Mohd Zain bin Abdullah v Chimbusco International Petroleum (Singapore) Pte Ltd and another appeal

• Court: Court of Appeal (Singapore)
• Judge: Sundaresh Menon CJ
• Judgment Date: 23 January 2014
• Neutral Citation: [2014] SGCA 8
• Citation: [2014] SGCA 8
• Docket Number: Civil Appeals Nos 116 and 118 of 2012
• Hearing Date: 14 August 2013
• Plaintiff Counsel: N Sreenivasan SC, Ahmad Khalis and Pravin Raj s/o Shanmugaraj (Straits Law Practice LLC)
• Defendant Counsel: Wendy Tan, Eugene Leong, Charmaine Fu and Tony Tan (Stamford Law Corporation)
• Subject Matter: Insolvency Law,Bankruptcy
• Published date: 17 February 2014

V K Rajah JA (delivering the grounds of decision of the court):

These were two appeals against the decision of the judicial commissioner (“the Judge”) in Chimbusco International Petroleum (Singapore) Pte Ltd v Jalalludin bin Abdullah and other matters [2013] 2 SLR 801 (“the GD”). We dismissed the appeals after hearing submissions from counsel. However, we thought it might be useful if we provided guidance on some of the issues that arose for consideration. We now do so in these grounds.

The facts

The factual matrix has been set out in detail in the GD and as such, we shall set out only such facts as are necessary to understand our decision on the relevant legal issues.

Chimbusco International Petroleum (Singapore) Pte Ltd (“Chimbusco”), a wholly-owned subsidiary of China Marine Bunker (PetroChina) Co Ltd, was in the business of supplying and trading in fuel oil. It supplied bunkers to a company known as Gas Trade (S) Pte Ltd (“Gas Trade”), which in turn was in the business of supplying bunkers to ship owners.

The two companies maintained a running account. As at 1 July 2011, Gas Trade owed Chimbusco US$13,024,322.48. On 15 July 2011, Gas Trade and Chimbusco executed an agreement for the debt to be repaid in minimum monthly instalments of US$700,000, with the latter to refrain from commencing legal proceedings if the arrangement was observed (“the Instalment Agreement”). Seven related companies extended joint and several corporate guarantees for all amounts owing from Gas Trade to Chimbusco from time to time. Three individuals, who were directors of one or more of the seven corporate guarantors, also extended joint and several personal guarantees for debts not exceeding US$4,000,000, plus interest and related costs. These individuals were: Mr Mohd Zain Bin Abdullah (“Zain”), the appellant in Civil Appeal No 116 of 2012 (“CA 116”); Mr Jalalludin Bin Abdullah (“Jalalludin”), the appellant in Civil Appeal No 118 of 2012 (“CA 118”); and Mr Mohammad Bin Abdul Rahman. We shall hereafter refer to the corporate and the personal guarantors collectively as “the Guarantors”.

It is not clear what the formal relationship between the Guarantors and Gas Trade was. However, both Zain and Jalalludin (“the appellants”) represented Gas Trade in its dealings with Chimbusco, and it is likely that Gas Trade and the seven corporate guarantors were related companies, with the appellants as the controlling minds behind them.

On 29 February 2012, the Guarantors received letters of demand from Chimbusco’s solicitors for the payment of US$13,015,342.03 and US$4,202,572.12 respectively. This was followed by statutory demands in March 2012 and insolvency proceedings early in April 2012.

On 26 April 2012, the eve of the first scheduled hearing of the winding-up applications against two of the corporate guarantors, Gas Trade and the Guarantors filed Suit No 347 of 2012 (“Suit 347”) against Chimbusco seeking the rescission of the Instalment Agreement and all the corporate and personal guarantees issued to Chimbusco (“the Guarantees”). Zain filed affidavits opposing the winding-up applications, the contents of which affidavits were adopted by Jalalludin. It was denied in Suit 347 and Zain’s affidavits that the Guarantors were indebted to Chimbusco.

According to Zain, there were discussions in April or May 2011 between Gas Trade and Chimbusco regarding the former’s existing debt. This led to an oral agreement for Chimbusco to incorporate a new company which would operate two barges chartered by Gas Trade (“the Oral Agreement”). Gas Trade would let the new company have the use of the two barges at cost, and the expected profits of US$700,000 per month would be treated as repayment of Gas Trade’s debt. Under this agreement, the parties would discuss and mutually agree on when to commence performing their respective obligations.

