Coöperatieve Centrale Raiffeisen-Boerenleenbank BA (trading as Rabobank International, Singapore Branch) v Jurong Technologies Industrial Corp Ltd (under judicial management)

• Jurisdiction: Singapore
• Judge: Chan Sek Keong CJ
• Judgment Date: 16 September 2011
• Neutral Citation: [2011] SGCA 48
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeal No 5 of 2011
• Year: 2011
• Published date: 23 September 2011
• Hearing Date: 26 May 2011
• Plaintiff Counsel: Gregory Vijayendran, Sheela Kumari Devi and Charmaine Neo (Rajah & Tann LLP)
• Defendant Counsel: Sarjit Singh Gill SC, Pradeep Pillai and Zhang Xiaowei (Shook Lin & Bok LLP)
• Subject Matter: Insolvency Law
• Citation: [2011] SGCA 48

Chan Sek Keong CJ (delivering the judgment of the court): Introduction

This is an appeal by Coöperatieve Centrale Raiffeisen-Boerenleenbank BA, trading as Rabobank International, Singapore Branch (“Rabobank”) against the decision of the trial judge (“the Judge”) in setting aside a total payment of US$2,775,149.37 made by Jurong Technologies Industrial Corporation Ltd (under judicial management) (“JTIC”) to Rabobank on 22 December 2008 ( “the Payment”) on the ground that it was an unfair preference under s 227T of the Companies Act (Cap 50, 2006 Rev Ed) (“CA”), read with s 99 of the Bankruptcy Act (Cap 20, 2000 Rev Ed) (“BA”) (see Jurong Technologies Industrial Corp Ltd (under judicial management) v Coöperatieve Centrale Raiffeisen-Boerenleenbank BA (trading as Rabobank International, Singapore Branch) [2011] 2 SLR 413 (“the GD”)).

Background facts

The background facts of this case are as follows. JTIC was an investment holding company which carried on the business of providing electronic manufacturing services (“EMS”) through wholly-owned operating subsidiaries. Its principal operating subsidiary was Jurong Hi-Tech Industries Pte Ltd (under judicial management) (“JHTI”). Most of the business operations of JTIC and JHTI (collectively, “the Companies”) were carried out by JHTI.

JTIC’s business activities were financed by loans from Rabobank and other banks (“Creditor Banks”), which included ABN AMRO Bank NV (“ABN-AMRO”), Bank of Tokyo-Mitsubishi UFJ (“BTMU”), KBC Bank NV (“KBC”), DBS Bank Ltd (“DBS”), Malayan Banking Berhad (“Maybank”), Oversea-Chinese Banking Corporation Ltd (“OCBC”), RHB Bank Berhad (“RHB”) and United Overseas Bank Ltd (“UOB”). All the bank facilities, including those granted by Rabobank to the Companies, were unsecured, but each Creditor Bank was given a negative pledge and a pari passu undertaking. Except for BTMU, Maybank and RHB, which had granted facilities solely to JTIC, all the other Creditor Banks granted facilities to the Companies jointly and severally.

Rabobank was not the first Creditor Bank to grant facilities to the Companies. When it first offered credit facilities to the Companies, initially of up to US$13m to JTIC in September 2004, the Companies had already given their existing Creditor Banks negative charges and pari passu undertakings with respect to the unsecured facilities. Rabobank agreed to grant facilities on the same terms. Additionally, Rabobank also granted receivables financing of up to US$20m under a Master Receivables Purchase Agreement on 15 February 2007 (“the MRPA”).

When Ms Joyce Lin Li Fang (“Ms Lin”), a founding member of JTIC and a director since 26 April 1986, and also a director of JHTI since 26 August 2003, 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, Ms Lin made a presentation to DBS of the Companies’ financial position and told DBS that some of the Companies’ assets could be “monetised”, ie, sold, to reduce the Companies’ loans. These assets included the Companies’ EMS business, shares in MAP Technology Holdings Limited (“MAP”) and shares in Min Aik Technology Co Ltd (“the Min Aik Shares”). From September 2008 to November 2008, the other Creditor Banks, including Sumitomo Mitsui Banking Corporation, were also informed of the possible sale of these assets.

By 30 June 2008, the Companies’ total borrowings had reached the level of S$340m, of which about S$87m was owing to DBS, S$70m to UOB, S$60m to OCBC and the remainder to the other Creditor Banks. In July 2008, JHTI deposited with ABN-AMRO at its request 18.6m of the MAP shares which it (JHTI) held. They were subsequently released to JHTI for conversion into scripless shares. JHTI acquired more MAP shares, bringing its total investment to 74,411,620 MAP shares (slightly below 20% of the paid-up capital of MAP). Between August and October 2008, ABN-AMRO requested that the 74,411,620 MAP shares (“the MAP Shares”) be put in a custodian account with it. The October 2008 request was made as a “non-negotiable condition” for ABN-AMRO to refrain from recalling its facilities. JHTI refused to do so for the reason that, as stated by Dr Chung Siang Joon (“Dr Chung”), JTIC’s executive director of finance, “this can trigger off and become a risk factor should the other [Creditor] Banks come to learn about it”. He pleaded for support: “I do hope you can understand my difficulty and obligation to the other [Creditor] Banks”.

