COUNTERCLAIMS AND SET-OFFS: ADJUDICATING A PROOF OF DEBT
In Kyen Resources Pte Ltd (in compulsory liquidation) and others
v Feima International (Hongkong) Ltd (In Liquidation) and another matter [2024] SGCA 7, the Court of Appeal set out some guidance on crossclaims and set-offs in the context of adjudicating a proof of debt.
Facts. The first appellant, Kyen Resources Pte Ltd (“Kyen”), was wound up by the court on 5 August 2019 in Singapore, with the second and third appellants (the “Kyen Liquidators”) appointed as joint and several liquidators (collectively, the “Kyen Appellants”) (at [3]).
The respondent, Feima International (Hongkong) Ltd (“Feima”), was wound up by the court in Hong Kong on 31 July 2019, with two individuals appointed as joint and several liquidators (the “Feima Liquidators”) (at [4]).
Kyen and Feima were members of a group of companies (at [5]).
On 2 September 2020, the Feima Liquidators lodged a proof of debt for approximately US$49m for “sums allegedly due from Kyen to Feima for goods sold and delivered by Feima to Kyen; and payments made by Feima on Kyen’s behalf.” (at [7])
On 23 July 2021, the Kyen Liquidators rejected Feima’s proof of debt on two grounds, the primary ground being that Kyen had alleged crossclaims (the “Crossclaims”) against Feima which exceeded the claim in Feima’s proof of debt (at [9]).
These Crossclaims were for alleged losses suffered by Kyen in transactions with third parties (i.e., various companies which were not members of the group, at [8]) (the “Third-Party Transactions”) which had been caused and/or occasioned by Feima (at [9]).
Feima appealed the rejection of its proof of debt by Kyen to the General Division of the High Court (at [10]).
The Judge admitted Feima’s proof of debt to the extent of approximately US$32m, which was the sum pursued by Feima before the Judge (at [14]).
And on the primary ground, “the Judge held that the Kyen Liquidators were not justified in rejecting Feima’s proof of debt as the Crossclaims involved complex disputes of fact…” (at [14])
This decision concerned the appeal brought by the Kyen Appellants (at [16]).
Issues. The issues on appeal were as follows (at [30]):
“(a) Whether the Kyen Liquidators were permitted to account for the Crossclaims when adjudicating Feima’s proof of debt. In addressing this issue, we considered the following sub-issues:
(i) whether any and all crossclaims may be set-off when adjudicating a proof of debt; and
(ii) whether a crossclaim may generally be taken into account if it is a matter of simple arithmetic.
(b) Whether res judicata and election precluded the Kyen Appellants from pursuing the Crossclaims in these proceedings.”
The short answer for the first issue is that “there was no basis in precedent or policy for the Kyen Liquidators to account for the Crossclaims when adjudicating Feima’s proof of debt.” (at [57])
This blog will only focus on some of the useful guidance from the Court of Appeal on the adjudication of a proof of debt.
For claims against company. The Court of Appeal explained that the proof of debt process is primarily a means by which unsecured creditors enforce their claims against a company in liquidation (at [32]). “Subject to any permissible set-off”, this process is not meant for the company in liquidation to pursue claims against the creditor.
Set-offs narrower than crossclaims. Crossclaims which qualify as permissible set-offs may be taken into account in the proof of debt process (at [33]).
This is because set-offs are a subset of crossclaims: while all set-offs are crossclaims, not all crossclaims are set-offs (at [33]).
Insolvency set-off. An example of a crossclaim that is a set-off is an insolvency set-off, which is statutorily provided for (at [34]). As the Court of Appeal explained at [35]:
“35 An insolvency set-off is an exception to the pari passu rule. To illustrate, suppose an unsecured creditor lodges a proof of debt for the sum of $1,000 and the company has a crossclaim against the creditor for the sum of $500 that satisfies the requirements for an insolvency set-off. The crossclaim for $500 must be set-off against the creditor’s proof of debt for $1,000. In this way, the creditor gets satisfaction of its claim to the full extent of the set-off, thereby illustrating the exception to the pari passu rule. This contrasts with how, ordinarily, the unsecured creditor is only entitled to a pro rata distribution of dividend based on the claim that has been admitted. As the insolvency set-off is an exception to the pari passu rule, its ambit is narrowly circumscribed by statute.”
The policy justification for the insolvency set-off is that where “parties have been giving credit to each other in reliance on their ability to secure payment by withholding what is due from them…”, it would be unjust to deprive the creditor from payment upon liquidation, therefore the law puts the unsecured creditor “in a position analogous to that of a secured creditor” (at [36]).
And for insolvency set-off to be available, there must be “mutual credits, mutual debts or other mutual dealings” within the meaning of s 219 of the Insolvency, Restructuring and Dissolution Act 2018 (2020 Rev Ed) (the “IRDA”) which came into force on 30 July 2020, or its predecessor provision (applicable to the present case), s 88(1) of the Bankruptcy Act (Cap 20, 2009 Rev Ed) (the “Bankruptcy Act”) (at [34]; [40]).
Not satisfied on the facts. The Court of Appeal found it “clear that the Crossclaims could not be the subject of an insolvency set-off” (at [39]) and agreed with the Judge that the requirements for an insolvency set-off were not satisfied (at [41]).
This was because the “Crossclaims were, in essence, independent claims by Kyen against Feima.” (at [41])
The Court of Appeal made clear that they did not need to (and did not) express a view on the merits of the Crossclaims because the Kyen Liquidators were not even entitled to set-off the Crossclaims when adjudicating Feima’s proof of debt (at [59]).
The Kyen Appellants also tried to argue that they could use the proof of debt process to carry out a “general accounting” of all claims (at [38] – [42]). But the Court of Appeal made clear that there must be a permissible set-off available, before the liquidator would be entitled to account for the company’s crossclaims against the creditor’s claim when adjudicating the creditor’s proof of debt (at [49]).
Where the crossclaim is “not disputed and a set-off is available, it is … a matter of simple arithmetic”, but where the crossclaim is “substantially disputed and factually complex”, the liquidator should seek directions from the court on how the crossclaim should be resolved (at [53]).
An observation. The Court of Appeal made a further point on the first issue that the issue of whether insolvency set-off was the only permitted form of set-off in the proof of debt process was left open for a further decision in the future. See the excerpt at [58] below:
“58 … we reiterate that we do not express a conclusive view on whether insolvency set-off is the only form of set-off permitted in the proof of debt process, to the exclusion of other forms of set-off such as equitable set-off. For present purposes, we need only emphasise that should this issue arise for determination in the future, any set-off should be justified in principle as it is likely to have a significant impact on the judicial management regime and insolvent liquidations. For example, in cases where the crossclaim exceeds the claim in the proof of debt, a set-off may result in the rejection of a creditor’s proof of debt.”
Significance. This decision explains that the proof of debt process is meant for unsecured creditors to enforce their claims against the company in liquidation, and not for the company to pursue claims against the creditor. If the company’s crossclaims satisfy the statutory “mutuality” requirement, then insolvency set-off applies, which means that instead of the unsecured creditor being entitled to a pro rata distribution under the pari passu rule, the creditor gets its claim to the full extent of the set-off.
The Court of Appeal also expressed some views (albeit obiter) as to whether the doctrines of res judicata and election prevented the Crossclaims from being pursued, given the liquidator’s rejection of the creditor’s proof of debt (at [60] – [65]). However, the present case had “an added dimension” as there was “liquidation of two estates based on different jurisdictions” and “the Crossclaims were asserted for different purposes in relation to each liquidation” (at [62] – [64]).
Interested readers may wish to read the judgment in full.
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