Articles

Introduction

1. Claimants who succeed at adjudication under the SOP Act sometimes find their success illusory if the respondent fails to pay the adjudicated amount.^[1] Such claimants may decide to take a ‘nuclear’ approach by applying to wind up the respondent based on the unpaid adjudicated amount.
2. However, such ‘nuclear’ approaches may become less viable after the recent Court of Appeal’s decision in Diamond Glass Enterprise Pte Ltd v Zhong Kai Construction Co Pte Ltd [2021] SGCA 61 (“Diamond Glass”), due to two aspects of the Court of Appeal’s decision:

2.1.  Firstly, the Court of Appeal held that a respondent could resist or stay a winding-up proceeding by a claimant (for an unpaid adjudicated amount) if that respondent had a bona fide cross-claim that could equal or extinguish the adjudicated amount.

2.2. Secondly, the Court of Appeal held that generally, a respondent would not be required to pay the adjudicated amount into court as a pre- condition to stay the winding-up proceeding.

3. More details are set out below.

Background to the Diamond Glass appeal

4. A brief chronology to the appeal is as follows:

4.1. Around 7 November 2016, Zhong Kai Construction Pte Ltd (the “Contractor”) engaged Diamond Glass Enterprise Pte Ltd (the “Subcontractor”) as a subcontractor for the supply of materials, equipment and tools to carry out and complete the external facade aluminium cladding, blast/ballistic doors and windows, aluminium door and window works.

4.2. On 28 August 2019, the Subcontractor served Payment Claim 17 on the Contractor for S$261,006.74.

4.3. On 14 September 2019, the Contractor commenced a High Court suit against the Subcontractor, without responding to Payment Claim 17.

4.4. On 16 September 2019, the Contractor served its Payment Response to the Subcontractor.

4.5. On 1 October 2019, the Subcontractor commenced adjudication proceedings for Payment Claim 17.

4.6. On 15 November 2019, the adjudicator determined that the Contractor was to pay the Subcontractor S$197,522.83 (the “adjudicated amount”), interest, costs and adjudicator’s fees within 35 days after the Subcontractor’s tax invoice for the adjudicated amount (the “Adjudication Determination”)

4.6. The Contractor failed to pay the adjudicated amount by the due date. Instead, the Contractor commenced a second High Court suit against the Subcontractor on 19 December 2019.

4.7. Despite the Contractor’s two lawsuits, the Subcontractor obtained a court order against the Contractor to enforce the said Adjudication Determination as a Judgment on 17 January 2020.

4.8. The Subcontractor also commenced winding-up proceedings against the Contractor for the Contractor’s failure to make payment of the Judgment debt.

4.9. The Contractor responded by filing various applications in the High Court which included a stay of the winding-up proceedings pending the disposal of the Contractor’s lawsuits.

4.10. The High Court allowed the Contractor’s application to stay the winding-up proceedings, pending the determination of the Contractor’s lawsuits and any appeal thereof.

4.11. Dissatisfied, the Subcontractor appealed to the Court of Appeal.

Summary of the Court of Appeal’s decision

5. In summary, the Court of Appeal upheld the High Court’s decision.
6. The Court of Appeal held that a winding-up petition cannot be used to enforce payment of a debt which can be extinguished by a bona fide cross-claim, particularly when the winding-up application arises from an unpaid adjudication determination. Additionally, the cross-claim must be likely to equal or exceed the creditor’s claim:

45 Thus, an applicant debtor who seeks to stay or dismiss a winding-up petition in a case like the present only needs to show, on a prima facie standard, the existence of a justiciable cross-claim that is likely to equal or exceed the claim against the debtor, and provided that the said dispute or cross-claim is not being raised in an abuse of the court’s process.

83 In our view, applying the prima facie standard of review represents a practical and workable solution to the apparent opposing considerations of the winding-up jurisdiction of the court and the temporary finality of adjudication determinations, in situations where an ADJ debtor raises a cross-claim against the ADJ creditor in order to challenge a winding-up petition founded on the adjudication debt. …

7. The Court of Appeal further observed that there were wider public policy considerations for companies threatened with winding-up applications despite having bona fide cross-claims likely to equal to or exceeding the creditor’s claims. Such policy considerations included the possible damage to a company’s creditworthiness, cross-default clauses in a company’s financing instruments and other economic and social interests:

73 … there were wider public policy considerations which had to be borne in mind when creditors threatened companies with winding-up petitions in circumstances where the claims or debts were not admitted, or where there were bona fide cross-claims equal to or exceeding the creditors’ claims. … a creditor’s winding-up petition implies insolvency and is likely to damage the company’s creditworthiness or financial standing with its other creditors or customers (BNP Paribas at [17]). This Court further elaborated that a winding-up petition might trigger cross-default clauses in the company’s own financing instruments or in other companies within the same group as the company. At the end of the day, many other economic and social interests might be affected, such as those of the company’s employees, non-petitioning creditors, the company’s suppliers, customers and shareholders …

8. The Court of Appeal added that the claimant’s right to be paid under an adjudication determination was not unfettered, and had to be balanced with the respondent’s right to have its claims ventilated fully in court or at arbitration:

78 … In W Y Steel Construction, Sundaresh Menon CJ (delivering the judgment of this Court) said (at [61]–[62]):

62 … Undoubtedly, the claimant who successfully secures an adjudication determination in his favour has a right to be paid, but there is a competing residual right on the part of the respondent to have his claims ventilated in full in court or in some other dispute resolution proceeding.

