Chee Yoh Chuang and Another (as Liquidators of Progen Engineering Pte Ltd (In Liquidation)) v Progen Holdings Ltd

• Court: Court of Appeal (Singapore)
• Judge: Chan Sek Keong CJ
• Judgment Date: 31 August 2010
• Neutral Citation: [2010] SGCA 31
• Citation: [2010] SGCA 31
• Defendant Counsel: Philip Fong and Shazana Anuar (Harry Elias Partnership LLP)
• Published date: 14 September 2010
• Plaintiff Counsel: Lee Eng Beng SC, Nigel Pereira and Jonathan Lee (Rajah & Tann LLP)
• Hearing Date: 26 April 2010
• Date: 31 August 2010
• Docket Number: Civil Appeal No 165 of 2009
• Subject Matter: Insolvency Law,Avoidance of transactions,unfair preferences

V K Rajah JA (delivering the judgment of the court): Introduction

Progen Holdings Ltd (“the respondent”), a company listed on the Singapore Stock Exchange, is the sole shareholder and holding company of Progen Engineering Pte Ltd (“PEPL”). A winding-up application was filed against PEPL on 22 January 2007 by a creditor, Chua Aik Kia trading as Uni-Sanitary Electrical Construction (“Uni-Sanitary”). As a result, an order to wind up PEPL was made on 16 February 2007. Chee Yoh Chuang and Lim Lee Meng were then appointed as liquidators of PEPL (“the liquidators”).

On 6 November 2008, the liquidators made an application to court to order the respondent to repay substantial amounts of monies paid by PEPL to it. These monies were alleged to be unfair preferences under s 99(2) of the Bankruptcy Act (Cap 20, 2000 Rev Ed) (‘the Bankruptcy Act’) read with s 329(1) of the Companies Act (Cap 50, 2006 Rev Ed) (‘the Companies Act’). A High Court judge (“the Judge”) dismissed this application and the liquidators now appeal against this decision.

This appeal raises interesting issues about how the law ought to balance the rights of creditors with the company directors’ desire to keep a company afloat when the company has financial difficulties. Difficulties often arise when an insolvent company seeks to make payments to certain creditors at the expense of others. Ordinarily, commercially sensible transactions made with the objective of creating or extending a lifeline to a company suffering financial difficulty should not be questioned. A court ought not to be too astute in taking directors to task when they appear to have been attempting in good faith to facilitate the preservation or rehabilitation of a company, and where they had reasonable commercial grounds for believing that the transaction would benefit the company. With that said, we must caution that where it appears that related parties have benefitted from priority payments, the law would usually view these transactions with a good measure of scepticism. This is particularly so if the interests of unrelated creditors, with claims standing on the same footing, are left in the cold. In respect of these kinds of transactions, the burden of proof would be placed on the related party for it to show that there had been no undue preference. Having sketched these broad parameters bounding the law on undue preferences, we now set out the salient facts before analysing the Judge’s grounds and giving our decision.

Factual Background

The Progen Group (“the Group”) comprises the respondent and a stable of ten subsidiaries, including PEPL and Progen Pte Ltd (“PPL”). The Group is in the business of supplying, installing, trading, maintaining and servicing air-conditioning and ventilation systems. Mr Lee Ee @ Lee Eng (“Lee Ee”) is the chairman and founder of the Group¹, and is the managing director of the respondent. In addition, Lee Ee and his wife, Koh Moi Huang, (“Koh”) together owned the largest block of shares in the respondent² amounting to 29.24% of the issued shares during the material period³. Lee Ee and Koh⁴ were, it ought to be noted, directors of PEPL at the material time. It also bears mention that there were three common directors of PEPL and the respondent at the relevant time, namely, Lee Ee, Tan Eng Liang and Ch’ng Jit Koon. Undoubtedly, Lee Ee is the key figure in the Group. Besides his family’s substantial shareholdings in the respondent, it is noteworthy that he was the only director of either company to affirm affidavits in these proceedings and in an earlier application for court sanction for the capital reduction of the respondent see below at [16].

In all, after the liquidators completed their investigations into PEPL’s affairs, it was alleged that ten transactions between PEPL and the respondent were unfair preferences. These transactions can be summarised (in chronological order) as follows:

	Date	Amount(S$)	Type of Transaction
1st Transaction	31.01.2005	92,994.50	Salaries, etc
2nd Transaction	21.02.2005	50,000.00	Purchases of iron ore
3rd Transaction	04.02.2005	10,987,960.85	Capital distribution and Special Dividend to Respondent’s shareholders
4th Transaction	28.02.2005	57,837.00	Salaries, etc
5th Transaction	04.03.2005	55,000.00	Purchases of iron ore
6th Transaction	31.03.2005	48,956.75	Salaries, etc
7th Transaction	30.04.2005	48,607.00	Salaries, etc
8th Transaction	31.05.2005	48,617.62	Salaries, etc
9th Transaction	30.06.2005	50,131.29	Salaries, etc
10th Transaction	30.06.2005	7,538,243.15	Set-off
Total amount transacted	-	18,978,348.16	-

The 3rd transaction involved the largest sum and obviously requires the greatest scrutiny. This particular transaction also gives an acute insight as to how the common directors typically handled inter-company transactions. We will therefore examine the 3rd transaction before the other transactions (“the other transactions”). In addition to the ten transactions above, PEPL made several payments amounting to $3,528,040 to other related companies within the Group between 23 February 2005 and 22 January 2007.⁵ These, however, are not being questioned in these proceedings.

