Overview Of Creditor Puts A Liquidator To The Test
In DB International Trust (Singapore) Ltd v Medora Xerxes Jamshid and another [2023] SGHC 83 a creditor puts a Liquidator to the test. Who came off second-best?
Kirkham International Pte Limited (“KIPL”) was placed into Liquidation on 20 November 2020, being wound up on a just and equitable basis.
Reasons For The Liquidator To Be Compelled To Leave Office
The following position was alleged by the applicant:
- A lack of vigour
- Failure to comply with statutory obligations
- Conflict of interest
- Creditor loss of confidence
This article only focuses on the key reasons the Court gave for granting the creditor application. The lack of vigour alone in this case it seems may have been sufficient.
To get a Liquidator to leave office via an application, the Court in Singapore said cause had to be shown with reference to the substantial honest interests of the Liquidation. Furthermore, benefit would need to be derived from the Liquidator being replaced.
The Court referred to a two stage test ie. the purpose of the appointment of the Liquidator and then assessing what is in the interests of the Liquidation with reference to such purpose.
Purposes Of Liquidation
The Court in Singapore looked into the purposes of Liquidations and highlighted three key principles:
- Provision of a fair procedure to distribute assets amongst creditors.
- Protection of the public to fetter the trade of insolvent companies.
- Enabling investigations by independent qualified persons to assess the cause of the winding up.
Given an insolvent Liquidation is for the benefit of creditors the Court suggested due weight was to be given to the creditors’ wishes.
Dilution Of Shares
KFL’s primary asset was its shareholding in a Singapore company. It had 95% of the shares in PT Borneo Prima Coal Indonesia (“BPCI”). However, on or around 21 January 2022 the shareholding dropped to 28.5% after an increase in share capital.
The problem here was the Liquidator ratified the actions of a former KIPL Director to act on behalf of KIPL after authorising a broad range of actions in Indonesia:
The Liquidator, on behalf of the Company, hereby ratifies (as if the same were undertaken by the Liquidator himself): all actions, announcements, commencement of proceedings, powers of attorney, resolutions and notices issued in relation to protecting the Company’s assets, interests and rights in Indonesia, from the date of the Winding Up Order (i.e. 20 November 2020) to the date of this Statement Letter. This also ratifies any actions taken by Mr. Garry David Taylor’s in signing any letters and resolutions on behalf of the Company, including but not limited to signing of the shareholders’ resolution of PT Borneo Prima Coal Indonesia and signing of powers of attorney for the appointment of Budidjaja International Lawyers as the Company’s counsel in Indonesia to commence any court proceeding and legal action for and on behalf of the Company in Indonesia.
The Court was critical the Liquidator provided ratification before finding out about the share issuance, had failed to preserve KIPL’s interest in its primary asset and asked questions after the problems sprouted:
28 In my judgment, the Liquidator has unjustifiably allowed Mr Taylor to act for and on behalf of KIPL in too broad a manner. As such, I find that he has failed to exercise sufficient vigour in the carrying out of his duties. I say so for the following reasons.
29 First, while I can accept that the Liquidator had provided the ratification on 31 January 2022 on the basis that the application to nullify the Share Pledge was in the interests of KIPL’s creditors as it would potentially increase the pool of assets available for distribution to the unsecured creditors, I do not think this objective was clearly expressed in the broadly framed ratification. In this regard, it is important that the ratification purported to “ratify any actions” taken by Mr Taylor in signing any letters and resolutions on behalf of the Company, “including but not limited to” [emphasis added] the signing of the shareholders’ resolution of BPCI, as well as the signing of powers of attorney for the appointment of Budidjaja International Lawyers as the Company’s counsel in Indonesia to commence any court proceeding and legal action for and on behalf of the Company in Indonesia. Therefore, despite what the Liquidator may say his intention was, the broad framing of this ratification clearly extends to the signing of letters and resolutions beyond those necessary to progress the application to nullify the Share Pledge. This is clearly unnecessary and unjustifiable for it effectively gives Mr Taylor a broad latitude to act on behalf of KIPL in matters other than the said nullification proceedings.
30 Second, I find it unsatisfactory that the Liquidator did not find out about the share issuance, which appears to have taken place sometime between December 2021 and January 2022, before he gave the ratification on 31 January 2022. Indeed, by the Liquidator’s own admission, he only found out about the share issuance and the resulting dilution of KIPL’s shares in BPCI when he read the affidavit filed by Mr Anil Sharma in support of the applicant’s application here. Since Mr Sharma’s affidavit is dated 20 October 2022 and the Liquidator’s own affidavit attesting to how he found out about the share issuance is dated 25 November 2022, I can only surmise that the Liquidator only found out about the share issuance and the resulting dilution between October and November 2022. This is at least eight months after he had provided the ratification on 31 January 2022. This is unsatisfactory considering that these very shares constituted KIPL’s primary assets.
