Jurisdiction - Singapore
News
A Relook at Creditors.

6 March, 2012

 

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

 

SAAG Oilfield Engineering (S) Pte Ltd (formerly known as Derrick Services Singapore Pte Ltd) v Shaik Abu Bakar bin Abdul Sukol and another and another appeal [2012] SGCA 7
 
SUMMARY
 
The Singapore Court of Appeal has, for the first time, clarified that the word “creditor” within the meaning of s210 of the Companies Act includes a contingent creditor, such as a tort claimant, whose claim may be admitted to proof, even if it is for an unproven, unliquidated amount.
 
The Court of Appeal also presented guidelines to ensure that the wide interpretation of “creditors” would not cause injustice.
 
BACKGROUND
 
Two workmen (“Workmen”) employed by Derrick Services Singapore Pte Ltd (“Derrick Services”) sustained injuries in two separate industrial accidents in the course of their employment. The Workmen lodged statutory claims under the Workmen’s Compensation Act (“WCA Claims”). Derrick Services subsequently encountered financial difficulties and entered into provisional liquidation. The provisional liquidator secured SAAG Oilfield Engineering (S) Pte Ltd (“SAAG”) as a “white knight” investor to save Derrick Services from liquidation by acquiring control of it pursuant to an investment agreement. The investment agreement was conditional upon creditors’ approval of a proposed scheme of arrangement (“Scheme”). Pursuant to the terms of the Scheme, a creditors meeting was held and the Scheme was unanimously approved. The Court subsequently sanctioned the Scheme.
 
Neither of the Workmen attended the creditors meeting nor submitted any proof of debt to the administrator of the Scheme. They also did not participate in or receive payments under the Scheme.
 
After the Scheme had terminated (in accordance with its terms), the Workmen withdrew their WCA Claims and commenced common law actions in tort against SAAG as they objected to the Ministry of Manpower’s assessment of their WCA Claims. In response, SAAG applied to the High Court to determine whether these actions had been extinguished by the implementation of the Scheme. Derrick Services (and SAAG) was at all material times covered by a valid insurance policy in respect of the Workmen’s claims.
 
SINGAPORE HIGH COURT’S DECISION
 
The High Court determined that the Workmen’s causes of action were not extinguished by the implementation of the Scheme.
 
The High Court judge reasoned that a scheme of arrangement could not bind tort claimants who did not participate in the scheme and whose claims were covered by insurance. Such claimants could therefore commence and maintain tortious claims against the company in question notwithstanding the completion of the scheme.
 
Dissatisfied with the High Court’s decision, SAAG appealed to the Court of Appeal.
 
SINGAPORE COURT OF APPEAL’S DECISION
 
The Court of Appeal allowed SAAG’s appeal.
 
The Court of Appeal was of the view that the fact that the Workmen’s claims were covered by insurance ought not to make a difference to whether or not the Workmen were “creditors” for the purposes of s210 of the Companies Act. The Court of Appeal reasoned that it cannot be correct that any person whose claim was covered by insurance, guarantee or indemnity would be excluded from the ambit of the word “creditors”.
 
The Court of Appeal adopted the English courts’ broad interpretation of the word “creditors” and held that as the Workmen were “creditors”, they were bound by the terms of the Scheme and were therefore precluded from maintaining their tortious claims against the SAAG.
 
Interpretation of “creditors” in various jurisdictions
 
The English cases unanimously adopt a very broad approach to the term “creditors”, an approach which can be traced back to In re Midland Coal, Coke, and Iron Company [1859] 1 Ch 267.
 
In that case, the English Court of Appeal held that the word “creditor” in s2 of the Joint Stock Companies Arrangement Act 1870 is used in the widest sense and includes a contingent creditor whose claims could be admitted to proof in a winding up, even if it was for an unproven, unliquidated amount.
 
