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Singapore company wound up in the U.S not allowed to block enforcement of charge over its shares

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20 January 2020

In a recent case, the High Court had to consider whether to apply a moratorium to the enforcement of a share charge taken over the shares in a Singapore company where that company was subject to insolvency proceedings in the United States. It held that it had no basis to do so under section 259 of the Companies Act which renders void a transfer of shares in company made after the commencement of a winding up by the Singapore Court as that section did not apply to a foreign proceedings.

Facts

As noted above, the recent case of Re Rooftop Group International Pte Ltd (2019) involved a Singapore-incorporated company, Rooftop Group International Pte Ltd (Rooftop), that was the subject of Chapter 11 insolvency proceedings in the United States. Although Rooftop was incorporated in Singapore, it did business primarily in the US and it was run and operated by Darren Scott Matloff, a US citizen (Darren).

When Rooftop ran into liquidity problems, it was sued by one of its creditors, Triumphant Gold Limited (TGL). TGL had given a loan to Rooftop and had also obtained security consisting of a charge over 44 shares in Rooftop, which shares were held by Gandiva Investments Limited (GIL). Rooftop started Chapter 11 proceedings in the US and obtained a US worldwide moratorium.

Notwithstanding the moratorium, TGL commenced proceedings in Singapore to enforce its security over the shares in Rooftop. It also commenced a debt claim against Rooftop in Singapore to enforce its loan, which proceedings also included actions against the guarantors of those loans. Rooftop and Darren applied to have the Chapter 11 proceedings recognized and for a moratorium to apply to, among other things, the commencement of legal proceedings and the enforcement of the security in Singapore.

Recognition and COMI

The Court first had to consider whether the proceedings in the US should be recognized as foreign main proceedings or foreign non-main proceedings. If the proceedings were foreign main proceedings, the moratorium would apply automatically. However, if the proceedings were foreign non-main proceedings, the Court’s leave would be required for the moratorium to apply in full or in part.

The Court noted that under the UNCITRAL Model Law on Cross-Border Insolvency (Model Law), the location of Rooftop’s Centre of Main Interest (COMI) would determine whether the Chapter 11 proceedings were foreign main or non-main proceedings. It further noted that as Rooftop’s registered office was in Singapore, the presumption under Article 16(3) of the Model Law operated such that Singapore was presumed to be its COMI. It then considered the various factors that might displace that presumption. In this regard, it noted that to be relevant such factors must be those ascertainable by third parties, particularly creditors and potential creditors.

In summary, the various factors considered fell into two broad categories: the place of Rooftop’s business and management (which tended to point to the US) and the place of Rooftop’s creditors and loan agreements (which tended to point away from the US). The Court held that the factors pointing to the US were not sufficient to displace the presumption in favour of Singapore and therefore held that Rooftop’s COMI was Singapore. Interestingly, it noted that while Rooftop’s sole decision maker was a US citizen who operated Rooftop from the US, there was little evidence that would have been available to third parties demonstrating that operational decisions of the first applicant were being made in the US. It also noted that Rooftop had not made any representation online or elsewhere that it was a US-based entity.

The Court therefore granted recognition of the US Chapter 11 proceedings as foreign non-main proceedings.

Orders granted to support the US proceedings

The Court then had to consider what orders to grant to support the US proceedings. The main live issues in this regard were:

  • Whether to stay the proceedings commenced by TGL to enforce its share charge over the shares in Rooftop; and
  • Whether to recognize the US court’s appointment of Darren as the foreign representative for the Chapter 11 proceedings. 

Transfer of shares

As noted above, section 259 of the Companies Act makes void a transfer of shares in a company where such transfer was made after the commencement of winding up by the court. If that section were to be applied, the share charge could not be enforced as that would have entailed a transfer of the shares to TGL. However, the Court declined to stay the proceedings for the enforcement of the share charge. It reasoned as follows:

  • It noted that while section 259 of the Companies Act made void a transfer of shares in a company where such transfer was made after the commencement of winding up by the court, the section only applied to a winding up in Singapore. The section was silent as to whether a similar prohibition should apply foreign winding up proceedings.
  • The rationale for granting assistance under the Model Law was to aid the orderly and equitable distribution of assets and to facilitate the process of restructuring whenever possible. It was not intended to protect or preserve a party’s position within the company in the case of a dispute between shareholders, or to prevent a different view being taken subsequently in the foreign proceedings about the direction of the restructuring, or whether restructuring efforts should even be maintained.

