Avoidance Provisions PDF

Corporate and Commercial Practice Insolvency Law and Practice Avoidance Provisions Mr Sim Kwan Kiat Copyright © 2024, Singapore Institute of Legal Education 1 Legislation IRDA - s 130,...

Corporate and Commercial Practice Insolvency Law and Practice Avoidance Provisions Mr Sim Kwan Kiat Copyright © 2024, Singapore Institute of Legal Education 1 Legislation IRDA - s 130, 229, 237, 238 and 239 IRDA - s 224, 225, 226 and 227 IRDA - s 361, 362, 363, and 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 / JM Personal liability of officers Fraudulent trading – intent to defraud Wrongful trading – s 239 IRDA No requirement for criminal conviction “wrongful”- company incurs debts without reasonable prospect of meeting them in full Unfair preference S 225 and 226 IRDA S 362 and 363 IRDA Elements of unfair preference a) Preferred party is a creditor or a surety or guarantor for any of the insolvent party’s debts or liabilities; b) Insolvent party was insolvent or became insolvent as a consequence of entering into the transaction; c) Insolvent party does anything or suffers anything to be done which has the effect of putting the creditor into a position which, in the event of the insolvent party’s bankruptcy or liquidation will be better than the position he would have been in if that thing had not been done; d) Insolvent party was influenced in deciding to enter into the transaction by a desire to prefer the creditor.  Relevant time period S 226, 363 IRDA- 1 year from date of commencement of winding up or JM / making of the bankruptcy application for parties which are unrelated to the insolvent party 2 years from date of commencement of winding up or JM / making of the bankruptcy application for persons connected/ associated to the insolvent party Must be insolvent or becomes insolvent at the time of giving the preference Meaning of “connected”, “associate” S 217(2)(b), (3)-(15) & 364 IRDA Examples for companies - Director of company, and associate of such director Person who is an associate of the company Examples for individuals - Spouse Relative - brother, sister, uncle, aunt, nephew, niece etc Presumption of “influenced by desire to prefer” S 225(5), 362(5) IRDA – preference to person connected with company Progen Engineering 4 SLR 1089 Payment to party within 2 years prior to liquidation Burden is on payee to rebut presumption that payment was not influenced by company’s desire to prefer payee 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. DBS Bank v Tam Chee Chong and another (judicial managers of Jurong Hi- Tech Industries Pte Ltd (under judicial management) 4 SLR 948 The court will look at the desire (a subjective state of mind) of the debtor to determine whether it had positively wished to improve the creditor’s position in the event of its own liquidation. The requisite desire may be proved by direct evidence or its existence may be inferred from the existing circumstances of the case. DBS Bank v Tam Chee Chong and another (judicial managers of Jurong Hi- Tech Industries Pte Ltd (under judicial management) 4 SLR 948 It is sufficient that the desire to prefer is one of the factors which influenced the decision to enter into the transactions; it need not be the sole or decisive factor. A transaction which is actuated by proper commercial consideration will not constitute a voidable preference. A genuine belief in the existence of a proper commercial consideration may be sufficient even if, objectively, such a belief might not be sustainable. Rabobank v Jurong Technologies Industrial Corp Ltd 4 SLR 977 The Court of Appeal upheld the High Court’s findings that notwithstanding the pressure exerted by Rabobank, who had received payment prior to the debtors’ appointment of judicial managers, the debtors had desired to prefer Rabobank. Transaction at undervalue (s224 & s361 IRDA) Person enters into transaction at an undervalue if: a) He makes a gift to that person or otherwise enters into a transaction for which he receives no consideration; (s224, s361 IRDA) b) He enters into a transaction with that person in consideration of marriage; (s361 IRDA) c) He enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by him; (s224, s361 IRDA) d) The individual was insolvent or became insolvent as a consequence of that transaction. (s224, s226 IRDA) Relevant time period 3 years from the commencement of winding up or JM – s 226(1)(a) IRDA. Within the period of 3 years ending on the day of the making of the bankruptcy application on which the individual is adjudged bankrupt – s 363(1)(a)(ii) IRDA Connected Persons When a transaction is entered into at an undervalue with a connected