Singapore High Court decides in landmark decision that legal and equitable set-offs are not permissible against a company in liquidation and clarifies application of the insolvency moratorium with respect to counterclaims

5 June 2024

Park Hotel CQ Pte Ltd (in liquidation) & Ors v Law Ching Hung and Park Hotel Management Pte Ltd (in liquidation) & Ors v Law Ching Hung & Ors [2024] SGHC 105

The General Division of the Singapore High Court (“High Court”) in Park Hotel CQ Pte Ltd (in liquidation) & Ors v Law Ching Hung and Park Hotel Management Pte Ltd (in liquidation) & Ors v Law Ching Hung & Ors has decided two major points of insolvency law for the first time:

• First, that a counterclaim would be caught by the insolvency moratorium (which prohibits the commencement of proceedings against a company in liquidation except with leave of court) where the counterclaim does not amount to a permissible set-off against the company in liquidation.
• Second, insolvency set-off is the only form of set-off that can be asserted against a company in liquidation, to the exclusion of legal set-off and equitable set-off.

As a result, the High Court denied the defendants’ application to amend their defences to bring their counterclaims in the proceedings commenced against them by the plaintiff companies in liquidation and their liquidators.

Allen & Gledhill Partners Lee Bik Wei and William Ong acted for the successful plaintiffs.

Background 

In March 2021, Park Hotel Management Pte Ltd and Park Hotel CQ Pte Ltd made substantial transfers of company assets to related parties. These companies were then placed into winding up. The companies and their liquidators brought clawback claims against the first defendant (who owned the plaintiff companies) and three companies related to him.

Three of the defendants sought to introduce counterclaims in the proceedings brought against them. To do so, the defendants applied to the court to amend their defence, but did not seek leave of court to proceed against the plaintiff companies under the Insolvency, Restructuring and Dissolution Act 2018 (which provides for a moratorium against the bringing of proceedings against companies in liquidation).

The High Court’s decision

The plaintiffs successfully resisted the defendants’ amendment applications on three key issues.

First, the plaintiffs successfully persuaded the High Court that counterclaims fall within the scope of the insolvency moratorium where the counterclaims could not be set off against the plaintiff’s claims.

Second, the High Court held for the first time that legal and equitable set-offs are not available against a company in liquidation, and therefore insolvency set-off is the only form of set-off that can be asserted against an insolvent company. This was a controversial issue which had been the subject of academic commentary as well as a prior High Court decision. The High Court in the present case came to its decision after considering, among other things, that:

• To allow set-off against a company in liquidation is an exception to the default rule that the distributable assets of a company in liquidation are to be distributed on a pari passu The pari passu principle and the true exceptions to it (e.g. insolvency set-off) are enshrined in statute. Legal set-off and equitable set-off, being doctrines developed in case law, do not have a statutory foundation.
• Allowing legal set-off or equitable set-off, when insolvency set-off may not be available, could produce anomalous outcomes which undermine the pari passu principle and its underlying policy.
• In relation to legal set-off, the High Court noted that legal set-off is an expedited method of enforcing a claim against the claimant that is made available to the defendant in the interests of procedural efficiency, and to allow it against a company in liquidation would undermine the proof of debt regime, as it would effectively allow a defendant to gain priority at the expense of other creditors through a procedural device.
• In relation to equitable set-off, the High Court noted that:
  • A majority, if not the vast majority, of claims that could amount to equitable set-offs would already be subject to the mandatory operation of insolvency set-off.
  • Equitable set-off is in the nature of a counterclaim which is a personal right of action against the company, and since insolvency law has long restrained prior contractual rights of set-off, there is little difficulty in taking the same approach with respect to equitable set-off.
  • Allowing equitable set-off could unjustly enrich the beneficiary of the set-off at the expense of the other creditors of the company.

Third, in relation to the application of insolvency set-off on the facts, the court accepted that the defendants’ counterclaims did not meet the requirement of mutuality (which is an essential precondition for insolvency set-off), because the plaintiffs’ claims were based on the defendants’ alleged wrongdoing and/or their alleged complicity to wrongdoing (i.e. based on the defendants’ alleged misfeasance, which did not constitute “mutual dealings” for the purposes of insolvency set-off). The court recognised that, to allow set-off in these circumstances would be unfair, since the set-off would benefit the wrongdoer as it would no longer need to prove in the winding up in competition with other creditors (but would effectively be paid in full for its claim to the extent of the set-off). The rationale for this rule is that the creditor cannot escape from the consequences of a misfeasance or other wrongdoing for which the company is making a claim by invoking a right of set-off against the claim, as any other conclusion would enable the wrongdoer to benefit from his wrongdoing by recovery through set-off instead of having to prove in the winding up in competition with other creditors.

Impact of the High Court’s decision

The decision in Park Hotel represents a landmark decision in insolvency law as this is the first time the Singapore High Court has held that both equitable and legal set-offs are not available against a company in liquidation, and accordingly counterclaims which do not amount to insolvency set-off fall within the scope of the insolvency moratorium.

The High Court’s decision on the inapplicability of legal and equitable set-off against a company in liquidation is especially significant, as it represents a departure from prior authorities. The rigour of its exposition in denying legal and equitable set-off may well be the first of its kind in the Commonwealth. This decision would impact creditors with crossclaims which do not fall strictly within the scope of insolvency set-off but may fall within the scope of equitable set-off.

Reference materials

The judgment is available on the Singapore Courts website www.judiciary.gov.sg.