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Singapore – What Should Courts Do When The Parties Sought To Be Declared Insolvent Bring A Separate Civil Suit To Challenge The Creditor’s Actions?

12 June, 2013

 

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

 

Introduction

 

In insolvency and personal bankruptcy proceedings, what should the court do when the parties sought to be declared insolvent or bankrupt bring a separate civil suit to challenge the creditor’s actions? Should the insolvency or bankruptcy proceedings be stayed pending resolution of the civil suit, or is the court able to determine liabilities vis-à-vis the parties there and then? This was the issue that arose for the High Court’s determination in Chimbusco International Petroleum (Singapore) Pte Ltd v. Jalalludin bin Abdullah [2013] SGHC 55.

 

The principal debtor in this case (“Gas Trade”) entered into an instalment payment plan with the plaintiff creditor (“Chimbusco”) whereby companies and directors of the companies affiliated to Gas Trade executed joint and several guarantees. However, Gas Trade defaulted and Chimbusco commenced winding up and bankruptcy proceedings against Gas Trade and the defendant guarantors. In turn, Gas Trade and the guarantors commenced a civil suit against Chimbusco for a declaration that Chimbusco was not entitled to pursue them.

 

Vinodh Coomaraswamy JC held that notwithstanding the pendency of the civil suit, the insolvency court was in just as good a position as the civil court to determine liability. In this regard, the applicable standard to determine if unconditional insolvency orders should be made was whether the creditor could show that there were no triable issues, just as in summary judgment proceedings. On the facts, Chimbusco could not show there were no triable issues raised, yet the guarantors’ defence (as raised in the civil suit) were shadowy. Coomaraswamy JC thus proceeded to stay all six proceedings pending the outcome of the civil suit on condition that the guarantors provide security to Chimbusco for the debt. They did not do so by the stipulated deadline. The personal guarantors were thus adjudicated bankrupt and the corporate guarantors wound up. 

 

Brief Facts

 

The chronology of events is as follows:

a.       August 2010-15 July 2011: Mutual business dealings and running account between Chimbusco and Gas Trade result in a net debt owed to Chimbusco.

b.      15 July 2011: Gas Trade entered into the instalment plan with Chimbusco whereby Chimbusco refrained from commencing legal proceedings against Gas Trade. Pursuant to this agreement, the guarantors executed joint and several guarantees.

c.       March 2012: Chimbusco served statutory demands on the guarantors who did not deny that they were liable.

d.      April-May 2012: Chimbusco commenced winding up and bankruptcy proceedings against Gas Trade and the guarantors.

e.       25 April 2012: Gas Trade and the guarantors initiated a civil suit against Chimbusco for a declaration that Chimbusco was not entitled to pursue Gas Trade or the Guarantors.

f.        1 June 2012: Four of the corporate guarantors were wound up.

g.       6 July 2012: Gas Trade was wound up.

h.       24 August 2012: The remaining six guarantors appeared before Coomaraswamy JC in insolvency proceedings brought by Chimbusco – the three personal guarantors on appeal from an Assistant Registrar (who granted a conditional stay of the bankruptcy proceedings pending the outcome of the civil suit); the remaining three corporate guarantors appearing at first instance.

 

Holding

 

The applicable standard in insolvency proceedings where the debt is disputed

 

Coomaraswamy JC first cited the Singapore Court of Appeal case of Pacific Recreation Pte Ltd v. S Y Technology Inc and another appeal [2008] 2 SLR(R) 491, which held that:

 

a.       a judge hearing winding up proceedings is entitled to evaluate the strength of the evidence presented by a company resisting the proceedings on the grounds that it is not indebted to the initiating party; and 

b.      the standard for evaluating that evidence and determining whether the company ought to be wound up is “no more than that for resisting a summary judgment application, i.e., the debtor-company need only raise triable issues in order to obtain a stay or dismissal of the winding-up application.”

 

While differences existed between civil and insolvency proceedings, there was a crucial similarity: the question of whether the defendant owed money to the plaintiff was the ultimate substantive objective of civil proceedings and a fundamental threshold in insolvency proceedings which determined standing. The same question also arose when a civil court had to consider whether to invoke the summary judgment procedure.

 

Next, as in this case, Coomaraswamy JC found that where a putative creditor commenced insolvency proceedings without first having had its rights adjudicated in a civil suit, the putative debtor remained able to dispute the threshold issue of whether there was in fact a debt.

 

Finally, Coomaraswamy JC reasoned that since the threshold issue is determined by an abridged procedure in insolvency proceedings (i.e. via affidavit evidence), the insolvency court should not automatically refer the parties to the civil court without evaluating the merits of the dispute before it. This saves time and money where, on evaluating the same evidence, the civil court would find it appropriate to determine the parties’ rights by the summary judgment procedure.

 

Conditional stay of the insolvency proceedings granted

 

Unconditional insolvency orders were not made because Chimbusco could not show that there were no triable issues raised. On the contrary, having determined that a bankruptcy court has the power to grant, in insolvency proceedings, the functional equivalent of conditional leave to defend in a civil suit, Coomaraswamy JC instead granted a conditional stay of the six proceedings because the guarantors’ defence raised triable issues which were at best shadowy.

 

Conclusion

 

The judgment by Coomaraswamy JC lucidly explores the differences and similarities between the nature and context of civil and insolvency proceedings. It carefully explains why the test of whether there are triable issues applies where the creditor who has not obtained a judgment seeks to wind up or declare the debtor bankrupt. This judgment is also instructive for insolvency practitioners acting for creditors seeking to wind up debtors against whom legal proceedings in respect of the underlying debt have not been commenced.

 

Shook Lin Bok LLP

 

For further information, please contact:

 
Debby Lim, Partner, Shook Lin & Bok LLP
debby.lim@shooklin.com 
 

 

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