Client update: DB International Trust (Singapore) Ltd v Medora Xerxes Jamshid and another [2023] SGHC 83

Summary

In DB International Trust (Singapore) Ltd v Medora Xerxes Jamshid and another [2023] SGHC 83, the Singapore High Court held that a failure to display sufficient vigour in carrying out duties and comply with statutory obligations were sufficient cause for the removal of a liquidator; there is no need to show wrongful conduct or ineptitude.

In coming to this decision, the Court also clarified two important points. First, a person who has a debt provable in the winding-up of a company (without the need for such a proof of debt to be admitted) is a “creditor” who is entitled to request a creditors’ meeting for the appointment of a committee of inspection (“COI”) under s.150 (1) of the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”). Second, proofs of debt (“POD”) can be admitted for the limited purposes of voting at this creditors’ meeting.

Facts

This was an application brought by DB International Trust (Singapore) Limited (the “Applicant”), a creditor of Kirkham International Pte Ltd (in compulsory liquidation) (the “Company”), to remove Mr Medora Xerxes Jamshid (the “Liquidator”) as the liquidator of the Company under s.139(1) of IRDA. In the alternative, the Applicant sought a creditors’ meeting to be summoned for the appointment of a COI and for the creditors’ PODs to be admitted for the limited purposes of voting at this meeting.

The Applicant is a trustee of secured bonds issued (the “Bonds”) by Kirkham Finance Limited (“KFL”), a subsidiary of the Company. The Bonds were secured by various agreements, including a Parent Company Share Pledge Agreement (the “Share Pledge”). At the time of the Bonds issuance and the commencement of the liquidation, the Company’s primary assets were its 95% shareholding in PT Borneo Prima Coal Indonesia (“BPCI”). Under the Share Pledge, Company’s shares in BPCI were pledged to the Applicant as security for the bonds. When KFL defaulted on the payment of the Bonds, the Applicant became entitled to claim the monies owed by KFL from KIPL in full, pursuant to the transaction documents.

In February 2022, the Liquidator provided a blanket ratification to Mr Taylor, the former director of the Company, retrospectively authorising Mr Taylor’s actions taken on behalf of the Company to nullify the Share Pledge in Indonesia. This ratification was, however, framed extremely broadly and allowed Mr Taylor to also act on behalf of the Company other than in those Share Pledge nullification proceedings. Crucially at the time the ratification was given, the Liquidator was purportedly unaware (and failed to take steps to discover) that on 21 January 2022, the issued share capital of BPCI had increased from 6,000 to 20,000 and the Company’s shareholding in BPCI was reduced from 95% to 28.5% (the “Share Dilution”). The Liquidator claimed that he only learnt about the Share Dilution after the application for his removal was filed.

Further, the Liquidator did not personally undertake any investigations into the affairs of the Company but instead exclusively relied on KPMG to conduct the relevant investigations. In this regard, the Liquidator was content to let the KPMG investigations go on for more than a year without seeking any update, failed to provide an update on the scope, purpose and progress of these investigations to interested parties, and used the investigations as a basis to delay the calling of a creditors’ meeting to form a COI for two years.

Cause for the removal of a Liquidator

The Court confirmed that for cause to be shown for the removal of a liquidator, the first stage involved assessing the purposes for which the liquidator was appointed (e. the purposes of the liquidation). The second stage involved assessing whether the removal of the liquidator is in the “real, substantial and honest interest of the liquidation” bearing in mind the purpose determined in the first stage (at [13]).

For an insolvent liquidation, three broad non-exhaustive purposes were identified according to which the actions of the Liquidator should be assessed: (a) providing a procedure that ensures an equitable and fair distribution of assets among creditors, (b) serving the community at large by not allowing insolvent companies to continue to trade, and (c) allowing for an investigation into the company’s affairs by an independent and appropriately qualified person. Further, it was held that predominant weight should also be given to the creditors’ wishes in assessing whether a liquidator (of an insolvent liquidation) should be removed (at [17]-[18]).

The Liquidator’s failure to display sufficient vigour in carrying out his duty

The Court acknowledged that a liquidator’s failure to display sufficient vigour in carrying out his duties can justify his removal. In particular, it was emphasised that establishing a lack of sufficient vigour did not require proving a liquidator was at fault or that he has acted wrongfully or ineptly (at [20]-[21]).

On the facts, it was found that the Liquidator had failed to display sufficient vigour in carrying out his duties by first unjustifiably allowing Mr Taylor to act for and behalf of the Company in Indonesia. Of particular concern was the Liquidator’s failure to find out about the Share Dilution before the ratification was given, especially since the BPCI shares were the Company’s primary assets (see paragraph 3 above). Instead, the Liquidator only found out about the Share Dilution more than eight months after the ratification was given, despite being put on notice by various creditors. Second, the Liquidator had unjustifiably failed to personally undertake any investigations into the affairs of the Company but had instead exclusively relied on KPMG to conduct the relevant investigations (see paragraph 4 above).

The Liquidator had in some respects failed to comply with his statutory obligations

The Court found that there will be a justifiable loss of confidence by the creditors in the liquidator’s ability “to realise the assets of the company to their best advantage and to pursue claims with due diligence”, if a liquidator does not even know the approvals and statutory obligations that he operates under. Here, much would depend on the nature of the failure and the cumulative effect of multiple failures if there is more than one failure (at [43]).

In this regard, the Court held that the Liquidator adopted an erroneous position in relation to who a “creditor” is and unjustifiably chose not to admit the Applicant’s POD for the limited purposes of voting at a creditors’ meeting under s.150 of IRDA. Here, the Court accepted (adapting the definition of a creditor under s.2 of the repealed Bankruptcy Act) that a “creditor” is a person who has a debt provable in the winding up of the company. This definition was also found to be supported by other parts of the IRDA that contain the word “creditor” (at [53] – [55]). The Applicant’s POD was found to fall within the definition of a provable debt.

The Court recognised that there is a distinction between the preliminary assessment of the PODs undertaken for the purposes of voting as compared to the examination of PODs with a view to admitting or rejecting them for the purposes of distribution of assets, with the latter being typically left to the last stages of liquidation (at [59]). With regard to the admission of the POD for voting purposes under r 101(1) of the Insolvency, Restructuring and Dissolution (Corporate Insolvency and Restructuring) Rules 2020, the Court found that while the Liquidator may refuse to admit PODs for voting at the start of the liquidation proceedings (if for e.g. there is a real possibility that upon further investigation there might be a major change in the composition of creditors who can vote), this cannot be extended indefinitely. In this case, substantial time of 2 years had already passed and no other identifiable classes of putative creditors had been identified. Further, the Liquidator failed to provide any evidence that the Applicant was not a true creditor. As such, it was found that the Liquidator had unjustifiably chosen not to admit the Applicant’s POD for the limited purposes of voting.

Justifiable loss in the creditors’ confidence in the Liquidator

The Court accepted the close relationship between the loss of confidence of creditors (in an insolvent liquidation) and the Liquidator’s conduct that justifies his removal (at [76]). Here it was found the loss of confidence by the creditors (a significant percentage of 95% in this case), was justified on the reasons summarised under paragraphs 5 to 11 above). Thus, due to this loss of confidence, it was held that the efficiency of the liquidation process would be affected if the Liquidator remained in his current role (at [78]).

Keith Han and Ammani Mathivanan of Oon & Bazul acted for the successful Applicant.

This client update is jointly authored by Head of Restructuring & Insolvency Keith Han, Senior Associate Ammani Mathivanan and Practice Trainee Cheryl Eio Yi Yun.