Beruflich Dokumente
Kultur Dokumente
LL4402
AY 2011/2012
Insolvent Liquidation
I. Initiating a Winding-up
Winding-up by the Court: Inability of Company to Pay Debts
Section 253(1) CA lists the persons who may apply for a compulsory winding-up, including (a) the
company; (b) any creditor, including a contingent or prospective creditor, of the company; (c) a
contributory; (d) the liquidator; (e) the Minister; (f) the judicial manager; and (g) the MAS.
Section 253(2)(c) CA, however, provides that the Court shall not hear the winding up application if
made by a contingent or prospective creditors until such security for costs has been given as the Court
thinks reasonably and a prima face case for winding up has been established to the satisfaction of the
Court.
Contingent creditor
A contingent debt is one that may not materialize at all, since it is dependent on the occurrence of
an event which may or may not take place. In Stonegate Securities Ltd v. Gregory [1980] Ch 576,
a contingent creditor was defined to mean a creditor in respect of a debt which will only become
due in an event which may or may not occur.
Examples of contingent creditors include a guarantor, a surety, an insurer of a policy of indemnity
insurance and a Df in a negligence claim.
A guarantor of a company's debt who has been called upon by the creditor to pay on the guarantee
was held in Re Fitness Centre (South East) Ltd [1986] BCLC 518 to be a contingent creditor of
the company for the purposes of presenting a winding-up petition. However, the case suggests
that in order to proceed with the hearing of the petition, the guarantor would have to show that he
had discharged, not merely a part, but the whole of the company's indebtedness which is the
subject of the guarantee, as until the primary debt has been discharged by the guarantor, the
creditor is technically the party entitled to submit proof of the debt in the company's winding-up,
and the guarantor would be debarred by the well established rule against double proof from
making a claim against the company.
In Re Butterworth Products & Industries Sdn Bhd [1992] 1 MLJ 429, a Malaysian court held that
a finance company which had given a loan on the security of a guarantee was a contingent creditor
of the guarantor, who had gone into liquidation. In that case, a demand had been made on the
guarantor although no legal action had been commenced to enforce the guarantee. This, the court
held, was sufficient to establish a pecuniary claim against the guarantor and to make the finance
company a contingent creditor of the guarantor.
It is unclear if a guarantor upon whom no demand to pay on the guarantee has been made would
be considered a "contingent creditor" for the purposes of presenting a winding-up petition under
s.253 CA. The aforesaid cases were specifically concerned with the guarantor's locus standi to
present a winding-up petition. As a general rule, a guarantor's liability arises upon the default of
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the primary debtor and no demand on the guarantor need be served by the creditor unless this is
expressly made a condition precedent to the guarantor's liability. Thus, it is likely that a guarantor
becomes a contingent creditor of the primary debtor upon default, regardless of whether a
demand to pay on the guarantee had been served. This view would be consistent with the notion
of a guarantor presenting a winding-up petition in order to protect himself against his secondary
liability to the creditor.
While the authorities seem to suggest that there must be some existing obligation between the
purported contingent creditor and contingent debtor, it has been held by Nicholson J in Re
Gasbourne Ply Ltd [1984] 8 ACLR 618 that a person with a prima facie claim against a company
will qualify as a "contingent creditor" and that it is not the role of the court hearing a winding-up
petition to adjudicate on the validity of this claim. Nicholson J went so far as to hold that a party
who may be successful in pending legal proceedings against a company will be a contingent
creditor of the company as to the costs incurred in the proceedings. He also held that a person
whose right to an indemnity from a company is dependent on the outcome of a pending court
proceeding will be a contingent creditor of the company. There is further case authority to the
effect that a person who has commenced an action against a company for damages arising from
the alleged negligence of the company is a contingent creditor even though the court has not
arrived at any judgment against the company (In re Harvest Lane Motor Bodies Ltd [1969] 1 Ch
457).
Notwithstanding the aforesaid, the weight of authorities appears to favour the view that to qualify
as a "contingent debtor", a person must be under a present and definite obligation to make
payment at a future point in time when a specified event occurs, should it occur.
Prospective creditor
A prospective debt is one that is certain to be due some time in the future, although the exact time
or quantum may not be ascertainable with any degree of precision. In Stonegate Securities Ltd v.
Gregory [1980] Ch 576, a prospective creditor was defined as a creditor in respect of a debt
which will certainly become due in the future, either on some date which has been already
determined or on some date determinable by reference to future events.
Examples of a prospective debt include a bill of exchange that has yet to mature and an established
claim in tort with only quantum of damages yet to be quantified.
In Holt Southey Ltd v. Catnic Components Ltd [1978] 1 WLR 630, it was held that a person who
had sold and delivered goods on credit to a company is a prospective creditor of the company and
is consequently entitled to present a winding-up petition against the company.
In Ganda Holdings Bhd v. Pamaron Holdings Sdn Bhd [1989] 2 MLJ 346, the Df had obtained an
order for specific performance against the Pf, which required the Pf to complete an agreement to
purchase certain shares from the Df. The order required the Pf to pay the agreed purchase price to
the Df by a specified date, failing which the defendant was to be entitled to damages from the Pf
to an amount to be subsequently assessed by the court. The Pf failed to make the necessary
payment by the date specified. In the circumstances, the court held that the Df became entitled to
be paid damages by the Pf under the court order. Although the amount of damages had not been
ascertained, the court was of the opinion that the Df had by the Pf's default, become a prospective
creditor of the Pf and was hence qualified to present a winding-up petition against the Pf.
What difficulties does a contingent or prospective creditor applying for a winding-up order face?
Establishing locus standi: a person who is petitioning for winding-up in the capacity of a
contingent or prospective creditor may not rely on an unsatisfied statutory demand under s.254(2)
(a) CA to prove that the company is unable to pay its debts since the section requires that the
statutory demand be in respect of a debt already due at the date the demand is made. In addition, it
is provided in s.253(2)(c) CA that a court shall not hear a winding up-petition against a company
presented by a contingent or prospective creditor until reasonable security for costs has been given
and a prima facie case for the winding up of the company has been established to the satisfaction
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of the court. The implication of all these is that a contingent or prospective creditor would need to
go take extra steps to ascertain that the company is insolvent to be entitled to present and to be
heard on a winding-up petition, as the hearing of a winding-up petition is typically not the proper
forum to adjudicate on the validity of an alleged debt (Mann v. Goldstein [1968] 1 WLR 1091, per
Ungoed-Thomas J; BNP Paribas v. Jurong Shipyard Pte Ltd [2009] SGCA 11 at [7], per Chan
CJ).
Under these circumstances, it would be more appropriate for a contingent or prospective creditor
to invoke the just and equitable ground (s.216 CA) on the basis that, although his debt is not yet
payable, there is a justifiable apprehension that the company would be unable to repay the debt
when the time for repayment arrives (Re a Company (No. 003028 of 1987) [1988] BCLC 282).
Secondly, while a contingent creditor and a prospective creditor are allowed to present a winding-
up petition and to prove their debts on the winding-up of a company, there is no statutory
provision (both in the CA and in the Companies (Winding Up) Rules) to expressly stipulate that
upon so doing, they would be accorded the same rights and be subject to the same obligations as
the other creditors of the company in the winding-up proceedings.
It could be argued that unless a contingent or prospective creditor is expressly referred to by the
CA or any of the rules made thereunder, he ought not, in the ordinary case to be considered a
"creditor" for the purposes of the Act or the rules. It is, after all, an established rule of statutory
construction, which goes by the Latin maxim of expressio unius est exclusio alterius, that where a
statute recognises two terms of similar but not identical nature in one part of its text, then the
express omission of one in another part of its text must be assumed to be a deliberate omission.
The unhelpful definition of contingent and prospective creditors in Re Peoples Parkway Development
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- The Court found that the Government was both a simple creditor, as well as a contingent or
prospective creditor. However, the qualification as one necessarily precludes the other, and the
Government could not have been both in respect of the same debt. Thus, the judgment of Thean
J should be read as alternative grounds of judgment, which was in fact what the A-G submitted.
- It was unclear on what basis did the Government qualify as a prospective creditor. To hazard a
guess, it could be that some of the instalments had not fallen due when the petition to wind up
the company was presented, and the Court would be right in classifying the Government as a
prospective creditor if it was only a matter of time before they fell due.
- It is also unclear as to what the payment of the instalments could have been contingent upon
for the purposes of classifying the Government as a contingent creditor.
- In the light of these factual gaps in the report of the judgment, the case is an unsatisfactory
guide as to what amounts to a contingent or prospective creditor in Singapore law.
Section 254 CA contains an exhaustive list of the grounds on which an application for the winding-up of a
company may be presented, i.e. locus standi.
Section 254(1)(e) CA: The Court may order the winding-up if the company is unable to pay its debts.
Section 254(2) CA states that a company is deemed unable to pay its debts if:
(a) a creditor by assignment or otherwise to whom the company is indebted in a sum exceeding $10,000
then due has served on the company by leaving at the registered office a demand under his hand or
under the hand of his agent thereunto lawfully authorised requiring the company to pay the sum so
due, and the company has for 3 weeks thereafter neglected to pay the sum or to secure or
compound for it to the reasonable satisfaction of the creditor, i.e., it has failed to comply with a
demand for payment issued by the creditor;
(b) execution or other process issued on a judgment or order of any court in favour of a creditor of the
company is returned unsatisfied in whole or in part;
(c) it is proved to the satisfaction of the Court that the company is unable to pay its debts; and in
determining whether a company is unable to pay its debts the Court shall take into account the
contingent and prospective liabilities of the company.
Why does the law provide for both cash flow and balance sheet tests? Why not only one test?
1. The company may have present liquidity problems, but is nonetheless balance sheet solvent (i.e.,
fail the cash flow test but satisfy the balance sheet test, as was the case in Cornhill Insurance plc
v. Improvement Services Ltd). This reality was thoroughly demonstrated during the liquidity
crunch of 2007/2008.
2. In this connection and in the context of banking, there is no bright-line between illiquidity and
insolvency. Indeed, a bank can experience temporary liquidity difficulties without being
fundamentally insolvent, as for example an inability to honour the convertibility guarantee of
deposits is not a proof of insolvency per se, but merely evidence of illiquidity.
3. According to Goode, the cash flow test is more commensurate with the purpose of insolvency law,
viz, the protection of creditors, since under the cash flow test, even the non-satisfaction of a small
debt owed by the company affords the creditor the right to petition for winding-up, regardless of
how excessive and disproportionate such a remedy is in relation to the claim (c.f. Jackson, who
sees the purpose of insolvency laws as being a collectivised debt-collection device which seeks to
maximise return to all parties).
4. The employment of discretionary accounting to distort or conceal true losses, as was widely
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practised during the 2007-2009 financial crisis, undermines the efficacy of the balance-sheet test
as a barometer of financial distress.
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mere omission to pay a debt on demand does not of itself constitute neglect within the meaning of the
provision, as the word neglect necessarily implies some element of fault.
Re Sanpete Builders (S) Pte Ltd [1989] SGHC 4 (balance sheet insolvency)
Held
- Chao J allowed the petition on the basis that the company was unable to pay its debts within the meaning
of s.254(1)(e) CA read with s.254(2)(a) CA. For completeness, he went on to express his view on the
general insolvency of the company under s.254(2)(c) CA, and that on the facts, this section was satisfied as
well.
- Chao J remarked that proof that a creditor's debt has not been paid per se does not establish an inability to
pay debts within the meaning of s.254(2)(c) CA. The conclusion of insolvency, generally speaking, ought
not to be drawn simply from evidence of a temporary lack of liquidity.
- However, as there was no indication that fresh capital would be injected into Sanpete, or that payments
will be received by Sanpete from any source to enable it to discharge its debts to the petitioning creditor,
Sanpete was therefore insolvent under s.254(2)(c) CA.
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practical (has the company failed to meet a current demand for a debt already due?), and one theoretical
(on a balancing overall of liabilities against assets, is there a deficit?). On the facts, the company passed
both tests, as the reality was that the creditor (OCBC) had not called on the overdraft, and there was no
legal basis for saying that the company was insolvent because it would not be in a position to pay its debts
out of current assets if OCBC were to call in the overdraft.
- Grimberg JC held that insufficiency of liquid assets to repay present debts is by itself insufficient to
prove an inability by the company to pay its debts if the company was able to raise the required funds by
borrowing or realising its liquid assets, even if these assets might take longer than a few days to realise:
Neglect in payment of a sum as to which a statutory notice has been given is only one of several ways of
showing inability to pay debts, which may be shown in any other way A failure by the company to pay
an admitted creditor within a reasonable time after demand would be likely to provide ample evidence of
such inability. I cannot, however, accept that mere evidence that a company, such as the company in
this present case, has for the time being insufficient liquid assets to pay all its presently owing debts,
whether or not repayment of such debts has been demanded, by itself proves inability on its part to
pay its debts The company may have other assets which would or could readily be realized in a few
days and would suffice for the discharge of all its immediate accrued liabilities. It may have other
assets which, while they would take longer to realize, would at present values suffice for the discharge
of all its contingent and prospective liabilities. It is significant that at the date of presentation of the
petition, the company did have liquid assets amply sufficient to meet all its accrued liabilities.
- Grimberg JC went on to say further: were the [liquidity] test to be the test for insolvency, some 20
companies listed on the Stock Exchange of Singapore would be insolvent on the basis of their last
published accounts, because each has a deficiency on current assets.
Evaluation
- The Court distinguished several authorities put forth by the petitioner to the effect that the test of
insolvency requires consideration of the amounts a debtor might readily be in a position to raise, in
addition to cash resources, by sale or mortgage, while continuing his business, and is inapplicable to the
situation where either sale or mortgage can produce cash resources if it breaks up its business (Re
Timbatec Pty Ltd & Companies Act (1974) 4 ALR 12 and Sandell v. Porter & Anor (1965) 115 CLR 666),
and of a number of surrounding circumstances, such as the nature of the assets and the nature of the
business (Expo International Pry Ltd v. Chant & Ors [1979] 2 NSWLR 820). However, it is arguable
whether the Court would given more weight to these decisions and consequently come to a different
conclusion had the creditor rather than the member been the one to have made the petition pursuant to a
statutory demand which had gone unsatisfied, considering that the Court had placed particular emphasis on
the fact that the creditor had not called on the overdraft which in turn meant that there was no basis in law
for saying that the company was insolvent. Surely, a company would be deemed insolvent for the purposes
of approving a winding-up application, even where the fair value of the companys assets exceeded its
liabilities at the time when the petition was presented, if its assets were mostly illiquid and therefore could
not be realized in a short span of time in order to meet its current debt obligations, such as long term fixed
deposits, i.e. the liquidity test applies? In particular to this case, while a mortgage could be taken out on
the hotel to pay off any existing loan obligations, it can hardly be said that the company a sale of the hotel
would not break up its business.
- Furthermore, comparisons made with publicly listed companies are tenable at best, since more funding
sources are available to the public listed company for the purposes of solving a liquidity problem.
- The proposition that both cash flow and balance sheet insolvency tests applied to s.254(2)(c) CA is,
although well established, not without difficulties. While s.254(2)(c) CA can fairly be seen as imposing the
balance sheet insolvency test, it is difficult to see how it can be said that it also contains a cash flow
insolvency test. The former requires the court to take into account the contingent and prospective liabilities
of the company whereas the latter does not. In fact, the cash flow solvency test excludes even due debts of
which repayments are not demanded, let alone liabilities.
Taylors Industrial Flooring Ltd v. M & H Plant Hire (Manchester) Ltd [1990] BCLC 216
Facts
- A winding-up petition was presented despite the absence of a statutory demand.
- The company applied to restrain the advertisement of the petition.
Held
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- The English C.A. held that there was no requirement for a creditor to serve a statutory demand before
presenting a winding-up petition. The only criteria that the creditor must meet before threatening or
petitioning for winding-up are: (a) the debt is at least 750; and (b) there is no genuine dispute about the
debt.
- Dillon LJ at 219: There is no requirement that a creditor must serve a statutory demand. The practice for
a long time has been that the vast majority of creditors who seek to petition for the winding-up of
companies do not serve statutory demands. The practical reason for that is that if a statutory demand is
served, three weeks have to pass until a winding-up petition can be presented. If, after the petition has
been presented, a winding-up order is made, the winding-up is only treated as commencing at the date of
the presentation of the petition; thus, if the creditor takes the course of serving a statutory demand, it
would be giving the company an extra three weeks' grace in which such assets as the company may have
may be dissipated in attempting to keep an insolvent business afloat, or may be absorbed into the security
of a debenture holder bank. So there are practical reasons for not allowing extra time, particularly where
commercial conditions and competition require promptness in the payment of companies' debts so that
the creditor companies can manage their own cash flow and keep their own costs down.
Chip Thye Enterprises Pte Ltd v. Phay Gi Mo [2004] 1 SLR 434, [17]-[20]
Held
- [17]: The authorities, such as Re Sanpete Builders (S) Pte Ltd [1989] 1 SLR(R) 5 reveal that the test for
insolvency is one of fact to be decided in the light of all the circumstances of the case. The Court would
look at, for e.g., the accumulated losses to see if it were in excess of its capital; nature of the assets of
company or were they book debts; current liabilities over current assets; prospect of fresh capital or
financial support from shareholders and incoming payments from any source to discharge the debts
including credit resources.
- [18]-[19]: Expanding on Grimberg JCs pratical and theoretical tests in Re Great Eastern Hotel (Pte) Ltd
[1988] 2 SLR(R) 276, the question to be asked is "when was the company unable to pay its debts as they
fell due?", which is to be answered by focusing on the company's financial position taken as a whole by
reference to whether a person would expect that at some point the company would be unable to meet a
liability. The various tests such as quick assets test, balance sheet test or cash flow test are all different
measures of solvency and depending on the facts of the case, one test or a combination of tests may or
may not be found to be appropriate. A surplus or deficiency of net assets is indicative but not
necessarily determinative in establishing whether or not an entity is able to pay all its debts as and when
they become due and payable.
- [20]: There is no single test for insolvency, and it is neither helpful nor necessary for to lean in favour of
any one test. This approach is all the more applicable to a company (like the plaintiff) that has already
been wound up under s.254(1)(e) CA of the Act and the liquidator of the company seeks to attack various
transactions entered into or made before the liquidation but at the time the company was insolvent or of
doubtful solvency.
Evaluation
- Not that the application in case pertains to a company that was already wound up.
*BNP Paribas v. Jurong Shipyard Pte Ltd [2009] SGCA 11 (affirming [2008] SGHC 86 on different
grounds)
Facts
- Wee, a director of JSPL, entered into a number of FX contracts with BNP Paribus as counterparty.
- When the other directors of JSPL learnt about the contracts, they repudiated them on the ground that,
inter alia, Wee had no authority to enter into the FX contracts.
- JSPL and BNP Paribas then agreed to close out the contracts in order to crystallise the losses
(approximately US$50m), with both parties reserving their respective rights and liabilities.
- Subsequently, BNP sent a letter of demand to JSPL for payment on the ground that there was an
immediate payment obligation under the Close-Out Agreement, and that the FX contracts had been
authorized by JSPL, all of which JSPL rejected.
- On 20 Nov 2007, JSPL offered to place in escrow sufficient funds to satisfy the US$ 50m should a
judgment by obtained in BNPs favour as to its claim, on the condition that BNP commenced legal
proceedings to recover the alleged debt. On the same day, BNP rejected the escrow offer and served a
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statutory demand on JSPL for payment.
- On 23 Nov 2007, JSPL applied to the H.C. for an injunction to restrain BNP from commencing winding-
up proceedings on the ground that there were triable issues to BNPs claim and that BNP was not entitled
to a winding-up petition.
- BNP relied on s.254(2)(a) CA in justifying its intention to present a winding-up petition.
- Lee Seiu Kin J found in favour of JSPL and granted the injunction. BNP appealed.
Held
- Chan CJ stated that the court may only wind up a company under s.254(1)(e) only if the company is
unable to pay its debts. The creditor may prove that the company is unable to pay its debts by adducing
evidence of actual inability to pay it debts under s.254(2)(c) or evidence of a deemed inability to pay its
debts under s.254(2)(a).
- To prove a deemed inability under s.254(2)(a), it is necessary for the creditor to have a "due" debt, which
the debtor has for 3 weeks neglected to pay or to secure or compound to the reasonable satisfaction of the
creditor, after it has been served with a statutory notice to pay. If the creditor claims that the security is not
satisfactory and is determined to issue winding-up proceedings, the debtor may then apply to court for a
restraining order so as to enable the court to determine on an objective basis what the reasonable
satisfaction of the creditor should be.
- On the facts, JSPL was not insolvent under s.254(2)(e) CA as it had offered to place US$50m in escrow,
which was patent indication that JSPL was both able and willing to pay in the event that the court
determined that it was liable to do so. The C.A. noted that as a result of this, it was obvious that BNP
relied on s.254(2)(a) CA as a shortcut by the backdoor to try to enforce a contested claim.
- Hence, Chan CJ dismissed the appeal and held that any filing of a winding-up petition on the facts of this
case would have constituted an abuse of the winding-up process:
Firstly, winding-up proceedings are intended only for cases where the company is insolvent or
deemed to be insolvent, and the fact that JSPL had offered to provide security showed that it was not
insolvent.
Secondly, BNP also could not prove a deemed inability to pay on the part of JSPL without first
requiring the winding-up court to determine whether the latter was liable for the claim in the first
place. Thus, it follows that there was no legal basis whatsoever for BNP to threaten to file a winding-
up petition against JSPL without first commencing court proceedings to determine JSPLs liability in
respect of its claim. Instead, by dispensing with that step, BNP was effectively seeking to invoke the
courts winding-up jurisdiction to adjudicate on a disputed claim, whereas it was held in Mann v.
Goldstein [1968] 1 WLR 1091 that the courts winding-up jurisdiction is not for the purpose of
deciding a disputed debt. Although the debt must be disputed on substantial grounds and not on
insubstantial grounds, the issue of substantiality or insubstantiality is irrelevant where an offer to
secure the disputed debt was made, given that the debtor was not unable to pay its debts.
Obiter: Even if BNP had admitted the debt, it would not be deemed under s.254(2)(a) CA to be
unable to pay its debts if it had not neglected to secure the debt demanded under the statutory notice.
The legal position must be a fortiori where the claim is not admitted but the provision of security is
offered.
Thus, where a solvent company does not admit the debt and is prepared to offer security to defend
the claim, the court should not, as a matter of principle, in the exercise of its discretion, allow the a
winding-up application to be filed, with all the potentially disastrous consequences that may result
from the filing. It is inappropriate to use the threat of winding up to force a company to pay the
unadmitted debt in such circumstances.
Evaluation
- Post-BNP Paribas, it appears that s.254(2)(c) CA is now concerned with actual insolvency, whereas
s.254(2)(a) and s.254(2)(b) CA are concerned with deemed insolvency, such that failure to pay an
undisputed debt will no longer amount to cash-flow insolvency under s.254(2)(c) CA. The insolvency test
under s.254(2)(c) CA is now based on a finding of fact which the court will only make if it is satisfied with
the evidence of insolvency adduced. However, there was no elaboration on the kind of evidence which the
court requires, and thus, the effect of the proposition on the existing law regarding s.254(2)(c) CA is not
clear.
- The right of a creditor with an undisputed debt against a recalcitrant debtor who has been severely
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curtailed (i.e. Cornhill has been severely undermined), since a company who is able to pay may choose not
to pay by offering to provide security for the debt, and the creditor is not entitled to make a winding-up
application before the dispute is determined unless the court holds on an objective basis that the security is
not to the reasonable satisfaction of the creditor.
- It is now unclear what the doctrinal basis for restraining bona fide disputed debts is. It appears, in the
light of BNP Paribas, that the primary reason for restraint is that a creditor will not be able to prove that
the debtor is insolvent where theres a bona fide disputed debt, rather than the traditional locus standi
approach as laid down in Mann v. Goldstein.
Pac-Asian Services Pte Ltd v. European Asian Bank AG [1989] 3 MLJ 385 at 387-8
Held
- The statutory demand was not served on the companys registered address and therefore held to be
defective.
- The Court held that in order to raise the presumption of insolvency under s.254(2)(a) CA, strict
compliance with the conditions set out therein is necessary, i.e., service of the statutory demand must not
be irregular or defective.
- There is a cogent reason for requiring exact compliance: The presumption that the company is unable to
pay its debts does not appear to be a rebuttable one and as such immediately renders the company liable
to be wound up by the H.C. under s.254(1)(e) CA, resulting in serious consequences for the company.
- Without the benefit of the deeming provision, the petitioner would be asserting indebtedness without
pleading facts in support of the assertion, which constitutes a bare assertion.
Re Dayang Construction and Engineering Pte Ltd [2002] 3 SLR 379 at 384-387
Facts
- Statutory notice of demand prescribed 5 days for repayment, and counsel for the Company contended
that this did not constitute a statutory demand within s.254(2)(a) CA, which prescribes 3 weeks.
- Counsel also contended that the statutory demand contained no warning that the company would be
wound up if the company did not meet the demand.
Held
- On a plain and ordinary reading of s.254(2)(a) CA, two separate sets of statutory requirements are
discernible; one for the creditor and the other is for the debtor company to comply. The 3 statutory
requirements that pertain to the creditor are:
The debt must exceed SG$10,000;
The written demand to pay the sum due must be properly signed by the creditor or his authorised
agent;
The demand has to be served on the debtor company by leaving it at its registered address.
- The statutory requirements that pertain to the debtor are:
The debtor has 3 weeks from the date of service of the demand letter to pay the sum due or to
secure or compound it to the reasonable satisfaction of the creditor.
- Hence, only where the creditor has fully complied with the requirements imposed by s.254(2)(a) CA,
and after the debtor company had neglected to take any of those 3 specified options within 3 weeks of the
service date, can a petition to wind up the company be presented in reliance of the presumption of
insolvency, which has arisen.
- Stating the 3-week period was not a statutory requirement in the notice of demand, which had no
prescribed form in either the CA or the Companies (Winding Up) Rules, unlike the English equivalent.
- It is also not a statutory requirement of s.254(2)(a) CA to spell out or indicate to the recipient in the
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demand letter the two other specified options (secure or compound to the reasonable satisfaction of the
creditor), other than payment. In addition, s.254(2)(a) CA does not require any explicit reference in the
demand to the consequence the subsection imposes or to warn the company of the creditor's intention of
instituting winding up proceedings if satisfaction was not given.
- The form in which a statutory demand is expressed ought to be approached with the general
discretion of the court in mind. Ultimately, it is for the court to determine whether a company should
be wound up in the exercise of its discretion. In the present case, it was not suggested at all that the
debtor company was in fact misled by the demand notice.
Disputed debts
It is established practice that no winding-up order will be made where the debt on which a winding-up
application is based is bona fide disputed by the company on a substantial ground.
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- The Respondent company was at all material times heavily indebted to the petitioners, although the
exact amount of the indebtedness was disputed.
Held
- What was in dispute was the amount of money owing and there was no doubt that the petitioners were
creditors for amounts which would entitle them to a winding-up order. A dispute over the exact amount
owed was not a substantial dispute. In other words, it is sufficient for the purposes of establishing locus
standi that the petitioning creditor is definitely a creditor as to some part of its claim.
Although the approach in Mann v. Goldstein is effective for protecting a company from being forced by the
threat of a winding-up application to pay a disputed debt, it can, on the other hand, cause hardship to
creditors when they seek to wind up recalcitrant debtors. This is because a recalcitrant debtor can claim that
the debt is disputed by raising a cloud of objections. This puts the creditor, especially a small trader, in a
very difficult position. Re Claybridge Shipping qualified the general rule in Mann v. Goldstein as a rule of
practice while the Australian courts refused to follow Mann v. Goldstein in General Welding &
Construction Co Pty Ltd v. International Rigging (Aust) Pty Ltd.
13
may be departed from in exceptional circumstances, and recognised that there may be cases where to
compel the petitioner to go off to another division of the Court to establish his debt would effectively
deprive him of any remedy at all. His Lordship recognised the ease with which an unwilling debtor may
raise a cloud of objections on affidavits and then to claim that, because a dispute of fact cannot be
decided without cross-examination, the petition should not be heard at all but the matter should be left to
be determined in some other proceedings. In this connection, he held that [t]he court must reserve to
itself the right to determine disputes even, perhaps, in some cases substantial disputes where this can
be done without undue inconvenience, and where the position of the company is such that the likely
result in effect of striking out the petition would be that the creditor, if he established his debt, would lose
his remedy altogether.
Evaluation
- Lord Denning MR was not contemplating the position at the hearing of the petition, whereas Oliver LJ
explicitly referred to the court's power to adjudicate disputes at the hearing of the petition, but did not
indicate that the requirement of a good arguable case existed at all.
- Lord Denning MRs holding that a person was a creditor as long as he had a good arguable case that
a debt of sufficient amount was owing to him essentially proposes that the existence of a bona fide
dispute does not deprive the petitioner of locus standi as a creditor. If this is correct, then the effect is that
the general rule that a winding-up petition founded on a bona fide disputed debt will not be allowed to
proceed has nothing to do with the lack of locus standi. But such a proposition is controversial for
various reasons:
Firstly, Lord Denning MR made no reference to the large number of authorities, such as Mann v.
Goldstein, which have held to the contrary (i.e., that the fact of the bona fide dispute goes to defeat
the locus standi of the petitioner).
Secondly, he justified his departure by analogy to Mareva injuctions (that there may be situations
where winding up petitions can be used in a similar way to Mareva injunctions, i.e. to prevent assets
from being removed from the jurisdiction out of reach of the company's creditors), which is surely a
flawed one. The right to present a winding-up petition is a right conferred by statute and the
petitioner should not be restrained from exercising it except on clear and persuasive grounds,
whereas the applicant for a Mareva injunction is, in contrast, seeking an exercise of discretion by the
court and has the burden of establishing grounds to convince the court to exercise the discretion.
Thirdly, as opposed to the starting point that a person is a 'creditor' as long as he has a good
arguable claim, the central question, it is suggested, should be whether the proceedings constitute an
abuse of process, which can be rebutted if sufficient reason is shown that winding up proceedings
are the most appropriate or the only effective remedy for the petitioner, and that compelling the
petitioner to establish his debt in a separate proceeding would effectively deprive him of any remedy
at all. This is appears to be the approach of Oliver LJ, who, presumably, proceeded on the basis that
if a bona fide dispute is one which will be determined by the court at the hearing of the petition, it
would not be an abuse of process for the petitioner to present the petition despite his debt being
disputed.
*General Welding & Construction Co Pty Ltd v. International Rigging (Aust) Pty Ltd (1983) 8 ACLR
307; (1984) 2 ACLC 56
Held
- McPherson J took a different approach than the one in Mann v. Goldstein, which has been followed in
Australian cases such as Forsayth NL v. Juno Securities Ltd (1991) 4 ACSR 281. McPherson J reasoned
that in order to qualify for injunctive relief, it must be shown that the prosecution of winding-up
proceedings would result in irreparable injury to the company, which is usually the damage to the
company through the diminution or loss of its commercial creditworthiness resulting from public
knowledge of the commencement of winding up proceedings. Thus, the jurisdiction to grant injunctive
relief is the injury which may be done to a solvent company, as [a]n insolvent company has no trading
reputation or commercial credit capable of amounting to an interest which the law either will or ought to
protect by interposition of an injunction. Accordingly, it is necessary to show that the company is
solvent even where there is a bona fide dispute over the debt before the court will impose an injunction.
Evaluation
14
- The requirement that irreparable injury to the company is a difficult one. It is not irreparable injury to
the company but the prevention of the abuse of process of the court which is the very essence of the
courts jurisdiction to restrain the presentation of a winding up petition (Mann v. Goldstein). Also, a
winding-up petition would invariably cause harm to the company, and if irreparable harm formed the
basis for the grant of an injunction, few petitions would proceed to the hearing stage, consequently
sending a signal to debtor companies that they need not be expeditious in repaying their debts when they
fall due.
- Furthermore, the all-encompassing proposition that an insolvent company has no trading reputation or
creditworthiness worthy of protection by the law is difficult to accept. It is self-evident that a company
can be technically insolvent as determined by the deeming provisions of the CA but still retain assets in
excess of liabilities, and as such retains the ability to discharge its current liabilities by raising money on
its assets. Furthermore, it is only be in rare circumstances that a company which was insolvent would be
able to successfully challenge the standing of all its creditors who claimed non-payment of monies due.
Another creditor with standing can replace a disputed creditor on an application.
15
The Courts Discretion in Refusing to Make the Winding-up Order
Once an applicant establishes that the company is unable to pay its debts within the meaning of s.254(2)
CA, he has a prima facie right to a winding-up order ex debito justitiae. The court then has a discretion
under s.257(1) CA to decide whether or not to make the winding-up order.
Bowes v. Hope Life Insurance (1865) 11 HLC 389 at 402, 11 ER 1383 (referred to in BNP Paribas v.
Jurong Shipping Pte Ltd [2009] SGCA 11)
Held
- Lord Cranworth: [I]t is not a discretionary matter with the Court when a debt is established, and not
satisfied, to say whether the company shall be wound up or not; that is to say, if there be a valid debt
established, valid both at law and in equity. One does not like to say positively that no case could occur
in which it would be right to refuse it; but ordinarily speaking, it is the duty of the Court to direct the
winding up.
Metalform Asia Pte Ltd v. Holland Leedon Pte Ltd [2007] SGCA 6
Held
- Irreparable harm is only one factor, albeit a significant factor, that a court takes into account in
exercising its discretion whether or not to restrain a creditor from presenting a winding-up petition, or to
restrain the advertising of such a petition or to stay such a petition. But it may be neutralised by other
factors, such as that the company is insolvent, or that a winding-up petition is the only means whereby a
creditor could get the company to pay the debt or any part thereof.
- The presentation of a winding-up petition based on the companys inability to pay its debts might cause
great damage to a companys business and reputation. A creditors winding-up petition implies
insolvency and is likely to damage the companys creditworthiness or financial standing with its other
creditors or customers. Modern loan arrangements inevitably contain financial covenants which, if
breached, might trigger other cross-default clauses (presentation of winding up petition typically being
one of them). This is particularly salient in the contemporary business environment, given that practically
all businesses are financed with varying degrees of debt.
16
where the company is a member of a group enterprise, the filing of a winding-up petition could
immediately, or subsequently, if it is not set aside or withdrawn within a specified period of time,
trigger a series of cross-defaults under financial arrangements entered into by that company or other
companies within the group, thereby putting the entire business group at risk of being pushed into a
state of insolvency by the mere presentation of a winding up petition.
Evaluation
- Given the current macroeconomic climate, it is perhaps timely reiteration by the Singapore courts that
the presentation of a winding up petition can have devastating effects on a companys business and the
overall goodwill of its customers.
There are various types of cross claims, each producing a different legal effect.
Insolvency set-off:
1. This arises out of the mandatory statutory rules on insolvency set-off and may not be varied by
contract: s.88 BA read with s.327(2) CA.
2. An account will be taken of any claims arising out of mutual debts and liabilities between the
debtor and creditor for which the creditor would be entitled to prove.
3. The mutual credits are automatically set-off (self-executing) and only the balance shall be
provable.
4. Prospective, contingent and unliquidated sums are included.
Legal set-off:
1. Legal set-off has a narrower scope than insolvency set-off in that it is confined to debts which, at
the time when the defence of set-off is filed, were due and payable and either liquidated or in sums
capable of ascertainment without valuation or estimation.
2. Legal set-off is not self-executing and requires the claimant to assert it.
Transaction/equitable set-off:
1. The claim and the cross claim must be so closely connected that it would be manifestly unjust to
allow the enforcement of one claim without taking into account the other.
2. It is not necessary that the claim and cross claim be liquidated.
3. It is a substantive defence, the effect of which is the same as a bona fide disputed debt, viz, such
cross claims affect the locus standi of the creditor.
4. Where it applies, the amount of the debt owed by the company is extinguished or reduced to the
extent of the cross claim.
Independent set-off:
1. The claim and the cross claim may arise from completely unrelated transactions.
17
2. It is necessary that the claims both be either liquidated or in sums capable of ascertainment
without valuation or estimation.
3. It is a procedural defence which has no effect until it is brought into effect by a court judgment.
4. The cross claim does not reduce or extinguish the claim and therefore does not affect the locus
standi of the creditor. He remains entitled to exercise his rights and remedies qua creditor.
Contractual set-off:
1. The parties may mutually agree that instead of both parties making separate payments, the party
due to make the larger payment should pay the difference between the two amounts due.
Counterclaim:
1. Order 15 Rule 2 of the Rules of Court provides that a Df in any action with a claim against the Pf
in respect of any matter may, instead of bringing a separate action, make a counterclaim in respect
of that matter.
2. It is a procedural device (not a defence) by which the court may consider independent cross
actions in the same proceedings to either enable them to be better managed or save time and
expenses.
3. It is not confined to monetary claims.
4. Counterclaims do not affect the locus standi of the creditor. He remains entitled to exercise his
rights and remedies qua creditor.
Equitable set-off
Ng Tai Tuan v. Chng Gim Huat Pte Ltd [1990] SLR 903
Facts
- The company and the petitioners had for several years been engaged in a kind of business relationship
where the company would obtain construction works and each of the projects so secured would be
entirely subcontracted to the petitioners.
- The company and the petitioners were jointly involved in 5 construction projects over several years.
The debt which was the subject of the petition arose under 2 judgments in relation to 2 of the 5 projects.
- Through their solicitors, the petitioners served a statutory notice of demand upon the company requiring
the company to pay the sums due within 21 days of the notice, failing which the petitioners would
commence winding up proceedings against the company without further reference.
- After 21 days elapsed and the company did not make due payment, the petitioners commenced
winding-up proceedings.
- As the debts was admitted to by the company, summary judgments in respect of the debts owed by the
company were given. Execution of the judgment was, however, stayed pending the hearing of certain
counterclaims by the company against the petitioners.
- On appeal, the judge in chambers lifted the stay on execution.
- The company further appealed, arguing that by virtue of their bona fide counterclaims which in their
totality are for an amount very much exceeding the debt owing by the company to the petitioners under
the two judgments, the company is justified in not complying with the statutory demand served by the
petitioners.
- The petitioners argued that as the counterclaims had nothing to do with the two judgment debts, the
existence of the counterclaims should not preclude the petitioners from winding up the company on the
ground that it had neglected to pay the petitioners in response to the statutory notice of demand.
18
- The 2 main issues were: (1) are the counterclaims of the company against the petitioners bona fide and
based on substantial grounds; and (2) even if the counterclaims are based on substantial grounds, is that a
sufficient basis to dismiss the petition or to order a stay?
Held
- As to issue (1), on the evidence, the counterclaims were bona fide and based on substantial grounds, and
either of the two counterclaims exceeded the amount of debt owing by the company to the petitioners.
- As to issue (2), the operative word in s.254(2)(a) CA is neglected, which necessarily implies so
element of fault. Accordingly, mere omission to pay a debt on demand does not of itself constitute
neglect to do so within the meaning of s.254(2)(a) CA.
- The authorities did not appear to draw a distinction between a counterclaim that arose out of the same
transaction or contract as the debt owing and a counterclaim which did not. The important thing was that
the counterclaim had to be bona fide and based on substantial grounds. The court was to exercise its
discretion in the light of all the circumstances of the case.
- It was therefore wrong to treat each project in isolation. The company and the petitioners had
established a special kind of relationship over many years involving several projects. Their arrangements
had some unusual features. To wind up a company based on two accounts between the parties instead of
all the accounts might not be entirely just, as the company might very well be at the end of the day a net
creditor. In all the circumstances, the company had not "neglected" to satisfy the statutory notice and it
would be just to stay the proceedings.
The English C.A. in Re Bayoil SA, however, supplanted the doctrinal basis of locus standi with court
discretion in the context of equitable set-off:
19
to reduce speed, the petitioner claimed freight and diversion expenses while Bayoil counterclaimed for
breach of the charterparty.