From September 2008 onwards, the Companies encountered significant financial difficulties, due primarily to the global recession and credit crunch, which had resulted in reduced orders from their customers. During this period, the Companies’ trade creditors were chasing for payment of their debts, and so were all the Creditor Banks. The Companies could only make payments in the ordinary course of business from trade receivables or by drawing on credit lines. The Companies continued to promise the Creditor Banks that they would pay their loans and facilities from the proceeds of sale of the MAP Shares, the Min Aik Shares and the EMS business. Although the Companies were defaulting in the payment of debts due to the Creditor Banks, they continued to roll over the debts. The Creditor Banks really had no choice but to wait for the Companies to sell their assets in order to pay their debts to the Creditor Banks.

On 11 September 2008, Rabobank requested that the Companies reduce the amount of invoices sent for discounting to avoid exceeding the MRPA’s limit of US$20m. On 22 September 2008, Rabobank’s relationship manager, Mr Richard Lee Seow Hong (“Mr Lee”), informed Ms Lin that the bank wished to exit from financing non-core markets (ie, the telecommunications and electronics sectors) and to end its relationship with the Companies in an orderly fashion. Ms Lin then requested that Rabobank reduce or cancel the banking facilities gradually and allow the Companies to pay according to the maturity dates of those facilities. After the limit was reached by the end of September 2008, no further invoices were sent to Rabobank for discounting.

The Companies first defaulted on their facilities with Rabobank on 7 October 2008, when they failed to pay over receivables that were due to be paid by Motorola Electronics (“Motorola”) to JHTI on that date. Besides this, JHTI failed to make payment on other amounts, including invoices under the MRPA facility and trade bills which had fallen due for payment in early October 2008. When the Companies failed to settle trust receipts which were due on 16 October 2008, Rabobank force-debited JHTI’s current account, causing it to be overdrawn.

Sometime in November 2008, Mr Lee asked Ms Lin whether the MAP Shares could be placed in an escrow account with Rabobank, but Ms Lin said that this could not be done and that the loans due to Rabobank could be repaid instead from the sale proceeds of the Min Aik Shares. Later that month, Mr Lee told Ms Lin that Rabobank wanted the Min Aik Shares to be placed in an escrow account with it to ensure that the sale proceeds of those shares would be paid to it.

On 17 November 2008, Rabobank demanded from JHTI payment of the unpaid receivables under the MRPA facility. On 25 November 2008, Ms Lin signed and 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 Min Aik Shares directly to the escrow account. However, the escrow account was not set up, nor were the Min Aik Shares deposited with Rabobank. In November and December 2008, Mr Lee sent numerous e-mails and made various telephone calls to the Companies’ officers to ask them to sell the Min Aik Shares and remit the proceeds to Rabobank. There were also meetings between Rabobank and the Companies where the bank made the same demands.

On 14 October 2008 JTIC signed a non-binding term sheet with Global Emerging Markets (“GEM”) to sell part of JTIC’s EMS business (“the GEM Deal”). The announcement made by JTIC the next day on the Singapore Exchange was as follows:

The Board of Directors of [JTIC] wishes to announce that [JTIC] has received and signed a non-binding term sheet with [GEM] … pursuant to which GEM, together with various investors … have proposed the formation of a special purpose vehicle… to acquire a significant interest in selected electronic manufacturing services businesses and assets … for cash consideration.

Shareholders should note that the Proposed Disposal will be subject to, inter alia, the negotiation and execution of definitive agreements and the conduct of a due diligence ...

The Creditor Banks were informed that the GEM Deal could bring in as much as US$160m. Two officers from GEM had visited Singapore in October 2008 to evaluate the deal, and KPMG was to conduct the necessary due diligence in January 2009.

During this period, the Companies were in default in paying certain short-term loans given by DBS, which continuously pressed for payment by the deadline of 14 November 2008 from the proceeds of sale of the MAP Shares, as Ms Lin had promised. On 13 November 2008, at a meeting with DBS, Ms Lin signed a security document which created a charge on the MAP Shares in favour of DBS (“the Charge”). The security document was fully executed on 17 November 2008. The validity of the Charge as an unfair preference has been considered in the judgment of the High Court reported in Tam Chee Chong and another v DBS Bank Ltd [2011] 2 SLR 310 and the judgment of this court in Civil Appeal No 230 of 2010 (see DBS Bank Ltd v Tam Chee Chong and another (judicial managers of Jurong Hi-Tech Industries Pte Ltd (under judicial management)) [2011] SGCA 47 (“DBS Bank v Tam Chee Chong”)).

On 8 December 2008, JTIC made a public announcement that its audit committee had commenced an investigation into alleged...