United Fiber System Limited v China National Machinery & Equipment Import & Export Corporation

Quentin Loh J:

[1] In this action, the plaintiff (“UFS”) is basically seeking to set aside a statutory demand for US$19,742,682 made on it by the defendant (“CMEC”) on 20 August 2010 in respect of a performance bond. UFS is seeking this relief on the ground that there was no debt immediately payable by it under the performance bond. It is also seeking certain ancillary reliefs.

[2] UFS is a public company listed on the Singapore stock exchange. It is the parent of an Indonesian company named PT Mangium Anugerah Lestari (“PT MAL”).

[3] In or around April 2007, CMEC completed delivery of a wood chip mill to PT MAL pursuant to a contract between them (“the EPC contract”). PT MAL’s payment obligations to CMEC under the EPC contract were secured by a guarantee from UFS to CMEC (“the guarantee”).

[4] PT MAL defaulted in its payment obligations and UFS also defaulted in its obligation under the guarantee. CMEC agreed to reschedule PT MAL’s debts in a deed of settlement dated 2 September 2008 (“the Deed of Settlement”). Under the Deed of Settlement:

[5] PT MAL’s payment obligations under the Deed of Settlement were secured by UFS’s irrevocable and unconditional performance bond, also dated 2 September 2008 (“the Performance Bond”). Under the Performance Bond, UFS covenanted to pay on demand (a) US$25,296,250 or the Outstanding Balance, as defined in the Deed of Settlement, and (b) a Depreciation Amount to compensate CMEC for any depreciation of the US dollar against the Renminbi, such amount to be calculated by a formula prescribed in the Performance Bond.

[6] By 5 February 2009, PT MAL had failed to pay at least three instalments, thereby triggering the acceleration clause in the Deed of Settlement.

[7] On 8 July 2009, CMEC demanded payment of US$24,060,958.43 from UFS pursuant to the Performance Bond as the accelerated sum due under the Deed of Settlement. Between 8 July 2009 and 15 July 2010, UFS paid CMEC US$926,107.

[8] On 15 July 2010, CMEC issued a statutory demand under section 254(2)(a) of the Companies Act, (Cap 50, 2006 Rev Ed) (“the Companies Act”), against UFS for the sum of US$22,980,625 (“the 15 July SD”). The parties subsequently entered into negotiations regarding the sum owed by UFS to CMEC. The relevant parties and interlocutors were:

[9] The parties were, to use a neutral term, in communication with each other up to 20 August 2010, when CMEC issued a second statutory demand to UFS for US$19,742,682 (“the 20 August SD”). On 23 August 2010, CMEC filed the present originating summons. In essence, UFS is contending that two agreements had been formed in between 15 July 2010 and 20 August 2010, the net effect of which was that no debt was due and payable to CMEC when it issued the 20 August SD.

[10] On 30 August 2010, counsel for UFS wrote to the Registrar and indicated that the parties have agreed that, pending the resolution of this originating summons, CMEC will not commence any winding up proceedings against UFS; and UFS will not enter into any transaction which has a material adverse effect on the net asset value or the net current asset value of the Plaintiff, save in the ordinary course of business.

[11] At the 1 hearing of this action, which was brought by way of originating summons (“OS”), I informed counsel that there seemed to be a serious dispute of fact and the OS procedure was not suitable. Furthermore, I was being asked to make a final determination on facts, which although evidenced in written exchanges, nonetheless involved quite a few telephone calls and meetings at important points of time. However, counsel prevailed upon me to consider limited cross-examination. I therefore ordered that counsel agree on a list of issues for the purposes of cross-examination. The agreed issues are as follows:

[12] Counsel also agreed to proceed on the basis that, as of 27 July 2010, UFS owed US$22,967,254.65 to CMEC. This was without prejudice to each side’s right to contend elsewhere that the actual figure was different.

[13] In order to present a fair picture of the communications which transpired between the parties, I first set out the relevant documents and each side’s evidence in detail and chronologically, before going on to address the arguments presented by each side. Unless otherwise stated, the emphases in the documentary evidence which I set out are original.

