Corporate Insolvency Law

LL4402

AY 2011/2012

Insolvent Liquidation
I. Initiating a Winding-up
Winding-up by the Court: Inability of Company to Pay Debts Who may apply to court for winding-up?
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.

Difference between contingent and prospective creditors

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

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

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 windingup 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 Re Peoples Parkway Development Pte Ltd [1992] 1 SLR 413 Facts - The A-G had applied to the court to be substituted as petitioning creditor in the winding-up of a company. - In order to qualify for such substitution under Rule 33(1) of the Companies (Winding Up) Rules 1969, the A-G had to be a person who "would have a right to present the petition". - The A-G claimed such an entitlement on the basis of an alleged debt that the company owed to the Government of Singapore amounting to $40,939,984 for the purchase of government land at Marine Parade/East Coast Parkway in 1981, which had not been satisfied despite the service of a statutory demand on 2 January 1991. - Counsel for the company submitted that the Government was not the person "who would have the right to present the petition", as at the time when the winding-up petition was presented (June 1986), the Government had no claim against the company. - The A-G submitted, inter alia, that he was entitled to present such a petition in the capacity of a contingent or prospective creditor. Held - On the facts, Thean J held that as there was no dispute as to the existence of the debt but only as to the amount still owing to the Government, the Government was a creditor of the company. - Thean J went on further to hold that the Government was also a contingent or prospective creditor and accordingly, the A-G was entitled to present the petition at the date it was filed. - In coming to his decision, Thean J cited with approval the cases of Re William Hockley Ltd [1962] 2 All ER 111 and the HCAs decision in Community Development Pty Ltd v. Engwirda Construction (1969) 120 CLR 455, concluding that contingent creditor denoted a person toward whom, under an existing obligation, the company may or will become subject to a present liability on the happening of some future event or at some future date, and that the company is bound from the time the contract is made to pay the money to the person upon the contingency. - The government was, in his Honours opinion, a contingent or prospective creditor, and the applicant on behalf of the government would be entitled to present the petition at the date it was filed. Evaluation

- 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.

Grounds on which an application for winding-up may be presented locus standi

Statutory provisions under the CA 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. 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. 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). 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.

Principles and application of the insolvency tests

Re Sunshine Securities (Pte) Ltd [1978] 1 MLJ 57 Facts - The company admitted that the debt was due and payable, but disputed the contention that it was insolvent on the ground that it owned a piece of land whose value far exceeded its liabilities (i.e., it was balance sheet solvent). Held - Quoting Buckley on The Companies Acts (13th Ed) at page 460 (in relation to s.233(d) of the English CA), AP Rajah J held that that the then equivalent of s.254(2)(a) CA is an instance of commercial insolvency (liquidity test), that is of the company being unable to meet current demands on it, and hence the balance sheet test was not applicable. - As the company had failed to pay or give security for the debt for which a statutory demand had been made, it was insolvent and may be wound up. Evaluation - Section 254(2)(c) CA, however, now recognizes and, in conjunction with s.254(1)(e) CA, expressly authorizes a winding-up in the case of another kind of insolvency; that is to say, if the existing and probable assets will be insufficient to meet the liabilities, taking into account not only liabilities presently due but also those which are contingent and prospective, i.e., balance sheet solvency. *Cornhill Insurance plc v. Improvement Services Ltd [1986] 1 WLR 114 Facts - Df wrote to Pf threatening that it would present a petition for its winding-up should it fail to pay within 3 weeks the 1154 that was due to the Df. - Just before the expiration of the 3 weeks, the Pf presented the Df with an ex parte injunction restraining the Df from presenting or threatening to present a petition to wind up the Pf. - In the present motion, the Pf sought the continuation of the injunction on the ground that the presentation of such a petition would be an abuse of process, since the Df, knowing that the Pf was a large public insurance company, could not properly put forward a fundamental allegation of insolvency in any petition against the Pf. Held - The sum of 1154 was an undisputed debt owed and due to the Df, which the Pf, despite having the resources, chose, for whatever reason, not to pay, and which entitled the Court to infer that the company was unable to pay its debts within the meaning of s 254(1)(e) of the English CA. - Under such circumstances, the Df was entitled to either threaten or actually present a winding-up petition. - Harman J also conceded that although the matter [was] sad and unfortunate because it may be that there were other out-of-court remedies which might effectively have got the money before now, he nonetheless had to adhere to the letter of the law by giving effect to the rights of people according to their proper legal entitlement, instead of forcing them into other courses. Evaluation - The case provides strong support for the proposition that failure to meet a current demand is sufficient to meet the criteria of insolvency, regardless of whether the company was in fact solvent or not. - It should be noted that the case concerned an interlocutory matter, viz, the learned judge merely decided whether the court should restrain the creditor from presenting a winding-up petition against Cornhill Insurance. He did not order the winding-up of the company, an issue which would arise should the petition have proceeded to the hearing stage. - Would mere omission to pay the debt satisfy the requirements under s.254(2)(a) CA for the purposes of deeming a company unable to pay its debts? It was held in Ng Tai Tuan v. Chng Gim Huat Pte Ltd that

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. Byblos Bank v. Al-Khudhairy (1987) 2 BCLC 232 Held - Nicholls LJ held that the court must assess the ability of a company to pay its debts on its assets as they currently stood and that the prospect of a company acquiring further assets before contingent or prospective debts became due went only to the discretion of the court in deciding whether or not to make an order winding-up the company, i.e., at the interlocutory stage (whether the court should restrain the presentation of the petition), the court will not take into account the prospect of future assets for the purpose of deciding whether the solvency test is satisfied. It will only consider exercising its discretion to take those into account at the hearing stage when deciding whether or not to make the winding-up order. Evaluation - The English C.A. drew a distinction between being balance sheet insolvent (which includes contingent and prospective liabilities) and cash flow insolvent. In essence Nicholls LJ held that at the interlocutory stage, the cash flow test is applicable to determine the ability of a company to pay its debts. This was the interpretation by Sir Morritt in BNY Corporate Trustee Services Ltd v. Eurosail [2010] EWHC 2005. 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. *Re Great Eastern Hotel (Pte) Ltd [1989] 1 MLJ 161 Facts - A winding-up petition was brought against the company by one of its members on the ground, inter alia, that the company was unable to pay its debts within the meaning of s.254(1)(e) CA. - There being no statutory demand pursuant to s.254(2)(a) CA, the petitioner (a member of the company) relied on s.254(2)(c) CA. The petitioner therefore had to positively prove insolvency, and in support of the petition, the financial status of the company was put before the court. - As at 31 December 1987, there was a current asset deficiency of $7,688,751, primarily owing to an OCBC overdraft. - However, the companys assets included the hotel, valued at approximately $21m. - The company would be capable, if necessary, of paying all its debts by a realization of its assets, including the hotel, and of carrying on some other business, if its shareholders so wished, out of the net amount realized after payment of all liabilities. - Hence, while it suffered from chronic illiquidity, its balance sheet figures were nonetheless positive, i.e. value of assets exceeded that of liabilities. - Counsel for the petitioner submitted that the fact that the companys assets exceeded its liabilities did not mean that the company was solvent. He contended that the test was that there should not be a deficiency on current assets. He also submitted in order to be solvent, the company must be able to pay its debts out of its own money and could not borrow money to do so. Held - The Court rejected the counsels submissions that the applicable test is the deficiency on current assets test and that the company should have the capacity to meet its liabilities out of its own moneys for the purposes of determining its solvency. - The Court propounded that there are two tests for determining solvency under s.254(2)(c) CA, one

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

- 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

statutory demand on JSPL for payment. - On 23 Nov 2007, JSPL applied to the H.C. for an injunction to restrain BNP from commencing windingup 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: 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 windingup 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

Firstly, winding-up proceedings are intended only for cases where the company is insolvent or

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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.

Standard of compliance in respect of the statutory demand under s.254(2)(a) CA

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:

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 debt must exceed SG$10,000; The written demand to pay the sum due must be properly signed by the creditor or his authorised

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. *Mann v. Goldstein [1968] 1 WLR 1091 Facts - 2 creditors had filed separate winding-up petitions for monies owed by the company. - The company applied for an injunction restraining the petitioners from advertising or taking any further steps in prosecuting the winding-up petitions on the ground that both of the winding-up petitions were based on disputed debts. Held - Presenting a petition for winding-up based on a debt that is disputed on some substantial ground (and not just on some ground which is frivolous or without substance and which the court should, therefore, ignore) is an abuse of process as the petitioner has no locus standi to invoking the courts winding-up jurisdiction. According, the court will dismiss the petition. - Ungoed-Thomas J: For my part, I would prefer to rest the jurisdiction directly on the comparatively simple propositions that a creditor's petition can only be presented by a creditor, that the winding-up jurisdiction is not for the purpose of deciding a disputed debt (that is, disputed on substantial and not insubstantial grounds), since, until a creditor is established as a creditor he is not entitled to present the petition and has no locus standi in the Companies Court; and that, therefore, to invoke the winding-up jurisdiction when the debt is disputed (that is on substantial grounds) or after it has become clear that it is so disputed is an abuse of the process of the court. Evaluation - Ungoed-Thomas J preferred to rest the justification for the exercise of the courts jurisdiction to restrain the presentation of a petition as an abuse of process of court directly on the lack of locus standi of the would-be petitioner. In In re Bayoil SA, the UK Court of Appeal regarded irreparable harm to the company as only one of the considerations but not the basis to grant an injunction. Similarly, in Metalform Asia Pte Ltd v. Holland Leedon Pte Ltd, it was held that 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. - However, irreparable harm to the company is the justification given by some Australian courts for the grant of an injunction to restrain presentation of petition (for e.g., General Welding & Construction Co Pty Ltd v. International Rigging (Aust) Pty Ltd). - The English authorities must be correct in principle. 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. *Re Tweeds Garages Ltd [1962] 1 Ch 406 Facts

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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. *Re RA Foulds Ltd (1986) 2 BCC 99269 Held - A petition which is presented upon the basis of a debt which is bona fide disputed on substantial grounds is an abuse of process. This practice of the court was firmly established since the decision in Mann v. Goldstein. The reason is that the presentation of a winding-up petition puts very great pressure on the company and it is not right for that pressure to be used in order to induce the company to abandon a fairly arguable defence to the claim. However, that does not mean that the petitioning creditor must be able to show that it is owed any particular quantified amount. Following the decision in Re Tweeds Garages Ltd, it is sufficient for the purposes of establishing locus standi if the petitioning creditor is definitely a creditor as to some part of its claim. Under such circumstances, consequently, the petition is not an abuse of process. Pacific Recreation Pte Ltd v. SY Technology Inc [2008] SGCA 1 Held - A company cannot stave off a winding-up application merely by alleging that there is a substantial and bona fide dispute over the debt claimed by the applicant-creditor. The court needs to evaluate the evidence adduced by the company in support of its allegation and come to an appropriate conclusion on whether the alleged dispute exists. Evaluating such evidence is different from deciding on the merits of the dispute. 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. *Re Claybridge Shipping Co SA [1997] 1 BCLC 572 Facts - The company, which was a foreign company, applied to strike out a winding-up petition presented against it on the basis that it was founded upon a bona fide disputed debt. Held - Lord Denning MR, without reference to previous authorities, expressed the view that a person is a creditor so long as he has a good arguable case that a debt of a sufficient amount is owing to him. He held that there might be special circumstances which warrant a departure from the general rule of practice that a petition may not proceed if the debt is disputed, as where the circumstances show that there is a danger of the assets being removed out of the jurisdiction and put out of the reach of the creditors. - Lord Denning MR, while agreeing that a petition for winding-up should not be used as a means of getting in a debt which is bona fide disputed on substantial grounds, opined that the Companies Court reserved the ability to look into the bona fides of the dispute: if it is obviously a put-up job or if it is so insubstantial that a judge would only give conditional leave to defend then the petition to wind up should stand. In other words, the Companies Court should keep the winding-up remedy flexible for the sake of all creditors so that the assets may not be disposed of or removed by the company before there is a chance of dealing with them. - On the other hand, Oliver LJ emphasised that the general rule was merely a rule of practice which

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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

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- 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.

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The Courts Discretion in Refusing to Make the Winding-up Order Creditor entitled to a winding-up ex debito justitiae
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. *BNP Paribas v. Jurong Shipyard Pte Ltd [2009] SGCA 11 Held - The C.A. stated in dicta:

The general rule: where a company is unable or deemed to be unable to pay its debts, the creditor

is prima facie entitled to a winding-up order ex debito justitiae (of or by reason of an obligation of justice; as a matter of legal right). Notwithstanding the general proposition, the court retained a discretionary power by virtue of the use of the word may in s.253(1)(b) CA. In exercising that discretion, 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. The interest of the public at large should also be taken into account, especially if the company is a viable one. Under s.257(1) CA, the court may adjourn the hearing of a winding-up application conditionally or unconditionally or make any interim or other order that it thinks fit. In cases where a company is temporarily insolvent but the winding-up court would ex hypothesi grant an adjournment under s.257(1) CA to allow the company time to resolve the issues at hand or to seek alternative measures, an injunction of limited duration to restrain a winding-up petition from being presented may also be justified if irreparable harm could flow from its presentation, such as

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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.

Cross claims by the debtor company

A cross claim affects the debt owed by the company to the applicant in different ways: (1) If the cross claim is amenable to be set-off in equity against the debt (transaction or equitable setoff), it is a substantive defence to the debt. The assertion of such a cross claim is no different from disputing the debt bona fide. (2) If the cross claim is amenable to legal set-off (also called independent set-off), it is a procedural defence to the debt. It does not extinguish the debt until judgment is entered in favour of the company. The assertion of such a cross claim does not impugn the status of the applicant as a creditor of the company. (3) If the cross claim may only be relied on as a counterclaim, it is no defence to the debt at all. It is merely a procedural device to enable a claim and cross claim to be managed in the most convenient and effective manner. Clearly, the assertion of such a cross claim does not impugn the status of the applicant as a creditor of the company. 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.

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2.

3. 4.

It is necessary that the claims both be either liquidated or in sums capable of ascertainment without valuation or estimation. It is a procedural defence which has no effect until it is brought into effect by a court judgment. 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.

Bankers set-off (right to combine accounts): 1. This arises in the situation where the company has more than one account with its bank, with at least one of it in debit and one of it in credit. 2. A debtor can only invoke a bankers set-off if the 2 accounts are current or running accounts, and where this is the case, the remedy is automatically invoked. 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.

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- 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. *McDonalds Restaurants Ltd v. Urbandivide Co Ltd [1994] 1 BCLC 306 Facts - A partnership carried out certain design work and supplied machinery and equipment to McDonalds. The partnership assigned the benefits of its contracts to Urbandivide. - There was a dispute between McDonalds and the partnership over the value of the equipment provided and the quality of the design work. - Urbandivide made a statutory demand on McDonalds amounting to 28,000 for services and goods provided by the partnership. - McDonalds in the present proceedings sought to restrain Urbandivide from presenting a winding-up petition on the basis of the statutory demand on the grounds that it had a set-off for damages as a result of defective work which exceeded the amount of the statutory demand. Held - The application was granted. - McDonald's claim was not simply a cross claim or counterclaim,s but a claim that McDonalds sought to rely on by way of equitable set-off against the sums owed to Urbandivde for the supply of plant and equipment. - The defence by way of equitable set-off can be relied upon if it is shown on the facts of the particular case that there is a sufficiently close relationship between the cross-claim and the subject-matter of the claim itself. The claim and the cross-claim must arise out of the same contract or transaction and must be so inseparably connected that one ought not to be enforced without taking into account the other. - Cross-claims amounting only to counterclaims cannot be relied upon as amounting to an equitable setoff - On the facts, McDonalds had an arguable defence by way of equitable set-off for damages as a result of defective work, as there was a sufficiently close connection between the claims sought to be made by McDonalds on the one hand and McDonalds' liability to pay for goods supplied on the other. If McDonalds cross-claim was successful, McDonalds would not be indebted to the petitioner. - Accordingly, as there was a bona fide dispute as to whether a debt was at all due, this was not a proper case in which a winding-up petition should be presented. 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: *Re Bayoil SA [1999] 1 WLR 147 Facts - After the starboard engine of a tanker chartered by Bayoil from the petitioner failed, causing the vessel

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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 crossclaim, 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)

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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 crossclaim 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 crossclaim 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

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arising from a separate contract. - The case also effectively equates a cross claim with a disputed debt in an interlocutory application.

