SINGAPORE - The High Court has decided that SM Investments (SMI) is entitled to assert its counterclaim for a $38.9 million deposit against debt-laden Hyflux without leave from the court, after a $530 million rescue deal was cancelled.

The failed debt restructuring plan with Salim-Medco consortium SMI was aborted on April 4. Both Hyflux, which is under court protection from its creditors, and SMI are now suing each other to claim a $38.9 million deposit by SMI in an escrow account.

The court said on Thursday (Oct 3) that SMI cannot pursue the claim for damages and other reliefs without leave, however, as these "go beyond a purely defensive stance".

The rationale the court gave for allowing certain counterclaims to proceed even in the face of a moratorium is that it would be "inimical" to allow a claim to proceed, but not a counterclaim on the same factual grounds, "in so far as it operates to extinguish or negate the claim, without affecting the position of the other creditors".

For this reason, any part of a counterclaim that goes beyond operating as a defence, such as a claim for damages or property, would require the leave of court.

Disallowing SMI from making a counterclaim would deprive it from either a defence or a reduction of the claim, and tilt the balance too far in favour of Hyflux, it said.

"Since the defendants (SMI) have sought leave, and wish to pursue remedies going beyond a pure defence, leave is granted for them to assert and pursue the counterclaim, save that no execution of any judgement, including the release of funds or payment, is to occur without leave so long as the moratorium is in place."

In its judgement, the court also addressed the controversy between the two parties regarding whether a letter issued by the Public Utilities Board (PUB) satisfied a clause in the restructuring agreement which said that PUB's consent for the change in control of Tuaspring Pte Ltd, a subsidiary of Hyflux which ran a desalination plant, has to be obtained.

Hyflux said it did satisfy the clause; SMI said it did not.

The court decided that in any event, the case should proceed to trial as answering this question on the clause alone would not help to solve the dispute over the repudiation of the restructuring agreement.

"There are significant disputes of fact as to the interpretation of (the clause) of the restructuring agreement that cannot be resolved without the benefit of a full trial. However, the plaintiff's pleadings are deficient and ought to be amended. It also does not appear to be the case that a determination of the issue would fully resolve the dispute between the parties," it said.

"In the present case, the clause in question is only one of several grounds invoked by the plaintiff (Hyflux) as the bases for its claim in repudiatory breach."

Hyflux had argued that the clause is only one out of five instances of repudiatory conduct, and that even if the PUB letter did not satisfy the clause, SMI would still not have been entitled to terminate the agreement before the long stop date of April 16. The five instances of "alleged repudiatory conduct" meant that the defendant was wrong in repudiating the agreement, and so Hyflux was entitled to the escrow sum.

But from SMI's perspective, the PUB letter simply did not amount to consent under the clause in the restructuring agreement, so SMI should be entitled to terminate the agreement.

The court decided that a full trial is needed to allow the court to study the particular clause in the agreement, as key witnesses can be cross-examined and all relevant evidence, including that of pre-contractual negotiations, adduced. Pre-contractual negotiations may shed light on the proper interpretation and construction of the clause, and therefore the matter should be left for trial rather than be determined "right now".

"Here, I am satisfied that the evidence of pre-contractual negotiations could be material, and might play a role in the determination of the interpretation and construction of (the clause) of the restructuring agreement."

The court added that Hyflux has also not yet sufficiently pleaded its case specifically on the factual assertions and must amend its pleadings to sufficiently address the concerns raised in this judgement.