CCM Industrial Pte Ltd (in liquidation) v Chan Pui Yee

• Judge: Chua Lee Ming JC
• Judgment Date: 18 October 2016
• Neutral Citation: [2016] SGHC 231
• Citation: [2016] SGHC 231
• Court: High Court (Singapore)
• Published date: 20 October 2016
• Docket Number: Originating Summons No 18 of 2016
• Plaintiff Counsel: Justin Yip Yung Keong and Aw Chee Yao (Morgan Lewis Stamford LLC)
• Defendant Counsel: Cheong Jun Ming Mervyn and Jerrie Tan (Eugene Thuraisingam LLP)
• Subject Matter: Insolvency Law,Avoidance of transactions,Unfair preferences
• Hearing Date: 15 July 2016

Chua Lee Ming JC: Introduction

This was a claim by the liquidators of the plaintiff, CCM Industrial Pte Ltd (“the Company”), for the recovery of payments amounting to $766,799.45 which were made to the defendant, Mdm Chan Pui Yee, in the lead up to the Company’s liquidation.

I agreed with the liquidators that the payments constituted unfair preferences to the defendant under s 329 of the Companies Act (Cap 50, 2006 Rev Ed) (“the CA”) read with s 99(5) of the Bankruptcy Act (Cap 20, 2009 Rev Ed) (“the BA”). Consequently, I ordered the defendant to repay the sum of $766,799.45 to the Company. The defendant has appealed against my decision.

The facts

The Company was a family business founded by the defendant’s husband, Liew Sen Keong (“Liew”), and some of his business friends in 2001. It operated in the construction industry in Singapore, leasing equipment such as gondolas and mast climbing work platforms.¹ The defendant and her brother, Lawrence Chan Tien Chih (“Lawrence”), joined the Company in 2002.² Liew was the managing director of the Company from its inception. Lawrence and the defendant were subsequently appointed executive directors in 2004 and 2006, respectively.³

In 2009, plans were made for an initial public offering to expand the business. A new company, CCM Group Ltd (“CCMG”), was incorporated as the corporate vehicle for the public listing. CCMG was listed and started trading on 5 June 2010.⁴ The Company was restructured as a wholly owned subsidiary of CCMG. The defendant, Liew, and Lawrence were all directors of CCMG, with Liew as the chairman of the board of directors.

Subsequently in 2013, the Company’s business deteriorated and it faced cost overruns for many of its construction projects.⁵ The Company’s audited financial statements for the financial year ended 31 December 2013 (“FY2013”) showed that the Company suffered a net loss of approximately $21.1m and had a negative net asset position of approximately $7.7m at the end of that financial year.⁶

It was undisputed that as at 31 December 2013, the Company owed the defendant the sum of $766,799.45 which comprised a loan of $500,000 given by the defendant in April 2013 and various payments amounting to $266,799.45 made by the defendant on behalf of the Company from 2010 to December 2013.⁷

The defendant resigned as a director of both the Company and CCMG with effect from 1 February 2014. Lawrence resigned as a director of the Company with effect from 28 April 2014⁸ and as a director of CCMG with effect from 1 February 2014.⁹

On 14 February 2014, the Company made the following payments in discharge of the debt of $766,799.45 owing to the defendant (“the Payments”): two cheques in the amounts of $300,000 and $266,799.45 drawn in favour of the defendant; and a cheque in the amount of $200,000 drawn in favour of Liew.¹⁰ Although this cheque was drawn in favour of Liew, it was common ground that it was issued in repayment of the debt owed by the Company to the defendant.¹¹ All three cheques were dated 14 February 2014. They were presented for payment and cleared on 20 March 2014.¹²

On 16 April 2014, one of the Company’s creditors, Guan Chuan Engineering Pte Ltd (“Guan Chuan”), applied for a winding up order against the Company.¹³ This application was based on an unpaid progress claim for the amount of $238,450.69 issued by Guan Chuan to the Company on 14 January 2014, and a statutory letter of demand by Guan Chuan for the same claim dated 21 March 2014.¹⁴

On 16 May 2014, CCMG entered into a sale and purchase agreement to sell all the shares in the Company to Raymond Brother Builder Pte Ltd (“RBB”) for $1.¹⁵ The sale to RBB was completed on 21 May 2014 after which the Company ceased to be a subsidiary of CCMG. On the same day, the Company filed an application for judicial management.¹⁶ The application was subsequently dismissed.

