1 (2004) 5 SAL Ann Rev Insolvency Law INSOLVENCY LAW LEE Eng Beng LLB (Hons) (National University of Singapore), BCL (Oxford); Advocate and Solicitor (Singapore). Introduction 14.1 The law of corporate liquidation has been a steady contributor of cases for this series of reviews but, being a well-trodden area of insolvency law, it has never been the highlight until this year. Refreshingly, this year s review features some very interesting cases on corporate liquidation law, containing many important pronouncements of law made by the Singapore High Court for the first time. Specifically, the High Court delivered leading judgments on private examinations of company officers by liquidators (Liquidator of W&P Piling Pte Ltd v Chew Yin What  3 SLR 164), the opening and operation of private bank accounts by court-appointed liquidators (Nova Leisure Pte Ltd v Dynasty Theatre Nite-Club KTV & Lounge Pte Ltd  1 SLR 466), the remuneration of liquidators and other insolvency practitioners (Re Econ Corp Ltd (No 2)  2 SLR 264), the commencement of winding up proceedings against a company already in voluntary winding up (Korea Asset Management Corp v Daewoo Singapore Pte Ltd  1 SLR 671), and the meaning of commencement of voluntary liquidation (Eversendai Engineering Pte Ltd v Synergy Construction Pte Ltd  SGHC 129) In contrast, there was a dearth of case law on judicial management and receivership, and a lone (but noteworthy) decision on schemes of arrangement (Re Horizon Knowledge Solutions Pte Ltd  SGHC 270). The law of bankruptcy, however, had its fair share of decisions, including a key decision on the rules governing service of bankruptcy process (Re Rasmachayana Sulistyo  1 SLR 483). Also, as in recent years, there is a good crop of cases on vulnerable transactions, including a Court of Appeal decision deliberating on the meaning of transaction for the purpose of transactions at an undervalue (Velstra Pte Ltd v Dexia Bank NV  1 SLR 154), two related High Court decisions which discusses the law on conveyances of property with intent to defraud creditors (Wong Ser Wan v Ng Bok Eng Holdings Pte Ltd  4 SLR 365 and Wong Ser Wan v Ng Bok Eng Holdings Pte Ltd (No 2)  4 SLR 464), and another High Court decision on unfair preferences (Velstra Pte Ltd v Azero Investments SA  SGHC 251). Finally, with regard to directors duties and liabilities in insolvency, the decision in Tang Yoke Kheng v Lek Benedict (No 2) 
2 5 SAL Ann Rev 302 Insolvency Law SLR 788 deserves a mention for its discussion on the law of fraudulent trading. General judicial observations on insolvency law English and Australian authorities 14.3 In Liquidator of W&P Piling Pte Ltd v Chew Yin What  3 SLR 164, ( W&P Piling ) V K Rajah JC (as he then was) caveated that, in view of the changes in English and Australian insolvency legislation, real caution must now be exercised in evaluating the relevance of recent English and Australian authorities in insolvency matters. There was still an umbilical cord of jurisprudence, particularly with England, that continued to offer guidance in the fleshing-out of applicable principles in insolvency law in general, but such guidance must be reviewed against the backdrop of commercial practices and policy considerations in Singapore (at ). Nature of insolvency proceedings 14.4 In W&P Piling (supra para 14.3), Rajah JC also opined that insolvency proceedings were not an exclusively private matter between the debtor and the creditors; the community also had an important interest in such proceedings. Subsequently, in Re Rasmachayana Sulistyo  1 SLR 483, V K Rajah J (as he had by then become) elaborated on the nature of winding up and bankruptcy proceedings. Rejecting an argument that bankruptcy proceedings were akin to enforcement and attachment proceedings, the learned judge pointed out that bankruptcy and winding-up proceedings involve the initiation of a process to alter the legal status of an insolvent debtor and are a collective and representative action on behalf of all creditors to ensure equal distribution of the available assets of an insolvent debtor. Liquidation Substitution of petitioner 14.5 Andrew Ang JC (as he then was) allowed the petitioning creditor in Eastern Pretech Pte Ltd v Kin Lin Builders Pte Ltd  SGHC 195 to withdraw and another creditor to be substituted as the petitioning creditor. This was because the petitioning creditor had been paid in full at the time of the hearing to decide whether the winding-up order should be set aside. The learned judicial commissioner declined to set aside the winding-up order, but
3 304 SAL Annual Review (2004) ordered that the winding-up order not be extracted until after the substitute petitioning creditor had filed papers in connection with the substitution within seven days The substitution of a petitioning creditor is itself an unremarkable procedural exercise, but this reviewer would like to highlight that a petitioning creditor who allows himself to be substituted on account of having received payment in full should be aware that the payment itself might be impugned if a winding-up order is made upon the petition of the substituted petitioning creditor. Because of the substitution, the commencement of winding up remains the date when the petition was filed. In the event that a winding-up order is made, s 259(1) of the Companies Act (Cap 50, 1994 Rev Ed) would apply from that date and invalidate any disposition of the company s property from that date unless sanctioned by the court. The payment made by the company to the original petitioning creditor would, ironically, be rendered void by the petition filed by the original petitioning creditor himself. It is also unlikely that the court will grant a validation order under s 259(1) given that the payment was made to a creditor ahead of other creditors and would contravene the pari passu principle As such, a petitioning creditor who is offered full payment of his debt should make it a condition that the payment