Insolvency Law

• Published date: 01 December 2010
• Citation: (2010) 11 SAL Ann Rev 387
• Author: LEE Eng Beng SC LLB (Hons) (National University of Singapore), BCL (Oxon); Advocate and Solicitor (Singapore); Managing Partner, Rajah & Tann LLP. Kelvin POON LLB (Hons) (National University of Singapore); Advocate and Solicitor (Singapore); Partner, Rajah & Tann LLP.
• Date: 01 December 2010

Introduction

16.1 In sharp contrast to 2009, 2010 was a very productive year in terms of the number of cases that dealt with insolvency law issues. The cases span a wide range of topics and areas. Some of the liquidationrelated cases which dealt with important points of law not previously considered by the courts include Pacific King Shipping Pte Ltd v Glory Wealth Shipping Pte Ltd [2010] 4 SLR 413 (whether it is necessary to obtain leave to enforce an arbitral award before it may be relied upon to support a winding-up application) and Power Knight Pte Ltd v Natural Fuel Pte Ltd [2010] 3 SLR 82 (on the nature of a statutory trust).

16.2 The year also saw many cases dealing with bankruptcy law issues. While most of them involved the application of well-established principles, there are a number of important decisions that traverse new grounds. Most notable of them is the Court of Appeal decision in Standard Chartered Bank v Loh Chong Yong Thomas [2010] 2 SLR 569, where the Court of Appeal surveyed the legislative history and the authorities relating to an undischarged bankrupt“s legal capacity to bring legal proceedings. Also important is the High Court decision in Re Lim Lye Hiang; Ex parte the Official Assignee [2011] 1 SLR 707 which deals with whether Central Provident Funds moneys belonging to a member who died before the bankrupt has been discharged but which were paid to the bankrupt only after his discharge are divisible and payable to the bankrupt“s creditors.

16.3 As regards the avoidance of transaction cases, the High Court decided two related actions on these issues in Tam Chee Chong v DBS Bank Ltd [2010] SGHC 331 and Jurong Technologies Industrial Corp Pte Ltd v Cooperatieve Centrale Raiffeisen-Boerenleenbank BA [2010] SGHC 357. There was also the interesting decision in Petroprod Ltd v Larsen Oil and Gas Pte Ltd [2010] 4 SLR 501 where the High Court held

that claims to avoid transactions cannot be resolved by arbitration on public policy grounds.

16.4 There were also a surprising number of cases relating to schemes of arrangement. The most notable decision relating to schemes of arrangement is the Court of Appeal decision in Re TT International Ltd Civil Appeal Nos 44 and 47 of 2010 (Brief Grounds of Decision on 13 October 2010) (unreported). Even though the Court of Appeal has yet to issue its full reasons for its decision, the directions given in that case provide a clear indication as to the measures that the court will take to ensure that the terms of a scheme of arrangement are fair.

Liquidation

Winding up application founded on an arbitral award

16.5 In Pacific King Shipping Pte Ltd v Glory Wealth Shipping Pte Ltd [2010] 4 SLR 413 (‘Pacific King’), two companies filed applications to strike out or stay the winding-up applications that had been filed against them. The applicant had filed the winding-up applications pursuant to unsatisfied statutory demands which were premised on an interim arbitration award issued out of London. The interim award was issued in respect of outstanding hire charter due under a charterparty between the applicant and one of the companies, for convenience referred to as the charterer. In addition to the charterer, the applicant also filed a winding-up application against another company from whom it had received a guarantee to secure the charterer“s obligations under the charterparty. This second company is referred to as the guarantor.

16.6 The companies argued that there were bona fide disputes over the debts underpinning the statutory demands. One of the arguments advanced was that the applicant ought to have first sought leave to enforce the interim award before applying to wind up the companies. The companies also argued that the interim award was obtained in circumstances that contravened s 31(2)(c) of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (‘IAA’) and that it would not have been recognised or enforced under the IAA. In addition, the charterer asserted a cross-claim against the applicant. The guarantor also contended that it was not a party to the arbitration proceedings that gave rise to the arbitral award and as such the arbitral award did not bind it and that the guarantor could dispute the debt on substantive grounds.

16.7 Before delving into the merits of the IAA issue, the High Court reaffirmed the well-established principle that the debtor company must

show that the dispute is bona fide in both a subjective and objective sense in order to obtain a stay or striking out of the winding-up applications: LKM Investment Holdings Pte Ltd v Cathay Theatres Pte Ltd [2000] 1 SLR(R) 135 at [20]. The High Court also correctly applied the principle that the applicable standard for determining the existence of a substantial and bona fide dispute was ‘no more than that for resisting a summary judgment application’: Pacific Recreation Pte Ltd v SY Technology Inc [2008] 2 SLR(R) 491 at [23].