[14] As mentioned, CMEC issued the 15 July SD to UFS for US$22,980,625.

[15] Lee, on behalf of Deboo, sent Dong and Ji an email, which read in material part as follows:

[16] Deboo also sent Dong and Ji a similarly-worded letter.

[17] Ji replied to Lee with an email at 2.01pm, the material part of which read as follows:

[18] According to Ji, Lee subsequently contacted him to say that UFS did not have the funds to meet this proposal.

[19] Ji sent a further email at 6.10pm varying his position. The material part of that email read as follows:

[20] Lee replied to Li with an email with a letter attached, making a counterproposal. The letter informed Li that Falcon was currently conducting due diligence on UFS with a view towards investing in it. It then went on to say:

It then proposed:

[21] UFS did not announce the 15 July SD as indicated in its 21 July letter. Instead, it suspended trading of its shares “pending for [sic] release of an announcement”.

[22] Under the SGX rules, the suspension of the shares had to be lifted by 28 July, which therefore represented, according to the evidence of Deboo and Soh, a critical point or deadline.

[23] At 1.57pm, Ji emailed Deboo to reject UFS’s proposal in its letter of 21 July and to restate the 15 July SD.

[24] At 6.08pm, Lee emailed Ji. The material part of the email read as follows:

[25] Lee and Li then spoke on the telephone. Lee alleged that Li agreed with her statement that by paying CMEC US$6m, UFS would be prepaying the instalments due under the Repayment Schedule up to December 2010. Li disagreed and said he clearly told Lee that there was no question of prepayment (which was a reference back to the Repayment Schedule) and that what was immediately due and owing was the entire debt and interest of some US$24m. The US$6m payment was to show good faith and was about one quarter of the amount due and owing.

[26] At 12.46pm, Lee reported to Deboo, who in turn reported to UFS’s board through an email, the material part of which read as follows:

[27] At 4.43pm, Lee sent Ji, Deboo and others an email containing a remittance advice from United Overseas Bank for the transfer of US$1m to CMEC’s bank. The remittance advice indicated the transfer as being “PART PYT OF DEBT”.

[28] At 5.33pm, Ji sent Lee an email which enclosed a letter from Li to UFS. The letter read in material part as follows:

[29] Between 5pm and 6pm, Deboo, WongP and MPillay also engaged in a conference call. After the call, at 7.55pm, WongP sent an email to MPillay, the material part of which read as follows:

[30] At 9.26pm, WongP sent Li and others a draft of the undertaking proposed to be given by Falcon. The draft read in material part as follows:

[31] Throughout the early hours Soh, Li and WongP were in negotiations over the telephone. Deboo appears to have a limited involvement, but it seems to be common ground that he was not in a position to give evidence on the negotiations because parts of the negotiations were conducted in Chinese, which he did not understand, and also because he was engaged in preparing the stock exchange announcement made later in the day (see below). In his evidence, Soh insisted that he had no mandate from Falcon to make payment to CMEC before 31 August. Li, on the other hand, insisted that Soh was aware of UFS’s commitment to pay the US$5m within the week.

[32] At 7.46am, Deboo sent an email to Li and others. The email read in material part as follows:

[33] At 8.04am, WongP sent an email to Li and others. The email enclosed the final agreed form of undertaking from Falcon (“the Falcon Undertaking”), which read in material part as follows (with the amendments from the draft of 27 July, 9.26pm (see [30] above), underlined):

[34] At 8.38am, Li sent an email to Deboo and others, stating:

Li was called immediately to remove the word “temporarily” and did so in an email at 8.45am.

[35] At 8.54am, UFS made a stock exchange announcement, which read in material part as follows:

[36] At 10.23am, MPillay replied to WongP’s email of 27 July, 7.55pm, stating that:

[37] At 2.31pm, WongP replied to MPillay via email, which read in material part as follows:

[38] At 5.25pm, MPillay informed WongP via email that:

[39] Deboo, Soh and Sia went to Beijing to meet with Li. It appears that, during their meeting, Li demanded the payment of the US$5m by 5 August. It is not alleged that any agreement was reached at this point. Indeed, Li, Sia and Soh, accepted in their evidence that there was no agreement reached at these meetings in Beijing.

