S Y Technology Inc v Pacific Recreation Pte Ltd

• Jurisdiction: Singapore
• Judge: Judith Prakash J
• Judgment Date: 21 March 2007
• Neutral Citation: [2007] SGHC 39
• Docket Number: Company Winding Up No 68 of 2006
• Date: 21 March 2007
• Year: 2007
• Published date: 28 March 2007
• Plaintiff Counsel: Foo Maw Shen and Ong Wei Chin (Yeo Wee Kiong Law Corporation)
• Citation: [2007] SGHC 39
• Defendant Counsel: Joseph Yeo and Nigel Pereira (KhattarWong)
• Court: High Court (Singapore)
• Subject Matter: Credit and Security,Conflict of Laws,Security for financial assistance given by way of letter of indemnity and deed of indemnity executed under seal,Whether deed legally enforceable,Deed not specifying governing law,Guarantees and indemnities,Choice of law,Applicable principles for determining governing law of deed,Contract,Difference between indemnity and guarantee

21 March 2007

Judith Prakash J

1 On 7 November 2006, after this originating summons was heard, I made an order that the defendant, Pacific Recreation Pte Ltd (“PRPL”), be wound up. Immediately after that, I made an order that the defendant in CWU 69/2006, Pacific Association Pte Ltd (“PAPL”), also be wound up. Both PRPL and PAPL, whom I shall hereafter sometimes refer to as “the defendants”, have appealed against the orders that I made. These grounds of decision contain my reasons for making those orders in respect of both the defendants, which were sister companies. The grounds of the two petitions presented against the defendants and my reasons for winding up both of them were identical. These grounds will therefore serve as the grounds of my decision in CWU 69/2006 as well.

Background

2 The plaintiff in both proceedings is S Y Technology Inc, a company incorporated in the United States of America. One Mr John Shih is a director and the sole shareholder of the plaintiff and he is the person who made the affidavits supporting the applications to wind up the defendants.

3 One Mr Lee Chong Ming who currently resides in Canada is the managing director of both the defendants. He is the person who set up first, PAPL, then a company called Shanghai Pacific (Singapore) Pte Ltd which later changed its name to Laien Holdings Pte Ltd (“Laien”), and, lastly, PRPL. When Laien was first incorporated, its shares were held by PAPL, PRPL and Mr Lee himself. Subsequently, 20% of the shares was transferred to 3 unrelated parties.

4 Laien is the parent company of Shanghai Pacific Club Co Ltd (“Shanghai Pacific”), a company incorporated in the People’s Republic of China. Shanghai Pacific is involved in the development of a club in Shanghai (“the project”). Being a Chinese company, Shanghai Pacific acts through its legal representative who has the authority to bind Shanghai Pacific in any transaction by affixing that company’s seal to the relevant documents. In this case, the legal representative is Mr Lee.

5 Sometime prior to January 2003, Mr Lee was introduced to the plaintiff by one Mr Wellington Yu, a director of one of Laien’s shareholders, who knew that Shanghai Pacific required additional financing in order to complete the project. There were negotiations between Mr Shih and Mr Lee and the plaintiff thereafter agreed to provide the required financial assistance. The terms of the assistance were contained in a contract executed between the plaintiff, Shanghai Pacific and Mr Lee dated 21 January 2003 (“the 2003 contract”). Subsequently, five supplementary agreements between the same parties were made between September 2003 and June 2004. Security for the assistance was given by way of, inter alia, a letter of indemnity from Mr Lee signed in February 2003 and a deed of indemnity (“the Deed”) executed under seal by each of the defendants and Mr Lee in favour of the plaintiff and dated 22 September 2003.

6 By the terms of the 2003 contract, the plaintiff agreed to procure the issue of standby letters of credit having a total value of US$6m as security for a loan to be extended to Shanghai Pacific by the Industrial and Commercial Bank of China (“ICBC Shanghai”) for the purpose of completing the project. It should be noted here that by a supplemental agreement made in September 2003, the original agreement in the 2003 contract to provide US$6m by way of standby letters of credit had been varied to allow for that amount to be provided instead by way of two standby letters of credit (in the respective sums of US$4m and US$1m) and a cash loan of US$1m paid into an escrow account. As security for the letters of credit, the defendants and Mr Lee agreed to pledge their shares in Laien to the plaintiff. Clause 7 of the 2003 contract provided that any dispute arising from the contract should be resolved by the parties through consultation but that if consultation failed, the dispute should be referred to the China International Economic and Trade Arbitration Commission (“CIETAC”) for resolution through arbitration.

7 Pursuant to the agreement to pledge shares, the defendants and Mr Lee transferred their shares in Laien to the plaintiff in October 2003. The plaintiff, for its part, provided the following to enable Shanghai Pacific to obtain the said loan facility:

1) a guarantee in the form of a standby letter of credit for US$4,000,000 issued by U.S. Bank National Association (“US Bank”) of Portland Oregon, U S A, in favour of ICBC Shanghai, for loans to be granted by ICBC Shanghai to SPSH;

2) a guarantee in the form of a standby letter of credit for US$1,000,000 issued by US Bank in favour of ICBC Shanghai for loans to be granted by ICBC Shanghai to SPSH; and

3) a direct loan of US$1,000,000 via an escrow account.

