Re Cosmotron Electronics (Singapore) Pte Ltd

Judgment

SK Chan J

1. This is a petition by Cosmotron Electronics (Singapore) Pte Ltd (the company) for an order that the company be placed under judicial management.

2. The company was incorporated on 17 October 1986 with an authorized capital of $5m divided into five million shares of $1 each. At the date of this petition, the company had a paid-up capital of $2,314,000.

3. The company carries on the business of manufacturing single and double-sided printed circuit boards in Singapore. It has a manufacturing plant which together with its undertaking and other assets has been charged by way of fixed and floating charge to the Indian Bank under a debenture dated 29 October 1987 to secure banking facilities of $900,000. The plant is subject to a fixed charge.

4. The company is unable to pay its debts. It currently has three outstanding contracts with an aggregate value of $305,000 to fulfil within two to six months from the date of this petition. Its liabilities (both secured and unsecured) as at 31 December 1988 amounted to about $901,650. The creditors have been pressing for payment for some time. Indian Bank had given notice of its intention to appoint receivers and managers under their debenture prior to the presentation of this petition but refrained from doing so in response to promises to pay by the principal shareholder and/or to find new investors for the company. The company’s plant is located in a factory rented at a monthly rent of $13,000 from a creditor, viz Mayertro Industrial Pte Ltd (a company which is in receivership). Rent has not been paid since July 1988 and Mayertro has on 13 January 1989 obtained judgment against the company for the arrears of rent as well as possession of the premises.

5. To alleviate its financial difficulties, the company has sought temporary finance from a company called South Asian Exports Pte Ltd which, it was alleged, had agreed to grant a loan of $200 000 in four instalments of $50,000 to be disbursed on 14 and 25 November 1988 and 5 and 15 December 1988 subject to certain terms and conditions set out in a letter dated 6 November 1988. This letter also referred to negotiations to sell the plant to one BT Doshi of Bombay at the price of US$1.6m subject to governmental approvals in India. The said loan was to be repaid by 30 June 1989 in the event that Doshi was unable to buy the plant. As at the date of hearing, the loan has not yet been disbursed.

6. On the same day, i.e. 6 November 1988, the company entered into an agreement (the relocation agreement) to sell the company’s plant and machinery to Doshi at US$1.6m subject to various conditions, amongst which were

   1. the obtaining of governmental approvals and the provision of technical assistance by the company;

   2. payment of the purchase price by irrevocable letter of credit to be opened prior to dismantling of the plant but not later than 15 March 1989 to be opened by such reputable bankers and such form and substance acceptable to the company.

7. The relocation agreement was signed without the consent of Indian Bank which had stipulated as a condition for its consent (the plant and machinery being subject to a fixed charge) that a deposit of US$100,000 or Indian rupees 2.5m be paid by Doshi to the bank. After the relocation agreement was signed, the bank was still prepared to grant its consent and extend the repayment date of its outstandings to June 1989 provided 10% of the purchase price was paid to the bank. This requirement was notified to the company on 17 November 1988 with a warning to appoint receivers and managers. This condition has not been complied with.

8. The company’s case is that unless the company is able to ‘see through the relocation of its manufacturing assets and complete the outstanding contracts there is no money .... now or in the future to pay off even part of its said aggregate debts ....’ (para 7 of the petition). For this reason, the company is of the view that placing the company under judicial management would ‘achieve the survival of the company on the whole or part of its undertaking as a going concern and a more advantageous realization of the company’s assets would be effected than through a winding up and the interest of the creditors would be better served’ (para 20 of the petition).

9. This petition is opposed by Indian Bank, Mayertro and three other unsecured creditors which together hold more than 50% of the indebtedness of the company. Indian Bank have on 18 January 1989 exercised their powers as debenture holders and appointed receivers and managers of the undertaking and assets of the company but these officers were unable to assume office by reason of this petition. Two main grounds of opposition were advanced by the creditors. The first was that the petition was not made bona fide, and the second was that no public interest was involved in this petition.

10. On the question of bona fides, the contention was that the petition was made with the sole purpose of preventing Indian Bank from appointing receivers and managers, to suspend payment of its debts to all creditors and to prevent Mayertro from repossessing the factory. It was also contended that the relocation agreement was ‘unusual’ in that the purchaser was not required to put down any deposit. The credit manager of Indian Bank, in his affidavit, has also deposed that Doshi had indicated to the bank on 30 September 1988 that he needed only two to three weeks to comply with the requirements of the Indian authorities in order to obtain approval for the purchase of the plant. The company has not any affidavit to show what steps have been taken by Doshi to apply for such approvals.

11. As to the question of public interest, reference was made to s 227B(10) of the Companies Act (Cap 50, 1988 Ed) which provides as follows:

    Nothing in this section shall preclude a court — (a) from making a judicial management order and appointing a judicial manager if it considers the public interest so requires; or (b) from appointing, after presentation of a petition and on the application of the petitioner, an interim judicial manager, pending the making of a judicial management order, and such interim judicial manager may, if the court sees fit, be the person nominated in the petition. The interim judicial manager so appointed may exercise such functions, powers and duties as the court may specify in the order.

12. Counsel for Mayertro submitted that this provision required the company to show that it was in the public interest that the company be placed under judicial management, that the facts as set out in the petition failed to show that any public interest was involved and that only the private interest of the company and the shareholders would be served by such an order. In this connection, the court was urged to take into account the views of the majority creditors who were opposing the petition.

