Singapore: Application For Leave To Continue Action Against An Insolvent Defendant: A Balancing Act

A case study of W Y Steel Construction Pte Ltd v Tycoon Construction Pte Ltd (in liquidation) [2016] SGHC 80

Overview

The issue before the High Court was whether leave should be granted to the plaintiff to proceed with an action for breach of contract against an insolvent defendant. The court held that in deciding whether leave should be granted, it must balance the collective interest of the defendant's general body of creditors against the relative hardship and injustice which may be experienced by the plaintiff. As the liquidator had only about S$200,000 available prior to the hearing of the leave application, whereas the plaintiff's claim amounted to more than S$18 million, the court found that allowing the plaintiff to proceed with its claim would exhaust the insolvent defendant's funds even before the claim was concluded. The detriment caused to the general body of creditors would thus far exceed the hardship to the plaintiff. Consequently, the court refused to grant leave to the plaintiff.

Relevant facts

W Y Steel Construction Pte Ltd (plaintiff) was the main contractor for a Housing Development Board project. Tycoon Construction Pte Ltd (defendant) was the sub-contractor engaged by the plaintiff to carry out the construction works under the project.

On 9 October 2014, the defendant submitted a payment claim to the plaintiff for the sum of S$1,878,439.39. Although the plaintiff took the position that the payment claim was served out of time, it nevertheless issued a payment response, but certifying a negative sum of S$666,382.89. This led the defendant to lodge an adjudication application on 30 October 2014 (Adjudication Application). The adjudication determination was rendered on 1 December 2014, and the plaintiff was held liable to pay the defendant the sum of S$1,135,987.04 (Adjudication Sum).

On 10 December 2014, the plaintiff applied to set aside the adjudication determination on the ground that the adjudicator had erred in finding that the payment claim and the Adjudication Application were filed within time (Setting Aside Application). Pursuant to section 27(5) of the Building and Construction Industry Security of Payment Act, the plaintiff paid the Adjudication Sum into court as security. When the defendant applied to enforce the adjudication determination subsequently (Enforcement Application), the plaintiff commenced an action against the defendant for breach of the sub-contract (the Suit) claiming S$18,588,051.25 in damages for claims such as failure to complete the works on time and defective work. The plaintiff also applied for a stay of execution pending the disposal of the Suit in the event the Enforcement Application was granted.

The defendant was subsequently wound up. Consequently, the Setting Aside Application and the Suit were automatically stayed pursuant to section 299(2) of the Companies Act. The plaintiff applied for leave of court to proceed with the Suit against the defendant. The issue before the High Court was whether leave should be granted.

The court's decision

The plaintiff argued that it had legitimate reasons for wanting to proceed with its claims in the Suit outside the insolvency regime of lodging a proof of debt. As the issues in the Suit and the Adjudication Application were the same, disposal of the Suit would at the same time dispose of the Setting Aside Application. If it were not allowed to proceed with the Suit, the plaintiff would have difficulties recovering the Adjudication Sum that was paid into court as security, since the Setting Aside Application was also stayed in view of the winding up. Furthermore, the other unsecured creditors would suffer no prejudice from allowing the plaintiff to recover the Adjudication Sum, since it was paid into court as security and hence did not form part of the defendant's assets.

The High Court disagreed with the plaintiff and refused to grant leave to proceed with the Suit. The court reiterated that in the determination of whether leave should be granted, it seeks to balance the collective interest of the general body of creditors against the relative hardship and injustice which may be experienced by the plaintiff. Ultimately, fair play and commercial morality are the most important considerations.

In coming to its decision, the court rejected the plaintiff's reliance on the principle in W Y Steel Construction Pte Ltd v Osko Pte Ltd [2013] 3 SLR 380 that the interests of a party who had paid monies into court pursuant to an adjudication determination, should be protected in circumstances where the initially successful party is in financial distress such that any monies paid to it is unlikely to be recovered by the time the parties' rights are finally determined. The court held that this principle was only relevant to the court's exercise of its discretion to grant a stay of the Enforcement Application which was not in issue before the court.

Most importantly, the court found that the liquidator only had S$203,409.59 available to it as at 23 November 2015, whereas the damages sought by the plaintiff in the Suit amounted to over S$18 million. Considering that the liquidator's and the defendant's solicitors' expenses had not yet been paid, and the fact that considerable costs would be incurred if the defendant was required to defend the Suit, the court held that the plaintiff's claim would, in all likelihood, exhaust the remaining funds of the defendant even before the conclusion of the Suit. This would be a futile utilisation of the defendant's limited assets that would further the plaintiff's interests to the detriment of the remaining creditors. Therefore, if leave was granted, the detriment caused to the defendant's general body of creditors would far exceed the hardship to the plaintiff.

Moreover, the plaintiff still had the recourse of lodging a proof of debt with the liquidators (which it did) in relation to its claim which would be dealt with in the ordinary course of the liquidation.

Conclusion

The High Court's decision clarifies that protecting the interests of a party who had paid monies into court pursuant to an adjudication determination, in the circumstances where there would be difficulty in recovering payment when parties' rights are finally determined, is only relevant in an application to stay enforcement proceedings of an adjudication determination, but not in an application for leave to commence or continue an action against an insolvent defendant. It further demonstrates that the Singapore courts will strive to prevent the dissipation of an insolvent defendant's assets and ensure that the creditors' interests are protected to the fullest extent, unless such interests are outweighed by the injustice to the plaintiff.

The author acknowledges and thanks Toh Cher Han for his contribution in the writing of this article.

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