- The dispute was referred to arbitration and an interim award for freight was made in the petitioner's
favour.
- The petitioner subsequently served a statutory demand in respect of the award and later presented a
petition for the winding up of Bayoil.
- At the hearing, Bayoil contended that the petition ought to be stayed or dismissed on the basis that,
while Bayoil did not dispute the debt upon which the petition was based, it had a genuine and serious
counterclaim, which it had been unable to litigate, in a sum exceeding the debt claimed by the petitioner.
- The judge at first held that he had an unfettered discretion to decide the issue and allowed the petition.
- Bayoil appealed.
Held
- The English C.A. allowed the appeal.
- Nourse LJ explained that the practice of the Companies Court to dismiss a petition where the petition
debt was bona fide disputed on substantial grounds was not, initially, a matter for the discretion of the
court, but instead founded on the creditor's inability to establish his locus standi to present the petition.
However, the case of an undisputed debt with a genuine and serious cross claim was different, in that
the dismissal or stay of the winding-up petition was a matter for the discretion of the court, albeit that
its exercise may have been narrowed by authority.
- When hearing a petition in which the debtor had a genuine and serious cross-claim (an amount
exceeding the amount of the petitioner's debt) which it had been unable to litigate, the court should,
in the absence of special circumstances, dismiss or stay the winding-up petition in the exercise of its
discretion.
- Neither the potential commercial insolvency of the company, the ability of the petitioning creditor to
levy execution against the company, nor the absence of an appeal laid against the interim award
amounted to a special circumstance that entitled him to have it wound up.
- Nourse LJ explained the rationale for the limited application of the discretion as such: A winding-up
order was a draconian order, and if wrongly made, the company had little commercial prospect of
reviving itself and recovering its former position. If there was any doubt about the claim and the cross-
claim, the court should proceed cautiously.
Evaluation
- Even though the petition was ultimately dismissed, the English C.A. was in essence of the opinion that
cross claims, unlike a bona fide disputed debt, do not deprive the petitioner of locus standi. Instead, the
court will simply dismiss or stay the winding-up application in the exercise of its discretion, unless there
are special circumstances that require the court to allow it.
Re Bayoil SA was purportedly followed by the SGCA in Metalform Asia Pte Ltd v. Holland Leedon Pte
Ltd, but it is not evident that this was really the case:
*Metalform Asia Pte Ltd v. Holland Leedon Pte Ltd [2007] SGCA 6; [2007] 2 SLR 268
Facts
- Metalform Asia owed the Holland Leedon an undisputed debt for steel supplied by HL to MA between
July 2004 and June 2005.
- Pursuant to the undisputed debt, HL served a statutory demand on MA under s.254(2)(a) CA requiring
payment.
- MA then applied to court for an interlocutory injunction to restrain HL from presenting a winding-up
petition until MA's claim for damages against HL arising under a sale-and-purchase agreement dated 13
June 2004 had been determined.
- MA's claim was based on HL's alleged breach of certain warranties under the sale-and-purchase
agreement. In support of its application, MA argued that: (a) MA had a bona fide cross-claim on
substantial grounds which exceeded the undisputed debt; (b) HL, as controlled by its majority
shareholders, had a collateral purpose in presenting the winding-up petition; and (c) the presentation of
the petition would cause irreparable harm to MA which had an ongoing business.
- Under the terms of the sale of the business, any claim by MA for breaches of warranties by HL was
secured by a S$25 million deposit (which was held back from the consideration paid for the business)
20
held in an escrow account as security.
- HL raised the argument that the Court should follow the approach in New Zealand in such cases in that
MA must show that HLs petition is bound to fail before the court may grant an injunction.
Held
- The Court held that the position where the debtor company has a cross claim of substance against the
creditor which is equal or exceeds the creditors debt is the same as the debtor company which disputes
the debt on substantial grounds, in that in both situations, the Court will restrain a creditor from
commencing winding-up proceedings or stay or dismiss the winding-up application if it had already been
filed. In both scenarios, the locus standi of the creditor to present a winding-up petition against the
debtor is called into question, and it follows that a winding-up petition should not be allowed in cross-
claim cases, except in special circumstances.
- In respect of the escrow account, the Court held that the security could not be taken into account as a
security remains a security and should not be treated as if it were a payment, i.e., providing security for
the cross-claim did not reduce the quantum of the cross-claim and accordingly, a partially secured cross-
claim was therefore still a cross-claim for the full amount claimed.
- The Court declined to follow the New Zealand approach, holding that the "bound to fail" test was in
principle the wrong test to apply in cross claim cases, whether the debt is disputed or undisputed. As a
matter of evidence, until the cross-claim is tried, it would be impossible to tell what the decision of the
court would be, either on the merits of the cross-claim or whether its quantum would equal or exceed the
undisputed debt. Applying such a stringent test at the hearing of any application to restrain a winding-up
petition would effectively lead to the dismissal of the application. It would amount to applying a
principle of law rather than a principle of evidence. The bound-to-fail test was only applicable in a just
and equitable winding up application by a shareholder.
- The Court, in rejecting the New Zealand approach, also opined that the policy consideration that the
commercial viability of a company should not be put in jeopardy by the premature presentation of a
winding-up petition against it where it has a serious cross-claim based on substantial grounds was
paramount. The Court explained that such a petition may adversely affect the reputation and the business
of the company and may also set in motion a process that may create cross-defaults or cut the company
off from further sources of financing, thereby exacerbating its financial condition.
- The Court went on to hold that [s]o long as the court is satisfied that on the evidence there is a distinct
possibility that the cross-claim may exceed the undisputed debt, it should give the company the
opportunity to prove its claim rather than to allow a winding-up petition to be filed, with all the normal
consequences attendant upon the filing of such a petition. Businesses that have a chance of recovery
should not be pushed into a state that makes it difficult for them to recover.
- On the facts, the C.A. found that the appellant company had a genuine cross-claim based on substantial
grounds which may be in excess of the undisputed debt owed to the respondent creditor. There were no
special circumstances militating against the grant of an injunction against the respondent creditor. In the
circumstances, the Court allowed the companys appeal and granted an injunction.
Evaluation
- It seems that the SGCA is pro-debtor. To this end, the unsecured part of the debtors cross-claim was in
fact less than the undisputed debt (unsecured debt was $17m, money locked up in the escrow account
amounted to $25m, and the cross-claim amount was alleged to be $34m, leaving $9m of the cross-claim
unsecured). It could be argued that while a cross-claim of substance equivalent or in excess of the debt
allows the debtor to resist a winding-up because no net debt is actually due to the creditor should the
cross-claim be established, the same reasoning does not apply where the cross-claim is secured. In other
words, the fact that the escrow sum did not reduce the debtors cross-claim should not mean that the
debtor should be allowed to rely on the full cross-claim to seek injunctive relief against the creditor.
- On another level, the effect of the judgment is to equalize all the different types of set-offs and even
counterclaims, such that any form of counterclaim becomes a substantive defence even at the
interlocutory stage. If this were the case, debtors would have an easier time trying to dismiss winding-up
petitions at the interlocutory stage.
Question to ask WMS: Could it be said that the effect of the C.A.s decision was to erode and differences
in the nature of different cross claims, for instance those that are form part of the same contract or are
closely connected to the contract and those that are not? The case dealt with a cross claim that arose from
the same contract and did not have as an issue the case where the cross claim was merely a counterclaim
21
arising from a separate contract.
- The case also effectively equates a cross claim with a disputed debt in an interlocutory application.
Opposition by contributories
22
are being run in such a manner as will enable it promptly to discharge its debts when the fall due, and to
say to the court, and, to other persons, that internal disputes between directors and/or contributories of
the company are no concern of his.
- Slade J added that the court would only adjourn a petition if it was satisfied that there were
exceptional circumstances that justified such a course.
Opposition by others
*BNP Paribas v. Jurong Shipyard Pte Ltd [2009] SGCA 11; [2009] 2 SLR 949
Held
- The C.A. remarked in obiter that in exercising its discretion not to wind-up the company, the court will
have regards to interests which the court may legitimately take into account, such as where the petition to
wind up a temporarily insolvent but commercially viable company affects many other economic and
social interests, such as those of its employees, the non-petitioning creditors, as well as the company's
suppliers, customers and shareholders.
- In addition, the interest of the public at large should also be taken into account, especially if the
company is a viable one.
23
Insolvent Liquidation
Compulsory winding-up
Section 255(1) CA: Where before the making of a winding-up application a resolution has been passed
by the company for voluntary winding-up, the winding-up of the company shall be deemed to have
commenced at the time of the passing of the resolution.
Section 255(2) CA: Winding-up shall be deemed to have commenced at the time of the making of the
application for the winding-up.
Voluntary winding-up
Section 296(6) CA: A voluntary winding-up shall commence (a) where a provisional liquidator has been
appointed before the resolution for voluntary winding-up was passed, at the time when the statutory
declaration in the prescribed form was lodged with the Registrar; and (b) in any other case, at the time of
the passing of the resolution for voluntary winding-up.
The making of a winding-up order brings into operation a statutory scheme for dealing with the assets of
the insolvent company.
24
purposes of s.131(1) CA.
*Power Knight Pte Ltd v. Natural Fuel Pte Ltd [2010] SGHC 75; [2010] 3 SLR 82
Facts
- The company was granted an equitable lease by JTC over 2 plots of land on Jurong Island.
- The company then executed a debenture which granted the Power Knight a fixed charge over all the
companys interests in any freehold or leasehold property or any other interest in real property.
- Although the debenture was registered in accordance with s.131 CA, Power Knight, for whatever
reason, did not lodge a caveat under s.115 LTA.
- Subsequently, a winding-up petition was filed against the company by an unsecured creditor, pursuant
to which a winding-up order was made and liquidators appointed.
- The liquidators lodged a caveat for and on behalf of the companys unsecured creditors, claiming an
interest in the 2 plots of land. The liquidators also lodged a caveat on behalf of the company claiming an
interest in the 2 plots of land as trustee of the interests in the land for the benefit of the unsecured
creditors of the company under a statutory trust arising as a result of the winding-up application and/or
winding-up order.
- Power Knight initiated proceedings seeking the removal of the caveats in accordance with s.127 LTA.
- Three issues arouse for the H.C.s consideration: (1) whether a statutory trust came into being upon the
winding-up of the company; (2) if so, what are the interests of the companys unsecured creditors under
the statutory trust and whether they qualify as an interest in land under s.115 LTA; and (3) whether the 2
plots of land fell within the ambit of the statutory trust, which encompasses assets available for
distribution to the companys unsecured creditors, notwithstanding the fixed charge granted to Power
Knight.
- The liquidators contended that, since the registration requirement under s.131 CA is required only to
perfect the charge vis--vis other creditors, the unregistered charge in Michael Ng Wei Teck v. OCBC
was valid and enforceable as against the company, and since, according to Thean JA, an unsecured
creditor must have an interest in the company's property before he can rely on s.131 CA, the unsecured
creditors in Michael Ng Wei Teck must, on the presentation of the winding-up, have had an interest in the
land subject to the unregistered equitable mortgage in order to invoke s.131 CA and avoid the equitable
mortgage. Therefore, Michael Ng Wei Teck demonstrates that encumbered assets are caught by the
statutory trust.
Held
- The first issue the H.C. considered was the 3rd issue, viz, whether the 2 plots of land fell within the
general pool of assets available for distribution to the companys unsecured creditors, for if they did not,
they would not fall within the ambit of the statutory trust. Judith Prakash J. affirmed the well-established
position that upon a winding-up, secured assets are not available for distribution by the liquidator among
the company's unsecured creditors. Consequently, even if, as the liquidators contend, a statutory trust
arose on the winding-up of the company for the benefit of the unsecured creditors, the subject matter of
such a trust could not include the 2 plots of land, which was already validly encumbered by Power
Knight's fixed charge which was perfected upon registration and therefore unavailable to the unsecured
creditors.
- Addressing the liquidators interpretation of Michael Ng Wei Teck put forth as a counter-argument,
Judith Prakash J. held that Michael Ng Wei Teck did not contradict the well-established position and does
not support the contention that an unsecured creditor, in and by virtue of a winding-up, has a beneficial
interest in property subject to a registered charge. Instead, what it decided was that an unsecured creditor
only has locus standi to invoke s.131 CA when a winding-up petition is presented, as it is only from that
25
date that he becomes interested in the property of the company, which will, once s.131 CA is relied upon,
include the subject matter of the unregistered charge. The sequence of events therefore runs as follows:
upon the presentation of a winding-up petition, the unsecured creditors obtain a beneficial interest in the
unencumbered property of the company. By virtue of that interest, an unsecured creditor obtains locus
standi to invoke s.131 CA to avoid the unregistered charge, and the charged property is then freed from
the charge, falling into the general pool of assets which is to be distributed among the unsecured
creditors. Such a reading of the case is confirmed by Thean JAs statement that [t]he avoidance of the
unregistered charge would, after all, free the subject matter of the charge to swell the assets of the
company for the benefit of the unsecured creditors.
- As such, the unsecured creditors of the company had no interest in the 2 plots of land, the equitable
interest in which had been validly charged to Power Knight and perfected upon registration. It followed
that they did not claim "an interest in land" for the purposes of lodging a caveat under s.115 LTA, and
both caveats must be removed.
- For completeness, Judith Prakash J. went on to consider the 1 st and 2nd issue. Her Honour followed
Ayerst v. C & K (Construction) Ltd [1976] AC 167 and held that a statutory trust comes into effect upon
the making of a winding-up order. In doing so, the H.C. declined to adopt the views of the H.C.A. in
Commissioner of Taxation of the Commonwealth of Australia v. Linter Textiles Australia Ltd (2005) 220
CLR 592 and that of the S.G.H.C. in Low Gim Har v. Low Gim Siah [1992] 1 SLR(R) 970, both of
which sought to interpret Ayerst as being limited to the specific provision of the U.K.s Finance Act 1954.
Her Honour did not think it was possible to interpret Ayerst in this manner. First, Ayerst relied on and
endorsed earlier authorities that predated the Finance Act which recognized the existence of the statutory
trust as a matter of common law. Second, Ayerst has been repeatedly cited as establishing, without
qualification, the existence of a statutory trust upon the winding-up of a company. Third, exactly the
same criticism may be employed against other landmark cases which, while ostensibly concerned with
interpreting specific points of revenue law, have been taken as representing the common law.
- As regards the nature of the statutory trust, her Honour observed that the prevailing view is that it is not
a kind which confers on the creditors beneficial co-ownership or proprietary interests of any kind. The
creditors rights are limited to invoking the protection of the court to ensure that the liquidator fulfils his
statutory duties. Thus, her Honour held that notwithstanding that the making of a winding-up order
brings into existence a statutory trust, unsecured creditors have no proprietary interests in a companys
property. To this extent, even though her Honour recognized that she was bound by the decision in
Michael Ng Wei Teck, she disagreed with the C.A.s statement that the unsecured creditors of a
company are in the nature of a cestui que trust with beneficial interests extending to all the companys
property, as it is inconsistent with the nature of the statutory trust.
Once winding-up commences, it is important that the assets of the company be preserved so as to enable a
fair distribution to all the companys creditors. Section 259 CA seeks to achieve this by rendering all
dispositions of the companys property after the commencement of the winding-up void.
Notwithstanding a moratorium on legal and enforcement proceedings coming into place following the
making of the winding-up order, leave of the Court may be given in some cases for the continuation of
legal or enforcement proceedings against the company in liquidation.
26
Held
- The English C.A. held that goods which were in the possession of a 3rd party under a sub-lease granted
by the company were nevertheless deemed to be in the company's possession, and that the owner of the
goods needed the leave of the court (the administrator not having given his consent) before he could
repossess the goods in exercise of his rights under the hire-purchase agreement. Leave is granted as a
matter of course, as the applicant stands outside the liquidation.
- The following guidelines were given:
(1) Upon an application for leave [to repossess goods], the burden is on the third party hirer to make out a
suitable case that leave should be granted.
(2) The purpose of the prohibition in s.11(3) of the U.K. Insolvency Act (now Para 43) is to assist the
administrator in carrying out his duties to achieve the purpose of the administration. Where it is the case
that should leave be granted it will not impede the purpose of the administration, then leave should
normally be granted.
(3) Otherwise, it is for the Court to carry out a balancing exercise between the legitimate interests of the
3rd party hirer and the legitimate interests of the other creditors of the company. This will be a question of
who may be caused the greater loss by either refusal or a decision to grant leave.
(4) In carrying out the balancing exercise the Court should give great weight to the proprietary interests
of the 3rd party hirer as administration should not prejudice the rights of those secured creditors at the
time the administration order was made rather than for example a winding-up order. The administration
for the benefit of the unsecured creditors should not be carried out at the expense of the 3 rd party hirer
trying to exercise their proprietary rights, save insofar as this is unavoidable.
(5) The conduct of the parties may also be relevant where a party has failed to make clear their intentions
to the administrator at the outset and/or has accepted benefits under the administration.
27
Insolvent Liquidation
The use of quasi-security devices, such as the Romalpa clause and the Quistclose trust, the advent of
proprietary remedies such as the constructive trust and subrogation deprive the pari passu rule of its
intended effect to a considerable extent. Indeed, in most cases there is normally little left for the unsecured
creditors after the secured creditors and creditors with quasi-security have obtained payment.
28
Trusts
29
- The Df later granted a floating charge to a bank.
- Subsequently, the Df became insolvent and the bank appointed a receiver.
- A question arose as to whether a trust of the retention money had been successfully created, and
consequently whether the Pf or the bank took priority in relation to the retention money.
Held
- The English C.A. held that a trust can only exist in relation to an identifiable asset or fund, and because
no money had been set aside, the Pf did not in fact get any equitable interest in the retention money. As
such, the bank took priority over the Pf.
Terminable Rights
Pre-insolvency arrangements that offend the pari passu or anti-deprivation principles are rendered invalid
and unenforceable. The existing state of law in the area of terminable rights is, however, complex,
uncertain and very unsatisfactory. The courts have tend to not draw a distinction between the pari passu
rule and the anti-depravation rule, until the Supreme Court judgment of Belmont Park Investments Pty Ltd
v. BNY Corporate Trustee Services Ltd acknowledged such a distinction, although the Court failed to press
the distinction between the two rules to its logical conclusion (quite possibly a conscious decision on the
part of the Supreme Court pursuant to HMRCs intervention to not pre-judge the issues which arose in the
Premier League case, the main issue being whether the so called Football Creditors Rule infringed the pari
passu principle):
The court said that the 2 rules are sub-rules of the general principle that parties cannot contract out
of the insolvency legislation.
It also said that the distinction between the two rules are by no means clear-cut.
A/P Wee Meng Seng proposes that the preferred principle should be that a contractual clause that confers
priority on a contracting party which is conditioned on insolvent liquidation or insolvency is invalid. The
corollary to this approach is that if priority is not so conditioned, then the clause is valid unless it is invalid
under another area of insolvency law.
However, the courts (such as in British Eagle v. Air France and Belmont Park, which classified the former
as a case regarding the pari passu principle) have taken a wider, all-encompassing approach to the pari
passu principle, preferring to invalidate inexorably all contractual agreements that purports to contract out
of the pari passu rule, whether or not conditioned upon insolvency.
It should also be noted that British Eagle v. Air France has been accepted as good law in Singapore: Joo
Yee Construction Pte Ltd v. Diethelm Industries Pte Ltd.
*Ex p Mackay (1872-73) LR 8 Ch App 643 (leading case on springing charge being invalid)
Facts
- One Joshua Jeavons had an iron manufacturing business.
- Jeavons sold one John Brown & Co Ltd a patent for improving armour plates manufacture in return for
royalties of 15s per ton of plates produced.
- Brown also lent Jeavons 12,500.
- It was agreed that half of Jeavons' royalties would go to paying back that loan, and if Jeavons became
bankrupt or made an arrangement with creditors, Brown would have a further right to keep the other half
of the royalties to satisfy the 12,500 debt (effectively a springing charge).
Held
- It was held that a valid charge was created on the first half of the royalties, but not on the other half (the
springing charge).
- James LJ: [A] man is not allowed, by stipulation with a creditor, to provide for a different distribution of
his effects in the event of his bankruptcy from that which the law provides.
- Mellish LJ: [A] person cannot make it a part of his contract that, in the event of bankruptcy, he is then to
get some additional advantage which prevents the property being distributed under the bankruptcy laws
In the simple case of a man lending a sum of money on mere personal security, and making a bargain that,
in the event of his debtor becoming bankrupt, he should then have a security upon a certain portion of his
30
property, it would really be an absurd contention that he should be allowed to have the benefit of the
security under the bankruptcy law.
Evaluation
- Brown was effectively attempting (albeit unsuccessfully) to create a charge that springs into existence
when the debtor becomes a bankrupt. The clause, if valid, would have upgraded the debtor from a hitherto
unsecured creditor (over the second part of the royalties) into a secured creditor upon bankruptcy. Its effect
is to carve out an asset of the debtor to give the creditor first bite on it to pay the debt owed by the debtor
to the creditor. This proposition was espoused in Belmont Park Investments Pty Ltd v. BNY Corporate
Trustee Services: [I]n Ex p Mackay, the agreement that the lender could keep the royalties in the event
of the borrowers bankruptcy was an unlawful additional advantage. This, like several of the other
decisions, is really about an unsuccessful attempt to create a charge.
- The clause does not affect the net asset position (total assets total liabilities) of the debtor, which
remains unchanged. In that sense it does not withdraw an asset from the estate of the debtor or cause its
destruction. What it does is give priority to the creditor.
31
the floating charge created by Clause 10 would have in any case been invalidate by virtue of s.330, as no
cash was paid by the bank to the borrower at the time of or subsequently to the deemed creation of the
floating charge (i.e. no new value was created).
*British Eagle v. Air France [1975] 1 WLR 758; [1975] 2 All ER 390 (pari passu principle)
Facts
- The case concerned the operation of IATA, a clearing house for airlines. Under the IATA arrangement,
debts owed between members were not payable, but were netted off in the clearing system; only the
balance was payable to or by IATA. The arrangement cut down administrative costs and served many
useful commercial functions.
- British Eagle, having carried passengers for Air France, was owed a certain sum by Air France.
- Following a winding up petition, British Eagles liquidator claimed that such amount was an asset that
should be available to its unsecured creditors.
- Air France contended that nothing was owed directly to British Eagle, and that, under the clearing house
system, British Eagle's only relevant assets or liabilities were rights or obligations as between British
Eagle and IATA.
- The pari passu principle is in issue and not the anti-deprivation rule as if the sums are payable to IATA
and not British Eagle, which would have in turn been used to pay off a creditor of British Eagle (Air
France), Air France will gain priority vis--vis other general unsecured creditors of British Eagle.
Held
- The H.L. held by a majority that it was open to the courts to refuse to give effect to provisions of a
contract which achieved a distribution of an insolvents property which ran counter to the insolvency
legislation.
- The majority took the view that the parties had by agreeing that simple contract debts were to be settled
in a particular way (in this case the netting arrangements) contracted out of insolvency legislation which
provided for the payment of unsecured debts pari passu. As such, the arrangements were contrary to
public policy and the insolvency legislation prevailed.
- The H.L. accepted that the parties had not entered into the arrangements for the purpose of evading
insolvency law, but held that it did not matter that the arrangements were entered into bona fide and
without the intention of defeating the insolvency laws. As Lord Cross of Chelsea noted: In such a context
it is to my mind irrelevant that the parties to the clearing house arrangements had good business reasons
for entering into them and did not direct their minds to the question how the arrangements might be
affected by the insolvency of one or more of the parties. Such a contracting out must, to my mind, be
contrary to public policy.
- Lord Cross in effect suggested that the only way to obtain priority apart from statute was through
security.
- The result meant that the liquidators of British Eagle could recover sums payable to it by Air France, and
that airlines which had rendered services to British Eagle would have to prove in the liquidation for any
amounts payable to them.
- In a dissenting judgment, Lord Morris preferred to distinguish cases like Ex p Mackay and Re Johns as
cases where the relevant provisions were a clear attempt to evade the operation of, or a device for
defeating, the bankruptcy laws upon insolvency, from the present case, which concerned a contract
which is made for valid commercial reasons which provided for netting-off. To this effect, he remarked:
In the contracts there was no provision which was designed to come into effect or to bring about a
change in the event of liquidation.
Evaluation
- The H.L. held in Belmont Park Investments Pty Ltd v. BNY Corporate Trustee Services Ltd that recourse
to public policy was unnecessary for the application of the statutory pari passu principle was mandatory.
There was no explanation in British Eagle as to why the netting-off arrangement was contrary to public
policy, nor was there any explanation in Belmont Park as to why the statutory pari pass principle was
mandatory
- The premise for the decision of Lord Cross was that the only way to obtain priority apart from statute is
through security. However, the premise in untenable on the basis that the law allows the use of contractual
device that serve a security function for the purposes of obtaining priority (quasi-securities such as hire-
purchase agreements and retention-of-title clause). In his defence, this case was decided around the time
32
when the Romalpa case was being heard, and hence such a device was not as established as it is today.
- During British Eagle's solvency, the members of IATA could not (unlike British Eagle's non-IATA
creditors) just have ignored the clearing house arrangements and sued British Eagle for any sums owed.
Correspondingly, British Eagle could not, while solvent, have proceeded directly against Air France. It
could only have claimed against the clearing house for any net balance due to it (as admitted by Lord
Cross at 777C-D). And yet British Eagle's liquidator was allowed to do precisely what British Eagle would
not have been able to do. By the same stroke, British Eagle's IATA creditors were forced to claim directly
against British Eagle (by proving in its liquidation) while they would have been neither required nor even
allowed to do so before the commencement of its winding-up. Pre-insolvency unequals were forcibly
equalized in insolvency. It is beyond argument that the pari passu rule does not equalise creditors who
rank differently. In Re Smith, Knight & Co, it was held that the court does not look to past transactions and
equalise all creditors. Instead, it takes them exactly as it finds them. Thus, the decision of British Eagle
hardly constitutes a vindication of the pari passu principle, no matter what the judicial rhetoric. And in any
case, the sums recovered as a result of this decision would not have been distributed pari passu. Pre-
preferential and preferential creditors etc. would have taken the first bite.
- Note: the judgment was overturned by legislation to preclude its operation to clearing houses. IATA also
amended the terms of its clearing house to overcome the effects of the judgment.
- Note, also, despite the difficulties of the case, it was applied by the S.G.H.C. in Joo Yee Construction v.
Diethelm Industries.
Joo Yee Construction Pte Ltd v. Diethelm Industries Ptd Ltd [1990] 2 MLJ 66
Facts
- The case concerned a building project, under which the owner of the project pays the main contractor and
the main contractor pays the sub-contractors.
- When the main contractor becomes insolvent or enters into an insolvent liquidation, the sub-contractors
will not be paid even though the owner continues to pay the main contractor. Hence, a direct payment
clause was entered into the contract to enable the owner (in this case the government) to pay the sub-
contractor directly.
- There were essentially 2 limbs to Clause 20(e): (1) If the main contractor has failed to pay the nominated
sub-contractors, the Government may pay the same and deduct the amount thereof from any sums due
to the main contractor; and (2) The Government is given a similar power when a winding-up petition has
been presented or a receiver has been appointed over the main contactors business.
Held
- L P Thean J applied British Eagle v. Air France, holding that upon liquidation of an insolvent company
(whether voluntary or compulsory), subject to the rights of preferential creditors and also secured
creditors, if any, its property must be applied in settlement of its liabilities pari passu, and any contract
made by the company which provided for a distribution of any of its property for the benefit of one or
more of its unsecured creditors which ran counter to or sought to vary this rule was contrary to public
policy, and the law as regards distribution of the insolvents property under the insolvency legislation must
prevail.
- If the government were to make direct payment to the 3 sub-contractors and deduct these amounts from
monies due or payable to the main contractor under the first limb, it was in effect distributing to the 3
unsecured creditors sums of money which would otherwise be paid to the main contractor and form part of
the general assets of the main contractor available for distribution among all its creditors pari passu. Such
a contractual provision clearly infringed the insolvency law providing for distribution of the insolvent`s
property pari passu among its creditors.
- The second limb went further than the first, and the above applies a fortiori.
- Consequently, the liquidator was not bound by that clause, and any payment made thereunder to the
subcontractors was void as against him.
*Re Harrison, ex p Jay (1880) LR 14 Ch D 19 (leading case on vesting clauses being invalid)
Facts
- The clause in issue stipulated that building materials on site were forfeited to the owner of the site should
the builder go bankrupt.
- The purpose of the clause was to divest the builders ownership of the building materials on the site and
33
vest it in the site owner so that the latter may use the materials to continue building the flats.
Held
- The clause was held to be against public policy and void, as a violation of the principle of anti-
deprivation rule.
- James LJ: [A] simple stipulation that, upon a mans becoming bankrupt, that which was his property up
to the date of bankruptcy should go over to some one else is void as being a violation of the policy of
the bankruptcy law.
- Cotton LJ: [T]here cannot be a valid contract that a mans property shall remain his until his
bankruptcy, and on the happening of that event shall go over to someone else, and be taken away from his
creditors.
Evaluation
- The clause in this case is different from the one in Ex p Mackay in that the one here causes the net asset
position of the debtor to decline, with the result being that all the unsecured creditors of the debtor are
worse off. The clause thus relates to a conflict between the debtor on the one hand and the creditors as a
whole on the other hand.
- Contrastingly, in Ex p Newitt (1880) 16 Ch D 522, which was decided by the same C.A. that had decided
Ex p Jay a year earlier, the bankrupt builder had broken the terms of his agreement with the landowner and
it was provided in the agreement that the chattels would be forfeited to the landowner as and for
liquidated damages, and it was held that the clause was valid, as the provision for forfeiture operated on
breach and not on bankruptcy. In Ex p Jay, the builder was not in breach of contract, and the right to
forfeit was expressed to be triggered, inter alia, on the builder becoming bankrupt.
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Trustee Services Ltd.
Money Markets International Stockbrokers Ltd v. London Stock Exchange Ltd [2002] 1 WLR 1150,
[2001] 2 BCLC 347
Facts
- Prior to April 2000, the London Stock Exchange was owned and controlled by exclusively by its
members.
- The LSE rules provided, inter alia, that membership would terminate were a member unable to pay its
debts ot other members.
- Clause 8.03 of the articles of association required members to dispose of B shares of the LSE that they
held, which carried voting rights, in the event they ceased to be a member. B shares could only be
transferred to firms that were members of the LSE, and not for any consideration.
- MMIS was a member firm of the LSE.
- In Feb 1999, MMIS was the subject of a winding up petition, and the following day, it was declared a
defaulter pursuant to the LSE rules, stripped of its membership, and in accordance with Clause 8.03,
required to dispose of its B shares (worth approximately 2.8 million) for no consideration.
- The liquidator of MMIS argued that Clause 8.03 was void as a fraud on the insolvency laws, as it
compulsorily deprived the insolvent company of the B shares, which ought to have formed part of its
estate for the distribution to its creditors.
- LSE argued that Clause 8.03 was not intended to subvert insolvency law, but rather to preserve the
personal character of membership of the LSE.
Held
- Neuberger, J held that the transfer of the share was valid and extracted the following principles from the
existing authorities:
A person cannot arrange his affairs so that what is already his own property is taken away in the
event of insolvency.
Subject to the above, transfer of an asset for an interest coming to an end on the transferee's
insolvency (or some other event) is effective even if the transferee is insolvent.
Subject to the following propositions, transfer of an asset on condition that the asset will revest in
the transferor in the event of the transferee's insolvency is generally invalid.
In deciding whether a deprivation provision, exercisable other than on insolvency, offends against
the anti-deprivation principle, the primary concern is with the effect of the provision, not the
intention of the parties; but if the deprivation provision is exercisable for reasons other than the
owner's insolvency, default or breach, it may be that its operation is not within the anti-deprivation
principle.
Intention to evade insolvency rules when agreeing to a deprivation provision may invalidate a
provision. If there was no such intention, a Court will more readily uphold the provision if it provides
compensation for the deprivation.
A Court will examine with particular care a deprivation provision that has the effect of preferring
the person to whom the asset reverts against other unsecured creditors.
Where the deprivation provision relates to an asset which has no value, or is incapable of transfer
or which depends on the character or status of the owner, then it will normally be enforceable on
insolvency.
A deprivation provision which might otherwise be invalid may be valid, if the asset concerned is
closely connected with, or subsidiary to, a right or other benefit in respect of which a deprivation
provision is valid.
If the deprivation provision does not offend against the anti-deprivation principle then, subject to
there being no other objection to it, it will be enforceable against a trustee in bankruptcy or on
liquidation just as much as it would have been enforceable in the absence of an insolvency.
*Belmont Park Investments Pty Ltd v. BNY Corporate Trustee Services Ltd [2011] UKSC 38
Facts
- The case concerned the enforceability of so-called flip clauses, which provide that payment obligations
owed to different creditors, in this case the swap counterparty and the noteholders (Australian companies,
35
institutions, authorities and charities), flip in priority following a counterparty bankruptcy.
- Notes were issued to investors by one of Lehman Brothers companies via a SPV (the issuer)
incorporated in a tax friendly jurisdiction.
- The issuer purchased government bonds or other secure investments with the subscription money paid by
the noteholders and these securities were vested in BNY Corporate Trustee Services.
- The issuer and one of Lehman Brothers subsidiaries, Lehman Brothers Special Financing (LBSF),
entered into a credit default swap arrangement under which LBSF paid the issuer the amounts due by the
issuer to noteholders in exchange for sums equal to the yield on the securities.
- The amount payable by LBSF to the issuer on the maturity of the notes (or on early redemption of
termination) was the initial principal amount subscribed by the noteholders less amounts calculated by
reference to events defined as credit events occurring during a specified period by reference to one or more
reference entities, thereby giving effect to the effective insurance aspect of the programme.
- The securities were charged by the issuer in favour of BNY to secure its obligations to the noteholders
and LBSF on terms which changed their respective priorities on the occurrence of certain credit events (the
flip clauses). Specifically, the respective priorities of LBSF and the noteholders depended on whether
there had been an event of default under the swap agreement, which included the institution by LBSF of
proceedings in insolvency or bankruptcy (such as filing for Chapter 11 protection). If there were no such
event of default, then LBSF would have priority in relation to the enforcement of the collateral in
satisfaction of its claim, but if there were an event of default in respect of which LBSF was the defaulting
party, the noteholders would have priority over LBSF.
- The original rationale for the flip provision was simple it prevented an in-the-money swap counterparty
from engineering its own default so as to be paid out the mark-to-market value of the swap, thereby
destroying the finely balanced cashflows underpinning the securitisation.
- Subsequently, LBSF filed for Chapter 11 protection in the U.S. Bankruptcy Court in New York, and the
ensuing flip in priority resulted in the noteholders being given priority over LBSF to the proceeds of the
enforcement of the charge over the securities.
- The liquidators of LBSF argued that it had been deprived of property to which it was entitled in its
bankruptcy in contravention of the anti-deprivation principle.
Held
- The Supreme Court held that the flip clause was valid and enforceable and did not offend the anti-
deprivation principle under English bankruptcy law.
- Lord Collins (with whom Lord Walker, Phillips, Hope, Clarke and Lady Hale agreed) made the
following key points:
A perusal of the case law demonstrated that those cases in which the anti-deprivation principle had been
contravened had all involved arrangements which had as their object the avoidance of the bankruptcy
laws, while those cases where the rule had not been contravened involved legitimate commercial
arrangements where there was no indication that they had been entered into to avoid the insolvency law.
Thus, a deliberate intention to evade insolvency laws is required in order for the anti-deprivation
principle to apply. That is not to say that there must be a subjective intention to avoid the insolvency
lawswhere it is possible to infer such intention from the circumstances, then that will be sufficient,
but in borderline cases, a commercially sensible transaction entered into in good faith should not be
held to infringe the anti-deprivation rule. This is more likely to be the case where (as here) the person
arguing that the rule should not apply has funded the purchase of the underlying asset. In addition, there
"is a particularly strong case for autonomy in cases of complex financial instruments". In any event,
there was no suggestion in this case that the relevant provisions were deliberately intended to evade
insolvency laws (as evidenced, for one, by the wide range of non-insolvency circumstances capable of
constituting an event of default under the swap agreement).
In contrast, the pari passu rule, bona fide intentions and the absence of a deliberate intention to evade
the insolvency laws are not required.
- Lord Mance, in coming to the same conclusion, took a different line of reasoning. He thought that the
priority lost by the swap counterparty on its insolvency was not a proprietary right, and accordingly there
was no property on which the anti-deprivation rule could bite.
- The Supreme Court was also invited by counsel for LBSF to do away with the distinction between an
interest determinable on bankruptcy and an absolute interest made defeasible on bankruptcy by a condition
subsequent. The Supreme Court defined a determinable interest and a defeasible interest respectively as
36
an interest the quantum of which is limited by the stipulated event, so that the occurrence of that event
marks the end of the duration of the interest, and an interest which is granted outright and then forfeited. In
response to the invitation, the majority judgment expressly noted that the principle that a determination
clause is not an attempt to remove an asset from the company but simply a delineation of the quantum of
the asset or the duration of the transferees entitlement is too well established to be dislodged
otherwise than by legislative fiat, even though the distinction was extremely hard to justify or explain.
Furthermore, the Supreme Court noted, to hold that both types of determination are contrary to the anti-
deprivation rule would be thoroughly destructive of commercial expectations in many areas. Hence, if it
were possible to characterise LBSFs right as a right to be repaid in priority to the noteholders when there
was not at the date of termination an event of default in relation to which it was the defaulting party, then
it would have been possible so to characterise the rights in cases in which the rule has been applied: e.g. a
right to royalties if not bankrupt (Ex p Mackay).
- In other words, the law distinguishes between the loss of an asset on insolvency (which infringes the
rule) and ownership for a limited time (which does not).
Evaluation
- The effect of the flip clause was to take away an asset of LBSF and cause its net asset position to fall.
Thus the issue here is not priority grabbing (net asset position remains the same) but the integrity of the
estate of LBSF. The noteholders (represented by the trustee) and LBSF were never in a creditor-debtor
relationship throughout the survival of the investment (in fact, there was no creditor-debtor relationship
between the SPV and either LBSF or the noteholders, as there were non-recourse clauses which insulated
the SPV from liability against the noteholders as well as LBSF. The only recourse for both LBSF and the
noteholders was to the collateral). In this connection, Lord Collins remarked at [15]: The noteholders are
creditors of the issuer. There is no question of disturbance of the pari passu rule as between the creditors of
[LBSF]. Accordingly, the relevant law is the anti-deprivation principle, as rightly applied by the Supreme
Court.
- As a result of the decision, there will be more focus on the jurisdiction and choice of law of the contract
in similar future transactions. In some circumstances, parties may prefer when possible to avoid contracts
with counterparties that are subject to U.S. bankruptcy laws, under which it is unclear whether flip clauses
are enforceable. Issuers may even consider re-structuring existing securities.
- It is worth noting that the judgment in this case did not state that good faith and commercial
justification will be good defenses on all occasions, nor did it set out clear principles of law which can be
applied definitively in all circumstances.
- To take the issue of commercial justification further, there are usually good commercial justifications for
the parties concerned to include the offending clause in most cases. For instance, it could be said that the
site owner in ex p Jay had good commercial reasons for including the vesting clause, viz, so that the site
owner may use the materials to continue building the flats. This suggests that the courts may be influenced
by other reasons which they are not being explicit about.
- To take the issue of good faith further, why should intention matter when the objective effect is that the
creditors as a whole have been deprived of an asset? To strike a comparison, intention is irrelevant when
determining whether a transaction is one at an undervalue.
Liquidation does not, of itself, bring a contract to an end, nor is it necessarily a ground for the solvent party
to terminate the contract (although there will often be provisions to this effect in an agreement) (SSSL
Reaslisations [2006] 2 WLR 1369).
