Litigation decisions in contentious R&I proceedings: The balance between managing risks and protecting creditors
Insights
In Nature One Dairy (Australia) Pte Ltd v Bicheno Investments Pty Ltd [2024] SGCA 44, the Singapore Court of Appeal emphasised the need for directors and shareholders to be prudent in any steps they cause the company to take in contentious restructuring and insolvency proceedings, and that directors who pursue unnecessary litigation may face personal liability for costs incurred by or awarded against the company.
Introduction
In the recent decision of Nature One Dairy (Australia) Pte Ltd v Bicheno Investments Pty Ltd [2024] SGCA 44, the Singapore Court of Appeal emphasised the need for directors and shareholders to be prudent in any steps they cause the company to take in contentious restructuring and insolvency proceedings. The Court made clear that directors who pursue unnecessary litigation may face personal liability for costs incurred by or awarded against the company.
Setia Law’s Danny Ong, Ayana Ki Su Jin and Lee Jin Loong successfully represented the respondent.
Facts
The respondent creditor obtained an order for IJMs to be appointed over the applicant company, pending the determination of the judicial management application itself, to prevent the company from proceeding with a plan to sell its milk powder business to a company seeking to list on the Australian Stock exchange through an asset-for-share swap arrangement (the “IJM Order”).
The company appealed against the IJM Order, and sought permission to adduce further evidence in the appeal (collectively, the “IJM Appeal”).
Litigation Strategies: A shift in focus from shareholders to creditors
The Court of Appeal criticised the company’s insistence on pursuing the IJM Appeal, particularly as the judicial management hearing was scheduled within the same month. The Court noted that the company’s additional evidence and arguments could have been raised at the JM hearing, making the IJM appeal an unnecessary use of resources. The Court ordered substantial costs against the company, highlighting the waste of judicial resources and the financial impact on the creditors.
The Court stressed that as a company approaches insolvency, shareholders and directors of a company must act with prudence and sensitivity in directing a company’s conduct in litigation with a focus on the interests of creditors, and that cost consequences may vest on them if their decisions result in unnecessary and unwarranted costs being incurred by the company. Creditors, unlike shareholders, are exposed to greater financial risk as the company’s main economic stakeholder in insolvency.
In this connection, the Court referred to jurisprudence on the court’s power to order directors and/or shareholders of a company to bear the security for costs of an appeal by a company against a winding up order, “Bathampton” orders – to order a company’s costs of unsuccessfully opposing a winding up petition to be paid out of its assets only after all creditors were paid in full, and the discretion to make adverse costs orders against non-parties to the proceedings who improperly caused the company and the petitioner to incur costs in connection with the winding up petition.
Comment
The decision provides important insights into how shareholders and directors should approach decision-making as the company veers on the brink of insolvency, especially in contentious restructuring and insolvency proceedings. Reckless litigation at the expense of creditors who bear the brunt of financial burden imposed on the company will not be condoned by the Court, and shareholders and directors of the company should be mindful of the need to act with caution and prudence to avoid unnecessary costs, keeping the creditors’ financial interests at the forefront. A failure to do so may result in the imposition of personal cost orders on the controllers of the company themselves.
Read the full Judgment here: https://www.elitigation.sg/gd/s/2024_SGCA_44
The Decision: Permission to appeal under the IJM Order denied
The company argued, amongst others, that the Judge erred in finding that the company was prima facie insolvent on the basis of its audited financial statements (“AFS”) for FY2023, when the Judge should have relied on more current financial information adduced by the company which purported to show the company’s solvency by recharacterizing the company’s current liabilities in the AFS for FY 2023 as non-current liabilities (the “Management Accounts”).
The Court of Appeal confirmed that permission was required to appeal the IJM Order as it was an interlocutory order, given that an IJM application is not a self-contained application, but is filed within an application for judicial management involving the same parties as the primary cause (i.e. the company, its directors, and creditors). Its purpose is to protect the assets and business of the company pending the disposal of the application for judicial management, and does not dispose of the substantive rights of the parties in the underlying cause, being the judicial management application itself.
The Court of Appeal denied the company permission to appeal the IJM Order, holding that there was no prima facie case of error in the Judge’s decision to grant the IJM Order. The Court of Appeal reasoned that:
- the Judge did not err in relying on the company’s AFS for the previous financial years to find that the company was prima facie insolvent, which evidenced the company’s bleak financial position, such that it was on the company to show that there was a credible explanation for a turnaround in the company’s fortunes in FY2024 as reflected in the Management Accounts; and
- the company’s explanation, that the auditors did not undertake an audit as they were statutorily obliged to do so for the company’s audited financial statements because they relied on representations from the directors which were in fact inaccurate, was “less than credible” and “no more than a convenient recharacterization of the current liabilities in the AFS for FY 2023”.
