Hyflux Ltd v SM Investments Pte Ltd

• Jurisdiction: Singapore
• Judge: Aedit Abdullah J
• Judgment Date: 03 October 2019
• Neutral Citation: [2019] SGHC 236
• Published date: 08 October 2019
• Date: 03 October 2019
• Year: 2019
• Hearing Date: 20 August 2019
• Plaintiff Counsel: Leo Zhen Wei Lionel, Liu Zhao Xiang, Tan Kai Yun and Muhammad Ismail K.O. Noordin (Wongpartnership LLP)
• Defendant Counsel: Chelva Retnam Rajah SC, Baratham Sayana, Sudhershen Hariram, Yap En Li and Yong Manling Jasmine (Tan Rajah & Cheah)
• Court: High Court (Singapore)
• Citation: [2019] SGHC 236
• Docket Number: Suit No 397 of 2019 (Summonses Nos 2747 and 3287 of 2019)

Aedit Abdullah J:Introduction

These grounds deal with two summonses heard together: one by the plaintiff to strike out the defendant’s counterclaim under O 18 r 19 of the Rules of Court (Cap 322, R 5, 2014 Rev Ed) (“ROC”); the other, the defendant’s application for determination of a question of law or construction under O 14 r 12 of the ROC.

Background

These applications stem out of an agreement between the parties relating to an investment by the defendant in the plaintiff (“the Restructuring Agreement”). The plaintiff was at the material times, and at the time of this judgment, in the midst of a restructuring effort. The plaintiff was covered by a moratorium under s 211B of the Companies Act (Cap 50, 2006 Rev Ed) (“CA”), which has been extended by this Court several times since 2018. The moratorium was imposed to allow the plaintiff to eventually propose a scheme of arrangement to its creditors.

In the course of 2018, the plaintiff and defendant entered into negotiations, which led to the conclusion of the Restructuring Agreement. Under the Restructuring Agreement, the defendant would invest in the plaintiff by, inter alia¸ subscribing for shares in the plaintiff. Various conditions precedent were specified in the Restructuring Agreement. One of these, cl 5.1(e)(i), stipulated that the consent of the Public Utilities Board (“PUB”) for the change in control of Tuaspring Pte Ltd (“Tuaspring”), a subsidiary of the plaintiff which ran a desalination plant, was to be obtained.¹

On 25 March 2019, the PUB informed Tuaspring by letter that it consented to the change in control of Tuaspring, but subject to the following provisos: ²the PUB had, by 26 April 2019, exercised its right to terminate the water purchase agreement (“WPA”) with Tuaspring and elected to purchase the desalination plant and other infrastructure; andownership of the desalination plant and other infrastructure had vested in the PUB in accordance with the WPA.

Whether this consent by the PUB fulfilled the requirements of cl 5.1(e)(i) of the Restructuring Agreement was contested by the parties. The defendant asserted through correspondence that it had the right to terminate the Restructuring Agreement, because of what it claimed was non-fulfilment of the condition precedents, as well as developments relating to other desalination plants.³

The plaintiff claims that the defendant committed a repudiatory breach of the Restructuring Agreement, which the defendant denies. The plaintiff seeks, inter alia, the release to it of the deposit of S$38,900,000 which was placed in escrow pursuant to cl 3.1(a) of the Restructuring Agreement (“the escrow sum”).⁴ The defendant in its counterclaim seeks the release to it of the escrow sum.

Summons No 2747 of 2019: application to strike out

The first application is by the plaintiff, seeking to strike out the defendant’s counterclaim under O 18 r 19 of the ROC as it would be in breach of the moratorium covering the plaintiff. The plaintiff’s primary argument is that the defendant failed to obtain leave of court to commence or continue its counterclaim against the plaintiff in breach of the moratorium.⁵ The plaintiff relies on all four grounds under O 18 r 19(1), ie, that the counterclaim discloses no reasonable cause of action; is scandalous, frivolous or vexatious; that it may prejudice, embarrass or delay the fair trial of the action; or would amount to an abuse of process.⁶

The defendant contends that it is able to proceed without leave of court as its counterclaim does not fall within the moratorium covering the plaintiff.⁷ The requirements under O 18 r 19 of the ROC for striking out its counterclaim would thus not be met.⁸ In any event, the defendant applied for leave to pursue its counterclaim at the oral hearing on 20 August 2019.

The decision

The defendant is entitled to assert its counterclaim without leave in so far as it relates to its entitlement to the escrow sum. It cannot, however, pursue the claim for damages and other reliefs without leave, as these go beyond a purely defensive stance. In any event, leave should be granted for the counterclaim and the other reliefs to be pursued by the defendants, save that no execution or enforcement of reliefs obtained may be made without leave of court.

