Insolvency Law

Date01 December 2020
Publication year2020
Published date01 December 2020
AuthorKelvin POON LLB (Hons) (National University of Singapore); Advocate and Solicitor (Singapore); Partner, Rajah & Tann Singapore LLP. SIM Kwan Kiat LLB (Hons) (National University of Singapore), LLM (New York University); Advocate and Solicitor (Singapore); Attorney and Counsellor-at-law (New York State); Partner, Rajah & Tann Singapore LLP. Wilson ZHU LLB (Hons) (National University of Singapore); Advocate and Solicitor (Singapore); Partner, Rajah & Tann Singapore LLP.
I. Introduction

18.1 The coming into effect of the Insolvency, Restructuring and Dissolution Act 20181 (“IRDA”) on 30 July 2020 is an important milestone for Singapore insolvency law. Extensive changes to Singapore's insolvency laws made by way of amendments to the Companies Act2 in 2017 are now consolidated in the IRDA. The Singapore courts continue to provide guidance on novel issues in debt restructuring. These include decisions on “roll-ups” in rescue financing3 and a foreign debtor's connection with Singapore for the purpose of commencing a scheme of arrangement process in Singapore.4 The interplay between insolvency law and arbitration was dealt with in a number of decisions, the most important of all being AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co)5 (“Anan”) by the Court of Appeal.

II. Winding up of companies
A. Winding up and disputed debts

18.2 It is settled law in Singapore that a winding-up application is not an appropriate means of enforcing a disputed debt, and that it would be an abuse of process to allow a creditor to wind up a company on that basis.

18.3 In RCMA Asia Pte Ltd v Sun Electric Power Pte Ltd,6 the High Court added an important qualifier, holding that in exceptional cases, it could wind up a company even if there was a substantial and bona fide dispute over the debt. In doing so, the court approved of the approach taken in England, where the court's refusal to entertain cases with a disputed debt was merely a rule of practice rather than a rule of law. In particular, the court accepted that it had discretion to grant winding-up orders if the applicant had a good arguable case, and if the effect of dismissal would deprive the applicant of a remedy or otherwise cause injustice.

18.4 The court considered that the present case was an exceptional one, and suitable for the exercise of its discretion. The company itself had already asserted that it was insolvent in a failed judicial management application. There was also a serious risk that if the winding-up application were dismissed, the applicant would eventually be without a remedy if it successfully proved its claim against the company in a writ action. It also appeared that the company was not serious in defending against the applicant's claims for damages in a separate writ action. More significantly, the company had already dissipated a substantial amount of funds, in breach of a court-ordered Mareva injunction. Given the highly suspicious circumstances, the appointment of a liquidator would provide greater transparency and assist the company in recovering funds wrongly dissipated.

B. Statutory demands

18.5 Following the seminal decision of the Court of Appeal in BNP Paribas v Jurong Shipyard Pte Ltd7 (“BNP Paribas”), the general practice is for the statutory demand to state all three options, rather than to simply demand payment of the debt in question. This is notwithstanding the fact that the Court of Appeal had noted that the Companies Act and the Companies (Winding Up) Rules8 do not require that a statutory demand

states all three options and left open the question as to whether there was a requirement for a statutory demand to state all three options. Nevertheless, it was considered good practice given that the Court of Appeal considered that the terms of the demand in BNP Paribas were “misleading in stating that [the debtor company] would be deemed unable to pay its debts if it did not pay the sum demanded within 21 days”.9

18.6 In Ley Choon Constructions and Engineering Pte Ltd v Yew San Construction Pte Ltd,10 the High Court addressed whether a statutory demand would be defective if it only demanded payment of the debt but did not state the alternative options of securing or compounding the same. The learned judge considered that BNP Paribas did not stand for the proposition that all statutory demands must state all three options, even though the possibility that in a different case, such a requirement may be properly justified on a different basis.

18.7 The learned judge went on to hold that even if there were such a requirement, it should not be applied so inflexibly that the statutory demand should be held invalid given that there was no evidence that the company was misled by the omission or that there would be such substantial injustice caused by the omission that it could not be remedied as an irregularity under s 392 of the Companies Act. After all, the company was clearly unable to pay its debts as they fell due and it was cash flow insolvent, and the general rule in Metalform Asia Pte Ltd v Holland Leedon Pte Ltd11 that a creditor is entitled to a winding-up order ex debito justitiae should apply.