is made by a third party and not from the assets of the company. If he accepts payment from the company, and his application for withdrawal of the winding-up petition is rejected because another creditor successfully applies to be substituted as the petitioning creditor, the original petitioning creditor may run the risk of having to disgorge the payment back to the company. Winding-up order 14.8 In Eastern Pretech Pte Ltd v Kin Lin Builders Pte Ltd (supra para 14.5), a winding-up order had been made against a company but, before its extraction, the court granted a stay of winding up under s 279(1) of the Companies Act. An application to set aside the winding up order was then made by the company on the basis that it intended to apply for a judicial management order and that funds would be procured to propose a scheme of arrangement. Andrew Ang JC rejected the application and lifted the stay There were ample grounds supporting Ang JC s decision. The company was clearly insolvent. No information relating to the proposed scheme of arrangement was provided by the company. No creditors
4 5 SAL Ann Rev 302 Insolvency Law 305 supported the company s application to set aside the winding-up order. On the contrary, the creditors who opposed the company s application held more than 25% in value of the unsecured debts owed by the company, and would have been able to vote down any scheme of arrangement proposed by the company. Further, the creditors who signed a standard letter prepared by the company stating that they would like to consider the Company s proposal for repayment were in the minority and their claims had been inflated by the company. The learned judicial commissioner therefore concluded that allowing the company to drag on and to seek in vain to enter into a scheme of arrangement would fritter away its scant financial resources at the expense of creditors In Eversendai Engineering Pte Ltd v Synergy Construction Pte Ltd  SGHC 129 ( Eversendai Engineering ), Assistant Registrar Vincent Leow ( AR Leow ) stated that winding up was a drastic remedy and that the court would hesitate before imposing the draconian measure of winding up the company unless this was the fairest course of action after taking into account the interests of all parties including the creditors, contributories, suppliers, employees, customers and shareholders. This reviewer would respectfully disagree. The judicial sentiment that winding up is draconian has been expressed in cases involving solvent companies in which feuding shareholder factions raise allegations of oppressive and unfairly prejudicial conduct under s 216 of the Companies Act or argue that the company should be wound up on the just and equitable ground under s 254(1)(i) of the Companies Act In the case of insolvent companies sought to be wound up by their creditors, different considerations apply with respect to the exercise of the court s discretion to make a winding-up order. That an unpaid creditor of an insolvent company is entitled to a winding-up order ex debito justitiae is a proposition laid down well over a century ago (Bowes v The Hope Life Insurance and Guarantee Company (1865) 11 HLC 389 at 402; 11 ER 1383 at 1389) and followed by many Commonwealth courts, including the Singapore courts (Wei Giap Construction Co (Pte) Ltd v Intraco Ltd [ ] SLR 351 at 354,  ; Re Sanpete Builders (S) Pte Ltd  SLR 164 at 176, ). The fact that a winding up order is a draconian remedy means that the court will proceed cautiously if there is any doubt as to the petitioner s claim (see Re Bayoil SA  1 WLR 147 at 156). However, if the petitioner is an undoubted creditor, the well-entrenched practice is that the court will grant a winding-up order, unless there are specific countervailing considerations such as opposition from other creditors, procedural defects, or bona fide disputes as to the petitioner s claim or substantial counterclaims against the
5 306 SAL Annual Review (2004) petitioner. It is not the law or prevailing practice that the court will consider whether a winding-up order is the fairest course of action after taking into account the interests of all parties including the creditors, contributories, suppliers, employees, customers and shareholders. In fact, there is direct authority that, in exercising its discretion whether to make a winding-up order, the court will usually attach little weight to the wishes of a contributory of an insolvent company (Re Camburn Petroleum Products Ltd  3 All ER 297). Commencement of winding up Section 255 of the Companies Act provides that, generally, the compulsory winding up of a company is deemed to have commenced at the time of the presentation of the winding-up petition. However, there is a division of opinion as to whether this deemed commencement takes effect prior to the making of any winding-up order. One view is that it does; in other words, winding up is deemed to have commenced once the winding-up petition is presented, regardless of whether a winding-up order is ultimately made on the petition (Kredin Sdn Bhd v Development & Commercial Bank  3 MLJ 304). The other view is that it does not; winding up is retrospectively deemed to have commenced at the time of the presentation of the winding-up petition only upon a winding-up order being made on the petition (Re Miles Aircraft Ltd  1 All ER 225; Fleet Motor & General Insurance Co (Aust) Pty Ltd v Tickle  2 ACLC 282) In Eversendai Engineering (supra para 14.10), AR Leow preferred the latter view and, in the humble view of this reviewer, rightly so. As pointed out by the learned assistant registrar, it is all too easy to present a winding-up petition against a company and it would be too onerous to have a blanket rule against dispositions of or attachments against the company s property once a winding-up petition is presented Another good reason for supporting the view of AR Leow is the fact that the commencement of winding up carries important consequences with regard to the legal status of acts done or transactions entered into by the company prior to the making of a winding-up order. If winding up commences immediately upon the presentation of a winding-up petition, and the winding-up petition is subsequently dismissed, struck out or withdrawn, what happens to these consequences? For instance, do dispositions of the company s property or floating charges rendered void by ss 259 and 330 of the Companies Act respectively suddenly revert to being valid and effective? Is attachment, sequestration, distress or execution
