Azman bin Kamis v Saag Oilfield Engineering (S) Pte Ltd (formerly known as Derrick Services Singapore Pte Ltd) and another suit

Philip Pillai J:

[1] The parties in Suit No 183 of 2010 and Suit No 717 of 2009, posed a question of law under O 14, r 12 of the Rules of Court (Cap 322, R 5, 2006 Rev Ed) to be determined on the agreed facts set out below. The question of law, as amended by consent of the parties and with leave of the court, reads as follows:

[2] Having heard counsels’ submissions, I delivered my decision that the plaintiff’s causes of action in Suit 183 of 2010 and, subject to the assumption in [14] below, the plaintiff’s causes of action in Suit 717 of 2009, respectively, against the defendant/first defendant have not been extinguished and/or barred and/or precluded from being maintained consequent to the Scheme of Compromise and Arrangement dated 3 July 2008 (“the Scheme”) which was by 4 May 2009 successfully completed and terminated. I now set out the grounds for my decision on this question of law on the following agreed facts.

[4] On 21 November 2007, the Ministry of Manpower (“MOM”) wrote to the Company to request for Azman’s medical report. Azman later filed a claim under the “Workmen’s Compensation Act” on 7 April 2008 (“Azman’s WCA Claim”). It should be noted that the Company’s liability to Azman whether under WCA or at common law was and continues to be covered by a valid insurance policy taken out by the Company. Azman’s solicitors subsequently wrote to the MOM on 15 March 2010 to inform it that Azman had decided to pursue his claim for damages under common law and that the MOM was to hold the matter in abeyance until further notice. The MOM later replied to Azman’s solicitors to inform them that it considered Azman’s WCA Claim to be withdrawn.

[5] Azman then filed a writ for breach of employers’ duty and breach of statutory duty on 16 March 2010 against the Company, his employer.

[6] Shortly after Azman first filed his WCA Claim, the provisional liquidators of the Company procured an investor who pursuant to an investment agreement conditional upon creditor approval of a scheme of arrangement, would acquire control of the Company. The Company then issued a notice to creditors of a meeting to be convened on 25 July 2008 to consider the Scheme. This notice was sent to all Scheme Creditors (as that term is defined in the Scheme – see below at [17]). Azman averred that he did not receive any notice of the Scheme. The Scheme’s meeting of creditors was advertised in The Straits Times on 3 July 2008. Azman avers that he was unaware of the advertisement as he does not read the English newspapers. The Scheme was duly approved by creditors attending the creditors’ meeting and a notice was issued and advertised in The Straits Times on 8 August 2008 of a court hearing on 25 August 2008 for court approval of the Scheme that had been approved by the creditors. The court approved the Scheme on 25 August 2008 and the Scheme took effect on 26 August 2008 when the Scheme and court approval were filed with the Accounting and Corporate Regulatory Authority.

[7] The Company admits that it had been notified and was aware of Azman’s industrial accident prior to the approval of the Scheme. It is not disputed that the Company is covered by a valid insurance policy in respect of Azman’s claim.

[8] The Scheme provided that the cut-off date to submit proofs of debt (“the Claims Cut-Off Date”) was 22 October 2008. Azman did not submit any proof of debt by this date or thereafter. Azman did not participate in the Scheme nor did he receive any payments under the Scheme. The Scheme was terminated on 4 May 2009 by the Scheme’s manager (“the Scheme Manager”), upon the fulfilment of all its terms. The Scheme Manager was then discharged on 11 May 2009. The Company, having successfully restructured and compromised its debts, is now operating unburdened by the Scheme.

[9] The plaintiff in Suit No 717 of 2010, Shaik Abu Bakar bin Abdul Sukol (“Shaik”), suffered injuries due to an industrial accident on 4 February 2008. Shaik was also an employee of the Company. The Company then filed a report of the accident with the MOM. The report, which was filed on 11 February 2008, indicated that it was filed under the “WCA Act [sic] [ie, the Workmen’s Compensation Act] only”. This report indicated that Shaik was claiming for “Workmen Injury Compensation” (“Shaik’s WCA Claim”).

