The liquidator of a company has an obligation to find out what led to the company’s failure, and take steps to maximise recovery for the company’s creditors. He is usually a stranger to the company’s business, and starts off at a disadvantage, having no prior knowledge of the company’s affairs, and usually incomplete and unsatisfactory records. He also has to deal with previous directors and officers of the company who are often uncooperative and may themselves be complicit in the company’s demise.
The recent Court of Appeal decision of PricewaterhouseCoopers LLP and others v Celestial Nutrifoods Ltd (in compulsory liquidation)  SGCA 20 recognises this disadvantage. In that case, the Court of Appeal affirmed an expansive view of the liquidator’s powers to investigate into the affairs of the company, in particular the liquidator’s powers to compel disclosure of documents from third parties under Section 285 of the Companies Act (the Act), and in so doing has levelled the playing field for the liquidator.
Background of matter
Celestial Nutrifoods Ltd (Celestial), a company listed on the Singapore Exchange, operated as an investment holding company. It held three subsidiaries incorporated in the British Virgin Islands, who each in turn held an operating entity incorporated in the People’s Republic of China (the PRC Operating Companies). The PRC Operating Companies held the physical and financial assets of the group.
In mid-2006, Celestial raised $235m from investors by issuing zero coupon convertible bonds (the Bonds), which granted the bondholders put options allowing them to compel Celestial to redeem all or some of the Bonds at 116.5% of their face values. In mid-2009, a majority of the bondholders exercised their put options and Celestial was required to redeem the Bonds. Celestial failed to do so and a statutory demand was issued by the trustee of the Bonds, BNY Corporate Trustee Services Ltd. The statutory demand was not satisfied and winding up proceedings were commenced in Singapore against Celestial.
Celestial was eventually wound up, and a liquidator was appointed.
Section 285 application
After taking control of Celestial, the liquidator discovered that the group’s operating companies, management, and directors were all based in the PRC. Despite his efforts, he was unable to obtain any meaningful assistance from them with regards to the affairs of Celestial and its subsidiaries. The liquidator nevertheless managed to identify several suspicious, irregular, and/or undisclosed transactions that warranted further investigation.
The liquidator sought to obtain information and records from Celestial’s auditor for the financial years 2004 to 2009, PricewaterhouseCoopers LLC (the Auditor), so that he could reconstruct the financial records of Celestial and investigate the various suspicious transactions that Celestial had been involved in.
The Auditor provided three lever arch files of documents that consisted only of high-level consolidation schedules, limited company and subsidiary level financial information, year-end balance, and minutes of meetings which the liquidator had already recovered from other sources.
The liquidator subsequently filed an application under section 285 of the Act against the Auditor for further disclosure of documents in relation to the group and for permission to orally examine the two audit partners. The documents sought to be disclosed included:
- general ledger and trial balances;
- bank statements and bank reconciliation statements;
- fixed asset registers and evidence of ownership of these fixed assets and land use rights;
- loan facilities documents;
- sales contracts, purchase contracts, supplier contracts, receipts, and payment vouchers;
- detailed creditors and debtors schedules;
- statutory documents filed by each entity of the group; and
- the working papers of the Auditor.
The liquidator’s application was granted by the Court. The Auditor appealed to the Court of Appeal.
Court of Appeal
The Court of Appeal dismissed the appeal on the ground that it lacked jurisdiction because the Auditor did not seek leave to file the appeal. Importantly, however, the Court of Appeal went on to consider whether the Court’s decision was correct.
The Court of Appeal noted that section 285 of the Act is couched in generous terms and should not be interpreted in a restrictive manner. It is not confined to eliciting such information as would reconstitute knowledge which the company once had or had been entitled in law to possess. Instead, the Court of Appeal adopted an expansive view that the power may be invoked to assist in the accumulation of facts, information, and knowledge that would enable or facilitate a liquidator to better discharge his statutory function, including information that the company may not have been apprised of prior to the onset of insolvency.
In deciding whether to grant an order under section 285 of the Act to a liquidator, the Court of Appeal clarified that a two-stage test should be used:
- Threshold test: The liquidator has to show some reasonable basis for his belief that the person whom the order is sought against can assist him in obtaining relevant information and/or documents and that such information and/or documents are reasonably required.
- Balancing test: The balance of the conflicting interests of allowing the liquidator to have a strong and cost-effective mechanism to enable him to discharge his functions to further the public interest in the regulation of corporate behaviour, and that of an order being wholly unreasonable, unnecessary or oppressive to the person concerned, must tilt in favour of the former.
The Court of Appeal was satisfied in this case that the nature of the documents and information sought by the liquidator satisfied both tests.
A number of the Court of Appeal’s findings will be of general interest to auditors. The fact that the liquidator was incentivised to pursue a claim against the Auditor is not per se objectionable because it was also in the interest of all creditors that any viable claims against third parties be pursued. It is also legitimate for a liquidator to rely on section 285 of the Act to investigate whether a claim exists, and if so, to sue the party responsible. It is not a bar to an examination order being made that a liquidator has in mind the possibility of litigation against the person whom the order is sought.
More importantly, the Court of Appeal affirmed the Court’s order for disclosure of the Auditor’s working papers, which the Auditors had resisted on the basis that they contained proprietary information and it would therefore be oppressive to order disclosure. The Court of Appeal acknowledged that the working papers belonged to the Auditor and that they contained proprietary information meant for internal use in preparing audit reports. But it held that this does not mean that the disclosure could not be ordered. The mere fact that the working papers are the Auditor’s property could not, in and of itself, form a basis for resisting the liquidator’s application. The working papers should be disclosed so long as they contain information that is of relevance to the liquidator’s investigations.
From a broader perspective, the Court of Appeal’s judgment recognises the difficulties faced by liquidators in investigating corporate wrongdoing, and a shift of the balance in favour of the liquidators. Further, the order for disclosure of an auditor’s working papers will be of great significance to auditors of companies, and may alter the manner in which audits are conducted.