8 On 25 June 2004, the plaintiff was informed by US Bank that ICBC Shanghai had presented documents in order to draw down US$1m under the standby letter of credit issued for that amount and that US Bank had duly paid ICBC Shanghai the principal sum of US$1m. Subsequently, on 12 August 2004, US Bank informed the plaintiff that ICBC Shanghai had presented documents under the other letter of credit to draw down US$4m and had been paid that sum. According to a subsequent letter from ICBC Shanghai, the loan of RMB7.85m extended to Shanghai Pacific had been due and payable on 15 June 2004 and, as Shanghai Pacific was not able to raise the funds to pay that loan on its due date, ICBC Shanghai had made a demand under the standby letter of credit and had received the sum of US$999,975 thereunder on 25 June 2004. The letter further stated that repayment of another loan of RMB30m was due from Shanghai Pacific on 18 August 2004. ICBC Shanghai confirmed that it had made a demand on US Bank for this amount as it expected that Shanghai Pacific would not be able to pay the amount when due and that, on 16 August 2004, it had received the sum of US$3,999,995 under the second standby letter of credit. The proceeds of both letters of credit were used by ICBC Shanghai to repay the principal and interest due from Shanghai Pacific and the balance remaining after settlement was remitted abroad. The plaintiff was required to reimburse US Bank in the sum of US$5m which it duly did.

9 In one of his affidavits filed in support of the winding up petition, Mr Shih confirmed that although the sum of US$5m in total had been drawn down by ICBC Shanghai under the two standby letters of credit, ICBC Shanghai had subsequently returned a sum of US$404,435.57. From the plaintiff’s point of view, however, the net amount returned to it was only US$376,000.03 because it had paid bank charges to procure the extension of the standby letters of credit and in relation to the call on the standby letters of credit. Thus, the plaintiff averred that the net amount paid by it by reason of the call on the standby letters of credit was US$4,623,999.97.

10 On 24 April 2006, the plaintiff’s solicitors M/s Yeo Wee Kiong Law Corporation sent a statutory letter of demand pursuant to s 254(2)(a) of the Companies Act (Cap 50, Rev Ed) (“the Act”) to both PRPL and PAPL demanding payment from each of the total sum of US$4,623,999.97. The material parts of this letter read as follows:

1. We act for S.Y. Technology Inc (“our clients”).

2. We are instructed that pursuant to a Deed of Indemnity entered into in 2003 (“the Deed”), each of you and Mr Lee Chong Ming had jointly and severally undertaken to our clients, to inter alia, fully and effectively indemnity our clients in respect of all liabilities, claims, damages, costs, charges and expenses to which our clients may inter alia, suffer as a consequence, or in connection with the Standby Letters of Credit, as defined in the Deed. Our clients have paid out the principal sums of US$4 million (on 21 January 2003) and US$1 million (on 15 September 2003) under the Standby Letters of Credit.

3. In the premises, each of you (together with Mr Lee Chong Ming) is jointly and severally liable to pay to our clients, the total sum of US$4,623,999.97 (“the Principal Sum”). The Principal Sum is arrived at after deducting a sum of US$376,000.03 (received from the bank) from the total figure of US$5 million (as referred to at paragraph 2 above).

No payment was received from either PRPL or PAPL within the period of three weeks specified in the letter. On 9 June 2006, the plaintiff filed the respective applications to wind up the defendants which I subsequently granted.

11 In the meantime, on 15 May 2006, Mr Lee submitted a request for arbitration to CIETAC asserting that because the 2003 contract had not been registered as required by Article 40 of the “Interim Measures on the Management of Foreign Debts”, a Chinese law that had been enacted in April 2005, the 2003 contract was not legally binding on Shanghai Pacific and the obligations imposed on the guarantors of Shanghai Pacific had also been discharged. On 15 May 2006, CIETAC accepted Mr Lee’s request. The next day, the defendants’ Singapore solicitors informed the plaintiff’s Singapore solicitors of the commencement of the arbitration proceedings and stated that as the outcome of the arbitration would have an impact on the defendants’ liability under the Deed, it was premature for the plaintiff to pursue its claim under the Deed until after the arbitration had been concluded. In their view, the plaintiff’s statutory letters of demand were premature and any application for winding up based on such demand would be irregular.

The application

12 The plaintiff’s claims against both PAPL and PRPL rested squarely on the terms of the Deed. The material provisions of this document are as follows:

To S.Y. TECHNOLOGY INC

Dear Sirs

SHANGHAI PACIFIC CLUB CO LTD (“SPSH”)

Whereas:-

A. SPSH is wholly-owned by Shanghai Pacific Singapore Pte Ltd (“SPS”). (sic) We, Pacific Associates Pte Ltd, Pacific Recreation Pte Ltd and Lee Chong Ming, are shareholders of SPS holding an aggregate of...