Insolvency Law

• Citation: (2000) 1 SAL Ann Rev 201
• Author: LEE ENG BENG LLB (NUS), BCL (Oxon), Advocate & Solicitor (Singapore)
• Date: 01 December 2000
• Published date: 01 December 2000

Introduction

Last year saw no less than four landmark decisions by the Court of Appeal and several notable judgments issued by the High Court in the area of insolvency law. Not only has this impressive crop of cases further established insolvency law as an important area of litigation practice, it has enhanced the reputation of Singapore as a significant Commonwealth jurisdiction in this area of law.

Liquidation of foreign companies

The Court of Appeal”s decision in Tohru Motobayashi v Official Receiver[2000] 4 SLR 529 is a landmark case on the law relating to the distribution of the assets of a foreign company under liquidation in Singapore. The case involved a Japan-incorporated company called Okura & Co, Ltd (“Okura Japan”) which had been adjudicated bankrupt in Japan. Okura Japan had a branch in Singapore (“Okura Singapore”), which was also wound up. Okura Japan was a net creditor of Okura Singapore. The Trustee in Bankruptcy for Okura Japan requested the liquidator for Okura Singapore to make an application to the Singapore court for a direction that the assets recovered and realised for Okura Singapore be remitted (after paying off the statutory preferential creditors under s 328 of the Companies Act (Cap 50, 1994 Ed)) to the Trustee for a global distribution to all creditors of Okura Japan and its branches in accordance with Japanese law.

The liquidator for Okura Singapore acceded to the request and made the application to the court. Lim Teong Qwee JC declined to give the direction sought. The Trustee in Bankruptcy for Okura Japan then requested the liquidator to appeal against the decision, but the liquidator did not do so. The Trustee in Bankruptcy then commenced fresh proceedings but Kan Ting Chiu J dismissed the proceedings on the ground that the Trustee should have applied to be added as party in the earlier proceedings, and that the fresh proceedings constituted an abuse of process. It was argued that the Companies (Winding Up) Rules did not provide for such joinder of party. However, Kan J held that, where the Companies (Winding Up) Rules were silent, the provisions of the Rules of Court may be used.

On appeal, the Court of Appeal, affirming its previous decision in Kuah Kok Kim v Chong Lee Leong Seng Co (Pte) Ltd[1991] SLR 122, rightly held that, by virtue of Ord 15 r 6(2)(b)(ii) therein, the Rules of Court do

not apply to proceedings relating to the winding up of companies. Further, the Trustee was not prevented from taking out the fresh proceedings on the ground of cause of action estoppel, as the Singapore liquidator and the Trustee were not the same parties and there was no sufficient privity of interest between them. Neither was the liquidator acting as an agent of the Trustee when he took out the earlier proceedings.

It was also argued before the Court of Appeal, in support of the Trustee”s application, that the Singapore liquidator”s application in the first set of proceedings was an application for directions under s 273(3) of the Companies Act, and that he could not have appealed against Lim JC”s decision. The court disagreed with this contention, and held that the earlier application was not an application for directions, but that even if it was, Lim JC”s decision was appealable. In doing so, the court appeared to have disagreed with a line of Australian authority led by the decision in Re Blackbird Pies (Management) Pty Ltd (No 2)[1970] Qd R 33. It is notable that, in any event, this line of authority has not been universally accepted in Australia (see Re Reid Murray Holdings Ltd[1969] VR 315; Re S & N (Nominees) Pty Ltd(1986) 84 FLR 463) and has been rejected in New Zealand (Re Securitibank Ltd[1978] 2 NZLR 133).

On the substantive point, the Court of Appeal declined to give the directions sought by the Trustee that the assets recovered and realised for Okura Singapore be remitted to the Trustee for a global distribution to all creditors of Okura Japan and its branches. The court held that, under s 377(3)(c) of the Companies Act, two propositions were clear:

1. (1) a liquidator of a foreign company appointed for Singapore by the Singapore court is to recover and realise the assets of the foreign company in Singapore, unless otherwise ordered by the court; and

2. (2) such a liquidator may only pay the net amount recovered and realised to the foreign liquidator appointed in the place of incorporation of the foreign company, after paying off the statutory preferential debts under s 328 of the Companies Act.

