CCP R&I (3) Insolvency Exam Notes (WT.2022) PDF
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2022
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This document provides detailed notes on insolvency law, covering topics such as winding up, bankruptcy, and judicial management. It examines different types of winding up, including compulsory and voluntary ones. It further analyzes procedures and considerations related to these processes.
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[PART B] INS Paragraphs 1. Winding Up/Liquidation (Companies) #WU #winding 3 A. Introduction.................................................................
[PART B] INS Paragraphs 1. Winding Up/Liquidation (Companies) #WU #winding 3 A. Introduction.....................................................................................................................3 B. Preliminary: Is it worth it for [creditor] to commence winding up proceedings against [company]?...........................................................................................................................3 C. Winding-up method #1: Compulsory winding up by the court......................................4 D. Winding up method #2: Voluntary Winding up............................................................ 10 E. Effect of winding-up APPLICATION being filed*.......................................................... 13 Compulsory Winding Up................................................................................................... 13 Voluntary Winding Up........................................................................................................13 Post-commencement enforcement................................................................................... 13 F. Effect of winding-up ORDER being made..................................................................... 14 Compulsory Winding Up................................................................................................... 15 Voluntary Winding Up........................................................................................................15 G. Administration of the winding-up.................................................................................20 2. Bankruptcy (Individuals) #bankruptcy 28 A. Preliminary: Is it worth it for [creditor] to commence bankruptcy proceedings against [individual]?........................................................................................................................ 28 B. Application for bankruptcy proceedings.......................................................................28 C. Effect of a bankruptcy application being filed.............................................................. 33 D. Effect of a bankruptcy order being made.....................................................................33 F. Discharge and annulment.............................................................................................. 39 G. Alternatives to bankruptcy (INDIVIDUAL VOLUNTARY ARRANGEMENT and DEBT REPAYMENT SCHEME)****............................................................................................... 40 3. Judicial Management #JM #judicial 45 A. Introduction...................................................................................................................45 1. When should you consider JM instead of liquidation?..............................................45 Would the purposes of JM be met? – IRDA s89(1)..................................................................... 45 2. You can apply for JM by court or resolution of creditors.............................................. 45 B. Application for COURT ORDERED JM..........................................................................45 C. Opposing the making of a JM order [by “whale” floating charge holder seeking to dismiss JM application]......................................................................................................47 D. Application for JM via CREDITOR’s RESOLUTION, i.e., VOLUNTARY JM...................48 1 [CREDITOR’s RESOLUTION –> INTERIM JUDICIAL MANAGER before obtaining the creditor’s resolution in majority & number to appoint the actual JM] N.B. THIS IS WITHOUT AN ORDER OF COURT....................................................................................48 E. Effect of a JM application being made......................................................................... 49 (regardless via Court or Voluntary via Creditors Resolution).............................................49 F. Effects of a JM order being made................................................................................. 49 G. Procedure for administration of JM & Functions/duties of judicial manager...............51 H. Discharge from JM........................................................................................................ 56 4. Avoidance of Antecedent Transactions for JM ONLY 58 58 5. Schemes of Arrangement #soa 64 A. Objective, purpose and scope of applicability of a scheme.........................................64 B. Process of sanctioning a SoA........................................................................................ 65 C. Administration of a SoA................................................................................................ 75 D. Termination of a Scheme.............................................................................................. 