Velstra Pte Ltd (in liquidation) v Dexia Bank NV (formerly known as Artesia Banking Corp NV)

• Judge: Kan Ting Chiu J
• Judgment Date: 13 February 2004
• Neutral Citation: [2004] SGHC 23
• Citation: [2004] SGHC 23
• Defendant Counsel: Tan Chuan Thye, Ivan Chia and Eugene Thuraisingam (Allen and Gledhill)
• Published date: 18 February 2004
• Plaintiff Counsel: Vinodh Coomaraswamy and David Chan (Shook Lin and Bok)
• Date: 13 February 2004
• Docket Number: Originating Summons No 1181 of
• Court: High Court (Singapore)
• Subject Matter: Whether plaintiff insolvent,Insolvency Law,Transactions at an undervalue,Avoidance of transactions,Whether there was transaction between parties,Section 98 Bankruptcy Act (Cap 20, 2000 Rev Ed)

13 February 2004 Judgment reserved.

Kan Ting Chiu J:

Background

1 The plaintiff, Velstra Pte Ltd (“Velstra”), is a Singapore company in insolvent liquidation. The defendant Dexia Bank NV is a Belgian bank which merged with and absorbed another bank previously known as the Artesia Bank.

2 On 25 June 1999, three persons, namely Jo Lernout, Pol Hauspie and Nico Willaert (“LH&W”) opened a joint account with the defendant, account no 553-2056900-42 (“the LH&W account”). The defendant granted to LH&W upon the opening of the account a rollover credit facility amounting to US$20m.

3 On 28 June 1999, US$20m was drawn from the account under the facility. The loan was not repaid when the facility expired on 10 October 1999.

4 On 30 December 1999, Velstra’s bank, DBS Bank, sent a SWIFT message to the defendant that DBS Bank “will be receiving USD36m value 4 Jan 2000 in favour of Velstra Pte Ltd A/C No: 001005582-01-8-022”.

5 On receipt of this message the defendant debited its own internal account with US$31m, and from the funds so debited, it credited US$21m to the LH&W account on 30 December 1999. The transfer was approved under Belgian law as a “repayment of loan under usual reservation”, and was used to discharge the debt in the LH&W account.

6 On 5 January 2000, DBS Bank, on the instructions of Velstra, paid US$20.92m (the balance from the US$21m payment after deducting banking charges) to the defendant. The remittance instruction form named Artesia Bank Brussels as the beneficiary, but the account number given was that of the LH&W account.

7 At the trial the parties called expert witnesses to give their views on the effect of the SWIFT message and Velstra’s instructions on the remittance instruction form. Professor M P A Dassesse and Professor P Ellinger were in agreement that the message and the instructions were not proof that the defendant was the beneficiary of the payment.

8 The defendant did not credit the remittance into the LH&W account, but placed it into its central treasury in Brussels. The difference between the US$21m credited on 30 December 1999 and the amount received on 5 January 2000 arising from bank charges was debited against the LH&W account on 13 January 2000.

9 Velstra was wound up and placed in compulsory liquidation on 12 April 2002.

10 The defendant treated the payment as its own when it used the payment to discharge the debt of LH&W, either by being the beneficiary directly, or through LH&W.

11 In this action, however, that is not an issue. The issues are set out in [16], in particular, whether the payment received by the defendant was a “transaction”.

The action

12 This action is instituted by the liquidators of Velstra. The company was a holding company involved in companies engaged in speech recognition, dictation and translation software development. It and its subsidiary and related companies were linked to a Belgian company, Lernout and Hauspie Speech Products NV (“LHSP”), listed on the US and European stock markets. LHSP was well regarded and attained considerable stature until August/September 2000, when it was hit by reports of corporate wrongdoing and came under stock exchange investigations which brought it to its collapse.

13 The plaintiff seeks a declaration that the transaction pursuant to which Velstra was caused to pay to the defendant the sum of US$20,920,000 on or about 5 January 2000 is a transaction at an undervalue within the meaning of s 98 of the Bankruptcy Act (Cap 20, 2000 Rev Ed) read with s 329(1) of the Companies Act (Cap 50, 1994 Rev Ed), and a declaration that the transaction is null and void, and that the defendant should repay the sum to the plaintiff.

14 The plaintiff’s claim is best understood by referring to its statutory underpinnings. Section 98 of the Bankruptcy Act reads:

(1) … where an individual is adjudged bankrupt and he has at the relevant time (as defined in section 100) entered into a transaction with any person at an undervalue, the Official Assignee may apply to the court for an order under this section.

