Metalform Asia Pte Ltd v Holland Leedon Pte Ltd

JudgeAndrew Ang J
Judgment Date13 February 2007
Neutral Citation[2007] SGCA 6
Docket NumberCivil Appeal No 48 of 2006
Date13 February 2007
Published date07 March 2007
Plaintiff CounselChelva Retnam Rajah SC, Moiz Haider Sithawalla and Lavinia Rajah (Tan Rajah & Cheah)
Citation[2007] SGCA 6
Defendant CounselDavinder Singh SC, Adrian Tan, Valerie Tan, Angie Han and Vanita Jegathesan (Drew & Napier LLC)
CourtCourt of Appeal (Singapore)
Subject MatterCreditor of undisputed debt presenting winding-up petition against debtor company,Whether debtor having bona fide cross-claim on substantial grounds which exceeding undisputed debt,Whether presentation of petition would cause irreparable harm to debtor company's ongoing business,Winding up,Companies,Whether court should grant injunction restraining filing of winding-up petition,Debtor company applying to court for injunction to restrain filing of winding-up petition,Whether creditors having collateral purpose in presenting winding-up petition

13 February 2007

Judgment reserved.

Chan Sek Keong CJ (delivering the judgment of the court):


1 This appeal raises an important issue of practice as to when the court may restrain a creditor of an undisputed debt from presenting a winding-up petition against the debtor company.

2 The appellant, Metalform Asia Pte Ltd (“MA”), owes the respondent, Holland Leedon Pte Ltd (“HL”) two sums of US$16,877,641.93 and S$112,677.17 (collectively, about S$25m and hereinafter collectively referred to as “the undisputed debt”) for steel supplied by HL to MA between July 2004 and June 2005.

3 On 11 November 2005, HL served a statutory demand on MA under s 254(2)(a) of the Companies Act (Cap 50, 1994 Rev Ed) (“the Act”) requiring payment of the undisputed debt by 3 December 2005.

4 On 2 December 2005, MA applied to court for an injunction to restrain HL from presenting a winding-up petition until MA’s claim for about S$34m in damages against HL arising under a sale and purchase agreement dated 13 June 2004 (“the SPA”) had been determined. MA’s claim is based on HL’s alleged breach of certain warranties under the SPA. On being served with the application, HL gave an undertaking not to present a winding-up petition pending the determination of the application.


5 Prior to 2004, HL, then known as Metalform Pte Ltd, was carrying on the business, inter alia, of manufacturing metal covers for disk drives. HL was at all material times controlled by Anthony Ser and George Ser (collectively “the Sers”). Together they own 67% of the shares in HL. The other shareholders are related to the Sers. HL sold its business and assets to MA at the price of about US$267m (or S$470m) on the terms and conditions set out in the SPA. The price was determined largely on the basis of HL’s earnings before interest, tax, depreciation and amortisation (“EBITDA”), multiplied by a factor of seven, ie, EBITDA x 7.

6 MA is wholly-owned by Metalform International Ltd (“MI”), a company incorporated in Mauritius. MI is in turn a wholly-owned subsidiary of MPL(I) Ltd (“MPLI”), also a Mauritian company. MPLI is owned 51% by JPMP MPL Holdings Ltd (“JPMP MPL”, which itself is owned by various funds managed by JP Morgan Partners) and 49% by Leedon Ltd (“Leedon”, which is owned by the Sers). Both JPMP MPL and Leedon are also Mauritian companies. The corporate structure of the group was so designed to maximise tax efficiency. Through the group shareholding structure, the ultimate shareholders of MA are JPMP MPL (51%) and Leedon (49%). MA was at all material times the principal operating company in the group.

7 The purchase of HL’s business and assets by MA was a leveraged buyout (“LBO”). The purchase price and the related transactional costs were raised in the following manner:

(a) US$152m by way of a loan from MI;

(b) US$6m by way of a cash injection from MI; and

(c) US$110m by way of a banking facility under a facilities agreement dated 28 June 2004 with DBS Bank Ltd.

8 The sums from MI referred to in [7](a) and [7](b) above came from a cash injection by MPLI into MI. The sources of MPLI’s funds were JPMP MPL (around US$80m) and Leedon (around US$77m). It is apparent that the Sers sold HL’s business and assets for US$267m and reinvested US$77m of the proceeds of sale in MPLI as a partner of JPMP MPL.

9 Apart from the SPA, there were several other agreements entered into between the parties, including a shareholders’ agreement and service agreements, under which Anthony Ser and George Ser were appointed, respectively, the chairman of the board of directors and chief technical officer of MA. The appointments were terminated by mutual agreement on 3 May 2005, but the Sers remained directors of MA to this date. Under these agreements, the Sers, inter alia, covenanted not to set up a competing business within a specified period after the LBO. The agreements also gave JPMP MPL preferential rights in the event of the liquidation of MPLI.