75 6. Cross-Border Insolvency/Restructuring #international 76 A. Cross-border Winding Up............................................................................................. 76 B. Cross-border Judicial Management.............................................................................. 84 C. Cross-border Restructuring/Schemes of Arrangement................................................ 92 Directors’ duty to creditors when company is insolvent creditors cannot sue Directors do not owe a duty to the creditors directly, even when the company is insolvent (Progen Engineering; Yukong). Directors owe a duty to the company instead, and the creditors cannot, without the assistance of liquidators, directly sue the directors for breaches of duty (Progen Engineering). Directors have to take into account the interests of the creditors When a company is insolvent, the directors have a fiduciary duty to take into account the interests of the company’s creditors when making decisions for the company. This duty requires the directors to ensure that the company’s assets are not dissipated or exploited for their own benefit to the prejudice of creditors’ interests (Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd at ) Contingent claims under insolvency set off A contingent claim against the insolvent company is provable and may be set off per Panorama Developments Pte Ltd (in liquidation) v Fitzroya Investments Pte Ltd at. Furthermore, per Section 219(4)(b) of the IRDA, a sum is regarded as being due from the company for the purposes of the set-off provision in Section 219(2) regardless of whether the obligation by virtue of which the sum is payable is certain or contingent. 1. Winding Up/Liquidation (Companies) #WU #winding A. Introduction What is liquidation? o Liquidation is a process where the company’s assets are seized and realised, with the resulting proceeds used to pay off its debts and liabilities. Any surplus is then distributed among the contributories of the company according to their rights and interests (under the Memorandum and Articles of Association). Upon the completion of the liquidation, the company goes into dissolution and it ceases to exist. o The purposes of a liquidation are: (a) to ensure a just distribution of the company's assets among creditors and contributories (b) to terminate the company's existence by its eventual dissolution. 2 Reasons for winding up a company: o Company has ceased business activities o Management deadlock o Oppression - shareholders dispute under s 216 CA o Corporate or financial restructuring of the group to which the company belongs o Minimise tax liabilities or maximise tax advantages for the group to which the company belongs o Breach of statutory provisions, including offences committed o Company acting outside its scope of activities Types of winding up: There are two key species of liquidation: Compulsory winding up by the Court Voluntary winding up The company or the 1. INSOLVENT (Creditor’s WU): The company convenes a creditors’ meeting to company’s creditors(s) apply consider a proposal for the company to be voluntarily wound up. for a winding-up order made by a court. 2. SOLVENT (Member’s WU): members’ voluntary winding up is only available if the company is solvent B. Preliminary: Is it worth it for [creditor] to commence winding up proceedings against [company]? In this regard, the following considerations are relevant: o Whether the creditor’s claim against the company is secured. If so, it may not be necessary for the creditor to commence winding-up proceedings if it can simply enforce its security to recover its debt. o Whether the insolvent company has any assets: This would determine whether the creditor has a realistic prospect of recovery. o Whether the insolvent company has other creditors, particularly secured creditors. This is a particularly important consideration if the creditor’s debt is unsecured, it would determine whether he has a realistic prospect of recovery [because the secured creditors will get priority leaving nth] 1. JURISDICTION (LOCAL/FOREIGN BOTH CAN)– Eligibility for winding up: In addition, it is necessary to ascertain that the company is eligible to be wound up. Eligible companies include: o Local companies, i.e. companies which are incorporated in Singapore (s 4(1) CA); o Foreign companies, i.e. companies which are not incorporated in Singapore. This is because s 246 IRDA expressly confers upon the Singapore courts the power to make a winding up order against an “unregistered company”, which is defined under s 245(1) IRDA to include a “foreign company”. The foreign company must have a substantial connection with Singapore (s 246(1)(d) IRDA). In deciding whether there is a substantial connection, the court will consider the factors set out under s 246(3) IRDA: (a) Singapore is the centre of main interest of the company (COMI) (b) the company is carrying on business in Singapore or has a place of business in Singapore; (d) the company has substantial assets in Singapore; (e) the company has chosen