[10] Shortly thereafter, the Company went into provisional liquidation on 24 March 2008 and it subsequently entered into the Scheme (see [6], above). Unlike the situation with Azman, Shaik had earlier notice of the creditors’ meeting. Shaik had also received notification on 27 August 2008 that the court had approved the Scheme and that he was to file a proof of debt.

[11] Shaik had also submitted original medical bills to the Scheme Manager on 14 August 2008 after the meetings of the creditors to consider the Scheme were held. The Scheme Manager submitted to the Company’s insurance company the bills which had not been paid. The MOM later issued a “notice of assessment of compensation” under the “Work Injury Compensation Act” for the sum of $29,400 on 20 October 2008. The insurance company filed its objection to the notice of assessment. Apparently, the Scheme Manager later issued a cheque for $1,235.25 to Shaik in “full and final settlement” of his claim on 9 January 2009.

[12] Like Azman, Shaik did not submit any proof of debt by the Claims Cut-Off Date.

[13] Shortly before the Scheme was discharged, on 8 April 2009 Shaik gave notice to the MOM of his intention to proceed with a claim under common law and, accordingly, he withdrew his WCA Claim. On 20 August 2009, Shaik commenced this suit against the first and second defendants.

[14] Some preliminary points pertaining to Shaik’s case should be noted, before I proceed further. It is worth reiterating that Shaik neither submitted a proof of debt nor did he vote in the creditors’ meeting. It is also worth noting that it was common ground that merely making his WCA Claim does not abrogate his common law claims and that he is entitled to withdraw his application and pursue his common law claims in court (see Ying Tai Plastic & Metal Manufacturing (S) Pte Ltd v Zahrin bin Rabu [1983-1984] SLR(R) 212 at [25]). The final preliminary point is that the legal significance of the Scheme Manager’s payment to Shaik of a cheque for $1,235.25 in “full and final settlement” of his claims in respect of the MOM’s assessment of the payable sum of $29,400 on his common law causes of action in Suit No 717 of 2009 was not argued before me. There was only a reference, without further elaboration, in Shaik’s affidavit that he had received a cheque for that amount in “full and final settlement of [his] claim against the [Company]”. For the purpose of the question of law before me, I expressed to the parties that I would be assuming for the purpose of this question of law, that the part payment by the Scheme Manager did not amount to a compromise by agreement within or apart from the Scheme, between the Scheme Manager or the Company and Shaik of his WCA Claim and his common law causes of action. If the part payment made by the Scheme Manager or the Company was in fact a “full and final settlement” of Shaik’s compromised claims and common law causes of action, then he would be barred from pursuing Suit No 717 of 2009 for reasons independent of the question of law posed before me.

[15] The question of law posed on these agreed facts is a novel but fundamental one which does not appear to have been addressed head on. This is either because the principles of law relating to the legal effect of schemes of arrangement are well settled or because the question of law on the factual matrices of these claims has not hitherto been squarely posed. I should begin by saying that the question of law is posed on the agreed factual matrix of a successfully completed and terminated scheme. The question is not posed within the context of an ongoing scheme. Now that the Scheme has been successfully completed and terminated in accordance with its terms, are Azman and Shaik (collectively referred to hereafter as “the plaintiffs”) barred as a matter of law from instituting their claims against the Company by reason of the Scheme? It is common ground that these claims are not barred by any statute of limitation.

[16] The Company submits that the Scheme had the legal effect even after the successful completion and termination of the Scheme, of extinguishing the insured contingent tortious claims because the plaintiffs had not filed a proof of debt as required by the Scheme document. Therefore, it is argued that the Company is completely and absolutely discharged from all such unproven claims as provided by clause 5.4 of the Scheme.

[17] The relevant provisions of the Scheme document are set out as follows:

[18] Although the industrial accidents occurred prior to the commencement of the Scheme, the plaintiffs’ writs were filed in 2009 and 2010 respectively, after the successful completion and termination of the Scheme. The question is whether the plaintiffs are, by reason of the Scheme, now barred, after the completion and termination of the Scheme, from pursuing their respective insured claims in those writs against the Company.

