4. Avoidance Provisions

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Questions and Answers

Which of the following elements is NOT required to establish unfair preference under the IRDA?

The transaction was made with a third-party guarantor.

The insolvent party was influenced by a desire to prefer the creditor.

The creditor is a shareholder of the insolvent party. (correct)

The transaction resulted in the creditor being better positioned in bankruptcy.

What must be proven to establish wrongful trading under s 239 IRDA?

The debts were incurred with no reasonable prospect of full repayment. (correct)

There was a criminal conviction of the company officers.

The directors continued trading despite not meeting debts.

The company incurred debts with fraudulent intent.

Which of the following statements regarding void dispositions after commencement of bankruptcy is accurate?

They can only be voided if made within a month of bankruptcy.

They can be upheld if proved to be made without intent to defraud.

They are automatically void regardless of creditor involvement. (correct)

They require a creditor to initiate action to be voided.

Under the IRDA, which section specifically addresses fraudulent trading?

Section 239 Signup and view all the answers

Which category of avoidance provision would apply if a company gives assets away for much less than their market value?

Transaction at an undervalue Signup and view all the answers

What is a characteristic of a transaction at undervalue according to the IRDA?

It involves entering into a transaction without receiving any consideration. Signup and view all the answers

What is the time frame for making a bankruptcy application for parties unrelated to the insolvent party?

1 year from the date of commencement of winding up Signup and view all the answers

Which of the following statements about the relevant time period for transactions at undervalue is true?

It is three years from the start of winding up or judicial management. Signup and view all the answers

In the context of connected persons, what assumption is made regarding insolvency?

The company or individual is presumed insolvent at the time of the transaction. Signup and view all the answers

Which of the following is considered an associate of a director in a company?

The director's spouse Signup and view all the answers

Which of the following best describes what constitutes a 'transaction' under the law?

A unilateral act of payment is included as a transaction. Signup and view all the answers

How is the burden of presumption regarding payments made to connected parties within 2 years of liquidation handled?

The payee must prove that the payment was not influenced by a desire to prefer Signup and view all the answers

In determining the desire to prefer a creditor, which of the following factors is considered insufficient alone?

A pre-existing debt owed to the creditor Signup and view all the answers

What is required for a transaction to be deemed at undervalue if conducted with an unintended recipient?

There should be an intention to enter into a transaction with the recipient. Signup and view all the answers

What must be considered when assessing the value provided by each party in a transaction?

The circumstances prevailing at the time of the transaction. Signup and view all the answers

What is the key element in assessing whether a debtor's decision was influenced by a desire to prefer?

Evidence of the debtor’s subjective wishes Signup and view all the answers

Which situation would NOT support the classification of a payment as a voidable preference?

The payment was made with a genuine belief in commercial viability Signup and view all the answers

According to case law, which situation would NOT classify as a transaction at undervalue?

Entering into a legally recognized contract for services. Signup and view all the answers

For which of the following relationships does the concept of 'associate' NOT apply according to the definitions provided?

An old college friend of the director Signup and view all the answers

What happens if a party intentionally enters into a transaction at undervalue during insolvency?

The transaction is presumed to have been made with fraudulent intent. Signup and view all the answers

What must a debtor prove to satisfy the test regarding their desire to prefer a creditor?

That the decision was one of several factors influencing the transaction Signup and view all the answers

What is required for a party to be personally liable for a company's debts under wrongful trading?

The party must be a knowing participant in trading while insolvent. Signup and view all the answers

What constitutes 'wrongful trading' under the relevant legislation?

Incurred liabilities when there is no realistic prospect of full repayment. Signup and view all the answers

Under what conditions can a defense of honesty be used in cases of wrongful trading?

If the party acted in good faith and without fraudulent intent. Signup and view all the answers

Which term is associated with actual dishonesty in the context of fraudulent company operations?

Real moral blame. Signup and view all the answers

Who has the authority to apply for a declaration of wrongful trading?

Any person who is a party to the trading conduct. Signup and view all the answers

Under what circumstances can the Court make an order regarding a transaction at an undervalue according to Section 224(4) IRDA?

The company must have entered into the transaction in good faith and with a business purpose. Signup and view all the answers

What is the legal status of any property disposition made after the commencement of winding up by the Court as stated in Section 130 IRDA?

