Case Summaries

Sun Electric Power Pte Ltd v RCMA Asia Pte Ltd (formerly known as Tong Teik Pte Ltd)

SUPREME COURT OF SINGAPORE

10 June 2021

Case summary

Sun Electric Power Pte Ltd v RCMA Asia Pte Ltd (formerly known as Tong Teik Pte Ltd) [2021] SGCA 60
Civil Appeal No 150 of 2020

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Decision of the Court of Appeal (delivered by Judith Prakash JCA):

Outcome: The Court of Appeal dismissed the appeal.

Pertinent and significant points of the judgment

  • The court held that a company has the right to appeal a winding up order regardless of whether a stay order is granted, and it is a necessary corollary of the company’s right to appeal that its directors be allowed to control the conduct of the appeal. However, it is impermissible for the directors and/or shareholders to whittle down the company’s funds to pursue an unmeritorious appeal when these funds should be reserved for payment to the creditors. To address this concern, the court set out two general rules.
    • First, the directors and/or shareholders controlling the conduct of the appeal should expect to pay any costs incurred by the company in prosecuting the appeal out of their own pockets, instead of using the funds of the company. That said, if the appeal succeeds, the directors and/or shareholders can reclaim from the company the funds that they had expended from their own pockets in prosecuting the appeal.
    • Second, the directors and/or shareholders controlling the conduct of the appeal should also expect to be personally responsible for the payment of any party and party costs awarded in favour of the respondent if the appeal fails.
  • The court held that the cash flow test is the sole applicable test under s 254(2)(c) of the Companies Act (Cap 50, 2006 Rev Ed) (“Companies Act”) to determine whether a company is unable to pay its debts. The court also set out a non-exhaustive list of factors which should be considered under the cash flow test (see below).
  • The court expressed its view that a company which makes partial payment of the debt demanded in a statutory demand within the prescribed three week period such that the remaining amount payable falls below $10,000 should not be deemed to be unable to pay its debts pursuant to s 254(2)(a) of the Companies Act .

Background to the appeal

1 In late 2015, the appellant entered into an agreement with the respondent for the respondent to assume certain market-making obligations owed by the appellant, in exchange for 70% of all incentive payments that the appellant would receive for carrying out these market-making obligations. The appellant initially paid the respondent its 70% share, but after January 2018 stopped all payments.

2 The respondent commenced a suit against the appellant to claim its 70% share of the incentive payments, and also successfully obtained an injunction over the appellant’s Overseas Chinese Banking Corporation Limited (“OCBC”) account, which was where the appellant would receive the incentive payments. However, the appellant eventually transferred all remaining funds in its OCBC account into its DBS Bank Ltd account where they were completely garnished by another creditor of the appellant.

3 In August and September 2019, the appellant applied for judicial management and interim judicial management. The respondent objected to both applications. Both applications were dismissed and the court ordered a total of $11,500 in costs to be paid by the appellant to the respondent.

4 On 21 November 2019, the respondent’s solicitors sent a statutory demand to the appellant’s registered office demanding payment of the costs and interests. On 13 December 2019, the 22nd day after the statutory demand was served, the appellant paid $3,000 into the respondent’s solicitors’ client account, reducing the balance to $8,568.88 (“Outstanding Costs”).

5 The respondent filed HC/CWU 393/2019 (“CWU 393”) for the appellant to be wound up.

6 The High Court judge (“Judge”) accepted all three grounds for winding up relied on by the respondent. First, he held that the appellant was deemed to be unable to pay its debts pursuant to s 254(2)(a) of the Companies Act as it had not repaid the Outstanding Costs in spite of the statutory demand. Although the appellant had repaid $3,000 such that the Outstanding Costs fell below $10,000, this was not to the reasonable satisfaction of the respondent. Second, the Judge found that the appellant was unable to pay its debts pursuant to s 254(2)(c) of the Companies Act as the appellant was cash flow insolvent and balance sheet insolvent. Third, the Judge also held that it was just and equitable to wind up the appellant.

7 The appellant appealed against all three grounds.

8 The respondent argued that Mr Matthew Peloso (“Mr Peloso”) (the director of the appellant) and M/s TanLim Partnership (the appellant’s solicitors) did not have the authority to act for the appellant in this appeal because there was no stay of the winding up order and upon a company’s liquidation, its directors are functus officio.

9 On 1 April 2021, the very last working day prior to the appeal, the appellant’s counsel, Mr Lim Chee San (“Mr Lim”), informed the court that he wished to adduce two cashier’s orders at the hearing of the appeal. Apart from certain bare details which appeared on the cashier’s orders themselves, the document forwarding copies of the cashier’s orders was completely devoid of any explanation, such as how the moneys had been obtained and who they were obtained from. In addition, there was no affidavit explaining the need for the court to take cognisance of these cashier’s orders.