Opposition to the application

*Re P & J Macrae [1961] 1 All ER 302 Facts - A majority in value and number of creditors opposed the winding-up petition. No reasons were presented for the opposition. Held - The English C.A. affirmed the winding-up order. - The majority held that the bare fact that the opposing creditors were in a majority was not of itself sufficient, much less conclusive, to require a judge to exercise his discretion in their favour. Good and cogent reason that stands up to scrutiny must be shown in order for the majority to override the wish of minority to wind up the debtor company, a right which it is entitled to ex debit justitiae. - Upjohn LJ dissented, holding that ordinarily, the court should be able to assume that trade creditors are actuated solely by business considerations. Re Demaglass Holdings Ltd [2001] 2 BCLC 633 Held - Where the dispute is between creditors of the company, with some creditors in favour and others against a winding-up order being made, an order would usually be made if the majority of the creditors supported the petition and would only be refused if the majority were against it. - When considering the views of the creditors on the question of whether to wind up a company, the Court would give little, if any, weight to the views of the secured creditors, as a secured creditor is entitled to rely on its security and therefore stands outside of the liquidation. - The Court would also have greater regard to the views of independent creditors as opposed to creditors connected with the company. - The mere fact that the majority of creditors opposed the making of a winding-up order was not by itself sufficient reason for the Court to refuse to make a winding-up order; instead, the Court had to be satisfied that the opposing majority had good reason for refusing to wind up the company. - Where the Court was satisfied that the opposing majoritys opposition to the making of a winding-up order was justified but the petitioning creditors desire to have a winding-up order made was also justified, it had to carry out a balancing exercise.

Opposition by contributories
Re Camburn Petroleum Products Ltd [1979] 3 All ER 297 Facts - A petition was filed for the winding-up of the debtor company pursuant to an undisputed debt that was unpaid. - A contributory of the debtor company sought an adjournment of the application. Held - Per Slade J: [I]n deciding whether or not to make a winding-up order on a creditors petition, or to adjourn the hearing, [the Court] should, ordinarily attach little weight to the wishes of the contributories, in comparison with the weight it attaches to the wishes of any creditor, who proves both that he is unpaid and that the company is unable to pay its debts. A creditor giving credit to a company, after all, cannot ordinarily be expected to know of or ascertain the potential difficulties which may face the company in regard to the discharge of debts In my judgment a creditor in advancing money to a company, at least in the absence of notice to the contrary, is ordinarily entitled to assume that its affairs

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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
Re Craven Insurance Company Ltd [1968] 1 All ER 1140 at 1144 Facts - The Board of Trade presented a petition to wind-up an insurance company. - The employees would lose their employment if a winding-up order was made and were anxious to support the company even to the extent of working for a month without wages. Held - The court does not have a wide discretion exercisable, inter alia, in the interests of employees and of the public generally to refuse to make a winding-up order. *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.

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Insolvent Liquidation
II. Commencement and Effect of Winding-up
Meaning of Commencement of Winding-up 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.

Effect of the Winding-up Order Making of the winding-up order brings into operation a statutory scheme
The making of a winding-up order brings into operation a statutory scheme for dealing with the assets of the insolvent company. *Ayerst v. C & K (Construction) Ltd [1976] AC 167 (HL) Held - Lord Diplock confirmed the existence of the statutory trust on the basis that upon the making of a winding-up order, by operation of the relevant provisions of the English CA, a company loses all custody and control of its property, and all powers of dealing with the company's assets are transferred to a liquidator who is to act in accordance with the statutory scheme set out in the English CA. - Consequently, Lord Diplock held, by operation of statute, upon the making of a winding-up order, a statutory trust comes into effect because the company, despite remaining legal owner of its property, loses all beneficial ownership to it. *Ng Wei Teck Michael v. OCBC Ltd [1998] 2 SLR 1 at [31] Held - On the presentation of a winding-up petition, a statutory scheme came into place to preserve the assets of the company for pari passu distribution among the unsecured creditors and the unsecured creditors were in the nature of a cestui que trust with beneficial interests extending to all the companys property, including the subject matter of the unregistered charge. An unsecured creditor thereupon acquired sufficient interest in the subject matter of the unregistered charge so as to qualify as a creditor for the

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purposes of s.131(1) CA. Buchler v. Talbot [2004] 2 AC 298; [2004] 2 WLR 582 at [28]-[29] Held - Lord Hoffmann held that the statutory trust is a special kind of trust as neither the creditors nor anyone else have a proprietary beneficial interest in the fund. - The creditors have only a right to have the assets administered by the liquidator in accordance with the provisions of the U.K. Insolvency Act 1986. - That said, the trust applies only to the company's property. It does not affect the proprietary interests of others. *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

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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.

Disposition of the companys property following the winding-up order

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.

Moratorium on legal and enforcement proceedings

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. *Re Atlantic Computer Systems plc [1992] 1 All ER 476 at 482-5

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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.

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Insolvent Liquidation
III. Treatment of Assets
Assets Subject to Security
Re David Lloyd & Co (1877) 6 ChD 339, 344-345 Facts - The issue in this case was whether the mortgagee was entitled to continue with its foreclosure action against the mortgagor even though the mortgagor was in liquidation. Held - The English C.A. held in favour of the mortgagee. - James LJ: The winding-up of a company and the consequent distribution of assets among all the persons who have claims upon it has nothing to do with the case of a man who for the present purpose is to be considered as entirely outside the company, who is merely seeking to enforce a claim, not against the company, but to his own property. - Power was given to the Court to interfere with actions by restraining them or not allowing them to proceed, but this power was given because it was understood that the Court would exercise it with a due regard to the rights of third persons, persons who were not members of the company, and who had not to come in and claim to share in the distribution of the company's assets among the creditors, and who were not therefore quasi parties to the winding-up proceedings. The Court would have due regard to the rights of independent persons. A mortgagee is such an independent person, and his rights ought not to be interfered with because his mortgagors have chosen to become insolvent and to have a winding-up.

Quasi-security and Other Proprietary Interests

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.

Retention of title clauses

Aluminium Industrie Vaasen BV v. Romalpa Aluminium [1976] 1 Lloyds Rep 443 Facts - Romalpa concerned the sale of aluminium foil. - The Df buyer went into liquidation still owing the Pf seller 122,000. - The plaintiff sought to rely on Clause 13, which provided that [t]he ownership of the material to be delivered by [the Pf seller] will only be transferred to purchaser when he has met all that is owing to [the Pf seller], no matter on what grounds. Held - Clause 13 was to be construed as conferring on the Df a power to sell unmixed foil and also as imposing on them an obligation to account to the Pf for the proceeds of sale unless and until all moneys owing from the Df to the Pf had been paid. The foil remained the Pf's property, and it therefore followed that the Pf was entitled to trace the proceeds of sale of the unmixed foil and to recover them in priority to the secured and unsecured creditors.

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Trusts
Barclays Bank v. Quistclose Investments [1970] AC 567 Facts - Quistclose advanced 209,000 to Rolls Razor in order to allow the latter to pay a dividend that it had already declared, failure of which would cause a loss of confidence and almost certainly drive the company into liquidation. - The terms of the loan were such that the funds would only be used for the sole purpose of paying the dividend. - It was accepted by all concerned that if Rolls Razor had used the money to pay the dividend, then Rolls Razor would simply have owed Quistclose 209,000 (plus interest), and Quistclose would have been an ordinary creditor of Rolls Razor. - Rolls Razor was deeply indebted to Barclays and went into liquidation before paying out the dividend. - Barclays Bank claimed that they were entitled to exercise a set-off of the money in the account against the debts that Rolls Razor owed with respect of Barclays, whereas Quistclose claimed that the moneys had to be returned to them, as the purpose for which they had been lent had now failed and were incapable of being fulfilled. Held - The H.L. held that Rolls Razor held the money on trust to pay the dividend and that, upon its failure to do so, the trust failed and the money was held upon resulting trust for Quistclose. As such, the liquidator of Rolls Razor could not claim title to the money, as it did not form part of the Rolls Razors estate for the purposes of liquidation. Evaluation - The estate of the borrower is not being divested of an asset upon the borrowers insolvency as the asset was never the borrowers beneficially. Re Kayford Ltd [1975] 1 WLR 279 Facts - A mail order company on the brink of insolvency opened a separate bank account with the objective of ensuring that all advance payments received from customers for goods would be protected in a subsequent insolvency, such that if the company failed, the customers should be refunded their money. - In the liquidation, the question was whether the money was ringfenced as trust money for the customers or whether it fell into the companys general assets, to be distributed between all the creditors. Held - A trust was validly created even though the instructions to the bank were oral and even though the account was not labelled a trust account. As such, the liquidator of Kayford could not claim title to the money, as it did not form part of the Kayfords estate for the purposes of liquidation. - The Court suggested that opening a segregated account for customers' money to be placed in to guard against the insolvency of the company was a proper and responsible thing to do. Evaluation - Giving a proprietary claim to a lender which enables the lender to reclaim the loan ahead of unsecured creditors has the effect of putting the lender in the position of a secured creditor, but without the need to register the secured interest against the borrower (and thus meaning that other creditors would not be aware of the preferential status of the lender's claim). In other words, holding that a valid trust was created amounted to undue preference of the pre-paying customers. *Mac-Jordan Construction Ltd v. Brookmont Erostin [19921 BCLC 350 Facts - Brookmount, the Df property developer, engaged the Pf under a building contract which provided for interim payments to be made by Brookmount subject to retentions of 3% as a safeguard against nonperformance and defective work. - The retention money was stated to held on trust for the Pf, but no retention fund was set aside.

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- 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

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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. Asiatic Enterprises (Pte) Ltd v. UOB [2000] 1 SLR 300 (CA) Facts - Clause 10 in the Facility Letter provided that in the event of default, the UOB would be entitled as equitable chargee to attach the outstanding debt to any property of the borrower and to lodge a caveat against any real property that may be registered in the Asiatics name. - After Asiatic committed an event of default, UOB demanded repayment and then lodged a caveat against the real properties of Asiatic. The charge was registered and a certificate of registration was issued pursuant to the registration. - UOB then proceeded to apply to court for an order of sale. - A winding-up order was subsequently made against Asiatic and the liquidator challenged the validity of the charge. Held - The C.A. construed the clause as such: the clause did not, expressly or impliedly, create a floating charge or any other type of security, but rather, it gave the bank a right or entitlement at some future date, upon the occurrence of any of the events of default, to unilaterally create or impose a charge on the property of the debtor in accordance with any mechanism provided for in the agreement or as the law provides (e.g. if the bank happens to have in its possession any funds or moveable assets of the debtor, it could assert its rights over them and appropriate them as security for the amount outstanding then due), as well as to lodge a caveat over any real property owned by the debtor. - In respect of the former, however, the mechanism for creating or imposing such a charge was not specifically provided for in the clause and hence the bank can only have available to it such mechanism as the law provides. - In respect of the latter, the mere act of lodging a caveat could not ipso facto create a security interest over land. - Hence, in the circumstances, there was no valid security interest held be the bank over the debtors properties. Evaluation - While the result of the C.A.s decision is the correct one as a matter of policy, the reasoning of the C.A. may not be wide enough to catch a more felicitously-worded clause. Instead, it implicitly suggests that it is possible to create a valid springing charge to circumvent the pari passu principle, as long as a mechanism for creating or imposing such a charge is specifically provided for. In other words, it appears that it is conceptually possible for a contract to provide for a creditor to acquire increased security rights upon the default of the debtor. This is objectionable from a policy perspective, as such springing security interests which come into existence upon the insolvency of a debtor are anathema to insolvency law. - The preferable analysis would be that in Ex p Mackay, which counsel for the liquidator did not argue, which will result in Clause 10 being struck down for evading the fundamental pari passu principle of insolvency law. - Notwithstanding the foregoing, s.330 CA renders a floating charge created within 6 months of the commencement of winding-up 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. Accordingly, on the facts of Asiatic,

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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 hirepurchase agreements and retention-of-title clause). In his defence, this case was decided around the time

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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. Prepreferential 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 subcontractor 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

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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 antideprivation 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. Re Johns; Worrell v. Johns [1928] Ch 737 Facts - An arrangement between mother and son in relation to the amount repayable by the son in respect of periodic loans made by the mother (which could not exceed 650, and might be as little as 10, in all) was such that the amount payable would increase from 650 to 1,650 (plus interest) in the event of the sons bankruptcy. Held - Tomlin J said that the principle was that 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 and described the agreement as a deliberate device to secure that more money should come to the mother if the son went bankrupt, than would come to her if he did not; and, that being so, the device is bad. Evaluation - The Supreme Court in Belmont Park Investments v. BNY Corporate Trustees noted that the agreement in this case offended the anti-depravation rule. In addition, it noted that the pari passu rule was also infringed, because the claim of the mothers estate in the insolvent estate would have increased. It is however questionable whether an increase in the claim of the mothers estate constitutes an infringement of the pari passu rule rather than the anti-depravation rule, since the effect of such an increase is to reduce the overall net asset position of the bankrupts estate. *Re Piggin (1962) 112 LJ 424 Facts - The clause in issue gave the owner of a vehicle a right to terminate the hire-purchase agreement if the hirer became bankrupt. Held - The clause was held to be void. - Any provision which deprives the trustee in bankruptcy of contractual advantages of the bankrupt was void against the trustee in bankruptcy. Evaluation - This case provides some support for the proposition that ipso facto clauses are invalid. Knox J declined to make a pronouncement on the validity of such a clause in Re Transag Haulage v. DAF Finance [1994] BCC 356. - This case will now have to be examined in light of Belmont Park Investments Pty Ltd v. BNY Corporate

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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,

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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 antideprivation 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

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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 antideprivation 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.

Disclaimer of Onerous Property

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

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(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).

Unprofitable contract for the purposes of s.332 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. Transmetro Corp Ltd v. Real Investments (1999) ACLC 1314 Held - Chesterman J extracted 5 principles from the existing authorities regarding unprofitable contract: [1] A contract is unprofitable if it imposes on the company continuing financial obligations which may be regarded as detrimental to the creditors, which presumably means that the contract confers no sufficient reciprocal benefit. [2] Before a contract may be unprofitable for the purposes of the section it must give rise to prospective liabilities. [3] Contracts the performance of which will prejudice the liquidator's obligation to realise the company's property and pay a dividend to creditors at the earliest possible time are unprofitable. [4] No case has decided that a contract is unprofitable merely because it is financially disadvantageous. The cases focus upon the nature and cause of the disadvantage. [5] A contract is not unprofitable merely because the company could have made or could make a better bargain. 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: In re SSSL Realisations (2002) Ltd [2006] 2 WLR 1369 Facts - SSSLs parent bought petrol and other products from suppliers and sold them on to SSSL and other subsidiaries. - The Group incurred liabilities for duty to the customs as a result. - AIG issued a bond to the customs to enable the Group to defer paying duty. As a condition for providing the bond, AIG entered into a Deed of Indemnity with the Group, SSSL and other subsidiaries in the Group, which provided that none of the companies in the Group could, inter alia, (1) be subrogated to any rights, security or monies received on account of such indemnifying companies liability to AIG; or (2) prove as a creditor of any of the indemnifying companies in competition with AIG. - The C.A. considered whether the deed could be disclaimed as an unprofitable contract. Held - While it is a necessary feature of an unprofitable contract that the contract imposes future obligations the performance of which may be detrimental to creditors, a contract is not an unprofitable contract for the purposes of the disclaimer provision merely because it is financially disadvantageous or merely because the company could have made or could make a better bargain. The critical feature of a contract that can be disclaimed, according to Chadwick LJ, is that performance of the future obligations will prejudice the liquidators obligation to realise the companys property and pay a dividend to creditors within a reasonable time. - Thus, the purpose of the disclaimer provisions is twofold: (1) to allow the liquidator to complete the administration of the liquidation without being held up by continuing obligations on the company under unprofitable contracts, or continued ownership and possession of assets which are of no value to the

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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. *Hindcastle Ltd v. Barbara Attenborough Associates [1996] 1 All ER 737; [1997] AC 70 Facts - Hindcastle granted BAA a lease of office premises for a term of 20 years. - As part of a transaction whereby BAA assigned the lease to the 2nd Df, CIT Developments Ltd, the 3rd Df, Patrick Whitten, guaranteed the performance of the obligations of CIT Developments under the lease. - CIT Developments assigned the lease in turn to a company which went into voluntary liquidation. - The liquidator disclaimed the lease under s.178 of the UK Insolvency Act 1986. Held - Lord Nicholls held that s.178(4) of the Insolvency Act 1986 (similar to s.332(2) CA) preserved the obligations of a guarantor to a landlord and ended the obligation of an insolvent tenant to indemnify a guarantor. He pointed out that whilst a guarantor would consequently lose his right to an indemnity from the insolvent tenant, the statute, in its place, gave him or her a right to prove as a creditor of the

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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.

