Coöperatieve Centrale Raiffeisen-Boerenleenbank BA v Jurong Technologies Industrial Corporation Ltd

• Court: Court of Appeal (Singapore)
• Judgment Date: 16 September 2011
• Docket Number: Civil Appeal No 5 of 2011
• Date: 16 September 2011

Coöperatieve Centrale Raiffeisen-Boerenleenbank BA (trading as Rabobank International, Singapore Branch)

Plaintiff

and

Jurong Technologies Industrial Corp Ltd (under judicial management)

Defendant

[2011] SGCA 48

Chan Sek Keong CJ

,

Andrew Phang Boon Leong JA

and

VK Rajah JA

Civil Appeal No 5 of 2011

Court of Appeal

Insolvency Law—Avoidance of transactions—Unfair preferences—Company granting preference to creditor—Whether knowledge or belief that company was insolvent at relevant time was legal requirement of unfair preference—Whether lack of such knowledge or belief precluded existence of desire to prefer—Section 99 (4) Bankruptcy Act (Cap 20, 2000 Rev Ed)

Insolvency Law—Avoidance of transactions—Unfair preferences—Company making decision to grant preference but actually granting preference some time later—Whether critical time to determine existence and influence of desire to prefer was time when preference was actually granted—Sections 99 (3) (b) and 99 (4) Bankruptcy Act (Cap 20, 2000 Rev Ed)

Insolvency Law—Avoidance of transactions—Unfair preferences—Creditor applying pressure on company to repay debts—Other creditors of company also applying pressure—Whether desire to prefer existed and influenced grant of preference to one creditor

Jurong Technologies Industrial Corporation Ltd (‘JTIC’) was an investment holding company which carried on the business of providing electronic manufacturing services (‘EMS’) through wholly-owned subsidiaries. Its principal operating subsidiary was Jurong Hi-Tech Industries Pte Ltd (‘JHTI’) . Most of the business operations of JTIC and JHTI (collectively, ‘the Companies’) were carried out by JHTI. The Companies were financed by Coöperatieve Centrale Raiffeisen-Boerenleenbank BA (trading as Rabobank International, Singapore Branch) (‘Rabobank’) and a group of other banks (‘the Creditor Banks’) . All the bank facilities were unsecured and were granted by the various banks subject to negative pledges andpari passu clauses.

Joyce Lin Li Fang (‘Ms Lin’) was appointed chairman of JTIC in March 2006. She began to be concerned with the level of the Companies' debts to the Creditor Banks. Sometime in April or May 2008, she made a presentation to DBS Bank Ltd (‘DBS’) of the Companies' financial position and told it that some of the Companies' assets could be sold to reduce the Companies' debts. These assets included the EMS business, shares in MAP Technology Holdings Limited (‘MAP shares’) and shares in Min Aik Technology Co Ltd (‘Min Aik shares’) .

By 30 June 2008, the Companies' total borrowings had reached S$340 m. From September 2008 onwards, the Companies encountered significant financial difficulties due primarily to the global recession. Their trade creditors and all the Creditor Banks were chasing for payment of their debts. The Companies continued to promise the Creditor Banks that they would pay their loans from the proceeds of sale of the EMS business, the MAP shares and the Min Aik shares.

On 14 October 2008, JTIC signed a non-binding term sheet with Global Emerging Markets (‘GEM’) to sell part of the EMS business (‘the GEM Deal’) . The Creditor Banks were informed that the GEM Deal could bring in as much as US$160 m.

On 17 November 2008, Rabobank demanded the payment of unpaid receivables under the receivables financing facility which it had provided to JHTI. On 25 November 2008, Ms Lin issued a letter of undertaking to set up an escrow account with Rabobank to hold the Min Aik shares and to credit the sale proceeds of the said shares directly to the escrow account. The account was not set up and the shares were not deposited with Rabobank. In November and December 2008, Rabobank sent numerous e-mails and made various telephone calls to ask the Companies to sell the Min Aik shares and remit the proceeds to Rabobank. Rabobank made the same demands in various meetings between it and the Companies.

On 8 December 2008, JTIC announced that its audit committee had commenced an investigation into alleged irregularities in the administration of the receivables financing facilities extended by Rabobank and another bank to the Companies. On 10 December 2008, DBS registered a charge over the MAP shares. By the end of December 2008, the Companies had received letters of demand from some of the Creditor Banks.