Investigations Failure
The Court was also critical that notwithstanding the Liquidator had engaged KPMG Services Pte Ltd to undertake forensic investigations into KIPL, he had not undertaken any personal investigations and was concerned the Liquidator delegated all responsibility to an external party without adequate oversight:
42 In view of my conclusion that the Liquidator has failed to display sufficient vigour in carrying out his duties by (a) unjustifiably allowing Mr Taylor to act for and on behalf of KIPL and therefore causing loss to KIPL, and (b) unjustifiably not personally undertaking any investigations into the affairs of KIPL, I find that the applicant has shown cause for the Liquidator’s removal. Put another way, I am satisfied that the removal of the Liquidator would be in the “real, substantial and honest interest of the liquidation”, bearing in mind that one purpose for which the Liquidator was appointed was to realise the value of KIPL’s assets, which the Liquidator has failed to achieve in standing by while KIPL’s primary asset was diluted. While this would be sufficient to enliven my discretion to remove the Liquidator, I will examine the other reasons advanced by the applicant for the removal of the Liquidator.
Creditor Confidence Lost In Liquidator
The applicant enlisted support from other creditors for its application and obtained such support from three other creditors. The Court considered what effect a loss of confidence should have on the removal application. It said a loss of confidence alone is not enough but if there were other reasons that meant a removal application was merited it might be a notable element to add to the mix:
75 In general, it is clear that the presence of considerable creditor opposition would be a valid factor in determining if a liquidator should be removed as that would affect the efficiency of the liquidation process (see Re Marseilles Extension Railway and Land Company (1867) LR 4 Eq 692 at 694). However, it has been said that a mere loss of confidence, without more, does not justify the removal of a liquidator (see the decision of the New South Wales Supreme Court in In the matter of St Gregory’s Armenian School (in liq) [2012] NSWSC 1215 at [29]). As Nourse LJ observed in Re Edennote (at 398), the court does not lightly remove its own officer and will, amongst other considerations, pay due regard to the impact of a removal on the liquidator’s professional standing and reputation. Therefore, the loss of confidence by creditors in the liquidator must be justified (see City & Suburban at 338). In my view, this requirement guards against creditors acting in concert to remove a liquidator solely at their whim and fancy, and for no justifiable reason.
76 Nevertheless, this does not mean that the threshold for removing a liquidator on this basis is necessarily set so high. In my view, where the liquidator has conducted himself in a manner that, by itself, justifies the removal of the liquidator on other grounds, this would be a highly relevant factor in favour of concluding that any consequential loss of confidence from the creditors is justified. Indeed, if it has already been shown that the liquidator’s conduct justifies his removal in the “real, substantial and honest interest of the liquidation”, and such interest in the context of an insolvent liquidation is inextricably linked to the interests of the creditors, then it must follow that, having regard to their interests, creditors would justifiably lose confidence in the liquidator’s continued appointment. The close relationship between the loss of confidence of creditors and the conduct that justifies the removal of the liquidator was alluded to by Nourse LJ in Re Edennote, where the learned Lord Justice opined that the removal of a liquidator due to his failure to display sufficient vigour in carrying out his duties can be explained on the general principle that a liquidator should not continue in office where the “creditors no longer had confidence in his ability to realise the assets of the company to their best advantage and to pursue claims with due diligence” (at 398).
77 This close relationship also finds implicit support in City & Suburban, the facts of which were already canvassed earlier (see [72] above), and which fell into one of the “obvious situations” where a liquidator ought not to continue to act (at 336–337). Alongside other matters which cumulatively gave the appearance of the liquidator favouring the interests of the directors and their entities rather than the interests of the creditors, the court was satisfied that the liquidator’s conduct had led to a justifiable loss of confidence in him on the part of the committee of inspection and many of the creditors represented by the committee (at 338).
78 Returning to the present application, the applicant has shown that the creditors have lost confidence in the Liquidator. In this regard, support for this application from creditors whose claims amount to about US$37,332,157 has been tendered by the applicant. By way of comparison the total amount claimed against KIPL, based on the PODs filed, is about US$38,982,069 (according to the Liquidator). Viewing the two figures together, the percentage of creditor support by this measure is about 95%. This is a significant level of support for this application and, by extension, opposition to the Liquidator. Further, I find that the creditors’ loss of confidence is justified by the first and second reason advanced by the applicant here, which is that the Liquidator had failed to show sufficient vigour in carrying out his duties and that he has in some respects failed to comply with his statutory obligations. The applicant has therefore established cause by virtue of this reason for the removal of the Liquidator. It would not be in the “real, substantial and honest interest of the liquidation” for the Liquidator to remain in his current role as the efficiency of the liquidation process would likely be affected by this loss of confidence in him by the creditors.
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