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Insolvent Liquidation
IV. Claims Against the Company
Nature of Proof
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.

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Provable Debts Only certain debts are provable

Debt versus liability 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). What debts are provable? 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. Hence, unliquidated tortious claims are not provable. 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

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importation and come up with separate rules for company liquidation.

Problem with the current rules

In principle, all claims against a company in insolvent liquidation should be provable unless there is a good reason to provide otherwise. This is because liquidation is terminal, unlike bankruptcy, and the effect of a claim not being provable is that the claimant will not be able to receive any payment at all. There is no reason for the law to discriminate against certain types of liquidated claims. Furthermore, an unliquidated claims existence or quantification may be ascertained through litigation or other procedures. If a contingent claim is provable as a value may be estimated, there is no reason why an unliquidated claim cannot be provable. Thus, our rules on proof of debts are outmoded.

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 nonprovable 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.

Rule against double proof (res judicata)

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): Re Polly Peck International plc [1996] BCC 486, 492-493 Held - The surety's contingent claim is not regarded as an independent, free-standing debt, but only as a reflection of the real debt that in respect of the money which the principal creditor had loaned to the principal debtor. - Walker J set out some very 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): (1) So long as any money remains due under the guaranteed loan, the Creditor can proceed against either the Principal Debtor or, after any requisite notice, the Surety. (2) If the Principal Debtor and the Surety are both wound up, the Creditor can prove in both liquidations and hope to receive a dividend in both, subject to recovering in total not more than the debt owed. (3) The Surety's liquidator can prove in the Principal Debtor's liquidation (under an express or implied

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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: Cherry v. Boultbee (1839) 4 My & Cr 442 The Rule - 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. Scope of the Rule - In the context of winding-up, the fund is constituted by the assets of the company and the administrator is the liquidator. - The rule will apply if a creditor who is entitled to participate in the fund (by receiving dividends) is at the same time a debtor of the company (liable to contribute to the fund). Conditions for the Rule to Apply - At the time when the application of the rule is sought, the obligations on both sides must be monetary obligations. - The obligation to contribute must be an obligation to pay a liquidated sum, or a liability sounding in damages. The obligation must be a present and not a contingent one. - The sum in which receipt from the fund is sought must be due and payable. How Does the Rule Operate? - The rule provides a method of payment. - It enables the administrator to appropriate a right to participate in satisfaction of the obligation to contribute. - But the rule does not always result in netting-off. There were times when the contributor was required to contribute first before he could participate in the fund. For instance, where a contributory is liable on unpaid calls on shares in the company is also a creditor of the company. - Thus, the rule in Cherry v. Boultbee produces a netting-off effect similar to liquidation set-off, except where some cogent principle of law requires one claim to be given strict priority to another. Comparisons with Insolvency Set-off - The rule does not work by way of set-off. - Also, insolvency set-off and the rule benefit different parties. The rule benefits the fund, while insolvency set-off benefits the creditor (the contributory in the context of the rule) as an exception to the pari passu princple. - Insolvency set-off and the rule have different scopes, for e.g., a time-barred claim is not available for insolvency set-off, whereas this is usually not an issue for the rule in Cherry v. Boultbee. The reason is that a time-barred claim, though it is not enforceable, is still an existing asset of the fund. Interaction Between the Rule and Insolvency Set-off - Where a creditor of a company in liquidation is also a debtor, insolvency set-off or the rule in Cherry v. Boultbee are both potentially applicable. - Where insolvency set-off applies, it is automatic. There is no scope for the rule to operate. However, where insolvency set-off does not apply, the rule may yet apply. If the rule leads to netting-off, it may undermine the underlying rationale for disallowing insolvency set-off in the first place.

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- The interaction between the two was explored in Re Kaupthing Singer and Friedlander Ltd (No 2). *Re Kaupthing Singer and Friedlander Ltd (No 2) [2011] UKSC 48 Facts - Singer & Friedlander Funding plc was a wholly owned subsidiary of KSFL set up for the sole purpose of raising funds for use by KSFL and other group companies. - In 2005, SFF issued 250 million worth of floating rate bearer notes which were guaranteed by KSFL. In consideration for the guarantee, SFF gave an indemnity to KSFL for its liability as guarantor. The net proceeds of the notes received by SFF were advanced to KFSL by way of an unsecured loan. - HSBC Trustee acted as trustee for the noteholders. - KSFL subsequently went into liquidation, at which point it owed SFF approximately 242.6 million pursuant to the loan. - SFF went into administration soon after, at which point approximately 240.3 million was prospectively owed on the notes. - HSBC Trustee gave notice of an Event of Default and the notes became immediately due and payable and the obligations of SFF, as principal debtor, and KSFL, as guarantor, crystallised. - HSBC Trustee proceeded to submit proofs of debt in respect of the loan notes in the sum of approximately 248.1 million to each of KSFLs and SFFs administrators. - Subsequently, SFF submitted a proof in respect of its loan to KSFL in the sum of approximately 242.6 million. - KSFLs administrators then gave notice of their intention to make distributions in the administration, including to ordinary unsecured creditors. KSFL had numerous creditors who had already received dividends amounting to 58 pence on the pound. By contrast, SFF had only one creditor other than the Trustee, that being HM Revenue and Customs to which it owed a mere 2,654.10. SFF had no assets other than its loan to KSFL. - The principal issue for the Supreme Court to determine was what function, if any, does the equitable rule in Cherry v. Boultbee have in the operation of the rule against double proof as it applies in suretyship situations? In the instant case, if the rule does apply then KSFL could reduce the amount payable to SFF by way of its right to indemnity, arising from its partial settlement of HSBC Trustee's claim against SFF. Held - The rule in Cherry v. Boultbee is excluded in this case by the rule against double proof. - The rule is a technique of netting-off monetary obligations, even where there is no room for legal setoff. The rule may be said to fill the gap left by the disapplication of set-off, but it does not work in opposition to it. - Accordingly, HSBC Trustee must be paid in full before there can be any proof against SFF as the principal debtor by KSFL as guarantor. Evaluation - The case clarifies and simplifies the potential outcomes for creditors who have competing claims. 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.

Procedure for Proof

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 Pari Passu Principle of Distribution

The general principle is that upon the liquidation of an insolvent company its property must be applied pari

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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.

Exceptions to the Pari Passu Principle The various exceptions to the pari passu principle
There are several exceptions to pari passu distribution amongst unsecured creditors, including: (a) insolvency set-off: s.327 CA read with s.88 BA. (b) debts, though provable, are paid in full, such as debts owed to creditors out of necessity and expenses deemed to be liquidation expenses under In re Lundy Granite Co. (c) preferential debts: s.328 CA. (d) subordinated/deferred debts, whether statutory (s.250(1)(g) CA (dividends, profits or otherwise due to a member of the company)) or by private agreement.

Insolvency set-off

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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(1) CA (in that order): (a) liquidation expenses; (b) wages or salary under contract of employment; (c) retrenchment benefit or ex gratia payment under contract of employment; (d) workmens compensation; (e) contributions to employees superannuation or provident funds; (f) remuneration in respect of vacation leave; (g) tax (whether assessed tax or GST). 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. Re Portbase Clothing Ltd [1993] Ch 388; [1993] 3 All ER 829 Facts - A company granted a debenture giving fixed and floating charges over all its property to a bank. - The company then granted a second debenture, comprising of a floating charge, to 2 directors. - Finally, the company granted a 3rd debenture to another creditor containing similar charges to those held by the bank. - 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.

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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.

Liquidation expenses principle

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. In re Lundy Granite Co, ex p Heavan (1871) 6 Ch App 462 Facts - A company quarrying granite on Lundy Island under a lease went into liquidation. - The liquidator sought to continue the business and renegotiate the companys contracts, which were thought to be valuable. - The liquidator paid the first instalment of rent falling due after his appointment but no further instalments. - The landlord distrained on the quarried stone and quarrying equipment present on the island and the liquidator sought an order restraining him from proceeding with the distress. Held - The English C.A. permitted the landlord to levy distress. The liquidator had retained possession of the land for the purposes of the liquidation and that had important consequences in the view of the court. - James LJ: ... if the company for its own purposes, and with a view to the realisation of the property to better advantage, remains in possession of the estate, which the lessor is therefore not able to obtain possession of, commonsense and ordinary justice require the court to see that the landlord receives the full value of the property. - The effect of the Lundy Granite principle is that rent falling due after the liquidation was treated as an expense of the liquidation (deemed liquidation expenses) even though strictly it was not, because the lease was entered into before the winding-up, hence creating an exception to the pari passu rule. Evaluation - In Re Toshoku Finance UK plc (in liquidation), Lord Hoffman explained Lundy Granite Co as such: Debts arising out of pre-liquidation contracts such as leases, whether they accrue before or after the liquidation, can and prima facie should be proved in the liquidation, and in this respect, they are crucially different from normal liquidation expenses, which are incurred after the liquidation date and cannot be proved for. Thus, the C.A. in Lundy Granite Co was exercising the discretion under s.87 of the UK 1982 Act to decide that, contrary to the pari passu principle, a creditor who had a debt which was capable of proof should be paid in priority to other creditors. The justification for the exercise of such a discretion is found in Lindley LJs judgment in In re Oak Pits Colliery Co, where he stated that it would be just and equitable to treat the rent liability as if it were an expense of the winding up and to accord it the same priority when the liquidator retains the property for the purpose of advantageously disposing of it, or

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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?

3rd party liability insurance and rights of indemnity

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.

Statutory subordination and subordination by private agreement

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. Re Portbase Clothing Ltd [1993] Ch 388; [1993] 3 All ER 829 Facts - A company granted a debenture giving fixed and floating charges over all its property to a bank. - The company then granted a second debenture, comprising of a floating charge, to 2 directors. - Finally, the company granted a 3rd debenture to another creditor containing similar charges to those held by the bank.

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- 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. *Re Maxwell Communications Corporation plc (No 3) [1993] 1 WLR 1402 Facts - The subsidiary of an English company in insolvent administration issued convertible bonds which were guaranteed on a subordinated basis by the English company. - The guarantee, which was governed by Swiss law, merely stated that on liquidation or bankruptcy, the claims of unsubordinated creditors would be paid before the claims of the bondholders under the guarantee. - The issue was whether the subordination was effective so that the bondholders were not entitled to participate in the scheme of arrangement. Held - The Halesowan rule (that statutory rules as to set-off are mandatory and cannot be excluded by agreement between the parties) did not apply to subordination clauses, as different policy considerations underpin insolvency set-off and the pari passu principle. - Policy underpinning of insolvency set-off: Whilst insolvency set-off operated to the advantage of those creditors with qualifying set-off rights, the company, and through it the general body of creditors, could also benefit. Set-off saved the company from having to take proceedings to recover debts owing to it; making it mandatory also avoided such complications as determining whether a dividend was owing in the liquidation to a creditor who had waived set-off in circumstances where proceedings against him were still on foot. - Policy underpinning of pari passu principle: the pari passu principle only benefits creditors. Waiver by a particular creditor or creditors would not affect the company or its general body of creditors and thus, giving effect to such an agreement would not impede the efficient administration of an insolvent estate. - Dicta in British Eagle suggested, however, that the pari passu principle excluded all forms of contractual arrangements that had the effect of contracting out of the principle. However, Vinelott J

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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 Principles of 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. There are 3 basic principles governing insolvency set-off: The mandatory principle: The rule is mandatory, and neither party can prove or sue for his full claim. Instead, an account must be taken and he must prove or sue (as the case may be) for the balance (NatWest Bank v. Halesowan Presswork & Assemblies). The retroactivity principle: The account is taken as at the date of the winding-up order (Stein v. Blake; BCCI (No.8)). The hindsight principle: In taking the account, the court has regard to events which have occurred since the date of the winding-up (MS Fashions Ltd v. BCCI; Wight v. Echhardt). Mandatory principle NatWest Bank v. Halesowan Presswork & Assemblies [1972] AC 785 Facts

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- 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 selfexecuting, 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. *Stein v. Blake [1995] 2 WLR 710 Facts - The Pf instituted proceedings against the Df for breach of contract and the Df counterclaimed for damages for misrepresentation. - Prior to the commencement of the trial the Pf was adjudicated bankrupt. The trustee in bankruptcy thereafter purported to assign to the Pf the right of action against the Df in the action for the purposes of getting legal aid, which the Pf and not the trustee was entitled to apply for. - The Pf argued, in relation to the assignment of the right of action against the Df, that his claim and the

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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 There are essentially 2 facets to the hindsight principle: (1) Post-liquidation events are taken into account Events that take place between the date of the winding-up order and the time when it becomes necessary to ascertain the state of account between the parties are taken into account. If a contingency occurred and the claim is quantified, such a claim will be deemed as the amount due at the date of the winding-up order. MS Fashions Ltd v. BCCI: When an account is taken, regard is to be had to events which have occurred since the date of the winding-up order. Wight v. Eckhardt: 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. (2) Fair estimation of claim with uncertain value It is not practical to wait until all possible contingencies have happened and all liabilities have been quantified before making the winding-up order. Thus, s.87(4) BA provides an estimation mechanism for claims against the debtor company by the creditor which have uncertain values as at the date that the account is taken. Do the claims of the debtor company against the creditor similarly qualify for estimation, especially where a contingency is involved? o The BA does not contain any estimation mechanism for the contingent debts and liabilities of the debtor company against the creditor. The wording in s.88 BA appears to be broad enough to encompass a contingent debt of a creditor: the debts and liabilities to which each party is or may become subject as a result of such mutual credits, debts or dealings. o However, as there is no provision similar to s.87(4) BA in respect of the debts and liabilities of a creditor, in order for set-off to be available, the contingency must have had occurred by the time the account was taken, i.e., if a contingent or unliquidated debt of the creditor remains so at the date of the account being taken, set-off will not operate.

Conditions for insolvency set-off 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).

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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.

Definition of debts, credits or dealings

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 SG, 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

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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: 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 windingup 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

Firstly, mutuality for the purposes of set-off is determined at the date of the presentation of the

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

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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

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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: *BCCI SA (in liq) v. Al-Saud [1997] 1 BCLC 457 Facts - BCCIs loan to the company was guaranteed by Al-Saud, a director of the company. - Upon default by the company, the liquidators of BCCI sued Al-Saud on the guarantee. - Al-Sauds assistant had bank accounts at BCCI which were in credit. - Al-Saud argued that insolvency set-off applied to the sums in those accounts against his liability on the guarantee. - It appeared that the moneys in the account belonged to Al-Saud, but there was some commingling with the assistants own money. An inquiry was necessary to determine the precise state of the accounts between Al-Saud and his assistant. Held - The C.A., in applying Ex p Morier, held that insolvency set-off was not possible as Al-Sauds beneficial interest could not be ascertained without inquiry. Evaluation - Ex p Morier held that where a debt is held on trust for a beneficiary, the beneficial ownership must be clear and ascertained without inquiry. - However, Derham pointed out that the rule in Ex p Morier was wrongly applied as Ex p Morier concerned with the claim of either a residuary legatee under a will or a person entitled under an intestacy. In such cases, until administration is completed, such a person, whether a residuary legatee under a will or a person entitled under intestacy, has no beneficial interest in the estate. In such cases, the Court will not take an account of the estate to allow a present set-off to the extent of the anticipated interest that such a person will acquire in the future. - Thus, it is true that mutuality must be established by the date when the company goes into liquidation, for if by that date the creditor has no beneficial interest in the claim, he could not be said to have given

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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.

Claims must be commensurable

Set-off is confined to mutual money obligations. Thus, the general rule is that if a creditor has possession of the companys property, he cannot setoff his obligation to return the property against the companys debt owed to him. This is so even if the propertys value could be quantified in monetary terms. The general rule is, however, subject to the limited exception in Rose v. Hart and the extension, albeit an erroneous one, of the Rose v. Hart exception in Rolls Razor Ltd v. Cox.

Rose v. Hart, 8 Taunt. 499 Held - A deposit of property that is accompanied with a direction to turn the property into money will constitute mutual debts on both sides where the conversion is being carried out. - Mutual credits has a wider meaning than mutual debts. When the company delivers the property with the requisite direction, it extends credit to the creditor. - Thus, a debt which arises after the company goes into liquidation can be brought into account, provided that it is based upon a credit given before that date, the proceeds from the property are received by the creditor when the account is taken, and the transaction ends in a debt. Evaluation - Derham argued that the following conditions must be satisfied before the exception can apply: The property was deposited with the creditor before the company goes into liquidation, and under circumstances not amounting to a preference. The creditor is given authority to turn the property into money. The creditor had in fact acted upon that authority. - Is Rose v. Hart an exception to the trust fund rule? This entails the following questions: In what capacity does the creditor hold the property in his possession? Does he hold it as a trustee or a debtor?

