Wah Yuen Electrical Engineering Pte Ltd v Singapore Cables Manufacturers Pte Ltd

• Jurisdiction: Singapore
• Judge: Chao Hick Tin JA
• Judgment Date: 28 May 2003
• Neutral Citation: [2003] SGCA 23
• Date: 28 May 2003
• Subject Matter: Lack of transparency of related parties' debts,Schemes of arrangement,Whether scheme should be sanctioned by court,Whether votes of related parties should be disregarded in determining if s 210(3) of the Companies Act (Cap 50, 1994 Rev Ed) satisfied,Scheme approved by creditors,Creditors to recover varying percentages,Companies,Whether creditors should be divided into separate classes for voting purposes,Information provided not adequate to evaluate scheme
• Docket Number: Civil Appeal No 78 of 2002
• Published date: 17 December 2003
• Defendant Counsel: Sharmilee Shanmugam (Citilegal LLC)
• Court: Court of Appeal (Singapore)
• Plaintiff Counsel: Michael Por Hock Sing (Tan Lee & Partners)

Delivered by Yong Pung How CJ

1 This was an appeal against the decision of S Rajendran J (‘the judge’) not to sanction the appellant’s proposed scheme of arrangement on the ground that the appellant had not been sufficiently forthcoming on the circumstances in which its related party debts were incurred. After considering the submissions of all the parties, we were unanimously of the opinion that the appeal should be dismissed with costs. We now give our reasons.

The Facts

2 The appellant, Wah Yuen Electrical Engineering Pte Ltd (‘Wah Yuen’), was a well-established company in the construction industry, with the nickname ‘Condominium King’ due to the large number of condominium projects that it had undertaken. By the time of the appeal, however, Wah Yuen had become insolvent and had a winding-up petition pending against it. The winding-up proceedings were adjourned to 2 May 2003, pending the outcome of this appeal.

3 In January 2002, Wah Yuen had applied to court under s 210 of the Companies Act (‘the Act’) for leave to convene a meeting of its creditors for the purpose of considering and, if thought fit, approving a scheme of arrangement with its creditors. Section 210(3) of the Act provides:

If a majority in number representing three-fourths in value of the creditors or class of creditors or members or class of members present and voting either in person or by proxy at the meeting or the adjourned meeting agrees to any compromise or arrangement, the compromise or arrangement shall, if approved by order of the Court, be binding on all the creditors or class of creditors or on the members or class of members, as the case may be, and also on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company.

4 At the meeting of creditors that was thereafter convened, Wah Yuen tendered a revised scheme of arrangement. The revised scheme envisaged an investor injecting funds into Wah Yuen for distribution to participating creditors in exchange for an assignment of their admitted claims to that investor. Participating creditors whose admitted claims were less than or equal to $2,000 were to be paid in full. Participating creditors whose claims were in excess of $2,000 were to be paid the greater of (i) $2,000 or (ii) an amount equal to 15% of the value of their admitted claims. Claims by related parties and directors (collectively referred to here as ‘the related parties’) were to be fully subordinated to those of the rest of the participating creditors. To secure payment under the scheme, the investor would furnish a performance guarantee of $250,000, the funds of which would be distributed pari passu among the participating creditors in the event of default. According to KPMG Corporate Restructuring Services (‘KPMG’), the Court-appointed Scheme Administrator, Wah Yuen’s estimated realisable value vis-à-vis each creditor in a liquidation scenario was 0.4% as opposed to 15% under the scheme. The meeting was adjourned to give the creditors time to study the revised scheme.

5 At the adjourned meeting, of the 92 creditors present and voting, 75 (constituting 81.52%) voted for and 17 voted against the acceptance of the revised scheme. The total value of the admitted claims of the 75 who voted for the revised scheme was $8,556,893.43 (constituting 82.26%) and the total value of the admitted claims of the 17 who voted against the revised scheme was $1,845,841.81.

6 Section 210(3) of the Act only requires 50% in number and 75% in value of the creditors (or a class of them) to vote in favour of the scheme (‘the percentage requirements’). As the 81.52% in number and the 82.26% in value that had voted in favour of the scheme complied with the percentage requirements of s 210(3), Wah Yuen applied to the High Court for its approval to implement the revised scheme.

7 The application was opposed by the respondent, Singapore Cables Manufacturers Pte Ltd (‘Singapore Cables’). It contended that the votes of Wah Yuen’s three related creditors should be disregarded for the purpose of determining whether the statutory majority under s 210(3) of the Act had been satisfied and that Wah Yuen had in any case not been sufficiently forthcoming with information that was necessary for a meaningful evaluation of the proposed scheme.