Section 332 CA empowers the liquidator to unilaterally disclaim any part of the property of a company
where it consists of:
(a) any estate or interest in land which is burdened with onerous covenants;
(b) shares in corporations;
(c) unprofitable contracts; or
37
(d) any other property that is unsaleable, or not readily saleable, by reason of its binding the possessor
thereof to the performance of any onerous act, or to the payment of any sum of money.
The liquidator can exercise the power of disclaimer only with the leave of the Court or the committee of
inspection (s.277-278, 298 CA).
Generally, a contract is not an unprofitable contract in this context merely because it is financially
disadvantageous or merely because the company could have made or could make a better bargain:
Transmetro Corp Ltd v. Real Investments and accepted in In re SSSL Realisations (2002) Ltd. Thus,
disclaimer cannot be used to maximize the companys estate.
The 5 principles laid down in Transmetro Corp Ltd v. Real Investments was largely adopted in In re SSSL
Realisations (2002) Ltd, except that earliest possible time was substituted with reasonable time:
38
estate; and (2) in an insolvent liquidation, to avoid the continuance of liabilities in respect of onerous
property which would be payable as expenses of the liquidation, to the detriment of unsecured creditors.
Evaluation
- It follows that obligations which have already accrued in the past are not liabilities which can be
terminated by disclaimer. Liabilities which can be terminated could be such things as an obligation that
will arise in the future to pay money or transfer property or provide goods or services, and they could be
restrictions on or inroads into the use or enjoyment of property. Where an obligation has arisen but the
time for performance has not yet arrived, or where the obligation is subject to conditions which are
not yet performed, then it may be that that is a liability which can be terminated. In some cases,
however, a question of degree may arise whether in substance there is a fully accrued obligation - which
cannot be terminated, or, in substance, an obligation in relation to the future - which can be. It follows
that no hard and fast test can be propounded. Each case will depend on its facts and the extent to which
continuing obligations defeat the orderly and prompt conclusion of the winding-up.
Effect of Disclaimer
Disclaimer in accordance with s.332 CA determines the rights, interests and liabilities of the company in or
in respect of the property disclaimed, but it does not affect the rights or liabilities of any other person
except to the extent that is necessary for the purpose of releasing the company from liability. Hence, in
Hindcastle Ltd v. Barbara Attenborough Associates, the H.L. held that disclaimer, being a deeming
provision so far as other persons rights and obligations are concerned, does not end the liability of any
guarantor of the tenant in liquidation or the original tenants to the landlord.
Any person sustaining loss as a result of a disclaimer is deemed a creditor of the company to the amount of
the injury, and may accordingly prove the amount as a debt in the winding-up: s.332(8) CA. Thus, in Re
Park Air Services, the English C.A. held that a landlord may submit a claim for sums (rent, insurance,
business rates etc) which would have been due to the landlord if there had been no disclaimer. This sum
will be discounted to reflect the likelihood of re-letting, rent free periods etc, and also to reflect accelerated
receipt.
Section 332(6) CA (vesting order): The Court may, on the application of a person who either claims any
interest in any disclaimed property or is under any liability not discharged by this Act in respect of any
disclaimed property and on hearing such persons as it thinks fit, make an order for the vesting of the
property in or the delivery of the property to any person entitled thereto, or to whom it seems just that
the property should be delivered by way of compensation for such liability as aforesaid, or a trustee for
him, and on such terms as the Court thinks just, and on any such vesting order being made and a copy
thereof and an office copy thereof being lodged with the Registrar and the Official Receiver, respectively,
and if the order relates to land with the appropriate authority concerned with the recording or registration of
dealings in that land, as the case requires, the property comprised therein shall vest accordingly in the
person therein named in that behalf without any further conveyance, transfer or assignment.
39
insolvent tenant's estate. Consequently, in his view, there was no question of the guarantor's right to
indemnity being confiscated.
- He also pointed out that a guarantor could take steps to obtain some return from the property by
applying to the court for a vesting order.
- Lord Nicholls decided that the best answer to the problem was to interpret the statute as taking effect
as a deeming provision so far as other persons preserved rights and obligations were concerned, i.e., the
lease is deemed to continue so far as those rights and obligations are concerned.
Re Park Air Services; Christopher Moran Holdings Ltd v. Bairstow [1999] 2 WLR 396
Facts
- The landlord, Christopher Moran Holdings Limited, granted a lease of the property to Park Air Services
for 25 years from 29 September 1989 with a provision for periodic upwards only rent reviews.
- On 9 December 1994, the tenant entered into a form of voluntary winding up and Bairstow were
appointed liquidators.
- On 10 December 1994 Bairstow gave notice to CMH that it was disclaiming the lease which entitled
CMH to submit a proof of its loss or damages sustained in consequence of the disclaimer.
- CMH submitted a proof of debt for some 5.3 million representing the difference between the amounts
which would have been paid to CMH (eg rent, insurance rent) if there had been no disclaimer and the
amounts which CMH would be likely to receive in respect of such items on a notional reletting or series
of reletting for a similar term after the disclaimer.
- Bairstow rejected this claim on the ground that each of the amounts should have been discounted for
accelerated receipt by the landlord.
- At first instance, the judge upheld Bairstows contention and assessed CMHs loss at just over 1
million with interest. On appeal, this amount was increased to just over 2.5 million together with
interest. Bairstow then appealed to the House of Lords who restored the order made by the judge at first
instance (i.e. assessing CMHs loss at 1,053,000). The way the compensation should be calculated is to
take into account the receipts which the landlord would enjoy by reletting the property. Also, the receipts
should be discounted to reflect their current value.
Held
- The House of Lords held that the landlord had a right to claim damages for loss in respect of a lease
which had been disclaimed by the tenants liquidator as onerous property under the terms of the
Insolvency Act 1986.
- Such loss is to be assessed in the same way as damages for breach of a contract which has been
wrongfully terminated, and in assessing those damages allowance for any advancement that has
occurred is to be made for losses that only accrue after the date the contract was terminated, as t o
fail to take into account the element of advancement leads to an over-compensation of the claimant.
40
Insolvent Liquidation
Proof of debts is the only machinery for creditors of a company in insolvent liquidation to be paid.
*Wight & Ors v. Eckhardt Marine GmbH [2003] UKPC 37; [2004] 1 AC 147; [2003] 3 WLR 414, [20]-
[35]
Facts
- Eckhardt entered into a contract to sell a vessel.
- The buyer procured a guarantee from BCCIs Bangladeshi branch in favour of Eckhardt.
- Eckhardt was not paid on the guarantee and BCCI was wound up in Cayman Islands.
- Eckhardt lodged a proof with the liquidators.
- The Bangladeshi government effected a reconstruction scheme which vested debts and liabilities of the
Bangladeshi branch in Eastern Bank (i.e. nationalisation). Thus, the debt that was previously owed by
BCCI to Eckhardt was now owed by Eastern Bank.
- Liquidators then rejected the proof. Eckhardt appealed against the decision.
- Eckhardt argued whether Eckhardt was owed a debt must be ascertained at the date of the winding-up,
and if it was at that date entitled to payment under the law of Bangladesh, it cannot be deprived of its
entitlement by subsequent events (in this case nationalization by the Bangladeshi government, which
purported to discharge the debt owed by BCCI to Eckhardt).
Held
- The Court held in favour of the liquidator.
- First, a winding-up order was not the equivalent of a judgment which converted the creditor's claim into
something juridically different, like a judgment debt. Winding-up did not create new substantive rights
in the creditors nor destroy old ones; the creditor who petitions for a winding-up is not engaged in
proceedings to establish the company's liability or the quantum of the liability (although liability and
quantum may be put in issue) but to enforce the liability. The winding-up leaves the debts of the creditors
untouched, and only affects the way in which they can be enforced. They are discharged by the
winding-up only to the extent that they are paid pari passu out of the companys assets. But when the
process of distribution is complete, there are no further assets against which they can be enforced.
- Secondly, provable claims were valued at the date of winding-up. All claims must crystallise at the
same date so that pari passu distribution of the available assets can be achieved. The courts, however,
only apply the principle of valuation at the date of winding-up to give effect to the underlying purpose of
fair distribution between creditors pari passu and not as a rigid rule. Specifically, it did not prevent
consideration of subsequent events that threw light on the value or existence of a claim. Hindsight
may be used as it is not considered fair to a creditor to value a contingent debt at what it might have been
worth at the date of the winding-up order when one now knows that prescience would have shown it to
be worth more. The same must be true of a contingent debt which prescience would have shown to be
worth less. The use of hindsight to value debts which were contingent at the date of the winding-up order
show that the scene does not freeze at the date of the winding-up order. Applying the same logic, the
principle of pari passu distribution according to the values of debts at the date of winding-up does not
necessarily lead to the conclusion that someone who was a creditor at that date must be allowed to
participate in the distribution even when he is no longer a creditor at all. Thus, as Eckhardt was no longer
a creditor when its proof was rejected, liquidator was entitled to reject its proof.
41
Provable Debts
Section 2(1) BA: A liability means a liability to pay money or moneys worth, irrespective of whether
such liability is present or future, certain or contingent or of an amount that is liquidated or capable of
being ascertained by fixed rules or as a matter of opinion, and includes any such liability arising (a) under
any written law; (b) under contract, tort or bailment; (c) as a result of a breach of trust by the person
liable; or (d) out of an obligation to make restitution.
Thus, the concept of liability is much broader that debt, and embraces all forms of liability, whether
liquidated or unliquidated (unascertained either as to existence or quantum or both).
Section 87(3) BA defined the type of debts or liabilites which are provable in bankruptcy.
Section 87(3)(a) BA: Any debt or liability to which a bankrupt is subject to at the date of the bankruptcy
order is provable in bankruptcy.
Section 87(3)(b) BA (contingent debts and liabilities): Any debt or liability to which a bankrupt may
become subject before his discharge by reason of any obligation incurred before the date of the
bankruptcy order provable in bankruptcy.
The date of the bankruptcy order in the context of insolvency is the date that the winding-up order is made.
Unliquidated damages
The types of unliquidated damages that are provable is qualified by s.87(3) BA.
Section 87(3) BA: Demands in the nature of unliquidated damages arising otherwise than by reason of a
contract, promise or breach of trust shall not be provable in bankruptcy.
When a claim remains unliquidated when a dividend is to be declared, an estimate will be assigned
pursuant to the estimation mechanism under s.87(4) BA.
Section 87(4) BA: An estimate of the value of any liability which by reason of its being subject to any
contingency does not bear a certain value shall be made.
Further, if in the debt or liability is, in the opinion of the court, capable of being fairly estimated, the court
may assess the same and may give all necessary directions for this purpose, and the amount of the value
when assessed shall be deemed to be a debt provable in bankruptcy: s.87(7) BA.
However, if the debt or liability is, in the opinion of the court, incapable of fairly estimated, the debt shall
not be provable: s.87(6) BA.
The new insolvency legislation that is currently being drafted, however, will most probably discard this
42
importation and come up with separate rules for company liquidation.
Tortious claim
A tortious claim is, by statutory prescription (s.87(1) BA), not provable unless it is liquidated (Re T&N Ltd
[2005] EWHC 2870; Edwards v. Attorney General (NSW) [2004] NSWCA 272). This is in line with the
general rule that provable claims are valued at the date of winding-up (Wight & Ors v. Eckhardt Marine
GmbH [2003] UKPC 37). This is objectionable for two reasons:
(1) Why should a claimant in tort be required to liquidate his claim when there is no similar
requirement for a claimant in contract?
(2) The harmful effects of some torts may take years to surface. A tortious victim should not be
penalised because of that. Consider the following: a company exposes its employees and outsiders
to hazardous substances which are liable to lead to serious illnesses. But it takes a long time for
some of those exposed to develop any symptoms, and some of them may not fall ill. Should this
mean that those that fall ill after the company is wound up are not entitled to prove? What about
those that are at risk of falling ill?
One justification is that since liability in tort of a company is always vicarious, the tort victim will have
some individual tortfeasor against whom he can prosecute his claim. However, this is unconvincing, as
there may well be tortious claims against a company which cannot be easily asserted against an individual
tortfeasor, for example, if a claim is against a manufacturing corporation in respect of a defective product
(the classic Donoghue v. Stevenson).
Particular difficulty arises where the solvency of the company hinges upon the admission or rejection of a
tortious claim which is provable according to the rules of proof applicable in a solvent winding up but non-
provable according to the bankruptcy rules of proof. If the exclusion of an unliquidated tort claim results in
the company having surplus assets and therefore a solvent company, the operation of s.327(1) CA is
triggered and the tort claim becomes provable due to the laxer rules relating to proof under s.327(1) CA (all
debts payable on a contingency, and all claims against the company, present or future, certain or
contingent, ascertained or sounding only in damages, are admissible to proof against the company.). If,
however, the tortious claim exceeds the surplus assets, the company will be insolvent and s.327(2) CA will
have effect again. But practically speaking, this conundrum is in most cases academic. Furthermore, the
expected legislative changes should do away with this problem.
But a solution to this conundrum would be to treat the claim as non-provable but to allow it to be admitted
to proof if it subsequently becomes provable (Re Berkeley Securities (Property) Ltd). This is in line with the
hindsight principle referred to in Wight & Ors v. Eckhardt Marine GmbH.
Fines
43
Under Singapore law, unlike in Australia, fines are treated as ordinary debts provable against a company in
insolvent liquidation. But this is objectionable on the basis that although a fine may be a claim by the
community, fines are by their nature generally intended to be a deterrent, but in the case of a corporate
insolvency, it is difficult to justify penalising creditors for a wrong committed by the company.
The rationale does not apply to s.87(8) BA (read with s.327(1) CA), which provides that an amount payable
under a compensation order pursuant to the confiscation of the proceeds of crime is provable in an
insolvent liquidation. A penalty or fine divests the company of its assets, but a confiscation order is merely
restitutionary, viz, it merely strips the company of criminal proceeds so that the ill-gotten gains do not go
towards swelling the assets of the company for the unwarranted benefit of its creditors.
The rule prohibits more than one proof for one debt owed by the insolvent company. Thus, a guarantor
cannot prove in the winding-up so long as the principal creditor retains a right of proof, as the both claims
are in substance in respect of the same debt. The purpose of the rule is to protect the other unsecured
creditors of the debtor company in insolvent proceedings. Thus, the indemnity of the debtor in favour of
the guarantor is not provable so long as the principal creditor retains a right of proof.
In Re Oriental Commercial Bank [1871] LR 7 Ch App 99, Mellish LJ explained the rule as follow:
An insolvent estate ought not to pay 2 dividends in respect of the same debt. If it were not so, a
creditor could always manage, by getting his debtor to enter into several distinct contracts with
different people for the same debt, to obtain higher dividends than the other creditors, and perhaps
get his debt paid in full.
The rule is that there is only to be 1 dividend in respect of what is in substance the same debt,
although there may be 2 separate contracts.
In Barclays Bank Ltd v. TOSG Trust Fund Ltd [1984] 2 WLR 49 (CA) (affirmed [1984] AC 626 on other
grounds), Oliver LJ stated that the test as to the necessary relationship between the two claims is as follows:
[T]he rule against the double proofs in respect of two liabilities of an insolvent debtor is going to apply
wherever the existence of one liability is dependent upon and referable only to the liability to the other and
where to allow both liabilities to rank independently for dividend would produce injustice to the unsecured
creditors.
The rule most commonly arises in the context of a surety or a guarantee. Re Polly Peck International plc
sets out the elementary rules as to suretyship, shorn of complications arising from the provision of security
or from the Ellis v. Emmanuel distinction (distinction between the guarantee of a part of a debt, and the
guarantee of the whole debt subject to a limitation on the guarantor's liability):
44
right of indemnity) only if the Surety has paid the Creditor in full (so that the Creditor drops out of the
matter and the Surety stands in its place).
(4) As a corollary of (3) above, the Surety's liquidator cannot prove in the Principal Debtor's liquidation
in any way that is in competition with the Creditor; though the Surety has a contingent claim against the
Principal Debtor (in the event of the Creditor being paid off by the Surety) the Surety may not make that
claim if it has not in fact paid off the Creditor.
- The situation in (2) is what insolvency practitioners term a double-dip, which is permissible, whereas
the situation in (4) is the simplest case of what would be double proof, which is not permissible.
The H.L. recently held in Re Kaupthing Singer and Friedlander Ltd (No 2) that the rule against double
proof trumped the rule in Cherry v. Boultbee (where a party is both entitled to a distribution from a fund
and at the same time is indebted to the fund or has given the fund a right of indemnity, the party must first
contribute to the fund to the extent of the debt owing before it may receive money from the fund), and
hence a guarantor cannot reduce the amount it owes to a principal obligor and set-off against its indemnity
until the guaranteed obligation is discharged completely:
45
- The interaction between the two was explored in Re Kaupthing Singer and Friedlander Ltd (No 2).
Debts are proved by sending a statutory declaration verifying the debt before a date fixed by the liquidator:
see s.283(1), s.288(e) CA and rr.79-91 CR. The liquidator may admit or reject the proof or may require
further evidence and a dissatisfied creditor or contributory may apply to the Court to reverse or vary the
liquidators decision: r.92, r.93 CR.
The general principle is that upon the liquidation of an insolvent company its property must be applied pari
46
passu to satisfy the claims of all its unsecured creditors: see, in the context of voluntary winding-up, s.300
CA. However, there is little doubt that the same rule applies to a compulsory winding-up. This is in line
with the general philosophy that winding-up proceedings are collective and intended for the benefit of all
parties concerned: see s.262(4) CA.
As Thean J, as he then was, said in The Hull 308 [1991] 3 MLJ 393:
The primary object of the winding-up provisions of the Act is to put all unsecured creditors
upon an equality and to pay them pari passu.
*British Eagle International Airlines .v Air France [1975] 1 WLR 758; [1975] 2 All ER 390
Held
- The majority took the view that the parties had, by agreeing that simple contract debts were to be settled
in a particular way, contracted out of the provisions of the relevant insolvency legislation for the payment
of unsecured debts pari passu. As such, the arrangements were contrary to public policy and the
insolvency legislation prevailed.
Evaluation
- That this case has been described as [undoubtedly the] leading modern authority on the pre-eminence
of the pari passu principle (Oditah, Assets and the Treatment of Claims in Insolvency (1992) 108
LQR 459 at 465) is not without irony. The case could not provide any support for the pari passu
principle. Even Lord Cross, speaking for the majority, accepted that AF, and other members of the
clearing house, were never equal to BE's general creditors outside liquidation. During BE's solvency, the
members of IATA could not (unlike BE's non-IATA creditors) just have ignored the clearing house
arrangements and sued BE for any sums owed. Correspondingly, BE could not, while solvent, have
proceeded directly against AF. It could only have claimed against the clearing house for any net balance
due to it. And yet BE's liquidator was allowed to do precisely what BE would not have been able to do.
By the same stroke, BE's IATA creditors were forced to claim directly against BE (by proving in its
liquidation) while they would have been neither required nor even allowed to do so before the
commencement of its winding-up. Pre-insolvency unequals were forcibly equalized in insolvency. It is
beyond argument that the pari passu rule does not equalise creditors who rank differently. In Re Smith,
Knight & Co, it was held that the court does not look to past transactions and equalise all creditors.
Instead, it takes them exactly as it finds them. Thus, the decision of British Eagle hardly constitutes a
vindication of the pari passu principle, no matter what the judicial rhetoric. And in any case, the sums
recovered as a result of this decision would not have been distributed pari passu. Pre-preferential and
preferential creditors etc. would have taken the first bite.
There are several exceptions to pari passu distribution amongst unsecured creditors, including:
Insolvency set-off
47
This is the best position for an unsecured creditor to be in. See below.
Preferential creditors
Section 328 CA accords certain debts priority over other unsecured debts and debts secured by floating
charges.
Section 328(3) CA: The debts in each class, specified in s.328(1), shall rank in the order therein specified
but as between debts of the same class shall rank equally between themselves.
Section 328(5) CA: Debts specified in ss.328(1)(a), (b), (c), (e) and (f) enjoy priority over debts owed to a
floating charge holder.
48
Evaluation
- It is possible to alter provisions such that floating charges rank ahead of fixed charges without
preferential creditors achieving priority over fixed charge holders. Properly drafted deeds of priority will
use a turn-over trust so that rather than the floating charge holder become entitled to prior payment, the
fixed charge holder holds the proceeds of its security on trust for the floating charge holder and thus
keeps both of them ahead of preferential creditors.
Under s.328(1) CA, the costs and expenses of winding-up are to be paid in priority to all other unsecured
debts.
Liquidation expenses rank equally between themselves: s.328(3) CA.
Some categories of types of liquidation expenses include:
Liquidator remuneration;
Expenses properly incurred by the liquidator in conducting the liquidation, e.g., in employing
assistants, realising assets, carrying on business of the company etc;
Debts incurred under new contracts made by the company;
Pre-liquidation debts owed to special creditors, such as rents incurred by company pre-liquidation
to avoid forfeiture or payments to ensure continued supply of essential goods or services (e.g., old
utilities debt to avoid utility supplier cutting off supply);
Non-contractual liabilities incurred by the company during liquidation.
49
when he continues to use it.
- The principle evolved from Lundy Granite Co is thus one which permits, on equitable grounds, the
concept of a liability incurred as an expense of the liquidation to be expanded to include liabilities
incurred before the liquidation in respect of property afterwards retained by the liquidator for the benefit
of the insolvent estate.
Apart from contractual claims, there may be claims, such as statutory claims, that are not incurred for the
benefit of the liquidation, though they may arise as a necessary or foreseeable consequence of liqidation.
This issue arose in Re Toshoku Finance UK plc (in liquidation) in the context of liability to pay corporate
tax:
*Re Toshoku Finance UK plc (in liquidation) [2002] 3 All ER 961, [2002] 1 WLR 671, [18]-[42]
Facts
- The matter in issue was the liability of the liquidator to pay corporate tax which had fallen due after the
commencement of the winding-up.
- The liquidator argued that a debt is only a liquidation expense if it is on the statutory list of liquidation
expenses and was incurred by the liquidator for the purpose of liquidation.
Held
- The H.L. rejected the argument. Lord Hoffman drew a distinction between pre-liquidation contracts and
post-liquidation liabilities. While pre-liquidation liabilities required an equitable justification to be
paid as an expense, obligations incurred by a liquidator post-liquidation should be paid as an expense of
the liquidation as a matter of course and required no equitable justification for their payment. So long
as they are listed on the statutory list (there is no statutory list in Singapore), they are payable.
Evaluation
- U.K. law, unlike Singapore, has an exhaustive list of liquidation expenses, as well as their respective
ranking. What should be Singapores position be in the absence of statutory guidance?
The Third Parties (Rights Against Insurers) Act (Cap. 395) creates priority in favour of 3rd parties to whom
the company has incurred liability in respect of the insurance moneys paid to the company in connection
with such liability.
Section 328(6) CA: Where the company is insured against liability to 3rd parties, any such liability so
incurred shall have priority above all preferential creditors specified in s.328(1) CA.
Section 250(1)(g): A sum due to any member in his character of a member by way of dividends, profits
or otherwise shall not be a debt of the company payable to that member in a case of competition
between himself and any other creditor not a member, but any such sum may be taken into account for
the purpose of the final adjustment of the rights of the contributories among themselves.
50
- A deed of priority was entered into by all the chargees, giving priority to the 3 rd charge held by the last
creditor (subordination agreement).
- The company subsequently got wound up, and during the proceedings, the Court considered whether
winding-up expenses and preferential creditors were to be paid in priority to the 3rd creditor, who had
contractual priority over the bank and the directors.
Held
- The Court re-characterised the 3rd creditors fixed charge, which covered the companys book and other
debts as well as its bank account, as a floating charge.
- The typical sequence of payments made on a companys insolvency is as such: (1) the expenses of
winding-up; (2) fixed charge holders; (3) statutory preferential creditors; (4) floating charge holders; (5)
unsecured creditors.
- In determining the priority of the 3rd creditor, the Court held that the deed of priority gave the 3 rd
creditors floating charge contractual priority ahead of the prior fixed charges but no new rights over
and above the statutory sequence has been created in favour of the 3rd creditor as the floating charge
holder.
- Accordingly, the preferential creditors were to be paid ahead of the 3rd creditor as a floating charge
holder, with the fixed charge holders coming after the floating charge holder: a holder of a subsequent
fixed charge which has been made subject to a prior floating charge either by express provisions in the
fixed charge itself or by a restriction in the floating charge of which the holder of the fixed charge had
notice takes his security upon terms that, if before the charged property has been realised under that
fixed charge events occur which cause the floating charge to crystallise, then the proceeds of realisation
must be paid to the holder of the floating charge; the holder of the fixed charge can have no claim upon
those proceeds until the claims under the floating charge have been paid out.
Evaluation
- It is possible to alter provisions such that floating charges rank ahead of fixed charges without
preferential creditors achieving priority over fixed charge holders. Properly drafted deeds of priority will
use a turn-over trust so that rather than the floating charge holder become entitled to prior payment, the
fixed charge holder holds the proceeds of its security on trust for the floating charge holder and thus
keeps both of them ahead of preferential creditors.
51
distinguished British Eagle on the basis that what the case actually stood for was that a creditor cannot
validly contract with his debtor that he will enjoy some advantage in an insolvency which is denied to
other creditors, i.e., the real policy underlying the case law was that the restrictions apply to contracts
that would have had adverse consequences on others.
- In this case, the senior creditor did not obtain a benefit to the detriment of other creditors similarly
situated. Instead, all creditors ranking equally with senior creditors benefit. Accordingly, the
subordination was valid and did not conflict with the mandatory pari passu principle.
Evaluation
- While this was a decision of a single judge made at first instance, it has to be a right one in view of the
importance and omnipresence of subordinations in the commercial world. As pointed out by Vinelott J,
the fundamental question in allowing debt subordination should be whether the arrangement was had any
adverse consequences on third parties, as opposed to an indiscriminate application of the pari passu
principle, which would undermine commercial expectations.
Insolvency Set-off
The pari passu principle is also subject to a very important statutory right of insolvency set-off: see s.327(2)
CA which brings in the application of s.88 BA.
The statutory right of set-off contained in s.88(1) BA in essence provides that where there are mutual debts
and liabilities between the company and the creditor, only the balance shall be provable. This translates to
a very important advantage to the creditor in that he can recover the full value of a debt owed to him by the
company to the extent that it does not exceed the value of any debt owed by him to the company. In effect,
he is a de facto secured creditor in respect of that portion of his claim against the company.
Section 88(1) BA: Where there have been any mutual credits, mutual debts or other mutual dealings
between a bankrupt and any creditor, the debts and liabilities to which each party is or may become
subject as a result of such mutual credits, debts or dealings shall be set-off against each other and only
the balance shall be a debt provable in bankruptcy.
Section 88(2) BA: There shall be excluded from any set-off under s.88(1) BA any debt or liability of the
bankrupt which
(a) is not a debt provable in bankruptcy; or
(b) arises by reason of an obligation incurred at a time when the creditor had notice that a bankruptcy
application relating to the bankrupt was pending.
Mandatory principle
52
- Halesowans bank account was overdrawn and was frozen as a result.
- Subsequently, a new account was opened and Halesowan deposited a cheque into the new account.
- NatWest bank agreed not to set-off 2 accounts of Halesowan for 4 months in the absence of a material
change of circumstances.
- Before the expiry of the freeze period, Halesowan convened a meeting of its creditors but the bank
decided not to set-off.
- Subsequently, the company passed a resolution to wind up and the bank tried to set-off.
- The liquidator argued that insolvency set-off did not apply as the parties had contracted out of it.
Held
- The statutory rules as to set-off are mandatory and cannot be excluded by agreement between the
parties.
- Set-off, according to their Lordships, was a procedure prescribed for the regulation of matters of public
interest in the orderly administration of the estate and not a private right which those who benefited
from it were free to waive.
- Lord Simon: insolvency set-off does not confer a right entirely on anyone. It lays down a procedure for
a proper and orderly administration of the assets of a bankrupt or insolvent company a matter in
which the commercial community generally has an interest.
- In a dissenting judgment, Lord Cross took the view that although mandatory in its terms, the section
should be read as being subject to any agreement to the contrary. He said that there was no reason why,
in principle, the person in whose interest it would be to invoke the rule of set-off, should not be entitled
to agree in advance that in the event of bankruptcy of the other party, he would not invoke it.
Evaluation
- The mandatory principle may be criticised for posing practical inconvenience. In this case, it would
have required Halesowan to open a new bank account with another bank in order to avoid the operation
of insolvency set-off.
- In relation to Lord Simons justification for insolvency set-off, theres no reason to assume that in the
absence of set-off, the administration of the assets of an insolvent company will be disorderly. After all,
continental jurisdictions do not recognise set-offs.
- Perhaps a more persuasive rationale for insolvency set-off is that which was articulated by Derham, viz,
that insolvency set-off enhances the provision of credit facilities and generally acts as a stimulus for trade
and commerce.
Retroactivity principle
- The account between the company and the creditor is taken at the date of the winding-up order (although
Good Property Land Development v. Societe-Generale held that the date at which the account is to be taken
is the date of the winding-up petition being presented).
- Although the account is to be taken at the date of the winding-up order, it might not practically be
possible to do so and therefore the taking of account is deemed or notional.
- As insolvency set-off operates automatically without the need for any procedural step, i.e., it is self-
executing, there is in practice no actual need to take account at the date of the winding-up order. An
account may be taken whenever it is necessary for any purpose to ascertain the effect which the set-off
section had.
- Due to the automatic operation of insolvency set-off, neither the company or the creditor can assign its
claim against the other after the date of the winding-up order. Only the balance after the set-off can be so
assigned.
53
Dfs counterclaim fell to be dealt with by way of set-off in the bankruptcy and that until the trustee had
taken an account under s.323 of the Insolvency Act 1986, there was nothing to assign.
Held
- The H.L. held that the claim could not be assigned.
- Insolvency set-offs are both mandatory and self-executing, in that they operate automatically and that
the statutory account is deemed to be taken on the date of the winding-up order.
- The Dfs cross claim amounts to an admission that he is liable on the claim and a contention that he is
entitled to set-off his cross claim in reduction or extinction of the amount for which the Pf is entitled to
judgment. Thus, once the Df was made a bankrupt, his cross claim was combined automatically with the
Pfs claim to produce a single net balance in favour of or due from the Df. Accordingly, only the net
balance (should it be positive in favour of the Df) could be assigned, and it may be done without having
to wait for an account to be actually taken.
Hindsight principle
1. With regards to debts owed by the company, only provable debts may be set-off: s.88(2)(a)
BA. This does not apply to debts owed by the other party to the company.
2. There must also be mutuality in debts, credits or dealings. Mutuality connotes reciprocity,
not correspondence (Gye v. McIntyre).
54
3. The claims must be commensurable, in that the claims on each side must be pecuniary claims
or non-pecuniary claims which, by their nature, will terminate in pecuniary claims.
4. The mutual dealings must have preceded the liquidation.
5. The claims of the company must have matured as a debt when the account is actually taken.
6. The claim must not arise by reason of an obligation incurred at a time when the creditor had
notice that a winding-up application was pending: s.88(2)(b) BA.
Debt
Debt is not defined in the BA or CA.
Common law restricts the meaning of debt to a liquidated claim.
Credit
Credit is broader than debt and therefore arguably includes unliquidated claims, such as damages.
Early authorities stated that the credit must in its nature end in a debt for the purposes of set-off
(Rose v. Hart).
This definition was relaxed in subsequent cases, and the present position is that it would suffice if
the credit naturally or in the ordinary course of business end in a debt.
Dealing
Dealings do not of themselves represent claims susceptible to set-off, whereas credits and debts
ordinarily do.
The concept of dealings has not been precisely defined, though it has been held by the English and
Australian courts that it has an extended meaning, and covers at least commercial transactions and
the negotiations leading up to them.
Commission of a tort can, but not always, constitute a dealing.
Mutuality
Good Property Land Development (in liq) v. Societe-Generale [1996] 2 SLR 239
Facts
- GPLD wanted to develop 2 plots of land and accordingly took out a syndicated loan of US$40m from S-
G, secured by, inter alia, a mortgage over the two plots of land.
- Subsequently, GPLD had difficulty meeting its payment obligations under the syndicated loan
agreement, and S-G proceeded to exercise its power of sale as mortgagee to sell the 2 plots of land.
- The sale yielded a surplus, and S-G proceeded to credit S$1,706,343.33 of the S$2,239,006.13 in surplus
funds into GPLDs bank account to set-off against outstanding bridging loans and overdraft owed by
GPLD.
- The parties the executed an agreement whereby GPLD acknowledged its indebtedness in respect of the
bridging loan account and the overdraft account.
- Subsequently, S-G filed a petition to wind up GPLD, and pursuant thereto, GPLD was wound up under
an order of court.
- GPLDs liquidator argued that S-G could not set-off the surplus proceeds of sale against the outstandings
in the bridging account and the overdraft account because of s.74(1) of the Land Titles Act, which provided
that the proceeds received by the mortgagee from exercising its power of sale were to be held on trust to be
applied in the following manner: (1) in payment of the costs of the sale; (2) in discharge of the liability
secured by the mortgage; (3) in payment of subsequent mortgages and charges in order of their priority;
and (4) to be paid over to the person who appears from the land-register to be entitled to the mortgaged
property.
- The liquidator also argued that the set-off agreement merely acknowledged the S-G's rights as bankers
55
and did not create any new rights for them.
- Finally, they contended that S-G held the surplus funds as agents of the syndicate of banks. Since the
debt was owed to GPLD and not the syndicate, there could be no set-off due to the absence of mutuality.
- In response, S-G argued that notwithstanding the fact that the surplus funds were impressed with a trust,
they were entitled to effect a set-off by virtue of s.88 of the BA.
Held
- The C.A. held that the surplus proceeds could not be set-off as there was no mutuality. The Courts line
of reasoning can be conveniently broken down into 3 steps:
Firstly, mutuality for the purposes of set-off is determined at the date of the presentation of the
winding-up petition, though the actual account may take place later. In coming to this conclusion, the
C.A. made reference to s.255(2) CA, which provides that [i]n any other case the winding up shall be
deemed to have commenced at the time of the presentation of the petition for the winding up.
Secondly, in order for set-off to apply, each claimant must, on this date, beneficially own the
claim which is owed to him by the other claimant and his ownership interest in that claim must be
clear and ascertained without inquiry.
Thirdly, if the interest in the companys claim becomes ascertained or crystallised only after the
commencement of winding-up, there is no mutuality because such claim would vest in the liquidator
of the company while the creditors claim would be against the company.
- On the facts, the companys interest in the surplus proceeds became clear and ascertained only after all
the superior claims under the statutory trust had been met from the surplus funds; this took place after the
commencement of the winding-up and thus, in the Courts opinion, no set-off could be effected.
Evaluation
- Date of determining mutuality
The C.A.s decision that the relevant date for determining whether there is mutuality between the
parties is the date of the presentation of the winding-up petition is generally in disagreement with the
English and Australian authorities.
The reliance on s.255 CA to conclude that the local position is different from that in England is
tenable, given that a very similar provision has at all material times existed in the English legislation.
Further, to fix the relevant date to be the date of commencement of winding-up is, to an extent,
inconsistent with the notion that set-off is but a rule with regard to debts provable. The date for
determining the provability and value of the claims against the company is the date of the winding-
up order. For set-off to be effected, it is necessary to determine whether the claim ought to be set-off
by a creditor is a provable debt, since only provable debts may be set-off (s.88 BA read with s.327(2)
CA) and, if so, the value of the claim must also be quantified. But these questions cannot be resolved
until the date of the winding-up order. It is therefore odd that set-off of a claim the provability and
value of which are determined by reference to the date of the winding up order should be effected at
an earlier date.
- Ascertainable without inquiry
The proposition that the claimants ownership interest in the claim must at the relevant date be
clear and ascertainable without inquiry (which suggests that the value of the claim must be certain in
terms of quantification at the relevant date) is hard to reconcile with the H.L. decision in Stein v.
Blake, where it was held that a claim for damages for breach of contract and a counter-claim for
damages for misrepresentation, both of which are unliquidated at the relevant date, will be
automatically set-off at the relevant date such that only the net balance of the two claims is left owing.
Furthermore, it has long been recognized that as long as a debt is provable, it is capable of being
set-off where the other requirements are met (Re Charge Card Services Ltd [1987] Ch 150), and it is
statutorily provided under s.87 BA that a claim is provable even if it is unliquidated or contingent at
the date of the winding-up order.
In the subsequent case of Panorama Development v. Fitzroyal Investments, Woo JC considerably
undermined the authoritativeness of and continued relevance of Good Property by stating that if [he]
were not bound by authority, [he] would be of the view that the difficulty of quantifying the moneys
owing to the liquidator cannot deny the Dfs from relying on the mutual credit and set-off provision
56
under s.41(1) of the pre-1995 Bankruptcy Act for the reasons mentioned in Mr Lee (Eng Beng)'s
article.
Thus, the correct view should be that ascertainability is an aspect of the requirement of existence
of a beneficial interest, not the quantification of the interest
- Vested in the liquidator
The C.A. found no mutuality because the companys claim vested in the liquidator of the
company whereas the creditors claim would be against the company. However, in a winding-up,
there is no transfer of the companys property to the liquidator whose duty is merely to take into
custody and take control of the companys property. This is implicit the terms of s.269 CA. As such, a
claim acquired by the company never vests in the liquidator unless the Court expressly makes an order
to that effect under s.269(2) CA.
Instead of adopting the aforesaid line of reasoning, the C.A. could have perhaps disposed of the
case by simply affirming the principle that trust funds cannot be subject of insolvency set-off, even in
relation to a trust of surplus proceeds of sale.
*Panorama Development Pte Ltd v. Fitzroyal Investments Pte Ltd [2003] 1 SLR 93
Facts
- Panorama Development was the developer of a housing project at Ewe Boon Road.
- Each of the Dfs entered into a sale-and-purchase agreement for of a unit in the project. The S&P
agreement is a standard form prescribed by r. 12(2) and Form E of the Schedule to the House Developers
Rules 1985 which were made pursuant to the then Housing Developers (Control and Licensing) Act.
- Under the terms of the S&P agreement, Panorama Development was obliged to deliver vacant possession
of the units by 31 December 1997. They failed to meet the deadline.
- Subsequently, a winding-up petition was filed against Panorama Development and an order was made for
the appointment of a liquidator.
- As at the date of the winding up order as well as the date of the filing of the winding-up petition,
liquidated damages were due and payable by Panorama Development to the Dfs and continued to accrue
by virtue of cl.11(3).
- The liquidator then obtained an order to allow him to engage the main contractor to complete the project.
- The liquidator then sought payment by giving notice to each Df to take possession of the units purchased,
but the Dfs did not pay the full instalments required of them, as they took the position that they were
entitled to set-off the liquidated damages from the instalments claimed and pay only the outstanding
balance, as provided for under cl. 11(4) (any liquidated damages payable to the Dfs may be deducted from
any instalment due and payable to the Panorama).
- The main argument of the liquidator was based on the principle established in Good Property Land, that
is, insolvency set-off is only applicable where each claimant beneficially owns the claim which is owed to
him by the other claimant and his ownership interest in that claim must be clear and ascertained without
inquiry. It was contended that the purchasers' claims for liquidated damages for delay had already accrued
but the progress payments were not due from the purchasers as at the relevant date on which set-off would
operate.
Held
- Woo JC opined that the ruling in Good Property Land was irreconcilable with the established principle
that insolvency set-off applies to contingent claims against a bankrupt or company under liquidation
(even though the quantum of such claims may not be ascertainable without inquiry). The difficulty in
quantifying the sums owed to the company by the purchasers should therefore not deny the purchasers
from relying on insolvency set-off. The learned JC also derived support for this view (that contingent
claims could be the subject of insolvency set-off) from leading English and Australian authorities
(including Stein v. Blake and Gye v. Mclntyre).
- Unexpectedly, however, the decision of the English Court of Appeal in BCCI SA v. Al-Saud, which held
the same as the C.A. in Good Property Land, was not argued before Woo JC.