Goode proposes that Rose v. Hart is not such an exception. He argues that that the holder of the

property extends credit to the company on the basis of his prospective receipt of the proceeds of the companys property for which the company extends him credit. Thus, the holder of the property is not a trustee of the proceeds, but a mere debtor for an equal sum. This distinction, he asserts, is well established in retention of title cases, which authorises the buyer to resell but imposes no duty on buyer to account for the proceeds, rendering the buyer a debtor for the proceeds. Derham, on the other hand, disagrees with Goodes proposition for being over-inclusive. He argues that Goodes explanation would not apply when there is no prior dealing between the parties, and the companys indebtedness to the property holder arose before the delivery of property. In such a case, he explains, there would not be reliance by the property holder in extending credit. *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.

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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.

Claim against company must be provable at the relevant time

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.

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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.

MS Fashions Ltd v. BCCI [1993] Ch 425 Facts - BCCIs loan to the company was guaranteed by a director who had a deposit account with BCCI. - The deposit account was charged to BCCI, and the director was expressed to be principal debtor. - BCCI went into insolvent liquidation and the issue before the C.A. was whether the director could setoff his claim for the return of his deposit against his liability under the guarantee, such that BCCI would not be able to claim the whole debt from the company and leave the director to prove in BCCIs liquidation for his deposit. - The liquidator argued that BCCIs claim against the director was contingent, and since no demand on the guarantee had been made by the bank, set-off should not operate. - The liquidator also argued that since the deposit was charged back to BCCI, the charge back destroyed the mutuality between BCCI and the director. Held - The English C.A. disagreed with the liquidator, pointing out that the director had contracted as principal debtor, and therefore could be sued without a demand having been made. Accordingly, the directors liability was not contingent and a set-off occurred automatically in the liquidation as between BCCIs debt to the director on the deposit and the directors liability as surety to BCCI. As a result of the set-off, the principal debt owed by the company was automatically extinguished to the extent of the deposit. - On the point about the charge back, Hoffmann LJ rejected the liquidators argument that the charge back destroyed mutuality. He held that the account required to be taken by the set-off provision requires an unwinding of the arrangement so that the deposit is set-off against the debt it was intended to secure. Evaluation - Under the current English law, the contingent claim of the debtor company against the creditor can be set-off. The law in Singapore is, however, still the position in MS Fashions Ltd v. BCCI, viz, contingent claims of the debtor company against the creditor cannot be set-off unless it matures into a debt by the date of the account being taken. - Derham argues that Hoffmann LJs analysis of the charge back argument is tenable. BCCI had a beneficial interest in the deposit due to the charge. Thus, the director did not have an unimpeded beneficial interest in the deposit, which destroyed mutuality. - Lord Hoffmann himself acknowledged in Re BCCI (No 8) that the charge back argument was cursorily rejected in MS Fashions Ltd v. BCCI. Re BCCI (No. 8) [1997] 3 WLR 909 Facts - BCCI had given loans to companies secured by arrangements pursuant to which a shareholder of the company with deposit accounts at the bank (1) purported to grant charges over those accounts, and (2) accepted that he was not entitled to repayment until the loans had been repaid in full. - Following the BCCI scandal, BCCI became insolvent. The appointed liquidators applied for directions as to whether they could require the companies to repay the loan in full without setting-off the BCCIs own indebtedness to the shareholder. Clearly, this course of action would have been advantageous for BCCI and equally disastrous for the shareholder. - In both cases the shareholder was the beneficial owner of the company for which he was acting as surety. - Given this direct financial interest in the affairs of the principal debtor, the only way the shareholder could realise the value of his right to repayment by BCCI would be if BCCI, in seeking recovery of the loans from the companies, were required to set-off the sums owed to him, leaving the companies liable to pay only the balance. - If, on the other hand, the liquidators were permitted to call in the debts owed by the companies without recourse to the depositors, the only benefit the shareholder would have been able to derive from his rights

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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.

No notice of winding-up application

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.

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Insolvent Liquidation
V. Avoidance Provisions
The Various Provisions
There are 3 avoidance provisions in the CA: Floating charge for past value (s.330 CA) Registrable but unregistered charges (s.131 CA) Avoidance of post-application dispositions (s.259 CA) There are also 3 avoidance provisions in the BA (imported by s.329 CA): Transactions at an undervalue (s.98 BA) Unfair preferences (s.99 BA) Extortionate credit transactions (s.103 BA) There is another avoidance provision in the CLPA (Cap. 61, 1994 Rev. Ed.): Voluntary conveyances to defraud creditors (s.73B CLPA) Pursuant to reg. 3 of the Companies (Application of Bankruptcy Act Provisions) Regulations (CABAR), t the avoidance provisions are subject to the modifications set out in regs. 4 to 9. For e.g., reg. 6 which provides defence to a undervalue transaction if the court is satisfied that (a) the company had entered into the transaction in good faith and for the purpose of carrying on the business; and (b) at the time it did so there were reasonable grounds for believing that the transaction would benefit the company.

Registrable But Unregistered Charges

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. 131.(3) Some of the charges to which this section applies are (a) a charge to secure any issue of debentures; (b) a charge on uncalled share capital of a company; (c) a charge on shares of a subsidiary of a company which are owned by the company; (d) a charge or an assignment created or evidenced by an instrument which if executed by an individual, would require registration as a bill of sale; (e) a charge on land wherever situate or any interest therein; (f) a charge on book debts of the company; (g) a floating charge on the undertaking or property of a company; (h) a charge on calls made but not paid; (i) a charge on a ship or aircraft or any share in a ship or aircraft; and (j) a charge on goodwill, on a patent or licence under a patent, on a trade mark, or on a copyright or a licence under a copyright. 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:

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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. *Michael Ng Wei Teck v. OCBC [1998] 2 SLR 1 (C.A.) Facts - In consideration for a time extension on debt that were due for payment, the company created an equitable mortgage in favour of OCBC by despositing with the bank the OCBC the title deeds. - OCBC did not rgister the equitable mortgage as required by s.131(1) CA. Soon thereafter, the bank initiated proceedings to enforce the equitable mortgage and obtained an order empowering them with a power of sale, which it exercised. The sale was completed on 13 April 1995. - The winding-up order was made against the company on 5 May 1995 and the liquidator (1st appellant) and an unsecured creditor (2nd appellant) sought a declaration that the equitable mortgage was void for want of registration. - The C.A. was hence confronted with 2 issues: (1) whether the equitable mortgage was void against the first appellant qua liquidator of the company; and (2) whether the equitable mortgage was void against the 2nd appellant qua unsecured creditor of the company. - One of the arguments raised by OCBC is that, in the context of s.131(1) CA, the term "creditor" means only a creditor who has acquired a property right to or an interest in the property. Section 131(1) CA did not therefore render the equitable mortgage void against the 2nd appellants, as they were, and are, unsecured creditors with no property right to or interest in the subject matter of the equitable mortgage. Held - The equitable mortgage was not void as against the liquidator but void as against the 2nd appellant. - In respect of the 1st issue, s.131(1) CA came into operation upon the appointment of the liquidator and not upon the presentation of the winding-up petition. As at the date of the appointment, the equitable mortgage had already been realised and was therefore spent. Accordingly, there was nothing for s.131(1) CA to operate on. - In respect of the 2nd issue, Thean JA held that the reference to "any creditor" in s.131(1) CA did not include an unsecured creditor while the company was a going concern, as an unsecured creditor had no interest in the company's property. However, upon the presentation of a winding-up petition, a statutory trust came into being for the benefit of the unsecured creditors, who thereby obtained a beneficial interest in the assets of the company, and could therefore be considered a "creditor" within the meaning of s.131(1) CA, thereby allowing an unsecured creditor to invoke s.131(1) CA to avoid the unregistered equitable mortgage: ... On the basis of all the authorities which we have discussed, s 131(1) CA of the Companies Act does not apply in favour of an unsecured creditor and an unregistered charge is not void as against such a creditor, while the company is a going concern. This is because he is not entitled to prevent the company from paying off the debt secured by the unregistered charge or granting a confirmatory charge. An unsecured creditor has no interest in the assets of a company and is powerless to restrain it from dealing with its assets as it wishes. This state of affairs which prevails while the company is a going concern ceases on the presentation of a winding-up petition. As from that date, the company is no longer at liberty to pay off the debt owed or grant a confirmatory charge to the chargee. Under s 259 read together with s 255(2) of the Companies Act, any disposition of the company's property from the presentation of the winding-up petition is void unless it is sanctioned by the court. A statutory scheme comes into place to preserve the assets of the company for pari passu distribution among the unsecured creditors: see, inter alia, ss 258, 259, 260, 334 of the Companies Act; and the unsecured creditors of a company are in the nature of a cestui que trust with beneficial interests extending to all the company's property, including the subject matter of the unregistered charge. The 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. In our judgment, on the presentation of a winding-up petition, an unsecured creditor acquires sufficient interest in the subject matter of the unregistered charge so as to qualify as a 'creditor' for the purposes of s 131(1).

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- 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. Smith v. Bridgend CBC [2001] 3 WLR 1347, [2002] 1 BCLC 77 Held - Lord Hoffmann: When a winding up order is made and a liquidator appointed, there is no divesting of the companys assets. The liquidator acquires no interest, whether beneficially or as a trustee. The assets continue to belong to the company but the liquidator is able to exercise the companys right to collect them for the purposes of the liquidation It must in my opinion follow that when [CA 1985 now CA 2006 s.874] s.395 says that the charge shall be void against the liquidator, it must mean void against a company acting by its liquidator, that is to say, a company in liquidation. *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

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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

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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 windingup 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) (b)

be insolvent at that time; or 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. *Re MC Bacon Ltd [1990] BCLC 324 Facts - The company had an unsecured overdraft limit of 300,000. - In 1986, it lost its major customer and 2 of the directors retired from active management. - In May 1987, a bank report found the company to be technically insolvent, and as a condition for the continuance of their overdraft account, the bank demanded fixed and floating charges over the companys assets. - In September 1987, the company went into liquidation, and the liquidator commenced proceedings pursuant to s.238 and s.239 of the English CA to set aside the charge as a transaction at an undervalue or as a voidable preference. Held - Per Millet J., in order to establish an undervalue transaction, the transaction must be (i) entered into by the company; (ii) for a consideration; (iii) the value of which measured in money or moneys worth; (iv) is significantly less than the value; (v) also measured in money or moneys worth; (vi) of the consideration provided by the company. - The Court concluded that the grant of security could not constitute a transaction at an undervalue for the purpose of s.238, because it does not reduce or deplete the chargor's assets, but instead attaches a particular liability to a particular asset. The company retains the right to redeem, sell or remortgage the charged assets. Furthermore, the security in the case before the Court was not given without consideration because it was given in exchange for forbearance by the creditor.

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.

Scope of consideration benefit as well as detrinemnt?

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. *Agricultural Mortgage Corporation v. Woodward [1995] 1 BCLC 1 Facts - The owner of a farm, which had been mortgaged to AMC, created an agricultural tenancy in favour of

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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. *Hills v. Spread Trustee Co Ltd [2006] EWCA Civ 542 Facts - The debtor was the owner of a piece of land adjoining a development site which he gifted into a trust set up for his infant daughter. - 5 months later, the adjoining land was sold by Spread Trustee and following the receipt of the sale proceeds, the Spread Trustee provided several loans to the debtor. - In subsequent years, the debtor executed charges as additional security in favour of the Trustees for the loans that were provided to him earlier. - The debtor also assigned to the Spread Trustee all the debt owed by his company to himself. - The transactions were executed without any real pressure from the trustees. The real purpose was to put assets beyond the reach of the HM Revenue & Customs. - The debtor then proceeded to not pay the capital gains tax arising on the gift of land and the HM Revenue & Customs made him a bankrupt. - The trustee in bankruptcy then applied for relief under s.423 of the UK Insolvency Act 1986 against, inter alia, the charges and the loan assignment. - The judge at first instance in the H.C. held that the charges and the loan assignment involved the grant of security for loans already made and although it might appear that Spread Trustee had given consideration in the form of forbearance from enforcing their loans, their pressure was in fact synthetic and no consideration was in fact given. The true purpose was to put assets beyond the reach of the Revenue. - Spread Trustee appealed against the decision of the H.C. Held - The English C.A. held that, inter alia, the grant of legal charges and an assignment of sums owed under a loan account constituted transactions at an undervalue for the purposes of s.423 of the English Insolvency Act 1986 (equivalent of s.88 BA) due to the lack of consideration. - The test for whether consideration was provided was an objective one. If forbearance, such as, as was sought to be argued in the present case, taking security in lieu of having recourse to other assets of the debtor, is relied upon to constitute consideration, there has to be evidence that the creditor was pressing for repayment. - Expressing its view on the decision in Re MC Bacon Ltd (which held that the grant of security cannot

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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.

Valuing the consideration

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 wellinformed 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. Mercator & Noordstar NV v. Velstra Pte Ltd [2003] SGCA 37

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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

Unfair preferences are governed by s.99 BA. 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 preexisting 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.

What is the meaning of a desire to prefer?

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. *Re MC Bacon Ltd [1990] BCLC 324 Facts - The company had an unsecured overdraft limit of 300,000. - In 1986, it lost its major customer and 2 of the directors retired from active management. - In May 1987, a bank report found the company to be technically insolvent, and as a condition for the continuance of their overdraft account, the bank demanded fixed and floating charges over the companys assets. - In September 1987, the company went into liquidation. - The liquidator argued, inter alia, that the directors were influenced, when they agreed to the banks request for a debenture, by a desire to improve the banks position in the event of the companys insolvent liquidation - Section 239 of the U.K. Insolvency Act 1986 provided: The court shall not make an order under this section in respect of a preference given to any person unless the company which 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 (4)(b). Held

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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 armslength 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. *DBS Bank Ltd v. Tam Chee Chong [2011] SGCA 47 Facts - DBS had granted banking facilities to Jurong Hi-Tech Industries Pte Ltd (JHTI) and Jurong Technologies Industrial Corp Ltd (JTIC). - Apart from DBS, JHTI and JTIC had also been granted facilities from other banks. - Under the offer letters relating to these facilities, DBS and the other banks all received a negative pledge and a pari passu undertaking from the companies. - From Sept to Nov 2008, JHTI encountered difficulties in paying the amounts due on the bank loans. The Df and the other banks started pressing JHTI for payment of the overdue amounts. To placate its bank creditors, JHTI offered to repay the facilities by selling its shares in various companies. - The share sale, however, did not materialise. - Sometime in Nov 2008, some of the JHTI and JTICs bank creditors issued demand letters recalling the banking facilities and demanding payment of all the outstanding amounts. Against this backdrop, JHTI granted a charge over the shares to DBS. - At the time and after the charge was given, DBS did not extend any new loan to JHTI. It also appeared from DBSs internal communications that DBS had taken the charge for whatever it [was] worth and would seek legal advice on its rights. - After the charge had been granted, JHTIs other bank creditors and DBS issued demand letters for the outstanding amounts under the facilities. Eventually, JHTI applied for and was placed under judicial management. - In the H.C., Andrew Ang J allowed the claim to set aside the charge. - The the entire appeal turned on whether JHTI agreed to grant the charge because it desired to improve DBS's position in the event of its (JHTI's) liquidation, or because it had no choice as DBS would otherwise have declared an event of default and recalled its facilities, thus scuttling its shares sale plan. - Section 227T(1) CA (Undue preference in case of judicial management): a settlement, a conveyance

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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. Cooperative Centrale (trading as Rabobank International, Singapore Branch) v. Jurong Technologies Industrial Corp Ltd [2011] SGCA 48 Facts - The circumstances of these case are similar to DBS v. Tam Chee Cheong. - Rabobank was one of the few banks that had advanced crdit to JTIC. In Nov 2008, it demanded the payment of unpaid receivables under the receivables financing facility which it had provided to JHTI. - JTIC proceeded to issue a letter of undertaking to set up an escrow account with Rabobank to hold the shares that were to be sold and to credit the sale proceeds of the said shares directly to the escrow account. The account was not set up and the shares were not deposited with Rabobank. - In Nov and Dec 2008, Rabobank sent numerous e-mails and made various telephone calls to ask the JTIC and JHTI to sell the said shares and remit the proceeds to Rabobank. Rabobank made the same demands in various meetings between it and the Companies. - Subsequently, JTIC sold the said shares for a total of about US$2.82m, of which about US$2.78m was remitted to Rabobank. - After JTIC was put into judicial management, it commenced proceedings against Rabobank to set aside the payment on the basis that it constituted an unfair preference under s.227T CA. - In the H.C., Andrew Ang J allowed the claim to set aside the payment. - In the C.A., Rabobank contended that the commercial pressure in the present case was so overwhelming or preponderant that the Judge should have inferred that JTIC could not and did not have the requisite desire to prefer Rabobank. Held - In respect of the commercial pressure exerted by Rabobank, the C.A. was of the opinion that the question of whether the company was influenced by a desire to prefer is a question of fact. - The C.A. accepted the submission that a commercial purpose (or a good commercial reason) would be a sufficient, but not a necessary, condition to rebut a desire to prefer, and if there was no commercial benefit to the company at all in paying a particular creditor, a court will be very slow to find that pressure from that creditor is a defence to the claim of unfair preference. The fact that the transaction was entered into without proper commercial considerations itself will not be sufficient to show a desire to prefer. - On the facts, Rabobank did put pressure on company, but so did several other creditor banks, which

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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.