Singapore law as the law governing a loan or other transaction, or the law governing the resolution of one or more disputes arising out of or in connection with a loan or other transaction; (f) the company has submitted to the jurisdiction of the Court for the resolution of one or more disputes relating to a loan or other transaction. S 246(3)(a) – Singapore is the COMI There is a presumption that the company’s registered office is its COMI, but this presumption can be rebutted by evidence to the contrary. In reality, a company’s COMI may not coincide with its place or registration/incorporation (Re Zetta, Re Opti-Medix). Key factors which a court should bear in mind in determing the COMI include the following (Re Zetta): (a) the location from which control and direction was administered; (b) the location of clients; (c) the location of creditors; (d) the location of employees; (e) the location of operations; (f) dealings with third parties; and (g) the governing law. EXCEPTION: COURT’S DISCRETION TO WU UNIQUE TO WU However, the court will only exercise its jurisdiction to wind up a foreign company when there is a sufficient nexus between the foreign company and Singapore (Re Griffin Securities, Re Projector). In ascertaining whether a nexus exists, the court will consider whether there is a reasonable possibility that benefits would accrue to the foreign companies’ creditors from the winding up (Re Projector). Relevant principles in determining whether there is sufficient nexus include (Re Projector SA at ): o Utility, propriety and effect of a WU order as well as the overall fairness and justice of the case o It suffices if the assets of the coy within the jurisdiction are of any nature; they need not be “commercial” assets, or assets which indicate that the coy formerly carried on biz here. o The assets need not be assets which will be distributable to creditors by the liquidator in the WU: it suffices if by the making of the WU order they will be of benefit to a creditor(s) in some other way. 3 o If it is shown that there is no reasonable possibility of benefit accruing to creditors from making the WU order, the jurisdiction is excluded. C. Winding-up method #1: Compulsory winding up by the court In the present case, __________________ can consider making an application for [the company] to be wound up under an order of the court pursuant to s 124 IRDA. In order for __________________’s application to succeed, there are several elements which must be satisfied: First, __________________ must have locus standi under s 124(1) IRDA to apply for [the company] to be wound up by order of court. Secondly, ___________________ must establish a statutory ground for winding up under s 125(1) IRDA. Note here: s 125(2) IRDA contain grounds for the presumption of insolvency. Thirdly, the court must exercise its discretion in favour of ordering a winding-up order (s 128(1) IRDA). [See below] In addition, _________________ must also follow the procedural requirements for a winding-up application which are set out under the Companies (Winding-Up) Rules (“CWUR”). [See below] (a) PROCEDURE for applying for compulsory winding up OA w/ supporting affidavit file @ office of the Registrar (w/ receipt from Official Receiver for payment of prescribed sum ($10,400) serve to affected persons (company/member/officer) + advertisement of application in gazette and 1 English local newspaper (+ file memorandum of advertisement) < 7 CLEAR days before hearing file affidavit of service w/ supporting affidavit < 5 days before hearing people intending to appear to give notice of intention to applicant (< 3 days), applicant to file list of people attending < 2 clear working days before hearing affidavits opposing the WU application to be filed (OR apply for interloc injunction) reply affidavit A winding up application is made by way of Originating Application supported by affidavit (r 8(1)(b) read with r 8(3) IRRD(Corporate Insolvency and Restructuring)Rules (“IRDCIRR””) o Form of OA: ▪ As the application is made by __________ (the company itself), it shall be made in Form CIR-11 (s 63(1)(a) IRDCIRR) ▪ As the application is made by _______ (made by any person other than the company), it shall be made in Form CIR-12 as set out in the First Schedule to the IRDCIRR (r 63(1)(b) IRDCIRR). o Form of Affidavit: ▪ The supporting affidavit must state: (a) date of incorporation of company, (b) registered office of company (if there is no registered office – the address of the principal or last known principal place of business) and grounds on which the application for winding up is made (r 67(1) IRDCIRR). ▪ It shall be made by the/one of the applicants or, in the case where the application is made by a corporation, by some director/manager/secretary/other principal officer thereof (r 67(2)(a) IDR(CIR)R). ▪ Affidavit shall be prima facie evidence of the statements therein (r 8(4) IDR(CIR)R). o Filing of the application: ▪ The Originating Application and supporting affidavit must be filed at the office of the Registrar, together with a receipt from the Official Receiver showing payment of the prescribed sum mentioned in r 64 (r 65(1) IRDCIRR read with 64(3) IDR(CIR)R). Notice of the time and place appointed for the hearing shall be written on the WU