6 5 SAL Ann Rev 302 Insolvency Law 307 avoided under s 260 validated? Do acts constituting offences under ss 336(1)(c) and 339(1) by virtue of being committed within the relevant time frames prior to the commencement of winding up abruptly cease to be offences? Does the proprietary interest in the assets of a company acquired by its unsecured creditors under the statutory trust arising upon the commencement of winding up which entitles them to challenge the nonregistration of a charge under s 131 (for which see Ng Wei Teck Michael v Oversea-Chinese Banking Corp Ltd  1 SLR 55 and this reviewer s comment at (2000) 12 SAcLJ 210) disappear into thin air? The answer to these questions must be in the negative, for there would otherwise be intolerable uncertainty and arbitrariness. Yet, if so, it would surely be unfair to those who are irreversibly affected by the consequences of the commencement of winding up, particularly where the winding-up petition does not ultimately lead to the making of a winding-up order. Further, there would be a grave risk of and great temptation for winding-up proceedings being commenced without any bona fide intention of seeking a winding-up order, but merely to invoke the consequences of the commencement of winding up These intractable difficulties provide compelling reason why there cannot and should not be any commencement of winding up until and unless a winding-up order is made Eversendai Engineering, however, was concerned with the case of a voluntary winding up. According to s 291(6) of the Companies Act, a voluntary winding up shall commence at the time of the passing of the winding-up resolution or, where a provisional liquidator is appointed under s 291(1) of the Companies Act upon the lodgment by the company s directors with the Registrar of Companies of a statutory declaration that the company cannot by reason of its liabilities continue its business, the time of lodgment of the statutory declaration. In Eversendai Engineering, a judgment creditor of the subject company had applied to attach sums owed by a third party to the subject company, and the application was heard at a time when the subject company had appointed a provisional liquidator but its shareholders had not passed the winding-up resolution. Further, the winding-up resolution was ultimately never passed. The main issue was whether the voluntary winding up had already commenced, since s 299 of the Companies Act provides that, after the commencement of a creditors voluntary winding up, any attachment against the assets of the company shall be void and no action or proceeding shall be proceeded with or commenced against the company except with the leave of the court. As this is a novel issue
7 308 SAL Annual Review (2004) which carries important ramifications and is plagued by poor drafting of the relevant statutory provisions, this reviewer would have to examine the reasoning of the AR Leow in some detail The assistant registrar expressed his views on the commencement of a compulsory winding up outlined above, and with which this reviewer is in agreement, but surprisingly declined to apply the same analysis to the commencement of a voluntary winding up. He noted that, unlike s 255 of the Companies Act which states when the compulsory winding up of a company shall be deemed to have commenced, s 291(6) of the Companies Act states when the voluntary winding up of a company shall commence. The word deemed in s 255, in the opinion of AR Leow, suggested that a statutory fiction was being created, namely, the backdating of the commencement of the compulsory winding up. The absence of the word deemed in s 291(6) conversely indicated that there was to be no backdating of the commencement of voluntary winding up With respect, this reviewer cannot agree. It is fallacious that the commencement of winding up involves a statutory fiction. The commencement of winding up is not a factual occurrence or physical phenomenon but a legal concept, and does not involve any leap in logic or linguistic interpretation. There is nothing imaginary about the commencement of winding up being defined as retrospectively taking place on the date of the filing of the winding-up petition More importantly, the conclusion that a voluntary winding up may commence prior to the passing of a winding-up resolution is so alarming that it cannot be based on the presence or absence of the word deemed. Many fundamental problems would arise if, after the appointment of a provisional liquidator, the shareholders decline to pass a winding-up resolution. If the learned assistant registrar s conclusion is correct, the voluntary winding up would have commenced for a short period (up to a period of one month as provided in ss 291(1)(b) and 291(3)) and would then be unceremoniously terminated. However, the legal status of acts done or transactions entered into by the company prior to and during this period would still be governed by the relevant winding-up provisions with dramatic consequences, even though the voluntary winding up is ultimately never consummated. As elaborated earlier with respect to a compulsory winding up, floating charges will be liable to be rendered void under s 330, any attachment, sequestration, distress or execution may be void under s 299(1), unregistered charges may be liable to become void under s 131 and offences may be committed under provisions such as ss 336(1)(c) and 339(1).