Is knowledge of insolvency relevant to the determination of a subjection desire to prefer?

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. *Cooperative Centrale (trading as Rabobank International, Singapore Branch) v. Jurong Technologies Industrial Corp Ltd [2011] SGCA 48 Held - On the issue of whether knowledge is relevant in insolvency, the C.A. held on the authority of Re MC Bacon that an inference of the requisite desire should not be drawn too readily from the presence of knowledge of insolvency because such knowledge in itself will not be sufficient to support that inference, given that desire is subjective in nature. - The C.A. went on to state that it is also possible that the relevant desire existed and influenced the debtor's decision despite the lack of actual knowledge, e.g., where the desire was to improve the creditor's absolute position at the time that the preference was granted. If the debtor did desire a particular result, it matters not that it thought that bankruptcy was a remote risk.

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. Wills v. Corfe Joinery Ltd [1998] 2 BCLC 75 Facts - The directors resolved in Jan 1994 that co would repay the directors loans in Jan 1995. The company paid the loans in Jan 1995 and was wound up in Feb 1995. Held - The relevant date for considering the mental state of the debtor was the date on which the preference was actually granted because that was the effective time when the decision to prefer was made. *Cooperative Centrale (trading as Rabobank International, Singapore Branch) v. Jurong Technologies

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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.

The presumption of a desire to prefer under s.99(5) BA where an associate is involved

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. *Re Fairway Magazines Ltd [1993] BCLC 643 Facts - A director was the guarantor of the companys overdraft with the bank. - The company ran into financial trouble and needed money to continue trading while it looked for buyer for a magazine title that it published. The goodwill of the title would be lost if publication ceased, as the company would have gone into liquidation. - The company gave the director a debenture to secure a loan that he gave to the company. The loan was given to the company for the purpose of paying off creditors. - The director requested last the 2 sums he advanced to company (20,000) be paid directly into companys overdraft account. The bank agreed to reduce his guarantee liability pro tanto. - The director argued that the reduction of the overdraft was one of the purposes of the advances, but not the sole purpose. - Section 340(5) of the U.K. Insolvency Act 1986 provides: An individual who has given a preference to a person who, at the time the preference was given, was an associate of his (otherwise than by reason only of being his employee) is 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). Held - Following the test in Re MC Bacon, Mummery J held that there was no desire to prefer; the company was attempting to keep trading in the hope of a rescue. In other words, the company was solely influenced by commercial considerations in its decision. Evaluation - This was the only decision in which the statutory presumption was rebutted. - It is questionable whether the decision was actuated by solely commercial considerations. The payment of 20,000 was accompanied by a corresponding reduction of the directors exposure and overdraft limit, and that was a purpose of the payment. - Walters argues that the court was reluctant to penalise the director who was prepared to inject more of his own money to steady the ship.

Running account principle

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. It is generally agreed that s.259 CA has 2 main purposes: (1) The first purpose is to preserve the assets of the company during the interim period (between the presentation of the winding-up order and the winding-up order being made) for the benefit of the general body of creditors (counterpart to the undervalue transaction provisions). (2) The second purpose is to uphold the scheme of pari passu distribution (counterpart to the unfair preference provisions).

The substantive elements to s.259 CA

There are 2 substantive elements to s.259 CA: (1) Winding-up must actually have commenced. A compulsory winding-up is deemed to have commenced on the presentation of the winding-up petition: s.255(2) CA. *Coutts & Co v. Stock [2000] 1 WLR 906, [2000] 1 BCLC 183 Held - The operation of [s 259] is contingent upon a winding-up order being subsequently made. Only upon a winding-up order being made will post-application dispositions be retrospectively rendered void. A post-application disposition is prima facie valid until a winding up-order is made on the application.

(2) There must be a disposition of the companys property. Definition of disposition

The Australian courts have defined disposition as follows: Re Mal Bowers Macquarie Electrical Centre Pty Ltd [1974] 1 NSWLR 254 o The origins of the word disposition is the word dispone, a Scots legal term meaning to transfer or alienate. o The word disposition connotes both a disponer and a disponee. o For the section to operate, there must be a disposition amounting to an alienation of the companys property.

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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.

Applying the Australian definition, the following transactions will be caught: A transfer by the company of its assets, whether by gift, sale or exchange. The grant of a mortgage, charge or lease by the company over its assets. The grant of an equitable interest by the company in its assets, by declaration of a trust or otherwise. Payments made with the companys money. 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.

Disposition must be of companys property

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. Re Margart Pty Ltd (1984) 9 ACLR 269 Facts - The company granted fixed and floating charges to the bank. - After a winding-up petition was presented, its assets were auctioned off and the proceeds were remitted to the bank. - It was argued that the sale of the assets constituted a post-application disposition.

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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. Wily v. The Commonwealth of Australia (1996) 136 ALR 527 Held - The Court extended the principle in Re Margart Pty Ltd and held that a series of payments made by a receiver in respect of licence fees due from the company to a 3 rd party creditor were not dispositions of companys property. In other words, dispositions used to pay off costs associated with the receivership properly incurred were not caught by the section. (b) Completion of an unconditional contract for sale of land by the company. Re Frenchs (Wine Bar) Ltd (1987) BCLC 499 Facts - The company entered into a contract to assign a lease, subject to the lessors consent, to Q when it was in serious financial difficulty. - The contract was entered into before the winding-up petition was presented and Q went into possession. - Completion of the contract took place in the interim period, but the lessor refused to give consent. - The issue before the court was whether the transfer of the lease was a void disposition. Held - Vinelott J held that [s.259 CA] only concerned assets to which the company was beneficially entitled and which are capable of being realised for the benefit of its creditors. Accordingly, where the contract is unconditional and specifically enforceable and there is no defence to it, completion of the contract according to its terms would fall outside the section. However, if the contract was conditional or voidable by the company, or if its terms are varied, the waiver or confirmation of the contract may constitute a disposition of the property of the company. - On the facts, although consent was not obtained from the lessor, as completion saved the company from breach of contract and therefore potentially damages, the creditors of the company are exposed to no loss and the court would have therefore granted consent had the company applied for it on completion.

Use of companys assets by the company not caught by s.259 CA

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.

Payments into and out of bank account(s)

(i) Withdrawal from account in debit 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. (ii) Withdrawal from account in credit 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. *Hollicourt (Contracts) Ltd v. Bank of Ireland [2001] 2 WLR 290 Facts - A compulsory winding up order was made against Hollicourt on 7 Jun 1996. - Due to human error, the winding-up petition advertisement had not been brought to the attention of the Bank of Ireland, with the result that the Bank did not freeze Hollicourt's account, which, at the time of presentation of the petition, was in credit. - Cheques were drawn on the account and paid in favour of 3rd parties totalling 156,000. - When the Bank of Ireland later became aware of the petition it froze the account. No validation order allowing for payments from the account had been sought or made. - The Liquidators of the Hollicourt did not bring proceedings to recover the sums from the payees and

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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. (iii) Withdrawal from account in general 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. (iv) Payment into account in debit 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. (v) Payment into account in credit In Re Barn Crown Ltd, it was held that payments from 3rd party cheques into an account in credit did not

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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.

Power of the court to validate a disposition either prospectively or retrospectively

Notwithstanding the peremptory language used in the section, the Court has the power to validate a disposition either prospectively or retrospectively. *Denney v. John Hudson Ltd [1992] BCLC 901 Facts - A creditor presented a winding-up petition against the Company, but before the directors learnt about it, they had authorised the payment of 3 invoices. - The Company continued to trade both before and after the petition was advertised in the Gazette, continuing to pay its supplier until shortly before a court ordered its compulsory winding-up. - It was accepted that the transactions were in the ordinary course of business, and everyone was acting in good faith. - The judge below was satisfied that in general the continuation of trading was likely to benefit the creditors, at least until the hearing of the winding-up petition. Thus, he sanctioned the payments for deliveries made prior to the presentation of the petition. Held - Good faith and lack of knowledge of the petition were not enough in themselves to justify validation. - Having accepted that the parties acted in good faith, Fox LJ posed the questions: (1) were the parties acting in the ordinary course of business; and (2) were the relevant transactions likely to be for the benefit of the creditors generally? - He answered both questions in the affirmative. However, the key consideration was whether the payments were likely to be for the benefit of creditors generally. - Hence, where a disposition is beneficial not only for the company but also for the unsecured creditors, the company should be able to dispose of some of its property during the period after the petition has been presented, but before the winding-up order has been made. Thus, it may sometimes be beneficial to the company and its creditors that the company should be able to continue the business in its ordinary course. - However, the court should not validate any transaction or series of transactions which might result in one or more pre-liquidation creditors being paid in full at the expense of other creditors, who will only receive a dividend, in the absence of special circumstances making such a course desirable in the interest of the creditors generally. If, for example, it were in the interests of the creditors generally that the company's business should be carried on, and this could only be achieved by paying for goods already supplied to the company when the petition is presented (but not yet paid for) the court might exercise its discretion to validate payments for those goods. - A disposition carried out in good faith in the ordinary course of business at a time when the parties were unaware that a petition had been presented would usually be validated by the court unless there is ground

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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.

Concept of new value

There are 4 elements to the concept of new value: (1) Value must be given in consideration for the charge. (2) Value must be contemporaneous with or subsequent to the creation of the charge. (3) It must be the permitted kind of new value (cash). (4) Cash must be in substance paid to company (i.e. it must benefit the company). Value must be given in consideration for the charge *Re Yeovil Glove Ltd [1965] Ch 148 Facts - The liquidator of Yeovil Glove brought an action against National Provincial Bank to void a floating charge that Yeovil Glove granted the bank within 12 months from the date of the winding-up petition. - The floating charge was given for the purpose of securing Yeovil Gloves overdraft, which (on top of debts amounting to 94,000 owed to other unsecured creditors) had grown to 67,000. - Over the next 12 months, the companys accounts showed a total credit of 111,000 and debit (through cheques written to other parties) of 110,000 a slight reduction in indebtedness to the bank overall. - At the time the Insolvency Act 1986 s.245 read that a floating charge was voidable 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.
2

Note: The equivalent legislation in the UK on which the cases rely on prescribes a time period of 12 months.

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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. Value must be contemporaneous or subsequent to the creation of the charge 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. *Power v. Sharp Investments Ltd [1994] 1 BCLC 111 Facts - A charge was executed on 24 July 1990. - It was contended that money earlier advanced by the chargee in anticipation of and in consideration for the charge, including an advance made on 16 July 1990, had not been made at the same time as the creation of the charge for the purposes of s.245(2) of the 1986 Act. Held - Per Sir Slade: The words at the time of or subsequently to the creation of the charge (just as the words at the same time as, or after, the creation of the charge) were clearly included by the legislature for the purpose of excluding from the exemption the amount of moneys paid to the company before the creation of the charge, even though they were paid in consideration for the charge; on any other construction these words would have been [redundant]. - Hence, the relevant date for the creation of a floating charge under s.245 is the date on which the charge is executed, and hence, payments which precede the formal execution of the charge do not fall within the section, unless the interval is so short that it can be regarded as de minimis, such as a coffee break. 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. Re Orleans Motor Co Ltd [1911] 2 Ch 41 Facts - The companys directors guaranteed its overdraft facility with the bank. - The bank demanded repayment from the company and the directors. - The directors lent money to the company secured by a charge, and stipulated that the company was to use the money to repay the debt owed to the bank, with the result that the directors liability on the guarantee was reduced pro tanto. Held

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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. Re Destone Fabrics Ltd [1941] Ch 319 Facts - The company was insolvent but still issued a debenture to Zimmerman secured by a floating charge over its assets. The money under the debenture was provided however by D. - The money was used to pay 2 directors for fees owed to them, and to D for the amount which he had guaranteed on the companys overdraft. Held - The Court held that Zimmerman held the charge on trust for D. The arrangement was to use the company as a conduit pipe to pay off certain creditors. It also involved a fraudulent preference. The purpose was not to benefit the company, but the contrivers. - In coming to its conclusion, the Court was was influenced by the following factors: (i) the payment was wholly inadequate to rescue the company; and (ii) the payment did not benefit the company at all.

What happens if the cash is subject to conditions? 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. Re Matthew Ellis Ltd [1993] 1 Ch 458 Facts - E was a director of the company and partner in a firm. - The company was in financial difficulties, and E believed that the company could be saved by an injection of funds. - The company then owed the firm about 2000. - When E discussed with his partners on giving further help to the company, they said that the firm would only continue to supply goods on credit if the existing indebtedness was paid out of the advance to be made by E to the company. - E lent 3000 on the security of a charge. 2000 was paid to firm, 750 to bank and the rest used as working capital. Held - The English C.A. unanimously held that the 2000 paid to the firm constituted cash paid to the company. - Lord Hanworth held that each case depended on its facts and that it was very difficult to lay down a precise test. This was an ordinary transaction between businessmen based on business views. The company decided to pay the firms debts so that the firm will continue to supply goods on credit, which it did. The sum of 3000 cannot be split into 1000 as a payment for the companys benefit, and 2000 which was a stratagem to convert the firms unsecured debts into Es secured debts. The loan enabled the company to carry on business. - Slesser LJ held that there is no payment to the company if the money paid by the lender is returned to him. That was not the case here. The debt was not owed to E but to the firm. There is no limitation that money lent could not be used to pay off an antecedent debt. The only question is whether there was in substance a payment to the company. As certain benefits to the company were only obtained by paying

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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.

Date of taking effect

Mace Builders (Glasgow) Ltd v. Lunn [1987] Ch 191 Facts - The company granted the Df (M.D. of the company) a floating charge within 12 months of the commencement of winding-up proceedings. - When the company failed to pay its debt to the Df, the Df appointed a receiver who realised the security and paid off the debt before the commencement of winding-up proceedings. - The company subsequently went into liquidation, and the liquidators brought an action against the Df to recover the money paid pursuant to the enforcement of the charge. Held - The opening words of the s.322 of the UK Insolvency Act 1948 (s.330 of Singapores CA) are where a company is being wound up, which, when literally interpreted, means that the section has no application unless and until the company is being wound up. However, once the order was made, the section would relate back to any transactions effected after the commencement of the winding-up. - Thus, if a floating charge that is purported to be in contravention of s.322 was enforced prior to the commencement of winding-up, s.322 will not operate to void the charge. - In other words, s.322 does not apply retrospectively such that any sums paid pursuant to a preliquidation enforcement of the charge are not recoverable from the chargee. Power v. Sharp Investments Ltd [1994] 1 BCLC 111 Facts - The sale of the charged assets took place in the interim period between the presentation of the windingup petition and the making of the winding-up order. Held - The court held that the rule in Mace Builders applied. Section 322 was incapable of applying in the case of a compulsory liquidation until the winding-up order was actually made, however, as soon as the order was made, the section would relate back to any transactions effected after the commencement of the winding-up. - Thus, s.322 applied to preclude Sharp from claiming any right as against the liquidator to the sums to which it claimed title by virtue of the floating charge.

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Insolvent Liquidation
VI. An Evaluation of Belmont Park Investments
Erosion of the Anti-Deprivation Principle
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 antideprivation 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 insolvencytriggered 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 antideprivation 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.

