INTERIM JUDICIAL MANAGERS AND DIRECTORS’ RESIDUAL POWERS
In Hin Leong Trading (Pte) Ltd (in liquidation) v Rajah & Tann Singapore LLP and another appeal [2022] SGCA 28, the Court of Appeal upheld the Judge’s decision to strike out the Injunction Applications brought by the directors in the Companies’ names as they had no authority nor the sanction to challenge the interim judicial managers’ appointment of solicitors.
Facts. The salient facts of this appeal are succinctly set out by the Court of Appeal (at [1]):
“1 The directors of a company instruct a law firm to act on the company’s behalf. Consequently, the law firm files an application for the company to be put under judicial management and for interim judicial managers to be appointed. The court then places the company under interim judicial management and appoints interim judicial managers. The interim judicial managers thereafter retain the legal services of the same law firm. The directors of the company object and cause an action to be commenced in the name of the company, seeking to injunct the law firm from acting for the interim judicial managers and the company [(the “Injunction Applications”)]. Do the directors have the legal standing to authorise such an action in the company’s name? What is the legal effect of an order placing the company under interim judicial management? Do the directors retain thereafter a common law power to commence such an action? These, in essence, are the legal issues that the present appeals raise for our determination.”
Procedural background. In the decision below from which this appeal arises, the High Court judge (the “Judge”) in Ocean Tankers (Pte) Ltd (under judicial management) v Rajah & Tann Singapore LLP and another matter [2021] SGHC 47 (the “Striking Out Judgment”) allowed the applications by Rajah & Tann Singapore LLP (“R&T”) for the Injunction Applications to be struck out, on the basis that the directors (“the Lims”) did not have the requisite authority to cause Hin Leong Trading (Pte) Ltd (“HLT”) and Ocean Tankers (Pte) Ltd (“OTPL”) (collectively, “the Companies”) to commence the actions as they had been divested of their managerial powers as directors of the Companies upon the appointment of the Interim Judicial Managers (“IJMs”) (at [3]).
The other appeal arising from the decision below is Lim Oon Kuin and others v Rajah & Tann Singapore LLP and another appeal [2022] SGCA 29 (the “CA Joinder Judgment”).
The Court of Appeal highlighted that in filing the Injunction Applications, the Lims had not sought the approval of the IJMs, nor did they seek the approval of the Companies’ Judicial Managers (“JM”) to proceed with the Injunction Applications following the court order placing the Companies under judicial management (at [7]). Therefore, the Lims had purported to act unilaterally on behalf of the Companies in filing and proceeding with the Injunction Applications.
R&T filed the Striking Out Applications seeking to strike out the Injunction Applications in their entirety, while the Lims and their father responded by commencing the Joinder Applications, seeking to join themselves as parties to the Injunction Applications in their personal capacities (at [8]).
The Judge dismissed the Joinder Applications but allowed the Striking Out Applications (at [9]).
The present appeals against the Judge’s decision allowing the Striking Out Applications were filed on behalf of the Companies (at [10]).
Subsequently, HLT and OTPL were placed in compulsory liquidation, with their respective JMs being appointed as their liquidators, with no appeal filed against either winding up order (at [11]).
Issues. The Court of Appeal set out the issues to be determined on appeal (at [12]):
“12 To determine whether the Judge erred in striking out the Injunction Applications on the basis of lack of authority, the legal issues that need to be determined as are follows:
(a) Does an interim judicial management order operate so as to divest the directors of a company of all their powers of management, including the power to commence an action in the company’s name?
(b) Even if the answer to the above is in the affirmative, what is the scope of any power that the directors retain at common law?”
Striking out. In relation to R&T’s Striking Out Applications under O 18 r 19(1)(a), (b) or (d), or alternatively O 92 r 4 of the Rules of Court (2014 Rev Ed), the Court of Appeal narrowed the enquiry as such (at [13] – [15]):
“… it is clear that striking out is warranted when there is an absence of legal standing owing to a lack of authority because such proceedings ought not, and indeed could not validly, have been brought at all (see United Investment and Finance Ltd v Tee Chin Yong and others [1965-1967] SLR(R) 349 at [51]–[58]). Hence, the sole point of contention is simply whether the Lims were legally entitled to commence the Injunction Applications in the Companies’ names. In turn, the enquiry as to whether they had authority to commence the Injunction Applications entails ascertaining the exact scope of a director’s powers, residual or otherwise, upon the appointment of insolvency officeholders, such as provisional liquidators, interim judicial managers, liquidators, and judicial managers.”