8 5 SAL Ann Rev 302 Insolvency Law This reviewer would further point out that s 292(1) of the Companies Act provides that the company shall, from the commencement of the winding up, cease to carry on its business, except so far as is in the opinion of the liquidator required for the beneficial winding up thereof. It seems reasonably clear that this provision assumes that the winding up commences only if the shareholders have passed the winding-up resolution. It would be very surprising if a provisional liquidator (assuming that the word liquidator in s 292(1) is interpreted to include a provisional liquidator by virtue of s 291(2)) has to cease the business of the company except where it is required for the beneficial winding up thereof. Indeed, AR Leow himself stated that the appointment of a provisional liquidator is only interlocutory in nature and designed to preserve the assets of the company The other reasons given by the learned assistant registrar for his conclusion are also, again with respect, inconclusive at best. First, he pointed out that there was no equivalent of s 258 in the voluntary winding up regime, and opined that the logical reason must be that there was no need for such a provision because a voluntary winding up could commence upon the appointment of a provisional liquidator without a winding-up resolution being passed. Elsewhere in the assistant registrar s judgment, it was also opined that, during the one-month period between the appointment of provisional liquidators and the passing of the winding-up resolution, there is a strong need to preserve the status quo and prevent any creditor from obtaining priority However, an application can be made to the court by a provisional liquidator under ss 291(2) and 310 of the Companies Act to stay any action or proceeding against a company. This can explain why there is no equivalent of s 258 in the voluntary winding up regime as well as provide the means to preserve the status quo and prevent a creditor from obtaining priority Second, AR Leow was of the view that, unlike in the case of the presentation of a winding-up petition where there was little certainty of a winding-up order being made, the chances of the shareholders of a company not passing a winding-up resolution, after the directors had already made a statutory declaration that the company was unable to continue trading because of its liabilities, were slim. The assistant registrar pointed out that it would take a brave shareholder to resist the voluntary winding up in the face of surrender by the company s management, and that the directors would normally be appointed by the majority shareholders.
9 310 SAL Annual Review (2004) While one can certainly expect that more often than not the shareholders will choose to wind up the company after the directors have filed the statutory declaration that the company is unable to continue trading, the alternative scenario of the shareholders declining to wind up the company is probably not as rare as the learned assistant registrar suggested. In fact, Eversendai Engineering itself was such a case. Further, it is entirely conceivable that the views of the directors (who are appointed by a simple majority of the shareholders votes) do not receive the support of 75% of the shareholders votes required for the passing of a winding-up resolution. For instance, the shareholders may prefer to place the company in judicial management or to propose a scheme of arrangement. This reviewer is therefore not in agreement with the learned assistant registrar that the prospects of the shareholders of a company refusing to pass a winding up resolution, after the appointment of a provisional liquidator by the directors, are slim. Certainly, the prospects of such a scenario occurring are not so slim as to provide a policy justification for the conclusion of the assistant registrar Third, the assistant registrar pointed out that, as a voluntary winding up was initiated by the directors of the company, there was no fear that injury would be unfairly caused to the company if the voluntary winding up commenced without the passing of a winding up resolution. He compared this to the case of a compulsory winding up where, in his view, the commencement of winding up, if triggered immediately upon the presentation of a winding-up petition, would ipso facto paralyse the trade of the company and cause great injury to the company and its stakeholders Realistically, paralysis and injury are caused to a company by the mere presentation of a winding-up petition, regardless of whether the presentation of the petition marks the commencement of winding up. Very few businessmen want to trade with a company which is facing a winding-up petition simply because the company might be wound up in the near future. Similarly, a company whose directors have caused the appointment of a provisional liquidator in anticipation of a voluntary winding up also suffers paralysis and injury, because of commercial pragmatism and not because of any technical notion of commencement of winding up. It is therefore respectfully suggested that the commercial issue of whether paralysis and injury is caused to a company is quite separate from the legal issue of when a winding up commences.
10 5 SAL Ann Rev 302 Insolvency Law 311 Distinction between members voluntary winding up and creditors voluntary winding up In Eversendai Engineering (supra para 14.10), the judgment creditor argued that the debtor company had gone into a members voluntary winding up and that a creditors voluntary winding up had not commenced. It was argued that a creditors voluntary winding up would commence only upon the creditors appointing a new liquidator or retaining the existing liquidator at a meeting convened under s 295 of the Companies Act. This was rightly dismissed by AR Leow. The learned assistant registrar pointed out that the company had gone into a creditors voluntary winding up from the outset because no declaration of solvency had been made under s 293. He further held that s 295 applied only where a company had gone into a members voluntary winding up after a declaration of solvency had been made but the liquidator subsequently formed the opinion that the company would not be able to pay its debts in full within the period stated in the declaration. In that situation, s 295 directed the