Analysis

The plaintiff’s application would fall away if the counterclaim does not require leave, or if leave is actually granted, as there would be no violation of the moratorium in that situation. The decision thus turned on the application of the law in respect of counterclaims while a moratorium or stay is in force, and on the discretion of the court to grant leave.

The Law

Under s 211B of the CA, an automatic moratorium is triggered when an application is made. Prior to the expiry of the automatic moratorium period, the applicant may apply for an extension, the granting of which is at the discretion of the court and grounded in the provisions of s 211B of the CA:

Power of Court to restrain proceedings, etc., against company

211B.—(1)When a company proposes, or intends to propose, a compromise or an arrangement between the company and its creditors or any class of those creditors, the Court may, on the application of the company, make one or more of the following orders, each of which is in force for such period as the Court thinks fit:

…

(c)an order restraining the commencement or continuation of any proceedings (other than proceedings under this section or section 210, 211D, 211G, 211H or 212) against the company, except with the leave of the Court and subject to such terms as the Court imposes;

…

(5)An order of the Court under subsection (1) —(a)may be made subject to such terms as the Court imposes…

…

[emphasis added]

It is clear from the statutory provisions that the court’s discretion is wide enough to allow for the imposition of various conditions, and carve outs may be allowed for certain claims by creditors.

The courts have allowed claims by creditors to proceed in some situations despite the existence of a moratorium. In some instances, the claims are allowed to proceed in so far as court proceedings are permitted to be commenced or continued, with stays being imposed on any execution. The primary consideration is to strike a balance between allowing the restructuring company space and time to pursue its reorganisation without the added distraction of fending off claims by creditors, and on the other hand, avoiding unnecessary delays in the satisfaction of creditor claims.

The plaintiff’s arguments

The plaintiff argues that the moratorium framework under s 211B of the CA is absolute and requires that leave be obtained even for counterclaims. The plaintiff relies on the absence of any express qualifications in favour of such counterclaims in either the statute or rules. Section 211B(12) of the CA specifies that a moratorium does not affect “the exercise of any legal right under any arrangement (including a set-off arrangement or a netting arrangement) that may be prescribed by regulations.” Regulation 3 of the Companies (Prescribed Arrangements) Regulations 2017 (S 246/2017) only specifies that legal rights under security interest arrangements are not affected.⁹

The moratorium in the present case is wide in import, covering all proceedings. The objective of the moratorium regime, to treat all creditors evenly, should require leave for the counterclaim to be obtained.¹⁰ No Singapore authority supports the defendant’s assertions that the counterclaim falls outside the moratorium because it arises from the same dealings which are the basis of the claim made against it.¹¹ The limited exceptions recognised in English cases such as Mortgage Debenture Ltd (in administration) v Chapman and others[2016] 1 WLR 3048 apply only to counterclaims in so far as they are defensive and are pleaded solely to raise a defence by way of set off. What the defendant seeks to do, it is said, goes beyond this.¹² In any event, even if an exception were to be found, it should be narrowly construed, and should not extend to allowing damages and payment out of the funds from escrow. To allow these would permit the defendant to get ahead of the other creditors.¹³

The defendant’s arguments

The defendant argues that the counterclaim could proceed without leave of court. The moratorium order does not give the plaintiff immunity to pursue claims on a contract without facing counterclaims for breach on that same contract.¹⁴

The defendant relies on the Malaysian case of CGU Insurance Bhd v Asean Security Paper Mills Sdn Bhd and other appeals[2002] 2 MLJ 1 (“CGU Insurance”) and the English case of Thomas Evan Cook v Mortgage Debenture Limited[2016] EWCA Civ 103 (“Thomas Evan Cook”) for the proposition that proceedings commenced to escape liability do not fall within the ambit of a statutory moratorium.¹⁵ Here, the defendant’s counterclaim was commenced to escape liability and is defensive in nature, as seen from its mirroring of the plaintiff’s claims.¹⁶ No limits are imposed in respect of a cross-claim for liquidated or unliquidated damages. Costs will be saved if the defendant were to be allowed to pursue its full counterclaim. This also avoids multiplicity of proceedings.¹⁷ The defendant’s counterclaim is in fact stronger than a set-off as it is an entire defence to the plaintiff’s claim, and if successful would entirely negate the plaintiff’s claim: the two sides cannot both have a claim to the escrow sum.¹⁸ The defendant also submits that a statutory moratorium does not bar a claim by a claimant to his own property, citing In re David Lloyd & Co6 Ch. D. 339.¹⁹

The counterclaim as a defence

The rationale for allowing certain counterclaims to proceed even in the face of moratoria is clear. It would be inimical to allow a claim to proceed but not a counterclaim in respect of the same...