Daewoo Singapore Pte Ltd v CEL Tractors Pte Ltd

• Jurisdiction: Singapore
• Judge: Chao Hick Tin JA
• Judgment Date: 20 August 2001
• Neutral Citation: [2001] SGCA 53
• Date: 20 August 2001
• Subject Matter: Whether term valid and effectual,When s to 210 invoked,Binding effect due to contract and operation of law,Companies,Objectives,Nature,s 210 Companies Act (Cap 50, 1994 Ed),Schemes of arrangement,Whether scheme can incorporate such term,ss 210 & 210(3) Companies Act (Cap 50, 1994 Ed),Court's duty when approving schemes,Scheme incorporating term releasing third party guarantor from liability for loans of debtor company,Effect of scheme on creditor's rights against third party guarantor and company
• Docket Number: Civil Appeal No 600031 of
• Published date: 19 September 2003
• Defendant Counsel: Vinodh S Coomaraswamy and David Chan (Shook Lin & Bok)
• Court: Court of Appeal (Singapore)
• Plaintiff Counsel: Tan Cheng Han (Tan Cheng Yew & Partners)

(delivering the judgment of the court):

Introduction

This is an appeal against the decision of Kan Ting Chiu J sanctioning a scheme of arrangement made between the company, CEL Tractors Pte Ltd (`CEL Tractors`) and ten creditors under s 210 of the Companies Act (Cap 50, 1994 Ed) (`the Companies Act`). One of the creditors, Daewoo Singapore Pte Ltd (`Daewoo`) objected to the scheme and now appeals against Kan J`s decision.

The facts

The facts are not in dispute and are briefly these. CEL Tractors have proposed a scheme of arrangement dated 23 February 2001 (`the scheme`) expressed to be made between CEL Tractors and ten creditors, one of whom was Daewoo. All the ten creditors hold guarantees in respect of loans and liabilities owed by CEL Tractors to them respectively. In particular Daewoo has a guarantee given by one Mr Lim Chee Seng (`Mr Lim`) in respect of moneys owing to them by CEL Tractors. Mr Lim is a director of CEL Tractors.

For the purpose of this appeal, the material terms of the scheme are those contained in cl 4. Briefly they are as follows. Under cl 4.1, CEL Tractors are obliged to pay certain sums of money to the creditors within certain times; and under cl 4.2, CEL Tractors are obliged to grant to the respective creditors an option entitling them to require CEL Tractors to allot and issue to them certain numbers of shares credited as fully paid in the capital of CEL Tractors. All these options become exercisable at a certain time. The controversial part of the scheme is cl 4.3, which is as follows:

4.3 Release of Security Documents and Guarantees

4.3.1 Upon the Company fulfilling its obligations under Clause 4.1.1.1 and Clause 4.1.1.2, (a) the Bank Creditors shall fully and completely discharge all and any of its rights under the Deed of Debenture and the Creditors` Mortgage, and save for Keppel TatLee Bank Limited, shall fully and completely release each and every Bank Guarantor from his obligations under any and each Bank Guarantee, and (b) Daewoo Singapore Pte Ltd shall fully and completely release the Daewoo Guarantor from his obligations under the Daewoo Guarantee.

4.3.2 Upon the Company fulfilling its obligations under Clause 4.1.1, Keppel TatLee Bank Limited shall fully and completely discharge all and any of its rights under the Keppel Mortgage, and shall fully and completely release each and every Bank Guarantor from his obligations under any and each Bank Guarantee in its favour.

4.3.3 If the Creditors decide to exercise the option for the First Tranche and the second Tranche pursuant to Clause 4.2.3, (a) the Bank Creditors shall fully and completely discharge all and any of its rights under the Deed of Debenture and the Creditors` Mortgage, and save for Keppel TatLee Bank Limited, shall fully and completely release each and every Bank Guarantor from his obligations under any and each Bank Guarantee, and (b) Daewoo Singapore Pte Ltd shall fully and completely release the Daewoo Guarantor from his obligations under the Daewoo Guarantee.

Section 210 of the Companies Act allows, among other things, a compromise or arrangement to be made between the company and its creditors or any class of creditors. In so far as relevant, the provisions of s 210 are as follows:

(1) Where a compromise or arrangement is proposed between a company and its creditors or any class of them ... the Court may, on the application in a summary way of the company or of any creditor ... order a meeting of the creditors or class of creditors ... to be summoned in such manner as the Court directs.

(2) ...

(3) If a majority in number representing three-fourths in value of the creditors or class of creditors or members or class of members present and voting either in person or by proxy at the meeting or the adjourned meeting agrees to any compromise or arrangement, the compromise or arrangement shall, if approved by order of the Court, be binding on all the creditors or class of creditors or on the members or class of members, as the case may be, and also on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company.

