Founder Group (Hong Kong) Ltd (in liquidation) v Singapore JHC Co Pte Ltd

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ
• Judgment Date: 28 November 2023
• Neutral Citation: [2023] SGCA 40
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeal No 41 of 2022
• Hearing Date: 08 September 2023,22 September 2023
• Citation: [2023] SGCA 40
• Year: 2023
• Plaintiff Counsel: Sarjit Singh Gill SC, Daniel Tan Shi Min, Hoang Linh Trang, Chu Shao Wei Jeremy and Edwin Yang Yingrong (Shook Lin & Bok LLP)
• Defendant Counsel: Tan Chuan Thye SC, Cheng Wai Yuen Mark, Tan Tian Hui and Timothy Ang Wei Kiat (Rajah & Tann Singapore LLP)
• Subject Matter: Insolvency Law,Winding up,Disputed debt,Standing,Contingent creditor,Arbitration,Agreement,Separability
• Published date: 28 November 2023

Sundaresh Menon CJ (delivering the grounds of decision of the court): Introduction

This was an appeal against the decision of a judge of the General Division of the High Court (“the Judge”) dismissing an application brought by the appellant, Founder Group (Hong Kong) (in liquidation) (“FGHK”), to wind up the respondent, Singapore JHC Co Pte Ltd (“JHC”). FGHK claimed to be a creditor of JHC in a sum of around US$47.43m and maintained that JHC was unable to pay its debts and/or that it would be just and equitable for JHC to be wound up. While the Judge accepted that JHC was unable to pay its debts, the Judge found that FGHK had not established its standing as a creditor because the debt it relied on was disputed by JHC and that dispute was subject to a valid arbitration agreement. The Judge considered that by reason of the arbitration agreement, the dispute over the debt first had to be resolved in arbitration before FGHK could take any steps to enforce it.

FGHK appealed on the basis that the Judge should have found that it had the requisite standing at least as a contingent creditor, and further that JHC had not raised the dispute over the debt in good faith and on substantial grounds and, in fact, was abusing the court’s process. For the reasons that follow, we disagreed that FGHK could be considered a contingent creditor. However, we were satisfied that JHC could not invoke the arbitration agreement in the present circumstances, and there was no real dispute over the debt. It followed that FGHK had the requisite standing as a creditor to bring a winding-up application. As there was no dispute that JHC was insolvent, we allowed the appeal and ordered that JHC be wound up.

Facts Parties to the dispute

The appellant, FGHK, is a company incorporated in the Hong Kong Special Administrative Region (“Hong Kong”) of the People’s Republic of China (“PRC”). The respondent, JHC, is a company incorporated in Singapore and is in the business of the general wholesale trade of metals and metal products, among other things.

Prior to 2020, FGHK and JHC were part of the same group of companies and were owned and controlled by Peking University Founder Group Company Limited (“PUFG”). PUFG is a company incorporated in the PRC.

In February 2020, a creditor of PUFG commenced reorganisation proceedings against it in the Beijing First Intermediate People’s Court. PUFG’s creditors subsequently consented to a reorganisation plan in May 2021, and this was approved by the Beijing First Intermediate People’s Court in June 2021. Pursuant to the plan, ownership and control of JHC were transferred from PUFG to a consortium of investors.

FGHK continued to be owned by PUFG, but it was ordered to be liquidated by the Hong Kong Court of First Instance on 19 July 2021, following a winding-up application made by one of its creditors. Liquidators of FGHK were appointed on 18 October 2021 (the “Liquidators”).

According to the Liquidators, they discovered upon a review of FGHK’s books and records that a sum of approximately US$47.43m was due and payable by JHC to FGHK. This sum pertained to an alleged sale of copper cathodes by FGHK to JHC pursuant to three contracts dated 11 December 2015, 22 December 2015 and 6 January 2016, respectively (the “Contracts”). Each of the Contracts stated that any disputes which could not be resolved amicably would be submitted to the China International Economic and Trade Arbitration Commission (“CIETAC”) for arbitration in Beijing, and that the governing law of the Contracts was Chinese law. The relevant provision was as follows: 13. ARBITRATION

The buyer and seller agree to attempt to resolve all disputes in connection with the contract or the performance of the contract through friendly discussion. Any controversy or claim that cannot be settled amicably between Buyer and Seller Shall be submitted to China International Economic and Trade Arbitration Commission for arbitration which shall be conducted in Beijing in accordance with the Commission’s arbitration rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties.

13. GOVERNING LAWS

This Contract shall be governed and construed by the laws of the People’s Republic of China (exclude Hong Kong, Macao, Taiwan areas) and INCOTERMS 2010.

