Insolvency Law

Citation(2019) 20 SAL Ann Rev 505
Date01 December 2019
Publication year2019
Published date01 December 2019
I. Introduction

17.1 The Singapore courts delivered a number of important decisions on insolvency law in 2019. They include the Court of Appeal's decision in Pathfinder Strategic Credit LP v Empire Capital Resources Pte Ltd,1 which set out a minimal standard of disclosure by a debtor who seeks to restructure its debts by a scheme of arrangement, and the High Court's decision in BWF v BWG2 on the interplay between winding up and arbitral proceedings.3 The local jurisprudence on cross-border insolvency continues to grow, with decisions on recognition of foreign non-main proceedings.4 and the recognition of foreign trustees in bankruptcy under common law.5

II. Winding up of companies
A. Disputed debts

17.2 In Seah Chee Wan v Connectus Group Pte Ltd,6 the High Court applied the well-established principle that where the company disputes the debt claimed by the creditor on substantial grounds, the court will restrain the winding-up application as an abuse of process for the creditor to try to enforce a disputed debt in such a way7 and that the standard for determining the existence of a substantial dispute is “no more than that for resisting a summary judgment application, that is, the debtor-company need only raise triable issues”.8

17.3 In this case, the applicant was himself a shareholder of the respondent company. Against a backdrop of disputes that had arisen between him and the other shareholders, the applicant served a statutory demand on the respondent company, which was unsatisfied. The applicant followed up with an application to wind up the respondent company pursuant to s 254(1)(e) of the Companies Act9 which provides that the court “may order the winding up if … (e) the company is unable to pay its debts”. The application was also made on the basis that it was just and equitable to wind up the company in view of the disputes between the shareholders.

17.4 While the respondent company itself was unrepresented at the hearing, one of its shareholders contested the application on the ground that the debts were disputed. Following a hearing over five days where the learned judge heard the evidence of the parties, he found that it had not been demonstrated that a substantial dispute existed in respect of the debts due and owing to the applicant.

B. Stay of enforcement

17.5 In SCK Serijadi Sdn Bhd v Artison Interior Pte Ltd,10 a judgment creditor had served a pair of garnishee orders nisi on the garnishee. Before the show-cause hearing, however, the judgment debtor was placed under creditors' voluntary winding-up.

17.6 Under s 299(2) of the Companies Act, the garnishee proceedings were stayed and could not be proceeded with except with the leave of court. Section 334(1) of the Companies Act also prevented the judgment creditor from retaining the benefit of the attachment unless the court orders otherwise.

17.7 In the circumstances, the judgment filed an application to the High Court for leave to continue with the garnishee proceedings and for an order allowing it to retain the benefit of the attachment. The High Court judge dismissed the application.11 The judgment creditor appealed.

17.8 Before the Court of Appeal, the judgment creditor argued that the service of the garnishee order nisi on the garnishee rendered it a secured creditor whose rights were unaffected by the winding up of the company in liquidation, which had occurred prior to the show cause hearing.

17.9 Dismissing the appeal, the Court of Appeal followed its earlier decision in Transbilt Engineering Pte Ltd v Finebuild Systems Pte Ltd12 (“Transbilt”), which had held that a judgment creditor who has obtained a garnishee order nisi is to be treated as an unsecured creditor and absent exceptional circumstances, is not entitled to proceed to have the garnishee order nisi made absolute after the commencement of winding-up proceedings.

17.10 The Court of Appeal nevertheless recognised that there were a number of authorities in which the courts have held that the service of a garnishee order nisi creates an “equitable charge” in the sense that it binds the garnishee not to pay the debt over to the judgment debtor pending the garnishee show-cause hearing. This was an argument that was not expressly considered by the court in Transbilt. As such, the Court of Appeal took the opportunity to trace the genesis of such an equitable charge and to explain why the service of a garnishee order nisi order does not render a judgment creditor a “secured creditor” for purposes of ss 299(2) and 334(1) of the Companies Act.

