May 2025
The courts are generally reluctant to interfere with the outcomes of creditors’ meetings at which resolutions are voted on and passed. After all, such resolutions are decided and voted on by the creditors, thereby representing the wants of the majority.
In the case of Zipmex Pte v Zipmex Asia Pte and another and another matter [2024] SGHC 298 (Zipmex) however, the Singapore High Court has invalidated the outcome of a creditors’ meeting on the basis of substantive irregularities.
Brief Facts of Zipmex
The case of Zipmex concerned an application to, among other things, set aside resolutions passed at a creditors’ meeting. The respondent, which wholly owned the applicant, had conversely applied for, among other things, a declaration that the creditors’ meeting was valid.
On 29 April 2024, the sole director of the respondent (who was also the sole director of the applicant), made a declaration that the respondent was unable to continue as a going concern due to its liabilities. He also appointed a provisional liquidator who provided notice of a creditors’ meeting, requesting creditors to submit their proofs of debt and special proxy forms. The applicant submitted its proof of debt for an amount of almost USD 49 million.
An extraordinary general meeting of the respondent was subsequently held, in which two resolutions were passed. First, a special resolution for the voluntary winding up of the respondent, and secondly, an ordinary resolution appointing the provisional liquidator as the liquidator of the respondent.
On the same day, the aforementioned creditors’ meeting was held and the applicant objected to the appointment of the provisional liquidator as the liquidator of the respondent, nominating an alternative candidate. The provisional liquidator also rejected 85% of the amount claimed in the applicant’s proof of debt, for the purposes of voting at the creditors’ meeting.
While the applicant questioned whether the provisional liquidator had the power to adjudicate and reject proofs of debts for the purposes of voting at the creditors’ meeting, the provisional liquidator did not choose to adjourn the meeting and instead maintained her position of partially rejecting the applicant’s claimed amount. She also went on to declare the tabled resolutions as approved by the creditors who were present and voting, which included a resolution confirming her appointment to act as the liquidator of the respondent for the purposes of the latter’s winding up.
Despite the fact that the applicant subsequently wrote to the respondent and provisional liquidator to notify them of the procedural and substantive irregularities of the creditors’ meeting, no further steps were taken by either the respondent or the provisional liquidator.
The applicant therefore commenced legal proceedings seeking an order that the creditors’ meeting be declared invalid and that the resolutions passed also be declared void by reason of substantive irregularities, pointing out that a provisional liquidator did not have the power to adjudicate on proofs of debt for the purposes of voting at a creditors’ meeting, and the provisional liquidator’s partial rejection of the applicant’s proof of debt was incorrect and unjustified as a result of a lack of supporting documentation and explanations. Moreover, the resolution considered at the creditors’ meeting was incorrectly worded as a confirmation of the provisional liquidator’s appointment as the respondent’s liquidator instead of being for the appointment of liquidators of the respondent. Additionally, the notice of creditors’ meeting issued by the provisional liquidator was in contravention of Regulation 28 of the Insolvency, Restructuring and Dissolution (Voluntary Winding Up) Regulations 2020 (VWU Regulations) wherein Regulation 28(1) stipulates that the notice of the creditors’ meeting must be accompanied by the general and special forms of instrument of proxy. In this case, the creditors were only provided with a special proxy form and not a general proxy form.
The applicant also argued that the creditors’ meeting had procedural irregularities, some of which may have caused substantial injustice.
On the flip side, the respondent cited subsidiary legislation (Rule 101 of the Insolvency, Restructuring and Dissolution (Corporate Insolvency and Restructuring) Rules 2020 to legitimise the provisional liquidator’s adjudication of the proofs of debts for the purposes of voting, and argued that the interests of justice and the need to protect the interests of the creditors necessitated the provisional liquidator’s exercising of her power to adjudicate. The respondent also argued that there was no substantive injustice caused to the applicant, who was not precluded from voting. It also argued that the resolution complained about by the applicant was in accordance with the Insolvency, Restructuring and Dissolution Act 2018 (‘IRDA’) and therefore not an irregularity, and even if it were so, it was only procedural and not substantive. Finally the respondent contended that the provisional liquidator had good reason not to include the general proxy form and that in any event, it was merely a procedural irregularity and not a substantive one.
The Findings of the Court
Under IRDA, a procedural irregularity is defined as the absence of a quorum at a meeting of a corporation, at a meeting of directors or creditors of a corporation or at a joint meeting of creditors and members of a corporation; and a defect, irregularity or deficiency of notice or time. IRDA, however, does not define a substantive irregularity.
To this end, the Court took guidance from the decision of the Singapore Court of Appeal in Thio Keng Poon v Thio Syn Pyn and others and another appeal [2010] 3 SLR 143 wherein it was set out that in ascertaining whether an irregularity is substantive or merely procedural, the Court must determine whether the act being complained of changes the substance of the aim or object of the requirement which was not complied with, or whether it merely departs from the prescribed manner in which the requirement is to be fulfilled.
The Provisional Liquidator’s Adjudication of the Proofs of Debts
The Court accepted the applicant’s arguments that the subsidiary legislation relied upon by the respondent only applied to court-ordered winding ups and not voluntary winding ups. The Court also held that the provisions of IRDA clearly set out what the powers of provisional liquidators are, and also make clear that the power to exercise all the functions and powers of a liquidator may not be exercised without having first obtained leave from the Court. This included the power to adjudicate proofs of debts which the provisional liquidator had exercised without any such leave having been obtained.
