Case Commentary Construction Insolvency Law Liquidation Singapore

The Relative Value of an Adjudication Determination in Liquidation [Insolvency Law] [Building & Construction Law]

Case Commentary:WY Steel Construction Pte Ltd v Tycoon Construction Pte Ltd (In Liquidation) [2016] SGHC 80

The Singapore High Court decision in WY Steel Construction Pte Ltd v Tycoon Construction Pte Ltd (In Liquidation) [2016] SGHC 80 raises certain some interesting questions about the effect and value of an adjudication determination (made pursuant to Building & Construction Industry Security of Payment Act (“SOP Act”)), where the party with the benefit of the adjudication determination subsequently goes into liquidation.

Background

By way of background, Tycoon had, pursuant to the SOP Act, obtained an adjudication determination in its favour in the amount of approximately S$1.1 million on 1 December 2014 (the “AD”). WY Steel subsequently filed an originating summons (“OS 1160”) to set aside the AD on 10 December 2014, whereas Tycoon file an application in OS 1160 to enforce the AD as an order of court on 24 December 2014 (“SUM 6372”).

Before OS 1160 was heard, WY Steel commenced proceedings in the High Court on 3 February 2015 against the Tycoon on the basis of the underlying sub-contract between the parties, seeking damages in excess of S$18 million (“Suit 112”). The matters pleaded in Suit 112 concerned an allegation of breach by WY Steel of the underlying sub-contract and also included and referred to issues which had been dealt with in the adjudication proceedings leading up to the AD. WY Steel subsequently filed an application on 9 February 2015 vide SUM 634 to have SUM 6372 stayed pending the disposal of Suit 112.

OS 1160 was fixed to be heard on 10 February 2015 and at the hearing, counsel for Tycoon informed the Court that Tycoon had, that very morning, been placed in creditors’ voluntary liquidation. The consequence of this was that Section 299(2) of the Companies Act required WY Steel to obtain the leave of court as a pre-condition to it continuing to prosecute Suit 112.

This is because Section 299(2) of the Companies Act provides:-

After the commencement of the winding up no action or proceeding shall be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.”

In the case of a creditors’ voluntary liquidation (“CVL”), the CVL is deemed to commence from the time the company passes a special resolution to wind up the company.

The Court therefore adjourned OS 1160 and SUM 6372 indefinitely, with liberty to restore. WY Steel subsequently filed an application seeking the Court’s leave to continue with Suit 112.

Decision

Justice Lee Seiu Kin, who heard WY Steel’s application, declined to grant WY Steel leave to continue with Suit 112. Central to Justice Lee’s reasoning was the fact that the respondent company’s assets were threadbare and considerable costs would be incurred if Tycoon were required to defend Suit 112, which would be to the detriment of the Tycoon’s general body of creditors.

The Court further held that WY Steel could (and in fact had) file a proof of debt in respect of its claims against Tycoon (which were the subject matter of Suit 112), and that this could therefore be adjudicated and (if thought fit) admitted by Tycoon’s liquidators.

Commentary

Under the SOP Act, an adjudication determination has force of law until and unless the rights of the parties are eventually and finally resolved or determined in the manner(s) prescribed under Section 21 of the SOP Act. This, as considered by the Court of Appeal in WY Steel Construction v Osko Pte Ltd [2013] 3 SLR 380 (“Osko”), is the quality of “temporary finality” which an adjudication determination possesses.

As noted by the Court in Osko at [18]:-

“[The SOP Act] achieves its stated purpose of facilitating cash flow in the building and construction industry in two principal ways. First, it establishes that parties who have done work or supplied goods are entitled to payment as of right: see s 5 of the Act. Second, it creates an intervening, provisional process of adjudication which, although provisional in nature, is final and binding on the parties to the adjudication until their differences are ultimately and conclusively determined or resolved: see s 21 of the Act. This is what is referred to as temporary finality.

However, as counsel for WY Steel (unsuccessfully) urged before the CA in Osko, where the holder of an adjudication determination subsequently becomes insolvent prior to the adjudication determination having been finally resolved or determined, “[t]emporary finality might, as a matter of circumstance, become absolute finality”.

The facts of the case in WY Steel Construction Pte Ltd v Tycoon Construction Pte Ltd (In Liquidation) [2016] SGHC 80 are unique insofar as, in this author’s view, gives rise to the very situation where the “temporary finality” of the adjudication determination in fact becomes absolute by reason of the supervening insolvency of the party with the benefit of the adjudication determination.

The main question which arises from this is what the relative value of an adjudication determination (which has not been set aside) is in the context of assessing the insolvent company’s assets and liabilities. Whilst it is likely that any application by a liquidator to enforce such an adjudication determination would likely be stayed, it does not follow that the value of the adjudication determination is any less final.

Therefore, in the context of calculating mutual credits and debits for the purposes of giving effect to the mandatory set-off provisions applicable to liquidations, it is possible (and likely probable) that the value of the adjudication determination (in favour of the insolvent company) may be set off pro tanto against the claims by the creditor (in this case WY Steel) against the insolvent company.

Thus, and assuming WY Steel’s claim in Suit 112 is fully-admitted to proof (an unsecured claim of S$18 million), the liquidators would likely consider setting off the entire value of the AD against this proof, with the result that the effect value of WY Steel’s right to participate in the pari passu distribution of Tycoon’s assets would be reduced to S$16.9 million. Alternatively, the liquidators may rely on the AD as a basis on which to reduce the value of WY Steel’s claim(s) admitted to proof (insofar as there is an overlap between the matters raised in the AD and Suit 112), with the result that WY Steel’s proof of debt would be adjudicated at S$16.9 million, which still then be subject to set-off against the value of the AD, with the net result that the value of WY’s right to participate in the Tycoon’s liquidation would consequently be reduced to S$15.7 million.

Conclusion

Ultimately, the consequences of this are that the entire value of the AD would be given effect to in a liquidation scenario, with the net result that the relative value of WY Steel’s (or in fact any net creditor against whom the AD was made) unsecured right to participate in the pari passu distribution of the insolvent company’s assets would be prejudiced by its inability to set aside the AD (or challenge its underlying basis by bringing suit / commencing arbitration on the original contract).

Temporary finality would, by reason of supervening insolvency, become absolute finality.

28 April 2016

*The contents of this article represent the views of the author alone from a Singapore law perspective and are subject to copyright protection under the laws of the Republic of Singapore (as may from time to time be amended). No part of this article may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed and/or broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of the author.

Please note that whilst the information in this article is correct to the best of the author’s knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for and/or in respect of any particular course of action as such information may not suit your specific business, operational and/or commercial requirements. You are therefore urged to seek legal advice for your specific situation. All the author’s rights are expressly reserved and nothing herein shall be construed as a waiver thereof.

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