Accordingly, the assistance in Singapore could not be directed to prevent the transfer of shares in Rooftop pursuant to the share charge. While this would mean that TGL could gain control over Rooftop as a controlling shareholder upon its enforcement of the share charge and therefore act to stop the Chapter 11 proceedings if it so wished, in the view of the Court the Model Law did not “require that a recognizing court preserve and protect the foreign proceedings”.

Recognition of foreign representative

The Court recognized the appointment of Darren as the foreign representative of Rooftop, but ordered that Rooftop and Darren were required to apply to the Court for approval before taking any steps to oversee any assets of Rooftop in Singapore (although the evidence was that there was none). Its reasons were as follows:

  • Darren was an undischarged bankrupt and would not, accordingly, be entitled to act as an insolvency officer under Singapore law. He had also willfully disobeyed prior Singapore court orders.
  • However, the Court held that it did not have the power under the Model Law to designate another person to administer Rooftop’s property. The term “foreign representative” was defined in the Model Law as the person authorized in a foreign proceeding to act as a representative of the foreign proceedings. The language of the Model Law was such that even if the Court was of the view that the interests of local creditors might be better served by having some other person administer or realise the locally-based assets, it could not displace the person appointed by the foreign court except on his own application.

The Court therefore granted assistance to the US Chapter 11 proceedings as follows:

  • a moratorium on the commencement of proceedings against Rooftop;
  • an order that no resolution may be passed for the winding up of Rooftop; and
  • an order that no execution, distress or other legal process may be commenced, continued or levied against any property of Rooftop (which for the avoidance of doubt did not prevent the enforcement by TGL of the share charge granted by GIL).

The Court also held that proceedings brought by TGL to enforce guarantees given for Rooftop’s debts were not covered by the above stay. It should be noted that the point was not in contention as all parties agreed to this position.

Comment

The case provides useful guidance on the approach which the Singapore courts will take when dealing with recognition of cross-border insolvency proceedings. It signals that Singapore insolvency legislation will still continue to apply (or in this case, will not be applied) to foreign non-main proceedings involving a company whose COMI is in Singapore.

Companies that want to ensure that a particular jurisdiction’s insolvency regime will be applied in full and treated as main proceedings under the Model Law should seek appropriate advice on steps they should take to ensure that their COMI is in the jurisdiction where the insolvency proceedings will be carried out and ideally such steps should have been implemented for a period of time prior to the actual commencement of insolvency proceedings. A company’s COMI is determined as at the date of the application for recognition under the Model Law and it has been recognized that companies may change their COMI to take advantage of restructuring procedures in jurisdictions other than their country of incorporation so long as their reasons for doing so are legitimate (Re Zetta Jet Pte Ltd (2019) – for more on this case, please see our update ‘Court Holds that Singapore-Incorporated Company Has Its Centre of Main Interest in the United States’).

Even if the Singapore court had held that section 259 could have been applied in this instance, the ultimate end result may have been the same. This is because the Singapore Court of Appeal has held that the purpose of section 259 is to prevent shareholders from evading their liability on calls on unpaid share capital (Seah Teong Kang & Anor v Seah Yong Chwan [2015] SGCA 48). Accordingly, the Singapore courts should not stop a transfer of shares which does not have this effect, especially if the transfer is being carried out pursuant to a valid agreement entered into before winding up proceedings were commenced.

It should also be borne in mind that the moratorium protection sought in this case was not one sought pursuant to Singapore insolvency legislation (e.g. the moratorium arising in connection to an application for a scheme of arrangement under section 211B of the Singapore Companies Act).