- Notwithstanding his reservations over the Good Property Land principle, Woo JC accepted that he was
bound by that decision. However, Woo JC held that the case before him fell outside the Good Property
Land principle on three grounds: (a) statutory set-off under s.88(1) BA, (b) contractual set-off because the
S&Ps have been adopted by the liquidator, and (c) statutory set-off because the S&Ps are in any event
57
binding on the liquidator in view of the housing developers legislation.
- Firstly, Woo JC suggested that Good Property Land was decided under s.41(1) of the old BA (1985 Ed.),
which was repealed and replaced in 1995 by the current BA, and is no longer authoritative with respect to
the set-off provision in s.88(1) of the current BA. His Honour pointed out that s.88 of the current BA (read
with s.87 BA) made it clear that contingent debts against the insolvent debtor could be set-off and that this
was of direct relevance to the case. Accordingly, pursuant to s.88(1) BA, the Dfs claims for liquidated
damages could be set-off against the contingent claims of Panorama which have since matured into claims
against the Dfs.
- The 2nd ground was a factual one, viz, that the right of set-off for late delivery of possession was
contractually provided for in cl. 11(4) of the S&P agreement. According to him, this was a material
difference, as in the present case, the liquidator carried on with the S&Ps in order to invoke the Dfs
payment obligations and having done so, he could not claim the benefits under the S&Ps and yet disclaim
the burdens under them, i.e., he could not choose which terms of the S&P would continue to apply and
which would not. The point was not so much whether the liquidator was the same person as the Vendor
but whether he was choosing to enforce the same contracts or not, and in that respect, Good Property Land
Development v. Societe Generale was distinguishable.
- The 3rd ground was that cl. 11(4) of the S&P was part of a set of standard terms prescribed by subsidiary
legislation, which could not be amended, deleted or altered without prior written approval of the Controller
as required by the Housing Developers Rules 1985, and any argument about the parties trying to
circumvent the pari passu principle in a liquidation could not carry much weight because the Vendor and
the defendants did not choose the terms of the S&P on their own free will. Therefore, unless the Rules
were ultra vires the Housing Developers Act, they had to be given effect to as the Act itself, because as far
as statutory set-off under any particular legislation is concerned, that set-off should prevail over the
principle of pari passu distribution under the Companies Act. As to whether the principle of pari passu
distribution prevails over contractual set-off, this would depend on the particular facts of each case.
Evaluation
- W.M.S. is doubtful as to whether the amendments to the Bankruptcy Act did indeed change the law.
At around the same time when Good Property was being decided, the English C.A. took a similar approach
in BCCI v. Al-Saud, holding that the beneficial interest of the parties must be ascertainable without inquiry:
58
credit to the company. However, this is a very different proposition from saying that the beneficial
interest must be ascertainable without inquiry at the date when the company goes into liquidation, which
is a rule more appropriate for casese where the beneficial interest would be present if the alleged facts are
proven, as in Ex p Morier.
*Rolls Razor Ltd v. Cox [1967] 1 QB 552 (Extension of dicta in Rose v. Hart)
Facts
- The company owed employees sales commission, and the employees in turn owed the company goods
that were entrusted to them for sale.
- When the company became insolvent, the employees sought to set-off the value of the goods in their
possession but unsold at the date of the insolvency against the unpaid commission.
- Note that in this case, there is no mutuality in respect of the claims sought to be set-off, as the
obligation on one hand is to deliver goods in specie (proprietary claim) and to pay a sum of money
(pecuniary claim) on the other.
59
Held
- Set-off was allowed. The employees had authority to turn the companys goods into money and this fact
gave them the right of set-off. The company gave credit to the employees for the expected proceeds,
while the employees gave credit to the company for the commission, thereby establishing a mutuality of
claims. The set-off could not be defeated by the company at the last moment by revoking the power of
sale.
Evaluation
- Both Derham and Goode argued that the majority decision was wrong, as there had been no previous
case in which in was held that a monetary claim could be set-off against an obligation to deliver
unrealised property. Also, since the employees were required to return the property on contract
termination, their authority to sell must also have been determined. There were therefore no mutual
credits, which makes the employees trustees instead of debtors.
- It is arguable that Rolls Razor Ltd v. Cox was implicitly overruled by Lord Hoffmann in Smith v.
Bridgend County BC, where he held that, in the absence of a lien or other security, a Df could not retain
an asset belonging to a Pf by way of set-off against a money claim. While the comment was made in the
context of equitable set-off, it is arguable that the comments apply to insolvency set-off as well.
Section 88(2) BA provides that a claim against a bankrupt must be provable in bankruptcy.
The relevant time in the context of companies is when the winding-up order is being made.
However, as the hindsight principle applies (Stein v. Blake), if subsequent events cause the claim
to not be provable (such as in Wight v. Eckhardt: nationalisation before the account was taken
destroyed the claim against BCCI), that may be taken into account.
The proof machinery under s87(1) BA is wide enough to encompass a prospective or contingent
claim against the company, at the date when the company goes into liquidation, to be proved.
Hence, a contingent claim is amenable to set-off, unless at the time when account is actually taken
it is so contingent as to be incapable of estimation by the liquidator or, under s.87(6) BA, by the
court.
There is no valuation mechanism for a contingent claim of the company.
The following debts cannot be set-off:
o Claims which are unenforceable;
o Claims which are statute-barred;
o Claims which are incapable of being fairly estimated: s.87(6) BA;
o Claims by a surety which are not provable because of the rule against double proof
o Claims the proof of which the liquidator have rejected;
o Claims of a junior creditor under a contractual subordination agreement before the senior
creditors are paid in full.
Claims of company must have been liquidated when the account is taken
A contingent claim against the debtor company that arises from a pre-liquidation obligation is
provable and may be set-off, as s.87(4) BA provides an estimation mechanism for such claims.
Rule 88 of the Companies (Winding Up) Rules also provides a mechanism, with an appropriate
discount, for the acceleration of a debt which repayment is not yet due at the time of the
declaration of dividend.
However, there is no acceleration or estimation mechanism for claims by the debtor company
against the creditor.
60
Hence, a contingent debt by the company against the creditor must have matured into a debt at the
time the account is being taken in order for set-off to be available. In order words, the contingency
must have occurred by the time an account is being taken.
In contrast, an estimation mechanism is provided for under English law in respect of contingent
claims of the debtor company against the creditor.
61
against the bank would have been an all but worthless entitlement to a dividend in BCCIs winding-up.
Held
- BCCI was not entitled to set-off. The H.L. held that the agreement took effect oth as a charge back and
as a flawed asset.
- Lord Hoffmann doubted whether there was any doctrine of conceptual impossibility which was drawn
so widely as to prevent a bank enforcing against its customer an equitable charge over an account held by
that same customer. He did not, however, call into question the conceptual impossibility of a bank having
title to, or a right to retain possession of, an account which it provides and explained Halesowen as a case
of the latter type. The latter type is usually termed a flawed asset.
- There was no mutuality between the sums owed to BCCI by the company and the sums owed by BCCI
to the shareholder:
The shareholders liability to have his deposit applied in discharge of the companys debts did
not make him a debtor to BCCI for the purpose of set-off.
Set-off required the existence of a right to make a pecuniary demand upon the other party to
mutual dealings. The right to appropriate property under one's control or to be discharged from a
liability did not amount to such a right.
- The shareholder was not a guarantor as he did not assume any personal liability to BCCI, and even if he
was, set-off would still be unavailable so long as BCCI did not call on him to pay so that its claim against
him would remain contingent.
Evaluation
- The companies obtained loans beneficially for themselves, used the loan funds beneficially for their
own corporate enterprises and had both the legal and beneficial liability to repay. The shareholder, on the
other hand, had no beneficial interest in the loan funds advanced by BCCI nor in any assets of the
companies acquired with them.
Section 88(2)(b) BA provides that there is no set-off if the claim against the company arises out of an
obligation incurred at a time when the creditor had notice that a winding-up application was pending.
Section 88(2)(b) BA applies only to a debt incurred by the company and does not extend
to a debt incurred by the creditor.
The relevant time for notice is when the obligation, out of which the debt arises, is
incurred. It does not matter if creditor has notice when the debt accrues or is payable.
It applies only to compulsory winding-up and not voluntary winding-up.
62
Insolvent Liquidation
V. Avoidance Provisions
The Various Provisions
A charge over the assets of the company which is registrable under s.131(1) CA but not registered is void as
against the liquidator and any creditor of the company.
If, however, the charge is realised before winding-up proceedings are commenced, it is spent and s.131(1)
CA has nothing to operate on, and consequently, the proceeds of realisation may be retained by the chargee:
63
Re Row Dal Construction [1966]; Michael Ng Wei Teck v. OCBC.
Between the winding-up application and winding-up order, the unregistered charge is void against the
unsecured creditors of the company: Michael Ng Wei Teck v. OCBC.
On the other hand, after the winding-up order is made, the unregistered charge is void against the
liquidator: Michael Ng Wei Teck v. OCBC.
64
- Accordingly, s.131(1) CA came into operation in favour of the 2 nd appellants qua unsecured creditors on
the presentation of the winding-up petition, and the equitable mortgage was void against the 2nd appellant
from that date. It followed that the subsequent sale of the property by OCBC was also void, as OCBCs
power of sale was derived from the equitable mortgage.
Evaluation
- In essence, the C.A. had accepted that unsecured creditors had a proprietary interest in the companys
assets in order to conclude that the unsecured creditors had locus standi to challenge a charge that had not
been registered under s.131 CA.
*Power Knight Pte Ltd v. Natural Fuel Pte Ltd [2010] SGHC 75; [2010] 3 SLR 82
Facts
- The company was granted an equitable lease by JTC over 2 plots of land on Jurong Island.
- The company then executed a debenture which granted the Power Knight a fixed charge over all the
companys interests in any freehold or leasehold property or any other interest in real property.
- Although the debenture was registered in accordance with s.131 CA, Power Knight, for whatever
reason, did not lodge a caveat under s.115 LTA.
- Subsequently, a winding-up petition was filed against the company by an unsecured creditor, pursuant
to which a winding-up order was made and liquidators appointed.
- The liquidators lodged a caveat for and on behalf of the companys unsecured creditors, claiming an
interest in the 2 plots of land. The liquidators also lodged a caveat on behalf of the company claiming an
interest in the 2 plots of land as trustee of the interests in the land for the benefit of the unsecured
creditors of the company under a statutory trust arising as a result of the winding-up application and/or
winding-up order.
- Power Knight initiated proceedings seeking the removal of the caveats in accordance with s.127 LTA.
- 3 issues arouse for the High Courts consideration: (1) whether a statutory trust came into being upon
the winding-up of the company; (2) if so, what are the interests of the companys unsecured creditors
under the statutory trust and whether they qualify as an interest in land under s.115 LTA; and (3) whether
the 2 plots of land fell within the ambit of the statutory trust, which encompasses assets available for
distribution to the companys unsecured creditors, notwithstanding the fixed charge granted to Power
Knight.
- The liquidators contended that, since the registration requirement under s.131 CA is required only to
perfect the charge vis--vis other creditors, the unregistered charge in Michael Ng Wei Teck v. OCBC
was valid and enforceable as against the company, and since, according to Thean JA, an unsecured
creditor must have an interest in the company's property before he can rely on s.131 CA, the unsecured
creditors in Michael Ng Wei Teck must, on the presentation of the winding-up, have had an interest in the
land subject to the unregistered equitable mortgage in order to invoke s.131 CA and avoid the equitable
mortgage. Therefore, Michael Ng Wei Teck demonstrates that encumbered assets are caught by the
statutory trust.
Held
- The first issue the H.C. considered was the 3rd issue, viz, whether the 2 plots of land fell within the
general pool of assets available for distribution to the companys unsecured creditors, for if they did not,
they would not fall within the ambit of the statutory trust. Judith Prakash J. affirmed the well-established
position that upon a winding-up, secured assets are not available for distribution by the liquidator among
the company's unsecured creditors. Consequently, even if, as the liquidators contend, a statutory trust
arose on the winding-up of the company for the benefit of the unsecured creditors, the subject matter of
65
such a trust could not include the 2 plots of land, which was already validly encumbered by Power
Knight's fixed charge which was perfected upon registration and therefore unavailable to the unsecured
creditors.
- Addressing the liquidators interpretation of Michael Ng Wei Teck put forth as a counter-argument,
Judith Prakash J. held that Michael Ng Wei Teck did not contradict the well-established position and does
not support the contention that an unsecured creditor, in and by virtue of a winding-up, has a beneficial
interest in property subject to a registered charge. Instead, what it decided was that an unsecured creditor
only has locus standi to invoke s.131 CA when a winding-up petition is presented, as it is only from that
date that he becomes interested in the property of the company, which will, once s.131 CA is relied upon,
include the subject matter of the unregistered charge. The sequence of events therefore runs as follows:
upon the presentation of a winding-up petition, the unsecured creditors obtain a beneficial interest in the
unencumbered property of the company. By virtue of that interest, an unsecured creditor obtains locus
standi to invoke s.131 CA to avoid the unregistered charge, and the charged property is then freed from
the charge, falling into the general pool of assets which is to be distributed among the unsecured
creditors. Such a reading of the case is confirmed by Thean JAs statement that [t]he avoidance of the
unregistered charge would, after all, free the subject matter of the charge to swell the assets of the
company for the benefit of the unsecured creditors.
- As such, the unsecured creditors of the company had no interest in the 2 plots of land, the equitable
interest in which had been validly charged to Power Knight and perfected upon registration. It followed
that they did not claim "an interest in land" for the purposes of lodging a caveat under s.115 LTA, and
both caveats must be removed.
- For completeness, Judith Prakash J. went on to consider the 1 st and 2nd issue. Her Honour followed
Ayerst v. C & K (Construction) Ltd [1976] AC 167 and held that a statutory trust comes into effect upon
the making of a winding-up order. In doing so, the H.C. declined to adopt the views of the H.C.A. in
Commissioner of Taxation of the Commonwealth of Australia v. Linter Textiles Australia Ltd (2005) 220
CLR 592 and that of the S.G.H.C. in Low Gim Har v. Low Gim Siah [1992] 1 SLR(R) 970, both of
which sought to interpret Ayerst as being limited to the specific provision of the U.K.s Finance Act
1954. Her Honour did not think it was possible to interpret Ayerst in this manner. First, Ayerst relied on
and endorsed earlier authorities that predated the Finance Act which recognized the existence of the
statutory trust as a matter of common law. Second, Ayerst has been repeatedly cited as establishing,
without qualification, the existence of a statutory trust upon the winding-up of a company. Third, exactly
the same criticism may be employed against other landmark cases which, while ostensibly concerned
with interpreting specific points of revenue law, have been taken as representing the common law.
- As regards the nature of the statutory trust, her Honour observed that the prevailing view is that it is not
a kind which confers on the creditors beneficial co-ownership or proprietary interests of any kind. The
creditors rights are limited to invoking the protection of the court to ensure that the liquidator fulfils his
statutory duties. Thus, her Honour held that notwithstanding that the making of a winding-up order
brings into existence a statutory trust, unsecured creditors have no proprietary interests in a companys
property. To this extent, even though her Honour recognized that she was bound by the decision in
Michael Ng Wei Teck, she disagreed with the C.A.s statement that the unsecured creditors of a
company are in the nature of a cestui que trust with beneficial interests extending to all the companys
property, as it is inconsistent with the nature of the statutory trust.
Lee Eng Beng, Unregistered Creditor versus Unregistered Charge (1998) 10 SAcLJ 241 (Note on Michael
Ng Wei Teck v. OCBC)
Undoubtedly, the ultimate result of the Court of Appeal's decision is correct. Holding otherwise
would have led to an undignified race between the security holder and the unsecured creditors, as
it would encourage the holder of an unregistered security to behave aggressively and realise the
security as soon and as clandestinely as possible, and on the other hand encourage the unsecured
creditors to present a winding-up petition as soon as possible.
Further, it seems indisputable that the policy behind s.131 CA is that a registrable security granted
by a company is of no effect in the liquidation of the company unless it is duly registered. It
cannot be right, then, that this policy may be defeated and the unsecured creditors
unceremoniously deprived of their intended rights, simply because there is a procedurally
inevitable time gap before the company may be formally placed in liquidation and a liquidator
66
appointed.
However, the reasoning that upon the presentation of a winding-up petition, an unsecured creditor
acquires some sort of proprietary interest in the company's assets which is sufficient to confer on
him the locus standi to invoke s.131 CA is a difficult one. The cases relied upon by the C.A. dealt
with voluntary winding-up, in which there is only one critical date, viz, the date of the passing of
the winding up resolution, which the statute fixes as the commencement of the voluntary winding
up. In such a case, the unsecured creditors acquire an interest in the assets of the company upon
the commencement of a voluntary winding-up because, upon the passing of a resolution for
voluntary winding-up, the assets of the company are held on a statutory trust for the creditors.
In contrast, the initiation of compulsory winding up proceedings has two important stages, viz, (1)
the presentation of the winding-up petition; and (2) the making of the winding-up order. While (1)
is statutorily deemed the commencement of the compulsory winding-up by virtue of s.255 CA, it is
(2) which, in this context, bears a closer analogy to the winding-up resolution in a voluntary
winding-up. A long line of authorities have held that upon the making of a winding-up order, the
assets of the company become impressed with a statutory trust the purpose of which is to apply the
assets in discharge of the company's liabilities, and on the state of the authorities, it is only upon
the making of the winding-up order, not the presentation of a winding-up petition, that an
unsecured creditor obtains any interest in the company's assets and acquires sufficient locus standi
to invoke s.131 CA.
Furthermore, the presentation of a winding-up petition is very different in nature from the passing
of a winding-up resolution. The latter is a final, irrevocable act which places the company into
voluntary winding-up, whereas the former is merely the first step in the invocation of the court's
winding-up jurisdiction and does not constitute any adjudication of the petition. It is the winding-
up order which irrevocably directs the company to be wound up, which, similar to voluntary
winding-up, can only be halted by obtaining a stay of proceedings under s.279 CA.
Thus, if a statutory trust comes into existence when a petition for winding-up is presented, does
this mean that the unsecured creditor suddenly loses whatever interest he acquired in the
companys assets upon the withdrawal, striking out or dismissal of the petition? In this connection,
does the unregistered charge once again become valid as against the unsecured creditors?
A better approach would be to resort to s.259 CA (W.M.S. says that this section is an extension of
ss. 98 and 99 BA), the material portion of which states that [a]ny disposition of the property of
the company, including things in action ... after the commencement of the winding up by the Court
shall unless the Court otherwise orders be void. While s.259 CA only relates to property to which
the company is beneficially entitled, and the retrieval of property by a chargee is not such a
disposition, it should apply to unregistered security interests which would be void in a subsequent
winding-up.
The reason why s.259 CA does not apply to the realisation of charges is that the holder of a charge
would be entitled to priority in the winding-up in any event, and allowing him to realise his charge
would neither amount to an improper alienation and dissipation of the company's property nor
undermine the pari passu principle of distribution of the company's property amongst the
unsecured creditors. The exact opposite is true in a case of an unregistered security, and the
compelling conclusion must be that s.259 CA is intended to and should catch the realisation of an
unregistered security. Following from this proposition, the holder of an unregistered security
cannot realise his security after the presentation of a winding-up petition because this would
amount to a void disposition of the company's property. If the petition is stuck out or dismissed,
such prohibition would be lifted and he will again be able to assert his right as a secured creditor
against the unsecured creditors.
Transactions at an Undervalue
Statutory provisions
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Transactions at an undervalue are governed by s.98 BA.
Transactions at an undervalue
98.(3) a company enters into a transaction at an undervalue if
(a) the company makes a gift or the company otherwise enters into a transaction on terms that provide
for the company to receive no consideration;
(b)
(c) the company enters into the transaction for a consideration the value of which, in money or moneys
worth, is significantly less than the value, in money or moneys worth, of the consideration it received.
If the company enters into such a transaction within 5 years before it commences winding-up proceedings,
and it is insolvent or becomes insolvent as a result, the appointed liquidator may apply to Court for relief:
Section 100(1)(a) BA: the relevant time under s.98 is within 5 years before the winding-up application
being made.
Section 100(2) BA: in addition to the requirement of the transaction being entered into within 5 years of
the winding-up application, the company must also
(a) be insolvent at that time; or
(b) become insolvent in consequence of the transaction.
Section 100(4) BA: for the purposes of s.100(2), the company shall be insolvent if
(a) it is unable to pay its debts as they fall due; or
(b) the value of its assets is less than the amount of its liabilities, taking into account its contingent
and prospective liabilities.
The concept of an associate, defined in s.101 BA, is used to invoke the presumption in s.100(3) BA.
Section 100(3) BA: Section 100(2) BA is presumed to be satisfied where the person with whom the
transaction is entered into with is an associate.
Meaning of associate
Section 101.(1) For the purposes of sections 99 and 100, any question whether a person is an associate
of another person shall be determined in accordance with this section.
(2) spouse or relative
(3) partner in a partnership
(4) employer or employee1
(5) trustee
(6) controlling shareholder
The Court is given wide powers to deal with transactions and preferences that run foul of s.98 BA. Under
s.98(2) BA, the Court is directed to make an order which restores the position to what it would have been
had the transaction at an under value not taken place.
Section 102 BA lists some of the types of orders which the Court may make but also contains restrictions
on orders which may prejudice the interests of innocent third parties.
Section 98(2): The court shall, on an application [in respect of a transaction at an undervalue], make
such order as it thinks fit for restoring the position to what it would have been if that individual had not
entered into that transaction.
1
A holding company is an associate of its subsidiary, while a director is an associate of the company of
which he is director.
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Orders under sections 98 and 99
Section 102.(1) Without prejudice to the generality of sections 98(2) and 99(2), an order under either
of those sections with respect to a transaction or preference entered into or given by an individual who is
subsequently adjudged bankrupt may, subject to this section
(a) require any property transferred as part of the transaction, or in connection with the giving of the
preference, to be vested in the Official Assignee;
(b) require any property to be so vested if it represents in any persons hands the application of the
proceeds of sale of property so transferred or of money so transferred;
(c) release or discharge (in whole or in part) any security given by the individual;
(d) require any person to pay, in respect of benefits received by him from the individual, such sums to the
Official Assignee as the court may direct;
(e) provide for any surety or guarantor whose obligations to any person were released or discharged (in
whole or in part) under the transaction or by the giving of the preference to be under such new or revived
obligations to that person as the court thinks appropriate;
(f) provide for security to be provided for the discharge of any obligation imposed by or arising under the
order, for such an obligation to be charged on any property and for the security or charge to have the
same priority as a security or charge released or discharged (in whole or in part) under the transaction or
by the giving of the unfair preference; and
(g) provide for the extent to which any person whose property is vested by the order in the Official
Assignee, or on whom obligations are imposed by the order, is to be able to prove in the bankruptcy for
debts or other liabilities which arose from, or were released or discharged (in whole or in part) under or
by, the transaction or the giving of the unfair preference.
Definition of transaction
Section 98(3) BA raises an issue pertaining to the definition of transaction. A transaction may comprise a
series of linked but discrete contracts, so how does the Court determine which acts constitutes part of the
transaction? The issue was considered by the H.L. in Phillips v. Brewin Dolphin Bell Lawrie Ltd.
*Phillips v. Brewin Dolphin Bell Lawrie Ltd [2001] 1 All ER 673, [2001] 1 BCLC 145 (H.L.)
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Facts
- AJ Bekhor & Co entered into an agreement with Brewin Dolphin regarding the sale of AJB's
stockbroking business to Brewin Dolphin.
- In order to facilitate and set the stage for the sale, AJB hived down its stockbrokering business and
business assets to Bekhor Securities Ltd, a wholly owned subsidiary, for a consideration of 1, with the
view that Brewin Dolphin would complete the transfer of the business by purchasing BSLs shares from
AJB.
- Brewin Dolphin proceeded to acquire BSLs shares from AJB in consideration for 1.25 million in cash
an assumption AJB's obligations to its employees, including, in particular, the obligation to make
redundancy payments by Brewin Dolphin. Simultaneously, Brewin Dolphins parent company, PCG,
would enter into a computer equipment leasing agreement with AJB, under which pay AJB 312,500 per
annum in rent for four years, with the total amount being 1.25million.
- The deal was structured this way for 2 reasons: (1) PCG hoped to be able to deduct the "rent" from its
taxable profits; and (2) The payment of 1.25 million for the goodwill of the stockbroking business
would have required Brewin Dolphin to raise more capital for the purposes of complying with capital
adequacy requirements.
- All parties knew that the lease was irrelevant as consent for its sublet had not been sought from the head
lessors.
- AJB defaulted on the head lease and a winding-up order was made pursuant to a petition presented by
the head lessors.
- Phillips, the liquidator of AJB, commenced proceedings against Brewin Dolphin and PCG contending
that the transaction under which AJB had transferred its shares in BSL to Brewin Dolphin, thereby, in
effect, transferring its stockbroking business to Brewin Dolphin, was a sale at an undervalue.
Held
- The H.L., through the speech of Lord Scott, unanimously concluded that the there were 2 transactions
which, after aggregation, were entered into at an undervalue.
- In relation to the provision concerning undervalue transactions in the U.K. Insolvency Act 1986, Lord
Scott held that it did not stipulate by what person(s) the consideration was to be provided. It simply
directed attention to the consideration for which the company had entered onto the transaction. Thus, if a
company agrees to sell an asset to A on terms that B agrees to enter into some collateral agreement with
the company, the consideration for the asset will be the combination of the consideration expressed in
the agreement with A and the value of the agreement with B. In other words, the consideration under
both contracts should be aggregated.
- On the facts, it was plain that the consideration for the BSL shares was, apart from obligations assumed
by Brewin Dolphin under the share sale agreement itself, the entry by PCG into the sublease agreement
under which it covenanted to pay 312,500 per annum for 4 years. The purchase price of 1.25 million
was to be paid under the sublease in 4 annual payments of 312,500 each. No other conclusion was, in
his Lordship's opinion, possible but that on those facts the consideration for the BSL shares included the
benefit of the covenant given by PCG under the sublease.
Evaluation
- Armour remarked that the H.L.s concept of consideration is in effect to say that the two contracts
constituted a transaction.
Another issue that s.98(3) BA raises is the scope of consideration. Is incident benefit or detriment included?
This issue was considered in Agricultural Mortgage Corporation v. Woodward. The grant of security to a
creditor who was initially unsecured was considered by the H.L. in Hills v. Spread Trustee Co Ltd.
70
his wife just prior to AMC taking steps to enforce its mortgage.
- His wife gave full market value for the agricultural tenancy in terms of the rent reserved.
- The owner was aware of the enforcement action and the effect of the creation of the tenancy was to
frustrate the enforcement of the mortgage.
- AMC argued that the transaction should be set aside as it was entered into at an undervalue, as the real
value of the property had to take into account the economic worth of her right to block the mortgage
enforcement (the so-called ransom value).
Held
- The C.A. held that the transaction should be avoided as the transaction as a whole included a ransom
value, which rendered the consideration provided by the husband far greater in value, in money or
money's worth, than the value of the consideration provided by her, which was the rent and other tenants
obligations undertook by her under the tenancy agreement, even thought the tenancy was granted at
market value. To hold otherwise, according to Sir Christopher Slade, would be to fly in the face of
reality and common sense.
- The C.A. also held that detriment can be considered valid consideration so long as that detriment was an
intentional part of the transaction (i.e., bargained for), but left open the question of whether unbargained
for detriment (i.e., incidental detriment) constitutes consideration.
Evaluation
- How does one quantify with any precision at all this so-called ransom value? The Court avoided having
to deal with the issue of quantification by stating that [n]o further evidence was required to establish
that the transaction was one falling within s.423(1)(c) [s.98(3)(c) BA]; the agreed facts speak for
themselves.
- Goode and Armour both argue that incidental detriment should not be included within the scope of
consideration.
71
constitute a transaction at an undervalue), Arden LJ remarked that the decision in that case did not mean
that a transaction involving the grant of security could never amount to a transaction for no
consideration. Further, in Re MC Bacon Ltd, the security was given in exchange for forbearance by the
creditor and hence there was consideration.
- Arden LJ went on to observe in obiter that whilst there is no change in the physical assets of the debtor
when security is given, there seems to be no reason why the value of the right to have recourse to the
security which the debtor creates by granting the security should be left out of the account. Arden LJ did
not express a conclusive view on this point as it was not necessary to do so for the purposes of disposing
of the appeal.
- On the facts, the C.A. did not think that Spread Trustee was pressing for repayment of the sums due to
them and hence there was no consideration in the form of forbearance for the charges and the loan
assignment. Spread Trustee were in no position to demand repayment at the date of the execution of the
charges and the loan assignment. Although Spread Trustee was, in law, prospective creditors of the
debtor, they did not threaten to start proceedings to obtain a judgment or to bring bankruptcy proceedings
against the debtor. As such, the C.A. agreed with the decision of the H.C. that the charges and the loan
assignment were given for no consideration.
- Accordingly, the charges were set aside and Spread Trustee was ordered to repay the trustee in
bankruptcy the sum paid to them under the loan assignment plus interest, such sums to be re-credited to
the amounts owed by the debtor to Spread Trustee.
Evaluation
- Following Hill v. Spread Trustee Co Ltd, the granting of additional charges or an assignment of a debt
owed to the debtor to secure pre-existing loans from the creditor where there was no real pressure for
repayment by the creditor may be challenged in Singapore as a transaction at an undervalue for want of
consideration.
- In cases where there is genuine economic pressure placed by creditors which results in the provision of
additional security by the debtor, the argument would be that the debtor had provided security in
consideration of a forbearance to sue by the creditor, a benefit which is real though difficult to value. In
defence to an application by a liquidator seeking to impugn such a transaction, it could be argued that the
company entered into the transaction in good faith, for the purpose of carrying on its business and when
entering the transaction there were reasonable grounds for believing that the transaction would benefit
the company (Paragraph 6 of the Companies (Application of Bankruptcy Act Provisions) Regulations
(CABAR)). Where good faith is concerned, it is the company that must have acted in good faith, not the
other party to the transaction. This is in line with the general scheme of insolvency law which
traditionally looks at the intent of the debtor to defeat the equitable distribution of assets (on a pari passu
basis) upon bankruptcy.
The next issue that s.98(3) BA raises is that of valuing the consideration. If a company is in financial
difficult, its debts are worth less than their face value, as the possibility of recovery is diminished. Such an
argument was raised and rejected in Leun Wah Electric Co (Pte) Ltd v. Sigma Cable Co (Pte) Ltd, although
in the opposite way, viz, that the debt owed to the company in financial difficulties which was assigned in
satisfaction of a debt to a creditor constituted an undervalue transaction since, owing to its financial
difficulties, the company's debts were worth less than their face values.
Leun Wah Electric Co (Pte) Ltd v. Sigma Cable Co (Pte) Ltd [2006] 3 SLR 227; [2006] SGHC 86
Facts
- Luen Wah Electric was a nominated subcontractor of Kajima in a construction project, and the retention
sum of US$236,892.24 held by Kajima became due and payable to Luen Wah upon the completion of the
project.
- Sigma Cable, who had sold and supplied electrical cables to Luen Wah, some of which were for use in
the project, wrote to Luen Wah following the completion of the project demanding payment of money
due on outstanding invoices amounting to $1,525,531.77.
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- In partial satisfaction of the debt, Luen Wah assigned the retention sum to Sigma Cable.
- Subsequently, Luen Wah went into liquidation and the present action arose from the claim made by
Sigma Cable that it was entitled to the retention sum because Luen Wah had assigned the money to it.
- Luen Wahs liquidator, however, disputed the assignment and sought a declaration that it was void on 3
grounds: (1) the assignment was made without consideration, or was for past consideration, because it
was made as a partial payment for existing debts; (2) the assignment was an unfair preference in favour
of the defendant; and (3) the assignment was a transaction at an undervalue because the Luen Wahs
debts were worth less than their face values as a result of its financial difficulties.
Held
- Addressing the point on consideration, Choo J held that Luen Wah had provided good consideration
promise to pay by assignment of the money due to it from Kajima was good consideration to Sigma,
who, in consideration for the assigned debt, provided consideration by accepting the assignment in lieu of
direct cash payment. Consideration did not have to be adequate, so long as it was different.
- As to whether s.98(3)(c) BA applied for the purposes of ascertaining that the transaction was at an
undervalue, there was no evidence that the assignment was given in discharge of a greater debt. Instead,
the evidence revealed that it was given as part payment to keep the business between the Luen Wah and
Sigma Cable going. As such, the evidence did not reveal any indication of bad faith. Absence of bad faith
may not mean that liquidator had satisfied the evidential burden of showing that the Sigma Cable acted in
good faith, but in the circumstances, the enquiry need go no further given that the transaction was not at
an undervalue, and that there were no indications of bad faith such as to warrant a deeper study of the
transaction.
Should ex post events be taken into consideration in the valuation of consideration? The SGHC in
Buildspeed v. Theme Corp and the SGCA in Mercator & Noordstar NV v. Velstra Pte Ltd held that only ex
ante events should be considered, i.e., only events which have a real likelihood of occurring should be
taken into account, whereas the H.L. held in Phillips v. Brewin Dolphin Bell Lawrie Ltd that ex post facto
events should be taken into account in the assessment of value of the transaction.
*Phillips v. Brewin Dolphin Bell Lawrie Ltd [2001] 1 All ER 673, [2001] 1 BCLC 145 (H.L.)
Held
- In relation to the value of the consideration in money or moneys worth, Lord Scott held that it should
be assessed as at the date of the transaction, but if the value is uncertain as at the date of the transaction,
ex post facto events should be taken into account in the assessment of value of the transaction, as it
would be unsatisfactory and unnecessary for the Court to pretend not to know of such events
(hindsight principle).
- On the facts, the critical uncertainty in valuing the covenant as at that date was whether the sublease
would survive for the 4 years necessary to enable all four 312,500 payments to fall due, or would
survive long enough to enable some of the instalments to fall due, or would come to end before any had
fallen due. Thus, although the sublease could be taken into account, it was held that the value of the
consideration, viz, PCGs covenant to pay 312,500 per annum under the sublease, was of no value as it
ultimately turned out that the head leases had been terminated and the equipment recovered by the head
lessors.
- In quantifying the value of the consideration, Lord Scott held that the value of an asset that was being
offered for sale was, prima facie, not less than the amount that a reasonably well informed purchaser
was prepared, in arm's length negotiations, to pay for it, and on the evidence, a reasonably well-
informed potential purchaser had been prepared to pay about 1,050,000 for the BSL shares.
Buildspeed Construction Pte Ltd v. Theme Corp Pte Ltd [2000] 4 SLR 776
Held
- The H.C. adopted an ex ante approach to the valuation of consideration, holding that the various items
have to be valued in light of the circumstances then prevailing.
- The also H.C. acknowledged that at the same time, events may occur which may have an effect on the
values, and if there is a real likelihood of such events occurring, it should be taken into account.
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Held
- Yong CJ held that the context in which Lord Scotts pronouncement in Phillips v. Brewin Dolphon Bell
Lawrie Ltd was made should be put into context. In that case, Yong CJ opined, what was in issue was the
value of a sublease covenant and quite clearly the H.L. did not think that at the time the sublease
covenant was made it was of any value.
- Thus, it would be wrong to hold that reference to subsequent events may generally be made to
determine the value of the consideration, as to do so would gravely undermine bona fide business
arrangements entered into between parties and the efficacy of business in general. It could not be the
intention of s.98 BA that a party in receipt of moneys from the other party to the transaction in
consideration of the discharge of a debt due to the 1 st party from a 3rd party would have to anticipate
future events that could happen to the other party making the payment before he could safely act on the
arrangements made.
- There could, however, be a case, albeit rare, where the circumstances are such that reference to
subsequent events may be appropriate in helping to determine the value of the consideration.
In Re Sonatacus Ltd, the English C.A. found it unnecessary to adjudge on the issue of whether the
transaction constituted an undervalue one, as it was already held to constitute a prefeence.
*Re Sonatacus Ltd [2007] EWCA Civ 31; [2007] 2 BCLC 627
Facts
- Sonatacus Ltd is the insolvent company.
- Susca, the sole director of Sonatacus, borrowed 65,000 from CI Ltd.
- CI Ltd pays the 65,000 to Sonatacus at Suscas instruction, giving rise to another debt obligation of
65,000 owed by Sonatacus to Susca.
- Shortly before going into liquidation, Sonatacus pays 50,000 to CI Ltd in purported satisfaction of part
of Suscas obligation to CI Ltd.
- Susca pays the remaining 15,000 to CI Ltd.
- On liquidation, however, Sonatacus did not have enough assets to satisfy all its obligations to its
creditors. Therefore, the liquidator brought claims under s.238 and s.239 of the U.K. Insolvency Act 1986
alleging that the payment of 50,000 that CI Ltd received from the Sonatacus was a preference (under
s.239), or alternatively, a transaction at an undervalue (under s.238) and that accordingly, the transaction
was void or voidable by the liquidator.
Held
- In the H.C. below, it was found that the only consideration provided to Sonatacus in respect of the
50,000 payment it made to CI Ltd was the discharge of the debt, to the extent of 50,000, that
Sonatacus owed to Susca. The H.C. reasoned (in concluding that the transaction was at an undervalue)
that because the discharge by Sonatacus of the 50,000 debt it owed to Susca amounted to a preference,
that same consideration could not be relied upon as valuable consideration for the purpose of considering
whether the payment to CI Ltd was a transaction at an undervalue under s.238 of the U.K. Insolvency Act
1986.
- The C.A. found that the transaction had constituted a preference, and as such, there was no need to
consider whether that payment also constituted a transaction at an undervalue. The C.A. declined to
express any definite opinion as to the correctness of the H.C.s reasoning, but remarked that there was
some logic in the argument that the transaction was not at an undervalue because in exchange for the
50,000 payment, Sonatacus had received consideration of exactly the same value in the form of the
discharge, to the extent of 50,000, of the debt it owed to Susca.
Defences
Paragraph 6 of the CABAR states that he Court shall not make an order in respect of a transaction at an
undervalue if it is satisfied (i) that the company which entered into the transaction did so in good faith and
for the purpose of carrying on its business; and (ii) that at the time it did so there were reasonable grounds
for believing that the transaction would benefit the company.
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Further, under s.102(3)(a) BA, a 3rd party who acquires property from the counterparty is protected if he
acquires it in good faith, for value and without notice of the relevant circumstances. Any interest deriving
from such an interest is also protected.
Also, under s.102(3)(b) BA, a 3rd party who received a benefit from the transaction is protected if he
receives it in good faith, for value and without notice of the relevant circumstances.
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Unfair Preferences
Statutory provisions
Practically, preference law serves no deterrence function as there are no sanctions for infringing preference
law. As such, a creditor would seek payment even at the risk of the Court ordering a return of the monies,
as in such an event, its debt is revived and it can still prove in its insolvency. Preference law merely seeks
to reverse transactions entered into by an insolvent company in the twilight period before liquidation
which have the effect of improving the position of one creditor in relation to other creditors possessing an
equal ranking claim to the companys assets on liquidation: Walters, Preferences, in Vulnerable
Transactions in Corporate Insolvency (2003) at 123.
Section 99(1) BA: where a company has, at the relevant time (as defined in s.100), given an unfair
preference to any person, the liquidator may apply to the Court for an order listed under s.102.
Section 99(3) BA: a person gives a preference if (a) the person purported to be preferred must be a
creditor or a surety or guarantor for any of the principal creditors debts or other liabilities; and (b) such a
person must receive a factual preference with regards to the pre-existing debt.
Factual preference under s.99(3)(b) BA can therefore be broken down into 3 elements:
(a) a pre-existing debt;
(b) the transaction that purportedly constitutes a preference must be referable to the pre-
existing debt; and
(c) the transaction in question must produce a preferential effect by improving the creditors
position in the companys insolvency.