16.8 On the merits, the High Court disagreed that it was necessary for the applicant to first seek leave to enforce the arbitral award under the IAA before issuing a statutory demand to wind up the companies. The High Court noted that there was no authority for the proposition that a successful party of a foreign arbitration award is obliged and confined to enforce the award only by way of enforcement proceedings under the IAA and is thereby precluded from issuing a statutory demand based on a foreign arbitration award followed, if unsatisfied, by a winding-up application on grounds of a presumption of insolvency. The High Court further highlighted that s 33 of the IAA provides that nothing in the IAA affects the right of any person to enforce an arbitral award otherwise than is provided for in the IAA. The High Court also observed that, following Re International Tin Council [1987] Ch 419 (‘International Tin Council’), a winding-up proceeding is not regarded as an enforcement of an arbitration award. As such, it is not the proper arena to ventilate procedural objections under s 31(2)(c) of the IAA and it was not required to consider the enforcement issues in the windingup proceedings.

16.9 Prior to Pacific King (above, para 16.5), there was slight doubt as to the correctness of the conclusion in International Tin Council applied in Singapore. The correctness of the reasoning in Re International Tin Council was doubted in the High Court decision in Re Makin Nominees Pte Ltd [1994] 2 SLR(R) 848 at [23] but approved in a later High Court decision in Re Rasmachayana Sulistyo; Ex parte The Hongkong and Shanghai Banking Corp Ltd [2005] 1 SLR(R) 483 at [40]. It would appear that the position has now been clarified, in this reviewer“s opinion, correctly, that winding-up proceedings do not amount to enforcement proceedings. On this basis, the High Court was correct in holding that there was no need for the applicant to first apply for leave to enforce the arbitral award before proceeding with a statutory demand or a winding-up application.

16.10 However, this does not mean that the High Court need not consider the issues as to whether the arbitral award is enforceable. If the court were not required to and does not consider the enforceability of an arbitral award underpinning a statutory demand in the context of winding-up proceedings, it may have the undesirable effect of enabling

parties to proceed to wind up a debtor company on the basis of a foreign arbitration award that may be unenforceable under the IAA. It is submitted that this cannot be the correct legal position, particularly if there is a substantial dispute as to whether the award is enforceable. Such a conclusion would also be at odds with the well-established principle that it would be an abuse of process to proceed with windingup applications where the underlying debt is seriously disputed: BNP Paribas v Jurong Shipyard Pte Ltd [2009] 2 SLR(R) 949.

16.11 On the cross-claim issue, the High Court applied the wellestablished rule that a debtor-company may rely on a cross-claim against its creditor to seek a striking out or stay of winding-up proceedings if it could satisfy the court that on the evidence there is a distinct possibility that the cross-claim may exceed the undisputed debt: Metalform Asia Pte Ltd v Holland Leedon Pte Ltd [2007] 2 SLR(R) 268. On the facts, however, the High Court found that there was no substantiated quantification of the cross-claim showing that it was likely to approximate to or exceed the debt claimed in the statutory demand. The High Court was also not satisfied that the cross-claim was meritorious.

16.12 On the guarantee issue, the High Court held that the statutory demand issued against the guarantor was not based on the arbitral award; it was based on the charterer“s failure to pay hire due under the hire statements issued in respect of the charterparty. As such, even if there was a dispute as to the enforceability of the arbitral award, there was no dispute that the charterer had failed to pay hire and the guarantor was liable to pay those sums under the guarantee. In the circumstances, the High Court dismissed the companies“ applications to strike out or stay the winding-up applications.

Adjournment of winding-up application

16.13 In Raiffeisen Zentralbank Osterreich AG v Continental Chemical Corp Pte Ltd [2010] 3 SLR 76, the company applied for a six-month adjournment of a winding-up application that one of its bank creditors had made against it. This was the second time the company was requesting for an adjournment. The purpose of the adjournment was to allow the company to present a scheme of arrangement to its creditors for their consideration and approval even though at the time of the application, the company lacked a scheme of arrangement that it could present to its creditors. All it had was a preliminary rescue plan.

16.14 The applicant creditor, whose unsecured debt constituted approximately 1% of the company“s total...