Neocorp Innovations Pte Ltd[2006] 2 SLR 717, which addressed the issue of whether a liquidator can continue with an action to reverse an unfair preference or transaction at an undervalue which had been commenced by a judicial manager.

Liquidation

Injunction against commencement of winding-up proceedings

15.2 In Metalform Asia Pte Ltd v Holland Leedon Pte Ltd[2006] 3 SLR 133, the plaintiff company applied to the court for an injunction restraining the defendant company from commencing winding-up proceedings against it. The defendant company had sold its business to the plaintiff company and subsequently supplied steel to the plaintiff company for which the plaintiff company owed the defendant company an undisputed sum of about US$17m. The plaintiff company wanted to restrain the defendant company from commencing winding-up proceedings based on this undisputed debt until the determination of the plaintiff company”s claim of about $35m against the defendant company for breaches of warranties under the contract for the sale of the business. The plaintiff company 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 defendant

company 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 plaintiff company which had an ongoing business.

15.3 Justice Woo Bih Li dismissed the plaintiff company”s application. Under the terms of the sale of the business, a sum of $25m from the purchase price of the business was held in an escrow account to meet any claim by the plaintiff company for breaches of warranties. The learned judge was of the view that the plaintiff company had agreed to look to the escrow account to meet any claim for breaches of warranties and only had a claim against the defendant company only in so far as the escrow sum was insufficient to meet the counterclaim. The learned judge also examined the plaintiff company”s counterclaim and found that it was not based on substantial grounds. His Honour further found that the defendant company had no collateral purpose in threatening to wind up the plaintiff company, and that the plaintiff company had no good reason not to pay the defendant company and instead use its funds to expand its operations.

15.4 It should be noted that Woo J”s decision has been reversed by the Court of Appeal”s decision in Metalform Asia Pte Ltd v Holland Leedon Pte Ltd[2007] 2 SLR 268, which will be covered in the next review.

Application by shareholder to wind up company on ground of insolvency

15.5 There is a common law rule that a contributory holding fully paid-up shares in a company has no locus standi to apply for the winding up of the company unless he is able to show that he has a tangible interest in the winding up, that is, that the company has sufficient assets to yield a surplus divisible among the contributories after paying all its debts and liabilities. In Re Ah Yee Contractors (Pte) Ltd[1987] SLR 383 (‘Re Ah Yee Contractors’), L P Thean J (as he then was) accepted this common law rule as part of the law of Singapore.

15.6 In Re HL Sensecurity Pte Ltd[2006] SGHC 135, a shareholder of a company applied to the court for a winding-up order against the company on the ground, inter alia, that the company was unable to pay its debts. The shareholder was able to adduce evidence from the main supplier and creditor of the company that it was owed large sums of money by the company, and that the company had defaulted on an instalment payment plan it had agreed to with the company. In the circumstances, Choo Han Teck J ruled that the company was unable to pay its debts within the meaning of s 254(2)(c) of the

Companies Act (Cap 50, 1994 Rev Ed) and that a winding-up order should be granted. The issue of whether the shareholder had a tangible interest in the winding up was not raised, possibly because the winding-up application was also based on other grounds.

15.7 In Summit Co (S) Pte Ltd v Pacific Biosciences Pte Ltd[2007] 1 SLR 46, Belinda Ang Saw Ean J pointed out that Thean J (in Re Ah Yee Contractors) was not referred to s 257(1) of the Companies Act which states that ‘the Court shall not refuse to make a winding up order on the ground only that the assets of the company have been mortgaged to an amount equal to or in excess of those assets or that the company has no assets or in the case of an application by a contributory that there will be no assets available for distribution amongst the contributories’. Her Honour commented that s 257(1) appears to have altered the common law position stated in Re Ah Yee Contractors. However, as the issue had not been argued before her Honour, she decided to reserve the determination of the point for another forum.

15.8 It is submitted that the basis of the ‘tangible interest’ rule is sound and that the rule should continue to be applied, albeit with some qualification. While s 257(1) dispenses with the need for the contributory to show that there will be a surplus of assets, it does not obviate the need for him to show a tangible interest in the winding-up proceedings (Re Chesterfield Catering Co Ltd[1977] Ch 373 at 380; Re Martin Coulter Enterprises Ltd[1988] BCLC 12 at 16). The ‘tangible interest’ rule is based on the larger principle that a man may only come to the courts for relief if he has a sufficient interest in the outcome of the action to warrant his joining other persons and taking the court”s time to decide the matter raised (Re Land & Property Trust Co[1991] BCLC 845 at 846). It is noteworthy that, in England, the ‘tangible interest’ rule has been applied despite the existence of a provision in terms similar to that of s 257(1) since 1908 (see Re Kaslo-Slocan Mining and Financial Corporation Ltd[1910] WN 13; Re Expanded Plugs Ltd[1966] 1 WLR 514 at 522; Re Chesterfield Catering Co Ltd at 378 and 381).

Liquidator”s personal liability for costs of legal proceedings

15.9 A liquidator of a company may commence legal proceedings in the course of its liquidation, with the objective of collecting or reconstituting the company”s assets or impugning a pre-liquidation transaction entered into by the company. If the legal proceedings are commenced pursuant to a statutory right accorded by the insolvency legislation to the office of the liquidator (such as the liquidator”s right to seek court orders to reverse the effects of

unfair preferences granted by the company or transactions at an undervalue entered into by the company), they are commenced by the liquidator personally and not in the name of the company. In this situation, the liquidator will be personally liable on any adverse costs order made by the court if the legal proceedings are ultimately unsuccessful. Of course, if he has acted properly, this liability will rank as a liquidation expense which is entitled to be met out of the assets of the company accordingly; however, the successful defendant need not concern himself with this and may demand payment of the costs from the liquidator personally.

15.10 On the other hand, if the legal proceedings are commenced by the liquidator in the name of the company to enforce the company”s pre-liquidation rights (such as a claim against the company”s officers for breach of fiduciary duty, or against a third party for breach of a contract entered into by the third party with the company), the liquidator is merely acting as the company”s agent and assumes no personal liability for any costs which may be awarded against the company in the legal proceedings. Of course, personal liability may still ensue in particular situations, such as where the liquidator has acted with impropriety.

15.11 In Ho Wing On Christopher v ECRC Land Pte Ltd[2006] 2 SLR 103, Lai Kew Chai J affirmed these general principles. In Ho Wing On Christopher v ECRC Land Pte Ltd[2006] 4 SLR 817 (‘ECRC Land’), the Court of Appeal allowed an appeal from Justice Lai”s decision on other grounds but also endorsed these principles. The Court of Appeal opined that a liquidator who brings a legal action in his own name litigates at his own risk and will be liable for the opposing party”s costs even if the company”s assets are inadequate to provide a complete indemnity. On the other hand, where litigation is commenced in the name of the company, the liquidator is a non-party and an order of costs against him will not follow as a matter of course.

15.12 The Court of Appeal also drew a distinction between its adjudicatory jurisdiction when determining disputes raised by a company in liquidation and its supervisory jurisdiction over the conduct of liquidators. Where a company in liquidation unsuccessfully brings or defends legal proceedings, the court may order the costs of the successful litigant to be paid by the liquidator of the company as a non-party to the proceedings. This is an exercise of the court”s adjudicatory jurisdiction and its invocation depends on factors relating to the proceedings. In contrast, the court”s...