On 17 December 2008, Rabobank sent a letter to the Companies which demanded the payment of US$2 m and S$0.8 m within five business days, and reserved the right to demand payment of other debts of US$12.3 m and S$10.9 m. On the same day, Rabobank continued to press for the immediate sale of the Min Aik shares. On 18 December 2008 and 7 January 2009, JTIC sold the Min Aik shares for a total of about US$2.82 m, of which about US$2.78 m was remitted to Rabobank on 22 December 2008 (‘the Payment’) .

The Companies were placed under judicial management in February 2009. JTIC subsequently commenced proceedings against Rabobank to set aside the Payment on the basis that it constituted an unfair preference under s 227 T of the Companies Act (Cap 50, 2006 Rev Ed) . The Judge allowed the application.

Held, dismissing the appeal:

(1) The test was whether the debtor's decision to grant the preference was influenced by a desire to prefer the creditor. The court would look at the state of mind of the debtor to determine whether it had positively wished to improve the creditor's position in the event of its own insolvent liquidation. The desire might be proved by direct evidence or its existence might be inferred. It was sufficient that the desire to prefer was one of the factors which influenced the decision; it need not be the sole or decisive factor. A transaction which was actuated only by proper commercial considerations would not constitute a voidable preference. A genuine belief in the existence of a proper commercial consideration might be sufficient even if, objectively, such a belief might not be sustainable: at [24].

(2) Rabobank did put pressure on the Companies to repay their loans. However, so did several other Creditor Banks who had also issued letters of demand to the Companies. By the time the Payment was made, all the Creditor Banks would have known that DBS had obtained a charge over the MAP shares to secure the Companies' debts to it in breach of the Companies' negative pledges, and Ms Lin would not have expected the Creditor Banks not to do anything and to allow the Companies to carry on business as usual. It was in those circumstances that Ms Lin directed that the proceeds of sale of the Min Aik shares be paid to Rabobank to honour her earlier agreement on 25 November 2008 to do so: at [41].

(3) The great pressure put on JTIC to sell the Min Aik Shares and pay the proceeds to Rabobank, as Ms Lin had earlier agreed JTIC would do, would have been much attenuated by the fact that so many other Creditor Banks were also demanding payment of their debts. Any expectation that Ms Lin had that the Payment would save the Companies was probably unrealistic. Ms Lin wanted to honour her promise to Rabobank that JTIC would pay the proceeds of sale of the Min Aik Shares to Rabobank. She did honour her promise, but, at the same time, she consistently said that JTIC made the Payment to Rabobank because the latter had been very supportive of the Companies in giving them indulgence after indulgence to pay their long overdue debts. At no time did Rabobank actually threaten to recall all its facilities if JTIC did not agree to sell the Min Aik Shares and pay the proceeds to the former. There were insufficient grounds to overturn the Judge's finding of fact that the making of the Payment was influenced by the requisite desire: at [42], [43] and [46].

(4) The statutory presumption in s 99 (5) of the Bankruptcy Act (Cap 20, 2000 Rev Ed) (‘BA’) merely reversed the burden of proof and did not alter the substantive elements of a claim of unfair preference. Section 99 (4) only required that there had to be a desire on the debtor's part to improve the creditor's absolute position at the time the preference was granted. It was not necessary to establish that the directors of the company knew or believed that it was insolvent at the relevant time: at [30] and [31].

(5) The critical question for the court was whether or not the relevant desire existed and influenced the debtor's decision to enter into the impugned transaction. An inference of the requisite desire should not be drawn too readily from the presence of knowledge of insolvency because such knowledge in itself would not be sufficient to support that inference, given that desire was subjective. Conversely, it was possible that the desire existed and influenced the decision despite the lack of actual knowledge: at [32].

(6) As a general principle, the relevant time to determine whether a debtor was influenced by a desire to prefer was when the creditor received the preference, and not when it was promised the preference. The critical time could not be the time when the decision to prefer was made unless the desire operated throughout. Where the judicial manager might not be able to prove the requisite desire on the date of the decision to give a preference, there was no reason why he was prevented by the terms of s 99 of the BA from proving the desire at the date when the preference was actually granted: at [34].

[Observation: Rabobank was fully aware of the existence of the negative pledges and pari passu undertakings given by the Companies, which bound JTIC not to prefer any one Creditor Bank to any other Creditor Bank in terms of giving security and repaying existing debts in circumstances where the Companies were insolvent and were facing imminent liquidation or the prospect of being put into judicial management. Any inducement by Rabobank of the breach of the pari passuundertakings by JTIC would amount to an unlawful interference with the contractual rights of the other...