liquidator to call for a creditors meeting and draw their attention to their right to appoint another person as the liquidator. Provisional voluntary liquidation In Eversendai Engineering (supra para 14.10), AR Leow expressed the view that the appointment of a provisional liquidator under s 291 of the Companies Act (that is, upon the filing with the Registrar of Companies by the directors of a company of a statutory declaration that the company was unable to continue its business by reason of its liabilities) was only interlocutory in nature and designed to preserve the assets of the company. While this is undoubtedly correct and consonant with the position of a provisional liquidator in a compulsory winding up, it is interesting to note that this is one of the few judicial pronouncements in the Commonwealth, and certainly the first in Singapore, on the nature of provisional liquidation in a voluntary winding up. Commencement or continuation of legal proceedings against company in winding up The general principles governing the exercise of the court s discretion to grant leave to a creditor to commence or continue legal proceedings against a company in compulsory liquidation or voluntary liquidation (pursuant to ss 262(3) and 299(2) of the Companies Act respectively) were discussed extensively, for the first time in this jurisdiction,
11 312 SAL Annual Review (2004) in Korea Asset Management Corp v Daewoo Singapore Pte Ltd  1 SLR V K Rajah JC (as he then was) stated that the rationale for the requirement to obtain leave of the court to commence or continue legal proceedings against a company in liquidation (or a company in judicial management or an individual against whom a bankruptcy order had been made) was to prevent the company from being further burdened by expenses incurred in defending unnecessary litigation and to maximise returns to the creditors. In the normal course of events, a claimant ought to submit a proof of debt and, if the liquidator rejects the proof, the claimant is entitled to appeal to the court. However, if there is a good reason to do so, this procedure may be dispensed with The learned judicial commissioner held that the words action or proceeding in s 299(2) and its sister provisions were widely interpreted and covered all manner of civil proceedings, including the prosecution of a counterclaim or the execution of a judgment, and criminal and other punitive proceedings. His Honour identified certain broad guidelines which the court might use to determine whether leave should be given for the commencement or continuation of legal proceedings Firstly, the applicant has to satisfy the court that the application is brought bona fide, underpinned by credible facts and is, even without a serious investigation of the factual matrix, capable of succeeding if and when heard. Secondly, the timing of the application for leave may be a relevant consideration, as an application for leave made late in the day is less likely to be persuasive. Thirdly, the court will scrutinise the nature of the claim to ensure that the claimant is not seeking to obtain a benefit which would not otherwise be available through the normal procedure of proof of debt or to prejudice the claims of other legitimate creditors in a manner which negates the statutory scheme of pari passu treatment for all unsecured creditors. As such, leave will be readily given to an applicant whose claim is founded on security or proprietary rights. Fourthly, if the applicant s claim can be adequately or conveniently dealt with within the insolvency regime, such as through the filing of a proof of debt, the court will not be inclined to grant leave to proceed. However, when the liability of the creditor needs to be a liquidated amount before it is admitted to proof, leave will usually be granted readily.
12 5 SAL Ann Rev 302 Insolvency Law 313 Compulsory winding up proceedings against company already in voluntary winding up In Korea Asset Management Corp v Daewoo Singapore Pte Ltd (supra para 14.30), the majority creditor holding 70% in value of the total debts of a company applied for leave under s 299(2) of the Companies Act to present a winding-up petition against the company, notwithstanding the fact that it had placed itself under voluntary liquidation. The directors of the company had, without prior consultation with its creditors, appointed provisional liquidators under s 291(1) of the Companies Act. A notice was issued to convene meetings of the members and the creditors respectively on the same day. The members meeting proceeded as scheduled and the company s sole shareholder resolved to place the company under voluntary liquidation. With regard to the creditors meeting, the major creditor had requested for a postponement and the provisional liquidators had agreed. However, the creditors meeting was held and the chairman of the meeting (who was a representative of the majority creditor) declared that the meeting had lapsed as it was not convened at a time and place convenient to the majority in value of the creditors (pursuant to s 296(8) of the Companies Act). No resolutions were voted on at the creditors meeting The provisional liquidators (who viewed themselves as the liquidators proper) then applied and obtained ex parte court orders that another creditors meeting be held and that they be permitted to exercise all powers as liquidators of the company. The liquidators used the same solicitors as the company. At the second creditors meeting, a representative of the majority creditor once again declared that the meeting had not been convened at a date and time convenient to the majority creditors and that the meeting had lapsed. It was only after the second creditors meeting and upon inquiry by the majority creditors that the liquidators revealed that the ex parte court orders had been obtained An accounting firm engaged by the majority creditor prepared a report indicating that the company s insolvency appeared to be inextricably linked to its related entities and that debts had been incurred in dubious circumstances which hinted at mismanagement and fraud on the part of the company s directors and officers. The provisional liquidators appointed by the directors were from an accounting firm which was a member of the same worldwide organisation as the auditors of the sole shareholder of the company.