Although s2 of the Joint Stock Companies Arrangement Act 1870 only applied to companies in liquidation, its descendants (found in different versions of the UK Companies Act), like s210 of our Companies Act, applied the rationale regardless of whether or not the company in question was in liquidation. The broad approach In Re Midland Coal was also followed in the subsequent English cases which held that a claimant with some sort of contingent claim against a company was to be considered a “creditor” for the purposes of the various English equivalents of s210 of our Companies Act.
 
With the exception of courts in South Australia, Australia largely adopts the English courts’ broad approach.
 
Before this Court of Appeal decision, the only local case which dealt with this issue was Pacrim Investments Pte Ltd v Tan Mui Keow Claire and another [2011] 2 SLR 438.
 
In Pacrim, the plaintiff creditor’s claim for damages had been dismissed by the High Court but was pending appeal before the Court of Appeal throughout the term of the scheme. Subsequent to the termination of the scheme, the Court of Appeal heard and allowed the plaintiff creditors’ claim. The issue to be decided was whether the plaintiff creditor was entitled to damages or whether the scheme had extinguished the plaintiff’s claim. The High Court held that the plaintiff was indeed a creditor under the scheme as it fell within the scope of "creditors" under s 210 of the Companies Act and there was no basis on principle to exclude persons in the plaintiff creditor’s position from the scope of "creditors".In arriving at its decision, the High Court adopted the English courts’ approach in giving a wide construction of the word “creditors” to include any person with a pecuniary claim against the company which was capable of estimate, regardless of whether such claim was unliquidated, prospective or contingent.
 
Court of Appeal decided to follow the broad interpretation adopted by the English courts
 
In this case, the Court of Appeal was of the view that it should be presumed, in the absence of contrary evidence, that Parliament, in enacting s210 of the Companies Act using wording identical to that of the various equivalent English provisions intended the word “creditors” to be given the meaning which had by then been regarded as settled in England.
 
The purpose of s210 of the Companies Act is to facilitate compromises and arrangements with a company’s creditors as an alternative to liquidation and where tort claimants may form a substantial class of a company’s creditors. To exclude such claimants from the ambit of “creditors” would render s210 pointless.
 
Where claims against a company have not been agreed, it is usual to allow creditors to vote for the amounts for which they estimate that the company is liable to them, provided such amounts appear reasonable. If there is genuine doubt over the existence and/or size of a tort claimant’s unliquidated claim, and if such a claim appears to be critical to determining whether the requisite statutory majority (pursuant to s210(2) of the Companies Act) has been made out, the most prudent and practical course of action would be to adjourn the creditors’ meeting for the matter to be decided by the court.
 
Ultimately, there was no injustice to the Workmen as they still had recourse to their WCA Claims (by virtue of the WCA Claims being under the Scheme). While the amount recoverable by the Workmen was less than that recoverable under common law, they had no real cause of complaint as all unsecured creditors in a scheme would be expected to take a haircut and receive less than their full claims.
 
COMMENT
 
By adopting a wide interpretation of “creditors” under s210 of the Companies Act, the Court of Appeal was cognizant that potential claimants whose claims were unknown, unproven and unliquidated may be bound by a scheme of arrangement which they did not participate in. In its judgment, the Court of Appeal presented guidelines for the future so that the wide interpretation of “creditors” would not cause injustice.
 
First, the company proposing the scheme should provide evidence that it has received no notice of any pecuniary claim against it and it is not aware of any circumstances likely to give rise to a pecuniary claim against the company other than what was disclosed to the court.
 
Second, the courts will be slow to approve a scheme which would have the effect of barring a potential claim where no effective notice of the scheme was given to the potential claimant.
 
Third, it would be appropriate to qualify the definition of a creditor in the scheme of arrangement to exclude any person having a claim in respect of which the company is entitled to indemnity under a policy of insurance, to the extent of the amount recoverable under such policy in respect of such claim.
 
 
For further information, please contact:
 
Raymond Lam, Director, Drew & Napier
raymond.lam@drewnapier.com
 

 

 

Leave a Reply

You must be logged in to post a comment.