The 3rd transaction

The 3rd transaction involved the transfer of $10,987,960.85 from PEPL to the respondent on 4 February 2005. The respondent maintains in this appeal that the 3rd transaction involved the repayment of an ordinary loan given by the respondent to PEPL. It asserts that these monies came from the sale of a property at 12 Woodlands Loop (”Progen Building”) on 29 July 2004 for a sum of $24.9m.⁶ Progen Building, however, was consistently reported as a fixed asset in PPL’s audited financial statements for the financial years.⁷ There is absolutely no documentary evidence of Progen Building ever being declared as an asset of the respondent. Despite this dearth of evidence, the respondent adamantly maintained during the trial proceedings that Progen Building was always held on trust by PPL for it, and the subsequent sale proceeds were trust monies belonging to it. This untenable contention, however, was not canvassed on appeal.

The sale proceeds of the Progen Building were eventually placed in PPL’s fixed deposit account with United Overseas Bank Limited (“UOB”) on a monthly basis until 4 December 2004. Before each renewal, PPL withdrew a small part of the funds. The aggregate sum in the account on final maturity was $23,342,695.12.⁸ Immediately after maturity, a sum of $19m was transferred from PPL’s UOB fixed deposit account to PEPL’s fixed deposit account with Malayan Banking Berhad (”MBB”) for two months.⁹ Initially, to persuade the Judge that the respondent had no intention of making a loan to PEPL, the respondent claimed that this transfer was merely an interim commercial decision to secure higher interest returns. However, we note that no satisfactory evidence to substantiate this was ever adduced.

The Group had at this point of time two available internal sources of funds: a sum of $19m from the sale proceeds of Progen Building kept in PPL’s UOB fixed deposit account; and a sum of $300,000 from the sale of the respondent’s shares in Wee Poh Holdings.¹⁰

From this, $19.3m was transferred to PEPL by way of two cheques on 4 December 2004: (a) a cheque drawn by PPL from its UOB account for $19m; and (b) a cheque drawn by the respondent from its UOB account for $300,000.

The purported reasons for the transfer of this sum of $19.3m (captured in two contemporaneous debit notes dated 31 December 2004 and issued by PEPL) were briefly recorded as follows: a sum of $300,000 recorded as a “transfer of funds to PEPL MBB fixed deposit account” and a sum of $15,750,000 recorded as an “advance from [the respondent] to PEPL”, both were recorded on the same Debit Note: PHL/DN/167 ¹¹ [emphasis in bold italics added]; and a sum of $3.25m that was recorded as an advance by PPL to PEPL in Debit Note PPL/DN/863.¹² (This sum was in fact a repayment by PPL to PEPL of monies previously advanced to PPL. This is not the subject of the present appeal.)

Having briefly set out the genesis of the “loan” given by the respondent to PEPL, we now examine the reasons given by the respondent to justify the 3rd transaction, that is, the repayment of the “loan”.

Alleged commercial reasons for the 3rd transaction

The respondent claims that the transaction was motivated by proper commercial considerations. Specifically, the transfer of $10,987,960.85 from PEPL to the respondent on 4 February 2005 was meant to pay for the respondent’s Capital Distribution and Special Dividend payout. In support of this, the respondent referred to an earlier SGX MASNET announcement dated 26 August 2004 where it had stated that there would be a special dividend payment of $4m and capital distribution of $11m to the respondent’s shareholders.¹³ Shareholders’ approval for this was obtained on 24 November 2004 at an Extraordinary General Meeting and Court approval was obtained on 10 January 2005.

However, in justifying the payment of the Capital Distribution and Special Dividend, the respondent has inadvertently drawn attention to several discrepancies in the processes it employed to secure sanction from the court. It appears from the relevant court minutes and affidavits on record that the respondent did not inform the Court about PEPL’s dire financial position (PEPL’s Balance sheet as at 31 December 2004 showed that it was insolvent). On the contrary, the respondent apparently misstated the position to the Court by not fully disclosing the material facts below.

On 26 November 2004, Winter Engineering (S) Pte Ltd (“Winter Engineering”) obtained an award against PEPL in the sum of $3.6m inclusive of costs...