person or associate, the company/individual is presumed to be insolvent at the time of the transaction or became insolvent as a result of the transaction (s226(3) IRDA; s363(3) IRDA). Meaning of “Transaction” Mercator & Noordstar NV v Velstra Pte Ltd 4 SLR(R) 667 A “transaction” includes a unilateral act of payment and includes a gift. No further requirement of mutuality. Meaning of “Transaction” Velstra Pte Ltd v Dexia Bank NV 1 SLR(R) 154 It is necessary for the insolvent party to have intended to “enter into a transaction” with the counterparty. Mistaken payment to an unintended recipient would not be regarded as an undervalue transaction. Meaning of “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 in light of the circumstances prevailing at the time of the transaction. Defence Section 224(4) IRDA – The Court must not make an order under this section in respect of a transaction at an undervalue if : a) The company which entered into the transaction did so in good faith and for purposes of carrying on its business, and b) At the time it did so, there were reasonable grounds for believing that the transaction would benefit the company Void disposition S 130 IRDA (s259 Companies Act) “Any disposition of the property of the company, including things in action, and any transfer of shares or alteration in the status of the members of the company, made after the commencement of the winding up by the Court is, unless the Court otherwise orders, void.” S 328 IRDA – restriction on disposition by bankrupt Cheo Sharon Andriesz v Official Assignee of the estate of Andriesz Paul Matthew 2 SLR 297 Disposition by bankrupt of properties to former wife pursuant to consent judgment in divorce suit Disposition took place after filing of bankruptcy application Section 77 Bankruptcy Act (s328 IRDA) applied to a disposition of property pursuant to a court order Important for parties to litigation to conduct bankruptcy searches before commencing litigation QCD Sdn Bhd v Wah nam Plastic Industry Pte Ltd 1 SLR(R) 270 The word “disposition” does not include the process by which a person with a beneficial interest in the property obtains that property, or the proceeds of realization from the company at a time when he is entitled to have it. Floating charges S 229 IRDA (cf s 330 Companies Act) Floating charges granted prior to commencement of winding up or JM may be invalid, except to the extent of- Fresh consideration Interest on fresh consideration Floating charges Relevant time period- 2 years for connected persons 1 year for unconnected persons For floating charges in favour of unconnected persons, company must be insolvent or became insolvent as a result (s 229(3) IRDA) Fraudulent trading Personal liability of directors or others dealing with company S 238 IRDA – business carried out with intent to defraud creditors Applicable to both winding up and JM. A party to the carrying on of business in such manner may be personally liable Tang Yoke Kheng (trading as Niklex Supply Co) v Lek Benedict and others Business of the company had been carried on with the intent to defraud the creditors of the company or of any other person or for any fraudulent purpose Defendants must be knowing parties to the carrying on of the business in that manner “Defraud” and “fraudulent purpose” connote “actual dishonesty involving, according to current notions of fair trading among commercial men, real moral blame”. Wrongful trading (s239 IRDA) Who can apply – s239(5) Applicable in both winding up and JM If it appears the company had traded wrongfully, any person party to the company trading in such manner may be personally liable for company’s debts Wrongful trading Meaning of “wrongful trading” – company when insolvent incurs liabilities without reasonable prospect of meeting them in full, or such liabilities result in the company becoming insolvent. Possible defence of honesty (s239(2) IRDA) Notice Copyright © 2024, Singapore Institute of Legal Education. All rights reserved. The Course materials are developed by the Singapore Institute of Legal Education, based on the content, syllabus, and guidance provided by the Chief and Principal Examiners and their teams. No direct or indirect reproduction, publication, communication to the public, adaptation or any other use (that is prohibited and/or proscribed by copyright laws) of the Course materials in whole or in part in any form or medium is allowed without the written permission of the Singapore Institute of Legal Education. Part B Candidates should refer to the Code of Conduct for more information, particularly, the sections on conduct and behaviour, and the use of SILE resources.