Exercise of Power of Appointment

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? Bank of Baroda v. Panessar [1987] Ch 335 Facts - The creditor bank served a demand on the company to repay all monies due to them under the debenture but did not mention any specific sum. - The bank appointed a receiver an hour later when no payment was forthcoming. - The Dfs denied liability on the grounds that the receiver was invalidly appointed because the demand did not specify the amount due and insufficient time was allowed for compliance with the demand. Held - Walton J rejected the Dfs grounds, holding that (1) there was no need to specify the exact amount due, and even if the debt was wrongly stated, a demand remains valid; and (2) the debtor only needed to allow such time as was necessary to institute such reasonable mechanics of payments as might be necessary to discharge the debt. Given modern methods of communication and transfer of money, such time was very short and 1 hour was therefore sufficient. - Thus, the receivers appointment was valid and the bank should have judgment on the guarantees. Evaluation - Note: Australian and Canadian approach is to afford the company reasonable time. This is imprecise, introduces commercial uncertainty and poses significant risks to banks. The SGCA refused to follow the reasonable the Canadian approach in Roberto Building Material Pte Ltd v. OCBC for this reason. *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?
*Newhart Developments Ltd v. Co-operative Commercial Bank [1978] QB 814 Facts - The directors of a company in receivership had, without the receivers knowledge or consent, commenced an action against the debenture holders for damages for breach of contract by reason of withdrawal of financial support. - The debenture holders applied to set aside the writ and contended that on the appointment of the receiver, the directors were divested of all power to bring an action and only the receiver could institute and pursue the action in question. Held - The C.A. upheld the residual powers of the board of directors to bring proceedings against the debenture holder who had appointed the receiver. - The C.A. accepted that the directors, in circumstances where an indemnity against costs was in place, could bring proceedings on behalf of the company. The provision in the debenture empowering the receiver to bring an action in the name of the company whose assets were charged was merely an enabling provision, investing the receiver with the capacity to bring such an action, and did not divest the companys directors of their power to institute proceedings on behalf of the company, provided that the proceedings did not interfere with the receivers function of getting in the companys assets or prejudicially affect the debenture holder by imperilling the assets. - The C.A. went as far as to hold that the directors were under a duty to bring an action which was in the companys interest because it was for the benefit of creditors generally, and to pursue that right of action did not amount to dealing with the companys assets so as to require the receivers consent or concurrence. - Shaw LJ: What of course the directors cannot do, and to this extent their powers are inhibited, is to dispose of the assets within the debenture charge without the assent or concurrence of the receiver, for it is his function to deal with the assets in the first place so as to provide the means of paying off the debenture holders claims. But where there is a right of action which the board (though not the receiver) would wish to pursue, it does not seem to me that the right or function of the receiver are affected if the company is indemnified against any liability for costs (as here). I see no principle of law or expediency which precludes the directors of a company, as a duly constituted board (and it is not suggested here that they were not a duly constituted board when they took the step of instituting this action) from seeking to enforce the claim, however ill founded it may be, provided only, of course, that nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders. Evaluation - This case should only be limited to the circumstances whereby the directors are suing the debenture holder, as there is only one power centre during the currency of the receivership, i.e., the power to institute proceedings generally vests with the receiver.

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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. *Tudor Grange Holdings v. Citibank NA [1992] Ch 53 Held - Browne-Wilkinson VC casted doubts over the reasoning of Shaw LJ in Newhart Development Ltd v. Co-operative Commercial Bank: I have substantial doubts whether the Newhart case was correctly decided in any event. That may have to be looked at again in the future. The decision seems to ignore the difficulty which arises if two different sets of people, the directors and the receivers, who may have widely differing views and interests, both have power to bring proceedings on the same cause of action. The position is exacerbated where, as here, the persons who have been sued by the directors bring a counterclaim against the company. Who is to have the conduct of that counterclaim which directly attacks the property of the company? Further, the Court of Appeal in the Newhart case does not seem to have had its attention drawn to the fact that the embarrassment of the receiver in deciding whether or not to sue can be met by an application to the court for directions as to what course should be taken, an application now envisaged in s.35 of the Insolvency Act 1986. - His Honour noted that the directors may bring such an action if a suitable indemnity against costs has been provided, as the debtor company will have to bear costs should the directors attempted enforcement of their rights prove unsuccessful.

Qualifications of the Receiver

An appointee must be qualified to act as a receiver and manager: see the qualifications in s.217 CA. Disqualification for appointment as receiver 217.(1) The following shall not be qualified to be appointed and shall not act as receiver of the property of a company:

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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.

Receiver as Officer of Company

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.

Powers in Rem and in Personam

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 Sale as a going concern

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. Sowman v. David Samuel Trust Ltd [1978] 1 WLR 22 Held - Goulding J: Winding up deprives the receiver, under such a debenture as that now in suit, of power to bind the company personally acting as its agent. It does not in the least affect his powers to hold and dispose of the company's property comprised in the debenture, including his power to use the company's name for that purpose, for such powers are given by the disposition of the company's property which it made (in equity) by the debenture itself. That disposition is binding on the company and those claiming through it, as well in liquidation as before liquidation, except of course where the debenture is vulnerable under s 95 or s 322 of the Companies Act 1948 or is otherwise invalidated by some provision of law applicable to winding up.

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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.

Duties to Debenture Holder What duties does the receiver owe to a debenture holder? general rule
R A Price Securities Ltd v. Henderson [1989] 2 NZLR 257 Held - The receiver owes an implied duty to his appointer to act with all reasonable care and skill, unless the duty is excluded. This duty subsists whether the receiver acts as agent of the compnay, the mortgagee or as principal. - The receiver overlooked his primary duty of recovering the sums due under the debenture in his concern to continue trading and was held to have breached the above duty.

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

Duties to Company and Other Creditors General duty of good faith

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? *Downsview Nominees v. First City Corp Ltd [1993] AC 295 Facts - The Pf appointed receivers pursuant to one of two debentures it held. - It then proceeded to assign its other debenture to the Df. - The Df appointed its own receivers and managers pursuant to the assigned debenture for the purpose of preventing the enforcement of the debenture held by the Pf. - The Pfs offer to purchase the assigned debenture was rejected. - The company continued trading and made substantial losses. - Eventually, pursuant to a court order, the assigned debenture was assigned back to the Pf and the receivers and managers for the Df ceased to act. The debenture that the Pf held all along was assigned to the other Pf in the case. Held - Lord Templeman, presiding in the P.C., held that equity imposed on mortgagees (as well as their appointed receivers and managers) were under a duty to exercise their powers in good faith for the purpose of obtaining repayment, even though, subject to that duty, the exercise of their powers might cause detrimental consequences to the mortgagor. - Thus, the law requires a receiver to exercise its powers in good faith and for proper purposes. Since a mortgage is only security for a debt, a receiver and manager commits a breach of his duty if he abuses his powers by exercising them otherwise than for the special purpose of enabling the assets comprised in the debenture holders' security to be preserved and realized for the benefit of the debenture holder. - Hence, the receivers, in procuring his appointment not for the purpose of enforcing the security but to disrupt an earlier receivership, had acted in bad faith and for improper purposes. *Medforth v. Blake [1999] 2 BCLC 221; [1999] 3 All ER 97 (CA) Facts - The Dfs were appointed receivers over the pig-farming business of the Pf. - The receivers only fed the pig only once a week and failed to inoculate them against diseases although it was common practice to do so. - After the receivership ended, the Pf brought an action alleging that the receivers had been negligent in their conduct of the business, that they had owed the Pf a duty of care and that their failure to request and obtain discounts for the purchase of pig-feed constituted a breach of that duty. - The court below held that such a duty was owed. The Dfs appealed. Held - A receiver managing mortgaged property owed duties to the mortgagor and anyone else with an interest in the equity of redemption. Those duties, imposed by equity, included, but were not necessarily confined to, a duty of good faith. - Per curiam: the concept of good faith should not be diluted by treating it as capable of being breached by conduct that is not dishonest or otherwise tainted by bad faith. Recklessness, viz, shutting one's eyes deliberately to the consequences of what one is doing may make it impossible to deny an intention to bring about those consequences is, equivalent to intent. Thereapart, however, the concepts of negligence on the one hand and fraud or bad faith on the other ought to be kept strictly apart. The breach of a duty of good faith should require some dishonesty or improper motive, some element of bad faith, to be established. Examples of deliberate and reckless conduct: Forsyth v. Blundell (1972-1973) 129 CLR 477 Facts - There was a mortgage of a petrol station and the mortgagee exercised the power of sale and sold it to Shell for $120,000. - The mortgagee knew that another oil company was prepared to pay $150,000 for the land, but the mortgagee did not inform Shell of the interest expressed by the other oil company, nor did it inform the

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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. *How Seen Ghee v. DBS Ltd [1994] 1 SLR 526 (CA) Facts - The mortgagee chose to exercise its power of sale at the same time when the mortgagor was trying to sell the property. - The mortgagor found a buyer, but the purchase price was not sufficient to discharge the mortgage debt, and thus the mortgagee refused to sanction the sale of the mortgaged property unless the matter of the deficiency was resolved satisfactorily. - The sale fell through, and the mortgagee sold the property at an auction for a price below that which the mortgagors prospective buyer had been prepared to pay. Held - While, in accordance with Cuckmere Brick, a mortgagee is entitled to prefer its own interest to that of the mortgagor so long as he does not disregard the interests of the mortgagor, the mortgagee, in accordance with Forsyth v. Blundell, is not entitled to act in a manner which sacrifices the interests of the mortgagor where the mortgagees own interests are not at risk. - On the facts, the mortgagee had sacrificed the interests of the mortgagor without any discernible gain to itself and had breached its duty as a mortgagee. Evaluation - The C.A. did not explicitly state that the duty of good faith was breached. This is, however, the best explanation as the conduct was intentional and not negligent.

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. Standard Chartered Bank v. Walker [1982] 1 WLR 1410 Held - Lord Denning MR suggested that a mortgagee owes a duty of care when choosing the time to sell. Evaluation - The timing of this decision coincided with a judicial expansion of the reach of tort of negligence, for instance in the area of pure economic loss on facts that previously were thought not to give rise to any

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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. **Downsview Nominees v. First City Corp Ltd [1993] AC 295 Held - Lord Templeman made clear that the duty owed by a receiver/manager to the mortgagor was, like the duty owed by the mortgagee, a duty imposed by equity. It was not a duty in tort and there was accordingly no general duty of care in negligence. There was only one specific situation in which the duty of care arose, which is the duty to take reasonable care to obtain a proper price when selling the mortgaged property, as enunciated in Cuckmere Brick. - The following reasons were proffered: (1) To impose a general duty of care is inconsistent with the rights of the mortgagee and the duties which the courts applying equitable principles have imposed on the mortgagee; (2) The general and specific duties of a mortgagee leave no room for the imposition of a general duty of care. (3) Duties in equity would be unnecessary if general duties in negligence exist; (4) A debenture holder dissatisfied with the performance of a receiver can remove him. A subsequent debenture holder or the company itself may redeem or put the company into liquidation; (5) In the U.K., the harsh consequences of receivership may be averted by putting the company into administration; (6) If the duty of care is imposed, a receiver will be tempted to sell as speedily as possible. A receiver who manages will run the risk of being sued if the financial condition of the company deteriorates. Evaluation The reasons proffered are not satisfactory for the following reasons (in accordance with the order presented above): (1) A general duty of care may be imposed consistently with the rights of the mortgagee as a secured creditor. This duty does not call for those rights to be diluted. Rather it only seeks to ensure that the mortgagee does not arrogate to itself rights beyond that of a secured creditor; (2) This is an argument for the status quo which hardly qualifies as a reason. Had this "reason" been accepted in Donoghue v. Stevenson, it would not have laid the foundation for the modern law of negligence. The question to ask is whether at this stage of the development of the institution of receivership, the time has come to bring together the specific duties from which to derive a more general

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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: Yorkshire Bank plc v. Hall [1999] 1 WLR 1713 (CA) Facts - Directors of a company had borrowed money from a bank to subscribe for shares in the company. - As security for the loan, they charged their shares and properties to the bank. - They later lost control of the company and became non-executive directors. They were concerned that the company's business was not run properly and requested the bank to intervene, or even to appoint some of its employees as directors. - The bank refused, saying that it was not its practice to do that. - The shares later became worthless. - An issue that arose for consideration was whether the bank owed a duty to the directors to intervene. Held - Robert Walker LJ, who delivered the only reasoned judgment in the English C.A., held that the law on a mortgagee's duty to the mortgagor was set out in China and South Seas Bank Ltd v. Tan, Downsview Nominees v. First City and National Bank of Greece SA v. Pinios Shipping Co (No. 1). - Accordingly, apart from bad faith (which was not asserted against the bank), it had no duty to intervene in the company's thoroughly confused affairs in the hope of preserving the value of its security. - Walker LJ also commented that the facts of the case made it a singularly inappropriate case for this court to take a leap forward in setting new standards in the duties owed by mortgagees. Evaluation - Walker LJ might have further strengthened the pro-mortgagee bias of the classical approach in expressing an opinion without having to do so on cousel of the directors argument that an equitable duty of care exists in circumstances in which there is no conflict between the interests of a mortgagee and those of the mortgagor. Walker LJ rejected such an argument and held that such a principle would be fraught with uncertainty and difficulty, and there is no warrant for it in the authorities. **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. Knight v. Lawrence [1993] BCLC 215 Facts - Receiver was appointed to collect rents on a mortgaged property that was leased out. - The lease contained an upwards only rent review clause. He failed to serve notice to trigger rent review, which lowered the sale price of the property as a result. Held - The Court held that the receiver was liable for the damages suffered by the mortgagor. He was under a duty of care to the mortgagors as it was foreseeable that the mortgagors would be prejudiced if the rent review was missed, and the agency relationship between him and the mortgagors was one of proximity. Evaluation - The tortuous language used was rejected in Downsview Nominee v. First City, but was regarded in Silven Properties v. RBS as an example of the duty of a receiver to be active in protecting the mortgaged property. **Medforth v. Blake [1999] 2 BCLC 221; [1999] 3 All ER 97 (CA)

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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. Palk v. Mortgage Services Funding plc [1993] Ch 330 Facts - The market was depressed and declining. - The mortgagor was in no position to redeem or continue financing the mortgage. - As house prices were in decline and his instalments were going up each year, the mortgagor negotiated a sale but the mortgagee refused as they wanted to wait for the property market to recover. - The mortgagor then applied to court to have the property sold and the mortgagee paid off to the extent of the proceeds of sale. - The mortgagee resisted the application as the effect of a judicial sale is to make the mortgagee an unsecured lender on the balance of the unpaid loan. Held - Application to have the property sold was allowed in spite of the mortgagees objections. - The C.A. stressed that the facts of the case were extreme and exceptional: The mortgagees intention was to rent out the property until the market improved, but the rent was insufficient to pay even the interest owed to the mortgagee. The mortgagor was in a position of financial haemorrhage for an indefinite period while the mortgagee continued to speculate at their expense on an increase in the value of the property. - In these circumstances, to disallow mortgagors application would result in the mortgagors liability

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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. *Kian Choon Investments (Pte) Ltd v. Societe Generale [1990] 2 MLJ 74 Facts - The terms of a sale of an office building to a bank included a lease to the bank of 4 floors of the building and an option for the bank to repurchase 6 floors at a price that is virtually the same as the sale price. Held - The H.C. granted an interlocutory injunction restraining the sale. - A mortgagee in exercising the power of sale had two duties: (1) the duty to act in good faith and (2) the duty to take reasonable steps to obtain the best price available in the circumstances or, the true market value thereof at the time of sale. - As there was a conflict between the mortgagees interest to repurchase the part of the property at the lowest price and his duty to sell the entire property at the best price available, the mortgagee would have to show that the sale was made in good faith and that reasonable precautions had been taken to obtain the best price reasonably obtainable in the circumstances.

Debts under contracts

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. The general rule is demonstrated in Nicoll v. Cutts [1985] BCLC 322. Nicoll v. Cutts [1985] BCLC 322 Facts - The managing directors contract for employment was continued during the receivership.

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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. The general rule as demonstrated by Nicoll v. Cutts is subject to a few qualifications: (1) Preferential debts incurred pre-receivership Debts which in every winding-up are preferential debts over debts secured by a floating charge and are due by way of wages, salary, retrenchment benefit or ex gratia payment, vacation leave or superannuation or provident fund payments and any amount which in a winding-up is payable in pursuance of s.328(4) CA or s.328(6) CA enjoy similar priority in receivership: s.226(1) CA. (2) Debts owed to creditors out of necessity A creditor that supplies essential goods or services to the company may demand payment of both pre- and post-receivership debts as a condition for continuing to supply essential goods or services to the company. The debts, if paid, constitute costs and expenses of receivership. In addition, the creditor may require the receiver to guarantee payment of the debts (c.f. s.218 CA: only debts accrued during the currency of the receivership).