13. Although counsel for the company made an application to the court for a short adjournment to enable Doshi to file an affidavit to demonstrate his bona fides and ability in carrying out the relocation agreement, I decided not to grant the adjournment and instead dismissed the petition on the ground that this was not an appropriate case for judicial management.

14. As, I believe, this may be the first case of an unsuccessful application to place a company under judicial management, I should give my reasons for dismissing the petition.

    Section 227A provides that:

    Where a company or where a creditor or creditors of the company consider that — (a) the company is or will be unable to pay its debts; and (b) there is a reasonable probability of rehabilitating the company or of preserving all or part of its business as a going concern or that otherwise the interests of creditors would be better served than by resorting to a winding up, an application may be made to the court under s 227B for an order that the company should be placed under the judicial management of a judicial manager.

15. Under s 227B, the court has the power to make a judicial management order in relation to a company if, and only if:

    (a)

    it is satisfied that the company is or will be unable to pay its debts; and

    (b)

    it considers that the making of the order would be likely to achieve one or more of the following purposes, namely: (i) the survival of the company, or the whole or part of its undertaking as a going concern; (ii) the approval under s 210 of a compromise or arrangement between the company and any such persons as are mentioned in that section; (iii) a more advantageous realization of the company’s assets would be effected than on a winding up.

16. In this petition, I was satisfied that the company was unable to pay its debts but I did not consider that the making of the order would be likely to achieve any of the purposes set out in s 227B(1)(b) (purpose (ii) not being relevant in any case) for the following reasons.

    • Firstly, the survival of the company did not depend on placing the company under judicial management so much as ensuring that the relocation agreement was implemented by the parties thereto. It should be noted that the sale price of the plant far exceeded the total indebtedness of the company, so that on completion of the sale, the company would realize a large surplus. Counsel for the company conceded, correctly, in my view, that the relocation agreement was binding on the parties thereto, and there was no evidence to show that the receivers and managers were not equally fit and competent to perform the relocation agreement. There was also no reason to suggest that the receivers and managers were not in a position to carry out the existing contracts. Indeed, counsel for the company went so far as to suggest that the receivers and managers could be appointed as the judicial managers. In my view, if the purposes sought to be achieved by the company in judicial management can equally be achieved by the creditors without any detriment to the company or its shareholders, the company has not made out a valid case for depriving a secured creditor of its contractual right to assume possession and control of its security.

    • Secondly, since the company has agreed to dispose of its manufacturing plant which, in effect, constitutes its entire undertaking, the question of rehabilitating the company or of preserving all or part of its business as a going concern does not arise: the company would have no going concern or part thereof as a manufacturer of printed circuit boards upon the disposal of the plant. Thirdly, the company has also failed to show that placing the company under judicial management would result in a more advantageous realization of the company’s assets than on a winding up. Indeed, if the company were wound up, the liquidators would simply take over the performance of the relocation contract and realize the proceeds of sale.

    • Finally, the relocation agreement contains a number of unusual features, the most notable of which is the agreement of Doshi to pay US$1.6m by way of irrevocable letter of credit in form and substance acceptable to the company, prior to dismantling of the plant, without any assurance as to when the plant would actually be dismantled, shipped and reassembled in Bombay. In my view, the open-endedness of this vital term in the relocation agreement calls into question the bona fides of this transaction.

17. Accordingly, I decided that allowing the receivers and managers to perform the relocation agreement would better serve the interests of all parties interested in the proceeds of sale than to allow the company to do so. If the transaction were bona fide, everyone would gain from its implementation; if it were not, then it was a ruse to buy time.

18. I have also when dismissing this application given as a ground that the company had not satisfied me that it was in the public interest that a judicial management order be made. I should like to elaborate on this ground to avoid any misunderstanding as to its purport. The argument on public interest was advanced by counsel for Mayertro, and was to the effect that, by reason of s 227B(10) of the Companies Act, a company seeking a judicial management order must, in addition to satisfying the court of the requirements of s 227B(1), prove that the public interest so requires it. This is not the correct approach. Section 227B(10)(a), in my view, has the effect of vesting in the court an overriding power to make a judicial management order if it considers the public interest so requires notwithstanding that it may not be satisfied that the making of the order would be likely to achieve one or more of the purposes set out in s 227B(1). This is undoubtedly the effect of s 227B(10)(a) in relation to s 227B(1). Whether it has the same effect in relation to s 227B(7) which provides that ‘a judicial management order shall not be made in relation to a company’ in the circumstances prescribed therein, is not absolutely clear.

19. The expression ‘public interest’ in s 227B(10) is not statutorily defined. But since its existence is a requirement for the exercise of an overriding power, it would connote an interest or object which, if achieved, would transcend any or all of the purposes prescribed in s 227B. Whatever may be the public interest contemplated by s 227B(10), counsel for the company conceded that there was no evidence to support a claim that in this petition public interest requires that the company be placed under judicial management.

20. The petition was accordingly dismissed with costs.

Legislations

Companies Act (Cap 50): s.227A, s.227B(1), (7), (10)

Representations

April Jacqueline Loh (Cheow Hin & Partners) for the petitioner.

K Bala Chandran (Ballal & Namazie) for the debenture holder.

KM Ng (PK Wong & Advani) for the receivers and managers of Mayertro Industrial Pte Ltd.