10 When questioned on these points at the hearing of the appeal, Mr Lim gave answers that were less than satisfactory. He informed the court that the moneys were obtained from an investor but admitted that he did not know who the investor was. He could not explain why these cashier’s orders were only obtained by the appellant at the eleventh hour. He also omitted to inform the court that the investment was conditional on the appeal being allowed, and that if the appeal was not allowed, the investor would withdraw the investment. Mr Lim only disclosed this point when the court probed him on it. Further, he could not give any good reason for the complete lack of detail in the document or the failure of the appellant to file any affidavit.

11 Nevertheless, the court treated Mr Lim’s submissions as an oral application to adjourn the hearing to allow the appellant to file an affidavit to formally adduce the cashier’s orders as evidence.

The Court of Appeal’s decision

12 The court rejected the appellant’s application to adjourn the hearing. More than one year and three months had passed since the filing of CWU 393, which period included almost seven months since the filing of the appeal. If the alleged investor had been genuine in wanting to invest in the appellant, he could have done so within that long period. In any event, even if the appellant filed an affidavit to adduce the two cashier’s orders as evidence, this may not have changed the court’s findings as the fact remained that the Outstanding Costs had not been paid. Furthermore, even if there was an investment (the sum was around $927,000), that sum might not necessarily have been sufficient to prove that the appellant was solvent, given that the evidence showed that it had a huge deficit of over $1m as at the date of CWU 393: at [33] to [36].

13 The court allowed Mr Peloso and Mr Lim to continue the conduct of the appeal, holding that a company has the right to appeal a winding up order regardless of whether a stay order is granted, and that it is a necessary corollary of the company’s right to appeal that its directors be allowed to control the conduct of the appeal. However, the court stated that it is impermissible for the directors and/or shareholders to whittle down the company’s funds to pursue an unmeritorious appeal when these funds should be reserved for payment to the creditors. To address this concern, the court set out two general rules: at [37] to [49].

(a) First, the directors and/or shareholders controlling the conduct of the appeal should expect to pay any costs incurred by the company in prosecuting the appeal out of their own pockets, instead of using the funds of the company. That said, if the appeal succeeds, the directors and/or shareholders can reclaim from the company the funds that they had expended from their own pockets in prosecuting the appeal.

(b) Second, the directors and/or shareholders controlling the conduct of the appeal should also expect to be personally responsible for the payment of any party and party costs awarded in favour of the respondent if the appeal fails.

14 The court held that the cash flow test is the sole applicable test under s 254(2)(c) of the Companies Act to determine whether a company is unable to pay its debts. The cash flow test assesses whether the company’s current assets exceed its current liabilities such that it is able to meet all debts as and when they fall due. “Current assets” and “current liabilities” refer to assets which will be realisable and debts which will fall due within a 12-month timeframe. The court also set out a non-exhaustive list of factors which should be considered under the cash flow test: at [50] to [69]:

a. the quantum of all debts which are due or will be due in the reasonably near future;

b. whether payment is being demanded or is likely to be demanded for those debts;

c. whether the company has failed to pay any of its debts, the quantum of such debt, and for how long the company has failed to pay it;

d. the length of time which has passed since the commencement of the winding up proceedings;

e. the value of the company’s current assets and assets which will be realisable in the reasonably near future;

f. the state of the company’s business, in order to determine its expected net cash flow from the business by deducting from projected future sales the cash expenses which would be necessary to generate those sales;

g. any other income or payment which the company may receive in the reasonably near future; and

h. arrangements between the company and prospective lenders, such as its bankers and shareholders, in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a time later than the debts.

15 Applying the cash flow test and considering the evidence, the court found that there was no reason to disturb the Judge’s findings that the appellant was insolvent: at [70] to [83].

16 The court also found that the Judge did not err in exercising his discretion to wind up the appellant. 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. While there may be exceptions to this general rule, the court found that there were no countervailing factors on the facts of the case: at [84] to [88].

17 The appellant also failed to prove its assertion that the respondent had brought the winding up proceedings with an ulterior motive: at [109].

18 The court thus dismissed the appeal and ordered Mr Peloso to pay $50,000 to the respondent, inclusive of disbursements, as costs of the appeal: at [110].

19 In light of the above, it was not strictly necessary to discuss whether the alternative ground for winding up under s 254(2)(a) of the Companies Act was made out but as it was argued by parties, the court expressed its view that a company which makes partial payment of the debt demanded in a statutory demand within the prescribed three week period such that the remaining amount payable falls below $10,000 should not be deemed to be unable to pay its debts pursuant to s 254(2)(a) of the Companies Act: at [89] to [103].

 

This summary is provided to assist in the understanding of the Court’s judgment. 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 judgment.

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