However, the head of Chimbusco’s bunker department, Yeo Beng Joo (“Yeo”), subsequently told Gas Trade’s representatives that Chimbusco would only perform its obligations under the Oral Agreement if the Instalment Agreement and the Guarantees were executed. Yeo is alleged to have said that the Guarantees were mere formalities to be produced to Chimbusco’s head office in Beijing, and that the head office would allow Chimbusco to commence performance of the Oral Agreement once this was done. The Instalment Agreement and the Guarantees were allegedly executed on the basis of Yeo’s representations. Chimbusco never performed the Oral Agreement, despite being urged by the appellants to do so.

The appellants alleged that Yeo’s representations were false and had wrongfully induced them to issue the Guarantees to Chimbusco. The appellants raised the same allegations in the bankruptcy proceedings commenced against them and sought the dismissal of those proceedings.

The decision below

The bankruptcy applications against the appellants were first heard before an assistant registrar (“the AR”), who found that the appellants barely met the threshold of showing that there was a substantial dispute of the underlying debt. The AR stayed the applications on condition that each of the appellants furnished US$1m as security.

On appeal, the Judge found that the allegations raised by the appellants were quintessential triable issues incapable of resolution based on affidavit evidence alone, and that Chimbusco had failed to put forward such clear-cut evidence as would have secured summary judgment in a civil suit. However, like the AR, he declined to make unconditional insolvency orders as he found the appellants’ case shadowy. He varied the AR’s order, revising the amount of security to be provided from US$1m per appellant to joint security for the full amount claimed against them, viz, US$4,202,572.12.

The appellants failed to provide the security ordered. The Judge declined to stay the execution of insolvency orders pending appeal and adjudicated them bankrupt.

The appellants’ case

Before us, the appellants sought an unconditional stay of the bankruptcy proceedings pending the resolution of Suit 347, arguing that the Judge was incorrect to find that their case was shadowy. Alternatively, the appellants sought the reduction of the sum to be provided as security. Relying on Abdul Salam Asanaru Pillai (trading as South Kerala Cashew Exporters) v Nomanbhoy & Sons Pte Ltd [2007] 2 SLR(R) 856 (“Abdul Salam Asanaru Pillai”) at [44], the appellants argued that the provision of security was primarily to show “some demonstration of commitment on the part of the defendant to the claimed defence”, and that the amount of security ordered by the Judge was too high.

Zain also filed Summons No 1964 of 2013 (“SUM 1964”) to admit, for the purposes of both CA 116 and CA 118, an affidavit deposed by Yeo after the GD was released. However, that application was withdrawn with leave at the hearing before us.

The relevant principles

The Judge had to rule on how applications for stays of bankruptcy proceedings should be approached by the court. He held that the standard for obtaining a stay or a dismissal of winding-up proceedings set out in Pacific Recreation Pte Ltd v S Y Technology Inc and another appeal [2008] 2 SLR(R) 491 (“Pacific Recreation”) should apply. The applicable standard was no more than that for resisting a summary judgment application, ie, the debtor need only raise triable issues in order to obtain a stay or a dismissal of bankruptcy proceedings.

In our view, the Judge was correct in so ruling. In Pacific Recreation, this court approved the following submissions (at [16] and [17]): 16 The appellants argued that the learned judge had wrongly applied the discretionary principles relevant to the granting of a winding-up order. Case law, they argued, had clearly established that a winding-up petition was not an appropriate means of enforcing a disputed debt, and that it would be an abuse of the process of the court to allow a creditor to wind up a company on the basis of a disputed debt. It was also submitted that a winding-up court was generally not in the best position to adjudicate on the merits of a commercial dispute without a proper ventilation of the evidential disputes through a trial. The appellants further stressed that a winding-up order was often the “death knell” for a company and was a “draconian order” to make. Thus, a court should proceed cautiously in deciding whether to grant a winding-up application.

…

17 We broadly agreed with the principles laid out by the appellants as summarised in the preceding paragraph. However, that is not to say that a company can stave off a winding-up application merely by alleging that there is a substantial and bona fide dispute over the debt claimed by the applicant-creditor. It is up to the court to evaluate whatever evidence the company has raised and come to a conclusion on whether the alleged dispute exists. … It is axiomatic that these concerns are equally applicable to bankruptcy proceedings. In this regard, the Judge’s observation at [42] of the GD – viz, that “it cannot be the case that a creditor or a debtor gains an advantage or suffers a disadvantage on the legal test to be satisfied in addressing the same question of fact simply because of the nature of the proceedings in which that question is raised or based on whether it is a natural person or a company” – was eminently sensible. We also agreed with the Judge that it would be a waste of court resources for an insolvency court not to summarily determine clear-cut issues that were not factually controversial.

We agreed with the Judge that it was correct to extend the analogy of a summary judgment application to the imposition of conditions for granting a stay of bankruptcy proceedings. A bankruptcy court may grant in insolvency proceedings what is the “functional equivalent” of conditional leave to defend in a civil suit. Further, the usual...