It is void unless the Court grants permission. Signup and view all the answers

In the case of Cheo Sharon Andriesz v Official Assignee, what significant factor influenced the ruling related to the disposition of properties?

The disposition occurred after the filing of bankruptcy application. Signup and view all the answers

How is the term 'disposition' legally interpreted based on the case of QCD Sdn Bhd v Wah Nam Plastic Industry Pte Ltd?

It does not include obtaining property by someone with beneficial interest. Signup and view all the answers

Which of the following statements regarding floating charges is correct?

Floating charges must have fresh consideration to be valid if granted prior to winding up. Signup and view all the answers

What is the time limitation for connected persons regarding floating charges?

2 years prior to winding up. Signup and view all the answers

What does Section 238 IRDA indicate about fraudulent trading?

It holds directors liable if business is conducted to defraud creditors. Signup and view all the answers

What is essential for parties to consider before commencing litigation as highlighted in the case of Cheo Sharon Andriesz?

The necessity of conducting bankruptcy searches. Signup and view all the answers

Study Notes

### Insolvency Law and Practice: Avoidance Provisions

Relevant Legislation: Insolvency, Restructuring and Dissolution Act (IRDA)
- Sections 130, 229, 237, 238, 239
- Sections 224, 225, 226, 227
- Sections 361, 362, 363, 364

Categories of avoidance provisions

Undue or unfair preference
Transaction at an undervalue
Void disposition of assets after commencement of bankruptcy or winding up proceedings
Floating charges prior to winding up / Judicial Management (JM)

Personal liability of officers

Fraudulent trading:
- Intent to defraud: Business carried out to defraud creditors or for a fraudulent purpose
- Applicable to both winding up and JM
- Liability: Individuals involved in the fraudulent trading can be held personally liable
Wrongful trading:
- Section 239 IRDA: No requirement for criminal conviction
- "Wrongful": Company incurs debts without a reasonable prospect of meeting them in full, or such liabilities result in insolvency
- Liability: Individuals involved in the wrongful trading can be held personally liable for company debts

Unfair preference

Sections 225 and 226 IRDA (winding up)
Sections 362 and 363 IRDA (bankruptcy)

Elements of unfair preference

Preferred party: Creditor, surety, or guarantor of the insolvent party's debt or liabilities
Insolvency: Insolvent party was insolvent or became insolvent as a consequence of the transaction
Improved position: The transaction put the preferred creditor in a better position than if it hadn't occurred, specifically in the event of bankruptcy or liquidation
Influence: The insolvent party was influenced by a desire to prefer the creditor when deciding to enter into the transaction

Relevant time period for unfair preference

Unrelated parties: 1 year from the commencement of winding up or JM / making the bankruptcy application
Connected parties: 2 years from the commencement of winding up or JM / making the bankruptcy application

Meaning of "connected" and "associate"

Section 217(2)(b), (3)-(15) & 364 IRDA
Examples for companies:
- Director of a company and their associates
- An associate of the company
Examples for individuals:
- Spouse
- Relatives (brother, sister, uncle, aunt, nephew, niece, etc.)

Presumption of "influenced by the desire to prefer"

Sections 225(5) and 362(5) IRDA: A presumption arises when a preference is granted to a person connected to the company
Progen Engineering 4 SLR 1089: Burden of proof is on the payee to rebut the presumption that the payment was not influenced by the company's desire to prefer

Desire to prefer

DBS Bank v Tam Chee Chong and another (judicial managers of Jurong Hi-Tech Industries Pte Ltd (under judicial management) 4 SLR 948:
- The test is not whether there is a dominant intention to prefer, but whether the debtor's decision was influenced by a desire to prefer the creditor
- The court will look at the debtor's subjective state of mind to determine if it positively wished to improve the creditor's position in the event of liquidation
- It is sufficient if the desire to prefer was one of the factors that influenced the decision, even if it wasn't the sole or decisive factor
Rabobank v Jurong Technologies Industrial Corp Ltd 4 SLR 977:
- A transaction actuated by proper commercial considerations will not constitute a voidable preference.
- A genuine belief in the existence of proper commercial consideration may be sufficient even if it might not be sustainable objectively.

