Re International Formwork & Scaffolding Pte Ltd

Quentin Loh J:

[1] The provisional liquidators of International Formwork & Scaffolding Pte Ltd (“the Company”) bring this application, Summons No 2313 of 2013, for an order that the liquidators of the company pay them their fees and expenses incurred in the provisional liquidation of the company.

[2] This application raises questions about the entitlement of a provisional liquidator to an equitable lien over the assets of the company and the extent of that equitable lien. I am told by counsel that there is no decided case in Singapore covering this point.

[3] By an order of court dated 11 October 2012, Timothy James Reid, Tan Aik Kiat and Ng Yau Yee Theresa were appointed provisional liquidators (“the Provisional Liquidators”) of the Company. The Provisional Liquidators’ appointment was made, inter alia, on the back of affidavit evidence suggesting that a particular group of creditors and their related parties had made several attempts to misappropriate the Company’s assets and records.

[4] After their appointment, one of the Company’s creditors, which was also its landlord, refused to allow the Provisional Liquidators to enter its premises to secure its assets and records. An urgent application was made to the court for an order that the landlord grant the Provisional Liquidators the access it sought. This was granted on 17 October 2012. Upon securing access to the Company’s books and assets, the Provisional Liquidators carried out extensive work for the Company. They said that these included reviewing all of its books and records, organising and accounting for all of its assets against the books and records, transporting its assets to alternative premises, convening a creditors’ meeting, handling its employment matters, and managing the sale of some assets.

[5] On 7 November 2012, Tay Yong Kwang J made an order winding up the Company. Abuthahir Abdul Gafoor and Chee Yoh Chuang were appointed liquidators of the Company (“the Liquidators”). In the winding up order, it was expressly ordered that:

[7] Pursuant to this agreement, the Provisional Liquidators wrote to the Liquidators on 1 April 2013 requesting payment of:

(a) S$97,417.67 to the Provisional Liquidators (inclusive of GST and disbursements); and

(b) S$57,324.59 to the solicitors of the Provisional Liquidators (inclusive of GST and disbursements).

However, by a letter dated 3 April 2013, the Liquidators refused to make payment of these sums, saying that they would respond only when the costs of the winding up application have also been agreed.

[8] The Provisional Liquidators accordingly filed this application against the Liquidators on 3 May 2013 for an order that the Company and the Liquidators pay the abovementioned sums for professional fees and expenses incurred in the provisional liquidation of the company without further delay.

[10] On 28 May 2013, the Liquidators applied by way of a letter for further arguments to be heard pursuant to s 28B of the Supreme Court of Judicature Act (Cap 322, 2007 Rev Ed). I heard the further arguments made by counsel in chambers on 18 September 2013 after which I reserved my decision. I now give the reasons for my decision on 23 May 2013 and my decision upon hearing the further arguments.

[15] Mr Sim’s response to this was the Australian case of Shirlaw v Taylor (1991) 5 ACSR 767. There, a provisional liquidator was appointed and later, he was discharged and a liquidator appointed in his place. The question before the Federal Court of Australia was whether the provisional liquidator was entitled to an equitable lien over a trust fund of the company in his hands amounting to $175,000 for his fees and expenses and whether such lien made him a secured creditor giving him priority over the other unsecured debts (including the liquidator’s remuneration and expenses). The liquidator argued that by reason of s 441(1) of the Companies Act 1981 (Cth) which statutorily sets out the priority of certain unsecured creditors (the corresponding provision in Singapore being s 328 of the CA), the provisional liquidator could not rank ahead of the liquidator. Section 441(1)(a) and (b) provided:

The full court rejected the liquidator’s argument. It held that the equitable lien was one granted under general law, and so was in no way inconsistent with the statutory scheme. The reference to the provisional liquidator’s fees costs and expenses in s 441(1)(b) was to be invoked by the provisional liquidator only if the lien over the assets of the company was insufficient to satisfy what is owed to him (see Shirlaw v Taylor at 777–778).