13 314 SAL Annual Review (2004) As a result of these circumstances, the majority creditor became concerned that its rights were being undermined and applied for leave to initiate compulsory winding-up proceedings against the company. The liquidators resisted the application, stating that they were fully independent and had been performing their duties in an impartial manner. They maintained that they faced no conflict of interests in their appointment and stressed that they were prepared to take action against any party involved in any wrongdoing. They further contended that placing the company in compulsory liquidation would be highly disruptive, and that time would be wasted and costs incurred V K Rajah JC (as he then was) allowed the application. His Honour prefaced his judgment with the observation that, sometimes, the persons running a company might attempt to hijack a voluntary liquidation to avoid having an independent third party mount an enquiry as to the circumstances that precipitated the insolvency of the company. In such cases, independent minority creditors might have a legitimate sense of grievance if their interests were disregarded or if they genuinely feared that the liquidation process might not be fairly implemented The learned judicial commissioner noted that s 253(2)(d) of the Companies Act provided that, where a company was being wound up voluntarily, the court should not make a winding-up order unless it was satisfied that the voluntary winding up could not be continued with due regard to the interests of the creditors or contributories. His Honour pointed out that, if there was no potential surplus of assets, the contributories views would be of little consequence. On the other hand, the views of the majority creditors would be a very significant factor as it would be these creditors who would effectively be funding the litigation process. Where the majority creditors were related to the company, however, the court would be vigilant to ensure that the views and rights of independent minority creditors were neither ignored nor trampled upon Rajah JC set out three matrix factors which need to be considered by the court in determining whether to allow a voluntary liquidation to continue: the views of the majority creditors, the need for an independent inquiry and the choice of liquidator. On the first factor, his Honour held that the court would give weight to the views of the majority creditors as they had the largest stake in the assets of the company. However, if such creditors were connected to the company and resisted a compulsory winding up, their motives might be seen to be questionable, particularly if there was no recovery for the unsecured creditors. The court might have regard to the
14 5 SAL Ann Rev 302 Insolvency Law 315 general principles of fairness and commercial morality, and the exercise of discretion should not leave substantial independent creditors with a strong legitimate sense of grievance. Further, fairness and commercial morality might require that an independent creditor should be able to insist on the company s affairs being scrutinised by the compulsory liquidation process On the second factor, the learned judicial commissioner was of the view that the need for an independent inquiry could be a critical consideration, particularly where one sensed that impropriety in one form or another had occurred in the company. In such a case, the liquidator should not be perceived as having had any relationship with the company s officers or shareholders and there was often a public interest element that might sometimes tip the scales in favour of allowing a compulsory winding up On the third factor, Rajah JC noted that, if the identity of the voluntary liquidator was in issue, it might be more expeditious and less costly to apply for a change of liquidator under s 302 of the Companies Act. However, the learned judicial commissioner held that the identity of the voluntary liquidator could be another legitimate reason for the independent creditors to seek the compulsory winding up of a company, particularly if a significant objective of such creditors was an investigation into the company s affairs On the facts, Rajah JC noted that the majority creditor had throughout the voluntary liquidation consistently voiced its concerns over the state of the company s affairs, the need for an enquiry into the reasons for the company s insolvency and the apparent lack of independence on the part of the liquidators. The learned judicial commissioner held that a critical factor was that the majority creditor held 71% of the admitted proofs of debt and that the shareholders had no equity left in the company. No weight could therefore be attached to the contention that additional costs would be incurred in a compulsory liquidation, particularly since it would be the majority creditor who would be bearing a substantial part of these additional costs. Rajah JC was of the view that leave should be given on this basis solely However, there were other factors which weighed heavily in favour of granting leave. There was a need for further inquiry into the circumstances that led to the demise of the company, and it was puzzling that the liquidators resorted to ex parte applications even after the majority creditor had voiced its objections. There was also a real basis for the majority creditor to perceive some apparent conflict.
15 316 SAL Annual Review (2004) Enforcement proceedings against company in liquidation Section 299(1) of the Companies Act provides that any attachment put in force against the estate or effects of the company after the commencement of a creditors voluntary winding up shall be void, while s 334(1) provides that a creditor shall not be entitled to retain the benefit of any attachment against the liquidator unless he has completed the attachment before the date of the commencement of winding up. An illustration of the application of these provisions may be seen in Eversendai Engineering (supra para 14.10). A judgment creditor of an insolvent company had, after the commencement of a creditors voluntary winding up of the company, applied to attach moneys due from a certain debtor of the company. AR Leow held that the application failed in the light of ss 299(2) and 334(1) of the Companies Act. The learned assistant registrar further held that the court would not grant dispensation from s 334(1) where it would encourage unsecured creditors to make a rush for the company s assets and undermine the pari passu principle of distribution. It was further held that, even if ss 299(2) and 334(1) did not apply, the court would not exercise its discretion to make absolute an attachment order nisi where to do so would prefer one creditor of an insolvent company over other creditors This reviewer had inadvertently left out mention of Supermix Concrete Pte Ltd v Econ Corp Ltd  1 SLR 250 in last year s review, and now seeks to make up for the remiss by recording the decision in this year s review. In this case, Lai Kew Chai J set aside a garnishee order absolute on the grounds that there had been material non-disclosure of, inter alia, the fact that the judgment debtor had applied for a stay of proceedings under s 210(10) of the Companies Act, and ordered that the garnished moneys be paid into court. As the judgment debtor had, by the time the matter was heard by Lai J, already obtained a stay of legal proceedings under s 210(10) of the Companies Act, the learned judge ordered that, if the stay of proceedings was lifted, the money paid into court would be released to the judgment creditor The judgment creditor wrote in for further arguments and requested that a banker s guarantee be provided in lieu of the payment of the garnished moneys into court. It was pointed out that, if winding-up proceedings were commenced against the judgment debtor before the garnished moneys paid into court were released to the judgment creditor, the judgment creditor might be prevented from receiving the garnished moneys by virtue of ss 260, 255(2) and 334(2)(b) of the Companies Act. This argument was accepted by
