Business Finance & Insolvency Law Developments In 2010

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1 Law Developments In 2010 Introduction 2010 saw many important legal developments in the area of business finance & insolvency law both internationally as well as in Singapore. We set out below a summary of the highlights. A) Voidable Transactions Once a company enters insolvency, the pool of assets available for distribution becomes a prime concern amongst its creditors. Creditors and liquidators are thus alert to attempts at dissipating the company s assets before such distribution. The issue of whether such transactions are voidable under the Companies Act frequently arises, and 2010 saw a number of important decisions on the topic. (i) Chee Yoh Chuang and Anor (as Liquidators of Progen Engineering Pte Ltd) v Progen Holdings Ltd [2010] SGCA 31 Unfair preference transactions are voidable under the Companies Act; the test for unfair preference transactions involves the finding of a desire on the part of the insolvent company to put the creditor in a better position should the company be wound up. However, where the recipient of the payment is related to the insolvent company, this desire to prefer is statutorily presumed. This Court of Appeal case demonstrates the operation of the presumption of the desire to prefer. (a) The receiving party must show on a balance of probabilities that the transaction had not been influenced at all by the desire to prefer. (b) Further, it is insufficient to simply deny the existence of such a desire to prefer; the facts must be explained in detail. (c) It does not follow that the presumption of the desire to prefer will be rebutted simply because similar transactions had been earlier carried out while a company was solvent. "Past practice" is only relevant if those practices show that the creditor has been providing new value to the company to keep the company's business going. 1 Rajah & Tann LLP

2 Here, the directors of the company had made false assurances that certain loans would not be repaid to the recipient company, and had subsequently breached these assurances. They had also breached their personal duties by putting their own interests ahead of the interests of the creditors. The Court found that these surrounding circumstances supported the finding of a desire to prefer, reversing the decision of the High Court in Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd [2009] SGHC 286. In doing so, the Court indicated that misconduct on the part of directors will be taken into account, and that it would embark on a full and proper analysis of all the surrounding circumstances so as to ascertain the subjective intention behind transactions which are alleged to be unfairly preferential. It will not blindly accept empty commercial justifications thrown up in an attempt to explain such transactions. B) Liquidators Powers & Duties The role of liquidators is vital in the process of winding up, and it is thus essential for the Court to properly define the scope of their powers and duties. Here, we take a look at a couple of decisions within the past year which have clarified the way in which liquidators may exercise their powers in the course of conducting their functions. (i) Regent National Enterprises Limited v Goldlion Holdings Limited [2009] HKCFA 58 In this case, the Hong Kong Court of Final Appeal had to determine whether a liquidator had validly invoked a force majeure clause. The liquidator had invoked the clause because the windingup order behind his authority to enter into the agreement was being challenged. Therefore, aided by legal advice from an experienced solicitor, he believed he might have lacked the legal power to complete the transaction. The Court found that this opinion was reasonably held. It is important to note that the liquidator's reliance on the solicitor's advice was held to be reasonable even if the advice itself might have been wrong, and that he was not obliged to query such advice. It is difficult to imagine a situation where it is unreasonable to rely on a solicitor's advice since reliance on a solicitor's opinion is often the entire point of engaging him. This case thus highlights the importance of obtaining legal advice when dealing with legally uncertain situations, and reassures liquidators that they are under no obligation to second guess their solicitors. (ii) Gresham International Ltd v Moonie [2009] EWHC 1093 (Ch) When a company enters liquidation, the appointed liquidator often needs approval from the Court or a liquidation committee before she can perform certain acts on the company's behalf. This English High Court case established that even where the liquidator has failed to obtain such approval before acting, the Court has the general discretion to grant retrospective approval. In this case, the liquidator failed to seek the requisite sanction from the Court before instituting legal proceedings. The Court found that it had the power under its supervisory role of winding up to 2 Rajah & Tann LLP

