BNP Paribas v Jurong Shipyard Pte Ltd

[1] This is an appeal against the decision of Lee Seiu Kin J (“the Judge”) in Originating Summons No 1727 of 2007, viz, Jurong Shipyard Pte Ltd v BNP Paribas [2008] 4 SLR 33 (“the GD”) granting Jurong Shipyard Pte Ltd (“JSPL”) an injunction to restrain BNP Paribas (“BNP”) from commencing winding-up proceedings against JSPL, which BNP had threatened to do after JSPL had failed to comply with BNP’s statutory demand for payment of approximately US$50m allegedly due and payable by JSPL to BNP arising from certain foreign exchange contracts to which BNP was a counterparty.

[2] At the conclusion of the hearing of this appeal, we dismissed it and gave the following brief grounds:

[3] We now elaborate on why it was wrong of BNP to have threatened to resort to winding-up proceedings against JSPL in order to recover a contested debt instead of accepting the security offered by JSPL pending the resolution of BNP’s claim through court proceedings. In our brief grounds, we held that JSPL was entirely justified in applying for an injunction to restrain BNP from filing the petition. Although JSPL filed the petition on the ground that there were triable issues with respect to BNP’s claim for the US$50m crystallised loss, it was also our view that the condition of triable issues was not even necessary to justify the injunction. We will now elaborate on our conclusions.

[4] We examine first the court’s statutory power to wind up a company under the Companies Act (Cap 50, 2006 Rev Ed) (“the Act”). Section 253(1)(b) of the Act provides that “[a] company … may be wound up under an order of the Court on the application of any creditor, including a contingent or prospective creditor, of the company” [emphasis added]. Section 254(1)(e) provides that the court may order the winding up of a company if it is unable to pay its debts. A company is deemed to be unable to pay its debts in the circumstances prescribed by s 254(2) of the Act as follows:

[5] In the context of this case, the following points may be noted with regard to the combined effect of ss 253(1)(b) and 254(2). First, the use of the word “may” instead of “shall” indicates a discretionary power in the court to order a winding up (see [15] below). Second, a creditor may be an actual, contingent or prospective creditor (see [6] below). Third, the court may wind up a company under s 254(1)(e) only if the latter is unable to pay its debts (see [7] below). Fourth, the creditor has to prove that the company is unable to pay its debts, and it can do so by adducing evidence of actual inability to pay its debts (s 254(2)(c)) or evidence of a deemed inability to pay its debts (s 254(2)(a)) (see [7] below). Fifth, to prove a deemed inability under s 254(2)(a) of the Act, it is necessary for the creditor to have a “due” debt, which the debtor has for three weeks neglected to pay or to secure or compound to the reasonable satisfaction of the creditor, after it has been served with a statutory notice to pay. If the creditor claims that the security is not satisfactory and is determined to issue winding-up proceedings, the debtor may then apply to court for a restraining order so as to enable the court to determine on an objective basis what the reasonable satisfaction of the creditor should be (see [9] below).

[6] Taking the second point first, in the present case, BNP took the position that it was an existing, and not a contingent or prospective, creditor with respect to the US$50m crystallised loss on the ground that the terms of the close-out agreement mentioned at [4] of our brief grounds (see [2] above) were such that JSPL had agreed to make payment for the crystallised loss of US$50m. Given the points we have highlighted, it was clear why BNP had to rely on s 254(2)(a) of the Act rather than s 254(2)(c), given that JSPL had offered to place US$50m in escrow. This was a patent indication that JSPL was both able and willing to pay in the event that the court determined that it was liable to do so. In other words, JSPL was not an insolvent company.

[7] This impediment, viz, the fact that JSPL was in reality not an insolvent company but yet refused to admit BNP’s claim, led the latter to use a shortcut by the backdoor to try to enforce a contested claim by issuing a s 254(2)(a) statutory notice and threatening JSPL with winding up unless it made payment. In our view, had a winding-up petition been filed, it would have amounted to an abuse of the court’s winding-up jurisdiction. First, winding-up proceedings are intended only for cases where the company is insolvent or deemed to be insolvent. In the present case, BNP could not have proved that JSPL was insolvent because the fact was that it was not insolvent, and this was easily confirmed by its offer to secure BNP’s claim for the crystallised loss, even though it did not admit that it was liable for the loss. Second, BNP also could not prove a deemed inability to pay on the part of JSPL without first requiring the winding-up court to determine whether the latter was liable for the claim in the first place. In this regard, we note that the second statutory demand for payment (the first being withdrawn) was issued after the offer of security was made. In essence, BNP was seeking to invoke the court’s winding-up jurisdiction to adjudicate on a disputed claim. Thus, it follows that there was no legal basis whatsoever for BNP to threaten to file a winding-up petition against JSPL. JSPL was not an insolvent company and BNP ought to have commenced court proceedings instead, as it is settled law that the court’s winding-up jurisdiction is not for the purpose of deciding a disputed debt; see Mann v Goldstein [1968] 1 WLR 1091, where Ungoed-Thomas J said (at 1098–1099):

Although this passage contains the qualification that the debt must be disputed on substantial grounds and not on insubstantial grounds (which is BNP’s case vis-à-vis JSPL), it should be remembered that Ungoed-Thomas J’s statement of principle was made in the context of a disputed debt where the debtor did not make any offer to secure the disputed debt. Where such an offer has been made, the issue of substantiality or insubstantiality falls by the wayside as it is no longer a relevant consideration given that the debtor is not unable to pay its debts. That is why, in our view, the issue of whether there were triable issues with respect to BNP’s claim was not even relevant in the present case.

[8] In Re Yet Kai Construction Co Ltd [2000] HKEC 186 (transcript available on Westlaw), Deputy Judge Woolley, in striking out a petition to wind up a company, based on a disputed debt, for abuse of process, made the following observations:

We agree.

