Metalform Asia Pte Ltd v Holland Leedon Pte Ltd

• Jurisdiction: Singapore
• Judge: Woo Bih Li J
• Judgment Date: 05 May 2006
• Neutral Citation: [2006] SGHC 74
• Docket Number: Originating Summons No 1996 of
• Date: 05 May 2006
• Published date: 05 May 2006
• Year: 2006
• Plaintiff Counsel: CR Rajah SC, Chew Kei-Jin, Moiz Haider Sithawalla and Lavinia Rajah (Tan Rajah & Cheah)
• Citation: [2006] SGHC 74
• Defendant Counsel: Steven Chong SC, Lee Eng Beng and Low Poh Ling (Rajah & Tann)
• Court: High Court (Singapore)
• Subject Matter: Plaintiff applying for injunction to prevent presentation of winding-up petition by defendant pending determination of plaintiff's counterclaim against defendant,Injunctions,Applicable principles for grant of injunction,Restraint of proceedings,Purposes for grant

5 May 2006

Woo Bih Li J:

1 The plaintiff, Metalform Asia Pte Ltd (“MA”), had purchased the business of the defendant, Holland Leedon Pte Ltd (“HL”), pursuant to a sale and purchase agreement dated 13 June 2004 (“the SPA”). HL was in the business of manufacturing and selling covers for computer disk drives and had sold its business to MA for US$267m. The price was based largely on earnings before interest, tax, depreciation and amortisation (“EBITDA”) multiplied by 7.

2 HL had also supplied steel to MA between July 2004 and June 2005. The undisputed amounts owing by MA to HL for the supply are US$16,877,641.93 and $112,667.17 (collectively referred to as “the undisputed debt”).

3 In this originating summons, MA was seeking an injunction to restrain HL from presenting a winding-up petition based on the undisputed debt until the determination of MA’s claims against HL for breaches of warranties given by HL under the SPA.

4 Cases like Re Sanpete Builders (S) Pte Ltd [1989] SLR 164 (“Sanpete”) and In re Bayoil SA [1999] 1 WLR 147 show that a court may restrain the filing of a winding-up petition or decline to make an order on a winding-up petition if the debtor has a bona fide cross-claim based on substantial grounds. This general proposition was not disputed by Mr Steven Chong SC, counsel for HL. Sanpete also makes it clear that the cross-claim must be for a sum equal to or exceeding an undisputed debt.

5 MA contended that the quantum of its claims under the SPA came up to the sum of $34,472,740. I will refer to MA’s claims collectively as “the counterclaim”. MA’s position was that the counterclaim was bona fide and based on substantial grounds and that it exceeded the quantum of the undisputed debt.

6 MA relied on two other grounds to support its application:

(a) that HL had a collateral motive in threatening to present a winding-up petition, and

(b) the presentation of such a petition would cause irreparable harm to MA which has an ongoing business.

7 HL disputed that the counterclaim was bona fide and based on substantial grounds. More significantly, Mr Chong submitted that under the terms of the SPA, Allen & Gledhill was holding $25m in an escrow account (“the escrow amount”) to meet any claim under the warranties. Once the escrow amount was taken into account, it was obvious that the quantum of the counterclaim, which was rounded up to $35m for the purpose of argument, fell far short of the quantum of the undisputed debt. For the purpose of argument, the parties proceeded on the basis that the undisputed debt amounted to $25m. Therefore, the aggregate of the escrow amount and the undisputed debt was $50m and exceeded the counterclaim by $15m.

8 Mr C R Rajah SC, counsel for MA, did not dispute the above scenario. However, upon inquiry by me, he said that MA would agree to the release of $15m from the escrow account so that the aggregate of the balance of $10m and the undisputed debt of $25m would be equal to the counterclaim of $35m. Mr Rajah also submitted that notwithstanding the escrow amount, MA was still standing in the position of a creditor vis-à-vis HL in view of the counterclaim.

9 However, Mr Chong objected to the suggestion to release $15m from the escrow account. He stressed that there was prejudice to HL in such an approach. Mr Chong explained that as matters stood, if the counterclaim was not successful, HL would be assured of receiving the return of the $25m from the escrow account but not payment of the $25m under the undisputed debt because MA’s financial position was weak. Mr Chong also stressed that the parties had agreed that MA would look to the escrow amount for any claim under the warranties. He sought payment of $15m from MA before HL would consider withholding a winding-up petition pending the outcome of the counterclaim.

10 Mr Chong also disputed that there was a collateral motive by HL in its intention to present a winding-up petition based on the undisputed debt.

11 He further submitted that there was prejudice to HL if the injunction sought was granted because the counterclaim was pursued in arbitration proceedings and it was not likely that such proceedings would be concluded in 2006. HL was intending to challenge the validity of payments made by MA to its holding company, being partial repayments of a loan, from September 2004 to March 2006, amounting to about US$10m. The basis of the intended challenge was that such payments amounted to an unfair preference. Payments which constitute an unfair preference may be set aside under s 99 of the Bankruptcy Act (Cap 20, 2000 Rev Ed) read with s 329 of the Companies Act (Cap 50, 1994 Rev Ed) provided the commencement of winding up is initiated no later than two years after the payments. Therefore, if HL was allowed to file its winding-up petition only after the arbitration was concluded, HL (or the liquidator) would not be able to challenge some of the payments made to the holding company.

12 I was of the view that it was not open to MA to rewrite the SPA. MA had agreed to look to the escrow amount to meet any claim under the warranties. In so far as the escrow amount was insufficient to meet the counterclaim, MA could look elsewhere but only to the extent of the difference. While it was true that the escrow amount was for MA’s benefit, I was of the view that MA could not unilaterally vary the SPA and effectively seek to substitute the security it had for the counterclaim. This reason alone was sufficient for me to dismiss MA’s application for the injunction.

13 However, as much time was also spent on the issue whether the counterclaim was bona...