Mercator & Noordstar NV v Velstra Pte Ltd (in liquidation)

JurisdictionSingapore
JudgeChao Hick Tin JA
Judgment Date23 September 2003
Neutral Citation[2003] SGCA 37
Citation[2003] SGCA 37
Defendant CounselVinodh Coomaraswamy and David Chan (Shook Lin & Bok)
Published date17 December 2003
Plaintiff CounselKoh Kok Wah and Dinesh Dhillon (Wong & Leow LLC)
Date23 September 2003
Docket NumberCivil Appeals Nos 24 and 25
CourtCourt of Appeal (Singapore)
Subject MatterWords and Phrases,Whether unilateral payment amounted to a "transaction" for the purposes of s 98 of the Bankruptcy Act (Cap 20, 2000 Rev Ed),Winding up,"Entered into a transaction",Companies,Whether two companies associated companies for purposes of s 101 of the Bankruptcy Act (Cap 20, 2000 Rev Ed) even if one company did not know it owned majority shareholding in other and did not control other,Civil Procedure,Whether trial would serve any purpose,Whether court should convert originating summons to writ action,Whether transaction at an undervalue for purposes of s 98 of the Bankruptcy Act (Cap 20, 2000 Rev Ed),Whether burden of proving undervalue lay with the liquidator challenging the payment or company receiving payment,Originating processes,Whether phrase in s 98 of the Bankruptcy Act (Cap 20, 2000 Rev Ed) suggests there should be element of mutuality,Whether court should look to subsequent developments in determining whether transaction at an undervalue

Delivered by Chao Hick Tin JA

1 There are two appeals before us. The substantive appeal relates to the question whether a payment made by the respondent, Velstra Pte Ltd (Velstra), to the appellant, Mercator & Noordstar NV (Mercator), should be declared null and void on the ground that it constituted a transaction at an undervalue within the meaning of s 98 of the Bankruptcy Act, read with s 329 of the Companies Act. The other appeal is of a procedural nature and is against the refusal of the court below to convert the present proceeding, which was commenced by originating summons (OS) into a writ action.

The background

2 The appellant, Mercator, is a Belgium insurance company. In early 1999, it was interested in investing in another Belgium company called Lernout & Hanspie Speech Products (“L&H”) which specialised in the development of speech recognition, dictation and translation software. The shares of L&H were listed on the US and European stock markets and at the height of its success, which was in March/April 2000, it had a market capitalisation of some US$9 billion when its shares were traded at US$60 each.

3 Earlier, in March 1999, Mercator met up with the directors of L&H indicating its interest. The directors suggested that Mercator invest in a proposed new company called NV Language Development Fund (“LDF”). Mercator decided to invest US$2 million in LDF and also to extend to it a loan of US$10 million. Following this understanding, on 31 March 1999, LDF was incorporated in Belgium, with Mr Tony Snauwaert (“Snauwaert”) as one of the directors. On the same day, LDF’s capital was increased from 2.5 million BF to 77.76 million BF.

4 With the investment of US$2 million, Mercator acquired all the new shares in LDF which constituted 97% of the shares in LDF. Mercator alleged that the directors of L&H had represented to Mercator that its shareholding in LDF would not exceed 4%. Also on the same day, Mercator entered into an agreement with LDF extending to the latter a loan of US$10 million, with 30 September 1999 as the deadline for repayment.

5 However, notwithstanding that Mercator owned 97% of the shares in LDF, it did not seek to have its own nominee on the board of directors. LDF continued to be managed by Snauwaert. Apparently, Mercator did not know that by its investment it had become the largest single shareholder.

6 On 24 June 1999, LDF incorporated a wholly owned subsidiary in Singapore called Velstra Pte Ltd (“Velstra”). Snauwaert was also a director of Velstra. In turn, Velstra incorporated nine new subsidiaries, three of which were in Singapore. All nine were apparently shell companies and did not carry out any business.

7 In late 1999, a Lebanese of Armenian descent by the name of Khatchadourian showed interest in investing in L&H, in particular in the development of speech and language software on the Armenian language. At a meeting he had with the directors of L&H, they indicated the need for US$30 million to finance L&H’s expansion in the Middle East and Asia. Eventually, it was agreed that Khatchadourian would give a loan of US$30 million to L&H and, in addition, a further loan of US$6 million specifically for the development of the software for the Armenian language.

8 On 24 December 1999, a loan agreement for US$36 million was executed between Katchadourian and Velstra (signed by Snauwaert) instead of L&H, and under the terms of this agreement the loan was to be repaid by 27 December 2001, with interest at 8%. However, the agreement did not specifically state that US$6 million of that loan was for the development of software for the Armenian language.

9 On 5 January 2000, Khatchadourian transferred the sum of US$36 million into Velstra’s account in Singapore. As soon as the sum was received, Snauwaert instructed the bank to pay out the entire sum to four parties, one of whom was Mercator for the sum of US$5.08 million. This is the sum which the liquidators of Velstra now seek to recover from Mercator, following the collapse of L&H, with charges of fraud being brought by the Belgium authorities against the directors of L&H, including Snauwaert.