Effect of an interim judicial management order. Pending the making of an order for judicial management, the power of the Court to appoint interim judicial managers over the company is provided for under s 227B(10)(b) of the Companies Act (Cap 50, 2006 Rev Ed) (“the Act”), which was repealed and re-enacted as s 92 of the Insolvency, Restructuring and Dissolution Act 2018 (Act 40 of 2018) (“IRDA”) with effect from 30 July 2020 (at [19]):
“Power of Court to make a judicial management order and appoint a judicial manager …
(10) Nothing in this section shall preclude a Court –
…
(b) from appointing, after the making of an application for a judicial management order and on the application of the person applying for the judicial management order, an interim judicial manager, pending the making of a judicial management order, and such interim judicial manager may, if the Court sees fit, be the person nominated in the application for a judicial management order. The interim judicial manager so appointed may exercise such functions, powers and duties as the Court may specify in the order.
[emphasis added]”
The Court of Appeal noted that the position in respect of the appointment of interim judicial managers over a company is the same under s 92 of the IRDA.
Therefore, “[d]ue regard must … be had to the court orders appointing the IJMs over the Companies (“the IJM Orders”) in order to determine the scope of the IJMs’ powers (and as a corollary, any power that the directors may continue to have).”
On the facts, the IJM Orders for the Companies were phrased in similar terms and “granted the general powers and entitlements of a judicial manager under the Act” (at [20]).
For the duration of a judicial management order, s 227G(2) of the Act made clear that “all powers conferred and duties imposed on the directors by this Act or by the constitution of the company shall be exercised and performed by the judicial manager and not by the directors” (at [21]; emphasis by the Court of Appeal).
Therefore, having regard to the terms of the IJM Orders, ss 227G(3) and 227G(4) read with the Eleventh Schedule of the Act meant that the IJMs possessed the power, exclusively, to bring or defend any action or other legal proceedings in the name and on behalf of the Companies (at [22] – [24]).
“… The effect of s 227G(2) read with the Eleventh Schedule of the Act, is that pursuant to the IJM Orders, the directors of the Companies were effectively divested of their management and control of the Companies. These powers instead lay with the IJMs, such powers being exercisable at their sole discretion. This position remained after the Companies were placed under judicial management, as the judicial management orders were worded almost identically to the IJM Orders …”
It was thus a “non-starter as long as the companies were under judicial management” (Striking Out Judgment at [29]) for the Lims to contend that they had power as directors of the Companies to commence and maintain the Injunction Applications, notwithstanding the lack of any sanction by the IJMs or the JMs (at [25]).
The Court of Appeal observed that the position is similar in the context of an order placing a company in liquidation and the consequent appointment of liquidators: the appointment of a provisional liquidator or a liquidator renders the directors functus officio (at [26]).
On this issue, the Court of Appeal concluded that “[f]or all intents and purposes, the appointment of judicial managers over a company effectively entails a usurpation, substitution and supplantation of the powers ordinarily vested in the board of directors. This is why neither the judicial management regime nor the liquidation regime under the Act bears the hallmarks of debtor-in-possession proceedings. …” (at [27]).
Residual powers of directors at common law. The Court of Appeal noted the case of Re Pacific Andes Resources Development Ltd and other matters [2018] 5 SLR 125 which considered the proposition of law that “the appointment of a provisional liquidator effectively displaces management save for some residuary responsibilities” as a well-established one (at [29]).
To “understand the contours of such residual powers” of the directors, the Court of Appeal examined the position in England (at [30] – [46]) and Malaysia (at [47] – [54]).
The Court of Appeal agreed with the Judge that the Re Union Accident Insurance Co Ltd [1972] 1 WLR 640 (“Re Union”) “line of cases merely stands for the proposition that following the making of an order appointing an interim judicial manager, judicial manager, provisional liquidator or liquidator, the directors only retain such “residuary powers” which the insolvency office-bearer did not or could not assume under the applicable legislation or order of court (Striking Out Judgment at [31])” (at [55]).