[40] Deboo reported to UFS’s board via an email, the material part of which read as follows:

[41] It appears that Soh and Li spoke over the telephone at some time before 8.41pm.

[42] At 8.41pm, Soh sent an email to Li, Sia and another. The email was entitled “Proposal for the Repayment of UFS Debt to CMEC” and read as follows:

[43] At 11.23am, Soh forwarded his email of 5 August, 8.41pm, to Ji, stating that:

[44] At 3.36pm, MPillay sent Soh and WongP an email. The email was marked “Subject to contract”. It read in material part as follows:

[45] At 7.25pm, Soh emailed Li as follows (and copying Sia and Deboo):

[46] It is pertinent to refer to some of the key terms of these drafts originating from UFS/Falcon and drafted with the benefit of legal advice from WongP. Clauses 1, 2 and 8 of the draft memorandum of understanding read as follows:

The draft memorandum also adopted the definition of “CMEC Debt” used in the draft term sheet. In this connection, the preamble to the draft term sheet read as follows:

“Settlement Sum” was defined in cl 2 as:

[47] At 7.39pm, Soh replied to MPillay, copying WongP, that:

[48] At 10.12pm, Li emailed Soh as follows:

[49] Soh and Li spoke over the telephone on 7 August 2010 but no agreement was reached.

[50] At 9.41am, Soh emailed Li requesting CMEC to provide the bank guarantee format so that there will not be any dispute.

[51] At 6.06pm, Soh emailed Li, Ji and Deboo as follows:

[52] At 11.41pm, WongP replied to MPillay’s email of 6 August, copying Deboo, Lee and others, as follows:

[53] At 4.18pm, Deboo sent a report via email to UFS’s board. The email read in material part as follows:

[54] At 5.40pm, MPillay sent WongP, Lee and Deboo an email. The email was entitled “RE: Tuesday 10 August final deadline for US$5 million payment from UFS to CMEC” and read:

[55] At 11.36pm, WongP sent an email replying to MPillay (copying Deboo and Lee). In the email, WongP said:

[56] At 7.38pm, WongP sent a scanned copy of the remittance advice issued in respect of “the sum of US$5,000,000 being partial repayment of the debt owing by UFS to CMEC”.

[57] At 5.41pm, UFS made the following stock exchange announcement:

[58] At 3.54pm, Li sent Deboo an email, stating that:

[59] At 6.00pm, MPillay emailed Soh and WongP (copying Ji and Li) as follows (the email was marked “Subject to Contract”):

[60] Pertinently, in the draft term sheet enclosed in MPillay’s email, “CMEC Debt” was defined as:

[61] The draft bank guarantee was for US$22,099,030.91,ie, US$17,385,434.70 with 8% interest per annum up till January 2014.

[63] UFS made a stock exchange announcement, the material part of which read as follows:

[64] At 3.55pm, WongP replied to MPillay’s email of 13 August. The email read in material part as follows:

[65] WongP’s email enclosed the draft repayment deed, in which the definition of “CMEC Debt” remained materially unchanged:

[66] At 4.01pm, Falcon’s solicitors replied to MPillay’s email of 13 August. The email read in material part as follows:

[67] At 6.40pm, Deboo reported to UFS’s board via an email. He began the email with the line:

He then summarised the above two emails, before saying that:

[68] At 12.51pm, MPillay replied to Falcon’s solicitors’ email of 17 August, 4.01pm. The email, which was copied to Soh, Lee, Li, Ji and WongP, read in material part as follows:

[69] At 4.34pm, MPillay sent an email to WongP and Falcon’s solicitors (copying Ji, Li, Soh and Lee), which read in material part as follows:

[70] At 6.17pm, Falcon’s solicitors replied as follows:

[71] At 7.15pm, MPillay emailed WongP and enclosed a letter, the material part of which reads as follows:

[72] There was some further correspondence but nothing substantial was discussed or agreed on.

[73] At 12.55pm, Li emailed Deboo (copying Soh) as follows:

[74] MPillay, on behalf of CMEC, then issued a statutory demand to UFS for US$19,742,682.00. A copy was emailed to WongP at 4.58pm.

