27 April 2018

Re: Zetta Jet Pte Ltd & Ors [2018] SGHC 16

In Re: Zetta Jet Pte Ltd & Ors, the Singapore High Court issued the first reported decision on Singapore’s new provisions enacting the UNCITRAL Model Law on Cross-Border Insolvency (30 May 1997) (“Singapore Model Law”).

Article 15 of the Singapore Model Law allows a foreign insolvency representative to apply to the Singapore High Court for the recognition and assistance of a foreign insolvency proceeding in which the foreign representative has been appointed. Recognition and assistance allows, among other things, the foreign representative to exercise powers in Singapore over a company (such as in relation to the realisation and/or distribution of the company’s assets in Singapore), and to obtain protections, moratoria and other forms of assistance from the Singapore court.

Under Article 17 of the Singapore Model Law, the court must grant recognition if various requirements are met. The foreign proceeding must be recognised as a:

  • Foreign main proceeding, if the foreign proceeding takes place where the debtor has its centre of main interests (“COMI”), or
  • Foreign non-main proceeding where the debtor has an establishment there, as defined under Article 2(d).

The Singapore Model Law accords foreign main proceedings (i.e. commenced in a debtor’s COMI) greater deference and, more immediate, automatic relief than foreign non-main proceedings (i.e. commenced in a jurisdiction where the debtor only has an establishment).

This decision addresses two important issues:

  • How the Singapore courts ascertain a company’s COMI, when that company is part of a larger corporate group. 
  • The Singapore court’s approach to refusing recognition or assistance due to “public policy” reasons.

Background

 Zetta Jet Pte Ltd (“Zetta Jet Singapore”) was a company incorporated in Singapore which wholly owned Zetta Jet USA, Inc (“Zetta Jet USA”) (collectively, “Zetta Entities”) which was a company organised under the laws of the State of California, US.

Set out below is the relevant sequence of proceedings:

  1. Chapter 11 bankruptcy proceedings: On 15 September 2017, voluntary Chapter 11 bankruptcy proceedings were filed against the Zetta Entities in the United States Bankruptcy Court in the Central District of California - Los Angeles Division (“US Bankruptcy Court”) and a worldwide automatic moratorium in the US came into effect. Chapter 11 proceedings in the US are a form of protected restructuring or reorganisation proceedings, accompanied by an automatic moratorium or stay upon application. Such moratorium or stay operates, at least from the perspective of the US, on a worldwide basis.
  2. Singapore injunction: On 19 September 2017, two shareholders of Zetta Jet Singapore obtained an injunction order (“Singapore injunction”) from the Singapore High Court against Zetta Jet Singapore and two other shareholders, restraining them from carrying out any further steps in and relating to the bankruptcy filings relating to the Zetta Entities in the US Bankruptcy Court until trial or further order.
  3. Chapter 7 bankruptcy proceedings: Subsequent to the issuance of the Singapore injunction, proceedings in the US Bankruptcy Court continued and an interim Trustee (“Trustee”) was appointed on 5 October 2017. On 4 December 2017, the Chapter 11 proceedings were converted to Chapter 7 proceedings (equivalent to liquidation in Singapore) as financing could not be obtained for the reorganisation plan under Chapter 11. On 5 December 2017, the same Trustee was appointed for the Chapter 7 proceedings.
  4. Recognition proceedings in Singapore: On 11 December 2017, the US Bankruptcy Court authorised the Trustee to commence recognition proceedings in Singapore. On 13 December 2017, the Trustee applied for recognition of foreign insolvency proceedings under section 354B and the Tenth Schedule of the Companies Act.

The intervener in the present application was one of the shareholders of Zetta Jet Singapore who obtained the Singapore injunction mentioned above.

Determination of COMI of a debtor which is part of a larger corporate group

The Trustee argued that, when determining the COMI of Zetta Jet Singapore, the court should treat the Zetta Entities as a single whole. In effect, the Trustee attempted to rely on the operations and assets of Zetta Jet USA, to argue that the US was Zetta Jet Singapore’s COMI.

The Singapore court expressed concerns with this approach, and noted that it is essential to observe the separate corporate personalities of each entity, and to treat each entity on its own, unless there is sufficient reason shown to deal with the Zetta Entities as one.

The court noted that, when determining the COMI of a debtor, the court might not apply the full rigour of the common law test for piercing a corporate veil. However, some basis must be made out for treating the two entities as one, beyond mere assertions that or examples where the entities were treated as one in practice.

The court nonetheless noted that it did not need to decide this issue fully, due to its conclusions on the issue of public policy below.

Denial of full recognition due to a breach of public policy

Article 6 of the Singapore Model Law is relatively unique among the jurisdictions that have enacted the UNCITRAL Model Law on Cross-Border Insolvency.

The Singapore version of Article 6 allows a Singapore court to refuse recognition under Article 17 if such recognition would be “contrary” to the public policy of Singapore.

In contrast, Article 6 of the UNCITRAL Model Law requires recognition to be “manifestly contrary” to public policy for it to be refused.

The Singapore court noted that the reason for the omission of this term does not appear in the records of the Parliamentary debates or any preparatory materials. There was also no other public statement on the omission of the term “manifestly” either.

The judge nonetheless held that Singapore’s omission of the said term had to be deliberate and conscious. This means that the standard of exclusion on public policy grounds in Singapore is lower than that in jurisdictions where the Model Law has been enacted unmodified.

In this case, the foreign insolvency proceedings sought to be recognised were commenced or continued in breach of an injunction granted by a Singapore court. Such conduct undermined the administration of justice, because orders issued by a court are to be complied with. Those who do not comply with Singapore court orders are rightly subject to penalties. In particular, they generally cannot seek the assistance of the court unless the non-compliance is rectified or purged.

The court further held that the fact that the Singapore injunction was obtained after the Chapter 11 proceedings were filed and any worldwide automatic moratorium in the US came into effect is irrelevant. The US moratorium does not bind the Singapore courts, any more than any Singapore moratorium or injunction would bind the US courts. The only thing that mattered was that an order was made in Singapore, which had not been complied with.

The judge was of the view that granting full recognition to the Trustee despite the breach of a Singapore injunction would undermine the administration of justice in Singapore. The Singapore injunction had remained in force and prohibited the pursuit of the very proceedings that was the basis of the Trustee’s appointment. There was nothing before the judge to show any error leading to the ordering of the Singapore injunction, but even if there were, the proper course would be to apply to set it aside or appeal. The judge did not think he could ignore or overlook the Singapore injunction which would have been the effect if general recognition was granted to the Trustee. The conversion from Chapter 11 to Chapter 7 did not bring the proceedings in the US out of the ambit of the Singapore injunction.

Limited recognition to challenge the Singapore injunction

However, the judge also recognised that justice and fairness entailed that some opportunity should be given to the Trustee to apply to set aside or appeal the Singapore injunction, or matters directly relating to such applications, such as extensions of time. The Trustee was granted limited recognition for these purposes.

 

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