[9] Taking the fifth point next (see [5] above), even in the case of an admitted debt, the debtor company is not deemed to be unable to pay its debts if it has not neglected to secure the debt demanded under the statutory notice. In our view, the legal position must be a fortiori where the company does not admit the claim but offers to provide security. Although this situation is not expressly covered under s 254(2)(a), it was in our view a compelling reason for this court to restrain BNP from filing a winding-up petition against JSPL. A debtor which has offered security is not deemed to be unable to pay its debts, and there is no reason why an alleged debtor who has offered the same ought to be treated any differently. In the circumstances, even if BNP had filed such a petition, the fact that adequate security had been offered would have been a compelling reason to dismiss the petition.

[10] In our view, we had no doubt that if BNP had filed a winding-up petition against JSPL in the circumstances of this case, the winding-up court would have dismissed the petition, in the exercise of its discretion, on the ground that it was an abuse of process as BNP would not have been able to prove that JSPL was unable or deemed to be unable to pay its debts.

[11] There is one issue in relation to the fifth point that was not argued before us. The point is whether the statutory demand requires the creditor to state that the debtor must be informed of the option of securing or compounding for the debt. It is a statutory requirement under the corresponding law in England, and also in Australia since June 1993. In both jurisdictions, the petitioner is required to inform the debtor company that he can either pay the debt or secure or compound for it to the creditor’s satisfaction. There is, however, no such requirement under the Act or the Companies (Winding Up) Rules (Cap 50, R 1, 2006 Rev Ed).

[12] However, in Consolidated Press (Finance) Ltd v Australian Horticultural Finance Pty Ltd (1992) 108 ALR 402, which was decided prior to the change in the law in Australia, Lockhart J of the Federal Court of Australia held (at 403) that even though:

[13] In the present case, BNP sent a statutory demand in the following terms:

[14] It is clear that, whether or not there is a requirement to spell out all the three options, the terms of the demand were misleading in stating that JSPL would be deemed to be unable to pay its debts if it did not pay the sum demanded within 21 days. If the statutory demand did not comply with s 254(2)(a), and on the assumption that substantial injustice would be caused such that s 392 of the Act could not apply to remedy the non-compliance, it would follow that JSPL would not have been deemed to be unable to pay its debts pursuant to that subsection, and it would have been entitled to the injunction on the terms prayed for. However, since this point was not argued, we will leave it to be raised at another time in another case.

[15] This brings us to the first point concerning the discretionary power of the court not to wind up even a company which is proved or deemed to be unable to pay its debts. The general rule is that, where a company is unable or deemed to be unable to pay its debts, the creditor is prima facie entitled to a winding-up order ex debito justitiae (see Metalform Asia Pte Ltd v Holland Leedon Pte Ltd [2007] 2 SLR 268 (“Metalform”) at [61]). This proposition can be traced to Lord Cranworth’s statement in Bowes v The Hope Life Insurance and Guarantee Company (1865) 11 HLC 389; 11 ER 1383, where he said, at 402; 1389:

[16] The first part of Lord Cranworth’s statement is, however, qualified by the second part of the statement that there could be exceptional cases where the court would not grant a winding-up order. The relevant statutory provision under which the court was vested with the power to wind up insolvent companies in 1865 in England contained the same phrase “may order the company to be wound up” which has been enacted in s 254 of the Act. In construing a similar provision in the Companies Act 1948 (c 38) (UK), Buckley LJ (with whom the other two members, viz, Bridge and Templeman LLJ, agreed) stated, in In re Southard & Co Ltd [1979] 1 WLR 1198 at 1203–1204:

[17] In Metalform, this court made some observations on public policy considerations in relation to attempts by creditors to threaten companies with winding-up petitions where the claims or debts are not admitted or where there are bona fide cross-claims equal to or exceeding the creditors’ claims. At [84], this court said:

[18] Furthermore, where the company is a member of a group enterprise, as in the present case, the filing of a winding-up petition could immediately, or subsequently, if it is not set aside or withdrawn within a specified period of time, trigger a series of cross-defaults under financial arrangements entered into by that company or other companies within the group. It would therefore not be an exaggeration to say that an entire business group could be put at risk of being pushed into a state of insolvency by the mere presentation of a winding-up petition.

[19] Where a petition to wind up a temporarily insolvent but commercially viable company is filed, many other economic and social interests may be affected, such as those of its employees, the non-petitioning creditors, as well as the company’s suppliers, customers and shareholders. These are interests that the court may legitimately take into account in deciding whether or not to wind up the company. In Pilecon Engineering Bhd v Remaja Jaya Sdn Bhd [1997] 1 MLJ 808, the High Court of Malaysia said, at 813 (in respect of a creditor’s petition to wind up a company), that “[n]ot only should the court consider the interest of the creditors, the court should also consider the interest of the public at large” [emphasis added]. There, the petitioner had obtained judgment against the respondent company, which was in the business of developing residential property. In staying the petition for a period of one year, the court took into account the fact that the majority of the unsecured creditors were opposed to the winding up, and added (ibid) that:

[20] We agree with the above decision in so far as the public’s interest could be taken into account in deciding whether to wind up a company. This is especially so if the company is a viable one. Under s 257(1) of the Act, the court may adjourn the hearing of a winding-up application conditionally or unconditionally or make any interim or other order that it thinks fit. In cases where a company is temporarily insolvent but the winding-up court would ex hypothesi grant an adjournment under s 257(1) of the Act to allow the company time to resolve the issues at hand or to seek alternative measures, an injunction of limited duration to restrain a winding-up petition from being presented may also be justified if irreparable harm could flow from its presentation.