Azero Investments SA v Velstra Pte Ltd and Another Appeal

JurisdictionSingapore
JudgeChao Hick Tin JA
Judgment Date19 September 2005
Neutral Citation[2005] SGCA 44
Date19 September 2005
Subject MatterWhether recipient liable as constructive trustee,Avoidance of transactions,Whether recipient receiving garnishee proceeds knowing that they were transferred in breach of trust,Sections 99, 100 Bankruptcy Act (Cap 20, 2000 Rev Ed), s 329 Companies Act (Cap 50, 1994 Rev Ed),Whether assignment of debt constituting unfair preference,Insolvency Law,Company's debt assigned to another creditor,Whether garnishee payments should be reversed on ground of unfair preference,Whether director breaching fiduciary duties owed to company in allowing garnished sums to be paid,Company's bank accounts subject to garnishee orders,Unfair preferences,Recipient liability,Trusts
Docket NumberCivil Appeals Nos 124 and
Published date21 September 2005
Defendant CounselVinodh Coomaraswamy SC and David Chan (Shook Lin and Bok)
CourtCourt of Appeal (Singapore)
Plaintiff CounselConrad Campos (Robert Wang and Woo LLC)

19 September 2005

Judgment reserved.

Kan Ting Chiu J (delivering the judgment of the court):

Background

1 Velstra Pte Ltd (“Velstra”), a company incorporated in Singapore, was fully owned by a Belgian company, Language Development Fund (“LDF”). LDF also owned a chain of language development companies (hereinafter referred to as “the LDCs”). A Belgian national, Tony Snauwaert (“Snauwaert”), was a director of Velstra and LDF.

2 LDF and Velstra were closely related to Lernout & Hauspie Speech Products NV (“L&H”), a leading provider of speech recognition software. L&H was founded by three Belgians, Jo Lernout (“Lernout”), Pol Hauspie (“Hauspie”) and Nico Willaert (“Willaert”).

3 Azero Investments SA (“Azero”) was a company incorporated in Luxembourg. A F Veltmeijer (“Veltmeijer”) was a director of Azero.

4 Veltmeijer was keen for Azero to invest in L&H, and had discussions with Snauwaert. Snauwaert suggested that Azero invest in Velstra instead, but Veltmeijer preferred to invest in a Belgian company. Snauwaert then proposed that the investment be in the form of a loan to BVBA Language Development Service (“LDS”), a shareholder of LDF, secured by the personal guarantees of Lernout, Hauspie and Willaert (hereinafter referred to collectively as “the sureties”). Snauwaert was also a director of LDS.

5 This proposal was accepted and in November 1999, Azero made a loan of €2m to LDS, secured by a surety agreement executed by the sureties. The loan was to be repaid on 31 May 2001.

6 The €2m was not retained by LDS. Without informing Azero, LDS entered into two sub-loan agreements to advance €1.5m to Velstra and the balance €500,000 to Four One-One.Com Pte Ltd (“411”), a subsidiary company of LDF.

7 In mid-2000, negative reports about L&H surfaced. Veltmeijer began to make enquiries from LDS about Azero’s loan. He was told by Snauwaert of the sub-loans, and he also came to realise that Velstra and the LDCs were just letter-box companies which held licences from L&H. However, Snauwaert represented to Veltmeijer that the LDCs had value, and put up a proposal to Veltmeijer to restructure LDF.

8 In March or April 2001, Azero considered taking over LDF. LDF shares were acquired to obtain access to LDF’s financial statements, and the services of accountants and lawyers were engaged. The trial judge accepted that Azero made these efforts in good faith. When the loan to LDS fell due on 31 May 2001, no payment was made. On 1 June 2001, Azero’s lawyers, Advocatenassociate Gilkens Panis Vandersanden (“AGPV”), wrote to LDS to demand for payment and for information on any action LDS had taken to recover the sub-loan to Velstra.

9 That set off a series of developments. On 11 June 2001, LDS’s lawyers, Advocatenkantoor Mattijs, Van Roy, Voet & Co (“AMVRV & Co”), replied that LDS was unable to repay the loan and proposed that LDS assign to Azero the sub-loans to Velstra and 411. On 13 June 2001, AMVRV & Co sent to AGPV a printout of the bank balances of the LDCs, Velstra and 411. On 14 June 2001, the sub-loans of Velstra and 411 were formally assigned to Azero, and LDS’s debt to Azero was discharged and the sureties were released.

10 On 22 June 2001, notice of assignment was given to Velstra. On 3 July 2001, Azero commenced proceedings against Velstra, and obtained judgment in default of appearance on 12 July 2001 for US$1,872,240, interest and costs.

11 On 20 July 2001, Azero applied to garnish Velstra’s two bank accounts with the Development Bank of Singapore (“DBS”) and KBC Bank NV (“KBC”), and garnishee orders absolute were made against the DBS account for US$91,546.48 and the KBC account for US$204,543.98. On 10 August 2001, KBC paid US$204,457.98 to Velstra and on 21 August 2001, DBS paid US$91,347.04, making a total of US$295,805.02.