(3) Section 218, CA Section 218 CA makes a receiver personally liable for debts incurred by him in the course of the
receivership for services rendered, goods purchased or property hired, leased, used or occupied, notwithstanding any agreement to the contrary. Since the receiver is entitled to an indemnity by the company (provided that the debts had been properly incurred), in substance, s.281 CA as good as reversing the law under Nicoll v. Cutts, by effectively according all contracts incurred by the receivership over the course of the receivership priority over the debenture holder. To qualify under s.218 CA, the debts must be incurred by the receiver during the course of the receivership. This would cover debts arising under contracts entered into by receiver. What is the scope of s.218 CA? In Chin Yoke Choong Bobby v. Hong Lam Marine Pte Ltd, the C.A. held that costs awarded in favour of an adverse party in an arbitration or litigation proceeding were not within the scope of s.218 CA. The literal interpretation of s.218 CA can cause some problems too, as a receiver enters into contracts on behalf of the company qua agent. To draw an analogy, officers of the company are generally not personally liable for debts arising under a contract made by the company. Thus, it would not make sense for a receiver to be personally liable if a literal interpretation is adopted, and debts that the receiver will be personally liable for will be limited to those that he entered into in his personal capacity.

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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: IRC v. Goldblatt [1972] 1 Ch 498 Facts - The receiver, on the instruction of the debenture holder, handed over the proceeds to the debenture holder without paying the preferential creditors. Held - [Section 226 CA] imposes a positive obligation on the receiver and the debenture holder to pay the preferential debts of which they have notice or ought to know in priority to debts owed to the debenture holder. - The receiver had breached that statutory duty and was liable in tort to the preferential creditors. - The debenture holder was also liable as constructive trustee for wrongfully procuring the breach or for the receipt of the proceeds with notice of the preferential creditors right to payment.

Other personal liabilities

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: A receiver carrying on the business of a company is exposed to a claim for fraudulent trading if he allows debts or liabilities to be incurred by the company ... under continuing contracts during the receivership for which he has no personal liability and in respect of which he knows there is no good reason for thinking that they can or will be paid. Honesty requires no less. The responsibility of receivers in respect of such creditors has perhaps been insufficiently regarded in the past.

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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.

VII. Termination of the Receivership

When is the receiver obliged to terminate the receivership and return (if any) the remaining assets to the company?
Rottenberg v. Monjack [1992] BCC 688 Facts - Although under the terms of their appointment, the receivers were entitled to be paid first, they had first paid off the debenture holder in full. - Subsequently, the receivers and the company disagreed about the amount of the former's remuneration. - The receivers wished to realise one more property to raise the amount which they contended was needed for remuneration, but the company alleged that the net liquid assets in the receivers' hands were sufficient. - The company sought summary determination as to what the receivers could properly charge for their remuneration, and an injunction to prevent the receivers from realising further properties to obtain that remuneration until such a determination had been made. Held - The interlocutory injunction was granted in favour of the company for the question of whether the receivership ought to be over or not to be determined. - The English Chancery Division held that a receiver could not in general, short of misconduct, be controlled by the court at the request of the company, and during the receivership the receiver's primary duty was to the mortgagee. However, once the receivership ended, the receiver's authority to realise properties ceased and any attempt to do so should be restrained, as such conduct is tortious.

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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 singleminded 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
I. Origins and Objectives
Impetus
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.

Defining Features of Judicial Management

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]. In essence, an administrative order does 2 things: (1) It places a procedural bar on the enforcement of security over the company's property or the commencement or continuance of any legal proceedings or execution against the company; (2) It substitutes for the existing management a court-appointed administrator with the power, under the control of the court, to manage the companys business and property.

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. The question is whether the English law applies in Singapore.

Comparison of the threshold requirements (s.227B CA) under English and Singapore law
Singapore Provision Court is satisfied that the company is or will be unable to pay its debts. Old English Provision Court is satisfied that a company is or is likely to become unable to pay its debts. New English Provision Court is satisfied that the company is or is likely to become unable to pay its debts.

Court considers that the making of the order would be likely to achieve one or more purposes.

Court considers that the making of an order would be likely to achieve one or more purposes.

Court is satisfied that the administration order is reasonably likely to achieve the purpose of the administration.

Insolvency requirement under s.227B CA

Re Colt Telecom Group plc (No 2) [2002] EWHC 2815 (Ch) Facts - This case concerned the interpretation of the insolvency requirement under the old English provision, which is substantially similar, although not identical, to the Singapore provision. Held

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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.

Purpose requirement under s.227B CA

Re Harris Simons Construction Ltd [1989] 1 WLR 368 Held - Construing the old English provision, the Court held that the degree of probability for the purpose requirement is that the court has to be satisfied that there is a real prospect that one or more of the stated purposes may be achieved. It is not necessary for the evidence to establish that the purpose will more probably than not be achieved (real prospect is a lower threshold than balance of probabilities). - A lower threshold is required for the purpose requirement because while the court needs to be satisfied with regards to the insolvency requirement, it only needs to consider with regards to the purpose requirement. Evaluation - Although the new English provision uses the word satisfy, the provision is balanced by the insertion of the word reasonably, which would make it likely that the lower threshold continues to apply under English law. 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.

Purpose For Which Order May Be Made

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 In England, an independent report on the companys affairs may be prepared in support of a petition. The report is not obligatory, but its absence must be explained. The report usually covers such matters as: (a) qualifications of the independent person and the fact of his independence; (b) the companys insolvency; (c) factors influencing his opinion in favour of recommending administration and the factors against; (d) proposals for the provision of working capital during administration, etc. English courts tend to rely heavily on the report. In Re Structures & Computers Ltd [1998] 1 BCLC 292, the court held that it is ultimately for the court to decide whether or not there is a real prospect of a purpose being achieved. Still, the views of experienced and impartial insolvency practitioners should clearly be given weight.

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.

The Courts Power and Discretion

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.

Scope of Judical Management

The availability of judicial management is circumscribed in various ways: Under s.227B(7) CA, no judicial management order may be made if (a) the company is already wound up; or (b) it is a bank, finance or insurance company. Under s.227B(5) CA, a person entitled to appoint a receiver and manager within the meaning of s.227B(4)(b) CA (i.e. a global receiver) may veto the making of a judicial management order (unless the court exercises its overriding discretion on public interest ground: s.227B(10)(a) CA). o Under s.227B(5) CA, the court is bound to dismiss the petition if (a) a global receiver has been or will be appointed, or (b) the making of an order is opposed by a person who has appointed or is entitled to appoint such a receiver and manager (a dominant creditor). o In Re Cosmotron Electronics, the bank had appointed a receiver and manager but he was unable to take office because of the petition. The bank also opposed the petition at the hearing. The petition could have been dismissed on either paragraph of s.227B(5) CA, but was not done. The reason for the omission is unclear. S.227B(5) CA seems to suggest it suffices that the creditor is entitled to appoint a global receiver and need not have in fact appointed one. 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.

Is the discretion under s.227B(10)(a) CA applicable to s.227B(1) CA?

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. Re Cosmotron Electronics (Singapore) Pte Ltd [1989] SLR 251 Held - In relation to in relation to s.227B(1) CA, s.227B(10)(a) CA has the effect of vesting in 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. - Chan J noted that the expression public interest in s.227B(10) CA was not statutorily defined, but since its existence is a requirement for the exercise of an overriding power, it would connote an interest or object which, if achieved, would transcend any or all of the purposes prescribed in s.227B CA. - In any case, Chan J did not have to decide on what the public interest contemplated by s.227B(10) CA may be, as counsel for the company conceded that there was no evidence to support a claim that in this petition public interest requires that the company be placed under judicial management. - Accordingly, the petition was dismissed with cost.

Is the discretion under s.227B(10)(a) CA applicable to s.227B(5) CA?

Nothing about s.277B(5) CA was mentioned in Re Cosmotron Electronics, but the section was in issue in Re Bintan Lagoon Resort. *Re Bintan Lagoon Resort Ltd [2005] 4 SLR 336 Facts - The dominant creditor was an entity formed by the shareholders of the company. - It acquired the securities from the companys banks and appointed a global receiver.

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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.

Is the discretion under s.227B(10)(a) CA applicable to s.227B(7) CA?

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. The moratorium covers the following: No resolution shall be passed or order made for the winding-up of the company. Thus, pending determination of the application, the company cannot be wound up voluntarily. An application to wind up company may however be made. A creditor who wishes to oppose a judicial management application may argue that the company should up wound up. If it had not made a winding up application earlier, it may do so in the interim period. No steps shall be taken to enforce any security over the companys property or to repossess any goods in the companys possession under any hire-purchase agreement (HPA), chattels leasing agreement (CLA) or retention of title agreement (RTA), except with the leave of the court. HPA, CLA and RTA are defined in s.227H CA. No other proceedings and no execution or other legal process shall be commenced or continued and no distress may be levied against the company or its property, except with leave of the court. 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).

Interim Judicial Manager

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. The key features of the moratorium under s.227D CA are as follows: Under s.227D(4)(d) CA, no steps shall be taken to enforce security over the companys property or to repossess any goods under any hire-purchase agreement, chattels leasing agreement or retention of title agreement. Under s.227D(4)(c) CA, no other proceedings and no execution or other legal process shall be commenced or continued and no distress may be levied against the company or its property. The moratorium in both cases may be lifted with consent of the judicial manager or the leave of the court.

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. Re Olympia & York Canary Wharf Ltd [1993] BCLC 453 Held - Per Millett J: The section is couched in procedural terms and is designed to prevent creditors from depriving the administrator of the possession of property which may be required by him for the purpose of the administration. - As the moratorium represents an interference with private rights, it should go no further than is required to support the ability of the administrator to carry out his functions.

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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. Bristol Airport plc v. Powdrill [1990] Ch 744 Facts - An airline went into administration. - Under the U.K. Civil Aviation Act 1982, airport authorities are conferred a right of detention to detain any aircraft of an airline where it had defaulted in payment of charges incurred. Held - The English C.A. held that the right of detention was a lien or other security within the meaning of s.248(b) of the U.K. Insolvency Act 1986. It has many features of a lien, but is not a possessory lien of the classic type as it does not give legal possession of the aircraft whilst it is being detained. The AOs could not exclude the airline from the aircraft completely. - Even if the right was not a lien, it was a security within s.11(3)(c). The word security should be given its ordinary or natural meaning.

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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.

No steps shall be taken to enforce the security or repossess any goods

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. Does serving a demand to satisfy a pre-condition to the enforcement of security or repossession of goods fall within the section?

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
Re David Meek Plant Ltd [1994] 1 BCLC 680 Facts - 2 companies, whose business was hiring out equipment (e.g. forklift trucks) to the construction industry went into administration. Much of the equipment was held by the companies under HPAs and then hired out by them to end users. - The HPA contained provisions for automatic termination on events which included the presentation or drafting of a petition for an administration order, and the financing companies claimed repossession of the equipment. - The companies' whole business was run with goods on hire-purchase and unless the administrators kept those goods, there would be no point in the administration. - It was argued by the financial companies that the termination of the hire-purchase agreements operated to take those goods out of the phrase goods in the company's possession under any hire-purchase agreement. Held - On a strictly logical grammatical construction, the goods should not only be in the company's possession at the time when the section was being applied, but also that they should be in the company's possession by virtue of a HPA subsisting at the same time. - However, the preferable approach, more likely to promote the purpose of s.11(3)(c) of the U.K. Insolvency Act 1986, was to construe the section as requiring, first, that the goods should be in the company's possession at the relevant time, which was the period during which the administration order was in force, and secondly that that possession should be attributable to, or derive its legal origin at some time from, a HPA, not necessarily a HPA still subsisting. - Accordingly, leave was required to repossess the goods. The words in the companys possession was given an extended meaning in Re Atlantic Computer

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Systems (No 1): Re Atlantic Computer Systems (No 1) [1992] Ch 505 Facts - The lessee sub-let the computers which were in the possession of the sub-lessees when the lessee was put into administration. - The owner terminated the head lease and repossessed the computers from the sub-lessees. Held - Adopting a purposive interpretation, the English C.A. deemed the computers to be in the lessees possession, and accordingly, 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 HPA. - The court observed that the section is dealing with goods which, as between the company and its supplier, are in the possession of the company under a hire-purchase agreement, and it was therefore immaterial whether they remain on the company's premises, or are entrusted by the company to others for repair, or are sub-let by the company as part of its trade to others. Such a construction, the court held, did not do any violence to the language of the section, nor was it more purposive than was warranted by the prevailing approach of the English courts to statutes which are neither fiscal nor penal, even though it is said that a breach of the section is a contempt of court. 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.

Meaning of other proceedings

Bristol Airport plc v. Powdrill [1990] Ch 744 Held - The English C.A. held that the words no other proceedings . . . may be commenced or continued in s.11(3)(d) of the U.K. Insolvency Act are to be given their natural meaning and refer only to legal proceedings or quasi-legal proceedings such as arbitration. - Accordingly, the detention of an aircraft does not constitute 'other proceedings' within s.11(3)(d). Electro Magnetic (S) Ltd v DBS Ltd [1994] 1 SLR 734 Facts - The company argued that, in exercising its right of set-off, the bank had initiated proceedings against the property of the company and therefore contravened ss.227C(c) and s.227D(4)(c) CA. Held - The word proceedings connotes a process initiated whether in court or by way of arbitration or a step in such process. - An exercise of a right of set-off is an extra-legal step and is not such a process or a step in such process. Exercising the right of set-off is a self-help remedy. Re Rhondda Waste Disposal Ltd [2001] Ch 57 Facts - The issue was whether criminal proceedings fell within the meaning of s.11(3)(d) of the U.K. Insolvency Act 1986. Held - The English C.A. held that other proceedings include criminal proceedings against the company. - In coming to its decision, the Court placed emphasis on the need to construe the words in the light of their ordinary meaning and the statutory objectives of the sections. - The C.A. emphasized that administration is intended to be only an interim and temporary regime. The

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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

Re Olympia & York Canary Wharf Ltd [1993] BCLC 453 Facts - The issue was whether service of a contractual notice is a legal process. Held - Millett J (as he then was) held that legal process means a process which requires the assistance of the court, and does not extend to the service of a contractual notice, whether or not the service of such a notice is a pre-condition to the bringing of legal proceedings. - This meaning of legal process makes it indistinguishable from other proceedings as defined in Bristol Airport plc v. Powdrill, but Millett J held that it was not necessary to distinguish between the two. - Proceedings together with legal process embrace all steps in legal proceedings, from the issue of initiating process to their final termination in execution or other means of enforcing a court judgment without execution.

Lifting the Moratorium

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? Re Atlantic Computer Systems (No 1) [1992] Ch 505 Held - The English C.A. laid down the following guidelines on the granting of leave: (a) It is for the person who seeks leave to make out a case for him to be given leave. (b) If granting leave is unlikely to impede the purpose of the administration, then it should normally be given. (c) In other cases the court has to balance the legitimate interests of the applicant and the legitimate interests of the other creditors of the company. (d) Great importance is to be given to proprietary interests in carrying out the balancing exercise. An administration for the benefit of the unsecured creditors should not be conducted at the expense of those who have proprietary rights, save to the extent that this may be unavoidable, and even then, this will usually be acceptable only to a strictly limited extent. (e) It will normally be a sufficient ground for the grant of leave if significant loss would be caused to an applicant with proprietary interests by a refusal. However if substantially greater loss would be caused to others by the grant of leave, or loss which is out of all proportion to the benefit which leave would confer on the lessor, that may outweigh the loss to the lessor caused by a refusal. (f) In assessing these respective losses the court will have regard to: the financial position of the company, the administrators proposals, the period for which the administration order has already been in force and is expected to remain in force, the effect on the administration if leave were given, the effect on the applicant if leave were refused, the end result sought to be achieved by the administration, the prospects of that result being achieved, and the history of the administration to date. (g) In considering these matters, it will often be necessary to assess how probable the suggested consequences are. (h) This is not an exhaustive list. For e.g., the conduct of the parties may be material, as in Bristol Airport plc v. Powdrill. A lessor should make his position clear to the administrator at the outset and, if it should become necessary, apply to the court promptly. (i) The above are relevant not only to the decision on leave, but also to a decision to impose terms if leave is granted. (j) The above considerations will also apply to a decision on whether to impose terms as a condition for

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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.