17.11 The Court of Appeal held that the “equitable charge” created by a garnishee order nisi over the garnished debt did not confer upon the judgment creditor an absolute right to have the subject property applied for its sole benefit. The “equitable charge” created by a garnishee order nisi only serves to prevent the judgment debtor from exercising its full and unfettered right to deal with the garnished debt in a manner that was inconsistent with the judgment creditor's rights. This is because

a garnishee order nisi created an obligation on the garnishee not to pay the garnished debt to the judgment debtor in breach of the order nisi.

17.12 The Court of Appeal also helpfully clarified that the “equitable charge” created by a garnishee order nisi was materially different from an equitable charge, which created security for the repayment of a debt. In the latter case, the creditor was given the right to resort to the charged property to satisfy the debt on the condition that it remained unpaid and this condition was necessarily fulfilled in every situation where the creditor sought to enforce its security.

17.13 By contrast, the “equitable charge” created by a garnishee order nisi only provides the judgment creditor with a contingent right to resort to the garnished debt, depending on whether some good cause might be shown otherwise. Whether such good cause might be shown was a future contingency which would be thwarted where the judgment debtor was placed under winding up before the show-cause hearing. As such, a judgment creditor was not in the same position as a secured creditor who had already accrued an entitlement to have the charged property of the debtor made available to satisfy the debt by virtue of the debtor's default in repayment.

C. Stay of winding-up proceedings in favour of arbitration

17.14 In BWF v BWG,13 the High Court considered an application for an injunction to restrain the commencement of winding-up proceedings on the basis that the underlying disputed debt fell within the scope of an arbitration clause. The High Court had to decide what the applicable standard was for the grant of an injunction in these circumstances: would a bona fide prima facie dispute14 suffice; or must the applicant show that there is a triable issue, which is the standard generally used for an injunction to restrain winding-up proceedings?15

17.15 The learned judge held that the existence of a bona fide prima facie dispute was enough for the court to grant the injunction sought. In arriving at her decision, the learned judge preferred the approach taken by the earlier High Court decision in BDG v BDH,16 which, she noted, was followed by the Hong Kong Court of First Instance in Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd.17

17.16 The learned judge also took guidance from the two decisions of the Court of Appeal which emphasised the primacy of party autonomy. In Tjong Very Sumito v Antig Investments Pte Ltd,18 the Court of Appeal held that the need to respect party autonomy has been accepted as the cornerstone underlying judicial non-intervention in arbitration. In similar vein, the Court of Appeal in Vinmar Overseas (Singapore) Pte Ltd v PTT International Trading Pte Ltd19 held that, in the context of exclusive jurisdiction clauses, the principle of party autonomy warranted that a court should disregard the merits of the parties' cases when considering whether there was a strong cause to refuse a stay. In doing so, the Court of Appeal in Vinmar departed from previous authorities laid down by the court.

17.17 The learned judge considered that the existence of an arbitration clause displaced the principle that a bankruptcy court should be able to have recourse to the summary judgment standard in order to protect the interest of a meritorious debtor. Where parties have agreed to an arbitration clause, it would be a misuse of judicial facilities for a creditor to proceed with winding-up proceedings knowing that the debt which is its premise is the subject of a dispute which was earlier agreed to be arbitrated, unless there is good reason to allow him to renege upon his contractual bargain. To hold otherwise would encourage parties to bypass the arbitration agreement as a standard tactic by presenting a winding-up application, thereby pressuring the alleged debtor with the draconian threat of liquidation.

17.18 The learned judge noted that in VTB Bank v Anan Group (Singapore) Pte Ltd,20 the High Court considered that Metalform Asia Pte Ltd v Holland Leedon Pte Ltd21 (“Metalform”), which was binding on the High Court, had held that where there was a cross-claim that was to be referred to arbitration, the applicable standard for an injunction restraining the winding-up proceedings was the triable issues standard. The learned judge (correctly in the view of the authors) reasoned that in the Court of Appeal in Metalform did not have to decide on the significance of the arbitration clause because the parties did not argue on the significance of the cross-claim's submission to arbitration with regard to the applicable standard for granting injunctions to restrain the commencement of winding-up proceedings. As such, Metalform did not bind the High Court on the question before the court in BWF.

17.19 Accordingly, the learned judge concluded that the relevant standard was that of a bona fide prima facie dispute and...

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