8 The judge accepted Singapore Cables’ argument based on the insufficiency of information and held that Wah Yuen had not been sufficiently transparent about the circumstances under which related party debts arose. This was particularly so, given the fact that Wah Yuen’s audited accounts for the relevant periods were not available. Full disclosure was necessary to allow the creditors to scrutinise the bona fides of the transactions. Failure to provide relevant accounting details would place third party creditors at a disadvantage which they would not be under if Wah Yuen were to be wound up and a liquidator appointed. The fact that the claims of the related parties would be subordinated to the claims of the other creditors did not adequately address this concern. The judge found the facts of the present case to be broadly analogous to those of Re Halley’s Departmental Store Pte Ltd [1996] 2 SLR 70, where Selvam J had declined to sanction the proposed scheme. The judge did not deal with Singapore Cables’ contention that the related party votes should be disregarded for the purposes of determining whether the statutory majority had been met, except to say that s 210 did not draw any distinction between third party creditors and related party creditors.

The issues

9 On appeal, five issues were raised for our consideration:

(a) whether the admitted claims of the company’s related parties should be excluded or disregarded in determining whether the statutory majority under s 210(3) of the Act has been satisfied;

(b) whether the 36 creditors who stood to recover more than 15% of their claims should have been sub-divided into separate classes for voting purposes;

(c) whether the company had been less than forthcoming in furnishing the information requested by Singapore Cables, and, if so, whether the court should refuse to sanction the scheme on the ground that such conduct evidenced bad faith on the part of the company in promoting the scheme;

(d) whether the scheme was a fair and reasonable one; and

(e) whether Re Halley’s Departmental Store Pte Ltd should be followed.

We will deal with each issue in turn. Singapore Cables’ position was that the third and fourth issues were in fact related because Wah Yuen’s lack of transparency prevented the creditors from assessing the bona fides of the related party votes, as well as the merits of the proposed scheme. We will therefore deal with the two issues together under the heading ‘the adequacy of information’.

General principles

10 The principles which guide the court when it considers an application under s 210 of the Act were set out by the Court of Appeal in Daewoo Singapore Pte Ltd v CEL Tractors Pte Ltd [2001] 4 SLR 35 at p 51:

Generally speaking, in approving a scheme under s 210 of the Act, the duty of the court is to consider whether the statutory provisions have been complied with, whether the scheme is fair and reasonable to the creditors as a whole, whether the company and the majority creditors are acting bona fide, and whether the minority is being coerced to promote the interest of the majority: see Re English, Scottish, and Australian Chartered Bank [1893] 3 CH 385; Re Dorman, Long & Co [1934] CH 635.

Whether the admitted claims of the company’s related parties should be excluded or disregarded in determining whether the statutory majority under s 210(3) of the Act has been satisfied

11 For voting purposes, s 210(3) requires the creditors to be divided into separate classes if “their rights are so dissimilar that they cannot sensibly consult together with a view to their common interest” : UDL Argos Engineering & Heavy Industries Co Ltd & Ors v Li Oi Lin & Ors [2001] 3 HKLRD 634 at p 647. Each class vote must comply with the percentage requirements in s 210(3) before the scheme can be put before the court for its approval. This is to minimise the risk that the majority may push through the scheme at the expense of the minority, whose rights may be dissimilar. In the present case, the creditors were not divided into any classes and all of the creditors voted together at the same meeting.

12 Singapore Cables took objection to the claims of three related parties, namely, Mr Stanley Lee Kiang Leng (‘Mr Lee’), Mr Wong Beng Huat (‘Mr Wong’) and R & N Electrical Engineering Pte Ltd (‘R & N’). The related party debts accounted for 61.72% of Wah Yuen’s total unsecured debt. The extent of the three parties’ relationship with Wah Yuen, as well as the quantum of each of their three claims was as follows:

	Related party	Quantum of claim
(a)	Mr Stanley Lee Kiang Leng, the Managing Director and 70.10% shareholder of Wah Yuen	$4,296,254.10
(b)	Mr Wong Beng Huat, a director and 14.95% shareholder of Wah Yuen	$ 20,000.00
(c)	R&N Electrical Engineering Pte Ltd, a company in which Mr Lee held 90% of the shares and of which he was Managing Director	$ 964,833.61
	Total:-	$ 5,281.087.71

13 Counsel for Wah Yuen correctly submitted that related party creditors did not constitute a separate class of creditors for voting purposes simply because they were related parties. This is because “the test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings” : UDL Argos Engineering & Heavy Industries Co Ltd & Ors v Li Oi Lin & Ors (supra).

14 The position of Singapore Cables, however,...