3 make orders which would in effect grant retrospective sanction. However, it chose not to exercise that discretion here as there was no reason to justify the liquidator's delay in seeking sanction. The Singapore Companies Act does not require the liquidator to seek approval before instituting legal proceedings. However, liquidators must still seek approval before performing certain other acts, such as the carrying on of the business of the company, or making compromise arrangements with creditors. Therefore, the principles established in this case may still be applicable to Singapore liquidators. C) Effects Of Winding Up When a company begins the process of winding up, its power to deal with its own assets changes significantly. The law imposes many rules and duties in order to protect the interests of the company s creditors. It is a wide topic of dispute, and 2010 produced a number of cases clarifying certain points. (1) Relationship with Creditors The main area of change upon winding up is the relationship between the company, its assets and its creditors. The interests of the creditor come to the forefront, but the exact structure and rights that attach to these interests are often unclear. (i) Power Knight Pte Ltd v Natural Fuel Pte Ltd (in compulsory liquidation) [2010] SGHC 75 The Singapore Court of Appeal in Ng Wei Teck Michael v Oversea-Chinese Banking Corp Ltd [1998] 1 SLR(R) 778 ("Michael Ng") had previously established that, upon the winding up of a company, a statutory trust arises to preserve the assets of the company for its unsecured creditors; the unsecured creditors thus have a beneficial interest in the company's property, including property subject to an unregistered charge. However, the High Court in Power Knight Pte Ltd v Natural Fuel Pte Ltd held that this beneficial interest does not extend to property subject to a registered charge. Judith Prakash J also disagreed with the Court of Appeal's holding that the statutory trust grants to unsecured creditors a beneficial interest in the insolvent company's assets, opining instead that the statutory trust does not grant any proprietary interest to unsecured creditors. Nonetheless, she was bound by the authority of Michael Ng. In this case, the liquidators of an insolvent company lodged two caveats over the company's property ("the Property") based on the beneficial interests of the unsecured creditors. However, the Property was already the subject of a registered charge, albeit one in which regard a caveat had yet to be lodged. It was held that the Property had already been validly encumbered by the registered charge, and that the unsecured creditors could not claim to have "an interest in land" for the purposes of lodging a caveat. 3 Rajah & Tann LLP

4 (ii) Harms Offshore AHT 'Taurus' GmbH & Co KG v Bloom [2009] EWCA Civ 632 Here, the English Court of Appeal had to decide whether it would grant an order to vacate an attachment on the property of a company in administration, even though the attachment was obtained by a creditor in a foreign court. The Court found that it had jurisdiction to vacate the foreign attachment because upon the commencement of administration, the company no longer had beneficial ownership of its property, creating a sort of extra-territorial trust. This jurisdiction was exercised in this case because the creditors had acted in an unconscionable manner. This decision reinforces the message that creditors of insolvent companies should not seek to avoid the statutorily imposed system of asset distribution and improve their position. Although the relevant statutes in England and Singapore may be different, the principles behind this decision may still apply in Singapore. The concept of administration is similar to that of judicial management, while the principle of equitable distribution of the company's assets is constant in both countries. (2) Schemes of Arrangement (i) Econ Piling Pte Ltd v Sambo E&C Pte Ltd [2010] SGHC 120 The Singapore High Court in this case rejected the proposition that where a debtor is released from its debt, its other joint-debtors are also automatically released. The other joint-debtors are only released if the primary debtor is released by accord and satisfaction, and not by operation of law. Here, the Plaintiff's ("Econ") debts and liabilities were released as a result of a scheme of arrangement. However, Econ had earlier entered into a joint venture with NCC, and questions were raised over Econ and NCC's joint liabilities. Steven Chong JC (as he then was) rejected the Plaintiff's proposition that NCC's joint liabilities as a partner of Econ were also released by the scheme of arrangement. It was held that a scheme of arrangement operates to release the debts under the scheme by operation of law, and not by accord and satisfaction. As such, the scheme which was proposed by Econ's judicial managers and accepted by a majority of Econ's creditors only released Econ from its debt and liabilities. NCC, which was not involved in the scheme of arrangement, does not enjoy the release of its liabilities. D) Banking And Loans In light of the volatile state of financial markets over the last few years, a great number of disputes involving banking and loans were brought to court across all jurisdictions. A number of significant decisions have been made in some novel areas, and although the law here is still relatively young, it is nonetheless worth looking at these decisions to see how it is developing. 4 Rajah & Tann LLP

5 (1) Investment Advice and the Duties of the Bank With the failure of many structured and other investment products, investors naturally sought to recoup their losses and to place liability at the feet of those they believed to be responsible. Many of these investors took action against the banks through which their investments were made, leading to a spate of decisions on the scope of duty that banks have to observe in relation to investments and investment advice. (i) Go Dante Yap v Bank Austria Creditanstalt AG [2010] SGHC 220 This case concerned a claim by the plaintiff customer against the defendant private bank for losses suffered in respect of certain investments made by the plaintiff through the defendant. The plaintiff alleged that the defendant had breached its contractual and/or tortious duty owed to the plaintiff to give investment advice. The plaintiff s claim was dismissed. The Court re-affirmed the principles set out by the English High Court in the important case of JP Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186, and adopted the factors formulated therein: (a) (b) (c) (d) the extent of the plaintiff's financial experience and sophistication; the contractual context; the actual role played by advisor; and the extent of the plaintiff's reliance on the advisor. The Court also recognised that out of the same contractual context, a general duty of care can arise as a concurrent tortious duty co-existing with the contractual duty. If there was an assumption of legal responsibility whereby one party undertook to perform a task or service for another, the contract may modify or exclude the scope of any existing tortious duties arising out of that assumption of responsibility by either party. (ii) Titan Steel Wheels Ltd v The Royal Bank of Scotland plc [2010] EWHC 211 (Comm) The English High Court here had to consider a very pertinent question: Does a bank selling structured products owe any duty of care to its customer in respect of advice given? In this case, the Court found that no such duty was owed. The Court found that the Bank's terms of business specified that it was not acting as advisor, nor was it undertaking any duty of care; this is so even if the Bank went beyond mere execution and actually offered advice. Even without the contractual provisions, the Court found that the Bank had no duty of care as it had not acted in an advisory capacity. This case was applied in the above local decision of Go Dante Yap v Bank Austria Creditanstalt AG. The approach taken in this case is thus in line with the Singapore position, reflecting the responsibility of purchasers of structured products for their own losses. 5 Rajah & Tann LLP