12 After the amounts were garnished, Velstra deposited various sums into the DBS account. On 9 November 2001 the amount in the account stood at US$250,346.98. Azero took further garnishee proceedings and received payment of US$250,145.08 (with a deduction of S$140 for the costs of DBS) on 18 December 2001.

13 The total amount Azero received through the garnishee proceedings was US$546,152.

14 On 12 April 2002, Velstra was wound up on a petition filed on 22 March 2002 by a creditor, Harout Khatchadourian, who had loaned Velstra US$36m. After Velstra was wound up, he funded Velstra’s liquidators in this action as well as other actions to recover Velstra’s assets. Velstra’s liquidators were the effective plaintiff in the action below.

The plaintiff’s action

15 The plaintiff commenced action against Azero to claim the three sums Azero received through the garnishee proceedings.

16 The plaintiff’s claims were founded on two grounds:

(a) that the garnishment of Velstra’s accounts were tainted by an unfair preference given to Azero; and

(b) Azero held the garnishee proceeds as a constructive trustee for Velstra because Azero received them with actual or constructive notice that Snauwaert had acted in breach of his fiduciary duties as a director of Velstra in allowing those sums to be paid to Azero.

Unfair preference

17 This claim is founded on s 329 of the Companies Act (Cap 50, 1994 Rev Ed) (“CA”) read with ss 99 and 100 of the Bankruptcy Act (Cap 20, 2000 Rev Ed) (“BA”).

18 Sections 329(1) and 329(2) of the CA read:

(1) Subject to this Act and such modifications as may be prescribed, any transfer, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company which, had it been made or done by or against an individual, would in his bankruptcy be void or voidable under section 98, 99 or 103 of the Bankruptcy Act 1995 (read with sections 100, 101 and 102 thereof) shall in the event of the company being wound up be void or voidable in like manner.

(2) For the purposes of this section, the date which corresponds with the date of presentation of the bankruptcy petition in the case of an individual shall be —

(a) in the case of a winding up by the Court —

(i) the date of the presentation of the petition; or

(ii) where before the presentation of the petition a resolution has been passed by the company for voluntary winding up, the date upon which the resolution to wind up the company voluntarily is passed,

whichever is the earlier; and

(b) in the case of a voluntary winding up, the date upon which the winding up is deemed by this Act to have commenced.

19 Sections 99(1) and 99(3) of the BA provide that:

(1) Subject to this section and sections 100 and 102, where an individual is adjudged bankrupt and he has, at the relevant time (as defined in section 100), given an unfair preference to any person, the Official Assignee may apply to the court for an order under this section.

(3) For the purposes of this section and sections 100 and 102, an individual gives an unfair preference to a person if —

(a) that person is one of the individual’s creditors or a surety or guarantor for any of his debts or other liabilities; and

(b) the individual does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the individual’s bankruptcy, will be better than the position he would have been in if that thing had not been done.

and s 100(1) of the BA provides that:

Subject to this section, the time at which an individual enters into a transaction at an undervalue or gives an unfair preference shall be a relevant time if the transaction is entered into or the preference given —

(a) in the case of a transaction at an undervalue, within the period of 5 years ending with the day of the presentation of the bankruptcy petition on which the individual is adjudged bankrupt;

(b) in the case of an unfair preference which is not a transaction at an undervalue and is given to a person who is an associate of the individual (otherwise than by reason only of being his employee), within the period of 2 years ending with that day; and

(c) in any other case of an unfair preference which is not a transaction at an undervalue, within the period of 6 months ending with that day.

20 The trial judge found that Velstra was insolvent, but rejected the plaintiff’s contentions that Azero was an associate of or a person connected with Velstra. In her judgment, [2004] SGHC 251, the judge stated that:

94 The plaintiff had pleaded that Snauwaert owed and breached his fiduciary duties as a director. This was not denied by the defendant and hence is not in issue.

95 [I]t cannot be disputed that were it not for the Assignment, the defendant would have had to sue the original debtor, LDS, under Belgian law when the loan remained unpaid after 31 May 2001. It would not have sued LDS in Singapore. Had the defendant obtained judgment in Belgium against LDS, it could not have garnished the plaintiff’s debt to LDS under Singapore law. Different jurisdictions would be involved and the defendant would not have been a judgment creditor under Singapore law. Snauwaert’s act, in his capacity as a common director of LDS and the plaintiff, in giving the Assignment undoubtedly overcame the defendant’s legal difficulties and I reject the defendant’s...

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2 books & journal articles
  • Insolvency Law
    • Singapore
    • Singapore Academy of Law Annual Review No. 2005, December 2005
    • 1 December 2005
    ...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 applic......
  • Restitution
    • Singapore
    • Singapore Academy of Law Annual Review No. 2006, December 2006
    • 1 December 2006
    ...the recipient ‘learns or is put on inquiry that the property was trust property’. (And see also Azero Investments SA v Velstra Pte Ltd[2005] 4 SLR 792 at [37].) It is a right step for the law to take to focus on the defendant”s actual knowledge rather than constructive knowledge. But what t......

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