Section 99(4) BA requires that the company giving the preference must have been influenced in deciding to
give it by a desire to improve the creditors position in the companys insolvency, and case law has
interpreted this requirement as being a subjective desire to improve the creditors position in the event of
the companys insolvent liquidation.
Section 99(4): The court shall not make an order under this section in respect of an unfair preference
given to any person unless the individual who gave the preference was influenced in deciding to give it
by a desire to produce in relation to that person the effect mentioned in subsection (3)(b).
Section 99(5) BA uses the concept of an associate, defined in s.101 BA, to invoke the presumption that
s.99(4) BA is satisfied.
Section 99(5): An individual who has given an unfair preference to a person who, at the time the unfair
preference was given, was an associate of his (otherwise than by reason only of being his employee) shall
be presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire
as is mentioned in subsection (4).
If the company enters into such a transaction within 6 months or 2 years, as the case may be, before it
commences winding-up proceedings, and it is insolvent or becomes insolvent as a result, the appointed
liquidator may apply to Court for relief:
Section 100(1)(c) BA: the relevant time in the case of an unfair preference which is not a transaction at an
undervalue is within 6 months before the winding-up application was made.
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Section 100(1)(b) BA: the relevant time in the case of an unfair preference which is not a transaction at
an undervalue and which is given to a person who is an associate of the company is within 2 years
before the winding-up application was made.
Section 100(2) BA: in addition to the requirement of the transaction being entered into within 6 months
of 2 years of the winding-up application, as the case may be, the company must also be
(a) insolvent at that time; or
(b) becomes insolvent in consequence of the transaction.
Section 100(4) BA: for the purposes of s.100(2), the company shall be insolvent if
(a) it is unable to pay its debts as they fall due; or
(b) the value of its assets is less than the amount of its liabilities, taking into account its contingent and
prospective liabilities.
A finding of unfair preference does not render the transaction void or voidable, but merely gives the court
the power to reverse the effects of the transaction by making any of the orders under s.102 BA.
Restating Millett Js (as he then was) propositions in Re MC Bacon, the SGCA enunciated in DBS v. Tam
Chee Chong and Cooperative Centrale (trading as Rabobank International, Singapore Branch) v. Jurong
Technologies Industrial Corp Ltd that the test for unfair preference is not whether there was a dominant
intention to prefer, but whether the debtors decision was influenced by a subjective desire to improve the
creditor's position in the event of its own insolvent liquidation. The desire to prefer need not be the sole or
decisive factor; instead it needs only be one of the factors which influenced the decision to enter into the
transaction. Thus, a transaction which was actuated only by proper commercial considerations will not
constitute a voidable preference.
Prior to the SGCAs back-to-back decisions in DBS Bank Ltd v. Tam Chee Chong and Cooperative
Centrale (trading as Rabobank International, Singapore Branch) v. Jurong Technologies Industrial Corp
Ltd, the exertion of genuine pressure by the creditor would mean that the company was not influenced by a
desire to prefer, as the giving of a preference predicates an act of free will and pressure negates free will. In
Rabobank, however, the SGCA held that the question of whether the company was influenced by a desire
to prefer is a question of fact, and proper commercial considerations or lack thereof are not, ipso facto,
sufficient to prove or disprove the requisite desire.
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- Millett J dismissed the liquidators application to have the debenture set aside as a preference under
s.239 Act and said that the transaction will not be set aside as a voidable preference unless the company
positively wished to improve the creditor's position in the event of its own insolvent liquidation, that
the requisite desire must have influenced the decision to enter into the transaction, and that that
requirement was satisfied if it was one of the factors that operated on the minds of those who made the
decision at the time when the decision was made.
- In the context of corporate insolvency, Millett J said that it was still possible to uphold a transaction
made by a company in financial difficulties provided that the company was actuated only by proper
commercial considerations.
- On the facts, in deciding to grant the debenture to the bank, the directors were not motivated by any
desire except the desire to avoid the calling-in of the overdraft and to continue trading. They were not
actuated by any desire to improve the banks position as a creditor in the event of the companys
liquidation. The companys relationship with the bank was an arms length one and the company,
through its directors, was not influenced by personal financial considerations.
Evaluation
- This case illustrates how difficult it is to prove the requisite desire exists, at least in relation to arms-
length transactions where there is no presumption of desire.
Leun Wah Electric Co (Pte) Ltd v. Sigma Cable Co (Pte) Ltd [2006] 3 SLR 227
Held
- The requirement in law that the assignor must have been influenced by a desire to give an unfair
preference is an important one, because without that requirement, almost every payment to a creditor
during the critical 6 months preceding a winding-up petition would, ipso facto, give rise to preference in
favour of those creditors.
- There was insufficient evidence before Choo J for him to form the conclusion that Luen Wah had any
desire to give an unfair preference to Sigma Cable when it agreed to assign the Kajima debt. Instead, the
evidence suggest that Luen Wah, who was financially tight, dealt with Sigmas claim for payment in the
way it did as the best option in the circumstances, i.e. it seemed to believe that the assignment would
forestall drastic action by Sigma Cable, and thereby gain time for them to collect their own debts.
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or transfer of property, a charge on property, a payment made or an obligation incurred by a company
which would be void as against the Official Assignee under ss. 98, 99 or 103 BA shall, in the event of the
company being placed under judicial management, be void as against the judicial manager.
- Section 227T(2) CA (Undue preference in case of judicial management): the relevant is the date on
which an application for a judicial management order is made.
Held
- The C.A. endorsed and summarised Millett Js propositions in Re MC Bacon Ltd as follows:
(a) The test is not whether there is a dominant intention to prefer, but whether the debtors decision was
influenced by a desire to prefer the creditor.
(b) The court will look at the desire (a subjective state of mind) of the debtor to determine whether it had
positively wished to improve the creditor's position in the event of its own insolvent liquidation.
(c) The requisite desire may be proved by direct evidence or its existence may be inferred from the
existing circumstances of the case.
(d) It is sufficient that the desire to prefer is one of the factors which influenced the decision to enter into
the transaction; it need not be the sole or decisive factor.
(e) A transaction which is actuated only by proper commercial considerations will not constitute a
voidable preference. A genuine belief in the existence of a proper commercial consideration may be
sufficient even if, objectively, such a belief might not be sustainable.
- The C.A. found an unfair preference on the basis that the evidence showed that the decision to grant the
charge was influenced by a desire to give the bank what it wanted as it had been good to the companies
in question. The SGCA rejected the argument that the company had no choice in granting the charge as
DBS would otherwise have declared an event of default and recalled its facilities, noting that although
the company was in default, DBS had not threatened to declare a default or recall its banking facilities as
it was not in its interest to do so.
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applied even greater pressure. In contrast, Rabobank did not threaten to recall facilities if the debts were
not repaid.
- The pressure did not have much value or benefit to the company. Lin, the chairman, could not have
realistically expected that payment to Rabobank would have saved the company. As the charge obtained
by DBS was public knowledge, Lin would not have expected that the other banks would allow the
company to continue trading as usual.
- Lin had given evidence that the company repaid the debt to Rabobank because Rabobank had been
supportive of the group. So long as there is some evidence that a company had the requisite desire, even
though it was under great pressure from a creditor to repay its debts, the influence of such a desire is
sufficient. This is so even though the desire may be weaker than the pressure as a causal factor.
The SGCA, following Re MC Bacon, answered this question in the negative in Cooperative Centrale
(trading as Rabobank International, Singapore Branch) v. Jurong Technologies Industrial Corp Ltd.
What is the material time to determine the influence of the requisite desire?
In Re MC Bacon, the relevant time did not matter on the facts, as, according to Millett J, the requisite
desire, if it was operating at all, was operating throughout, i.e., from the time of the agreement to create the
debenture to the time of the execution of the debenture. Will v. Corfe Joinery Ltd, on the other hand, held
that the relevant time to determine whether a debtor had the requisite desire to prefer is the time when the
creditor received the preference, and not when it was promised the preference. Extrapolating from both
cases, the SGCA held in Cooperative Centrale (trading as Rabobank International, Singapore Branch) v.
Jurong Technologies Industrial Corp Ltd that the relevant time is the date on which the preference was
actually granted and not the time when the decision to prefer was made, unless the desire operated
throughout.
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Industrial Corp Ltd [2011] SGCA 48
Held
- Relying on Wills v. Corfe Joinery Ltd and extrapolating from Re MC Bacon, the C.A. held that the
relevant time to determine whether a debtor had the requisite desire to prefer is the time when the
creditor received the preference, and not when it was promised the preference, unless the desire operated
throughout.
- In the case of a promise or commitment to create a security, as in DBS Bank Ltd v. Tam Chee Chong, it
is the time of the first act of creation (signing of the security document which created the Charge) of the
security that is relevant, unless the execution of the security is done pursuant to a prior promise or
commitment to do so.
There is a presumption of a desire to prefer where an associate is involved: s.99(5) BA. In order to rebut the
presumption, it is necessary to show that the company was not influenced at all by a desire to prefer
(Liquidators of Progen Engineering Pte Ltd v. Progen Holdings Ltd). Thus, the presumption is not easy to
rebut.
*Liquidators of Progen Engineering Pte Ltd v. Progen Holdings Ltd [2010] SGCA 31; [2010] 4 SLR
1089
Facts
- The respondent (Progen Holdings) was the holding company of Progen Engineering with which it
shared common directors. As such, the respondent and Progen Engineering were clearly connected to
each other under the Companies (Application of Bankruptcy Act Provisions) Regulations.
- It was also undisputed that the 10 payments alleged to constitute an unfair preference were made within
2 years of the date of the filing of the winding-up petition and that the company was insolvent at the time
the payments were made.
- In the circumstances, there is a statutory presumption pursuant to s.99(5) BA read with s.329 CA that
the payments constituted an unfair preference to the respondent.
- The respondents position is that the transactions were not unfair preferences as there was evidence that
they were part of Progen Engineering's settled practice Progen Engineering had been acting as the
"payment centre" to make payments to other related companies within the Group.
Held
- The statutory presumption in relation to the other transactions was unrebutted.
- In order to rebut the presumption, the respondent had to show that the transactions were not influenced
at all by any desire on Progen Engineering's part to place the respondent in a preferential position.
- The C.A. held that the mere fact that a transaction was carried out during the company's solvency did
not necessarily mean that the continuance of such a transaction during the company's insolvency was not
influenced by a desire to prefer. The existence of an established course of practice was relevant if those
past practices showed that the creditor was providing new value to the company by granting new credit
towards the company's operations; in these cases, the repayment of monies was not made with the desire
to prefer the creditor, but with the motivation to obtain fresh financing to sustain the company's business.
As such, the existence of an established past practice, without more, did not mean that the statutory
presumption would ipso facto be rebutted.
- In coming to its conclusion, the C.A. clarified that Re Libra Industries Pte Ltd (1999) 3 SLR(R) 205
did not stand for the proposition that the mere existence of an established past practice of payments
would indicate that there was no desire to prefer the creditor. The C.A. explained that in Libra Securities,
there was something more than the mere existence of an established past practice of payments to the
creditor. In that case, the repayment of loans had continued with the extension of new credit to the
company. The company had made the repayments of loans with the intention of obtaining new credit to
supply its own business operations. As such, those payments should not be regarded as preferential
payments.
- On the facts, the payments were made by Progen Engineering without any extension of new credit
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given. There was insufficient evidence to substantiate the alleged past practice of reimbursements. In
relation to the set-off transaction, there was no evidence that the respondent had granted new credit to
Progen Engineering subsequent to the discharge of Progen Engineering's indebtedness. There was, in any
event, no evidence that there existed a past practice of such a tripartite set-off transaction between Progen
Engineering, Progen Ltd and the respondent.
- Accordingly, the C.A. ordered the respondent to repay to the liquidators all moneys required to settle
debts to the unrelated creditors (as well as professional fees) up to the sum of money that it had received
from the company.
The principle states that where there is a series of mutual dealings between the parties in the same account,
if each payment is treated in isolation, each would constitute a factual preference, but if the entries in the
account are aggregated, there is a factual preference only to the extent that the total payments into account
overtopped the total payments out of the account. The principle was accepted as law by the H.C.A. in
Airservices Australia v. Ferrier.
Thus, if the purpose of a payment, being a part of a wider transaction, was not just to discharge a debt, but
also to induce the provision of further goods or services, it is not a preference unless it exceeds the value of
the goods or services acquired.
The principle is important in Australia as whether there was a factual preference is determined on an
objective basis. The C.A. in Liquidators of Progen Engineering Pte Ltd v. Progen Holdings Ltd also
accepted the principle as law, where the C.A. remarked that where the company made repayments of loans
with the intention of obtaining new credit to supply its own business operations, these repayments would
not be considered as preferential payments.
The principle, however, is less important in Singapore given that a factual preference per se is not
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objectionable, i.e., factual preference is determined on a subjective basis.
Good faith defence created by reg. 6 CABAR does not extend to unfair preference
Reg. 6 of CABAR refers only to s.98 BA, and therefore, preferences are not afforded the defence.
Under s.102(3)(a) BA, however, a 3rd party who acquires property from the counterparty is protected if he
acquires it in good faith, for value and without notice of the relevant circumstances. Any interest deriving
from such an interest is also protected.
Also, under s.102(3)(b) BA, a 3rd party who received a benefit from the transaction is protected if he
receives it in good faith, for value and without notice of the relevant circumstances. This defence was
raised but not made out in Re Sonatacus Ltd [2007] EWCA Civ 31.
*Re Sonatacus Ltd [2007] EWCA Civ 31; [2007] 2 BCLC 627
Facts
- Sonatacus Ltd is the insolvent company.
- Susca, the sole director of Sonatacus, borrowed 65,000 from CI Ltd.
- CI Ltd pays the 65,000 to Sonatacus at Suscas instruction, giving rise to another debt obligation of
65,000 owed by Sonatacus to Susca.
- Shortly before going into liquidation, Sonatacus pays 50,000 to CI Ltd in purported satisfaction of part
of Suscas obligation to CI Ltd.
- Susca pays the remaining 15,000 to CI Ltd.
- On liquidation, however, Sonatacus did not have enough assets to satisfy all its obligations to its
creditors. Therefore, the liquidator brought claims under s.238 and s.239 of the U.K. Insolvency Act 1986
alleging that the payment of 50,000 that CI Ltd received from the Sonatacus was a preference (under
s.239), or alternatively, a transaction at an undervalue (under s.238) and that accordingly, the transaction
was void or voidable by the liquidator.
Held
- The C.A. held that it was clear that the underlying motivation for the 50,000 payment was to secure a
discharge by Susca of his personal indebtedness to CI Ltd by using the Sonatacus funds. By that
payment being made, Susca was put in a better position in the event of the Sonatacus insolvency than he
would otherwise have been in had the payment not been made.
- The C.A.s decision was also influenced by the failure to discharge the statutory presumption of
preferential desire arising from Suscas position as a director of CI Ltd.
- Accordingly, and as CI Ltd could not prove that it had acted in good faith, the 50,000 payment was
voidable by the liquidators and the C.A. ordered CI Ltd, as a 3rd party recipient of preferential payments,
to return the 50,000.
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Post-application Dispositions
Statutory provision
Section 259 CA: Any disposition of the property of the company, including things in action, and any
transfer of shares or alteration in the status of the members of the company made after the
commencement of the winding up by the Court shall unless the Court otherwise orders be void.
In Re Wiltshire Iron Co Ltd [1868] 3 LR Ch App 443, Lord Cairns LJ stated that s.259 CA is a
wholesome and necessary provision to prevent, during the period which must elapse before an
application can be heard, the improper alienation and dissipation of the property of a company in extremis.
It was designed according to Lightman J in Coutts & Co v. Stock [2000] 1 WLR 906, to prevent the
director of a company, when liquidation is imminent, from disposing of the Companys assets to the
prejudice of its creditors and to preserve those assets for the benefit of the general body of creditors.
Definition of disposition
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Re Loteka Pty Ltd (in liq) [1990] 1 Qd R 322
o There must be some change that takes out of the company at least the beneficial
ownership in a corporate asset and passes it to someone else.
The issue then is whether s.259 CA captures transactions which transfers value from the company to a 3rd
party but which does not involve a transfer of ownership. Goode argues that disposition should be given a
wide meaning for the purpose of s.259 CA, including not only any dealing in the companys tangible or
intangible assets, but also any other act which, in reducing or extinguishing the companys rights in an
asset transfers value to another person. The transfer of value is the critical element according to Goode,
and thus, a transfer of property which is in form only falls outside the section, for the reduction of the
companys rights in an asset must be one which leads, in a real and not merely a technical sense, to the
transfer of value to another party.
Some of the transactions that Goode feels should be caught by s.259 CA include:
An agreement by which the company surrenders a lease or gives up its contractual rights.
o Walters response to this is that the surrender of a lease extinguishes lessees property
rights rather than grants or transfers the right from the lessee to the lessor.
The conferment and exercise of the rights of set-off.
o Walters response to this is that a set-off does not confer property rights in the companys
assets in favour of debtor.
An extension of further credit to the company which leads to the exercise of a right of transaction
set-off against the companys credit balance.
On a literal construction, mere shift in value will fall outside the scope of s.259 CA unless it is accompanied
by a transfer of some identifiable proprietary right. However, where value is subtracted from the
company, the court may be persuaded to adopt a purposive interpretation, on the basis that the counterparty
was enriched at expense of the company.
The section is confined to a disposition of the companys property. Where what was being disposed was
not company property, the section does not apply. Hence, it is necessary to determine whether the company
was the beneficial owner of the property concerned at the relevant time.
Some of the transactions that fall outside of the scope of s.259 CA for not being a disposition of the
company's property include:
(a) Sale of charged property, whether by the chargee or the company acting through the receiver.
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Held
- The Court rejected the argument, explaining that the chargee enjoyed a pre-existing equitable interest in
the charged assets, and so the receipt of the proceeds did not involve any transfer of beneficial
ownership.
- The section did not concerned transactions involving the enforcement of security, and to hold otherwise
would would mean that the chargee would have to obtain a validating order from the court, which could
not have been intended.
It was held in Coutts & Co v. Stock that s.259 CA has no impact on the company's use, consumption or
exhaustion of its own assets. Thus, even though an agreed overdraft limit has been held to be property in
criminal law, the use and exhaustion of that overdraft limit by the company does not constitute a
disposition within the section.
Walters explanation for this rule, which is a very property-based reasoning, is that no rights in any
identifiable property are transferred to or conferred on any other party.
Goode, however, argues that there are at least 3 cases in which the use of an overdraft can amount to a
disposition:
(1) Where the bank holds security for future advances, an increase in the overdraft
increases the banks interest in the charged assets, unless the assets were already
charged to their full value.
(2) The company has a credit balance on another account. The effect of the drawing
increases the banks right to set-off against that credit balance.
(3) Where the drawing is within the banks contractual obligation to the company, the
effect of the drawing reduces the amount of the facility available, and the quantum
of the chose in action vested in the company.
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Incurring of liabilities by the company not caught by s.259 CA
Invalidation under s.259 CA is limited to dispositions of the companys property, and does not extend to the
companys assumption of liabilities. Thus, an increase in the companys overdraft in the interim period
does not constitute a disposition to the bank.
In Re Grays Inn Construction Co Ltd, the English CA, on a concession by counsel, thought that a payment
from an overdrawn account is a disposition in favour of the bank.
This mistake was subsequently rectified in Coutts & Co v. Stock, where Lightman J held that in honouring
a cheque, the bank lent money to the company and as agent of the company, paid the companys money to
the party who presented the cheque for payment. The loan by the bank to the company was not a
disposition, but the payment by the bank qua agent for the company was a disposition of the companys
property in favour of the payee. Lightman J justified his analysis on the basis that it reflects the common
understanding of all the parties involved that it was the company paying the companys debts.
In Re Loteka Property Ltd, the Court held that in the course of a payment from an account in credit, there
was no disposition of the companys property to the bank. It is the payee of the cheque that receives the
benefit of the cheque. The disposition of the companys property takes place when the cheque is issued by
the company. The disponee is not the bank, but the creditor in whose favour the cheque is drawn and
delivered.
In Hollicourt (Contracts) Ltd v. Bank of Ireland, the English CA held the legal consequence of the
disposition being void should be only to avoid the disposition to the ultimate recipients of the companys
property, i.e., the statutory purpose is accomplished without any need for the section to impinge on the
validity of intermediate steps, such as banking transactions. The bank merely collected and cleared cheques
drawn on the companys account, and therefore there was no disposition in favour of the bank. In other
words, the bank was merely acting in its capacity as agent for the company, and s.127 did not avoid, revoke
or countermand the company's mandate to the bank to make payments out of its account to meet its
cheques.
The English CA went as far as to say in obiter that even if the Company's bank account was in debit, the
above analysis would produce the same result in respect of a claim for recovery against the bank. It
concluded that the practical advantage of this was that it does not require what could be a complex analysis
of whether payments were made from an account which was in debit or in credit; the need for such analysis
could not be justified by any sensible view of the purpose of s.127.
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instead sought repayment from the Bank.
Held
- The C.A. held, reversing the decision of the court below, that the final payees and not the bank were
liable to repay the money.
- The C.A. found in favour of the bank on 2 grounds:
(1) The payments should not be regarded as involving a "double disposition". It was common ground that
the disposition of Hollicourt's property in favour of the creditor/payee fell within s.127. However, the
Bank's debiting of the account with the value of the cheques should not be regarded as another relevant
disposition of Hollicourts property in favour of the Bank.
(2) The legal consequence of the disposition being void should be only to avoid the disposition to the
creditors. The related transaction between Hollicourt and the Bank as customer and banker should not be
avoided.
- For there to be a disposition caught by s.127 of the UK Insolvency Act (the UK equivalent of s.259 CA),
it needed to amount to an alienation of the Company's property.
- No such alienation occurred in the Bank's favour as the Bank merely collected and cleared cheques
drawn on the Companys account. In other words, the Bank was merely acting in its capacity as agent for
the Company, and s.127 did not avoid, revoke or countermand the Company's mandate to the Bank to
make payments out of its account to meet its cheques.
- The only disposition where alienation occurred was the payment to the payees, and hence, s.127 only
invalidated the dispositions by the Company of its property to the payees of the cheques, enabling
recovery of the amount disposed of from the payees.
- The C.A. further added in obiter that even if the Company's bank account was in debit, the above
analysis would produce the same result in respect of a claim for recovery against the Bank. It concluded
that the practical advantage of this was that it does not require what could be a complex analysis of
whether payments were made from an account which was in debit or in credit; the need for such analysis
could not be justified by any sensible view of the purpose of s.127.
Evaluation
- It would appear, on the basis of the Hollicourt decision, that in simply obeying its customer's
instructions to make payment from its account, a bank cannot be liable to reconstitute its customer's
account with payments made after presentation of a petition despite those payments to the payee being
void; the liability will remain solely with the payee.
The combined result of Coutts & Co v. Stock and Hollicourt (Contracts) Ltd v. Bank of Ireland is that
payment by cheque from an account, whether in credit or debit, does not amount to a disposition in
favour of the bank. This has the practical advantage, as pointed out by the English C.A. in Hollicourt, of
avoiding a complicated analysis into whether an account is in credit or debit at the relevant time.
The approach in Hollicourt, which holds that the statutory purpose is accomplished without any need for
the section to impinge on the validity of intermediate steps, such as banking transactions, is broader. This
raises the question of whether all payments, regardless of the mode of payment (such as internet banking or
other forms of instruction to the bank), can never amount to a disposition in favour of the bank.
It was held in Re Grays Inn Construction Co Ltd that where there is a payment into an account in debit,
there is a disposition in favour of the bank no matter whether the payment is in coins or cheques, as the
company is discharging its debt to the bank pro tanto.
Goode, however, opines that disposition occurs on the delivery of the cheque to the bank, which confers on
the bank a bankers lien for the companys indebtedness. Crediting of account therefore does not give rise
to a disposition.
In Re Barn Crown Ltd, it was held that payments from 3rd party cheques into an account in credit did not
88
constitute a disposition in favour of the bank. In coming to its decision, the Court in Re Barn Crown Ltd
refused to follow the dicta in Re Grays Inn Construction Co Ltd, which stated that payment of a cheque
into a bank account that was in credit was a disposition of the amount of the cheque to the bank. The court
held that the process is merely one of asset substitution property in the cheque is transformed into a debt
owed by the bank to the company, but as the latter remains within the companys control, the process does
not involve any transfer or alienation of the companys property. Also, in collecting a cheque, the bank acts
as its customers agent and so all that happened as between the company and the bank was a movement on
accounts.
In contrast, Goode argues that while the presentation of the cheque itself involves no disposition as the
bank merely acts as agent for the company for the purpose of collection and has no interest of its own in the
cheque, there is a disposition in the banks favour when the account is credited. The bank borrows the
collected proceeds and credits the companys account with the sum so borrowed, and the sum so borrowed
is not merely a mere matter of book entry, but involves involves the transfer of collected funds from the
company to the bank in exchange for the banks promise of repayment. If the bank is solvent, the breach of
s.259 CA is technical, but if the bank is insolvent, the bank will not be able to pay the borrowed sum in full.
Notwithstanding the peremptory language used in the section, the Court has the power to validate a
disposition either prospectively or retrospectively.
89
for thinking that the transaction may involve an attempt to prefer the disponee in which case the
transaction would not be validated.
- Despite the strength of the principle of securing pari passu distribution, the principle has no application
to post-liquidation creditors; for example, the sale of an asset at full market value after the presentation of
the petition. That is because such a transaction involves no dissipation of the company's assets for it does
not reduce the value of its assets.
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Floating Charges for Past Value
Statutory provisions
Section 330: A floating charge on the undertaking or property of the company created within 6 months2
of the commencement of the winding up shall, unless it is proved that the company immediately after
the creation of the charge was solvent, be invalid except to the amount of any cash paid to the company
at the time of or subsequently to the creation of and in consideration for the charge together with
interest on that amount at the rate of 5% per annum.
Section 330 was designed apparently to prevent companies on their last legs from creating floating
charges to secure past debts or for moneys which do not go to swell their assets and become available for
creditors, per Parker J, Re Orleans Motor Co Ltd [1911] 2 Ch 41 at 45.
Armour & Bennett eds., Vulnerable Transactions in Insolvency (2003), Chap 5, paras 5.5-5.10:
The effect of the section is to avoid floating charges created by the company within 6 months of
the commencement of winding-up, except to the amount of any cash paid to the company at the
time of or subsequently to the creation of and in consideration for the charge.
Why is s.330 confined to floating charges and not any other type of security?
The operation of s.259 CA is confined to floating charges so as to reflect the view that a floating charge
should be subject to a special rule due to its all-encompassing nature and impact on the general body of
creditors.
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- The liquidator argued that since the accounts as a whole recorded practically no net benefit to the
company over the period, it could not be said that any cash was paid to the company at or subsequent to
the creation of the charge, and therefore, there was no consideration given for the charge except the
banks immediate forbearance.
Held
- Rejecting the liquidators argument, Harman LJ held that each payment into the account by Yeovil
Glove was presumed to discharge the earliest indebtedness incurred (i.e. Claytons rule (first in first out
rule)), and each payment out from the overdraft account was in fact new money.
- Hence, every payment by the bank made on behalf of Yeovil Glove on the overdraft, after the charge
had been granted, was cash paid to Yeovil Glove and constituted new value made in consideration of
the charge. The charge was not invalid against the liquidator and the bank was a secured creditor for
those payments, even if the resulting balance of the account is the same as before the creation of the
charge. When all the antecedent debts before the creation of the charge have been discharged, the
account becomes fully secured.
Cash must be paid to co at the time of or subsequently to the creation of the charge for it to be secured
by the floating charge. This was interpreted by the majority in Power v. Sharp Investments Ltd to be mean
that no moneys before the execution of the debenture will be secured, unless the interval between payment
and execution is so short that it can be disregarded as de minimis.
Cash must be in substance paid to the company (i.e., it must benefit the company)
The company must in substance have received the cash, i.e., it must have benefited from the cash paid. If
the cash is available to the company to do with what it likes, the cash is an injection of new value into the
company. Not only is there no depletion of the companys assets, the cash helps the company to continue
trading and may be beneficial to the creditors. The cases of Re Orleans Motor Co Ltd and Re Destone
Fabrics Ltd demonstrates this.
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- The money was never the company's assets to deal freely with, since it was under an obligation to hand
them to the bank. All that happened was that directors repaid corporate debt they had guaranteed using
the company as a conduit pipe, with the unsecured debt owed to bank and guaranteed by the directors
being replaced by a secured debt owed to the directors.
- Parker J famously remarked that [t]he section was designed apparently to prevent companies on their
last legs from creating floating charges to secure past debts or for moneys which do not go to swell their
assets and become available for creditors.
In Re Matthew Ellis Ltd, the court held that it was permissible to stipulate conditions, including that it was
to be used to pay off certain debts, provided that the company obtained some genuine benefit. The test,
according to Re Destone Fabrics Ltd, is whether the transaction is one intended bona fide for the benefit of
company, or whether it is intended merely to provide moneys for the benefit of certain creditors of the
company to the prejudice of other creditors. However, Lord Hanworth held in Re Matthew Ellis Ltd that
each case depended on its facts and that it was very difficult to lay down a precise test.
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off the firms debts, there was a cash payment.
- Romer LJ held that if the other partners in the firm were mere figures holding no real interest in the
firm, it might be held that the 2000 was not payment to the company. That was not the case here. Thus
no reason to hold that this was a subterfuge, unlike the case of Orleans Motor.
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Insolvent Liquidation
In Belmont Part, the Supreme Court upheld, by a majority, the validity of the an insolvency-triggered
priority flip clause, holding that it did not offend the anti-deprivation rule. Lord Collins, who delivered the
majority judgment, concluded after a survey of the authorities that a deliberate intention, which may be
inferable from the circumstance, to evade insolvency laws was required in order for the anti-deprivation
principle to apply. However, in borderline cases, as his Lordship felt was the case in Belmont, a
commercially sensible transaction entered into in good faith should not be held to infringe the anti-
deprivation rule, noting in particular the fact that the Noteholders had funded the purchase of the
underlying asset. In coming to his decision, his Lordship placed particular emphasis on freedom of contract
and party autonomy in cases of complex financial instruments.
Lord Mance, on the other hand, was more circumspect in his dissenting judgment. He played down the
overriding value of party autonomy, rejected the notion that deliberate intention was required to defeat the
statutory regime, and saw little relevance in the Noteholders' funding of the purchase of the underlying
asset. His Lordship nevertheless upheld the insolvency-triggered provision on the basis that the priority lost
by the swap counterparty on its insolvency was not a proprietary right, and accordingly there was no
property on which the anti-deprivation rule could bite. This approach stands in stark contrast to the Lord
Collins, and it would therefore be necessary to undertake a more detailed analysis of Lord Collins
reasoning.
Taking issue first with the notion of party autonomy, while the objective value of party autonomy is
incontrovertible, there is, however, a litany of cases within English jurisprudence which illustrate that
parties may not act at will. As Lord Mance stated, the fact that two contracting parties have agreed a
provision does not make it valid. The autonomy of contracting parties cannot axiomatically prevail over the
interests of third party creditors in bankruptcy. The crux of the matter, therefore, is delineating the
circumstances when party autonomy must give way to the anti-deprivation rule (or to the pari passu rule for
that matter). This is a difficult endeavour, which Lord Collins acknowledged, and it is submitted that the
preferable approach, and as Lord Mance would have it, is that it must give way every time the parties'
agreement avoids the normal operation of the insolvency statute.
In coming to the more liberal conclusion that party autonomy should be allowed to prevail unless there was
a deliberate intention to defeat the statutory insolvency regime, Lord Collins undertook a detailed analysis
of 11 relevant authorities. In 5 of those cases where the anti-deprivation rule was contravened, the
insolvency-triggered provisions were described as in fraud of the bankrupt laws (Whitmore v. Mason),
evidence of an intention to defraud creditors (Ex p Brown), a deliberate device (In re Johns), a
violation of the policy of the bankrupt law (Borlands Trustee), and evincing a clear attempt to evade
the operation of the statutory regime (Ex p Mackay).
In 6 other cases, the insolvency-triggered deprivation rule was held inapplicable. In all of those, Lord
Collins found the explanation to lie substantially in the findings of good faith and/or the commercial
good sense of the transaction, which findings, it seems, both negated the possibility of a deliberate
intention to defeat the statute in the circumstances of the particular case, and indicated that such an
intention was crucial to any breach of the anti-deprivation rule. Relying on these cases, Lord Collins
concluded that there is an impressive body of opinion from some of the most distinguished judges that, in
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the case of the anti-deprivation rule, a deliberate intention to evade the insolvency laws is required.
With respect, however, it is difficult to see how these 6 unsuccessful anti-deprivation cases provide support
for Lord Collins conclusions. In all 6 cases, the courts declined to invalidate clauses that were either not
triggered by insolvency or did not effect a deprivation. The judgments focus on these issues and not on the
parties good faith and commercial sensibilities. Indeed, if the provisions had been triggered by insolvency
and had generated deprivations, then the outcomes would have been reversed, notwithstanding the parties'
good faith or the obvious commercial benefits of the arrangements. Support for this view can be gleaned
from the judgments of Whitmore v. Mason and Jay, both of which suggest that the decisions would most
certainly have gone the other way had the trigger for the deprivation not been insolvency but some other
event. In the other 4 cases, all of which were triggered by insolvency, the decisions were based on findings
that there were no deprivations to the debtor's assets. For instance, in Borland's Trustee, an insolvency-
triggered deprivation of shares was matched by a payment to the debtor of fair value for the deprived
shares, with the court explicitly noting the outcome would have been otherwise if payment had been some
lesser price, notwithstanding the parties bona fides. Thus, it is perhaps more appropriate to view the basis
for these cases as the absence of either an insolvency-trigger or a deprivation, and not so much the presence
of good faith and commercial purposes.
Thus, the state of the law following the majoritys holding in Belmont seems to be that there are 2 limbs to
the anti-deprivation rule, viz, that a deliberate intention may be inferred from the very existence of a
insolvency-triggered deprivation provision itself, as in Ex p Jay; but on the other hand, borderline cases
which are commercially sensible and was entered into good faith will upheld. This begs the question of
what makes a case borderline? Obviously, Lord Collins reasoning necessarily means that cases where a
deliberate intention cannot be inferred on the face of the deprivation provision itself. But if some provisions
are seen as speaking for themselves, it is difficult to see why all would not meet that standard. Instead, Lord
Collins seems to have classed cases as borderline because the effect of the deprivation provision is
equivocal, not because the intention to evade the statute is equivocal. In fact, it is submitted that this was
the real issue in all the cases that Lord Collins relied upon. The necessary implication of this view would be
that Lord Collins' use of good faith and commercial sensibility is not concerned with proof of intention, but
with proof of a factual deprivation.
Additionally, requiring a deliberate intention to evade the insolvency law effectively emasculates the anti-
deprivation policy, particularly considering that it is often eminently impossible to disprove the bona fides
of a transaction which purports to make commercial sense. This stands in stark contrast to the approach
taken with the pari passu rule, where the parties' intentions and bona fides, as well as the commercial sense
of the arrangements, are all irrelevant all that matters is the effect of the agreement. British Eagle is
authority for this proposition. If, as submitted above, the true concern is with the effect of the provision, viz,
whether there was in fact a deprivation, whether the parties intended the avoidance is surely immaterial (or
it was until Belmont). Instead, as the law currently stands, one limb of the anti-deprivation principle
requires strict enforced while the other permits avoidance of the statute so long as the parties did not intend
that end, and this, apart from the obvious difficulties inherent in allocating cases to one category or the
other due to the amorphous concept of borderline cases, effectively eliminates the automatic operation of
the anti-deprivation principle, at least for complex financial instruments. Further, the new approach
suggests that parties may have legitimate business purposes for avoiding the insolvency regime, which is
anathema to the corporate insolvency regime and hard to justify.
Agaisnt the backdrop of Belmont, the only certainty from all the uncertainty would be a marked increase in
felicitous drafting to ensure that transactions are well justified as commercially sensible arrangements
entered into in good faith, with the result that the role of the anti-deprivation principle within the corporate
insolvency regime may effectively be subverted.
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Receivership
I. Nature of Receivership
Evolution
Receivership originated in the Court of Chancery as a remedy to protect a persons equitable interest in
property or as a form of equitable execution. Subsequently creditors who took a security over the debtors
property were allowed to stipulate in the contract of loan for a power of appointment of a private receiver
or a receiver and manager for the purpose of enforcing their security. Private receivers have since
outstripped Court-appointed receivers in practical importance, and private receivership has become a
significant insolvency regime in itself. What is the reason for the receiverships popularity?
Gaskell v. Gosling [1896] 1 QB 669 at 685-700 (dissenting judgment of Rigby LJ approved on appeal by
the House of Lords in Gosling v. Gaskell [1897] AC 575):
[A] receiver and manager appointed by a mortgagee under an agreement that he shall be the agent
of the mortgagor is in the same position as if appointed by the mortgagor himself, and as if every
direction given to him emanated from the mortgagor himself.
In other words, the receiver is an agent of the company and not the debenture holder.
Types of Receivership
There is a clear distinction between a receiver on the one hand and a receiver and manager on the other. As
Jessel MR pointed out in Re Manchester & Milford Rly Co (1880) 14 Ch D 645 at 653:
A receiver ... [means] ... a person who receives rents or other income paying ascertained
outgoings, but who does not ... manage the property in the sense of buying or selling or
anything of that kind... If it was desired to continue the trade at all it was necessary to appoint
a manager, or a receiver and manager as it was generally called. He could buy and sell and
carry on the trade.
In practice, a debenture holder who holds a floating charge over the entire undertaking of the company
would usually have the power to appoint a receiver and manager rather than a mere receiver, because of the
all-encompassing nature of the security.
Statutory Framework
The statutory framework for receivership is very brief. It is contained in Part VIII, Companies Act (CA).
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II. Appointment of Receiver
Source of Power of Appointment
The power to appoint a private receiver and manager is purely contractual and provision for such a power
must be found in the debenture, failing which the debenture holder will not be able to make an
appointment. The argument that a debenture holder has an inherent right to appoint a receiver once its
security is in jeopardy was rejected in Cryne v. Barclays Bank plc [1987] BCLC 548 at 554.
In Cryne v. Barclays Bank plc [1987] BCLC 548, it was held that if a loan were made for a fixed term, the
Court would not imply a provision into the agreement entitling the lender to require earlier repayment or to
appoint a receiver for cause on the ground that its security is in jeopardy.
It is therefore critical for the loan contract to set out the terms entitling the lender to appoint a receiver on
the occurrence of an event of default.
One of the usual events of default which give rise to the right to appoint a receiver is the default of the
debtor company. In a loan repayable on demand, when can the debtor company be said to be in default?
*Sheppard & Cooper Ltd v. TSB Bank plc (No 2) [1996] 2 All ER 654; [1996] BCC 965
Facts
- The bank demanded repayment of all debts at a meeting.
- A director said that the company was unable to repay.
- The bank appointed a receiver 15 minutes after the meeting had ended.
Held
- The Court held the appointment of the receiver to be valid.
- Where the company had made it clear that it could not pay, that admission established the necessary
default and there was no need for the bank to allow any time to elapse before treating the company as in
default.
*Roberto Building Material Pte Ltd v. OCBC Ltd [2003] 3 SLR 217 (C.A.)
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Facts
- OCBC granted Roberto Building Material credit facilities of up to $31 million that was repayable upon
demand.
- On the failure to comply with such demand, OCBC was entitled to appoint a receiver and manager.
- In consideration for the credit facilities, Roberto Building Material (1) mortgaged its property to
OCBC; (2) granted a fixed and floating charge over its remaining assets to OCBC. The directors of
Roberto Building Material also gave a joint and several letter of guarantee to OCBC.
- On 3 Apr 2000, OCBC served a payment demand on Robert Building Material, demanding payment
within 14 days from the date of receipt of the demand.
- On 17 Apr 2000, Roberto Building Materials auditors informed OCBC that a UK company was a
potential buyer for the mortgaged property and that it would revert with an offer on 20 Apr 2000.