How the undisputed debt arose

10 The bulk of the undisputed debt was incurred through the purchase of raw materials in the form of steel before and after the completion of the LBO in July 2004. According to Anurag Mathur (“AM”), a director of MA, HL agreed to sell steel to MA at a discount in order to offset the extra US$7m–US$8m that MA had allegedly overpaid for HL’s business under the SPA. This sum arose because the purchase price payable by MA was determined by HL’s EBITDA x 7 for the financial year ending 30 June 2004 and HL recorded higher than normal revenues and earnings in that financial year by arranging for one of its customers to pull greater than normal levels of product shipments in the last week of June 2004. HL’s response to this allegation was that such practice was normal in the industry.

11 Thus, by a letter dated 27 July 2004, HL agreed to sell an initial stock of 5,000mt of steel at a discounted price of US$6.5m to MA, with a discount of almost US$6.5m, which according to AM, was close to the adjustment that had to be made for the excess price paid by MA under the SPA. AM claimed that the parties had also agreed that this stock of 5,000mt of steel would form part of the assets sold by HL to MA under the SPA.

12 HL agreed to sell further stocks of steel to MA at either the prevailing market price or at its historical cost (whichever was lower). The sales were at a discounted price lower than the prevailing market rate as the steel, having been purchased by HL according to certain specifications, could not be sold in the open market but only to MA’s competitors.

13 Although cl 5.7 of the SPA provided that the steel supplied by HL would be paid within 30 days of delivery, AM alleged that there was a clear understanding between MA and the Sers that MA would not have to pay HL for the purchases until its working capital position improved to a level when inventories on hand had been brought down and when the time taken to collect trade receivables from customers had been reduced. This was the reason why HL did not demand payment until May 2005, some ten months after the first delivery was made.

Attempts to settle the undisputed debt

14 Some months before HL served its statutory demand on 11 November 2005, MA had in March 2005 considered various ways to pay the undisputed debt. MA’s projected cash flow then would not have been sufficient to pay the undisputed debt unless MA carried out two financial transactions, viz, the sale and leaseback transaction of MA’s leasehold properties in order to reduce its bank debt by about US$28m–US$30m to US$81m–US$82m and the refinancing of the existing loan (collectively, “the refinancing proposals”). MA had during this period negotiated successfully with its bankers to refinance its loan upon the completion of the sale and leaseback transactions.

15 Sometime in May 2005, MA proposed to repay HL the undisputed debt by instalments up to January 2006. HL rejected this proposal on 11 May 2005 and demanded full payment by 31 May 2005. MA replied the next day with a specific proposal to pay the debt of US$17,412,601.21 in six instalments, beginning from July 2005 to December 2005, contingent upon the completion of the refinancing proposals.

16 MI approved the refinancing proposals at a board meeting held on 12 May 2005. However, on 21 June 2005, Anthony Ser wrote to MI to deny that any such resolution had been approved as he had not been asked to vote on it. By a separate letter sent on the same day, HL also rejected MA’s offer to pay the undisputed debt in six instalments, and counter-proposed that it be paid in four equal instalments of US$4.25m each, and in default of any instalment, the whole of the balance would become payable immediately.

17 On 23 June 2005, JPMP MPL wrote to Leedon to explain the benefits of the refinancing proposals to the business of the Metalform group of companies, and their relevance to MA’s proposal to pay the undisputed debt, viz, there would be a greater cushion in the financial covenants, lower interest rates, reduced debt amortisation pressure, higher capital expenditure allowances, and bigger working capital. In response to HL’s proposal that the debt be paid in four instalments, JPMP MPL also explained that unless the refinancing proposals were effected, MA’s cash flow projections would not even allow MA to pay the undisputed debt in the next six months, much less in the four months that HL had wanted.

18 On the same day, MA also wrote to HL proposing to repay the undisputed debt in six instalments as follows: (a) a first payment of US$2m on or before 1 July 2005; and (b) followed by five monthly payments of US$3.1m each at the end of each calendar month starting from 31 July 2005, up to and including November 2005 (and for the avoidance of doubt the monthly payment on 31 November 2005 would be US$3,114,663.13). MA reiterated that its proposal was contingent on the refinancing proposals being effected. As a gesture of good faith, MA paid US$2m to HL on 24 June 2005.

19 In a written reply on 28 June 2005, HL rejected MA’s offer and demanded payment of the undisputed debt within seven days, failing which it would refer the matter to its solicitors. In the same letter, HL disputed the amount given by MA and stated that it would be taking steps to verify the amount, including certain deductions made by MA for sums which had allegedly been erroneously paid by two customers, viz, Seagate and Maxtor, to HL instead of MA.

20 On 5 July 2005, MA replied to HL’s letter seeking an opportunity to meet to explain MA’s current financial situation and the obstacles MA faced in effecting payment of the undisputed debt. As a further demonstration of its commitment to honour the repayment of the undisputed debt, MA also wished to discuss with HL the possibility of a parent company guarantee extended by a fund directly advised and managed by JP Morgan Partners Asia LDC. An MA directors’ meeting was scheduled for 7 July 2005 to...

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