[75] UFS made a stock exchange announcement, the material part of which read as follows:

[76] UFS called a trading halt “pending for [sic] release of an announcement.” It also filed the present originating summons – this was announced on the stock exchange 3 days later, on 26 August.

[77] With regard to question (1) of the agreed list of issues (see [11] above), UFS argued that an agreement had been reached on 27/28 July between UFS/Falcon and CMEC, wherein CMEC agreed to withdraw the 15 July SD on the conditions that (a) UFS made payment of the sum of US$5m by 31 August; (b) such payment to be guaranteed by an undertaking issued by Falcon in favour CMEC; and (c) parties enter into discussions on restructuring the balance amount to be paid to CMEC.

[78] With regard to question (2) (and the sub-questions) therein (see [11] above), UFS argued that the agreed deadline for UFS’s payment of the US$5m was 31 August as stated in the Falcon Undertaking, that this meant that CMEC was not entitled to issue a fresh SD until at least after 31 August, and that the US$5m represented payment by UFS of the instalments under the Repayment Schedule from August 2010 onwards and at least through December 2010.

[79] With regard to question (3) (see [11] above), UFS argued that on 5 August 2010, UFS, Falcon and CMEC had reached an agreement on the restructuring of the remaining amounts due under the Deed of Settlement (after payment of the US$5m). The terms of the agreement were: (a) repayment of US$17,385,434.70, to be made on a quarterly basis from January 2012 until January 2014; (b) UFS/Falcon to procure a bank guarantee for the sum of USD $17,385,434.70, which can be called upon by CMEC in the event of default by UFS under the new repayment plan; and (c) interest rate of 8% per annum.

[80] With regard to question (4) (see [11] above), UFS repeated its answers to question (3).

[81] With regard to question (5) (see [11] above), UFS argued that the US$5m was paid to CMEC on the basis of the agreement alleged by UFS in its answer to question (3).

[83] CMEC’s position is essentially to deny that any binding agreement had been reached.

[84] With regard to the deadline for the payment of the US$5m, the documents of 27/28 July are admittedly inconsistent. On the one hand, Li’s 27 July letter to UFS (see [28] above), WongP’s email of 7.55pm on 27 July (see [29] above), and the Falcon Undertaking of 28 July (see [33] above) all refer to payment by 31 August 2010, or August 2010. On the other, there was Deboo’s email of 7.46am on 28 July referring to payment by “next week” (see [32] above), although I note in this regard that the parties do agree that Deboo was not in the best position to give evidence on the negotiations between Li and Soh. There was also Li’s emails of 8.38am and 8.45am which withdrew the 15 July SD on the basis of both Deboo’s email and the Falcon Undertaking (see [34] above). The evidence of the telephone conversation between Soh, Li and Deboo was also conflicting, although I would say in this regard that, in the light of the fact that Falcon had agreed on 27 July with UFS to make available the US$5m available for drawdown within a week (see UFS’s stock exchange announcement of 28 July at [35] above), I find it difficult to accept Soh’s evidence that he had no mandate to agree to Falcon making payment before 31 August.

[85] In this respect I should say that on the whole I found the witnesses on both sides honest. Where their recollections differ, I prefer the evidence of CMEC’s witnesses. Their evidence was more consistent with the contemporaneous communications that passed between the parties. UFS’s witnesses were obviously under great pressure at that time and it is understandable that their recollection was coloured by what they had hoped to achieve, rather than being dishonest. Their recollection was of those parts of the conversations that supported their hopes. Even then, their evidence pointed more to an overly sanguine, but nonetheless misplaced, recollection of an “understanding” rather than any express “agreement” being reached.