Governance in a Judicial Management

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. The judicial manager enjoys a wide range of powers. The judicial manager is given a broad range of powers under the 11th schedule CA. Also, all the powers conferred and duties imposed on the directors by the CA or by the companys memorandum or articles of association shall be exercised and performed by the judicial manager: s.22&G(2) CA. The judicial manager shall take into custody or under his control all the property to which the company is or appears to be entitled: s.227G(1) CA. The judicial manager may call a creditors meeting, and shall do so if directed by the court: s.227G(7) CA. A main responsibility of the judicial manager is to prepare the statement of proposals and call a meeting of the creditors to vote on the proposal: s.227M and s.227N CA. A duty is imposed on directors and officers of the company to provide information and co-operate with the judicial manager: s.227L and s.227V CA. In addition to the powers one would expect him to have in order to conduct the judicial management, he also has powers to dispose of charged property, a very valuable power to maximise recoveries for the benefit of the creditors. However, the power to make distributions is very narrow, and has given rise to problems in practice. 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.

The Judicial Managers Options

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.

The Judicial Managers Powers 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. Some of the more important powers: Power to carry on the business of the company.

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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). Re T&D Industries plc [2000] 1 WLR 646 Held - Neuberger J accepted the submission that unless there is anything in the administration order to the contrary, an administrator may dispose of all the assets of the company before the creditors meeting under [s.227M CA] without leave of the court, although it may be advisable to obtain leave in exceptional circumstances. - In coming to his decision, Neuberger J took into account the following factors : It is not appropriate for the original administration order to give the administrator specific powers, like when a provisional liquidator is appointed. His role is more flexible and his powers are wider. Leave of court is not mandatory as to require leave would result in delay and expense when administration is meant to be a more flexible, cheaper and less formal alternative to liquidation. Applying for leave is not useful. Save where the issue is whether he has power to take an action, commercial decisions are for the administrator to make and be held responsible. Where a court approves a proposed course of action, its effect is to enable him to take that course where otherwise he could not do so. It does not absolve him from any liability for negligence. - In exercising his power to dispose of the companys assets before the meeting, however, the administrative should take into consideration whether a disposal of assets may result in the creditors meeting being rendered ineffective. - Even where a sale is urgent so that a [s.227M CA] meeting cannot be held, the administrator should have whatever consultation he can have with the creditors. In an appropriate case he should seek a direction of the court for an early meeting of creditors on short notice, which direction the court can make under [s.227G(7) CA].

Rejection of the Judicial Managers Proposals 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. *Re Structures & Computers Ltd [1998] 1 BCLC 292 Facts - 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. - In truth, had the company gone into liquidation instead, the opposing creditor might have stood to gain

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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: BLV Realty Organisation Ltd v. Batten [2009] EWHC 2994 Held - The Court held that terminating the contract of a creditor, even if it causes harm, does not of itself indicate unfairness. The duty of administrators to perform their functions in the interests of the creditors as a whole does not mean that the obligation had to be performed in an identical way in relation to each creditor. Unequal treatment of creditors is not necessarily unfair treatment where there were sound commercial reasons for treating the creditors differently.

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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: Re Lehman Bros International (Europe) [2008] EWHC 2869 Facts - The administrator, after spending much time and resources to provide information to the applicant, was unwilling to commit more resources and so refused to provide additional information. Held - The Court held that even if harm (the word harm replaced the word prejudice in the U.K.) was caused, it was hard to see how it was unfair. - If the administrators were seeking in good faith to carry out their functions in the interests of the creditors as a whole, and refused to be deflected from that course by spending what they considered to be disproportionate time and resources to answer a creditors request for information, there was no unfair harm.

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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. *Re Atlantic Computer Systems (No 1) [1992] Ch 505, 529-530. 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.

To Whom are the Duties Owed?

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.

Some of the Main Duties of a Judicial Manager

Below is a non-exhaustive list of some of the main duties of a judicial manager. Duty to take into custody or control property to which the company is or appears to be entitled (s.227G(1) CA). o In fulfilling the above duty, the judicial manager will not be liable for loss or damage resulting from the seizure or sale of property which is not the property of the company, unless he had been negligent: s.227U(3) CA. Duty to prepare statement within 60 days or such longer period as the court may allow, and call a creditors meeting on not less than 14 days notice to vote on the proposal (s.277M(1) CA). Duty to manage the affairs, business and property of the company in accordance with the approved proposals as from time to time revised by him (s.227P(1) CA). o If the judicial manager proposes to make substantial revisions of the approved proposals, the procedure and majority applicable for obtaining the creditors initial approval apply equally to the approval of the revised proposals: s.227P(2), (3) and (4) CA. Duty to exercise care and skill. o The leading case is Re Charnley Davies Ltd (No 2). Re Charnley Davies Ltd (No 2) [1990] BCLC 760 Held - Millett J held that an administrator must take reasonable care in choosing the time at which to sell property. He must also exercise reasonable care to obtain the best price that the circumstances, as he reasonably perceives them to be, permit.

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Analogy with Court Appointer Receiver?

Re Newdigate Colliery [1912] 1 Ch 468 Held - The Court held that a receiver is appointed for the benefit of all persons interested in the assets of the company, not the debenture holder alone. Thus, a receiver is under a duty to hold the scales evenly between the company and the debenture holder. He has a continuing duty to preserve the goodwill of the companys business for the benefit of all persons interested. He should not disregard existing contracts and cease carrying on the business merely because this course would accelerate repayment to the debenture holder.

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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. A distinction should be drawn between pre- and post-judicial management contracts. The relevant statutory sections are ss.227I and 227J CA. Agency and liability for contracts 227I.(1) The judicial manager of a company (a) shall be deemed to be the agent of the company; (b) shall be personally liable on any contract, including any contract of employment, entered into or adopted by him in the carrying out of his functions (except in so far as the contract or a notice under subsection (2) otherwise provides); and (c) shall be entitled 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 section 227H(2) applies. (2) Where a contract entered into by the company is adopted by the judicial manager, he may, by notice given to the other party, disclaim any personal liability under that contract. (3) For the purposes of this section, the judicial manager is not to be taken to have adopted a contract entered into by the company by reason of anything done or omitted to be done within 28 days after the making of the judicial management order. (4) Nothing in this section shall (a) limit the right of a judicial manager to seek an indemnity from any other person in respect of contracts entered into by him that are approved by the Court; or (b) make the judicial manager personally liable for payment of rent under leases held by the company at the time of his appointment. Vacation of office and release 227J.(1) The judicial manager of a company may at any time be removed from office by order of the Court and may, with leave of the Court and subject to such conditions as the Court may impose, resign his office by giving notice of his resignation to the Court. (2) The judicial manager of a company shall vacate office if (a) being a public accountant at the time of his appointment, he ceases to be a public accountant; or (b) the judicial management order is discharged. (3) Where at any time a person ceases to be a judicial manager of a company whether by virtue of this section or by reason of his death (a) any sums payable in respect of any debts or liabilities incurred while he was a judicial manager under contracts entered into by him in the carrying out of his functions; and (b) any remuneration and expenses properly incurred by him, shall be charged on and paid out of the property of the company in his custody or under his control in priority to all other debts, except those subject to a security to which section 227H(2) applies. (4) Where a person ceases to be a judicial manager of a company, he shall, from such time as the Court may determine, be released from any liability in respect of any act or omission by him in the management of the company or otherwise in relation to his conduct as a judicial manager but nothing in this section shall relieve him of any of the liabilities referred to in section 227Q(4).

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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. For judicial management, Re Atlantic Computer Systems plc is instructive: Re Atlantic Computer Systems plc [1992] Ch 505 Held - At common law, there is no doctrine of administration expenses and that there is no rigid rule on postadoption debts under a pre-existing contract. - Administration, according to the court, is an interim and temporary regime. The moratorium on the enforcement of debts and rights gives the administrator time to formulate proposals and to implement any proposals approved by the creditors. - Thus, whether those whose land or goods are being used by the company during this interim period should be given leave to enforce their proprietary rights or should be paid must depend on all the circumstances, which will vary from case to case. 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 hirepurchase 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.

Adoption of Pre-existing Contracts

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.

What amounts to an adoption of a contract?

Powdrill v. Watson [1995] 2 AC 394 Facts - The administrators wrote to the company's employees stating that the company will continue to employ them but that they were not adopting the contracts of employment. - The first question before the H.L. was whether there had been adoption of the contracts of employment notwithstanding the protestations of the administrators to the contrary. Held - The question was answered in the affirmative. Lord Browne-Wilkinson, with whom the other Law Lords agreed, held that adoption in the context of the English provisions connoted some conduct by the administrator which amounted to an election to treat a contract of employment

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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 BrowneWilkinson, 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. Johannes Kotjo v. Ng Wei Teck Michael [2001] 4 SLR 232 Facts - The judicial managers appeared to have failed to give the customary notice to the employee of the company that they were not personally liable for his contract of employment with the company. - The company was placed under judicial management on 11 February 2000 and the contract of employment was terminated by the judicial managers on 17 August 2000 by giving him 6 months notice as provided under the contract. Evaluation - It was unclear, on the facts recorded in Choo JCs judgment, how the judicial managers had adopted the contract of employment. If it is on the basis of the H.L.s decision in Powdrill v. Watson (the adoption of a contract of employment connotes conduct on the part of the judicial managers which amounts to an election to treat a contract of employment with the company as giving rise to a separate liability in the judicial management), then there has been an adoption of the contract of employment by the judicial managers on the basis that the contract of employment was continued for more than 28 days after the making of the judicial management order.

Entering into New Contracts

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: Centre Reinsurance International Co v. Freakley [2006] UKHL 445 Facts - Massive tort claims were made against the company, and it went into administration, the purpose of which was to approve a scheme of arrangement. - It was a condition of a policy taken out by the company upon the presentation of an administration petition, the insurer would have the exclusive right to handle claims as agent of the company, and would be entitled to reimbursement for its expenses. - The issue before the H.L. was whether the claims handling expenses under those contracts fell within s.19(5) of the U.K. Insolvency Act 1986 [s.227J(3)(a) CA]. Held - Although only an administrator could act or confer authority to act on behalf of a company in administration, it did not follow that anyone with authority to act on behalf of a company in administration was deemed to have derived authority from the administrator. Authority conferred on another party before the appointment of the administrator to contract on its behalf which the administrator was unable to revoke, contracts made thereunder were made on behalf of the company but not on behalf of the administrator. Thus, in the absence of specific approval by the administrators or by the court, those expenses did not have priority over the company's other debts pursuant to [s.227J(3)(a) CA]. - While the court had a broad discretion to authorise or direct the administrator to make payments or enter into contracts for the purposes of the administration, and could therefore direct the administrator to authorise or ratify particular claims-handling expenditure by the insurers, with the result that their right to reimbursement would have priority under [s.227J(3)(a) CA], it would be unusual for the court to make such a decision, involving questions of business judgment, contrary to the administrator's opinion that such expenditure, while no doubt in the interests of the insurers, was not necessary for the very limited purposes of the administration. Before making such a decision, the court would also require much more evidence of the particular expenditure than was available to the court in the present case. Evaluation - The Singapore provision (s.227J(3)(a) CA) differs from the U.K. one (s.19(5) Insolvency Act 1986) in that the Singapore provision goes on to qualify that the relevant debts or liabilities must be incurred only under contracts entered into by the judicial manager in the carrying out of his functions, and does not mention contracts adopted by him. Hence, contracts adopted by the judicial manager would not be subject to the statutory charge and therefore would not obtain priority. Only debts and liabilities incurred before the discharge of the judicial management under new contracts entered into by the judicial manager would be.

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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.

X.

Avoidance Law in Judicial Management

Importation of Provision in Part X CA

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. Re Wan Soon Construction Pte Ltd [2005] 3 SLR 375 Facts - The company granted an option to purchase a property just before it petitioned for judicial management. - The purchaser exercised the option in the interim period before the judicial management order was made and the judicial managers adopted the contract. - Before those events, a creditor obtained a judgment against the company and registered a writ of seizure and sale against the property. - The issue was whether the execution creditor was entitled to the proceeds of sale in priority to the unsecured creditors to satisfy the judgment against the company. Held - Phang JC, as he then was, held that s.227X(b) CA was intended to import provisions relating to liquidation in Part X CA where it was appropriate in facilitating the general mission and purpose of judicial management. Thus, on the basis that judicial management is a corporate rescue mechanism and not a distributive one, Phang JC held that the pari passu principle is per se inapplicable to judicial management. However, the learned judge subsequently went on to state that there was no reason in principle why s.334 CA could not be imported into judicial management to prevent the judgment creditor as unsecured creditor from gaining priority over the companys remaining unsecured creditors. - Section 334 CA provides that an execution creditor against the goods or land of a company is not entitled to retain the benefit of the execution unless he has completed the execution before the commencement of the winding-up. - There was no exact formula regarding when the court could order s.334 CA to apply pursuant to the power conferred under s.227X(b) CA. However, there could be broad guidelines, the most important guideline being whether application of the provision would inure to the benefit of the unsecured creditors generally and/or aid the company in its attempt at economic recovery.

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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.

Application of Imported Avoidance Provisions

The imported avoidance provisions apply to judicial management via ss.227T and 227X(b) CA. Undue preference in case of judicial management Section 227T(1) Subject to this Act and such modifications as may be prescribed, a settlement, a conveyance 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 of the BA (read with ss.100, 101 and 102 BA thereof) shall, in the event of the company being placed under judicial management, be void as against the judicial manager. (2) For the purposes of subsection (1), the date that corresponds with the date of the application for a bankruptcy order in the case of a natural person and the date on which a person is adjudged bankrupt is the date on which an application for a judicial management order is made. 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
I. Usefulness of a Scheme of Arrangement
Assets Subject to Security

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. Schemes of arrangements are increasingly regarded in Singapore as an expedient, flexible and useful procedure which is the first port of call for companies in parlous situations and who, due to a stalemate in reaching a consensual compromise with their creditors and require a cram-down mechanism to implement a debt restructuring plan. The efficacy of a non-automatic moratorium that only covers proceedings that are already existing apart, the point is that a legislative framework is in place within which the company is able to operate under more certainty. 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. Secondly, from a commercial perspective, a listed company which presents a scheme of arrangement will not usually have its shares suspended from trading by SGX, a consideration which is obviously given a lot of weight by the company and, sometimes, by its financial creditors who might have also extended loans to the substantial shareholders of the company on the security of their shareholdings in the company. By way of contrast, a listed company which is placed under judicial management face a substantially higher risk of being suspended from trading during the period of judicial management. Further, the widely held perception of judicial management as a preclude to liquidation generates considerable negative press for the company, whereas schemes of arrangement are viewed with less negativity by the public.

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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.

Economic Interest Subordinated claims

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. The decision can be criticized on 3 fronts: (1) Mann Js approach to the valuation of the scheme company is fundamentally flawed. As Crystal & Mokal forcefully argued, when Mann J decided that the company should be valued on a liquidation basis, the learned judge failed to give due regard to the fact that MyTravel Group was in the process of undergoing reorganization proceedings with the aim of maintaining its business as a functioning unit. This, the learned authors argued, must reflect the companys belief that the value of the companys business contained a going concern surplus, which was what the scheme of arrangement was intended to preserve. The going concern basis therefore should have been the basis for valuing the company. The US bankruptcy courts, on the other hand, appear to have understood this fundamental premise better and have consistently taken the position that in the context of reorganizations and restructurings, in assessing the fairness of a plan, an enterprise needs to be valued by capitalizing the prospective earnings of the rehabilitated enterprise and not by reference to its liquidation value. (2) Mann Js decision in effect aids a company that can show, on a notional liquidation basis, that a class of junior creditors is out of the money, to wipe out the class of junior creditors without their consent and without their participation in any formal insolvency proceedings. On policy grounds, the application of a law (here English law) that engenders such an unfair result would severely erode junior creditors confidence in the law in safeguarding their rights, which would in turn have an adverse impact on the future development of the European leveraged loan market ,which has hitherto used English law as the transactional governing law. (3) The decision may have the unintended result of encouraging collusion between an overleveraged company and its senior lenders to pursue coercive tactics to unfairly prejudice junior lenders. Based on the hypothetical liquidation valuation approach adopted by Mann J (which tends to yield a lower valuation of the enterprise), the company could more likely pursue a scheme of arrangement which did not require the participation of the junior bondholders. Under the class constitution rules for the purposes of a scheme of arrangement as recently held in RBS v. International, there would have been no doubt that the junior bondholders in MyTravel Group would have constituted a class of their own for voting purposes had they been found to have an economic interest in the company under a going concern valuation. The company and the senior lenders would therefore have had to give fair regard to the interests of the junior creditors when proposing a scheme in such an instance. In fact, the facts of MyTravel Group showed how the coercive tactics pursued by the senior lenders in concert with the company, coupled with the unfavourable ruling which the junior bondholders obtained from Mann J and the C.A. on the valuation issue, eventually succeeded in coercing the junior bondholders into accepting the terms

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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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