Case Summaries

Civil Appeal No 12 of 2019 BWG v BWF [2020] SGCA 36

SUPREME COURT OF SINGAPORE

16 April 2020

Case summary

Civil Appeal No 12 of 2019
BWG v BWF [2020] SGCA 36

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Decision of the Court of Appeal (delivered by Steven Chong JA):

Outcome: The Court of Appeal dismisses the appeal by the appellant, granting the injunction restraining the commencement of winding-up proceedings against the respondent with liberty for parties to apply where there are legitimate concerns about the solvency of the respondent.  Following Anan Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33 (“VTB Bank”), the Court of Appeal holds that, in respect of a winding-up application that is premised on a debt which is subject to arbitration, the prima facie standard of review applies, such that the debtor needs simply to show that there is a dispute in relation to the debt which is the subject of an arbitration agreement. The court also explained that the abuse of process doctrine is discretionary, and may apply to deny an applicant from raising a defence to restrain the commencement of winding-up proceedings.  

Facts and procedural history

1 There was a string of contracts involving X, the appellant, and the respondent, in which the appellant would purchase cargo from X (pursuant to “the X-appellant contract”), before it was to be sold to the respondent (pursuant to “the appellant-respondent contract”). The respondent would subsequently sell the cargo to X (pursuant to “the respondent-X contract”). The respondent did not know at the time it entered into the appellant-respondent contract that X was both the ultimate buyer and the ultimate seller of the cargo. Based on the timelines under the respective contracts, X was to pay the respondent before the respondent was due to pay the appellant, though the respondent was supposed to receive the cargo from the appellant before it was delivered to X. As an intermediary, the respondent stood to gain a modest sum of US$8,000.

2 Under the respondent-X contract, X was due to pay the respondent by 10 July 2018, but failed to do so. The respondent in turn failed to pay the appellant by 11 July 2018, as required under the appellant-respondent contract. Prior to the non-payment, there were negotiations between representatives of the respondent, the appellant and X. During these negotiations, it became clear that X would be unable to pay the respondent by 10 July 2018.

3 On 4 July 2018, the respondent found out that the appellant had initially bought the cargo from X, such that X was both the ultimate buyer and the ultimate seller of the cargo. The respondent also found out that the appellant had procured a letter of credit from a bank in order to pay X under the X-appellant contract. During a second meeting later that same day between representatives of the respondent and the appellant, the parties discussed delayed instalment payments by X to the respondent. Subsequently, on 12 July 2018, the respondent and X entered into a settlement agreement for payment of US$30,253,600 by way of four instalments, the first of which was due on 10 August 2018. The settlement agreement also contained an undertaking for one Sit, the Chief Executive Officer of X, to execute a personal guarantee for the sum of US$30,253,600.  

4 Having failed to receive full payment of the first instalment under the settlement agreement, the respondent could not make payment to the appellant. On 13 August 2018, the appellant served a statutory demand on the respondent for its failure to pay outstanding sums under the appellant-respondent contract. The respondent denied liability, claiming, among other things, that it was due to pay the appellant only after receiving payment from X.

5 On 30 August 2018, the respondent served a statutory demand on X pursuant to the settlement agreement, and thereafter commenced winding-up proceedings against it. X then sought a moratorium against the winding-up proceedings. There was evidence that X was facing substantial debts of approximately US$870m in relation to other creditors. On 3 September 2018, the respondent took out a summons to set aside the statutory demand and to restrain the appellant’s pending winding-up proceedings. Subsequently, on 11 April 2019, the respondent obtained a bankruptcy order in Hong Kong against Sit for non-payment under the personal guarantee.

Decision of the Court of Appeal

6 On appeal, the appellant submitted that the respondent had acted inconsistently by taking out proceedings against X and Sit, whilst at the same time relying on the “Price Defences”, which consisted of the following: (a) the non-receipt of documents defence: the respondent alleged that the appellant had failed to comply with cl 8.1 of their contract, which required payment to made against the presentation of the seller’s commercial invoice and “usual shipping documents” comprising of copies of non-negotiable bills of lading and certificates of quantity, quality and origin. The appellant, however, did not provide such certificates to the respondent; (b) the title defence: the respondent claimed that the appellant never passed title or delivered the cargo to it; and (c) the illegality defence: the respondent asserted that the entire transaction involving X, the appellant and the respondent, was a sham or tainted by illegality, rendering it unenforceable, because the appellant had induced the bank, upon provision of false documents, to effect payment under the letter of credit.

7 The respondent also raised another defence, known as the “pay when paid defence”, which was that the respondent was only obliged to pay the appellant after it had been paid by X. The appellant did not assert that the respondent had acted inconsistently in respect of this defence.

8 The Court of Appeal was of the view that any or all of the four defences raised by the respondent would satisfy the prima facie standard of review. In order for the appellant to rely on the abuse of process exception to displace the respondent’s right to refer the dispute to arbitration, it had to establish that all four defences were similarly infected by abuse of process: at [41].

Preliminary finding on the true nature of the entire transaction involving X, the appellant and the respondent

9 The Court found that the X-appellant contract was not a transaction made in good faith for the sale of goods but a disguised loan arrangement between the two parties. First, it was an employee of X, Shi, who had introduced the appellant to the respondent. Shi also facilitated all of the negotiations leading up to the conclusion of the contracts between the appellant and the respondent, as well as between the respondent and X. In the circumstances, X must have known that it would be the eventual buyer of the cargo from the respondent after the deal between the appellant and the respondent.