Transaction at an undervalue (Sections 224 & 361 IRDA)

Requirements:
- Gift or no consideration: The insolvent party makes a gift or enters into a transaction with no consideration
- Marriage consideration: The insolvent party enters into a transaction with consideration only for marriage
- Significantly less consideration: The insolvent party provides consideration that is significantly less valuable than the value received
- Insolvency: The individual was insolvent or became insolvent as a result of the transaction

Relevant time period for transactions at an undervalue

Winding up: 3 years from the commencement of winding up or JM
Bankruptcy: Within the 3-year period ending on the day of the bankruptcy application

Connected Persons and transaction at an undervalue

Sections 226(3) IRDA and 363(3) IRDA: A presumption of insolvency exists if the transaction at an undervalue is with a connected person or associate.

Meaning of "Transaction"

Mercator & Noordstar NV v Velstra Pte Ltd 4 SLR(R) 667:
- A "transaction" includes a unilateral act of payment and a gift
- No further requirement of mutuality
Velstra Pte Ltd v Dexia Bank NV 1 SLR(R) 154:
- The insolvent party must have intended to "enter into a transaction" with the counterparty
- A mistaken payment to an unintended recipient would not be considered an undervalue transaction
Buildspeed Construction Pte Ltd (in liq) v Theme Corp Pte Ltd 1 SLR(R) 287:
- The value provided by each party must be assessed based on the circumstances prevailing at the time of the transaction

Defence to transaction at an undervalue

Section 224(4) IRDA:
- The company acted in good faith and for the purpose of its business
- There were reasonable grounds for believing that the transaction would benefit the company

Void disposition

Section 130 IRDA (Section 259 Companies Act):
- Any disposition of property, transfer of shares, or alteration in membership status after the commencement of winding up is void unless the court orders otherwise
Section 328 IRDA: Restriction on disposition by a bankrupt
Cheo Sharon Andriesz v Official Assignee of the estate of Andriesz Paul Matthew 2 SLR 297:
- A disposition by a bankrupt to a former wife following a consent judgment in a divorce suit after the filing of a bankruptcy application is void under Section 77 of the Bankruptcy Act (Section 328 IRDA)
- Parties to litigation should conduct bankruptcy searches before commencing litigation
QCD Sdn Bhd v Wah nam Plastic Industry Pte Ltd 1 SLR(R) 270:
- "Disposition" does not include the process through which a person acquires beneficial interest in property, or proceeds from the company when they are entitled to it.

Floating charges

Section 229 IRDA (Section 330 Companies Act):
- A floating charge granted prior to winding up or JM may be invalid, except for fresh consideration and interest on such consideration.

Relevant time period for floating charges

Connected persons: 2 years
Unconnected persons: 1 year
Insolvency: For unconnected persons, the company must have been insolvent or become insolvent as a result (Section 229(3) IRDA)

Fraudulent trading

Section 238 IRDA: Business carried on with intent to defraud creditors
Applies to both winding up and JM: Anyone involved in carrying on the business in this manner may be personally liable
Tang Yoke Kheng (trading as Niklex Supply Co) v Lek Benedict and others:
- Business carried on with intent to defraud creditors or for a fraudulent purpose
- "Defraud" and "fraudulent purpose" connote "actual dishonesty involving, according to current notions of fair trading among commercial men, real moral blame”.

Wrongful trading (Section 239 IRDA)

Who can apply: Section 239(5)
Applies to both winding up and JM
Liability: If it appears the company traded wrongfully, any person who was party to the company's trading in such manner can be held personally liable for the company's debts

Meaning of "wrongful trading"

When an insolvent company incurs liabilities without a reasonable prospect of meeting them in full

Possible defence of honesty (Section 239(2) IRDA)

A person may be able to avoid liability if they acted honestly and reasonably believed, having regard to the company's financial position, that there was a reasonable prospect of the company avoiding insolvency.

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Test your knowledge on the Avoidance Provisions of the Insolvency, Restructuring and Dissolution Act (IRDA). This quiz covers essential sections and categories related to unfair preferences, transactions at undervalue, and personal liability of officers in insolvency cases. Dive into the complexities of fraudulent and wrongful trading as well.