[16] I agree. The equitable lien which a provisional liquidator is entitled to stands outside of the statutory scheme of priorities. In the circumstances, I did not think that it was contrary to s 328 of the CA for the Provisional Liquidator to be a secured creditor by virtue of his lien over the assets of the company and therefore in priority to the other unsecured creditors.

[17] This position at general law was, in my view, correctly reflected in para 4 of the winding up order made by Tay J on 7 November 2012 (see above at [5]). Neither the Company nor the Liquidators appealed against the order. In any event, because the lien arises at general law and exists outside of the statutory scheme of priorities, even if the winding up order did not expressly provide for it, its validity would not have been affected upon the winding up of the Company.

[18] During the oral arguments before me in chambers on 23 May 2013, counsel for the Liquidators, Mr Paul Wong (“Mr Wong”), additionally argued that the equitable lien a provisional liquidator is entitled to does not extend to all the assets of the company. This submission was further amplified in his further arguments heard on 18 September 2013.

[19] The Liquidators’ case was that the equitable lien extends only insofar as the assets that were realised by the provisional liquidators in the course of their appointment. They say that so far as these assets are insufficient to satisfy the provisional liquidators’ claim, the outstanding would fall to be distributed as a preferential debt under s 328(1)(a) of the CA and thus rank pari passu with the fees and expenses of the liquidator.

[20] The Liquidators’ arguments may be distilled into the following:

(a) the English decision of Mellor v Mellor and Others [1992] 1 WLR 517 (“Mellor v Mellor”) must be qualified because in that case winding up did not follow the termination of the receiver’s appointment (the facts and holdings in Mellor v Mellor will be discussed below);

(b) the Australian authorities suggest that where winding up follows the provisional liquidators’ appointment, the extent of the provisional liquidators’ lien extends only to the assets realised during their appointment and not more; and

(c) the above is consistent with the principle of “salvage”.

[21] Mellor v Mellor was relied on by Mr Sim for the proposition that a “receiver’s right to be indemnified out of the assets of which he is appointed a receiver extends to all the assets of which he is so appointed and does not simply attach to those assets which, in the course of the receivership, he is able to bring within his grasp” [emphasis added] (per Michael Hart QC, sitting as a Deputy High Court Judge, at 527D). By analogy, this proposition would apply to provisional liquidators as well. There are sound policy reasons for this and they are two-fold as explained by Michael Hart QC (at 527D–E):

I agree. I would add that a provisional liquidator by the nature of his appointment may need to act swiftly and efficiently in the discharge of his duties, and thus should not be put in a position such as he would be distracted by concerns as to the recoverability of his reasonable fees, costs and expenses (see Weston and Another v Carling Constructions Pty Ltd (in provisional liquidation) and Another (2000) 175 ALR 202 at [21]).

[22] Mr Wong argued that the above observations of Michael Hart QC were made in a case where winding up did not follow the receivership. Mr Wong’s argument was in essence that the above proposition is correct only insofar as winding up does not follow the receivership, or in our case, follow the provisional liquidation. If the receivership or the provisional liquidation is followed by winding up, Mr Wong says that a different rule applies, and the equitable lien in such a circumstance is attenuated and extends only to some but not all the assets of the company.

[23] With respect, I do not agree. The observations of Michael Hart QC apply with equal force even if winding up follows the provisional liquidation. Whether or not winding up would follow the provisional liquidator’s appointment is not something the provisional liquidator can foresee at the time of accepting the appointment, so it cannot be a fact which should change his position and the extent to which the law protects him as an officer of the court.

[24] It is the Liquidators’ submission that the Australian authorities support the proposition that only assets brought in by the provisional liquidator are subject to the equitable lien.

[30] Much is made in the Liquidators’ submissions about the salvage principle, upon which they say the equitable lien is founded. Mr Wong sought to convince me that a proper appreciation of the principle of salvage supported their argument that the Provisional Liquidators’ lien extends only to some but not all of the assets of the Company.

[32] Further, given the principle of salvage should be looked at as more of a metaphor than a strict legal principle, its application in this context can be extended as and when it is appropriate or necessary.

