Liquidator of Leong Seng Hin Piling Pte Ltd v Chan Ah Lek and Others

• Jurisdiction: Singapore
• Judge: Belinda Ang Saw Ean J
• Judgment Date: 19 January 2007
• Neutral Citation: [2007] SGHC 9
• Docket Number: Suit No 680 of 2005
• Date: 19 January 2007
• Year: 2007
• Published date: 23 January 2007
• Plaintiff Counsel: Gan Kam Yuin (Bih Li & Lee)
• Citation: [2007] SGHC 9
• Defendant Counsel: Spencer Gwee and Lee Kwok Weng (Lee Kwok Weng & Co)
• Court: High Court (Singapore)
• Subject Matter: Section 329(1) Companies Act (Cap 50, 1994 Rev Ed),Winding up,Fraudulent trading,Whether defendants knowingly parties to carrying on of business of company with intent to defraud creditors,Insolvency Law,Avoidance of transactions,Whether second defendant may set off such cash payments from debt owed to him by company,Companies,Whether cash payments made by company in favour of second defendant amounting to undue preferences,Whether defendants continuing to receive supplies knowing that company could not pay for them,Undue preferences,Section 340(1) Companies Act (Cap 50, 1994 Rev Ed)

19 January 2007

Belinda Ang Saw Ean J:

1 The plaintiff is the liquidator of Leong Seng Hin Piling Pte Ltd (“LSH”), a company which was wound up on 29 April 2005 pursuant to a winding up petition presented by Group Industries Pte Ltd (“GIPL”) on the ground that LSH was insolvent as it was unable to pay a judgment debt. In this action, the plaintiff as liquidator of LSH sought a declaration under s 340(1) of the Companies Act (Cap 50, 1994 Rev Ed) that the three defendants, who were former directors of LSH, were knowingly a party to the carrying on of the business of LSH with intent to defraud creditors. As such, the defendants were liable to make such contributions to the assets of the company as the court thought proper. The second claim was against the second defendant and it was to recover the sum of $430,066.34, being the amount of money paid out in preference of the second defendant. For this second claim, the plaintiff relied on s 329(1) of the Companies Act read with ss 98 to 100 of the Bankruptcy Act (Cap 20, 2000 Rev Ed).

2 On 4 December 2006, I delivered a relatively lengthy oral judgment covering the main grounds of my decision for dismissing the plaintiff’s claim against the defendants under s 340(1) of the Companies Act, but allowing the claim against the second defendant for undue preference in respect of a lesser sum of $190,835.21. On the question of costs, the plaintiff was ordered to pay costs of the action to the first and third defendants. As against the second defendant, the plaintiff was awarded 50% of the costs of the action. The plaintiff has appealed against my decision. I now set out in full the reasons for my decision.

3 The founding two directors of the company were Chan Ah Lay (“the third defendant”) and his son, Tony Chan Soon Chew (“the second defendant”). Madam Lim, the sole proprietor of Soon Guan Piling and Engineering Construction (“Soon Guan”) was once a director of LSH; but she had no management responsibilities and eventually left the company. The third defendant was appointed the managing director of the company soon after LSH’s incorporation and, due to his ill health, relinquished this position around 27 July 2004. The second defendant thereupon immediately succeeded the third defendant as the managing director of LSH. Chan Ah Lek (“the first defendant”) was also named as director at around the same time (ie 26/27 July 2004).

4 The business relationship between GIPL and LSH went as far back as 2000 when GIPL agreed to the manufacture and supply of pre-cast reinforced concrete piles (“RC piles”) to LSH. LSH did not pay GIPL for any of the RC piles supplied between April and July 2004 even though it had paid a total of $909,492.61 to its other creditors during the period spanning 21 April 2004 to April 2005. No payment was made even after judgment was obtained against LSH on 28 February 2005. The last payment, which was to settle GIPL’s March 2004 invoice, was on 25 June 2004. It was this failure to make good the judgment that eventually resulted in the winding up of LSH by GIPL.

Fraudulent trading under s 340(1) of the Companies Act

5 The plaintiff’s pleaded case was that the defendants were knowingly a party to the carrying on of the business of the company with intent to defraud creditors of the company or for fraudulent purposes. Despite the generalisation, the only creditor in relation to whom the defendants could be said to have had an intention to defraud was GIPL and the only relevant intention in relation to GIPL was the supplies collected between 3 April and 10 July 2004. It was argued that the defendants had caused LSH to continue to order RC piles from GIPL even though they were aware that the company was indisputably insolvent and there was no reasonable prospect that the company would be able to pay for them when payment was due. It was averred in paragraph 8 of the Statement of Claim that:

For upwards of a year before the winding up of [LSH], the defendants regularly caused the Company to purchase goods on credit without any reasonable prospect of being able to pay for them. Very many of these goods were not paid for at the date of the winding up. In particular, at this time, the Liquidator has identified a Judgment entered against the Company for $330,614.70, interest thereon at 6% per annum from 1 September 2004 to 28 February 2005,amounting to $9,836.92 and costs of $12,000 in Suit No 784 of 2004/Q by [GIPL] on 28 February 2005 arising from the sale and supply of goods by [GIPL] to the Company over the period 2004.