On 1 December 2021, the Liquidators issued a letter of demand to JHC demanding payment of US$47.43m within 14 days. On 18 February 2022, the Liquidators issued a statutory demand to JHC for the same sum, pursuant to s 125 of the Insolvency, Restructuring and Dissolution Act 2018 (2020 Rev Ed) (“IRDA”). In March and April 2022, the parties engaged in negotiations to fully and finally settle the outstanding debts, but no agreement was reached.

HC/CWU 121/2022

On 27 May 2022, the Liquidators (acting on behalf of FGHK) filed HC/CWU 121/2022 (“CWU 121”), seeking an order that JHC be wound up on the basis that (a) it was unable to pay its debts within the meaning of s 125(1)(e) of the IRDA; or (b) it was just and equitable to wind up the company pursuant to s 125(1)(i) of the IRDA.

The Liquidators claimed that the debt of US$47.43m was presently owed by JHC to FGHK and was evidenced by, among other things, an audit confirmation request that had been issued by JHC’s external auditors to FGHK on 26 February 2019 (the “FY2018 Audit Confirmation Request”). In the FY2018 Audit Confirmation Request, JHC’s external auditors, Dexin Assurance (“Dexin”), had stated that JHC’s books reflected a sum of US$47.43m that was owed to FGHK, and requested FGHK’s confirmation that this was correct as at 31 December 2018. JHC had clearly and unequivocally admitted its liability for the debt. Further, given that the statutory demand issued on 18 February 2022 remained unsatisfied, JHC was deemed unable to pay its debts pursuant to s 125(2)(a) of the IRDA. Alternatively, JHC’s financial statements showed that it was in fact unable to pay its debts.

As for the second ground (namely, that it would be just and equitable to wind the company up), this was based on JHC’s stated position that it had entered into contracts (these being the Contracts) that were not meant to be enforced (see [12] below). There was no further explanation for why this had been done, and this suggested a lack of probity or the possibility of fraudulent conduct on its part. It was therefore said to be in the interests of JHC’s and PUFG’s creditors and contributories that the company be wound up and liquidators be appointed, so that they could investigate whether there had been any wrongful conduct on the part of JHC or its directors.

JHC resisted CWU 121 on the following grounds: First, it disputed the debt of US$47.43m. As mentioned above, JHC’s position was that the ostensible payment obligations arising under the Contracts were not meant to be enforced. JHC claimed that this had arisen from transactions within the PUFG group. No copper cathodes had in fact been delivered under the Contracts. The Contracts were consequently null and void under their governing law, which was Chinese law. Notably, nothing was said about why these arrangements had been entered into. Second, the dispute over JHC’s liability for the debt fell within the scope of the arbitration agreements contained in the Contracts and this dispute should therefore be referred to arbitration before the CIETAC. It was not appropriate in such circumstances for the insolvency court to make a winding-up order in a summary way. Third, the threshold for a just and equitable winding up had not been met.

At the time CWU 121 was filed, the Liquidators also filed a separate application in HC/CWU 120/2022 (“CWU 120”) on behalf of FGHK. CWU 120 was an application to wind up another subsidiary of PUFG, Singapore Commodities Group Co Pte Ltd (“SG Commodities”). Similar to the proceedings in CWU 121, the Liquidators alleged that SG Commodities owed FGHK a debt arising from the sale of copper cathodes. SG Commodities disputed the debt on the basis that the payment obligation was not meant to be enforced, and the dispute was subject to ongoing arbitration proceedings before the CIETAC in Beijing. Following an offer from SG Commodities to provide security for FGHK’s claim against it, the Liquidators consented to CWU 120 being stayed pending the outcome of the CIETAC arbitration proceedings.

Decision below

On 29 September 2022, the Judge dismissed CWU 121: see Founder Group (Hong Kong) Ltd (in liquidation) v Singapore JHC Co Pte Ltd [2023] SGHC 159 (the “GD”).

The Judge began by considering whether FGHK had established that it was a “creditor” of JHC within the meaning of s 124(1)(c) of the IRDA. The Judge observed that where a defendant disputes the debt on which the claimant relies, a court may take two approaches (GD at [22]–[44]): the “general approach”, under which the court considers whether the defendant disputes the debt in good faith and on substantial grounds; and where the claimant asserts that it is a creditor of the defendant based on a debt arising under a contract containing an arbitration agreement and the defendant disputes the debt or raises a cross-claim arising out of such a contract, the court must apply the test set out by this court in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co) [2020] 1 SLR 1158 (“AnAn”). In this setting, the court must consider whether: there is an arbitration agreement between the parties that appears prima facie to be valid (AnAn at [56]); the dispute or cross-claim which the defendant raises appears prima facie to fall within the scope of the arbitration agreement (AnAn at [56]); and upon a consideration of factors which do not relate to the merits of the dispute in respect of the debt or the merits of the cross-claim, the court is satisfied that the defendant is not abusing the court’s process by raising the dispute or...