10 In accordance with the loan agreement, Velstra was to repay Khatchadourian the total debt of US$36 million by 27 December 2001. Velstra could not do so. In the meantime, neither was there any effort made by L&H or Velstra to develop the software for the Armenian language. Following default of appearance, Khatchadourian obtained judgment in the High Court against Velstra for the sum owing. This judgment, not having been satisfied, eventually led to the winding up of Velstra on 12 April 2002.

Relevant statutory provisions

11 In seeking to recover the sum of US$ 5.08 million, the liquidators of Velstra relied upon s 329 of the Companies Act which incorporated by reference the provisions of s 98 of the Bankruptcy Act. The relevant portion of s 329(1) reads:-

“Subject to this Act and such modifications as may be prescribed, any … payment … which, had it been made … by … an individual, would in his bankruptcy be void or voidable under s 98 … of the Bankruptcy Act 1995 … shall in the event of the company being wound up be void or voidable in like manner.”

12 Section 98(1) of the Bankruptcy Act provides that, subject to this section and ss 100 and 102 of the same Act –

“where an individual is adjudged bankrupt and he has at the relevant time (as defined in s 100) entered into a transaction with any person at an undervalue,”

the Official Assignee may apply to court for an order to restore the respective parties’ position as if the transaction had not been entered into.

13 For this purpose, the term “relevant period”, in so far as it concerns a transaction allegedly at an undervalue, is the period of five years prior to the presentation of the winding up proceedings (see s 100(1)(a) of the Bankruptcy Act). But in order that the transaction could be so declared void, s 100(2) requires that it must be shown that the company under liquidation,

“(a) is insolvent at that time; or

(b) becomes insolvent in consequence of the

transaction …”

14 Ordinarily the burden of proving such insolvency rests with the party who makes that allegation. However, s 100(3) provides for a presumption of such insolvency in a situation where, as between the parties to the transaction, one is an associate of the other.

Associated companies

15 Counsel for the appellant argued that Mercator and Velstra were not associated companies because –

(i) there was no common person in control of both companies; and

(ii) LDF did not, in fact, control Velstra as Snauwaert, the director of Velstra, acted on the instructions of L&H. Counsel also pointed out that Mercator did not even know the existence of Velstra.

16 Section 101 of the Bankruptcy Act lays down the criteria upon which a person would be considered to be an associate of another person. Furthermore, regulation 3 of the Companies (Application of Bankruptcy Act Provisions) Regulations (“CABAR”) provides that ss 98-103 of the Bankruptcy Act shall be read subject to, inter alia, “such textual and other modification as may be necessary” for their application to a company being wound up.

17 Section 101(6) provides that -

“A company is an associate of an individual if that individual has control of it or if that individual and persons who are his associates together have control of it.”

18 Section 101(9)(b) provides that for the purposes of the section, an individual shall be taken to have control of a company if –

he is entitled to exercise, or control the exercise of, one-third or more of the voting power at any general meeting of the company or of another company which has control of it. (Emphasis added).

19 It seems clear to us that, where it is in relation to two companies, the reference to “individual” in s 101(6) & (9) must be read to refer to “company”. This is a necessary modification contemplated by regulation 3: see Show Theatres Pte Ltd (in liquidation) v Shaw Theatres Pte Ltd & Anor [2002] 4 SLR 145. Reading subs (6) with subs (9)(b) it is also clear that Mercator had control of Velstra because Mercator owned 97% of the shares of LDF, which in turn owned Velstra wholly. The fact that Mercator did not know it owned 97% of the shares of LDF is beside the point. Neither is it material that LDF had always acted in accordance with the instructions of L&H. The fact of the matter is that Mercator did own 97% of the shares of LDF and could have exercised control. The fact that it did not know that it owned 97% of the shares is not really relevant. That is not the test. Neither is it relevant that Mercator left everything to the directors of LDF. The critical fact is that it owned 97% of the shares in LDF and this factor is decisive.

20 As regards Mercator’s argument that there must be a common person in charge of both Mercator and Velstra before the two companies could be regarded as associated, relying in relation thereto on Show Theatres Pte Ltd, we must point out that that case merely illustrates a situation where two companies were considered to be associated. But it does not mean that another two companies which do not have a common person in charge may not be regarded as associated provided that they satisfy the other criteria set out in s 101, read with the regulations in CABAR. For the reasons above, we hold that Mercator and Velstra were associated companies and the presumption that Velstra was insolvent would apply.

Essential elements of s 98

21 Thus, to bring a case within s 98, the following elements must be satisfied. First, there must have been a transaction. Second, the transaction must have taken place within the relevant period. Third, it must be shown that the transaction was at an undervalue. Fourth, that the company under liquidation was insolvent at the time of the transaction. But in a case where the two companies are associated, like the present, there is a presumption of insolvency and...

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5 books & journal articles
  • Insolvency Law
    • Singapore
    • Singapore Academy of Law Annual Review No. 2004, December 2004
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    • Singapore
    • Singapore Academy of Law Annual Review No. 2005, December 2005
    • 1 December 2005
    ...third Court of Appeal decision on transactions involving Velstra (the other two decisions being Mercator & Noordstar NV v Velstra Pte Ltd[2003] 4 SLR 667 and Velstra Pte Ltd v Dexia Bank NV[2005] 1 SLR 154). Azero Investments SA (‘Azero’) was interested in investing in the Lernout & Hauspie......
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