6 According to the liquidator, Mr Don Ho Mun-Tuke, based on the balance sheet test of insolvency, LSH was already insolvent since 2001 and the company continued to be insolvent until it was wound up. This balance sheet insolvency was evident from (a) the audited accounts for the financial year ended 31 December 2002 and financial year ended 31 December 2003 respectively; (b) the company’s management accounts, balance sheet and profit and loss account as at 31 December 2004 and (c) a comparison table of the company’s audited accounts for the period from 31 December 2001 to 31 December 2004. It was apparent from these accounts that by 31 December 2003, the capital of the company was depleted. As at the same date, the total trade creditors amounted to $392,825.00 and the trade debtors was only $38,512.51. It was argued that any reasonable person looking at the accounts for the financial year ended 31 December 2003 (“the 2003 accounts”) would have no doubt that the company was not a going concern. The auditor’s report to shareholders dated 15 June 2004 on the 2003 accounts was issued with a negative qualification in the following terms:

... the company’s current liabilities exceeded its current assets by $664,249 and its total liabilities exceeded its total assets by $255,946. These factors raised doubt that the company will be able to continue as a going concern.

A similar negative qualification was given by the auditors in their report for the accounts for the financial year ended 31 December 2002 (“the 2002 accounts”).

7 Counsel for the plaintiff, Ms Gan Kam Yuin, submitted that the defendants’ conduct in relation to the unpaid supplies, which went beyond the bounds of ordinary decency, was objectively speaking plainly dishonest. She urged that common decency dictated that the defendants either stop collecting supplies from GIPL between April 2004 and July 2004 or pay GIPL for the undisputed portion of the invoices. Elaborating she explained that even though the price increase of the relevant supplies was being disputed by LSH who claimed that there was an agreement to hold prices at current level, the defendants could have but did not pay the undisputed portion of the invoices. Alternatively, they ought to have returned the unused RC piles to GIPL. The defendants’ behaviour deviated from the standard of an ordinary decent person thereby giving rise to an inference of dishonesty on the part of the defendants. Ms Gan relied on Rahj Kamal bin Abdullah v PP [1998] 1 SLR 447 (“Rahj Kamal”) at [30] for the proposition that positive evidence of a dishonest intention was not needed. Dishonesty could be inferred from the surrounding circumstances and from the subsequent conduct of the defendants.

8 The defendants refuted the serious claim of fraudulent trading brought under s 340(1) of the Companies Act. Their counter argument was that it had a dispute with GIPL over the price of the RC piles supplied between April and July 2004. It was not a case of the company’s inability to pay GIPL. In support, the defendants pointed out that, save for the disputed GIPL invoices, all third party creditors were paid. Moreover, LSH stopped ordering RC piles from GIPL after the dispute arose and had since 9 July 2004 obtained supplies from other sources such as Power Precast Concrete Pte Ltd, Eastern Union Trading and Sawmill and ECI Corporation Pte Ltd. The third defendant explained that at the end of the day, the company, having lost the case on the disputed invoices to GIPL (ie Suit No 784 of 2004/Q), was faced with a sizeable judgment with which the company and its owners did not have the wherewithal to discharge. The failure to satisfy the judgment sum led to the winding up of the company.

9 Furthermore, it was denied that the company was insolvent at the time the RC piles were supplied and collected by the defendants. The auditors of the company did not qualify the accounts as such. The accounts were drawn up on a going concern basis on the assumption of continued financial support of the directors. In other words, the company was able to continue trading legitimately with continued financial support from the source indicated. The continual financial support from the directors was borne out by the evidence. If anything, LSH was insolvent on 28 February 2005, being the date GIPL entered judgment against the company in Suit No 784 of 2004/Q. The rationale was that the debt to GIPL in respect of the RC piles would have only crystallised on 28 February 2005. Yin Kum Choi (“Yin”), an accountant who testified as the defendants’ expert, accepted that based on the balance sheet insolvency test the company was insolvent on paper from 2001, but he opined that, having regard to the circumstances of this case, balance sheet insolvency as a test was inappropriate. Yin was of the opinion that the company had the ability to pay its debts as and when they fell due given its resources to pay debts from the company’s bank overdraft facility and from directors’ financial support in the form of loans. By this, Yin meant that there was no risk of cash flow insolvency (ie inability to pay debts as they fall due) until 28 February 2005.

10 In any case, counsel for the defendants, Mr Spencer Gwee, argued that even if it was accepted that the company was insolvent, the non-payment of GIPL’s invoices and subsequently the judgment sum did not constitute a breach...