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Singapore – The Court Of Appeal’s Approach To Stays Of Bankruptcy Proceedings.

26 February, 2014

 

Legal News & Analysis – Asia Pacific – Singapore – Insolvency & Restructuring

 

Introduction


Bankruptcy and insolvency proceedings are often a delicate balance of interests. On one hand, the Court seeks to ensure the claimant promptly obtains the fullest measure of his rights. On the other hand, the defendant must be afforded the right to defend himself. In Mohd Zain bin Abdullah v Chimbusco International Petroleum (Singapore) Pte Ltd and another appeal [2014] SGCA 8, the Singapore Court of Appeal laid out the approach it would take to balance these concerns when dealing with applications for a stay of such proceedings.


In this case, the Appellants were guarantors of a debt owed to the Respondent. When insolvency proceedings were initiated against the Appellants, they sought to dispute the validity of the guarantees and the underlying debt. However, the High Court found their defence to be shadowy, and ordered only a conditional stay of bankruptcy proceedings, under which the Appellants had to provide full security for the sums claimed against them.


The Appellants failed to provide the security and were adjudicated to be bankrupt. Upon appeal to the Court of Appeal, the High Court’s decision was upheld. The applicable standard for stays of bankruptcy proceedings was held to be similar to that of resisting summary judgments, and as such, the High Court was correct in imposing the conditional stay.


This decision provides guidance as to how the Court will manage applications for stays of bankruptcy and insolvency proceedings. It highlights the Court’s discretion to issue conditional stays, as well as the standard to be met when applying for a stay of proceedings.


Brief Facts


The Respondent and the debtor had negotiated for the repayment of an outstanding debt through an Instalment Agreement. Several related corporate and individual guarantors also extended guarantees over the debt. When the debt went unpaid, the Respondent sent statutory demands and commenced insolvency proceedings against the guarantors.


However, the guarantors opposed the insolvency and bankruptcy proceedings, claiming that a separate Oral Agreement had been concluded between the Respondent and the debtor, and that Yeo, an employee of the Respondent, had assured them that the guarantees were mere formalities for the execution of the Oral Agreement. The Appellants, being two of the individual guarantors, alleged that Yeo’s representations were false and had wrongfully induced them to issue the guarantees.


The Appellants obtained conditional stays of the bankruptcy proceedings before the Assistant Registrar and the High Court on the ground that there was a substantial dispute of the underlying debt. However, the High Court found that the Appellants’ defence was shadowy, and imposed the condition that they had to provide security for the full amount claimed against them, which was more than US$4m.


The Appellants failed to provide the security ordered, and the Court thus declined to stay the bankruptcy proceedings and adjudicated them bankrupt. The Appellants then brought the matter to the Court of Appeal.


Holding of the Court of Appeal


The Appellants sought an unconditional stay of bankruptcy proceedings against them or, alternatively, that the security ordered be reduced. The Court of Appeal dismissed their appeals, upholding the High Court’s decision.


While bankruptcy proceedings are directed towards preserving a creditor’s interests to the extent that is possible, it is also necessary to uphold the debtor’s right to defend himself. Therefore, the Court laid out the following principles when approaching applications for stays of bankruptcy proceedings.


(i) The standard for obtaining a stay of bankruptcy proceedings is the same as that for resisting a summary judgment application, that is, the debtor need only raise triable issues.

(ii) Following this analogy, the Court is entitled to impose conditions for granting a stay of bankruptcy proceedings where the case advanced by the debtor is shadowy.

(iii) The Court may impose any condition it sees fit. The Court will consider competing concerns in imposing conditions, such as the pecuniary interests of the creditor, the size of the debt, the acknowledgement of triable issues, and the degree of shadowiness.

(iv) If security is ordered as a condition, the Court would exercise its discretion flexibly to meet the needs of the case before it, and would not begin with any fixed starting point in determining the amount of security to be provided.


On an analysis of the facts, the Court of Appeal found that the Appellants’ case was indeed shadowy:


(i) Their allegations were not supported by any contemporaneous documents.

(ii) Yeo had denied the existence of the Oral Agreement or the making of any representations. In any event, Yeo had no authority to make any representations, and it was unlikely that experienced businessmen like the Appellants had been misled by Yeo.

(iii) There was correspondence between the Appellants and the debtor which suggested that the guarantors considered themselves bound by the guarantee.


As such, the High Court was correct to impose a conditional stay of bankruptcy proceedings. Since the Appellants had not provided any evidence of their inability to provide the security ordered, the quantum of security was also upheld.


Concluding Words


The standard applicable for obtaining a stay or dismissal of winding up proceedings are equally applicable to applications for a stay of bankruptcy proceedings, as the principles and interests concerned do not vary when the debtor is a company rather than an individual. Therefore, the Court would approach applications for stays of insolvency proceedings in largely the same manner.


In any contest to stay bankruptcy or insolvency proceedings, it is important to note that not any dispute over the underlying debt will result in a stay of proceedings. The issues raised must first be genuinely worthy of trial. Even then, the debtor’s case must be sufficiently believable and supported by enough evidence, or else a conditional stay may be ordered, under which the debtor may be ordered to furnish security for an amount constituting a significant amount (if not all) of the claimed debt.


Rajah & Tann

 

Low Poh Ling, Partner, Rajah & Tann

poh.ling.low@rajahtann.com

 

Rajah & Tann Insolvency & Restructuring Practice Profile in Singapore

 
 
 

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