- OCBC did not receive any indication of an offer by 22 Apr 2000 and proceeded to appoint a receiver
and manager, with a view to realise the assets secured under the debenture.
- Subsequently, the UK company made an offer to purchase the mortgaged property. The deals with
potential buyers eventually fell through and the mortgaged property remained unsold.
- It was argued that OCBC had not given Roberto Building Material sufficient time to repay the debt
before appointing a receiver and manager and the appointment was therefore invalid.
Held
- Applying Bank of Baroda v. Panessar, the SGCA held that where money was payable on demand, a
debtor was only permitted to have such time as was necessary to enable him to implement the
mechanics of payment. He was not entitled to any time to raise the funds, either from other banks or
from other sources.
- The concept of "reasonable time" as enunciated by the Canadian cases would introduce uncertainty into
a commercial arrangement where it was essential that there should be clarity. The sort of factors which
the Canadian cases said should be taken into account (viz, (1) the amount of the loan; (2) the risk to the
creditor of losing his money or the security; (3) the length of the relationship between the debtor and the
creditor; (4) the character and reputation of the debtor; (5) the potential ability to raise the money
required in a short period; (6) the circumstances surrounding the demand for payment; and (7) any other
relevant factors), would leave the issue completely open-ended, as it would appear that almost anything
can be taken into consideration, making invocation of the right to enforce the security absolutely
hazardous. It would not promote business efficacy.
- The parties had voluntarily entered into an agreement which provided that in the event of a default, the
lender was entitled to recall the entire loan and ask for the immediate repayment of it. It was not for the
court to rewrite the terms or to imply terms which would be inconsistent with the spirit of the express
terms.
- The power to appoint a receiver was not a power which could be invoked at the whim and fancy of the
lender. The cause for the invocation of the enforcement rights of the lender would always be contingent
on the commission of a default which the parties had agreed to and as defined in the debenture. The vast
majority of the events of default as defined in the present debenture would arise from an act or omission
of the debtor.
*Shamji v. Johnson Matthey Bankers Ltd [1986] BCLC 278, affirmed [1991] BCLC 36
Facts
- Shamjis group of companies owed around 21 million to the bank.
- Negotiations failed between Shamji and the bank to find finance to pay the debt.
- The bank appointed a receiver.
- Shamji applied for an injunction on the grounds that this was a breach of an agreement not to appoint
and that the bank owed a duty of care to Shamji not to appoint a receiver while they were actively
seeking alternative finance.
Held
- The C.A. held that provided it did not act in bad faith, the bank owed no duty of care to the company in
exercising rights to appoint a receiver under the debenture, although it may owe some duty in the manner
in which the right is exercised, such as not to appoint someone who is incompetent.
- The bank is under no duty to refrain from exercising his rights merely because to exercise them may
cause loss to the company. The appointment of a receiver involves an inherent conflict of interest
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between mortgagee and mortgagor, unlike a sale of mortgaged property where there can be no real
conflict.
Evaluation
- That the appointment of a receiver involves an inherent conflict of interest between mortgagee and
mortgagor is probably true in most cases, but it cannot be taken as a given. If the mortgagee has nothing
to lose by deferring the appointment temporarily whilst the mortgagor has much to gain from it, it can
hardly be said that there is a real conflict of interests here. The same argument applies to a decision on
whether to sell and the time to sell the mortgaged property, where it is generally assumed that there is
inevitably a conflict of interests.
Effect of Appointment
What is the effect of the appointment of a receiver and manager on the powers of the
board of directors?
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Gomba Holdings UK Ltd v. Homan [1986] 1 WLR 1301
Facts
- The debenture holder realised part of the charged assets in satisfaction of part of the debt, reducing the
overall indebtedness to about 11 million.
- The sole director of the company entered into an agreement with an undisclosed 3rd party which
purportedly enabled the company to pay off the remaining outstanding indebtedness and to reclaim the
remaining assets in the receivers possession.
- The company sought information as to the current state of the receivership in order to conclude the
negotiations with the 3rd party.
- The information was supplied but was considered by the company to be far less than it was legally
entitled.
Held
- Although a receiver's primary duty was to realise and manage the assets of the company under his
control in the interests of the debenture holder and in so doing he could refuse to disclose information
contrary to the interests of the debenture holder, he also had a duty to supply information to the board
of the company during his receivership in accordance with any statutory obligations and the terms of the
contract under which he was appointed.
- The duty of disclosure was not limited under those provisions and further disclosure might be required
where it was demonstrated that the board of the company had a need to know the information.
- In respect of Newhart Developments Ltd v. Co-operative Commercial Bank Ltd, the Court stated that
the board has during the currency of the receivership no powers over assets in the possession or control
of the receiver. The Court opined, however, that the alleged chose in action in that case was not an asset
which the receiver had taken into his possession or control, as the receiver for obvious reasons did not
consider that the debenture holders interests would be served by pursuing the action (the receivers were
invited to sue the party who had appointed him). In other words, the receiver wanted nothing to do with
the alleged chose in action. The board was therefore free to bring the action in the interests of unsecured
creditors and shareholders.
An appointee must be qualified to act as a receiver and manager: see the qualifications in s.217 CA.
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(a) a corporation;
(b) an undischarged bankrupt;
(c) a mortgagee of any property of the company, an auditor of the company or a director, secretary or
employee of the company or of any corporation which is a mortgagee of the property of the company;
and
(d) any person who is neither an approved liquidator nor the Official Receiver.
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III. Status of Receiver
Receiver as Agent
In law, the receiver and manager is an agent of the company, not the debenture holder that appoints him.
In making the appointment, the receiver acts as agent of the company. In the words of Fox LJ in Gomba
Holdings UK Ltd v. Minories Finance Ltd [1988] 1 WLR 1231 at 1233:
The agency of a receiver is not an ordinary agency. It is primarily a device to protect the
mortgagee or debenture holder. Thus, the receiver acts as agent for the mortgagor in that he
has power to affect the mortgagors position by acts which, though done for the benefit of the
debenture holder, are treated as if they were the acts of the mortgagor... The receiver is
appointed by the debenture holder, on the happening of specified events, and becomes the
mortgagors agent whether the mortgagor likes it or not.
The English C.A. in Silven Properties Ltd v. RBS [2004] 1 WLR 997:
But this agency of the receivers is a real one, even though it has some peculiar incidents.
The peculiar incidents of the agency are significant. In particular: (1) the agency is one where the
principal, the mortgagor, has no say in the appointment or identity of the receiver and is not
entitled to give any instructions to the receiver or to dismiss the receiver (2) there is no
contractual relationship or duty owed in tort by the receiver to the mortgagor: the relationship and
duties owed by the receiver are equitable only (3) the equitable duty is owed to the mortgagee
as well as the mortgagor. The relationship created by the mortgage is tripartite involving the
mortgagor, the mortgagee and the receiver; (4) the duty owed by the receiver (like the duty owed
by a mortgagee) to the mortgagor is not owed to him individually but to him as one of the persons
interested in the equity of redemption. The class character of the right is reflected in the class
character of the relief to be granted in case of a breach of this duty. That relief is an order that the
receiver account to the persons interested in the equity of redemption for what he would have held
as receiver but for his default; (5) not merely does the receiver owe a duty of care to the mortgagee
as well as the mortgagor, but his primary duty in exercising his powers of management is to try
and bring about a situation in which the secured debt is repaid and (6) the receiver is not
managing the mortgagor's property for the benefit of the mortgagor, but the security, the property
of the mortgagee, for the benefit of the mortgagee.
A receiver and manager, but not a receiver, is an officer of the company (see s.4(1) CA) and bears the
disabilities and potential liabilities of the office. The details will be dealt with under the section on duties
and liabilities of receiver.
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IV. Powers of Receiver
Source of Powers
The powers of a privately appointed receiver and manager emanate, directly or indirectly, from the
company. At first sight it seems anomalous that a receiver and manager can be appointed and exercise
powers under a debenture to which he is not a party and by virtue of an appointment under an instrument to
which the company is apparently not a party. The key to understand this apparent anomaly is to realize that
in making the appointment the debenture holder acts as agent of the company, as pointed out by Rigby LJ
in Gaskell v. Gosling [1986] 1 QB 669, 692 693, approved subsequently by the House of Lords in
Gosling v. Gaskell [1897] AC 575:
Though it was the mortgagee who in fact appointed the receiver, yet in making the
appointment the mortgagee acted, and it was the object of the parties that he should act, as
agent for the mortgagor. Lord Cranworth, in Jefferys v. Dickson, stated the doctrine of Courts
of Equity on the subject to the effect following. The mortgagee, as agent of the mortgagor,
appointed a person to receive the income, with directions to keep down the interest of the
mortgage, and to account for the surplus to the mortgagor as his principal. These directions
were supposed to emanate, not from the mortgagee, but from the mortgagor; and the receiver
therefore, in the relation between himself and the mortgagor, stood in the position of a person
appointed by an instrument to which the mortgagee was no party. . Of course the
mortgagor cannot of his own will revoke the appointment of a receiver, or that appointment
would be useless. For valuable consideration he has committed the management of his
property to an attorney whose appointment he cannot interfere with. The appointment so
made will stand good against himself and all persons claiming through him, except
incumbrancers having priority to the mortgagee who appoints the receiver. By degrees the
forms of appointment of receivers became more complicated, and their powers of
management more extensive; but the doctrine explained by Lord Cranworth in the case cited
was consistently adhered to, and it remained true throughout that the receiver's appointment,
and all directions and powers given and conferred upon him, were supposed to emanate from
the mortgagor, and the mortgagee, though he might be the actual appointor, and might have
stipulated for all the powers conferred upon the receiver, was in no other position, so far as
responsibility was concerned, than if he had been altogether a stranger to the appointment.
The position is well summarized by Goode (3rd edn, 2005), para 9-40 as follows:
Thus the receiver is notionally appointed by the company through the agency of the
debenture holder and his powers derive from the debenture and, being given to secure the
rights of the debenture holder, cannot be restricted or revoked except with the debenture
holders consent.
Goode classifies the powers of the receiver into in rem and personal (agency) powers.
In rem powers are held in right of the debenture holder and derive from the security
created by the debenture. They include the power to collect in the assets comprising the
security, to possess, control and use those assets.
In personam powers are vested in the debenture holder as agent of the company. They
include the power to enter into contracts on behalf of the company and pledge its credit.
If the company is not in liquidation, in rem and personal powers overlap in relation to the charged assets.
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Their distinction however becomes crucial when the company is in liquidation.
Disposals
This is the ideal situation. What are the benefits of a going concern sale? In order to sell a business as a
going concern, the receiver will usually have to continue the companys business and keep its goodwill
alive, but this not possible in some cases.
Hive-down
A hive-down is the transfer of certain assets of the business of the company in administration or
receivership to a new wholly-owned subsidiary controlled by the office-holder, but leaving behind the
liabilities. Without the dead weight of the accumulated debts of the parent, the subsidiary may prove both
profitable and marketable. Per Lightman & Moss (3rd edn, para 12-083).
Effect of Liquidation
What is the effect of liquidation on receivership and are the powers of the receiver
affected?
The position, as explained in Lightman & Moss (3rd edn, para 16-043), is as follows:
The winding-up order or resolution for winding-up terminates the receivers agency for the
company. The powers given by the debenture to exploit the companys undertaking and
assets, however, continue unaffected, save only that they cannot be exercised so as to create
any new debt or fresh liability. The receiver can, therefore, carry on the business of the
company, get in and realize the companys assets and take proceedings in the name of the
company to recover assets. He may do so either as agent for the debenture-holder or as
principal. Ordinarily, the receiver carries on the business and exercises his other surviving
powers as principal, incurs personal liability but claims a right of indemnity out of any assets
in his hands.
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The position in Singapore is not certain as Choo JC took different approaches in QCD (M) Sdn Bhd v. Wah
Nam Plastic Industry Pte Ltd and Harrick Engineering Pte Ltd v. Singapore Finance Ltd.
*QCD (M) Sdn Bhd v. Wah Nam Plastic Industry Pte Ltd [1997] 2 SLR 544
Held
- Choo JC held that the right to take proceedings in the name of the company was just as much a security
for the debt as any other right under the debenture. In other words, the right to use the companys name
in litigation has been given to the debenture holder as part of the security package.
- Thus, while winding-up terminates the receivers agency, this right of the receiver was not affected,
and to hold otherwise would be to diminish the commercial value of debentures as a security device.
Evaluation
- This is the approach adopted in English law.
*Harrick Engineering Pte Ltd v. Singapore Finance Ltd [1998] 1 SLR 197
Facts
- Harrick sued UOB for negligence, alleging that the charged property was sold at a gross undervalue.
- Harrick argued that OUB was liable for the negligence of the receivers who made the sale had been
appointed under the terms of a debenture between Harrick and OUB (which stipualated that the receivers
shall be the agent of Harrick and Harrick shall be responsible for their acts and default), as the receivers
had acted as UOBs agents since the agency between Harrick and the receiver terminated when Harrick
was wound up.
- An order for winding-up Harrick was made on 6 February 1987, whereas the sale was effected after this
date.
Held
- Choo JC held that there was no dispute that the debenture terms stipulated that the receivers shall be the
agent of Harrick and Harrick shall be responsible for their acts and default. Referring to some Australian
authorities, Choo JC held that as the debenture between Harrick and OUB did not terminate by virtue of
Harrick's liquidation, Harrick should be held to the agreement so far as it is compatible with the existence
of the winding-up. Since the conduct of the sale was not incompatible with Harrick's winding-up as the
unsecured creditors had no interest in the assets, the receivers did not cease to be Harrick's agents upon
its liquidation.
- Choo JC went on to say that even if the winding-up terminated the agency, the receivers did not
automatically become OUB's agents. There must be adequate evidence that the bank has to conduct itself
in such a way as to constitute the receivers as its agent, but no such evidence that this had occurred in the
present case. The fact that OUB did not object to the receivers' proposed price at which to sell the assets
did not make the receivers OUB's agents.
Evaluation
- In terms of practically result, both cases are not different.
The reason why liquidation terminates the receivers agency, as held in QCD (M) Sdn Bhd v. Wah Nam
Plastic Industry Pte Ltd, is set out in Wily v. Commonwealth of Australia (1996) 19 ACSR 720.
Wily v. Commonwealth of Australia (1995) 18 ACSR 299 at 304, affirmed on appeal (1996) 19 ACSR
720 (Federal Court)
Held
- It is the liquidator that has the authority to bind the company, carrying on its business or otherwise
entering into transactions, for the benefit of the company's unsecured creditors. It is inconsistent with
winding-up and the powers of the liquidator that a receiver can act also as the company's agent so as to
incur liabilities provable in the winding-up.
If a liquidator is appointed, how does the receiver go about performing its obligations
in winding-up?
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- The receiver may conduct receivership either as agent for the debenture holder or as a principal.
- Ordinarily, a receiver carries on business and exercises his surviving powers as principal, incurs personal
liability but claims a right of indemnity out of any assets in his hands, and if he has bargained for it, an
indemnity against his appointer.
- If the debenture holder becomes principal of the receiver, it will be liable for the acts of the receiver. That
is the last thing the debenture holder wants, and in fact was the reason historically why receivers were
appointed. However, if the debenture holder interferes by giving instructions to the receivers, it may
constitute the receiver as its agent, as was held in Harrick Engineering Pte Ltd v. Singapore Finance Ltd.
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V. Duties and Liabilities of a Receiver
Nature of a Receivers Duties
As stated earlier, a receiver is an agent of the company but this agency is very different from the ordinary
agency one encounters. Receivership is simply a means by which a secured creditor may enforce
its security. Hence, it has been said that [t]he law governing the duties and liabilities of a receiver
and manager ... ignores the biblical dictum that a man cannot serve two masters: ODonovan,
Company Receivers and Managers (2nd ed, 1992), at para. 11.10.
Apart from duties imposed by contract, tort and equity, the CA also imposes some duties on the receiver.
There are certain statutory duties which must be performed upon the appointment of a receiver and
manager: see ss.221-224 CA. See also s.219 CA.
What duties does the receiver owe to a debenture holder? general rule
Taking control
This is one of the first duties of a receiver. He needs to take control of the company. The complete change
of control from the board of directors to the receiver needs to be effected, in many cases, with great speed.
Professional receivers plan the take-over with military precision. On the day a big company goes
into receivership there are suddenly accountants everywhere. The receiver himself usually moves
into the managing directors office, the finance director is given a thorough grilling, teams burrow
through the companys books, and men are posted at all entrances to make sure that in the
confusion nobody makes off with anything of conceivable value. per Stephen Aris, Going Bust
(1985) p 86
A mortgagee and a receiver owe a duty in exercising their powers to do so in good faith for the purpose of
preserving, exploiting and realizing the assets comprise in the security and obtaining repayment of the sum
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secured. What is the meaning of good faith? Will deliberate or reckless conduct in ignoring the interests of
the mortgagor suffice to constitute a lack of good faith?
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other oil company of Shells offer.
Held
- The H.C.A. held that the conduct of the mortgagee did not merely amount to a lack of reasonable care,
but in knowing that it could have gotten more than just selling to Shell, it had recklessly sacrificed and
acted with calculated indifference to the interests of the mortgagor, and was therefore in breach of the
duty of good faith.
Duties of care
The classical approach of Equity, as recounted in Downsview Nominees Ltd v. First City Corp Ltd, is
highly indulgent towards the mortgagee and the receiver the mortgagee appoints. Neither owes any general
duty of care to the mortgagor. The only duty of care they owe is on a sale, and in the case of the
mortgagee, in addition the duty to exercise due diligence when it is in possession. Therefore, other than in
a sale or when a mortgagee is in possession, a mortgagor cannot hold a mortgagee or receiver accountable
for any prejudice it suffers, no matter how unreasonable or negligent the conduct of the mortgagee or
receiver may be.
*Cuckmere Brick Co Ltd v. Mutual Finance Ltd [1971] Ch 949 (CA) 965 973
Held
- The English C.A. held that while a mortgagee is, once the power of sale has accrued, entitled to sell at
any time it thinks fit regardless of whether a higher price might be obtained if he had waited, the
mortgagee owes a duty when selling to exercise reasonable care to obtain the true market value of the
property.
- 2 reasons were proffered for imposing this duty:
(1) The mortgagor is vitally affected by the result of the sale but has no role in it.
(2) The mortgagee is not an absolute owner selling its own property.
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such duties.
China and South Seas Bank Ltd v. Tan [1990] 1 AC 536 (PC)
Facts
- The bank had advanced a loan secured by a mortgage of shares and a guarantee. When the debtor
defaulted, the shares were allegedly worth more than the outstanding debts.
- The bank did not realise the mortgage, and after the shares had become worthless, demanded repayment
of the debts from the surety.
- The Hong Kong C.A. held that although there were dicta in some cases to the effect that a mortgagee
owed no duty of care in deciding when to exercise its power of sale, it was arguable that such a duty
existed, as suggested by Lord Denning in Standard Chartered Bank v. Walker. Accordingly, on the
assumption that the duty of care did exist, it was prima facie unreasonable to delay selling the shares for a
substantial length of time against the backdrop of a falling market.
Held
- On appeal to the P.C., Lord Templeman the mortgagee owed no duty to the mortgagor to exercise its
power of sale over the mortgaged securities and could decide in its own interest whether to sell and when
to do so. Accordingly, as the mortgagee had done no act injurious to the mortgagor or inconsistent with
his rights, nor failed to perform any act which it was under a duty to do, equity would not intervene to
protect the surety.
Evaluation
- Leave should have been given to the mortgagor to defend as there was prima facie evidence that the
mortgagee had acted unreasonably in delaying to sell for a substantial length of time on a falling market,
as pointed out by the Hong Kong Court of Appeal. In granting summary judgment, the P.C. might well
have exonerated negligent conduct on the part of the mortgagee which had caused gratuitous harm to the
mortgagor.
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principle;
(3) This did not address the possibility of a general equitable duty of care;
(4) It is unrealistic to rely on the debenture holder to protect the interests of the company. When a
debenture holder is fully secured, there is very little reason for it to remove a receiver that is
underperforming. And even when it is under secured, the perspectives of the debenture holder and the
company are likely to be very different. Redemption of the debenture and putting the company into
liquidation are hardly adequate remedies;
(5) Lord Templeman was clearly mistaken on this point, since a debenture holder entitled to a global
security was entitled to veto the making of an administration order. Whilst this is no longer the case in
England after the Enterprise Act 2002, the same continues to apply in Singapore, judicial management
being Singapore's equivalent of the English administration;
(6) Where piecemeal sale will not realise enough to pay off the debts owed to the debenture holder, a
receiver will have to consider whether it would be better to carry on the business of the company. In any
event, this reason begs the question why in the first place a receiver does not owe a duty to the mortgagor
to exercise care in deciding whether to carry on the business or not.
Yorkshire Bank plc v. Hall reiterated and reinforced the dominance of the classical position:
**Silven Properties Ltd v. RBS Plc [2003] EWCA Civ 1409; [2004] 1 WLR 997; [2004] 4 All E.R. 484
Facts
- Receivers were appointed to a property company.
- In the hope of adding value to some of the mortgaged properties, the receivers obtained advice from
planning consultants on the prospects of obtaining planning permission and the expected uplift in price if
permission was obtained.
- Satisfied with the advice, they instructed the planning consultants to make planning applications.
- 2 months later, however, they changed their mind and decided not to continue with any application for
planning permission or the negotiations to grant a lease of a vacant property, but instead to sell the
mortgaged properties, in the state they were in, immediately.
Held
- Lightman J, delivering the judgment of the C.A., held that
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(1) a mortgagee is entitled to sell the mortgaged property as it is and is under no obligation to invest
money or time to improve it or increase its value;
(2) the primary duty of the receivers was to bring about a situation where a secured debt was repaid; and
(3) therefore, as a matter of principle, the receiver had to be entitled, like the mortgagee, to sell the
property in the condition it was in, and in particular without awaiting or effecting any increase in value in
the property, spending money on repairs or otherwise making the property more attractive before
marketing it for sale.
Den Norske Bank ASA v. Acemex Management Co Ltd [2003] EWCA Civ 1559, [2005] 1 BCLC 274
(CA) 279 283
Facts
- The mortgagee of a ship which arrested the ship upon the mortgagor's default refused to allow the ship
to travel to Hamburg, its destination, to discharge a cargo of bananas.
- Instead, the cargo was discharged overboard at Panama and the ship later sold there.
- An argument was raised that the mortgagee, having decided to sell, had not taken reasonable care to
obtain a proper price because it was obviously more sensible to have allowed the ship to proceed to
Hamburg to discharge its cargo in the ordinary course of events and arrest the vessel there.
Held
- Longmore LJ, who wrote the only reasoned judgment of the C.A., held that in reality this was an
argument that the bank ought to have deferred the arrest and sale of the ship until it arrived in Hamburg,
and accordingly rejected it for falling foul of the many statements in the cases that the mortgagee is
entitled to decide the time at which he sells without regard to the interest of the mortgagor. These
statements, according to Longmore LJ, cannot be side-stepped by saying, in the case of a moveable
chattel such as a ship, that the mortgagee has to take care to sell at the place where the best price is
available, because to transfer a chattel from one place to another will inevitably take time and mean that
the sale is deferred.
Evaluation
- Longmore LJs was more explicit than Lightman J in his rejection, saying that the many statements that
the mortgagee is entitled to decide the time at which he sells without regard to the interest of the
mortgagor cannot be side-stepped.
Over the last three decades a few cases have taken a different and more sensitive approach that whilst
acknowledging the superior rights of the mortgagee, seeks to protect the interests of the mortgagor. At the
risk of oversimplification, this approach is justified on a combination of the following factors:
(1) that it accords with good commercial sense;
(2) that it comports with the duties of a mortgagee in possession,
(3) that a mortgagee is not an absolute owner but a secured creditor; and
(4) that whilst the conduct of the mortgagee and receiver affect the interests of the mortgagor the
latter has no say in the matter.
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Held
- In respect of the issue as to whether receivers owed a duty of care, the English C.A. laid down the
following propositions:
(1) A receiver managing mortgaged property owes duties to the mortgagor and anyone else with an
interest in the equity of redemption.
(2) The duties include, but are not limited, to a duty of good faith.
(3) The extent and scope of any additional duty will depend on the facts and circumstances of each case.
(4) In exercising his powers of management, the primary duty of the receiver is to try to procure the
payment of the interest and debt.
(5) Subject to that primary duty, the receiver owes a duty to manage the property with due diligence.
(6) Due diligence does not require the receiver to continue to carry on a business previously carried on
by the mortgagor, only that if he does so he should take reasonable steps to try to do so profitably.
- The C.A. gave the following reasons for imposing the duty:
(1) Since a mortgagee in possession owes duty of due diligence, this should apply similarly to a receiver
carrying on business.
(2) Since a receiver owes a duty to take reasonable care when conducting a sale, he should similarly owe
such a duty when carrying on a business.
(3) The proposition that in managing and carrying on the mortgaged business, the receiver owes the
mortgagor no duty other than that of good faith offends commercial sense.
(4) This is necessary to ensure that receiver takes into account the interests of the mortgagor and others
interested in the mortgaged property.
(5) This will not undermine the receivership system.
Evaluation
- Whilst Medforth v. Blake is to be lauded, its impact on the law is limited. Scott V-C did not, and
realistically could not, repudiate the classical approach entirely. What he had done was to refuse to
follow the classical approach on the particular issue he was asked to decide.
- However, any suggestions that Medforth v. Blake laid the foundations for a broadening of the scope of
duties of receivers were firmly rejected in Silven Properties Ltd v. RBS and subsequently in Den Norske
Bank ASA v. Acemex Management Co Ltd.
The law has oscillated between the two approaches in recent years. Overall the classical approach has
continued to dominate. Should Singapore depart from English law and hold that a mortgagee and receiver
come under a general duty of care?
In an exceptional case, the Court may, pursuant to s.30 of the CLPA (Cap. 61), order a sale of the
mortgaged property against the wishes of the mortgagee.
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being open-ended and increasing indefinitely.
Fiduciary duties the self-dealing and fair-dealing rules
Tse Kwong Lam v. Wong Chit Sen [1983] 1 WLR 1349 (PC)
Facts
- The mortgagee sold the mortgaged property at an undervalue to a company of which he, his wife and
his children were directors and shareholders.
Held
- Although there was no fixed rule that a mortgagee exercising his power of sale might not sell the
mortgaged property to a company in which he was interested, in order to resist a borrower's application
to set aside such a sale, he had to show that he had made the sale in good faith and had taken reasonable
precautions to obtain the best price reasonably obtainable at the time.
- A mortgagee who wishes to secure the mortgaged property for a company in which he is interested
ought to show that he protected the interest of the borrower by taking expert advice as to (1) the method
of sale; (2) the steps taken to make the sale a success; and (3) the amount of the reserve.
2 issues arise when a receiver performs a pre-existing contract or enters into a new contract on behalf of the
company:
(1) What is the priority of the debts arising from the contract? Do they constitute
receivership expenses like in the case of liqudation?
(2) Is the receiver personally liable for the debts?
Unlike in the case of a liquidation, there is no similar doctrine for receivership expenses.
Generally, a debt that is unsecured, whether accruing pre- or post-receivership, ranks after the secured
debts owed to the debenture holder that appointed the receiver.
The receiver is not bound to pay any unsecured debts even where the debenture holder has benefitted from
the other partys performance of the contract. Thus, a receiver is not obliged to pay any sums payable
pursuant to a contract if they are unsecured.
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- The contract for employment was not terminated for a few weeks even after the receivership was
terminated.
- The wages post-receivership were not paid by the receiver.
Held
- The employee's claims that the receiver was personally liable, or that he should be paid as an expense of
the receivership, were rejected.
- The English C.A. held that the wages would have been a cost and expense of receivership had they
been paid. However, unpaid wages arising after the receivership was terminated did not constitute a
cost and expense of the receivership entitling it to priority over the debts owed to the debenture
holder.
- In respect of the claim that the receiver was personally liable, the English C.A. held that the receiver
was not personally liable as the contract was between the company and the employee. The appointment
of an out of court receiver has no effect on ordinary contracts of service.
Evaluation
- Parliament reacted by introducing new provisions into the Insolvency Bill which was then before it.
The remedy was to confer special rights on employees whose contracts of employment were 'adopted' by
receivers or administrators.
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*Chin Yoke Choong Bobby v. Hong Lam Marine Pte Ltd [2000] 1 SLR 137
Facts
- The appellants were the receivers of a company who had caused the company to continue the
prosecution of an arbitration claim against the respondents as well as the defence of the respondents'
counterclaim.
- The claim was subsequently withdrawn with costs and an arbitration award on the counterclaim with
costs was made in favour of the respondents. The respondents sued the appellants for the costs awarded
by the arbitration tribunal. They argued that the appellants could be made personally liable for the costs
pursuant to s.218 CA.
Held
- The receivers were not liable for costs under s.218 CA.
- Relying on Australian authorities interpreting the Australian equivalent of s.218 CA, the C.A. held that
costs awarded in favour of an adverse party in an arbitration or litigation were not within the scope of
s.218 CA, as such costs could not qualify as debts incurred ... for services rendered. The C.A. further
stated that the application of s.218(1) CA was confined to situations where a 3rd party has supplied goods
or services and has provided a direct benefit to the company.
- The C.A. further observed that receiver and manager will generally not be personally liable for the
debts properly incurred in the name of the company and within the scope of his authority, and that the
purpose of s.218(1) CA in imposing statutory liability on receivers was to overcome problems of abuse of
position by receivers who acted to the detriment of the company or other innocent 3rd parties. The
section applied notwithstanding any agreement to the contrary and the receiver could not raise the
defence that the debt was indemnified by the company or other persons. He remained primarily liable
even though he might ultimately have had recourse against the parties indemnifying him.
Evaluation
- The C.A.s observation seemed to suggest that a receiver and manager is not personally liable for debts
incurred in the course of receivership unless there is an element of impropriety, abuse of position or
unauthorized conduct. With respect, the more correct analysis is that a receiver and manager is generally
liable for debts incurred in the course of the receivership by reason of the wide terms of s.218 CA, and
this is so regardless of whether such debts were incurred in the name of the company or whether the
receiver and manager was acting within the scope of his authority.
- Further, the purpose of s.218(1) CA is not to prevent abuse of position, as it applies even if the receiver
and manager is acting properly, responsibly and with the best of intentions. Rather, s.218(1) CA serves a
protective as well as a facilitative function. In contrast to debts and liabilities incurred during a
liquidation or judicial management by a liquidator (s.328(1) CA) or judicial manager (s.227J(3) CA),
debts and liabilities incurred during a receivership by a receiver are not conferred statutory priority. A
party who is ignorant of his legal rights may thus grant credit to a company in receivership only to
subsequently find that his contractual or unsecured claim against the company ranks after the claim of the
secured creditor who has placed the company in receivership. On the other hand, a party who is aware of
his legal rights will probably decline to deal with the company in receivership for fear of his claim being
unsatisfied. By imposing personal liability for receivership debts and liabilities on the receiver, s.218(1)
CA protects the former category of ignorant parties and facilitates dealings by the latter category of
'enlightened' parties with the company in receivership.
- Further, the receiver would not be unfairly prejudiced by the operation of s.218(1) CA. If the debt or
liability in question was properly incurred by the receiver, the receiver may claim an indemnity in respect
of such debt or liability, either against the assets of the company subject to the security or on the express
indemnity usually granted by the secured creditor when the receiver is appointed, as was alluded to in the
case.
Distribution of assets
Section 226 CA imposes a duty on a receiver to discharge certain preferential debts in priority to the debt of
the debenture holder.
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For assets subject to a fixed charge, the order of application of realisations is as follows:
(1) Any costs arising out of preserving and realising the assets.
(2) The receivers costs, remuneration and expenses.
(3) Sums due to the chargee.
(4) Sums due to any secured creditor ranking after the chargee.
(5) Remaining surplus to the directors, or if the company is in liquidation, the liquidator.
For assets subject to a floating charge, the order of application of realisations is as follows:
(1) Any costs arising out of preserving and realising the assets.
(2) The receivers costs, remuneration and expenses.
(3) Section 226 CA preferential debts.
(4) Sums due to the chargee.
(5) Sums due to any secured creditor ranking after the chargee.
(6) Remaining surplus to the directors, or if the company is in liquidation, the liquidator.
If the amount collected is insufficient to pay off the creditor, the receiver might be tempted to attribute
more of the amount to the fixed charge than the floating charge.
The statutory duty under s.226 CA imposes a positive obligation on the receiver:
As stated earlier, a receiver is an officer of the company and so bears the disabilities and potential liabilities
of that office. For instance, he may be liable for insolvent trading under s.339(3) CA. Does the offence of
fraudulent trading provided for in s.340(1) CA also apply to him? Lightman J. thought so in Re Leyland
DAF Ltd [1994] 2 BCLC 760 at 771:
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VI. The Debenture Holder
Indemnity
The debenture holder usually expressly agrees to indemnify the receiver and manager from any loss which
may be suffered by the latter in the conduct of the receivership. In the absence of an express indemnity, an
implied indemnity may exist in an appropriate case.
Where a receiver or manager has been appointed to enforce any charge, the debenture holder may apply to
court for directions in relation to the performance of the functions of the receiver or manager: s.218(4) CA.
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VIII. Evaluating the Institution of Receivership
The enforcement of the powerful and all-encompassing form of security known as the floating charge under
Singapore law is effected principally through the institution of receivership, under which a private receiver
and manager may be appointed to take possession of and administer the assets of the company. This mode
of enforcement is particularly advantageous to the security holder as it allows him to unilaterally appoint an
insolvency practitioner of his choice to realize the floating charge. The security holder does not enter into
possession or assume responsibility or vicarious liability for the realization of the security. Instead, the
receiver and manager is appointed, pursuant to a private power of appointment in accordance with the
terms of the security, to be an agent of the company for the purpose of realizing the security. The receiver
and managers primary duty is to realize the security for the benefit of the security holder, and he owes
only minimal duties to the company and its other creditors. He can disregard, without personal liability, the
unsecured contractual rights that other parties may have against the company, but, in his capacity as an
agent of the company, he can enforce the companys contracts. In short, the receiver and manager has all
the powers and benefits of being an agent of the company with only few of the liabilities.
Not unexpectedly, under Singapore law, as a corollary of the respect for security rights, the insitution of
private receivership has been accorded favourable treatment. For instance, under s.277B(5)(b) CA, private
receivership is given precedence over judicial management, as a holder of a floating charge who is entitled
to appoint a receiver and manager is given the absolute statutory power to block a judicial management
order, unless there are considerations of public interest. One may expect that such a security holder would
more often than not exercise that veto right. The appointment of a receiver and manager for the single-
minded purpose of realizing the security advances the security holders interests much more than the
appointment of a judicial manager to carry out proposals in the collective interests of the companys
creditors as a whole. As one may expect, there are, invariably, few cases where a holder of a floating
charge would consent to the debtor company being placed under judicial management.
Recent Singapore authorities have further endorsed the exalted status of receivership. It has been made
abundantly clear by the courts that receivership has precedence over liquidation. For example, in Power
Knight, Prakash J stated that [t]he rule that upon liquidation only a company's unencumbered or free
assets are available for distribution among its unsecured creditors has a long and distinguished pedigree.
Hence, a receiver and manager of a company continues to have the power to sue to recover the companys
debts which are subject to the security, even after the company has been put into liquidation. Such is
required of the law, as otherwise would, according to Choo JC held in QCD (M) Sdn Bhd, diminish the
commercial value of floating charges as a security device. Although Choo JC initially held in the same case
that liquidation terminates the agency, his Honour subsequently changed his position and held in Harrick
Engineering that liquidation did not terminate the agency, and the receiver and manager continues to have
the power to deal with the companys property as an agent of the company. The only restriction imposed by
the liquidation is that the receiver and manager loses the power to create liabilities provable against the
company in the liquidation.
The courts have also refused to impose general duties of care on security holders and receivers and
managers. A security holder does not owe a duty of care to the company in deciding whether to exercise his
power to appoint a receiver and manager. Instead, the duties of a security holder are relegated to that of
mere good faith, as was held in Roberto Building Material. Neither does the security holder have to give a
reasonable time to the company to raise the necessary funds to repay the secured debt before he appoints a
receiver and manager. All that is required of the security holder is that he affords such time as was
necessary to institute such reasonable mechanics of payment (Roberto Building Material applying
Panessar). Similarly, a receiver and manager owes only a general duty of good faith, as well as a duty of
care in the very specific situation of exercising the power of sale, where he is required to obtain the true
market value of the property (Roberto Building Material applying Cuckmere Brick). It has also been held
that a receiver and manager is not obliged to carry on the business of the company and may decide to close
it down. However, if he decides to carry on the business, he owes a duty of care to exercise due care to run
it properly and profitably (Roberto Building Material applying Medforth). Although a few cases in the UK
have threaded a different and more sensitive approach to afford more protection to the interests of the
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mortgagor, such as Knight v. Lawrence and Medforth, the overall classical approach as laid down by the
PC in Downsview has continued to dominate, particularly following the English CAs decision in Silven
Properties and Den Norske Bank. Thus, the state of the law, as argued by Professor Wee Meng Seng, goes
far beyond what is necessary, at least in so far as the security holder is allowed to harm the interests of the
mortgagee gratuitously, to protect a security holders interests qua secured creditor, at the expense of the
interests of the mortgagor.
The courts have also allayed any concerns of receivers and managers in relation to their potential personal
liability under s.218 CA, which makes a receiver liable for debts incurred by him in the course of
receivership or possession for services rendered, goods purchased or property hired, leased, used or
occupied. This provision has been given a somewhat restrictive reading by the CA in Chin Yoke Choong
Bobby, where it was held that the receivers of the company who had caused the company to continue with
an arbitration claim against another party and defend that partys counterclaim were not personally liable
for the costs awarded against the company by the arbitration tribunal. Hence, s.218 CA is confined to
situations where a third party has supplied goods or services and has provided a direct benefit to the
company. While this position is entirely supportable as a matter of statutory interpretation, it seems to
accord receivers with undue protection and further exacerbates the perennial problem of lack of
accountability. As a matter of principle, there is no reason why a receiver who has caused the company to
incur a debt or liability to a third party in the course of receivership should not be personally liable for that
debt or liability, particularly where such a debt or liability is incurred for the benefit of the security holder.
In view of the foregoing, the fundamental question is whether the private receivership regime should be
preserved in its existing form. The whole concept of a selfish and non-collective regime seems to be
outmoded and incongruous with modern ideals of insolvency law. The supremacy of security rights is
arguably not a sufficient reason, as there is no compelling reason why the administration and realization of
security cannot be left to a liquidator or judicial manager, so long as the priority of the security holder is
respected and there are sufficient safeguards to balance the interests of the security holder vis--vis the
unsecured creditors. The law relating to receivership also does not provide any incentives to the receiver to
expend efforts to continue the companys business (other than for the purpose of preserving value) and to
attempt to rehabilitate the company. Not only is there no general duty to do so, there is also hardly any
financial and practical incentive to do so. Short of taking a shop for foreign models approach by making
the transition to the administrative receivership regime as was recommended by the CLRFC in 2002, or
even a wholesale abolishment of the receivership regime, the way forward towards effecting meaningful
change would be to specifically address the problems highlighted above from an organic and functional
perspective. In respect of the lack of duties imposed on receivers, the starting point of the analysis should
be whether there is a real conflict between the mortgagor and security holders interests. Without being at
risk of over generalizing, where and only where there is no such conflict, the security holder or receiver
would come under a wider duty of care and good faith. In respect of s.218, if it were to serve its protective
and facilitative functions, a wide reading is necessary, such that a receiver and manager is generally liable
for debts incurred in the course of the receivership, whether or not impropriety, which the CA in Chin Yoke
Choong Bobby seemed to suggest was a necessary element, was involved. Addressing these issues will not
ameliorate completely all the difficulties and criticisms that have been leveled at the private receivership
regime, but at the very least, if receivership were to remain as part of Singapores insolvency regime, it will
be a first step towards improving the accountability of receivers.
