WINDING UP AND SOPA
In Diamond Glass Enterprise Pte Ltd v Zhong Kai Construction Co Pte Ltd [2021] SGCA 61 (“Diamond Glass”), the Court of Appeal made clear that while an adjudication debtor cannot dispute the adjudication determination as a ground for staying or setting aside a winding up petition founded upon that very adjudication determination, it is nonetheless open to such an adjudication debtor to stay or set aside the winding up petition by showing, on a prima facie standard, the existence of a justificiable cross-claim that is likely to equal or exceed the claim.
Standard for staying or dismissing a winding up petition. Since AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co) [2020] 1 SLR 1158, it has been established that when an applicant debtor seeks to stay or dismiss a winding up petition, the applicable standard of proof is that of a prima facie standard: i.e., “the winding-up proceedings would be stayed or dismissed so long as (a) there was a valid arbitration agreement between the parties; and (b) the dispute fell within the scope of the arbitration agreement, provided that the dispute was not being raised by the debtor in abuse of the court’s process” (see [34] – [42] Diamond Glass).
No different standard for building and construction cases. The Court of Appeal clarified that this same standard applies to building and construction cases even where the cross-claim is not the subject of an arbitration agreement. Hence, “an applicant debtor who seeks to stay or dismiss a winding-up petition… 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” ([43] – [45] Diamond Glass).
Temporary finality? Astute readers may ask what happens if the winding up petition is founded upon an adjudication determination under the Building and Construction Industry Security of Payment Act (“SOPA”): if the adjudication determination is temporarily final, why should the debtor be entitled to stay or dismiss a winding up petition by refusing to pay the adjudicated amount?
Cannot dispute the AD. Indeed, the Court of Appeal clarified at [32] Diamond Glass and re-iterated the point at [46] Diamond Glass that an adjudication debtor cannot dispute the adjudication determination. This is because the adjudication determination can only be challenged by either challenging its validity as provided under SOPA by until a final resolution of the disputes before either an arbitral tribunal or the court.
The question. Nonetheless, the Court of Appeal stated that due to the interface between SOPA and insolvency regimes, the question is “When or under what circumstances would an [adjudication] debtor be allowed to stay or dismiss a winding-up petition premised on a debt arising from the adjudication determination, by alleging a cross-claim on a prima facie basis” ([47] Diamond Glass).
The Court of Appeal made clear that the “real difficult comes when the project comes or is coming to an end or has been terminated, and the downstream party takes out an adjudication application and secures an adjudication determination. To readily allow the [adjudication] debtor to halt enforcement of the adjudication determination by alleging a cross-claim on a prima facie standard might enable upstream parties to evade their payment obligations all too easily” ([52] Diamond Glass).
After considering various authorities such as the local cases of Lim Poh Yeah (alias Lim Aster) v TS Ong Construction Pte Ltd [2016] 5 SLR 272 and Strategic Construction Pte Ltd v JH Projects Pte Ltd [2018] 4 SLR 1192, as well as the Australian cases including in particular Re J Group Constructions Pty Ltd [2015] NSWSC 2607 which the Court of Appeal stated is notable for its “correct view that, allied to the concept of temporary finality and rough justice handed down within tight timelines, decisions by an adjudicator on the validity of cross-claims are not necessarily binding for all time nor on a court considering the merits of a winding-up petition”, the Court of Appeal concluded that the courts in Singapore, Australia and England have consistently adopted a position that is similar in effect to the prima facie standard of review: an adjudicator debtor can resist or stay winding-up proceedings by raising a genuine or bona fide cross-claim, even though the debt underlying the winding-up petition is founded on an adjudication determination [54] – [69] Diamond Glass).
The decision. After setting out the nature of the winding-up jurisdiction of the court and how the power is to be exercised (at [71] – [75] Diamond Glass), and highlighting that a “a blind enforcement of [Adjudication Determinations], whatever the facts of circumstances of a case may be, has never been the rule” ([78] Diamond Glass) and re-iterating the Court of Appeal’s remarks in Orion-One Residential Pte Ltd v Dong Cheng Construction Pte Ltd and another appeal [2021] 1 SLR 791 that the parties’ rights and obligations will be conclusively determined after the termination of the contract, the Court of Appeal held that applying the prima facie standard is justifiable in principle. We set out the key paragraph in full below:
“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 [Adjudication] debtor raises a cross-claim against the [Adjudication] creditor in order to challenge a winding-up petition founded on the adjudication debt. On one hand, reviewing the cross-claim in accordance with a lower prima facie standard acknowledges the reality that the adjudication determination will, in all likelihood, be ‘opened up’ when the contract between the parties is coming or has come to an end or has been terminated. On the other hand, the requirement that the cross-claim or dispute (as the case may be) cannot constitute an abuse of the court’s process provides a useful check on parties trying to game the system. We have no doubt that courts will be able to sift out disputes or cross-claims that are raised merely to delay winding up those companies which, despite raising such disputes or cross-claims, are hopelessly insolvent. Thus, save for the fact that an [Adjudication] debtor cannot dispute the adjudication determination as a ground for staying or setting aside a winding-up petition founded on that adjudication determination, there is no ned to modify the general approach which we have endorsed at [45] above in building and construction cases like the present. In so far as cross-claims are concerned, the general approach continues to work well when we consider the true nature of the temporary finality under SOPA, and bear in mind that the jurisdiction of the winding-up court is not to decide cross-claims or set offs.”
Conclusion. Diamond Glass is therefore an important decision as, even without looking at the facts of the case, we finally have a decision by the Court of Appeal clarifying the important issue of how the winding-up regime interacts with SOPA.
But Diamond Glass does leave some food for thought. For instance, does the statement “… save for the fact that an [Adjudication] debtor cannot dispute the adjudication determination as a ground for staying or setting aside a winding-up petition founded on that adjudication determination …” mean that an adjudication debtor is barred from raising a cross-claim as long as that cross-claim was decided against the adjudication debtor in the adjudication?
If we look at the facts of Diamond Glass, at [14] Diamond Glass, it is reported that the adjudication respondent had declined to certify or did not certify in full the adjudication claimant’s claimed items citing reasons such as “differences in quantity, defective works, incomplete works, failures to provide product and/or workmanship indemnities and warranties, and failures to conduct final handovers.”
It is also reported at [85] Diamond Glass that (in summary) the adjudication respondent’s cross-claims in the consolidated suits before the court encompasses liquidated damages as well as “damages amounting to S$385,870.25 for work allegedly done to rectify work that was not properly carried out or not completed by [the adjudication claimant]”.
Is there any contradiction? We leave you with this food for thought, along with the fact that in Diamond Glass, the Court of Appeal had Re J Group Constructions Pty Ltd [2015] NSWSC 1607 at [65].
This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.