18.8 In arriving at this conclusion, the learned judge recognised that this general rule is qualified by the Court of Appeal decision in BNP Paribas that even if a debtor company is proved or deemed unable to pay its debts, the court retains a residual discretion not to wind it up and/or grant an adjournment to allow the company time to resolve the issues at hand or to seek alternative measures. In the exercise of this discretion, the court may take into account various economic and social interests, especially where a “temporarily insolvent but commercially viable company”12 is concerned. On the facts, however, the learned judge was not persuaded that the company's insolvent state was only temporary. The learned judge also found that the company was, at the most, just barely commercially viable and failed to meet the standard required to

justify the exercise of the court's discretion to adjourn the winding-up proceedings despite its cash flow insolvency.
C. Stay of winding-up proceedings in favour of arbitration

18.9 In BW Umuroa Pte Ltd v Tamarind Resources Pte Ltd13 (“BW Umuroa”), the creditor filed a winding-up application against the company on the basis of an unsatisfied statutory demand. The company argued that the winding-up application should be stayed, if not dismissed, on the ground that the alleged debt was disputed, and that it had substantial cross-claims against the creditor, both of which matters should be referred to arbitration.

18.10 The learned judge held that whether the winding-up application should be stayed or dismissed was an issue that had to be determined by Singapore law, regardless of whether the arbitration court might apply another law for the substantive dispute over the debt and cross-claim, if any. As regards the standard of review to be applied, the learned judge considered that the lower threshold should apply, namely whether there was a “bona fide prima facie” case that a dispute existed. On the facts, he found that the company did not even manage to raise a bona fide prima facie dispute over the debt. Neither did the company meet that same threshold in relation to its alleged cross-claims against the creditor. In the circumstances, the High Court made the winding-up order against the company.

18.11 A day after the judgment in BW Umuroa was delievered, the Court of Appeal delivered its much-anticipated decision in Anan14 where a similar issue arose. In Anan, the Court of Appeal grappled with whether the triable issue standard or the prima facie standard applied when a debtor raised a dispute which was the subject of an arbitration agreement to resist a winding-up application on the basis of an unsatisfied debt.

18.12 The triable issue standard allows the court to conduct a summary judgment type analysis of liability on an unadmitted debt. The prima facie standard, on the other hand, requires the court to either stay or dismiss a winding-up application, save in wholly exceptional circumstances, when it is faced with a disputed debt that was subject to an arbitration agreement.

18.13 The Court of Appeal held that when a court was faced with either a disputed debt or a cross-claim that was subject to an arbitration

agreement, the prima facie standard of review should be adopted in lieu of the triable issue standard, even though that reception across the Commonwealth towards that approach has been mixed.

18.14 When a court is faced with either a disputed debt or a cross-claim that was subject to an arbitration agreement, the prima facie standard of review would require the court to either stay or dismiss the winding-up proceedings if (a) there was a valid arbitration agreement; and (b) the dispute fell within the scope of the arbitration agreement, provided that the dispute was not being raised in abuse of the court's process.

18.15 The Court of Appeal reasoned that such an approach would promote coherence in the law concerning stay applications. If there were a dichotomy of standards, the applicable standard would depend solely on the creditor's tactical choice to pursue an ordinary claim for debt (in which case the prima facie standard would apply) or to apply to wind the debtor up (in which case the triable standard would apply). By adopting the prima facie standard for winding-up proceedings, creditors would be discouraged from abusing the court's winding-up jurisdiction as a means to avoid the parties' agreed method of dispute resolution, that is, arbitration.

18.16 The prima facie standard would also give effect to the principle of party autonomy. The triable issue standard would require the court to critically consider the merits of the debtor's defences despite the parties' agreement that such disputes ought to be determined by an arbitrator, who might arrive at a different conclusion from the court. The Court of Appeal also observed that if the company were wound up on the basis that no triable issue had been demonstrated, the principle of party autonomy would be further undercut because the decision-making on the dispute would then be foisted upon the liquidator, whereas such decision-making function properly belonged to the arbitral tribunal. This problem could be exacerbated because of the difficulties that the...

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