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Judicial Management
Singapore was in an economic recession in 1985/1986. The Pan-Electric group, a listed conglomerate,
collapsed in 1985 with huge impact on the economy and Singapores reputation as a financial centre. The
Stock Exchange of Singapore was forced to close for 3 days, and many companies were dragged into
receiverships and insolvent liquidations. The crisis led to calls that we should introduce laws to rescue
companies in financial difficulties.
The government set up the Economic Committee to review and strengthen our economy. The Fiscal and
Financial Policy Sub-Committee stated that measures should be introduced so that viable business
capable of making a contribution to the economy could be preserved whenever possible for the benefit of
employees, the commercial community and the general public.
As a result, judicial management was established via the Companies (Amendment) Act 1987. It is
substantially modelled on the administration regime as contained in the Insolvency Act 1986, even though
there was no express reference to administration in the legislative materials or Parliamentary debates.
The judicial management regime is constituted by the provisions in Part VIIIA of the CA and rules found
in Part V of the Companies Regulations (CReg).
Administration came about because of the recommendations of the Cork Committee, which was appointed
by the UK government to conduct a comprehensive review of UKs insolvency laws. Its recommendations
led to the Insolvency Act 1986 which institutionalised the rescue law and culture in UK.
The original model for administration was the global receivership, where a creditor holding a floating
charge, and sometimes other securities as well, appoint a receiver over the whole or substantially the whole
of the companys undertaking. The Cork Committee thought that global receiverships had been successful
in preserving the profitable parts of ailing enterprises. That was advantageous to the employees, the
commercial community and the general public. Where no receiver could or would be appointed, there were
few options for rescue. Thus, companies had been forced into liquidation, and potentially viable businesses
capable of being rescued have been closed down. The Committee thus recommended that provision should
be made to enable an administrator to be appointed by the court with all the powers normally conferred on
a global receiver and manager to carry on the business of the company. As originally conceived,
administration was thus offered as a supplement to receivership. That is still the case today in Singapore
but no longer in UK.
In Re Atlantic Computer Systems plc [1992] Ch 505 at 528, Nicholls LJ said that administration is
intended to be only an interim and temporary regime. There is to be breathing space while
the company, under new management in the person of the [judicial manager], seeks to achieve
one or more of the purposes set out in [s.227B(3)]. There is a moratorium on the enforcement of
debts and rights, proprietary and otherwise, against the company, so as to give the [judicial
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manager] time to formulate proposals and lay them before the creditors, and then implement
any proposals approved by the creditors. In some cases winding-up will follow, in others it will
not.
In Centre Reinsurance International Co v. Freakley [2006] UKHL 445, Lord Hoffmann pointed out that
administration has 2 main features.
It was introduced to give insolvent companies a moratorium on the enforcement of debts and
securities while the possibility of some form of rescue or arrangement with creditors was explored.
Unlike Chapter 11 of the U.S. Bankruptcy Code, with which it is sometimes compared,
administration does not involve a reconstruction of the company. It may look forward to some
kind of reconstruction, but that takes place under different statutory provisions such as Part I of the
IA 1986 Act [company voluntary arrangement which has no Singaporean equivalent] or [s.210
CA].
Section 227A CA
We have an interesting s.227A CA which has no UK equivalent. It provides that an application for a
judicial management order may be made, if the company or creditor(s) considers that the company is or
will be unable to pay its debts, and there is a reasonable probability of
rehabilitating the company; or
preserving all or part of its business as a going concern; or that otherwise
the interests of creditors would be better served than by resorting to a winding up.
Is this a statement of the objectives of judicial management? Note that s.227A CA draws a clear distinction
between saving the company as a legal entity and saving its business, a distinction that is maintained in
s.227B(1) CA. Is there an implicit ranking of objectives?
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II. Initiating Judicial Management
Elements in an Application
An applicant must have locus standi to apply: see s.227B(1) CA. Pursuant to s.227B(1) CA, the following
people have locus standi to apply:
(a) The company or its directors (pursuant to a resolution of its members or board of directors);
(b) A creditor or creditors (including any contingent or prospective creditor or creditors or all or
any of those parties, together or separately).
An applicant must comply with 2 threshold requirements for the court to have jurisdiction: (i) actual or
likely insolvency; and (ii) the likely achievement of one or more purposes of judicial management.
Even where the thresholds are satisfied, the court retains a discretion on whether to make a judicial
management order or not.
The interpretation of the threshold requirements, particularly on the standard of proof required, has initially
given rise to conflicting rulings in England. It has since been established that with regards to the
insolvency requirement, the standard of proof is more likely than not (i.e., on a balance of probability),
whereas the standard with regards to the purpose requirement is a real prospect, which is a lower
standard than more likely than not.
Comparison of the threshold requirements (s.227B CA) under English and Singapore
law
Court is satisfied that the Court is satisfied that a company Court is satisfied that the
company is or will be unable to is or is likely to become unable to company is or is likely to
pay its debts. pay its debts. become unable to pay its debts.
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- It was held that with regards to the insolvency requirement, the petitioner must establish that it was
'more likely than not' that the company was or would become insolvent, not merely that there was a 'real
prospect' of that.
- Satisfied here means satisfied on a balance of probabilities.
- Administration and the associated expense, danger and problems that a company would be exposed to
is a serious matter, and thus, since it is a rescue procedure, it must be shown that rescue is probably
needed before asking for a rescue team.
Deutsche Bank AG v. Asia Pulp & Paper Co Ltd [2003] 2 SLR 320 (CA)
Facts
- The company was clearly insolvent and therefore the only issue before the C.A. was whether or not
there is a real prospect that the appointment of judicial managers will achieve one or more of the
purposes stated in s.227B CA.
Held
- The C.A. approved of the holding in Re Harris Simons Construction Ltd and held that a lower burden
of proof applied to the purpose requirement.
Evaluation
- The C.A.s approval of Re Harris Simons Construction Ltd is an implicit approval of the balance of
probability standard of proof for the insolvency requirements, even though the issue was not before the
court.
- Under s.227A(b) CA, however, the phrase used is reasonable probability that a purpose stated therein
would be achieved. This would appear to suggest a lower threshold than a balance of probabilities that is
commensurate with real prospect.
The applicant must state the purposes that is hoped to be achieved in a judicial management. The purposes
for which an order may be made are:
The survival of the company, or the whole or part of its undertaking as a going concern (s.227B(1)
(b)(i));
The approval under s.210 CA of a compromise or arrangement between the company and its
creditors (s.227B(1)(b)(ii)); or
A more advantageous realisation of the companys assets would be effected than on a winding-up
(s.227B(1)(b)(iii)).
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What is the reason for including another procedure, the s.210 CA scheme of arrangement, within a judicial
management? Why is that necessary?
A s.210 CA scheme of arrangement allows the company to restructure its debts with its creditors,
for e.g., through a debt-equity swap, extending the loan repayment period, and/or extinguishing
part of the debt (haircut).
Section 210 CA creates a statutory framework within which a majority of creditors may bind an
opposing minority to a debt-restructuring plan. That is not possible under judicial management.
Under a judicial management, there is no mechanism for the majority creditors to bind the
minority the creditors must be unanimously in agreement in order for the debt-restructuring plan
to go through.
Practically, however, as the moratorium in s.210 CA is very narrow, it may be necessary to put the
company into judicial management, which has a wider moratorium, first before being able to
effect a s.210 CA scheme. This is different from Chapter 11 under U.S. bankruptcy laws where a
single regime contains both elements of moratorium and debt restructuring.
How does the court determine whether a judicial management will achieve one or
more of the statutory purposes?
England
Singapore
Locally, in Re Genesis Technologies International [1994] 3 SLR 390, the court regarded the
companys failure to explain how it had gotten into its financial predicaments and how the
situation was to be improved as crucial.
In Deutsche Bank AG v. Asia Pulp & Paper Co Ltd [2003] 2 SLR 320, the C.A. took into account
the opinions of experts in corporate restructuring.
Both cases demonstrate the weight that the local courts ascribe to an independent report in
assessing the viability of judicial management.
Even where the threshold requirements are met, the court still retains a discretion on whether or not to
make a judicial management order. While an unpaid creditor has an ex debito justitae right as between
himself and the company to a winding-up order, this does not apply in an application for judicial
management.
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What are the factors that may influence the courts exercise of discretion?
It is not possible to catalogue all the factors that influence the courts exercise of discretion. Below are
some of the more common factors:
Independent insolvency practitioners report
Interests of the creditors
o Judicial management is not a reorganization procedure for the benefit of the debtors, but
provides breathing space to consider the exit route which will best serve the interests of
the creditors.
o In Re Genesis Technologies International, Selvam J held that the court should be vigilant
to ensure that judicial management is not used by directors or shareholders to the
detriment of the creditors.
o Thus, in opposing an application, the court will consider whether the creditor is opposing
out of its interests as a creditor or otherwise. In Re Structures & Computers, a majority
creditor argued that the petition should be dismissed as it was in a position to defeat any
proposal put forth by the administrator. The argument was rejected and the court held that
it had jurisdiction to make an order for administration, as the opposition did not mean that
an administration would not achieve its stated purpose. The court was also influenced by
the fact that had the company gone into liquidation instead, the opposing creditor might
have stood to gain the companys goodwill and employees for free or at a huge discount.
The court found this to be improper and ordered the administration despite the creditors
opposition.
o The interests of a secured creditor are not given as much weight as those of an unsecured
creditors in deciding whether to make a judicial management/administration order. This
is because, as explained in Re Consumer & Industrial Press Ltd (No 2) (1988) 4 BCC 72,
a secured creditor does not stand to lose that much.
o However, if the secured creditor is a dominant creditor, its opposition will defeat an
application, unless the court overrides its opposition on the ground of public interest
under s.227B(10)(a) CA (Re Bintan Lagoon Resort Ltd [2005] 4 SLR 336).
Conduct of the company
o The court in Re Structures & Computers held that criticisms of the companys conduct
did not per se mean that a petition should be dismissed. The court was mainly concerned
with the benefit to creditors and would only be concerned with the companys behaviour
if the matters complained of rendered liquidation more appropriate than
administration.
Relative merits of judicial management compared to other regimes, for example, winding-up,
consensual debt workout etc.
o Judicial management versus Winding-up: Re Genesis Technologies International [1994]
3 SLR 390.
o Judicial management versus consensual debt workout: Deutsche Bank AG v. Asia Pulp
& Paper Co Ltd [2003] 2 SLR 320.
o Judicial management versus global receivership: s.277B(5) CA.
If the dominant creditor opposes to the petition, the court cannot make a judicial
management order unless the public interest exception under s.227B(10)(a) CA
applies. However, as it was given a very narrow interpretation in Re Bintan
Lagoon Ltd, in practice there will be no occasion to assess the relative merits of
the two regimes.
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Nomination of judicial manager
The judicial manager is given wide powers to manage the company and the exclusive right to present the
proposal on how to achieve the purpose(s) of the judicial management. The identity of the judicial
manager is thus of considerable importance.
Who are given rights to nominate or oppose the nomination of a judicial manager? Is the court bound by
any nomination or opposition?
Pursuant to s.227B(3)(a) CA, the applicant shall nominate a public accountant who is not the
companys auditor to be judicial manager.
Pursuant to s.227B(3)(c) CA, a majority of creditors (including contingent or prospective creditors)
in number and value may appear at the hearing of the application to oppose the companys
nomination. The court, if satisfied as to the value of the creditors claims and the grounds of
opposition, may invite the creditors to nominate another person.
Pursuant to s.227B(3)(b), (c) and (e) CA, the court is not bound by any nomination and may
appoint a non-public accountant.
If the Minister considers that the public interest so requires, he is entitled to nominate, and the
nominee need not be a public accountant: s.227B(3)(d) and (e) CA.
A creditor with the veto right (the right to appoint a global receiver) will be referred to as a dominant
creditor.
Note that the security package of the dominant creditor must consist of a floating charge or a floating
charge and one or more fixed charges. In practice, a floating charge does not offer much security. But as it
is an essential security which a creditor must have in order to be a dominant creditor, it has become the
norm for creditors to take floating charges. In an extreme case, the creditor may tack a floating charge on a
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fixed charge over the companys sole or principal asset. Such a floating charge is called a lightweight
floating charge. It was argued in Re Croftbell Ltd that a lightweight floating charge was a mere artifice
aimed at circumventing the purpose of the Insolvency Act 1986 and that the power of the court to appoint an
administrator should not be stultified by the device. The argument failed.
As a matter of practice, though, floating charges are not often given in the corporate world. The reason is
that if the borrower is not credit-worthy, the lender will simply not lend the money. Conversely, if the
borrower is credit-worthy, it will not be necessary for the borrower to provide security in the form of a
floating charge over all its assets in order to secure the funds. Floating charges therefore are usually only
relevant in times of distress, and are therefore closely related to avoidance provisions.
Overriding discretion
Under s.227B(10)(a) CA, nothing in the section precludes a court from making a judicial management order
if it considers the public interest so requires.
A difficulty with s.227B(10)(a) CA is that it is very broadly worded. Taken literally, the
public interest exception may be invoked with regards to all the sub-sections in s.227B, such as the
threshold requirements in s.227B(1) CA, the veto right of a dominant creditor under s.227B(5) CA,
etc.
Chan J held in Re Cosmotron Electronics that it does, and that the court has the power (if it considers the
public interest so requires) to make a judicial management order even though the making of such order is
unlikely to achieve any of the purposes stated in s.227B(1) CA.
Nothing about s.277B(5) CA was mentioned in Re Cosmotron Electronics, but the section was in issue in
Re Bintan Lagoon Resort.
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- The other creditors of the company petitioned for a judicial manager to be appointed, arguing that (a) it
would be in the public interest to rescue the company as it had a decent chance of survival; (b) there
would be adverse economic, social and political consequences if the company was allowed to be wound
up; and (c) the manner in which the dominant creditor acquired its security violated the rules of fair play
and good conscience.
Held
- Andrew Ang J held that the test in s.227B(10) CA is not merely whether it is in the public interest, but
the more stringent construction of whether the court considers that the public interest so requires.
- This is because the opening words [n]othing in this section shall preclude confers upon the court an
overriding power to make a judicial management order (if it considers the public interest so requires)
notwithstanding that it may not be satisfied that the making of the order would be likely to achieve one or
more of the purposes set out in s.227B(1) CA.
- In other words, the court has the power (if it considers the public interest so requires) to make a judicial
management order even though the making of such order is unlikely to achieve any of the purposes,
which, by virtue of s.227B(1) CA, are prerequisites to the making of such order.
- Such a power therefore should not be lightly exercised even if it may be in the public interest to do so.
The court must be of the view that the public interest so requires; it should not only be opportune but
also importunate that the power be exercised. Thus, even assuming, as the petitioners counsel
contended, that it is in the public interest to rescue companies with a decent chance of survival, that alone
is not enough.
- The question whether the public interest so requires may perhaps best be answered by considering the
likely consequences of not making a judicial management order will a refusal to make such order
lead to or allow the dismemberment or collapse of a company whose failure will have a serious
economic or social impact?
- While the consequences need not be as dire as that in the Pan-Electric case, the mere fact that amongst
the petitioners is a listed company in Singapore or a statutory body such as the Inland Revenue Authority
of Singapore is not enough. If the Company were to fail and the debts owed to such a petitioner had to be
written off, it will be of no great moment.
Economic and social consequences
- Companies do fail sometimes and often with adverse consequences to employees, customers and
suppliers. It cannot seriously be suggested that the court should exercise its power under s.227B(10) CA
each time this happens. Besides, in this present case, any buyer of the resort wishing to continue
operating it will have to offer employment either to the incumbent or new employees. Arrangements
would also need to be made for the continuation of supplies. The impact of the sale therefore should not
be exaggerated.
Political consequences
- The Court was of the view that it was a gross exaggeration to suggest that there would be any political
repercussions, assuming that it was even appropriate to entertain such considerations.
The rules of fair play as a public interest that requires the exercise of the discretion where infringed
- The Court held that this was not a case where in which the public interest required the appointment of a
judicial manager. The Court, however, did not preclude the possibility that in certain egregious
circumstances, the public interest might require the making of a judicial management order so as to
redress a grievous wrong.
In Re Cosmotron Electronics, Chan J (as he then was) held whether the section has the same effect in
relation to s.227B(7) CA (as it does in relation to s.227B(1) CA) is not absolutely clear. In principle, it
seems unlikely that Parliament had intended for s.227B(7)(a) nor s.227B(7)(c) CA to be subject to
s.227B(10)(a) CA.
If the company has already gone into liquidation, it would be too late to make a judicial
management order.
Banks, finance companies and insurance companies occupy special positions within the economy
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and should therefore the lex specialis doctrine should apply, as is the case in the U.K.
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III. The Effect of Making an Application for Judicial
Management
Interim Moratorium
On the making of an application, pursuant to s.227C CA, an interim moratorium comes into effect
automatically. Its purpose is to preserve the companys assets in this critical period, until the application is
finally disposed of.
Once a judicial management order is made, the interim moratorium will be replaced by a final and broader
moratorium s.227D(4) CA (see below).
The Court may appoint an interim judicial manager, and such interim judicial manager may, if the Court
sees fit, be the person nominated in the application for a judicial management order. The interim judicial
manager so appointed may exercise such functions, powers and duties as the Court may specify in the
order: s.227B(10)(b) CA.
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IV. The Effect of Making a Judicial Mangement Order
Scope of the Moratorium
The interim moratorium continues, and is broadened, but an affected may now apply to the judicial
manager for permission to exercise its rights, in addition to applying to the court for leave.
What is the function of the moratorium and what is its scope? Does it affect any
substantive rights?
The moratorium is entirely procedural, viz, to allow time to find a way of saving the business or realising it
to better advantage than in a liquidation, and its imposition not intended to alter substantive rights or
priorities more than was necessary to enable that objective to be achieved (Centre Reinsurance
International Co v. Freakley [2006] UKHL 45). It does not affect the company's capacity, under its new
management, to continue to trade and incur liabilities. It does not, save to the extent [under s.227J CA],
affect the priorities which creditors would have if the company was wound up. That is left to any future
reconstruction or liquidation.
Barclays Mercantile Business Finance Ltd v. Sibec Developments Ltd [1993] 2 All ER 195
Held
- Per Millett J: The section is couched in purely procedural terms. It presupposes that the legal right to
enforce the security or repossess the goods and the cause of action remain vested in the party seeking
leave. In granting leave, the court does not alter the parties' legal rights. It merely grants the person
having a legal right the liberty to enforce it by proceedings if necessary. The section imposes a
moratorium on the enforcement of the creditor's rights but does not destroy those rights.
Evaluation
- Millett Js pronouncement was endorsed by the SGCA in Electro Magnetic (S) Ltd v DBS Ltd, where it
commented that ss.227C and 227D CA are not intended to deprive a secured creditor of a company under
judicial management of his security.
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Meaning of security
There is no question that consensual securities such as mortgage, charge etc are considered security
within the meaning of the section.
It is less clear in respect of non-consensual securities such a lien, right of detention etc.
Electro Magnetic (S) Ltd v DBS Ltd [1994] 1 SLR 734 (CA)
Facts
- The bank granted the company short-term banking facilities and a term loan.
- Under the terms of the facilities, the company sent the bank several bills of exchange for collection.
- The company subsequently petitioned for itself to be placed under judicial management, and as at the
date of the petition, the company owed the bank large sums of money.
- At the same time, however, the company also had accounts with the bank that were in credit.
- When the companys judicial managers requested the bank to forward all proceeds of the bills which
the bank had collected to the companys account, the bank refused, claiming a lien on the bills and the
proceeds.
- Accordingly, the bank retained the bills and presented them as and when they matured and collected the
proceeds and applied them to reduce or discharge the company's liabilities to it.
- The company subsequently sought 2 declarations to the effect: (a) that the bank was not entitled to
exercise any lien over the company's property held by it and/or exercise any right of set-off against any
moneys belonging to the company; and (b) that by so doing, the bank had breached or acted contrary to
Part VIIIA of the CA.
Held
- The term security has not been defined in the CA and should therefore bear the natural and ordinary
meaning.
- A security over a property consists of some real or proprietary interest, legal or equitable, in the
property as distinguished from a personal right or claim thereon.
- A lien was in the nature of a security and was essentially a passive right of retention, which did not
bestow on the holder of the lien a power of sale.
- A right of set-off is a personal right; it is a right given by contract or by law to set off one claim against
the other and arrive at a balance. Thus, a right of set-off is not a security within the meaning of s.227C(b)
or s.227D(4)(d) of the CA.
- On the facts, the bank, had only a contractual right to set-off the credit balance of the company in one
account against its debit balance in the other or to combine the two and net the balance. Aside from this
right, the bank had no interest or claim on the balance standing to the account of the appellant. Thus, in
exercising the right of set-off, the bank did not contravene the CA.
Evaluation
- The definition given by the C.A. is broad enough to encompass non-consensual securities.
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Does the meaning of security extend to the right of forfeiture and other self-help
remedies?
The self-help remedy of contractual set-off was excluded from the definition of security in Electro
Magnetic (S) Ltd v DBS Ltd. From this, it would appear that self-help remedies are generally not caught by
the moratorium.
The argument could, however, be made that there is a need to distinguish between a proposed exercise of
contractual right that does not involve exerting proprietary or possessory rights as part of a broader scheme,
and one that does. Following from this would be the conclusion that the right of forfeiture by re-entry will
be caught by the moratorium. However, as a matter of statutory interpretation, such a right should not fall
within the meaning of security, since certain quasi-securities are specifically provided for in this section,
which attracts the interpretive canon of expressio unius est exclusio alterius. Additionally, from a policy
perspective, the more generous the definition of security, the more commercial certainty is undermined.
The moratorium in s.227C(b) and s.227D(4)(d) CA is triggered only if a step has been taken to enforce
security or repossess goods.
Some acts such as the appointment of a receiver and the exercise of the power of sale clearly fall within the
scope of the phrase.
In Bristol Airport plc v. Powdrill, Woolf LJ held that a person is not taking steps to enforce a
security unless, by relying on the security, the person is preventing the administrator doing
something to the chattel in which he has an interest which he would otherwise be entitled to do.
The passage was cited by the SGCA in Electro Magnetic (S) Ltd v DBS Ltd.
Goode is of a similar view. He argues that the words step taken to enforce is narrower than steps
taken towards enforcement, the former denoting acts which in some degree interfere with the
companys enjoyment of its property or of property in its possession or inhibit the administrators
use of such property in the conduct of the business. Accordingly, he is of the opinion that the
service of a demand for payment or notice terminating a contract does not amount to a step taken
to enforce or repossess, as such a demand or notice does not interfere with the administration.
On the other hand, a chargee of book debts who demands payment from the account debtors is
taking steps to enforce the security over the book debts as such an act may interfere with the
administrators ability to collect the debts himself.
The law in this area, however, has been inconsistent. In Re Atlantic Computer Systems, the C.A.
held that goods which were in the possession of a 3rd party under a sub-lease granted by the
company were nevertheless deemed to be in the company's possession, and that the owner of the
goods needed the leave of the court (the administrator not having given his consent) before he
could repossess the goods in exercise of his rights under the hire-purchase agreement. It is
arguable, though, that the termination did not interfere per se with the administration of the
company.
Does mere refusal of an owner, who has a possessory lien or similar right to detain a chattel of the
company, to comply with the demand of judicial manager to hand it over amount to taking a step to
enforce a security?
It was held in Bristol Airport plc v. Powdrill that in the case of an ordinary possessory lien, the
assertion by the lien-holder of a right to retain a chattel constituted, in the case of chattels of a
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company in relation to which an administration order had been made, the taking of a step to
enforce the security within s.11(3)(c) of the U.K. Insolvency Act 1986, and therefore, in default of
agreement with the administrator, required the leave of the court. Sir Browne Wilkinson VC
opined that such an interpretation was appropriate as it was necessary for the administrator to have
available to him the right to use the property of the company free from interference by creditors
and others during the period of administration so as to carry out the statutory purpose of
administration. Interpreting the section otherwise would force the administrator either to seek to
run the business without the chattels so retained or to pay in full and at once the amount owed to
the lien-holder.
In the same vein, the C.A. in Electro Magnetic (S) Ltd v DBS Ltd held that mere assertion of a lien
over a property in the face of demand by the owner thereof is an act enforcing the lien, and
accordingly, the the refusal of the bank to hand over the bills on which it had a lien pursuant to the
demand of the company was in effect an enforcement of the lien, which could only be done with
the leave of the court. Even if those acts were insufficient to constitute an enforcement of the
security, presenting the bills for payment and collecting the proceeds thereof plainly amounted to
enforcing, in breach of the CA, the security that the bank had on the bills.
The effect of both cases is that the retention of an asset subject to a possessory security will
amount to the taking of a step to enforce the security. However, the very nature of a possessory
security would render the security lost upon handing over the asset. How, then, can the creditor
preserve its security without detaining the assets after demand by the judicial manager for the
surrender of the assets has been made? In this connection, it was held in Bristol Airport plc v.
Powdrill that a creditor can apply for leave ex parte, and, in an urgent case, may detain the asset
while seeking leave without being in contempt of court. In such a case, according to Woolf LJ, the
creditor is not taking a step to enforce, as that does not occur until he makes an unqualified
refusal to hand over the goods.
No steps shall be taken to repossess goods in the companys possession under HPA
The words in the companys possession was given an extended meaning in Re Atlantic Computer
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Systems (No 1):
While the words in the companys possession are similarly found in the interim moratorium provision
(s.227C(b) CA), it is curiously not found in the final moratorium provision (s.227D(4)(d) CA).
It is arguable, though, that the English approach should apply to both the interim moratorium and final
moratorium in Singapore.
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moratorium gives the administrator time to formulate proposals and lay them before the creditors. Such a
purpose would be hindered were all prosecutions to be allowed to proceed whatever the circumstances.
Meaning of legal process
The court, or the judicial manager, has a discretion to allow otherwise prohibited proceedings or
enforcement actions to be commenced or continued. On what principles is this discretion exercised?
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refusing leave (by, for e.g., giving directors to the administrator); e.g., that the lessor shall have leave
unless the administrator pays the current rent. If rent is paid the loss to the lessor arising from his
inability to recover his property will normally be small. In most cases this should be possible, as the
business should be able to pay current outgoings if the administration order has been rightly made.
(k) A broadly similar approach will be applicable in many applications for leave to enforce a security.
(l) The court will not, on a leave application, seek to adjudicate upon a dispute over the existence,
validity or nature of a security unless the issue raises a short point of law which it is convenient to
determine without further ado. Otherwise the court needs to be satisfied only that the applicant has a
seriously arguable case.
See Bristol Airport plc v Powdrill, Electro Magnetic (S) Ltd v DBS Ltd, AES Barry Ltd v TXU Europe
Energy Trading Ltd and Re Rhondda Waste Disposal Ltd for examples of how the discretion was
exercised.
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V. The Judicial Manager
Overview
On making of a judicial management order, the court will appoint a judicial manager who, under s.227B(2)
CA, shall manage the affairs, business and property of the company while the judicial management order is
in force.
The governance mechanism in a judicial management consists of a complex and sophisticated interplay
between the powers and duties of a judicial manager, the rights of creditors and the roles of the court in
supervising and helping the judicial manager.
Clearly, the judicial managers exercise of his powers is subject to limits or supervision and control.
A general limitation on the judicial managers exercise of powers is that the powers are only
exercisable for the purposes set out in the judicial management order as being the purposes for
which the order was made.
The statute imposes various duties on the judicial manager to ensure that he discharges his
statutory functions, and to channel the exercise of the broad powers conferred on him.
He is also subject to duties at common law which arise due to his status as agent of the company
and officer of the court.
Creditors are protected mainly by the aforesaid duties imposed on the judicial manager to discharge his
statutory function, but the right to participate in the conduct of the judicial management is limited.
Creditors have a right to vote on the statement of proposals which the judicial manager is required
to prepare. The judicial manager is required to act in accordance with the approved proposals.
However, the judicial manager may in a proper case dispose of all or substantially all the
companys assets before the creditors meeting to vote on the proposals. If so, the creditors lose
their right of participating in the conduct of the judicial management.
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The court plays a limited but crucial role in protecting creditors interests, resolving intra-creditor disputes
and disputes between the judicial manager and the creditors, and providing help and advice to the judicial
manager for the judicial management to work. A valuable facility here is the courts powers to give
directions to the judicial manager: ss.227G(3)(b) and 227G(5) CA.
Although rehabilitation is one of the statutory objectives of judicial management, it is very rarely achieved.
The most common purpose achieved is a more advantageous realisation of the companys assets than in a
winding-up. The best case scenario is a going concern sale of the whole or part of the companys
undertaking in the market, followed by liquidation or dissolution. If that is not possible, the assets will
have to be disposed of piecemeal more or less.
The likelihood of rehabilitating the company without any restructuring of its debts, i.e., the company is
nursed back to health through trading and disposal of non-core assets only, is extremely remote. This may
occur where the company is illiquid but balance sheet solvent. The moratorium gives the company the
requisite breathing space to dispose of its assets in an orderly fashion to raise the cash to pay its creditors.
In most cases, rehabilitation, if at all possible, will require restructuring. In substance, this involves a sale
to existing creditors or shareholders of the companys assets. In the absence of unanimity, it will be
necessary to use a s.210 CA scheme of arrangement to restructure debts. There are many hurdles to
restructuring. It is time intensive and the outcome is uncertain.
General Powers
Power is conferred generally by s.227G(3)(a) CA: a judicial manager may do all such things as may
be necessary for the management of the affairs, business and property of the company.
In Denny v. Yeldon, the word affairs was construed widely to cover at least matters which realistically
touched or concerned the companys business or property.
The powers conferred on the judicial manager are extensive. Other than the power to distribute, he is likely
to have the power to do what is necessary or beneficial in the conduct of the judicial management. Further,
he may apply to court for assistance where necessary.
The design of judicial management is thus to confer extensive powers on the judicial manager, and then
constrain their exercise through the duties and liabilities the judicial manager is subjected to.
Specific Powers
Section 227G(4) CA provides that without prejudice to the generality of the general powers conferred by
s.227G(3)(a) CA, there is a list of specific powers in the 11th Schedule CA.
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Power to sell or otherwise dispose of the property of the company, and the power to do all such
things (including the carrying out of works) as may be necessary for the realisation of the property
of the company.
o These powers are augmented by the power to sell charged property in s.227H CA.
Power to borrow money and grant security over the companys property.
o This allows him to raise the necessary finance to achieve the purposes for which the
judicial management order was made.
Power to bring or defend any action or other legal proceedings in the name and on behalf of the
company.
Power to dispose of or otherwise exercise his powers in relation to any property which is subject
to a security which, as created, was a floating charge as if it were not subject to the charge:
s.227H(1) read with s.227H(3) CA.
o Where property is so disposed of, the holder of the floating charge has the same priority
in respect of any property of the company directly or indirectly representing the property
disposed of as he enjoyed in the property disposed of: s.227H(4) CA.
In other words, the priority previously enjoyed by the floating charge holder is
transferred to the products or proceeds.
Power to, with the approval of the court, dispose of (a) any property subject to a security other
than a floating charge, or (b) any good under a HTA, CLA or RTA, as if it were not subject to the
security: s.227H(2)(a) and s.227H(2)(b) read with s.227H(3) CA.
o Under s.227H(2) CA, the court must be satisfied that the disposal, with or without other
assets, would be likely to promote one or more of the purposes specified in the judicial
management order.
A balancing exercise between the prejudice that would be felt by the secured
creditor if the order is made and the prejudice that would be felt by those
interested in the promotion of the purposes of the administration if it is not will
be undertaken by the court in deciding whether to exercise that discretion: Re
ARV Aviation Ltd.
o The net proceeds of the disposal shall be applied towards discharging the sums secured
by the security or payable under the HPA, CLA or RTA, and where the net proceeds are
insufficient to pay off the sums secured, the security holder may prove for the balance in
the liquidation: s.227H(5) CA.
o Like a receiver, the judicial manager has a duty to obtain the market price of the property
when exercising the power sale. This protection is not as effective as the protection
afforded in the U.K., where it is provided that the company must pay the shortfall to the
security holder if the proceeds are less than the open market value.
o Power to make any payment which is necessary or incidental to the performance of his
functions: 11th Schedule, para (m) CA. This enables him to pay debts incurred during the
course of the judicial management, and in an appropriate case, pre-judicial management
debts (payment of a pre-JM debt, unless it is a secured debt or payable under a HPA,
CLA or RTA, requires court sanction: s.227G(6) CA). The exercise of this power raises a
few difficult issues.
First, the context behind payment must be understood in order to appreciate the
exercise of this power. A judicial manager must be able to pay for the continued
supply of essential goods and services under an existing contract. Further, he
must give a new supplier assurance that it would be paid in full even if the
judicial management ended in an insolvent liquidation under which unsecured
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creditors receive only a dividend.
Second, the cimcumscribed power of distribution necessarily impacts the
judicial managers ability to make payments.
Related to the power to pay is the statutory charge that arises upon the judicial
manager ceasing to hold office to secure the debts or liabilities incurred under
contracts entered into by him in carrying out his functions while he was in
office: s.227J(3) CA. This helps to achieve the purpose of having the power to
make payments as it assures suppliers that they will be paid.
Power to distribute:
o The statutory purpose of judicial management does not extend to being an alternative to
the distribution function of liquidation. This inherent limit creates problem where it is
desirable to distribute to the preferential or unsecured creditors in the judicial
management itself.
o Re Lune Metal Products Ltd explained that there are 3 possible sources for the courts
power to sanction or order a distribution:
(1) The judicial manager has power under 11th Schedule, para (m) to make any
payment which is necessary or incidental to the performance of his functions.
For instance, in Re John Slack Ltd, the administration order included
the survival of the company, and the court held that distributions to creditors
was necessary for the carrying out of the administrator's function, viz, to bring
about the survival of the company as a going concern. Accordingly, the
administrator had power to distribute and court authorisation was not required.
In Re WBSL Realisations 1992 Ltd, there was the possibility that a 1.5
million surplus on a pension scheme would become available to unsecured
creditors, providing that a compulsory liquidation was avoided. However,
anything other than a compulsory liquidation would prejudice preferential
creditors. Knox J permitted the administrators (in exercise of the power
conferred by [11th Schedule, para (m)]) to make the payments to the preferential
creditors to which they would have been entitled if there had been a compulsory
liquidation, even though there was to be no such compulsory liquidation (in
order to secure the possibility of recovering 1.5 million for the benefit of the
creditors as a whole). The effect of the payment was to enlarge the entitlement
of the persons paid beyond that to which they were strictly entitled under UK
insolvency law, but was permitted nonetheless in order to achieve the purpose of
the administration.
The facts of Re WBSL Realisations 1992 Ltd were, however, unusual.
In an ordinary case, a pro rata distribution would not fall within the ambit of the
advantageous realisation purpose of a judicial management. Another basis to
justify distribution has to be found.
(2) The court rely on its power in s.14(3) of the U.K. Insolvency Act 1986
[s.227G(5) CA] to give directions to the judicial manager, or what is referred to as its
inherent jurisdiction over the judicial manager as an officer of the court, to sanction
or order the distribution.
(3) The court can order a distribution as an ancillary matter when it discharges the
judicial management order: s.18(3) of the U.K. Insolvency Act 1986 [s.227Q(2) CA].
The applicable source depends on the facts of the case:
Re Lune Metal Products Ltd [2006] EWCA Civ 1720; [2007] 2 BCLC 746
Facts
- The administrators were appointed by the court to approve a company voluntary
arrangement and/or achieve a more advantageous realisation of the company's assets than
would be achieved on a winding-up.
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- The administrators intended to put the company into a CVA after realising the assets, but
when that had been done and they had a fund of 485,237 available for distribution, they
decided that it was in the best interests of the creditors for them to be paid on the same basis
as in a compulsory liquidation but without the company actually going into liquidation or
into a CVA, since that would save 30,000 in costs which could then be added to the
amount available for distribution.
- The administrators applied to the H.C. to sanction the proposed distribution but the judge,
faced with conflicting first instance authorities, held that the administrators had no power
under the U.K. Insolvency Act 1986 to make, and the court had no power to sanction or
order, such a distribution.
- The administrators appealed. The questions arose whether the payment proposed by the
administrators could be sanctioned by the court under any of the four purposes for which
the court could make an administration order under s 8(3) of the 1986 Act, or under the
inherent jurisdiction expressed in s.14(3) of the 1986 Act [s.227G(5) CA] to give directions
to an administrator 'in relation to any particular matter arising in connection with the
carrying out of his functions', or under the wide ranging powers given to an administrator
by Sch 1 to the 1986 Act [Schedule 11 CA], or under the power of the court under s.18(3) of
the 1986 Act [s.227Q(2) CA] to make 'any other order it thinks fit'.
- The 4 purposes for which the court could make an administration order under s.8(3) of the
1986 Act were the survival of the company or any part thereof as a going concern, the
approval of a CVA, the sanctioning of a compromise or arrangement, or a more
advantageous realisation of the company's assets than would be effected on a winding-up.
Held
- Inherent jurisdiction under s.14(3) 1986 Act [s.227G(5) CA]
Agreeing with Rimer J in Re The Designer Room Ltd, Neuberger LJ held that
the administrators could not rely on this section, since any directions given by the court
under s.14(3) had to be in connection with the carrying out of [the administrator's]
functions within the ambit of the statutory purposes of the administration, and the
administrator's functions did not extend to paying out creditors.
- Ancillary jurisdiction under s.18(3) 1986 Act [s.227Q(1) CA]:
Agreeing with Rimer J in Re The Designer Room Ltd, Neuberger LJ held that
the administrators could not ask the court to invoke its power under s.18(3) to make
such order as it sees fit, since that power could only be exercised on the hearing of an
application under s.18(3) to discharge, vary, or add an additional purpose to, an
administration order, which was not what the administrators sought in their application.
However, the administrators were permitted to amend their application to apply
for a discharge of the administration order since there were there no procedural
objections to the application and no party would be prejudiced by it. The application
for the sanction of the court for the distribution out of the fund held by the
administrators could then be granted under s.18(3) because the distribution was
ancillary to the application for discharge of the administration order and the ambit
of s.18(3) was wide enough to permit the court to sanction administrators paying
money directly to a class of creditors (and therefore to all creditors) in order to
facilitate a desirable exit route from the administration.
Applying Arden Js reasoning in Re UCT (UK) Ltd (in administration),
Neuberger LJ explained that a provision is consequential even though it takes effect
before the discharge because it is a direction to the administrator and he will cease to
hold office on the discharge. The particular direction is necessitated by the application
for discharge since an exit route to administration has to be found. Thus, the court has
power to make the direction, provided that the administrator has power to make the
distribution.
Part of the administrators function is to find an exit route for the
administration which is in the best interests of the creditors, and since the payment out
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to the creditors would leave the company as an empty shell, the order permitting the
administrators to make the proposed distribution would be conditional on the Registrar
of Companies being requested to strike the company off the register 'not carrying on
business or [being] in operation' once the distribution had been made, and offering to
provide such assistance and defray such costs as the Registrar might require.
Evaluation
- There was no application for a discharge of the administration in Re The Designer Room
Ltd, whereas the court allowed the administrators on the basis that there was no procedural
objections to the application and no party would be prejudiced to make an amended
application to include an application for discharge of the administration order in Re Lund
Metal Products Ltd, thus the different outcome.
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VI. Control and Supervision of the Exercise of Powers
Disposal before Creditors Meeting
The judicial manager is required to manage the company in accordance with the proposals which the
creditors have approved at a creditors meeting: s.227P(1) CA. A central issue here is whether the judicial
manager may dispose of all the companys assets before the creditors meeting? The sale may be an urgent
one for which there is no time to hold the meeting, as in Re Charnley Davies Ltd (No 2).