On 4 August 2014, Guan Chuan’s winding up application was granted and the Company was placed in liquidation.¹⁷

What the liquidators had to prove

Section 329 of the CA makes ss 98–103 of the BA applicable to the winding up of companies. Where an unfair preference has been given, s 99(2) of the BA gives the court the power to make such order as it thinks fit for restoring the position to what it would have been if the unfair preference had not been given. For purposes of the present action to recover the Payments as undue preferences, the liquidators had to prove that: the Payments were made within the claw-back period of six months (or two years, if the defendant was an associate of the Company when the Payments were made) prior to the winding up order against the Company: s 329(2) of the CA read with s 100(1) of the BA; the Company was insolvent at the time of the Payments, or became insolvent in consequence of the Payments: s 100(2) of the BA; each of the Payments gave a preference to the defendant in that the defendant’s position, upon the winding up of the Company, was improved: s 99(3) of the BA; and in making the Payments, the Company was influenced by a desire to improve the defendant’s position in the event the Company was wound up: s 99(4) of the BA.

Whether the Payments were made within the claw-back period

There was no dispute that the Payments were made within six months before the Company was wound up. Whether or not the defendant was an associate was therefore irrelevant for this purpose.

Whether the Company was insolvent when the Payments were made

Section 100(4) of the BA provides as follows:

Section 100.

…

(4) For the purposes of subsection (2), an individual shall be insolvent if — (a) he is unable to pay his debts as they fall due; or (b) the value of his assets is less than the amount of his liabilities, taking into account his contingent and prospective liabilities.

These two tests are also known respectively as the “cash flow (or liquidity) test” and the “balance sheet test”. It is established law that both tests are to be read disjunctively: Jurong Technologies Industrial Corp Ltd (under judicial management) v Coöperatieve Centrale Raiffeisen-Boerenleenbank BA (trading as Rabobank International, Singapore Branch) [2011] 2 SLR 413 (HC) at [57]; Tam Chee Chong and another v DBS Bank Ltd [2011] 2 SLR 310 at [57].

The defendant submitted that there is no single test for insolvency and regard must be had to all evidence that appears relevant to the question of insolvency: Chip Thye Enterprises Pte Ltd (in liquidation) v Phay Gi Mo and others [2004] 1 SLR(R) 434 (“Chip Thye”) at [20]; Kon Yin Tong and another v Leow Boon Cher and others [2011] SGHC 228 (“Kon Yin Tong”) at [30].

I disagreed with the defendant’s submission. As pointed out in Living the Link Pte Ltd (in creditors’ voluntary liquidation) and others v Tan Lay Tin Tina and others [2016] 3 SLR 621 (“Living the Link”) at [30], the dicta in Chip Thye arose in a different context and was “based on authorities dealing with the court’s discretion to wind up a company under s 254(1)(e) read with sub-s (2)(c) of the Companies Act”. Chip Thye did not deal with the specific application of s 100(4) of the BA. Neither did Kon Yin Tong.

The issue of solvency may arise in different contexts. In the context of a winding up by the court, s 254(2)(e) of the CA provides a general definition of insolvency. However, in the context of avoidance of transactions giving unfair preferences, it is s 100(4) of the BA that applies. The language in s 100(4) is clear. It introduces two specific tests of insolvency and upon either of the tests being satisfied, the company is deemed insolvent: Velstra Pte Ltd (in compulsory winding up) v Azero Investments SA [2004] SGHC 251 at [89]; Living the Link at [26].

The question in the present case then was whether the Company was cash flow insolvent or balance sheet insolvent at the time the Payments were made.

The liquidators submitted that the Company was both cash flow insolvent and balance sheet at the material time.

The liquidators submitted that the Company was cash flow insolvent based on the following facts: The Company’s financial statements for FY2013 showed that as at 31 December 2013, the Company had: incurred a net loss of $21,404,557;¹⁸ a negative net cash flow of $1,678,679 from its operations;¹⁹ and a negative position of $2,426,192 in respect of cash and cash equivalents.²⁰ If the Company had paid all of its creditors as and when the debts fell due, it would have faced a cash shortage of $3.3m.²¹ In addition, the Company would have exceeded its overdraft facilities as at 31 December 2013 and for each month of the next financial year ended 31 December 2014 (“FY2014”).²² Cash flow from the Company’s operations was insufficient to fund the Company’s operations and pay trade creditors. In particular, of the Company’s four main projects (which accounted for 88% of the Company’s total revenue in FY2013), only one (“the Eon Shenton Project”) was operating within budget and at a positive gross margin.²³ However, the Company received a termination warning letter for the Eon Shenton Project on 5 February 2014 and the Company’s contract was terminated on 17 March 2014.²⁴ Based on the proofs of debt filed in the liquidation to date, as at 31 December 2013, the Company had at least $6.3m of payables outstanding dating as far back as November 2010.²⁵ The Company was unable to pay Guan Chuan’s progress claim of $238,450.69 when it was issued on 14 January 2014. Guan Chuan issued a statutory letter of demand on 21 March 2014; the Company did not pay. The Company’s failure to make payment led to the winding up application on 16 April 2016 and the eventual liquidation of the Company. In his affidavit filed in support of the Company’s application for judicial management, Liew admitted that the Company was unable to pay its debts as and when they fell due.²⁶ Although this referred to the...