9. While the Court of Appeal highlighted the limitations of using the winding-up process in enforcing payment of a debt which could be extinguished by a bona fide cross-claim (which likely equalled or exceeded the creditor’s claim), the Court of Appeal reiterated that the successful claimant in an adjudication still had other avenues to obtain satisfaction of a judgment debt (at [77] of Diamond Glass).

Cross-claims must be of prima facie standard

10. The Court of Appeal explained that the court would assess the respondent’s cross-claim on a prima facie standard, as the prima facie standard was practical, workable and consistent with other similar situations:

44 In our view, the prima facie standard of review should also apply in building and construction cases like the present where the cross-claim is not the subject of an arbitration agreement. … The case for a consistent approach is also compelling in building and construction cases where the winding-up proceedings in question are premised on a debt which is incurred during the project, and the final determination of disputes in relation to the whole project is subject to resolution either by arbitration or through the courts,  usually at some later stage

45 Thus, an applicant debtor who seeks to stay or dismiss a winding-up petition in a case like the present only needs to show, on a prima facie standard, the existence of a justiciable cross-claim that is likely to equal or exceed the claim against the debtor, and provided that the said dispute or cross-claim is not being raised in an abuse of the court’s process.

No general rule for payments into court

11. Further, the Court of Appeal held that there was no general rule that the court would only stay a winding-up application if the respondent first paid the adjudicated amount into court. Such conditions would remain at the discretion of the court:

110 … However, we do not think it appropriate to lay down a general rule that parties in the position of [the Contractor] should pay the adjudicated amounts into court pending the resolution of the arbitral tribunal or the court.

111 There may be circumstances which make this a just condition, yet there may be other circumstances where making such an order would be unjust. One example of the latter type of situation is where the project is at an end or in the defects liability phase or has been terminated, and the downstream party launches its payment claim which is, in effect, its final accounts for the project. … In such cases, the adjudicator’s endeavour to achieve rough and ready justice may produce an erroneous adjudication determination which may be very large in value. To make an ADJ debtor pay this sum into court may cause great financial stress; it can result in tying up large sums of money whilst the matter is arbitrated or litigated

12. Notwithstanding the principles set out above, the Court of Appeal did order the Contractor in Diamond Glass to pay the adjudicated amount into court. In so doing, the Court of Appeal considered the issues with the Contractor’s cross-claims, the judgment debt not being inordinately high or crippling, and that paying the judgment debt into court would remove any doubt as to whether the Contractor was insolvent:

112 Turning to the facts of this case, we take the view that it is appropriate to require [the Contractor] to pay the sum of the Judgment Debt into court. We have borne in mind [the Contractor]’s lack of a response to [the Subcontractor]’s payment claim, the strange pleadings in S 917, the failure to state a total response amount and the varying amounts of [the Contractor]’s alleged cross-claims. Some of these factors were ameliorated by the filing of S 1282 and the Consolidated Suit which placed [the Contractor]’s cross-claim on a more secure footing. We also note that the Judgment Debt was not inordinately high or crippling. Although we are of the view that the evidence before us more than meets the prima facie test, we consider it just to order [the Contractor] to pay the ADJ sum into court on the analogy of s 27(5) of the SOPA. Upon [the Contractor] paying the sum of the Judgment Debt into court, there can be no justification to presume that [the Contractor] is insolvent on the basis that it is unable to pay its debts (see BNP Paribas at [7], cited at [72] above).

Conclusion

13. The Court of Appeal’s decision in Diamond Glass balances the tension between the competing principles espoused under the SOP Act and the winding-up regime.
14. For claimants, the winding-up regime will no longer be viable as a means to enforce payment of an adjudicated amount against respondents, if the said respondents can show a bona fide cross-claim that equals or extinguishes the adjudicated amount. While claimants may seek the respondent’s payment of the adjudicated sum into court as a condition of staying the winding-up process, there is no certainty that the court will allow such applications. However, such claimants retain their right to enforce the adjudicated amount by other means.
15. Respondents faced with a winding-up application should ensure their cross-claims against claimants are not spurious or hypothetical, given the need to demonstrate that their cross-claims are bona fide.^[2] Failing to do so may result in the respondent being wound up, or at the very least, be required to make payment of the adjudicated sums into Court, if they are not able to prove the bona fides of their cross-claims.

Contributed by:

Justin Tan - Accredited Specialist in Building and Construction Law, WongPartnership LLP

^[1] The SOP Act refers to the Building And Construction Industry Security Of Payment Act (Cap 30B)

^[2]  As a matter of good practice, this should be done on all occasions, and not simply when faced with a winding-up application.