If the creditors reject the judicial mangers proposals, is the court bound to discharge
the judicial management order?
If the creditors refuse to approve the judicial managers proposals, the court may discharge the judicial
management order or make an interim order or any other order that it thinks fit: s.227N(4) CA.
In other words, as observed by Hoffmann J (as he then was) in Re Maxwell Communications Corp plc (No
1), the court enjoys an unfettered discretion and may order that the proposals be put into effect.
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the companys goodwill and employees for free or at a huge discount.
Held
- Neuberger J said that if the proposals were not approved due to opposition by the majority creditor, the
Court might still approve the proposals if they were supported by the independent creditors.
Creditors Committee
Where the judicial managers proposals have been approved, the creditors may establish a committee of
creditors: s.227O(1) CA.
The only expressed power of this committee is that it may require the judicial manager to attend before it
and furnish it with such information on the discharge of his functions as it may reasonably require:
s.227O(2) CA.
The committee has no power to approve revisions to the proposals or to sanction the judicial managers
proposed exercise of a power. Its role is more of a monitoring role.
Still, the judicial manager should wherever possible consult the committee, as the representative body of
the creditors, on major issues, even if he is not able to summon a creditors meeting.
Unfair Prejudice
Where the judicial managers conduct of the companys affairs, business and property is unfairly
prejudicial to the interests of creditors or a single creditor representing 25% in value of the claims against
the company, an aggrieved creditor may seek relief under s.227R(1) CA.
A breach of the administrators duty, which amounts to unlawful conduct, is not the same as unfairly
prejudicial condct, and accordingly, a negligent sale by an administrator of the companys business will be
insufficient in itself to amount to unfairly prejudicial conduct (per Millett J in Re Charnley Davies Ltd (No
2)).
Millett Js distinction is right in principle.
The distinction between misconduct and unfairly prejudicial management does not lie in the
conduct complained of, but in the nature of the complaint and the remedy requested.
Where the whole gist of the complaint is that the conduct is unlawful, and the wrong may be
adequately redressed by the remedy provided by law, it is unnecessary to assume the
additional burden of proving unfairly prejudicial conduct.
However, that burden must be assumed but not necessarily that of proving unlawful conduct
as well if a wider remedy under s.227R(1) CA is sought.
The courts are in principle unwilling to review commercial decisions, and discourage the use of the
procedure under s.227R(1) CA for this purpose: MTI Trading Systems plc v. Winter. However, the English
H.C. in BLV Realty Organisation Ltd v. Batter held otherwise:
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Thus, to succeed under s.227R(1) CA, unfairness alone is insufficient to establish unfair prejudice.
Prejudice, or harm (under the new U.K. provision), must also be established. In the following case,
prejudice was established but unfairness was not:
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VII. The Duties and Liabilities of a Judicial Manager
Sources
Part VIIIA CA does not set out all the duties of a judicial manager. Duties arise at common law too, due
mainly to his status as an officer of the court and an agent of the company.
As an officer of the court, he should make his decisions speedily, responsibly, and take into consideration
any orders the court might be expected to make on an application for directions. He has a duty to obey
directions of the court.
He owes fiduciary duties and the duty to exercise care and skill, typical duties of an agent. In this respect
his position is comparable to that of a liquidator. The usual liabilities apply too, for eg, he should not make
any secret profit from his position as judicial manager and he should not place himself in a position
whereby his duties as judicial manager and his personal interests or any duties owed by him to third parties
conflict. Though not described as a fiduciary, the court in Cendekia Candranegara Tjiang v. Yin Kum
Choy said that a judicial manager should not place himself in a position of conflict.
An administrator is an officer of the court. He can be expected to make his decision speedily, so
far as he can do so. He may be able at least to make an interim decision, such as agreeing to pay
the current rents for the time being. The administrator should also make his decision responsibly.
His power to give or withhold consent was not intended to be used as a bargaining counter in a
negotiation in which the administrator has regard only to the interests of the unsecured creditors.
When he refuses consent it would be helpful if, unless the reason is self-evident, he were to state
succinctly why he has refused and also why he is not prepared to pay the rental arrears or at least
the current rentals. A similar approach should be adopted by the administrator when secured
creditors seek his consent to enforce their security. It should not be necessary, therefore, for the
Companies Court to be swamped with applications under section 11, or for administrations to be
subjected regularly to the expense and disruption of such applications. Should it become necessary
for a lessor or owner of goods or the owner of a security to make an application to the court, the
court has ample powers, by making orders as to costs and giving directions to the administrator,
either as its own officer or as envisaged by section 17, to ensure that the applicant is not
prejudiced by an unreasonable decision of an administrator.
Cendekia Candranegara Tjiang v. Yin Kum Choy & Ors [2002] 4 SLR 48, [23], [48]
[23] In the first place, what was glaring in this dispute was the feature that the first defendant, in
addition to his role as the judicial manager - needless to highlight the aspect that he was appointed
to that position by an order of court - was seen to be wearing many other hats in connection with
the responsibilities undertaken by him, ie, (a) special accountant to the related companies of the
company (para 12 of his AEIC), (b) personal adviser to the Kwan family (para 15 of his AEIC),
(c) nominee for the Kwan brothers in connection with their problems with their creditors (para 19
of his AEIC) and finally (d) corporate service provider to Newco. Could he have objectively
managed all these in an even-handed manner? I will return to this question later in these grounds.
[48] In my opinion, there was an agreement in relation to the basic framework for the plaintiff to
take over the company as contained in the MOU and nothing more. The phraseology employed by
the first defendant in the MOU made it abundantly clear that many other matters had to be settled
before a deal could be sealed. The introduction by the first defendant of a multitude of fresh terms
in the draft agreements prepared on his and on behalf of the Kwan brothers and forwarded to the
plaintiff most certainly created a great deal of uncertainty in respect of the proposed deal. It must
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be added here that the uncertainty bespoken was the making of the first defendant. The insistence
of the Kwan brothers for a higher remuneration than what was mentioned in the MOU and their
intention to part from the plaintiff added further complexity to the deal. The first defendant was
found by me to be far too ambitious in his balancing exercise. He was indeed wearing too many
hats and the resultant conflict of interest substantially contributed to the collapse of this deal. A
judicial manager appointed by the court is bound to carry out his tasks even-handedly and in an
objective manner. He should at all costs avoid overt and unseemly bias in favour of those who in
the first instance invited him to accept appointment. In the case at hand, it would seem that the
objectivity and balance required of him were unwittingly lost when he tried to obtain a little too
much for the Kwan family. This was borne out by the fact that when the company was finally
wound up, his application to assume the role of liquidator was not acceded to by the creditors
(AB-2102) and hence the appointment of three other persons as the liquidators of the company on
6 April 2001.
In Kyrris v. Oldham [2004] 1 BCLC 305, the English CA held that the position of an administrator vis--vis
creditors is directly analogous to that of a director vis--vis shareholders. Thus absent some special
relationship, an administrator owes no common law duty of care to individual unsecured creditors in
relation to the conduct of the administration. The creditors interests are mediated through the
administrators duties to the company.
150
Analogy with Court Appointer Receiver?
151
VIII. Contracts
Statutory Provisions
The judicial manager has the power to enter into new contracts on behalf of the company qua agent
pursuant to s.227G(4) and the 11th Schedule CA read with s.227I(1)(a) CA.
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Judicial Management Expenses
For liquidation, debts arising under a new contract are liquidation expenses, and post- adoption debts under
a pre-existing contract are deemed to be liquidation expenses.
For receivership, no similar doctrine exists. If the receiver pays the debts and the payments are proper, they
become receivership expenses. If, however, the receiver fails to pay the debts, those debts do not constitute
receivership expenses and the only remedy would be the mandatory personal liability of the receiver under
s.218(1) CA.
Applying the flexible approach in Re Atlantic Computer Systems plc to judicial management, there is
neither a rigid principle that if land or goods in the companys possession under an existing lease or hire-
purchase agreement are used for the purposes of the judicial management, the continuing rent or charges
will rank automatically as judicial management expenses and thus payable ahead of the pre-judicial
management creditors, nor is there a principle that leave to enforce property rights or take proceedings will
be granted as of a matter of course. Much will depend on the circumstances of the case.
Re Atlantic Computer Systems plc is no longer good law in the U.K. following the enactment of the
Enterprise Act (which has no local equivalent), as cases subsequent to the enactment (such as Re Toshoku
Finance UK plc (in liquidation)) have held that the Lundy Granite Co principle, viz, post-adoption debts
under a pre-existing contract are deemed to be liquidation expenses, applies equally to administration such
that post-adoption debts under pre-existing contracts are always administration expenses.
As to which approach the local courts will follow, it is likely that the approach is Re Atlantic Computer
Systems plc will be followed. Not only are our statutory provisions different, Re Toshoku Finance UK plc
(in liquidation), as Moss QC pointed out in an academic writing, can be distinguished on the basis that the
obligations incurred were pre-liquidation, and therefore the flexible approach in Re Atlantic Computer
Systems plc continues to apply to post-adoption debts under a pre-existing contracts. Furthermore, the rigid
application of the Lundy Granite Co principle in the context of judicial management would be prohibitively
obstructive to achieving the statutory purposes of judicial management.
N.B.: The common law position as enunciated in Re Atlantic Computer Systems plc has been modified by
s.227I(1)(b) CA.
Although a judicial manager is deemed to be the agent of the company under s.227I(1)(a) CA, he is
personally liable on any contract, including any contract of employment, adopted by him in the carrying out
of his functions by virtue of s.227I(1)(b) CA.
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The s.227I(1)(b) CA personal liability is qualified by s.227I(4) CA, which excludes from
the ambit of the liability payment of rent under leases held by the company at the time of his
appointment.
o It is unclear on the existing authorities whether the personal liability starts at the
date when the judicial manager was appointed, or the time of adoption of the contract. In
Johannes Kotjo v. Ng Wei Teck Michael, Choo JC held that judicial managers are
personally liable on a contract from the time they adopt it up to the point in time when
the notice of disclaimer of personal liability is given to the other party to the contract.
The personal liability of a judicial manager is further qualified by s.227I(2) CA, which
allows him, by notice given to the other party, to disclaim any personal liability under an adopted
contract.
o The judicial manager can give notice to disclaim his personal liability at any
time that he chooses, as s.227I(2) CA does not impose a time limit by which he has to
disclaim, and the disclaimer will exclude any liability incurred after the disclaimer is
given (Johannes Kotjo v. Ng Wei Teck Michael). In other words, the judicial manager
will be liable for the liabilities on the contract during the tenure of the judicial manager
up to the time when the liability is disclaimed.
o Where there is a disclaimer, the analysis reverts back to the common law one,
i.e. Re Atlantic Computer Systems plc, viz, if the judicial manager refuses to pay, the
other party may rely on whatever self-help remedies it has, which are not prohibited by
the moratorium, or apply to court for relief.
o Parties to an adopted contract where a disclaimer exists are therefore in a very
disadvantageous position. This is further aggrevated by the fact that under s.227J(3)(a)
CA, only sums payable in respect of any debts or liability incurred under new contracts
entered into by the judicial manager are entitled to be paid out of the property of the
company in priority to unsecured debts and debts secured by a floating charge (c.f.
ss.19(4) and 19(5) of the U.K. Insolvency Act 1986). In other words, it appears that a
claim against the company under a contract adopted by the judicial manager is only in as
good a position as any other unsecured claim against the company, while a claim
against the company on a contract entered into by the judicial manager is entitled to
priority over all unsecured debts and even debts secured by a floating charge. It is
arguable that such an unfair outcome will not be endorsed by the local courts should the
issue arise, and reliance will be placed upon the common law (perhaps by invoking the
Ex parte James principle applied in Re PC Chip Computer Manufacturer (S) Pte Ltd to
nullify an enrichment of the assets of the company) to achieve the desired result.
Where there is no disclaimer, the judicial manager shall be entitled pursuant to s.227I(1)
(c) CA to be indemnified in respect of that liability, and to have his remuneration and expenses
defrayed, out of the property of the company which is in his custody or under his control in
priority to all other debts except those subject to a security to which s.227H(2) CA applies.
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with the company as giving rise to a separate liability in the administration. There is no such
election unless he decides to allow the contract to continue for more than 14 days when he is
at liberty to terminate it.
- Additionally, adoption could not be conditional or qualified. According to Lord Browne-
Wilkinson, the concept of adoption of the contract is inconsistent with an ability to pick and
choose between different liabilities under the contract. The contract as a whole is either
adopted or not: the consequences of adoption are then spelt out by the Act.
Evaluation
- Note that the time period of 14 days is due to the provision under the U.K. Act that stipulates
that the administrator is not to be taken to have adopted a contract of employment by reason of
anything done or omitted to be done within 14 days after his appointment. The local equivalent
under s.227I(3) CA is 28 days.
- It is important to note also that the contract adopted by the administrators in Powdrill v.
Watson was a contract employment. As the U.K. legislation uses the concept of adoption only
for contracts of employment, only the first part of the holding in Powdrill v. Watson would be of
assistance, that is, there is adoption of a contract where there is conduct by the judicial managers
which amounts to an election to treat a contract with the company as giving rise to a separate
liability in the judicial management. In contrast, the test of adoption in s.227I(1)(b) CA applies
to applies to all contracts to which the company is a party, and in respect of a contract which is
not a contract of employment, it does not necessarily follow that the judicial managers will be
regarded as having adopted a contract as long as they allow it to remain on foot after the 28-day
period in s.227I(3) CA. As Lee SC has suggested that, a judicial manager is a true agent of the
company, and thus he should not be taken to have adopted a contract merely because he refrains
from repudiating it or performs the company's side of the bargain, as such conduct is consistent
with his agency and, in the absence of any other factors, cannot constitute an election to treat the
contract as giving rise to a separate liability. What would be required is unequivocal conduct,
such as an express or implied declaration of adoption. A contract of employment, on the other
hand, attracts the application of apparently different rules because it is usually determinable by
either side upon the giving of notice; the company is under no obligation to continue the
employment indefinitely.
The main issue with respect to new contracts is the assurance that a 3rd party contracting with the company
in judicial management would require that it would be paid in full.
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Insolvency law has 2 mechanisms to achieve this:
(1) s.227J(3)(a) CA: where a person ceases to be judicial manager, 'any sums payable in respect of any
debts or liabilities incurred while he was a judicial manager' shall be charged on and paid out of the
property of the company in priority to unsecured debts and debts secured by a floating charge.
(2) s.227I(1)(b) CA: a judicial manager is personally liable on any contract, including any contract of
employment, entered into or adopted by him in the carrying out of his functions.
The disclaimer under s.227I(2) CA only applies to contracts adopted by the
judicial manager. Thus, the rule in Johannes Kotjo v. Ng Wei Teck Michael does not
apply to new contracts entered into by the judicial manager. In other words, it must have
been agreed as part of the contract that the personal liability of the judicial manager shall
be excluded, and where such an agreement cannot be reached, the judicial manager is still
afforded, by virtue of s.227I(1)(c), the protection of an indemnity which will rank in
priority to all other debts except those subject to a security which is a non-floating
charge.
Common to both provisions is that the contract must be one which is entered into by the judicial manager in
the carrying out of his functions. Thus, it is not enough if the contract is entered into by the company but it
is not entered into by the judicial manager or his agent:
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IX. Access to Information
As in the case of the liquidator, the judicial manager has considerable powers in obtaining information
about the company. To facilitate the performance of his functions, a statement of affairs must be prepared
in accordance with s.227L CA.
Section 227W CA, like s.285 CA, empowers the court to make an order compelling a person who can give
the required information to submit an affidavit containing an account of dealings with the company, to be
examined on oath and to produce any documents relating to the company.
Certain powers of avoidance are conferred on the judicial manager by s.227T CA and s.227X(b) CA. The
former imports ss.98-103 BA, while the latter potentially renders other provisions in Part X of the CA
applicable by order of the Court. When will or should the court exercise such a power? For e.g., under what
circumstances may ss.334 and 335 CA be imported into judicial management?
Section 227X(b) CA: At any time when a judicial management order is in force in relation to a company
under judicial management, ss.337, 340, 341 and 342 CA shall apply as if the company under judicial
management were a company being wound up and the judicial manager were the liquidator, but this shall
be without prejudice to the power of the Court to order that any other section in Part X CA shall apply to
a company under judicial management as if it applied in a winding up by the Court and any reference to
the liquidator shall be taken as a reference to the judicial manager and any reference to a contributory as
a reference to a member of the company.
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- On the facts of the present case, allowing s.334 CA to apply pursuant to the power conferred under
s.227X(b) CA would indeed conduce towards the benefit of the company in general and unsecured
creditors in particular.
- As the execution creditor was an unsecured creditor, there was no reason to allow it to be paid ahead of
the other unsecured creditors. The application of s.334 CA would ensure that this did not occur. But if the
execution creditor had completed execution of the writ of seizure and sale, it would have reaped the full
benefits concerned.
Evaluation
- The apparent contradiction in Phang JCs judgment on the pari passu principle in judicial management
can be resolved by interpreting his pronouncements restrictively as only precluding mandatory or
automatic application of the pari passu principle. Under such an interpretation, the principle enunciated
in British Eagle v. Air France and Joo Yee Construction v. Diethelm, viz, that any contract made by the
company which provided for a distribution of any of its property for the benefit of one or more of its
unsecured creditors upon liquidation will be invalid for being in contravention of the pari passu principle,
will not apply to judicial management.
The imported avoidance provisions apply to judicial management via ss.227T and 227X(b) CA.
Application of certain provisions in Parts VII and X to a company under judicial management
Section 227X CA: At any time when a judicial management order is in force in relation to a company
under judicial management
(a) section 210 shall apply as if for subsections (1) and (3) thereof there were substituted the following:
(1) Where a compromise or arrangement is proposed between a company and its creditors, the Court
may on the application of the judicial manager order a meeting of creditors to be summoned in such
manner as the Court directs.
(3) If three-fourths in value of the creditors present and voting either in person or by proxy at the meeting
agree to any compromise or arrangement, the compromise or arrangement shall, if approved by the
Court, be binding on all the creditors and on the judicial manager.; and
(b) sections 337, 340, 341 and 342 shall apply as if the company under judicial management were a
company being wound up and the judicial manager were the liquidator, but this shall be without
prejudice to the power of the Court to order that any other section in Part X shall apply to a company
under judicial management as if it applied in a winding up by the Court and any reference to the
liquidator shall be taken as a reference to the judicial manager and any reference to a contributory as a
reference to a member of the company.
The SGCA has held in Neo Corp Pte Ltd v. Neocorp Innovations Pte Ltd that the powers of avoidance
accrue in favour of the judicial manager only, and as such. can only be exercised by the judicial manager.
Neo Corp Pte Ltd v. Neocorp Innovations Pte Ltd [2006] 2 SLR 717 (CA)
Facts
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- The judicial managers of Neo Corp had applied under s.227T CA to have a floating charge created by
Neo Corp in favour of Neocorp Innovations set aside on the ground that the transaction was an unfair
preference or was at an undervalue.
- Pursuant to a petition filed by the judicial managers, an order for the winding-up of Neo Corp was
made.
- In the same order, the liquidators were authorised to continue with any legal action commenced by the
judicial managers.
- Neocorp Innovations then applied to set aside the authority conferred upon the liquidators by the order
on the ground that the liquidators of Neo Corp had no right to continue the action under s.227T CA, as
the right belonged to the judicial managers only.
- On appeal, the liquidators raised 2 arguments, viz, (1) there was no necessity for the judicial managers
to bring the action to fruition in order that the rights granted by s.227T CA may be enforced by the
liquidators; and (2) if the liquidators were not allowed to pursue the action, the general creditors of Neo
Corp would be unfairly disadvantaged.
Held
- The C.A. rejected the 1st argument on the basis that such an argument presupposed that the right of
action to void the transaction had become a general asset of the company which would or could
automatically vest in the liquidator upon winding-up. This was not the case, as the right of a judicial
manager to challenge a transaction as an unfair preference or transaction at an undervalue under s.227T
CA is personal to the judicial manager. The C.A. further pointed out that s.227T CA states that the
impugned transaction is void as against the judicial manager and that, conceptually, if a right is
available only to a judicial manager, no other party can step into the shoes of the non-existent judicial
manager and pursue the action.
- As to the 2nd argument, the C.A. recognised that there was some force to it. However, it was always
open to the judicial managers to apply to the court for an extension of the judicial management order just
for the purpose of the better realisation of the assets of the company. The judicial managers could also
apply for orders under s.227X(b) CA to import the application of the statutory provisions relating to
corporate liquidation and to obtain the powers of a liquidator.
Evaluation
- The decision underscores the drafting weaknesses of our judicial management provisions as well as the
legislative mechanisms in ss.227T and 329(1) CA of importing BA provisions into our corporate
insolvency regimes. It exposes an unnecessary pitfall for judicial managers and their advisers, and one
can only wonder whether there are any other dangers caused by inadequate or deficient statutory drafting
lying in wait for unsuspecting insolvency practitioners.
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XI. Discharge from Judicial Management
Duty to Apply for Discharge
Pursuant to s.227Q CA, the judicial manager has a duty to apply to the court for the judicial management
order to be discharged if the purpose(s) specified in the order has either been achieved or is incapable of
achievement.
The order may also be discharged if the s.227M CA creditors meeting declines to approve the statement of
proposals: s.227N(4) CA.
The court may also discharge an order on an application under s.227R CA.
Distribution to Creditors
As mentioned earlier, a judicial manager has limited powers to pay pre-judicial management debts. This
limited power is a problem if he wants to distribute the proceeds of realisations to the creditors of the
company, even though our law on a companys move from judicial management into winding-up is not as
complicated as the pre-Enterprise Act 2002 English law. If a judicial manager has realised all the assets of
the company and there is no investigation or recovery action to be pursued in a liquidation, putting the
company into liquidation serves no useful purpose other than as a forum to distribute to the creditors. If so,
it would make sense to enable the judicial manager to do that instead of requiring him to put the company
into liquidation just for that purpose. There is no reason to incur the costs and expense of a liquidation to
the detriment of the creditors.
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XII. Evaluating the Institution of Judicial Management
Judicial management was introduced in Singapore more almost 25 years ago, but the results have been
mixed at best. While the core concepts of providing a moratorium on creditor action and to provide the
company in distress with a breather while proposals are prepared for consideration by creditors are a
welcome alternative to liquidation and receivership, it cannot be said that judicial management has been a
veritable success. Indeed, some might even consider judicial management as a preclude to insolvent
liquidation, as a quick review of the major judicial management cases reveal that the track record of
judicial management in effecting corporate rescue is dismal to say the least. In this connection, the
CLFRCs survey of judicial managements track record between 1996 and 2000 indicated that a majority of
judicial managements resulted in asset sales or liquidation. In the instances where the rescue was
successfully, it is also often the case that the rescue simply resulted in the retention of the corporate shell
for the purposes of injecting the assets and maintaining the listing, without any attempt to revive the ailing
business. The empirical evidence therefore highlights several weaknesses of the judicial management
regime.
Firstly, the fact that the management of the company is displaced by the judicial managers has proved to be
a significant drawback. The management of the company may have little incentive to assist the judicial
managers to run the company, especially if the judicial managers were appointed pursuant to the petition by
a creditor and not through the companys own initiative. The problem is that while the judicial managers
may be highly competent professionals, they inevitably lack the familiarity and experience in respect of the
companys business operations and assets, with the difficulty increasing proportionately with the size of the
company. The steep learning curve is inevitably accompanied by higher percuniary and opportunity costs,
which in turn reduces the prospects of successful rehabilitation. Thus, management acting in good faith are
often in a better position to salvage the company than a judicial manager. Where the company in question is
a listed company, more resistance from management is expected to be met, since the shares of a company
that is placed into judicial management will invariably be suspended from trading, thereby severely
disincentivising a management that holds securities in the company that may have been pledged as security.
An attendant consequence of this disincentive is that intervention is not instituted until it is too late, which
no doubt accounts for a large percentage of the failed judicial managements in Singapore.
Secondly, the statutory moratorium on creditor action does not apply to self-help remedies such as
contractual termination clauses, contractual set-off and, arguably, the exercise of the right of forfeiture by
re-entry. Such rights, according to the CA in Electro Magnetic, are personal rights given by a contract or by
law and therefore fall outside the meaning of security in s.227C(b) or s.227D(4)(d) CA. Even if one
argues that a distinction may be drawn between a proposed exercise of contractual rights that do not
involve exerting proprietary or possessory rights from one that does, such that self-help remedies such as
the right of forfeiture by reentry will be caught, as a matter of statutory interpretation, the fact that certain
quasi-securities such as hire-purchase agreements are specifically provided for attracts the interpretive
canon of expressio unius est exclusio alterius. There is also the rather puissant countervailing consideration
of commercial certainty which is inversely proportionate to a more all-encompassing moratorium. A
company in judicial management may therefore find the credit balances in its bank accounts being set-off
against liabilities owed to the bank and its contractual rights and benefits, such as distribution and licensee
agreements, unceremoniously terminated, not to mention its leased premises being repossessed.
Thirdly, the judicial management regime is not well-supported by legislation, as neither the CA nor the
subsidiary legislations are sufficiently comprehensive. For instance, there is no clear provision conferring
priority on debts incurred by the company in the course of judicial management or prescribing how these
are to be paid, which has led to decisions such as the one in Chew Eu Hock Construction, where it was
held that the liability of a company to make employees CPF contributions is not accorded any priority in
judicial management unlike in liquidation. Another curious provision is s.227T, which provides that a
judicial manager is personally liable on any contract entered into or adopted by him in the performance of
his functions, unless such personal liability is disclaimed. As it expressly envisages that a judicial manager
may, without restriction, exclude personal liability, the practice is that all judicial managers will invariably
seek to incorporate such an exemption in every case, and the issue boils down to whether the judicial
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managers of the company had done enough to exclude their personal liability, as was the case in Johannes
Kotjo. The result is that properly advised parties will deal with a judicially managed company only on cash
terms, a commodity which the company, by definition, is likely to be in short supply of. The other
provision that requires clarification is s.227B(10)(a) CA, which provides that the Court may make a judicial
management order on the ground the public interest so required. The courts have hitherto grappled with the
amorphous concept of public interest. In Re Cosmotron, public interest was unhelpfully defined as
connoting an interest or object which, if achieved, would transcend any or all of the purposes prescribed in
s.227B CA. The public exception ground was more recently invoked in Re Bintan Lagoon, where Andrew
Ang J held that the question whether the public interest so requires may perhaps best be answered by
considering the likely consequences of not making a judicial management order. Specifically, the question
is will a refusal to make such order lead to or allow the dismemberment or collapse of a company whose
failure will have a serious economic or social impact? In the circumstances, his Honour was of the opinion
that the facts of the case did not justify the public interest ground to be invoked. While his Honour did not
preclude the possibility that the ground might be successfully invoked in certain egregious circumstances,
the particular circumstances envisaged by the learned judge seems to require that the gravity be graver than
mere failure of the company, even though it need not be as grave as the Pan-Electric crisis. The result is
that the ground will effectively be of no practical function, which in turn undermines one of its very salient
functions, viz, its function as an exceptional instance to override the veto given to a secured creditor. To
this date, the ground has not been successfully invoked, and it appears that, in light of the existing
authorities, such will remain the case.
Fourthly, the general perception, justified or otherwise, that judicial management is a preclude to insolvent
liquidation generates bad publicity, which discourages many distressed companies, particularly listed ones,
from resorting to judicial management as a means of resuscitating their businesses until it is too late.
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Schemes of Arrangement
Patrick Ang, Corporate Workouts A Commercial Perspective, Singapore Law Gazette, Feb 2002
A scheme or arrangement is particularly useful in the context of publicly listed companies as the
listing status of the company is maintained and trading continues with minimal disruption. Hence,
minimal stigma or adverse publicity is ensured and shareholders will not be unnecessarily
alarmed, which in turn provides share price support.
Additionally, vulnerable transactions are not caught and investigations into the affairs of the
company are often unlikely. Most importantly, the moratorium is useful in allowing the company
some breathing space to re-arrange its affairs. Time does not start to run until formal insolvency
proceedings are commenced against the company.
However, because the directors remain in control of the company, there is only so much
supervision that the financial advisor/accountant has over the company. The financial
advisor/accountant has no statutory powers and hence can only exert limited control over the
directors. Furthermore, the actual scope of the moratorium is not precisely defined. It is unclear,
for example, whether 3rd party guarantees are also covered under a scheme or whether one may
enforce the security owed by a 3rd party.
Lee Eng Beng, Recent Developments on Insolvency Laws and Business Rehabilitations, 8th ASEAN
Law Association General Assembly, 2003.
There are several reasons for the increasing popularity of schemes of arrangement. Firstly,
s.210(10) CA empowers the Court to grant a moratorium on legal proceedings against a company
which is proposing a scheme of arrangement to its creditors.
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Thirdly, a scheme of arrangement does not displace the incumbent management, thus allowing the
management to initiate and take charge of the reorganisation process. This may be important in
cases where only the incumbent management has the expertise and experience in continuing to run
the companys operations, and there is a risk that they may refuse to extend their full cooperation
to the judicial managers if a judicial management order is made. It may also be important in cases
where the parties dealing with the company, or an investor who intends to inject funds or assets
into the company, prefer to deal with the existing management rather than judicial managers.
Although schemes can be used in judicial management, and it might have once been thought that it
is more advantageous for a scheme to be presented in a judicial management since there was no
express requirement under s.227X(a) CA that its creditors be divided into classes for the purpose
of voting, thus avoiding the conceptual difficulties associated with classification, this perceived
advantage has however been largely eroded by the C.A.s decision in Hitachi Plant Engineering,
which clarified that the court may still consider creditor classes at the sanction stage if it was
necessary for ensuring fairness and reasonableness.
Proof of Debt
Prior to RBS v. TT International, one of the principle obstacles facing the scheme of arrangement process
was the lack of a coherent and clear proof of debt mechanism. Proof debt goes towards not only the
accurate valuation of the alternative outcomes of the company in reorganisation and liquidation, but also
the allocation of voting rights at the creditors meeting, and in the lack of a proper mechanism, woodwork
creditors, the origin and quantum of whose claims are unsubstantiated or dubious, were a common
phenomenon. Indeed, this was evident in RBS v. TT International itself, where there was an astronomical
increase in the proof of debt lodged by a wholly owned subsidiary of TT International and a supporting
scheme creditor, which the SGCA found to be suspicious. In RBS v. TT International, the SGCA
attempted to delineate the rules on proof of debts for the purpose of voting. The SGCA stated that in
assessing a contentious claim, the chairman of the meeting has 3 options. Firstly, he might admit the claim
wholly. Secondly, he might reject a claim wholly or partially, in which case he should provide to the
creditor written grounds of his rejection, thereby placing the onus on him to look at each proof more
carefully in the proper exercise of his quasi-judicial function. This requirement, according to the SGCA,
also improves the transparency of the voting process. Thirdly, if the chairman has doubts whether a proof
should be admitted or rejected, he should mark it as objected to and allow the creditor to vote subject to the
vote being declared invalid in the event of the objection being sustained. When deciding which proportion
of a creditors claim to admit (or to allow a creditor to vote, when his proof is marked as objected to), the
chairman need only make a just estimate of the claim in question by doing his best with the factual
material the claimant furnishes, without undertaking any detailed inquiry. If it was, however, impossible to
ascribe any sensible value to a claim, the chairman should attribute a nil value to it and the claim should be
rejected. Further, if a proof of debt is not capable of substantiation without the need for serious
investigation or exertion, he should at least make the necessary enquiries regarding the proof. This is
especially so if the proof in question seeks to prove a substantial claim.
While the guidelines provided by the SGCA are welcomed, the concept of a just estimate may be
difficult to apply in some cases. For instance, where the debt revolves around an issue of time bar, such that
the very definition and nature of the debt requires that either 0% or 100% be assigned to it. While the
SGCA alluded that in such a situation, the chairman should simply attribute a nil value to the debt and
reject it,
Moratorium
The scheme of arrangement process is supported by the interim moratorium available under s.210(10) CA.
Unlike judicial management, the moratorium does not come into operation automatically to restrain further
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proceedings in any action or proceeding against the company, and an application to court must be made.
The moratorium is important in allowing management to focus on negotiations with creditors and
shareholders, without being bogged down resisting enforcement, repossession or winding-up proceedings
as and when they emerge. Thus, the period and scope of the moratorium is crucial, and this appears to be
subject to the discretion of the court. Locally, the Pillai JC held in Re TPC Korea Co Ltd that the court will
only grant a stay in respect of an action or proceeding already commenced. In addition, such an application
should not be made ex parte but rather inter parties summons in the pending action. The passage that the
learned JC relied on made reference to the Australian case of Re Reid Murray Acceptance Ltd. In Australia,
however, the more recent decision of Re Glencore adopted a purposive interpretation and granted a stay
order restraining any action or other civil proceeding against the debtor company. The court effectively
read further to extend to other proceedings against the company, whether pending or not, in order to
facilitate an orderly and efficient consideration of the proposed schemes. It is also unclear whether the
scope of the moratorium extends to non-judicial enforcement action such as set-off. It is more likely than
not, for the purposes of achieving internal consistency, that the courts will confine the meaning of
proceedings to legal proceedings, as was held by the SGCA in Electro Magnetic in the context of judicial
management.
Thus, as the interim moratorium currently stands, a distinction appears to be drawn between judicial and
private (contractual) means of enforcement of secured and unsecured debt, and further between pending
and future judicial proceedings against the company. These distinctions unduly limit the efficacy of the
moratorium, which runs counter to the notion that the purpose of the moratorium is to afford the company a
breather while proposing and negotiating a reorganisation with its creditors and shareholders. Creditors
exempted from the moratorium may be elevated into a position of ransom by threatening to unilaterally
short circuit any such negotiation process unless their demands are met. It would therefore be prudent to
extend s.210(10) to cover all enforcement action, secured and unsecured alike, set-off, ipso facto clauses
and other self-help remedies.
A likely sticking point in extending the scope of the interim moratorium will be the existing privilege given
to a qualifying floating charge holder who has a veto power over judicial management and therefore
priority of enforcement via a receivership. The criticisms of exempting receivership from the collective
principle have been well documented, although there have also been arguments in support of the process
where dominant creditors holding a floating charge have heightened incentives to monitor debtor
companies and take prompt action. However, this latter analysis assumes that a floating chargee is at least
at risk of being undersecured and is not able to extract further collateral or guarantees from the company.
Even then, receivership law in Singapore does not require the receiver or appointer to act in the collective
interest of all creditors in examining the merits of a reorganisation so long as they act in good faith.
The concerns of secured creditors are nonetheless legitimate if the SOA process clothes the company and
its management with a more extensive moratorium which may be used to deplete or extract value from their
security in an attempt to advance management and shareholder interests.
However, the fact that the interim moratorium is discretionary in nature affords some protection, as the
courts play the role of threshold gatekeepers who ensure that only bona fide attempts to restructure should
receive the protection of the s.210(10) moratorium, and in doing so allow interested claimants to provide
relevant information and input in such decisions.
In Wah Yuen, the SGCA held that the subordinated creditors should have been placed in a different class
for the purpose of voting. The point that the subordinated creditors should not have been allowed to vote in
the same class as the ordinary creditors was not argued. In RBS v. TT International, the SGCA definitively
held that as the appropriate comparator was liquidation, the subordinated creditors rights were thus so
dissimilar from those of the general class of unsecured Scheme Creditors such that it was plainly necessary
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for them to be classified separately for the purposes of voting. On principle, this is correct, since the
subordinated creditors stood to gain nothing from a notional liquidation until after all the general creditors
have been paid off.
Subordinated claims raise the issue of whether such creditors have any economic interest in the company at
all, which impacts on the question of whether they are even required to be consulted. In Re Tea Corp,
Williams LJ held that as the value of the scheme companys assets was only sufficient to pay off the
creditors and some of the preference shareholders, it was not necessary to take into account the dissent of
the ordinary shareholders that had voted against the scheme, since they had no economic interest in the
company.
While appearing prima facie to be a non-contentious proposition, it has however accentuated the
importance of properly valuing a distressed company, since an inappropriate valuation might lead to a
lower than justified valuation of the company, with the consequence that junior claimants may be
unilaterally excluded from the proposed scheme.
The issue of valuation was addressed, albeit in obiter, by Mann J in Re MyTravel Group. Noting the
shortfall of 435m in relation to the ordinary unsubordinated creditors in a notional winding-up, Mann J
went on to conclude that the subordinated creditors had no economic interest in the scheme company and
therefore need not be included in the proposed scheme.
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of the initial consensual restructuring plan proposed by the company and the senior lenders which
the junior bondholders had initially rejected as being unfair.
A similar tactic was pursued in Re Bluebrook Ltd. In that case, although Mann J agreed that going concern
was the correct basis for the valuation of the scheme companies, his Honour did not go so far as to state
that the going concern basis was the general valuation methodology to be applied whenever a debt
restructuring via a scheme of arrangement was contemplated. Mann J merely stated, without any
explanation, that a going concern value [was] appropriate on the facts of the case, and that the issue was
in any case academic, since none of the counsels before him argued in favour of a liquidation basis of
valuation. Indeed, Mann J continued to affirm the reasoning he adopted in MyTravel Groups case, and
stated that the basis on which valuation would be carried out will vary from case to case.
Notwithstanding Mann Js qualifications, the acceptance of the going concern basis of valuation in Re
Bluebrook marked a significant development on the issue of valuation methodologies in the context of
schemes of arrangement.
The original rationale for the Re Tea principle was to safeguard senior creditors against attempts by junior
creditors to extract an unfair bargaining advantage by threatening to exercise their veto rights if they were
made parties to a scheme of arrangement. While this is a legitimate reason for the rule, an overly rigid
application lends itself to abuse by senior creditors by allowing senior creditors to enter into private debt
restructuring discussions or arrangements with the borrower (without the involvement of the junior
creditors) with the primary objective of resolving the senior debt only, with little or no consideration being
given to the ability of the junior creditors to achieve a reasonable prospect of recovery on the junior debt. If
the approaches in Re MyTravel Group were to continue unabated, more and more junior creditors would,
even in cases where the ultimate objective of a scheme is to enable the scheme company to continue as a
going concern, find themselves excluded from debt restructuring discussions and be left with worthless
claims against shell companies. Thus, while grounded on the legitimate rationale of protecting seniors
against holdup risks posed by opportunistic junior claimants, a highly technical application of the Re Tea
principle to exclude junior creditors from a scheme of arrangement so as to effectively leave them with
claims against a shell company is prima facie unfair since it amounts to a de facto confiscation or wiping
out of the junior creditors rights without any effective right of consultation.
Two options that may seem fair: (1) offering the junior creditors subordinated scheme consideration under
which their priority status in relation to the assets of Newco would continue to rank behind the seniors (for
e.g., having 2 classes of shares in the Newco); and, where creating multiple classes of shares unduly
complicates the capital structure of the Newco and the exercise by the creditors of their respective exit
rights, (2) creating a single class of shares in Newco with junior creditors being offered an appropriate per
cent of Newco shares (while this may involve an inherently complicated and uncertain valuation exercise, it
is not insurmountable).
Classification of Creditors
One of the difficulties with schemes of arrangement is that creditors have to be divided into classes
according to the nature of their rights against the company. If the creditors classes are not properly
constituted for the purposes of the voting, the statutory requirements may not be fulfilled and the court may
decline to sanction the scheme. The old approach, contained in the Practice Note of 1934, was that the court
would not address the question of classification at the first stage. The old approach was defended by Lord
Millett NPJ in UDL Argos, where he held that the old practice ensured that the companys advisors took
their responsibilities seriously. In RBS v. TT International, however, the SGCA held that Lord Millett
NPJs reasoning avoids the chicken and egg problem, viz, it could not be known whether a scheme was
likely to attract enough support without a preliminary determination of classification. Instead, the SGCA
preferred to follow the approach in the new Practice Note of 2002, which allows the company to apply to
court for directions in respect of classification, as it injects more certainty into the process.
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