10 Second, there were features of the transaction which appeared consistent with a disguised loan arrangement. For instance, despite the appellant having no previous dealings with the appellant, the appellant sold cargo valued in excess of US$30m to the respondent without taking any kind of security. The material terms of the three contracts, when read together, were also consistent with a loan arrangement. In addition, the Court found that the appellant was privy to the entire loan arrangement, and that it had secured the letter of credit from the bank on the basis that there would be a genuine transaction for the sale of goods.

Abuse of process doctrine

11 The Court of Appeal observed that the abuse of process doctrine is exercised at the court’s discretion, depending on all the interests and circumstances of the case. This may entail balancing considerations of public policy and the interests of justice. In VTB Bank, the court explained that the doctrine is applied as a control mechanism against possible abuses of the lower prima facie standard of review, and that it may manifest itself in different scenarios. One example of this is where a debtor adopts an inconsistent position in raising a defence to dispute the debt in order to restrain a winding-up application. Such an assertion of inconsistent positions is treated as an abuse of process in order to protect the integrity of the judicial process and to safeguard the administration of justice: at [52]–[56].

12 In assessing whether a debtor has adopted inconsistent positions, the court considers each defence separately to determine whether there was abuse of process. Where a debtor raises multiple defences, some of which do not involve the assertion of inconsistent positions, the raising of those defences would not amount to an abuse of the court’s process. As the doctrine is a discretionary one, by reason of policy considerations and in exceptional circumstances, the court may decide that a party is not in abuse of the court’s process despite that party’s inconsistent conduct if there is a risk of a greater injustice in barring that party from taking such an inconsistent position: at [57]–[58].

Applicable principles on settlement agreements

13 The Court deemed that it was relevant to have regard to the general principles relating to settlement agreements in order to determine whether the respondent’s claims against X and Sit were inconsistent with its reliance on the Price Defences in the present proceedings. A settlement agreement may be valid even if the underlying claim, which was compromised, is invalid, so long as a plaintiff suing under the settlement agreement believed in good faith in the validity of the underlying claim at the time it entered into the settlement agreement. This same principle also applies where the underlying claim is invalid because of illegality. One example of where a settlement agreement lacks good faith is when one party knows that the underlying claim is invalid, but proceeds to negotiate the settlement agreement. In such a case, the settlement agreement is liable to be set aside: at [62]–[67].

14 In this case, the Court found that there was no evidence that the respondent did not genuinely believe in the validity of its claim at the time it entered into the settlement agreement: at [70].

Whether the respondent adopted inconsistent positions in relying on the Price Defences

15 The Court found that the respondent had not acted inconsistently in relying on the title defence, as its claims against X and Sit were made pursuant to the settlement agreement and personal guarantee, and not the underlying respondent-X contract. The claims against X and Sit were in law a separate cause of action from the underlying claim pursuant to the respondent-X contract: at [75] and [76].

16 The Court also held that the respondent had not acted inconsistently in relying on the non-receipt of documents defence. By claiming against X under the settlement agreement, the respondent did not represent that it had delivered the necessary shipping documents to X. There was thus no inconsistency with its position that it had never received the relevant shipping documents from the appellant, as required under cl 8.1 of the appellant-respondent contract: at [79].  

17 According to the Court, the respondent appeared to have acted inconsistently by pursuing Sit to bankruptcy, and against X under the settlement agreement, whilst at the same time raising the illegality defence in the present proceedings. In respect of X, the respondent had commenced winding up proceedings against it despite suspecting that the appellant had deceived the bank in order to obtain a letter of credit. The respondent had also proceeded against Sit despite its belief that its transaction involving X and the appellant might be illegal: at [82], [91]–[92].

Application of the abuse of process doctrine to the illegality defence

18 The Court was of the view that even if the respondent’s actions against Sit were inconsistent with its illegality defence, it would be inappropriate to deny the respondent from relying on the illegality defence on the basis of abuse of process. In exercising its abuse of process jurisdiction, the court must balance the competing factors and determine which position carries the greater risk of injustice: at [93].

19 In the present case, the Court considered four factors germane to the balancing exercise. First, the respondent was not the typical litigant seeking to profit from an illegal transaction after mounting inconsistent positions. Furthermore, there was no evidence showing that the respondent had engineered or known of the true nature of the entire transaction when it was first contemplated. Second, the respondent had found itself between a “rock and a hard place” in that it had no real choice but to take all reasonable defences to resist the appellant’s claim while seeking to recover from X in order to pay the appellant. Notably, the respondent did not have direct knowledge of the purported illegality, but relied on the information provided to it by third parties and, on the basis of the information supplied, adopted a certain position against the appellant. Third, when pursuing X and Sit, the respondent would not have known what defences X and Sit would raise. The risk of a windfall was also unlikely, given the respondent’s repeated confirmations that it would pay the appellant after receiving payment from X. Finally, barring the respondent from raising the illegality defence would mean that appellant would be allowed to enforce a potentially illegal contract without the illegality defence being explored at all: at [94]–[97].

20 In determining whether the respondent should be permitted to rely on the illegality defence, the Court faced a clash between the policy of preventing the assertion of inconsistent positions and the policy that the court will not lend its aid to enforce an illegal contract. Given the exceptional circumstances of the case and considering all of the circumstances, the court held that the respondent should not be barred from raising the illegality defence, particularly as there was a risk of an even greater injustice otherwise: at [98] and [99].

Applying the prima facie standard

21 The Court held that all of the defences raised by the respondent would give rise to a prima facie dispute that would justify restraining the winding-up application. In fact, the defences raised triable issues: at [128] and [129].  

 

 This summary is provided to assist in the understanding of the Court’s grounds of decision. It is not intended to be a substitute for the reasons of the Court. All numbers in bold font and square brackets refer to the corresponding paragraph numbers in the Court’s grounds of decision.

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