Because “an application challenging the making of a judicial management order would challenge the very juridical basis on which such management powers of the directors have been removed”, the Court of Appeal was of the view that unless the judicial management order was made by the resolutions of the board or the shareholders, the directors should have such residual powers to challenge a judicial management order, i.e., where the original application had been made by a creditor (at [56]; emphasis by the Court of Appeal). The Court of Appeal opined that this view was consistent with the statutory prescription as to which parties are empowered to veto or challenge a judicial management application, specifically ss 227B(5)(b) and 227B(3)(c) of the Act (at [57]).
The Court of Appeal rejected the argument that because it would not be appropriate for the IJMs or the JMs or the liquidators of the Companies to commence proceedings in their names to restrain R&T from acting, then by Re Union the directors should have residual powers to challenge so (at [58] – [59]).
“… The Lims’ interpretation of Re Union as standing for such a broad proposition of law is untethered to authority; it is nothing more than a thinly veiled assertion that directors possess residual powers to effectively second-guess the decisions of judicial managers in the management of the company. This appears to be an argument from necessity: in that if directors do not have that power, no one can make a different decision and the judicial managers or liquidators would not do so since they made the decision in the first place. But necessity is not the touchstone. Re Union provides no such authority. Moreover, as R&T rightly points out, this would effectively outflank and upend the purpose of the legislative scheme for judicial management and liquidation, which is to vest authority over the company’s affairs in the judicial managers and liquidators to the exclusion of the directors. To describe the boundaries of a residual power in such an amorphous way would unduly impinge upon the powers, and interfere with the ability, of the appointed insolvency professionals to carry out their duties. This cannot be the correct position in law.”
(Emphasis by the Court of Appeal)
The Court of Appeal also rejected the purported distinction between the power to retain solicitors and the power to restrain solicitors as being “one of semantics but not based on any legal principle”, because if “insolvency office holders have the power to retain solicitors … the corollary of this must be that they also have the power to discharge solicitors. If they choose not to exercise that power by continuing to have a set of solicitors represent the company, that is a choice which is wholly within their prerogative. …” (at [60]).
The Court of Appeal summarised as follows (at [62] – [64]):
“62 … As the cases establish, upon a court order placing a company under judicial management or in liquidation, with insolvency representatives being appointed concomitantly over the company, the company’s directors retain residual powers in the limited situation where the company seeks to appeal against or otherwise challenge the very order appointing the judicial managers or liquidators, and must therefore act through its directors. This residual power is necessarily of a narrow scope, to be invoked only in very specific situations.
63 The present case does not come within the strictures of this exception. In contradistinction to, say, a challenge against the appointment of insolvency office holders, the Injunction Applications do not challenge the juridical basis of the IJMs’, JMs’ and liquidators’ powers.
64 Therefore, we agree with the Judge’s conclusion that the Lims did not retain any residual power as directors to procure the commencement of the Injunction Applications in the Companies’ names. They had no authority to do so. And they did not have sanction to do so. The Injunction Applications were correctly struck out.”
As the Injunction Applications ought not to have been brought in the names of the Companies in the first place, the Court of Appeal ordered that costs be paid by the Lims personally as non-parties to the present appeals (at [65] – [70]).
Significance. This decision makes clear that once the powers of directors of a company are divested, be it due to judicial management or liquidation, the residual powers of the directors are limited to challenging the juridical basis of the IJMs’, JMs’, provisional liquidators’ or liquidators’ powers, as the case may be.
In addition, as made clear by the Court of Appeal at [56], such “residual powers” should be limited to situations where the original applications were made by a creditor, because “it would be incongruous to allow the directors power to challenge their own actions or those of the shareholders” which led to the judicial management order (at [56]).
Hence, as on the facts of this case, this residual power also does not extend to challenging the appointment of the solicitors, the prerogative of which lies with the relevant insolvency office holders.
Lastly, as mentioned by the Court of Appeal at [21], this case also illustrates the difference between a judicial management regime versus “debtor-in-possession” proceedings such as the scheme of arrangement regime, where the company’s management would ordinarily remain in control of the company’s assets. This difference is vital to bear in mind for companies who are looking to restructure themselves due to, e.g., cashflow issues.
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