6 (2) Margin Loans Margin loans are both popular instruments and, unfortunately, popular topics of legal dispute. Here, we take a look at two judicial approaches to margin loans and the validity of margin calls one from Singapore, and one from an Australian perspective. (i) Lam Chi Kin David v Deutsche Bank AG [2010] SGHC 50; Lam Chi Kin David v Deutsche Bank AG [2010] SGCA 42 The Plaintiff borrower claimed that his securities under a margin loan with the Defendant bank were wrongly sold because the margin calls made on him were invalid, or alternatively, that he was entitled to more time to deliver additional collateral before his securities were sold. The High Court rejected the claim, but upon appeal, the Court of Appeal reversed the decision. The Plaintiff had received two letters informing him of a margin shortfall, both stating that they were not an official bank s statement or advice, and prepared as a service to provide account information and is intended for discussion purposes only. The High Court found that these letters constituted valid margin calls because the Plaintiff as a seasoned investor knew that he was required to take steps to clear the margin shortfall. However, the Court of Appeal disagreed, holding that the letters were only notifications of the Plaintiff s collateral availability. The High Court rejected the Plaintiff s submission that he was entitled to at least one day s notice before the Defendant took steps to clear the shortfall by selling his securities, as provided by one of the documents governing the contracts. The Court of Appeal reversed this finding, commenting that it would be surprising if in the business of wealth management banks could give themselves the right to close their clients accounts without giving any notice at all. Further, the Court of Appeal found that the Defendant had promised the Plaintiff an additional grace period, and that it could not resile from this promise as it had benefited considerably from the Plaintiff s resultant investment. (ii) Leveraged Equities Limited v Goodridge [2011] FCAFC 3 This case involved the sale of a bank's margin loan books to another margin lender ("the buyer") and the buyer's margin call on and subsequent share sale in respect of the account of one of the individual borrowers. The primary judge in Goodridge v Macquarie Bank Limited [2010] FCA 67 found that the margin calls were invalid as they did not strictly comply with the contractually agreed notice period. He also held that the attempted novation or assignment of the margin loan agreement to the buyer was ineffective because the borrower's express consent was not obtained. However, on appeal, the Federal Court (Full Court) reversed the primary judge s decisions. The Court interpreted the contract as allowing the buyer to shorten the period of compliance to one business day, and to sell part of the borrower s securities upon occurrence of shortfall, regardless of whether a margin call had been made. Further, it was held that the novation of the margin loan agreement was valid as the borrower had given prospective consent in the contract. This decision reverses the primary judge s onerous requirements on the sale and transfer of margin loan agreements, and on loan books in general, resulting in a more commercially practical standard 6 Rajah & Tann LLP

7 of transfer. It is also notable that the Court here took a less strict view of the requirements which a bank must fulfill before the securities under a margin loan agreement may be sold as compared to Lam Chi Kin David v Deutsche Bank AG above, allowing the possibility of sale before the full period for compliance had passed, and even before a margin call had been made. Contacts Lee Eng Beng SC Managing Partner D (65) F (65) eng.beng.lee@rajahtann.com Sim Kwan Kiat Head, Business Finance & Insolvency Practice D (65) F (65) kwan.kiat.sim@rajahtann.com Please feel free to also contact the Knowledge and Risk Management Group at eoasis@rajahtann.com Rajah & Tann LLP is one of the largest law firms in Singapore and Asia, with representative offices in Shanghai and Vientiane, as well as an associate office (Kamilah & Chong) in Kuala Lumpur. As a full service regional law firm, our knowledge, resources and insight can be your business advantage. Rajah & Tann LLP is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealing with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The contents of this Update are owned by Rajah & Tann LLP and subject to copyright protection under the laws of Singapore and, through international treaties, other countries. No part of this Update may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed, broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of Rajah & Tann LLP. Please note also that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as such information may not suit your specific business and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann LLP or the Knowledge & Risk Management Group at eoasis@rajahtann.com. 7 Rajah & Tann LLP