What was not clear, however, was whether the Singapore liquidator should also pay all debts and liabilities incurred in Singapore by the foreign company before remitting the net assets to the foreign liquidator. In this regard, the two relevant statutory provisions were s 377(3)(c) and s 377(3)(b) of the Companies Act.

The relevant part of s 377(3)(c) states that a Singapore liquidator of a foreign company “shall, unless otherwise ordered by the Court, only recover and realise the assets of the foreign company in Singapore and shall … pay the net amount so recovered and realised to the liquidator of that foreign company for the place where it was formed or incorporated after paying any debts and satisfying any liabilities incurred in Singapore by the foreign company” (emphasis added). However, s 377(3)(c) is also

stated to be subject to s 377(3)(b), which provides that the Singapore liquidator shall not. without obtaining an order of the court, pay out any creditor to the exclusion of any other creditor of the foreign company.

The court traced the legislative history of s 377(3)(c) and concluded that the italicised words had been specifically inserted by the legislature and that they should override the contradictory words in s 377(3)(b). Accordingly, the effect of s 377(3)(c) is that, before the Singapore liquidator remits the net assets recovered and realised by him to the foreign liquidator appointed in the place of incorporation of the foreign company, the Singapore liquidator has to pay off the statutory preferential debts under s 328 of the Companies Act as well as all debts and liabilities incurred by the foreign company in Singapore.

This reviewer would agree that this is the only reasonable interpretation of the provisions and that the court could not have come to any other sustainable conclusion. However, the result raises several interesting considerations.

Firstly, the test of whether a debt or liability is incurred by a foreign company in Singapore was not considered in detail by the court. Obviously, this is an important issue, as a claimant who is able to show that his claim against the foreign company is a debt or liability incurred in Singapore will get priority over the other creditors of the foreign company as far as the distribution of assets in Singapore is concerned. Presumably, when the occasion arises for this issue to be determined, it is likely that the court will refer to factors such as the place in which the principal events giving rise to the debt or liability took place, the law governing the transaction in question, whether a Singapore judgment has been obtained against the foreign company, and so on. It seems unavoidable that any test, when ultimately formulated by the court, will suffer from a certain degree of lack of certainty.

Secondly, it should be noted that s 377(3)(c) applies only to foreign companies, that is, a foreign corporation which establishes a place of business or carries on business in Singapore and is registered under s 368 of the Companies Act as a foreign company. A foreign corporation does not necessarily have to be registered as a foreign company merely because it carries out certain acts in Singapore, including, inter alia, the holding of property, the investment of funds, the conduct of isolated transactions, the maintenance of a bank account, the creation of evidence of a debt or a charge on property, or being a party to any legal or arbitration proceedings. Such acts do not per se amount to the carrying on of business in Singapore (see s 366(2) of the Companies Act). It is therefore conceivable that there may be a liquidation of an unregistered foreign corporation in Singapore involving substantial assets as well as debts and liabilities incurred in Singapore. However, in the event of such liquidation, no priority would be conferred by s 377(3)(c) in respect of the debts and

liabilities incurred in Singapore by that foreign corporation. Instead, the court will have to apply the common law in relation to the conduct of an ancillary winding up in conjunction with the conduct of a principal winding up in the place of incorporation of the foreign corporation. Unfortunately, the common law in this respect apparently takes a position which is divergent from s 377(3)(c), that is, that all creditors wherever situated should be treated equally and that the court in an ancillary winding up should generally direct the ancillary liquidator to transmit funds to the principal liquidators in order to achieve a pari passu distribution to worldwide creditors (see Re Bank of Credit and Commerce International SA (No 10)[1997] Ch 213 and the authorities discussed therein).

This creates a potentially serious problem. If the Singapore courts apply the common law in relation to the ancillary winding up of foreign corporations, there will be a sharp distinction between the position in the liquidation of a foreign company and that in the liquidation of an unregistered foreign corporation. It seems difficult to justify such a distinction as a matter of policy. On the other hand, it is equally difficult to contend that, in relation to the ancillary winding up of a foreign corporation, the Singapore courts should decline to follow the common law position and instead exercise their inherent jurisdiction to direct the Singapore liquidator, by analogy with s 377(3)(c), that the debts and liabilities incurred in...