[34] By way of their second letter in the chain of correspondence to the court requesting further arguments to be heard and at the hearing before me on 18 September 2013, Mr Wong further honed his argument. Instead of reiterating his previously advanced argument that the equitable lien extends only to the assets realised by the provisional liquidator, he presented a relatively more palatable proposition: the lien extends only to assets which the provisional liquidator had preserved, protected, or enhanced the value of. Mr Wong argued that the burden was on the Provisional Liquidators to demonstrate exactly which assets of the Company it had preserved, protected, or enhanced the value of. This, he pointed out, they had not done.

[35] While superficially attractive, with respect, I find that I also cannot accept this refined argument.

[36] First, there is the problem of workability. In response to my query as to what constituted having done enough under his suggested test, Mr Wong said that so long as the provisional liquidators had looked at a particular asset and considered what to do with it and how to manage it, he was ready to accept that it would fall to be covered by the equitable lien. In other words, he accepted that any minimum effort expended in relation to a particular asset had the effect of causing it to fall within the extent of the equitable lien. However, he said, the Provisional Liquidators had to show which assets were of such a nature. To my mind, a company such as the present demonstrates starkly the difficulty of this proposition. Mr Wong confirmed that the assets of the Company, which was in the business of scaffolding and formwork, were, in his words, “in many bits and pieces”. One cannot expect the provisional liquidator to have to bear the burden of showing the status of each particular asset and what he had done (or considered and not done, or, not done at all) in relation to it before he is entitled to be indemnified from it. Were the Provisional Liquidators in the present case expected to show, among other things, exactly which of the many “bits and pieces” of scaffolding and formwork satisfied this test? I do not think so.

[37] Secondly, in the order of court appointing the Provisional Liquidators on 17 October 2012, it was expressly provided that they were to:

This was consistent with s 269(1) of the CA which provides:

It was therefore in respect of all the assets of the company that the Provisional Liquidators undertook their work. I do not think the law further requires a provisional liquidator to enumerate the precise and particular assets he had worked on.

[38] In further support of his submission that the assets of the company should be divided up as he suggests, Mr Wong referred to Shirlaw v Taylor ([15] supra). As I have noted, in Shirlaw v Taylor, the court dealt with the fact that s 441(1) of the Companies Act 1981 lists claims of the provisional liquidator lower in the scheme of priority than those of the liquidator by holding that the provisional liquidator would resort to claiming under s 441(1) only where the lien was insufficient to satisfy his claims and it was only such claims which ranked behind those of the liquidator under the statutory scheme (see above at [15]). The court in holding so said (at 778):

Mr Wong submitted that the court in Shirlaw v Taylor contemplated there is a distinct difference between the assets a provisional liquidators’ equitable lien covered and the assets “brought into the winding up” by the liquidator, thus supporting his view that the assets covered by the provisional liquidators’ lien are attenuated in the way he suggests. In the light of the considerations articulated in the preceding paragraphs, I agree with Mr Sim’s response. Mr Sim submitted that there are two pools of assets from which the provisional liquidator can claim. First, he is entitled to a lien over all the assets of the company and such lien is superior to and stands outside of the statutory scheme of priorities. When the court in Shirlaw v Taylor envisaged the provisional liquidator having to claim under the statutory scheme, the assets against which he would be claiming (and which would in the event be all that is left) would be assets which can only be brought into the winding up by the liquidator when the winding up order has been made. These would include assets brought into the liquidation in the winding up by the unwinding of voidable transactions. The unwinding of voidable transactions (undervalue transactions, unfair preferences, floating charges for past value, etc) can only be done upon the making of the winding up order and only by the liquidators, not by the provisional liquidator during his appointment.

[41] Despite the extensiveness of the written submissions in the letters to the court requesting for further arguments to be heard and the earnestness of Mr Wong in his oral submissions of the same in chambers before me, I am not persuaded that my order was wrong or needed to be varied. I would like to record my gratitude to both counsel for their cogent arguments which I found of great assistance.