[19] This question falls in law to be determined by the terms and the scope of s 210 of the Companies Act (Cap 50, 2006 Rev Ed) (“the Companies Act”) in the first instance and, secondarily, by the terms and effects of the Scheme document itself.

[20] I first examine s 210 of the Companies Act to determine whether anything within its purpose, text or scope supports the argued proposition that the insured contingent tortious claims of the plaintiffs are, after the completion and termination of the Scheme, barred. Section 210(3) of the Companies Act provides for the effect of a duly approved and confirmed scheme to be as follows:

[21] The purpose and function of the antecedents of s 210 of the Companies Act have been set out and approved by the Court of Appeal in The Oriental Insurance Co Ltd v Reliance National Asia Re Pte Ltd [2008] 3 SLR(R) 121 (“Oriental Insurance”) at [38] and [40] in the following terms:

[22] The scope and procedural object of schemes of arrangements or compromises are further outlined by Peter Gibson LJ in SEA Assets Limited v Perusahaan Perseroan (Persero) PT Perusahaan Penerbangan Garuda Indonesia [2001] EWCA Civ 1696 at [2]:

Finally, in In re T & N Ltd and others [2006] 1 WLR 1728 (“In re T & N”), David Richards J described the purposes of a scheme of arrangement in the following terms (at [40]):

[23] The courts have given effect to the underlying legislative policy of the antecedents of s 210 of the Companies Act by holding that such creditor and court approved schemes of compromise or arrangement bind all creditors. I should underscore that what binds the creditors is the compromise or arrangement set out in the scheme. A compromise or arrangement ordinarily means a variation by way of restructuring and/or rescheduling of the company’s debts owed to creditors. The question here is whether a scheme has the effect in law of unilaterally extinguishing an insured claim in totality, quite apart from compromising it. A careful reading of s 210 of the Companies Act and the underlying legislative policy set out in the cases cited above, reveals nothing which supports the proposition that s 210 of the Companies Act by its terms confers a statutory result that the scheme extinguishes an insured claim against a company, after the completion and termination of a scheme. Debts or claims can ordinarily only be compromised to the extent provided and performed by the company as set out in the scheme vis-à-vis each individual creditor or claimant.

[24] Once a scheme has been duly approved by the creditors and the court, the scheme will be binding on all creditors, whether proven or unproven, and the courts will not vary or amend the scheme save for fraud, obvious mistakes in the scheme document and, in Singapore, our courts will on occasion extend the time for an unproven creditor to prove his debt and participate in the scheme (see Oriental Insurance at [66] and [69]). A duly approved scheme may also, in principle, be amended by another duly approved scheme. This guarded approach provides finality, clarity and certainty for such approved schemes (see Oriental Insuranceat [66] and [69]), and facilitates corporate rehabilitation.

[25] Where a scheme has been proposed between the company and its creditors, the court is empowered under s 210(10) of the Companies Act upon the application of the company or any member or creditor of the company to restrain further proceedings in any action or proceeding against the company except by leave of the court and subject to such terms as the court imposes. What this means is that once the scheme has been approved by the court, for the duration of the scheme, the status of any further court proceedings against the company will be determined by the court before which such proceedings were commenced, either by reason of s 210(10) of the Companies Act or by reason of any moratorium against actions provided for in the scheme document itself.

[26] I turn next to consider the meaning of the word “creditors” in s 210(3) of the Companies Act. The word is not defined in the Companies Act. Courts elsewhere have adopted different interpretations of the word. A summary of the relevant case law may be found in Pacrim Investments Pte Ltd v Tan Mui Keow Claire and another [2010] SGHC 134 at [24]–[31] and in Australian Corporation Law: Principles and Practice (Butterworths, Looseleaf Ed, 1991, November 2010 issue) at para 5.1.0035.