16 5 SAL Ann Rev 302 Insolvency Law 317 the learned judge, who then ordered that the judgment creditor be allowed to keep the garnished moneys subject to the provision of a banker s guarantee This reviewer would point out that, generally, moneys paid into court by one party for the benefit of another party constitutes a security arrangement which remains effective in the insolvency of the former. Money paid into court by a defendant pursuant to a condition in granting leave to defend, or money which is paid into court by an appellant as security for costs in respect of an appeal, will place the other party in the position of a secured creditor: Cheng Lip Kwong v Bangkok Bank Ltd  2 SLR 290. It is also well established that ss 260, 255(2) and 334(2) of the Companies Act do not affect the exercise of security rights. Of course, the facts of Supermix Concrete Pte Ltd v Econ Corp Ltd were rather unusual, and there is no case authority which deals with the status of payment into court in similar circumstances. However, there is probably no reason to distinguish payment into court in such circumstances from payment into court in the more familiar contexts of conditional leave to defend and security for costs. Duties of liquidators Some useful general observations on the duties of liquidators were made by V K Rajah JC (as he then was) in two cases. In Korea Asset Management Corp v Daewoo Singapore Pte Ltd (supra para 14.30), the learned judicial commissioner reminded liquidators that, where one senses that impropriety in one form or another has occurred in the company, the role of the liquidator takes on an added dimension. The liquidator wears the hat of investigator and sometimes that of prosecutor. He is not a mere collector of assets performing an administrative function. His Honour also reaffirmed the well-established principle that liquidators must not only be impartial but must remain above the fray at all times. A liquidator must be independent, and must be perceived to be independent by all right-thinking independent creditors and observers. Where concerns are raised and liquidators are challenged on an issue involving an existing or potential conflict, they should pause and carefully review their position dispassionately and should seek advice from wholly independent counsel or their peers in the same profession Subsequently, in Liquidator of W& P Piling Pte Ltd v Chew Yin What  3 SLR 164, V K Rajah JC (as he then was) further stated that the role of liquidator was not confined to the safeguarding, collection and redistribution of the company s assets, but extended to inquiring into the reasons for the company s demise as well as the peculiar responsibility and
17 318 SAL Annual Review (2004) particular role of management in the antecedent events. Rajah JC also highlighted that, although the Companies Act did not stipulate when the liquidator should complete his tasks, he must discharge his responsibilities diligently and within a reasonable time. With regard to the commencement of legal proceedings, the learned judicial commissioner cautioned that a liquidator had no mandate to commence litigation which had no real prospect of succeeding, and should not allow himself to be manipulated by creditors or third parties for collateral objectives In Trustee of the Estate of Ong Thiam Huat v Chan Hock Seng  SGHC 232, the liquidator of a company was sued by one of the shareholders of the company for negligently failing to recover a debt owed to the company before the debt became time-barred. The company had been founded by the plaintiff s father, who treated the company s assets as his own even after he had transferred away his shares in the company. At the time of his demise, the plaintiff s father had withdrawn a sum of $7.1m from the company. The company was subsequently placed under voluntary liquidation and the defendant was appointed as the liquidator. The shareholders of the company at the time of liquidation were the plaintiff, his two half-sisters and his halfbrother. The plaintiff s half-brother had been disowned by the plantiff s father for failing to obey his instructions to transfer some of his shares in the company to his father s other children The plaintiff s father wanted the debt to be written off, and had instructed the plaintiff to make the necessary arrangements. The plaintiff took a number of steps towards this end. He approved an accounting entry to write off his father s debt. He and his two half-sisters also executed three documents to facilitate the cancellation of the debt, namely, a shareholders resolution authorising the defendant liquidator to write off the father s debt or to offset the debt against their entitlements to distributions from the liquidation of the company, an indemnity in favour of the defendant in respect of any loss or damage he might suffer as a result of complying with their instructions to write off the father s debt, and an authority to the defendant to offset their entitlements against the father s account with the company. The plaintiff himself signed a letter authorising the defendant to offset his own credit balance of over $200,000 against his father s account with the company Two years after the company was placed under voluntary liquidation, the plaintiff s father passed away. During the latter s lifetime, the plaintiff had confirmed on several occasions to the defendant that his father s debt was to be written off, and he showed no interest in the recovery of the
