Bilia AB v Te Pte Ltd and Others

• Jurisdiction: Singapore
• Judge: Lim Teong Qwee JC
• Judgment Date: 17 April 1999
• Neutral Citation: [1999] SGHC 96
• Court: High Court (Singapore)
• Year: 1999
• Published date: 05 March 2013
• Plaintiff Counsel: Suresh Nair, Vikhna Raj S and Perry Yuen (Allen & Gledhill)
• Defendant Counsel: Suresh Damodara and Diana The (Gabriel Peter & Partners)
• Citation: [1999] SGHC 96

Judgment :

GROUNDS OF JUDGMENT

1. The plaintiff ("Bilia") is a Swedish corporation. Until completion of the agreement for sale dated 11 March 1994 ("sale agreement") it was the sole holder of all the 30 million fully paid issued shares of $1 each in the third defendant ("Probo Pacific"). Probo Pacific is a Singapore company. It is a public company but its shares are not quoted on any stock exchange. The first defendant ("TE") is also a Singapore company. It is a private company which was incorporated for the purpose of buying the issued shares in Probo Pacific under the sale agreement and holding such shares. Until lately it enjoyed exempt status as its entire issued capital of only two fully paid shares of $1 each were held one each by the second defendant ("Enslow") and one of the defendants’ solicitors. In June 1997 they transferred the shares to a British Virgin Islands company. Enslow is a permanent resident of Singapore. He has been the managing director of Probo Pacific since December 1982. He has a deemed interest in the whole of its issued capital.

2. The sale agreement provides for the price to be paid in two parts. One part called the fixed price is $34m but this is subject to reduction in certain circumstances. The other part called the variable price is the sum equivalent to 20% of the added value to be determined according to an agreed formula but failing agreement by 31 January 1998 between the parties as to the added value then it is to be the average of the values determined by two independent valuers appointed one each by the parties. The sale agreement provides that "for purposes of enabling the Independent Valuers to determine the added value, [Probo Pacific] shall furnish such information and documents as the Independent Valuers may require and if required, the Independent Valuers shall consult [Probo Pacific’s] Auditors for purposes of determining the added value". The sale agreement also provides for an indemnity ("shortfall indemnity") to be given by Bilia "for any shortfall sustained or incurred as a consequence of a default by any borrower of an Existing Loan ... and where the net amount realised ... from a sale, disposition or realisation of the security ... is insufficient to meet the total liabilities". The total liability of Bilia under the shortfall indemnity is reduced each year and is limited to the outstanding balance of the loan repayable to it by Probo Pacific. The shortfall indemnity took effect on 30 December 1993 and remained in force for a period which expired on 30 December 1997.

3. Disputes have arisen between Bilia and TE and in accordance with the arbitration provision in the sale agreement TE has commenced arbitration proceedings under the Rules of Arbitration of the International Chamber of Commerce ("ICC"). In the arbitration proceedings TE claims sums due under the shortfall indemnity or alternatively damages and Bilia counterclaims the variable price. Both the claim and the counterclaim are disputed.

4. On 4 July 1998 Bilia commenced these proceedings for an order that the defendants provide certain documents to its independent valuers and that the independent valuers be granted access to Probo Pacific’s auditors to obtain such information and documents as they (the independent valuers) considered necessary. Bilia also claims an order that TE provide security for Bilia’s costs in the arbitration proceedings. On 6 October 1998 assistant registrar Thian Yee Sze granted the orders for the provision of documents and for access to the auditors for information and documents. She also granted an order for security in the sum of $150,000 by bank guarantee to be provided by 27 October 1998. The defendants appealed against all the orders made but later withdrew the appeal in respect of the orders relating to documents and to access for information and documents. On 22 January 1999 I heard the appeal in respect of the order for security for costs and dismissed it. TE has given notice of appeal to the Court of Appeal and these are my written grounds.

5. Section 388(1) of the Companies Act provides:

"Where a corporation is plaintiff in any action or other legal proceeding the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs and stay all proceedings until the security is given."

It is now well settled that security may be ordered against a claimant in arbitration proceedings. See Gateway Land Pte Ltd v Turner (East Asia) Pte Ltd [1987] SLR 553; Sembawang Engineering Pte Ltd v Priser Asia Engineering Pte Ltd [1992] 2 SLR 806; KS Oriental Trading Pte Ltd v Defmat Aerospace Pte Ltd [1996] 2 SLR 606. Where the condition as regards inability to pay costs is satisfied s 388(1) gives the court a discretion to make an order for sufficient security to be given. TE’s case is that the condition has not been satisfied and if it has then the discretion ought to be exercised in its favour.

6. TE is the claimant in the arbitration proceedings. Its issued capital is $2. According to its balance sheet at 31 December 1997 its only asset is its investment in Probo Pacific stated at $30m at cost. The amount due to a subsidiary (not identified but probably Probo Pacific) exceeds this by more than $1m. TE appears to be insolvent. If there is no favourable change in its position it would be unable to pay any costs that may be awarded against it if Bilia succeeds in its defence.

7. Mr Damodara said that I should look at the financial position of TE. The consolidated balance sheet at 31 December 1997 shows total assets of about $53m and total liabilities of about $33m. TE’s auditors provided an unaudited consolidated balance sheet at 30 September 1998 compiled by them on the basis of information provided by the management of the company. In their letter dated 26 November 1998 to TE’s directors the auditors said that the net worth of the group based on the book value of the assets was $21,684,253 at 30 September 1998. I think the amount was intended to be reduced by $31,611 (preliminary and pre-operating expenses) but the difference is not significant.

8. At 31 December 1997 the current assets of the group included about $13m in fixed deposits, cash and bank balances. At 30 September 1998 these assets had been reduced to about $5m. The balance sheet of Probo Pacific at 31 December 1996 shows such assets at about $25m at 31 December 1996 and about $36m at 31 December 1995. There is no explanation for this substantial change in the first nine months of 1998. There are no statements as to the movement of funds.

9. The auditors’ report to the members of Probo Pacific dated 24 July 1998 contains this statement:

"... we draw attention to Note 25 to the financial statements, which summarises [Probo Pacific’s] loan exposure to customers in certain countries in Asia which are currently in the midst of economic turmoil. The valuation of these loan exposures as at 31 December 1997 was determined based on the effects of the economic turmoil to the extent they are known and can be estimated at the date of this report. However, the valuation of the loan exposures has been affected significantly, and will continue to be affected significantly for the foreseeable future, by the economic turmoil and instability of the markets in the region. As a result, there are significant uncertainties that may affect the valuation of [Probo Pacific’s] loan exposures. The ultimate outcome of this matter cannot presently be determined. The financial statements do not include any adjustments that might result from these uncertainties. Related effects will be reported in the future financial statements as they become known and estimable."

Note 25 to the financial statements states:

"[Probo Pacific] has loan exposures to customers in certain countries in Asia (Thailand and Indonesia) which are currently in the midst of economic turmoil; as characterised by highly volatile foreign currency exchange and interest rates, sharply reduced economic activity, illiquidity of funds and unstable stock markets.

As at 31 December 1997, the aggregate amount of [Probo Pacific’s] loan exposures to customers in these countries, net of provision of approximately $32.0 million, amounted to approximatley $17.2 million. This net...