[27] On one view, “creditors” may refer to all persons who have claims which may be admitted to proof in the winding up of the company (see Re Glendale Land Development (in liq) (1982) ACLC 562 at 564; followed in Re Huon Valley Springs Pty Ltd (Receivers and Managers appointed) (1986) 10 ACLR 883). Applying this view in the context of the relevant legislation in Singapore, unliquidated tort claimants such as the plaintiffs would not be “creditors” within the meaning of s 210(3) of the Companies Act. This is because s 327(2) of the Companies Act provides that, in the winding up of an insolvent company, the same rules that prevail in relation to bankrupt persons are applicable with regard to, inter alia, the debts that are provable. Reference must then be made to the Bankruptcy Act (Cap 20, 2009 Rev Ed) (“the Bankruptcy Act”) to determine whether unliquidated tort claims may be provable in the winding up of an insolvent company. Section 87(1) of the Bankruptcy Act provides, in effect, that such claims shall not be provable:

[28] Another view is that the definition of “creditors” for the purpose of schemes of arrangement extends beyond persons with claims provable in winding up (see In re T & N at [40]). However, even if a broader view is adopted, it is not entirely clear whether a person with an unliquidated claim in tort is a creditor for the purpose of a scheme of arrangement. There is Australian case law to the effect that such claimants are not creditors (see Trocko v Renlita Products Pty Ltd; The Commonwealth Trading Bank and Shepherd (Claimants) [1973] 5 SASR 207 at 209–210, In re Waymouth Guarantee and Discount Co [1975] 10 SASR 407 at 457 (per Walters J)). There is case law to the contrary as well (see Re R L Child & Co Pty Ltd (1986) 10 ACLR 673).

[29] However, it was not necessary for me to reach a conclusion as to whether unliquidated tort claimants, in general, are “creditors” within the meaning of s 210(3) of the Companies Act.

[30] It is appropriate that the courts adopt an approach which gives the broadest scope to creditors for the purpose of facilitating corporate rehabilitations. Thus an insured unliquidated tort claimant may opt in to participate in a scheme, receive compromised payments thereunder and be bound by the scheme. Other insured unliquidated tort claimants may elect to opt out of the scheme and commence court actions against the company between the period where the company has proposed scheme and right up to the termination of the scheme. Claimants who opt out run the risk of any moratorium that might arise either out of s 210(10) of the Companies Act or from the terms of the scheme document.

[31] Nothing in s 210 of the Companies Act is directed to address post-completion and post-scheme termination events. Section 210 of the Companies Act quite naturally does not go further to prescribe consequences that follow the completion and termination of schemes of arrangement, it being concerned only to facilitate the corporate rehabilitation process. The practical reality before me, is that the Company’s insurer is the person who bears the liability to meet the unliquidated tort claims should the plaintiffs succeed. It would not serve any statutory purpose of s 210(3) of the Companies Act, which is to facilitate rehabilitation of companies in financial difficulty, and neither is there any language in s 210(3) of the Companies Act which provides any basis to conclude that a scheme may statutorily extinguish the insured claims of persons such as the plaintiffs, which have no real impact on the Company’s assets or its rehabilitation, and who did not participate in the scheme in any way.

[32] I next turn to the Scheme document on how it defines Scheme Creditors and the scope and effects expressed within it. The material definition clauses are as follows:

[33] It is clear that each Scheme Claim is defined to mean a claim “for which the Company is or may be liable to that Scheme Creditor”. The definition of “liability” which is defined to aggregate all liabilities in their totality and to comprise individual claims for which the company is or may be liable to that Scheme Creditor, resonates the same point. I note that an Australian court has following its construction of the scheme document held that an unliquidated tort claimant was not a creditor bound by a scheme of arrangement (see Smith v Carr and others (1993) 10 ACSR 427). As a matter of construction of the Scheme document’s definition clauses, the plaintiffs’ insured claims for which the Company bears no substantive actual or contingent liability would not, in my view, be claims for which the Company “is or may be liable ... (whether contingently or otherwise)”.