18 5 SAL Ann Rev 302 Insolvency Law 319 debt for almost five years after his father s demise. During this period, the shareholders meetings which the defendant tried to arrange were not attended by the requisite number of shareholders, and the meetings had to be adjourned because of the lack of a quorum The plaintiff then suddenly wrote to the defendant to revoke the authority to offset his entitlement against the father s debt. He pointed out that the resolution authorising the write-off or set-off was not effective because the last shareholder (the plaintiff s half-brother) did not execute the resolution. The defendant then started an action against the estate of the plaintiff s father. The action was unsuccessful as the claim had become timebarred It was conceded by the defendant that he would be liable for the $7.1m if it was indeed owed by the plaintiff s father to the company. However, the defendant argued that there was no debt owed by the plaintiff s father to the company, as the plaintiff s father in fact owned all the shares in the company. Tan Lee Meng J expressed some initial doubts about the defendant s case, since the defendant had, in the action by the company against the estate of the plaintiff s father, asserted that the sum of $7.1m was indeed owing by the plaintiff s father to the company. Further, the accounts of the company showed clearly that the plaintiff s father was a debtor Nevertheless, the learned judge ultimately dismissed the plaintiff s claim with costs. In the words of Tan J, the plaintiff scuttled his own case from the very start because of his absolutely astonishing answers during cross-examination and even more startling answers during re-examination (at ). Effectively, the plaintiff had in his testimony admitted that the $7.1m withdrawn by his father was money belonging to his father, and not the company, and that he therefore had no reason to sue. He further conceded that he had revoked the authority given to the defendant to write off his father s debt as an attempt to take advantage of the company s accounts to get more money from his father s estate. A last-minute attempt by the plaintiff to completely change his evidence in the last part of his reexamination found no sympathy with the learned judge Although this case was decided in favour of the defendant purely on the evidence, and no doubt rightly so, it indirectly raises two points for consideration. First, it is difficult to see how the plaintiff could hope to recover anything from the defendant, even if the latter was found to be legally liable. According to the facts narrated in the judgment, the plaintiff had executed an indemnity in favour of the defendant to cover any loss or
19 320 SAL Annual Review (2004) damage the defendant might suffer as a result of complying with the plaintiff s instruction to write off the debt purportedly owed by the plaintiff s late father. Any liability imposed on the defendant would have automatically cancelled out the defendant s claim against the plaintiff pursuant to the indemnity. Further, based on the facts set out in the judgment, it would appear that the defendant would have an unassailable defence of estoppel against the plaintiff Second, the judgment proceeds on the basis that the plaintiff was suing the defendant for negligence. It is not clear whether the term negligence is used in the sense of the tort of negligence, or merely incompetence or lack of diligence in the defendant s discharge of his duties as liquidator. Either way, it would seem that there is no basis in law for the plaintiff s claim. The liquidator of a company does not owe a duty of care in tort to the shareholders of the company; neither does he owe his liquidator s duties of skill, care and diligence to the shareholders of the company. The liquidator of a company owes his duties to the company and not to its shareholders, unless there are exceptional facts indicating that he has independently and voluntarily assumed specific duties to the shareholders (an example of which can be found in A & J Fabrications Ltd v Grant Thornton  2 BCLC 227), or his conduct has caused specific prejudice to a particular creditor or contributory, such as where he has negligently failed to notify a creditor to lodge his proof in the winding up (Pulsford v Devenish  2 Ch 625). No common law action is available against the liquidator in respect of an act which causes loss to the company, such as where he realises the company s assets at an undervalue (see Thomas Franklin & Sons Ltd v Cameron (1935) 36 SR (NSW) 286). Similarly, any failure by the defendant in Trustee of the Estate of Ong Thiam Huat v Chan Hock Seng to recover the debt of $7.1m was a failure to properly realise the company s assets, and caused loss only to the company. Position of voluntary liquidators It will be recalled that the principle in Ex parte James (1874) LR 9 Ch App 609 is, put simply, that a liquidator should act honourably and do what is really honest, including refunding moneys paid to him under a mistake of law. In Re Pinkroccade Educational Services Pte Ltd  4 SLR 867 ( Re Pinkroccade ), the High Court held that the principle in Ex parte James did not apply to voluntary liquidators but only to court-appointed liquidators. In the 2002 review, this reviewer stated his disagreement with this ruling, as in this context the distinction between a voluntary liquidator and a courtappointed liquidator is one without a difference.
20 5 SAL Ann Rev 302 Insolvency Law Similar doubts have now been expressed in Korea Asset Management Corp v Daewoo Singapore Pte Ltd (supra para 14.30). Rajah JC referred to Re Pinkroccade, having apparently accepted that voluntary liquidators have less exacting obligations than court-appointed liquidators, and expressed reservations on the merits of this view. However, the learned judicial commissioner did not elaborate on the issue, given that it was not argued before him Nevertheless, in the same judgment, Rajah JC addressed the position of a voluntary liquidator where a creditor is seeking to place the company under compulsory liquidation. A voluntary liquidator should not descend into the battle arena and strenuously oppose the granting of leave to proceed with the compulsory winding up of the company, as the liquidators had done in the case before his Honour. The voluntary liquidator should not be partisan and should not become involved in arguing the merits for or against the making of a winding-up order. The voluntary liquidator has no locus standi to oppose or support the making of an order, but should merely recite the relevant facts and leave it to the court to decide the matter on the merits. Estoppel against liquidators The well-established rule that estoppel does not operate against the liquidators of a company for representations made by the company prior to liquidation was affirmed by Woo Bih Li J in RBG Resources plc v Banque Cantonale Vaudoise  3 SLR 421. The facts in this case are complicated and involve many other issues. In essence, with respect to the issue of estoppel, the defendant bank had laid claim to the ownership of various metals stored in warehouses on the basis that it had purchased the metals from a company prior to its liquidation. One of the arguments raised by the bank was that the company had, by delivering warehouse receipts to the bank, represented that it was appropriating metals to the purchase by the bank or that it was identifying bulks of metals in the warehouses as the bulks from which the bank s metals were to come. In reliance on such representations, the bank had acted to its detriment by paying the purchase price and the company was therefore estopped from contending otherwise Woo J held that estoppel could not be used against the liquidators of the company. Reference was made to the leading statements of law in Re Exchange Securities & Commodities Ltd  Ch 46 and the unreported decision of Choo Han Teck JC (as he then was) in Asia Sawmill Co Pte Ltd v Tan Bak Liang  SGHC 160.
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