[86] This view is confirmed when one examines the evidence post-28 July 2010. The existence of such a grace period lasting until 31 August 2010 was not raised at all in the many instances after 28 July where CMEC insisted on being paid earlier. On 4 August, Deboo reported to his board that CMEC needed to be paid US$5m “by tomorrow as part of the SD withdrawal” and emphasised that “it is critical that the BOD approve the resolution so we can get CMEC paid tomorrow failing which they are liable to slap another SD” (see [40] above). On 6 August (which was a Thursday), MPillay’s email to Soh and WongP stated that “[a]s you may be aware, UFS has committed to pay CMEC a sum of US$5m by the end of this week. ... However … CMEC will, as a gesture of goodwill, hold its hands until Tuesday 10 August …” (see [44] above). This was reported without protest by Deboo to UFS’s board at 4.18pm on 9 August (see [53] above); indeed, Deboo also reported the efforts being made to comply with CMEC’s demands “[b]efore CMEC slaps another SD”. At 5.40pm on the same day, MPillay sent what can only be described as an ultimatum, stating that the payment of the US$5m was to be made immediately and was not to be conditional on further negotiation or agreement (see [54] above). At 11.36pm, WongP simply replied, without any murmur of dissent, that arrangements had been made to disburse the US$5m (see [55] above). The payment was disbursed the next day. CMEC clearly felt free to make demands for payment before 31 August, and that UFS, equally clearly, felt compelled by the exigencies of the situation to comply with those demands. This would be completely incongruous with the existence of a binding grace period lasting until 31 August. Similarly, UFS’s willingness to comply with CMEC’s demands show that it did not rely on any representation of a grace period that CMEC may have made (and I do not think that any was made), and therefore there can be no estoppel.

[88] Counsel for UFS referred to two items of correspondence from Ji referring to payment of instalments from December 2009 to December 2010. The first is Ji’s email of 2.01pm on 20 July to Lee, stating that “[i]f UFS could pay the installments [sic] from Dec 2009 to Dec 2010 in accordance with Schedule 1 of Deed of Settlement dated 2 Sept 2008, then CMEC would consider whether or not to withdraw the SD” (see [17] above). The second is Ji’s email at 6.10pm on the same day, referring again to payment of “installments [sic] from Dec 2009 to Dec 2010”, before “CMEC will consider to withdraw the SD” (see [19] above). The short answer to this is that it would be internally inconsistent for Ji to only “consider” withdrawing the 15 July SD if he had somehow acceded to UFS making instalment payments up to December 2010. I accept the view was that put forth by Ji, ie, the reference to instalments under the Deed of Settlement was simply a loose and convenient way for CMEC to state the amount it wished UFS to pay, as a sign of its good faith, before further negotiations on restructuring the debt could take place. Also, there is the evidence, already referred to, that UFS simply did not act as if it had secured a reprieve of at least three to four months in its conduct subsequent to paying the US$5m.

[89] It is also untenable that there was an agreement reached on 5 August. Even on its face, Soh’s email of 5 August (see [42] above) cannot plausibly be read as a record of a binding agreement. Soh listed “[a] Binding term sheet between UFS, CMEC and Falcon Capital” as the first item under “What needs to be done”. This indicated that the parties had not intended to create legal relations. In the same list, Soh referred to CMEC not taking any action against UFS during the two weeks for finalising the term sheet – why was this grace period necessary if an agreement had been reached? Also, Soh expressly recorded that an exchange rate range remained to be agreed – a perusal of the detailed mechanism in the Deed of Settlement to protect CMEC against the US dollar depreciating against the Renminbi would have made clear that this was an important point. There was also no agreement on the form of the bank guarantee to be provided to CMEC. In these circumstances there can be no binding contract, even though the parties might have reached agreement on some points.

[90] It is even more improbable that Soh’s email of 7 August confirmed any prior agreement. The day before, MPillay had sent a “[s]ubject to contract” email proposing terms (see [44] above). Li had likewise rejected Soh’s proposed term sheet (see [48] above). In these circumstances, it must have been abundantly clear that there was no consensus reached. As was indicated in the email of 7 August, Soh opened with an apology by to Li if he had misunderstood what Li said (see [51] above). He closed by expressing his hope that he got everything down correctly. Such tentativeness does not amount to convincing proof of a binding agreement.