[34] Even if insured claims were to be construed to be within the Scheme definitions, the next question is whether the Scheme document has overreaching effects after the conclusion and termination of the Scheme. The critical clause which is invoked by the Company to close out the plaintiffs’ claims is clause 5.4 of the Scheme which reads as follows:

[35] In order for a scheme to achieve its purpose of binding minority creditors, the statutory conditions in s 210(3) of the Companies Act must be followed and court approval of the scheme must be obtained. In order to fulfil the statutory conditions in s 210(3) of the Companies Act, the company has to identify its creditors and settle the amounts payable to them in order that the necessary numerical and value votes may be determined. Clause 5.4 is designed to determine the classes of eligible Scheme Creditors and the amounts due to them for this purpose. In order to determine the relevant numbers and values, clause 3.3 treats unproven debts or claims to be computed as zero and then clause 5.4 treats such unproven creditors as not being entitled to participate in payments under the Scheme and as having had their debts discharged from the Claims Cut-off Date for the purposes of the Scheme. Clauses 3 and 5 accordingly set out the mechanics of determining the number and value of eligible creditors for purposes of computing the statutory thresholds and for determining the persons entitled to receive the compromised payments as set out in the Scheme.

[36] What is clear is that such unproven creditors are not entitled to receive any payments made to proven creditors under the Scheme and for this purpose his claim is to be treated as discharged. As noted above, the unproven creditor would find himself closed out from participating in the Scheme save in exceptional circumstances (see [24], above). What is not expressed in clause 5.4, however, is that all unproven claims are to be treated as unilaterally discharged beyond the life of the Scheme.

[37] The heart and effects of the Scheme is set out in clause 2.1.1 of the Scheme as follows:

Clause 2.1.1 expressly contemplates that the Company has to provide some consideration to Scheme Creditors in exchange for which the claims as compromised will be discharged and released. Clause 5.4 does not have an independent life of its own but is subject to clause 2.1.1. The compromise is ordinarily structured by a variety and combination of means including reduction/forgiveness of principal and/or interest (referred to as “haircuts”), equity for debt exchanges, and the rescheduling/postponement of repayment. This comports with the basic legal principle that a legal obligation cannot be unilaterally disclaimed by one party save by mutual agreement. Neither clause 2.1.1 nor clause 5.4 have, following the completion and termination of the Scheme, the overreaching effect of enabling the company to have unilaterally extinguished debts or claims which were unproven and which did not participate in the scheme.

[38] I am mindful of the wider market implications of this question of law and I accordingly frame my decision within the narrow context of the agreed facts (see [3]–[13], above) and test it against the legislative policy of s 210 of the Companies Act. The legislative policy is to facilitate companies to reach a compromise and arrangement with their creditors in order to obviate the need for liquidation and to facilitate financial rehabilitation of the company, where the prescribed majority of creditors agree to such compromise or arrangement (see above at [21]–[22]). This policy is achieved by ensuring finality to the process of identifying and quantifying the value of outstanding debts and claims in order to determine whether the prescribed majority agree to the proposed compromise. This legislative policy will not be undermined by holding that unproven and insured unliquidated tort claimants whose claims have no substantive effect on the Company’s assets, are not barred from pursuing their claims in court after the successful completion and termination of the Scheme. I have addressed the risks that such insured claimants take in commencing actions in court once a scheme has been proposed and up to the termination of a creditor and court approved scheme above at [30].

[39] In the light of the above, I would hold that the plaintiffs’ unproven insured contingent tortious claims against the Company are not within the definition of creditors in the Scheme document. Even if they were to be regarded as within such definition, the Scheme document does not have overreaching effects following the completion and termination of the Scheme so as to unilaterally completely and absolutely discharge the Company from the plaintiffs’ claims.

[40] For all these reasons, I decided that, in these circumstances:

(i) Azman’s causes of action in Suit No 183 of 2010 against the Company have not been extinguished and/or barred and/or precluded from being maintained consequent to the Scheme of Compromise and Arrangement dated 3 July 2008 which had been duly completed, performed and fulfilled according to its terms by 4 May 2009; and

(ii) Shaik’s causes of action in Suit No 717 of 2009 against the Company, assuming that his receipt of part payment from the Scheme Manager was not in full and final settlement of his claim and causes of action, either in or apart from the Scheme, have not been extinguished and/or barred and/or precluded from being maintained consequent to the Scheme of Compromise and Arrangement dated 3 July 2008 which had been duly completed, performed and fulfilled according to its terms by 4 May 2009.