It was therefore held that the provisional liquidator had no power to adjudicate the proofs of debts and that her exercise of such a power constituted a substantive irregularity. This is because the adjudication affected the voting rights of the creditors and, in turn, the probability of the resolutions tabled at the creditors’ meeting being passed.
Resolution to Confirm the Provisional Liquidator’s Appointment as the Liquidator of the Respondent
The applicant had argued that the purpose of the creditors’ meeting could not be only for the confirmation of the company’s choice of having the provisional liquidator be the liquidator.
For context, Section 167(1) IRDA provides that “the company must, and the creditors may at their respective meetings, nominate a person to be liquidator”, and where the company and creditors nominate different persons, the person nominated by the creditors shall be the liquidator. The Court explained that to nominate means to be chosen or selected, either at the company’s meeting or the creditors’ meeting, with priority given to the creditors’ selection.
This echoed the decision in Sysma Construction Pte v EK Developments Pte [2007] 2 SLR(R) 742 which found that the creditors’ meeting is not solely for the confirmation of the company’s appointment of the liquidator, but also to consider any other persons for nomination and then to make their choice of who would be the actual liquidator.
While the majority of creditors had approved the provisional liquidator’s appointment as the respondent’s liquidator, the Court held that this approval could not be given much weight as, even though the applicant had sought to nominate an alternative person, the provisional liquidator was the only person being put before them to vote.
The Court held that this was a substantive irregularity as it affected the choice and ability of the creditors to properly participate in the selection of the liquidator in an informed manner and was not a breach that could be remedied.
Failure to Provide General Proxy Forms
The respondent’s position was that the exclusion of the general proxy forms was for compliance with the Covid-19 (Temporary Measures) (Alternative Arrangements for Meetings) (Corporate Insolvency) Order 2020 which placed restrictions on the verification, authentication and counting of votes in virtual meetings. It was also argued that the provisional liquidator had conducted the creditors’ meeting in an inclusive and open manner and accordingly, the lack of general proxy forms was a mere procedural irregularity.
The Court, however, found that the lack of general proxy forms was fatal and therefore a substantive irregularity. It was held that the use of only special proxy forms meant that those who were present at the creditors’ meeting could only vote on the matters identified in the special proxy form. This prevented other issues from being raised at the meeting and being put to a vote, including the nomination of the creditors’ choice of liquidator, which was something that the applicant could not table despite seeking to nominate an alternative person as the liquidator.
In light of the findings around the irregularities at the creditors’ meeting, the Court held the meeting to be invalid and the resolutions passed during said meeting to be void.
Takeaways from Zipmex
The findings of the Court in Zipmex, while not binding in offshore jurisdictions such as the British Virgin Islands and the Cayman Islands, provide useful guidance as to when the Court should exercise its powers to intervene in decisions taken at a creditors’ meeting. In particular, the Court’s approval in Zipmex as to when an irregularity would be deemed substantive could prove to be persuasive, even if not binding. The findings also provide reminders as to what parties ought to be mindful of in exercising their powers, especially with respect to liquidators, provisional liquidators and voluntary liquidators.
Powers of Liquidators
In the Cayman Islands, the powers of an official liquidator are prescribed by Schedule 3 of the Companies Act with such powers being defined as those that are exercisable with the sanction of the Court and those that are exercisable without requiring such sanction. Conversely, the Companies Act provides that the powers of a provisional liquidator are limited to that which are conferred upon the provisional liquidator by the Court. As for voluntary liquidators, the Companies Winding Up Rules provide that a voluntary liquidator shall have all the powers of an official liquidator save for any powers which have been reserved to the directors of the company.
Similarly in the BVI, the general powers of a liquidator are provided for in Schedule 2 of the Insolvency Act. The Insolvency Act also provides that a provisional liquidator has the same powers of a liquidator to the extent necessary to maintain the value of the assets owned or managed by the company, or to carry out the functions for which the provisional liquidator was appointed. The powers of a provisional liquidator may also be limited by the Court.
Accordingly, anyone appointed as an official liquidator, provisional liquidator or voluntary liquidator ought to be mindful as to the ambits of their powers and ensure that they do not act beyond the powers prescribed to them. Official liquidators and voluntary liquidators in the Cayman Islands would also need to be cognisant of whether the powers they intend to exercise first require the sanction of the Court. Any exercise of powers that falls outside the scope of powers prescribed may result in such persons being removed from their appointments, either through the passing of resolutions or through a court order.
Proceedings of Creditors’ Meetings
Creditors should also be aware of their rights when it comes to proceedings of creditors’ meetings in respect of when and under what circumstances they can take any form of action to address any grievances.
In the BVI, the Insolvency Act provides that, in respect of a creditors’ arrangement, an application may be made to the Court on the basis that, among other things, there has been a material irregularity at or in relation to the meeting at which the arrangement was approved and modified. Where the Court is satisfied that there has been a material irregularity, the Court has the power to revoke or suspend any decision taken at the meeting.
The guidance provided in Zipmex could therefore be useful in persuading the courts in the BVI and the Cayman Islands as to what constitutes a material irregularity and whether the irregularity complained of is indeed a material one in which the Court ought to exercise its prescribed powers.
Further, the findings in Zipmex would be useful for a company going through a creditors’ arrangement as they provide guidance on what the company should be aware of when a creditors’ meeting is being called and conducted. This reduces the risk of any irregularities occurring which could jeopardise the outcome of the creditors’ meeting should they turn out to be material and trigger the Court’s powers to revoke or suspend any decision taken at meeting.
This article was previously published by Commercial Dispute Resolution (CDR).