[92] Taking the evidence in the round, this is clearly a case where a creditor was negotiating sharply with a debtor who was completely at its mercy, and who was fully and painfully aware of this. It was clear to all parties involved that there would be no binding agreement regarding the restructuring and repayment of the debt between UFS and CMEC until the parties signed on the dotted line. Until that time, CMEC could and did drive a hard bargain, and forcing UFS to make substantial partial repayments of the debt due and owing to CMEC before CMEC would even contemplate negotiations. This uncompromising stance and the last minute introduction of additional payments, hitherto not raised (see Li’s email of 13 August 2010 at [58] above), eventually caused the negotiations to break down. What CMEC hoped to gain by this I do not understand – the intervention of Falcon gave it a third party guarantee that it would otherwise not have had. But that is another commercial matter that does not concern the court. For present purposes it is clear that the negotiations gave rise to no agreement, no intention to create legal relation, no representation and no detrimental reliance. There can therefore be no collateral agreement or estoppel in relation to the debt due and owing by UFS to CMEC.

[93] I therefore answer the issues presented to me (see [11] above) as follows:

[94] UFS is therefore not entitled to the reliefs it claimed on the basis of the alleged agreements and/or estoppels.

[95] There were some arguments relating to the bona fides of CMEC in issuing the 20 August SD. I think these arguments are without any foundation or basis given CMEC’s consistent stance in the negotiations that sums were owing to it under the Performance Bond and it would issue a statutory demand for them if the negotiations fail to produce an agreement. In any case, I do not think that considerations of bona fides are relevant to the validity of a SD after the court has adjudicated that a debt was indeed owing to the party issuing the SD. The starting point of these proceedings was an undisputed breach of the Repayment Schedule, a valid acceleration of the entire debt and interest and an enforceable obligation under a Performance Bond given by UFS to make good P T Mal’s breaches of the Deed of Settlement. In this regard, there is no dispute that a debt would be due and owing by UFS to CMEC but for UFS’s allegations of agreements, collateral or otherwise, and estoppels, which I have rejected. The only question, then, is the quantum of the debt, and on this the parties have reserved their positions. I think the question of quantum is something on which the parties can sensibly agree between themselves, but if they are unable to agree I can hear further arguments on quantum. For now, it suffices for me to say that the 20 August SD is valid to the extent of the debt owing by UFS to CMEC as of 20 August 2010.

[96] UFS also sought a limited injunction of 21 days (or such further period as I deem fit) to restrain CMEC from commencing any winding up proceedings. I was told during oral submissions on 20 January 2011 that there is a new ‘white knight’ in the wings and it was “a matter of weeks” before UFS would get funds to pay off the debt.

[97] In this regard, counsel for UFS referred to observations in Metalform Asia Pte Ltd v Holland Leedon Pte Ltd [2007] 2 SLR(R) 268 and BNP Paribas v Jurong Shipyard Pte Ltd [2009] 2 SLR(R) 949. Those observations concerned the inappropriateness of presenting a winding up petition when there is a dispute as to the debt owed. I do not see how they assist UFS in this case, where CMEC has, quite properly, agreed not to take any action to wind up UFS pending my decision.

[98] Counsel for UFS also pointed out that the presumption of insolvency under s 254(2)(a) of the Companies Act arises only if UFS does not comply with a statutory demand for three weeks. Three weeks means 21 clear days excluding the day of service: see Re Lympne Investments Ltd [1972] 1 WLR 523. I am of the view that a bona fide action brought to dispute the debt must have the effect of suspending the running of time for payment until the dispute is resolved – non-payment of a disputed debt cannot logically give rise to a presumption of insolvency. In this case, the application which was brought promptly after the issuance of the 20 August SD, and I would hold that the 21 days for payment would start to run from the date of my judgment. However, there is no evidence that CMEC would not wait for the presumption of insolvency to arise upon the expiry of the 21 days before taking any action to wind up UFS. In the circumstances, I see no reason to grant the injunction sought by UFS. Of course, if there are subsequent developments UFS is at liberty to apply to me to exercise the court’s limited jurisdiction, as recognised by the Court of Appeal in BNP Paribas v Jurong Shipyard Pte Ltd [2009] 2 SLR(R) 949 at [20], to restrain a valid winding up petition.