We should mention that, in the case of a compromise or arrangement with creditors of a company, s 210 is applicable only if the compromise or arrangement as proposed is one made between the company and all its creditors or any class of its creditors. It is unclear from the facts deposed in the affidavits whether the ten creditors are all the creditors of CEL Tractors or they form a class of the creditors of CEL Tractors. However, no issue was raised on this point, and for the purpose of this appeal, we assume that the ten creditors are either all the creditors or form a class of the creditors of CEL Tractors.

Pursuant to s 210(1), an order of court was obtained by CEL Tractors on 2 February 2001, directing them to convene a meeting of the ten creditors for the purpose of considering and, if thought fit, approving the scheme. Accordingly, a meeting of the creditors was duly convened for the purpose. At the meeting, the scheme was put to vote and was approved by a majority representing not less than three-fourths in value of the debts of the creditors present and voting, namely eight out of the ten creditors, holding 95.62% of the debts, with one creditor abstaining. Only Daewoo voted against the scheme.

Having obtained the requisite majority of the creditors at the meeting, CEL Tractors applied to court for approval of the scheme under s 210(3) of the Companies Act. At the hearing of the application, predictably Daewoo objected to the scheme. They raised two objections. The first objection was that the scheme as drafted requires them to release the guarantor from his obligations under the guarantee given to them for the debt of CEL Tractors. That was the guarantee issued by Mr Lim in favour of Daewoo. Under the guarantee, Mr Lim guaranteed the payment of all moneys and liabilities owing by CEL Tractors to Daewoo. It was contended on their behalf that such release was unfair to Daewoo as the guarantee was a valuable security to them. The second objection is that a scheme of arrangement under s 210 of the Companies Act could not embody a term which had the effect of discharging the liability of a third party, such as a guarantor, for the debt or liability of CEL Tractors or make such a term as part of the scheme. Mr Lee Young Kwon, the finance manager of Daewoo, in his affidavit filed in opposition to the scheme, said at paras 7, 11 and 12 as follows:

7 The principle ( sic ) reason why Daewoo is objecting to the scheme of arrangement is because the scheme of arrangement as drafted/passed requires Daewoo to release a guarantee given by a director of CEL on 15 August 1998 i.e. one Lim Chee Seng. A copy of the said guarantee is now produced and shown to me marked as "YKL-1".

11 I wish to state that sanction of the scheme is unfair to Daewoo as the said Lim Chee Seng`s debt to Daewoo under the said guarantee is a personal debt which he owes to Daewoo, wherein he contracts as principle ( sic ) debtor. By allowing the scheme to encompass the guarantee, Daewoo would be losing a valuable security and/or an opportunity to recover its losses from an independent third party, which is over and above the debt which CEL owes to Daewoo.

12 I verily believe that a scheme of arrangement under Section 210 of the Companies Act cannot encompass a scheme which allows the debts or financial obligations of a non-company or third party individual to be forgiven or to form part of a comprehensive settlement of a company`s debts as Section 210 of the Companies Act should only allow a scheme of arrangement in relation to debts owed by the Company itself.

The first objection raises the question of fairness of the scheme to Daewoo, which, however, was not canvassed before the court below. It was not suggested that the scheme was unfair to Daewoo in any way. True it is that cl 4.3.1 of the scheme requires Daewoo to release the guarantor, Mr Lim, from his liability under the guarantee in respect of CEL Tractors` debts owed to them. But Daewoo have not been singled out in this respect. All the other creditors have been treated alike. They are required to discharge their securities and also to release their guarantors from the guarantees respectively. In particular, the bank creditors (as described therein) are required to discharge the securities given to them, such as the mortgages and debenture, and also to release the `the Bank Guarantors` from their guarantees respectively.

The second objection is this. The scheme expressly incorporates provisions requiring the creditors to discharge and release their securities and further to release the guarantors from their liabilities under the guarantees for the debts and liabilities of CEL Tractors. It was argued that a scheme of arrangement under s 210 of the Companies Act could not encompass such provisions on the ground that a scheme under that section bound only the company and the creditors and therefore could only discharge or affect the debts and liabilities of the company and not the liability of a third party, such as a guarantor, for the same debts and liabilities of the company.

The decision below

The judge examined the Australian and English cases dealing with statutory schemes of arrangement, and acknowledged that there were authorities to the effect that a scheme of arrangement could not affect the rights of third parties. However, he regarded the authorities as only persuasive and chose to adopt the approach in the analogous case of Johnson v Davies [1998] 2 BCLC 252[1998] 2 All ER 649 decided by the English Court of Appeal. The judge agreed with the reasoning in Johnson v Davies and accordingly held that a scheme of arrangement could similarly discharge the liability of a third party such as a guarantor. He also justified this...