(2) …

(3) For the purposes of this section and sections 100 and 102, an individual enters into a transaction with a person at an undervalue if —

(a) …

(b) …

(c) he enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the individual.

and s 100(1)(a) provides that in the case of a transaction at an undervalue, the relevant time is any time within the period of five years ending with the day of the presentation of the bankruptcy petition on which the individual is adjudged bankrupt, but under sub-s (2) that time is not a relevant time unless he (a) is insolvent at that time or (b) becomes insolvent in consequence of the transaction. A transaction is defined to include any gift, agreement or arrangement. Section 100(4) provides that a person is insolvent if (a) he is unable to pay his debts as they fall due; or (b) the value of his assets is less than the amount of his liabilities, taking into account his contingent and prospective liabilities. The tests are called the cash flow test and the balance sheet test respectively.

15 Section 98 applies to this action through s 329(1) of the Companies Act which provides that:

[A]ny transfer, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company which, had it been made or done by or against an individual, would in his bankruptcy be void or voidable under section 98, 99 or 103 of the Bankruptcy Act 1995 (read with sections 100, 101 and 102 thereof) shall in the event of the company being wound up be void or voidable in like manner.

16 In its opening statement the plaintiff accepted that to succeed it must show:

a. That the Plaintiff either:

i. Made a gift to the Defendant of US$20.92m on or about 5 January 2000;

ii. Paid US$20.92m to the Defendant on terms that provided for the Plaintiff to receive no consideration; or

iii. Entered into a transaction with the Defendant for a consideration the value of which is significantly less than US$20.92m.

b. That the transaction took place within 5 years of the Plaintiff’s going into liquidation.

c. That the Plaintiff was insolvent on or about 5 January 2000 or became insolvent as a result of the payment of US$20.92m to the Defendant on that day.[1]

17 The action will succeed if it is established that Velstra was insolvent at or around the time of the payment, or as a result of it, and the payment was a transaction within the meaning of s 98. The onus of proof is on the plaintiff. It was common ground that the payment was made within five years of Velstra going into liquidation.

Whether the plaintiff was insolvent

18 The plaintiff’s evidence on this issue came from W C Hutchison, one of the liquidators of the plaintiff and a practising accountant. He concluded, after examining Velstra’s audited balance sheet as at 31 August 2000 and profit and loss statement for the period 19 June 1999 to 31 August 2000 that it was insolvent at the time of the payment, or became insolvent in consequence of it. The balance sheet showed that Velstra’s liabilities exceeded its assets by $4,440,153 as at 31 August 2000 and the profit and loss account showed that Velstra suffered a net loss of $4,439,255 over the period in question. Hutchison was of the view that a very strong inference could be made from these statements that Velstra was insolvent on 5 January 2000.

19 The liquidators also prepared adjusted trial balances, balance sheets and profit and loss accounts as at 4 January 2000 and 5 January 2000 from Velstra’s ledgers.

20 The adjusted balance sheet as at 4 January 2000 showed assets of $15,198,836 against liabilities of $31,565,073, representing a deficit of $16,366,237, while the profit and loss account for the same period showed a loss of $16,366,239.

21 In these adjusted accounts, the liquidators had written down $10.2m worth of loans which Velstra made to three subsidiary companies, namely The French CALC Pte Ltd, The German CALC Pte Ltd and The Italian CALC Pte Ltd. The loans were made to enable each of the subsidiary companies to pay US$2m each towards the purchase of language development licences at US$4m each. The liquidators wrote these loans down on the ground that the subsidiary companies did not have the funds to pay the balance of the purchase price for the licences and would not be able to repay the loans.

22 The liquidators also wrote off $5.8m for goodwill. This amount represented the premium Velstra paid when it acquired six Belgian companies which held language development licences. When Velstra acquired the six companies, it paid a premium of $5.8m over the price the subsidiary companies paid for the licences. The liquidators regarded the premium as unjustified because the six companies had no assets other than the licences, and did not have employees to develop the licences into products and therefore had not enhanced the licences to justify the premium. I am unable to accept the liquidators’ reasoning. Assets do not always have fixed values; assets may appreciate or depreciate over time. A licence may appreciate in value after it is acquired. Before the liquidators write off the goodwill, they must show that there was no appreciation when Velstra acquired the subsidiary companies. Hutchison also expressed doubts over the genuineness of the licences and over their prices as the purchases were not done at arm’s length. However, these were not in issue as they were not reflected in the adjusted accounts, where only the premium was called into question.

23 In the adjusted 5 January 2000 accounts, Velstra’s position worsened. The...