application and sealed copies thereof (r 65(2)(a) ICR(CIR)R), and the Registrar may at any time before the WU application has been advertised, alter the time appointed and fix another time (r 65(1)(b) IDR(CIR)R). ▪ Deposit of “Prescribed Sum”: The applicant is to pay a prescribed sum to the Official Receiver before filing a WU application (s 64 (1) IRDCIRR). According to The Schedule to Fees (Winding up and Dissolution of Companies and Other Bodies) Order 2005 and r 64(3) IRDCIRR, the prescribed sum in relation to an application to court to wind up a company is $10,400 (preliminary administrative fee + administrative fee). o Service: ▪ The Originating Application and supporting affidavit shall be served on the party affected at least 7 clear days before hearing of the application (s 68(1) IRDCIRR). These are to be served at the registered office of the company (or if there is no registered office, then the principal or last known place of business of the company), by leaving a copy with any member, officer of employee of the company there (r 68(1) IRDCIRR). If no member/officer/employee can be found, it can be: o Left at the registered office/principal place of business of the company; or o Served on such member or members of the company as the court may direct. ▪ Affidavit of service Only if the WU application is filed by other persons An affidavit of service must be filed in Form CIR-13 (First Schedule of IRDCIRR), and together with the supporting affidavit must be filed at least 5 days before the hearing of the application (r 68(4) IDR(CIR)R). Copies to other parties [if Voluntary WU]: 4 ▪ If winding up is voluntary, a copy of both Originating Application and supporting affidavit must also be served on the liquidator (if any) appointed for the purpose of winding up the affairs of the company (r 68(2) IRDCIRR). If this applies – applicant of winding up application must also file in Form CIR-14 an affidavit of service of the application & supporting affidavit on the liquidator at least 5 days before the day appointed for the hearing of the winding up application (r 68(5) IRDCIRR). ▪ The Originating Application and the supporting affidavit should also be served on the Official Receiver and the licensed insolvency practitioner (if not Official Receiver) nominated by the applicant of the winding up application (r 68(3) IRDCIRR). ▪ Every contributory [shareholder per s4(1) CA] or creditor of the company is entitled to be provided a copy of the application and affidavit within 48 hours after requesting and payment of $1 per page of such copy (r 69 IRDCIRR). o Advertisement of the application to notify general public: ▪ Notice of every winding up application must be advertised 7 clear days (or such longer time as the court may direct) before the hearing of the winding up application. (r 66(1) IRDCIRR). ▪ The advertisement must be made once in the Gazette, and once at least in 1 English local daily newspaper or in such other newspaper as the court may direct (r 66(1)(a) and r 66(1)(b) IRDCIRR) ▪ Contents: Further, the advertisement shall state the day the application was filed, the name and address of the applicant and solicitor; a note stating that anyone who wishes to appear on the hearing of the Winding Up application must send notice of intention to appear to the applicant/ solicitor within the manner prescribed by r 70 IRDCIRR (r 66(2) IRDCIRR). ▪ Consequence of non-compliance: Failure to advertise in accordance with rr 66(1)-(2) IDR(CIR)R will result in the Registrar postponing the date of hearing of the WU application or give any other direction that he thinks fit, and the application must be removed from the file unless the court otherwise directs (r 66(4) IDR(CIR)R). ▪ Memorandum: A memorandum of advertisement in Form CIR-2 mentioning and giving the date of the Gazette or newspaper and signed by the person responsible for the publication shall also be filed by the person responsible for the publication (r 39 IDR(CIR)R). The memorandum shall be prima facie evidence that the advertisement to which it refers was published in the Gazette and newspaper (r 39(c) IDR(CIR)R). o List of persons intending to appear: The applicant shall prepare a list in Form CIR-16 of the names and addresses of the persons who have given notice of their intention to appear at the hearing and of their solicitors (r 71(1) IDR(CIR)R). ▪ A copy of the list, or, if no notice of intention to appear is given, a statement to that effect, shall be filed by the applicant at least 2 clear working days before the day of the hearing (r 71(2) IDR(CIR)R). o Attendance on Registrar (hearing): ▪ Rule 73(1) IRDCIRR provides that after the winding up application has been filed, the applicant or his solicitor shall attend before the Registrar and satisfy him that (a) the winding up application has been duly published in accordance with rule 66(1); (b) the affidavit supporting the winding up application and the affidavit of service (if any) have been duly filed; (c) the consent in writing of the Official Receiver or the licensed insolvency practitioner nominated by the applicant as liquidator has been obtained and filed; (d) the provisions of these Rules as to winding up applications have been duly complied with; and (e) the prescribed sum mentioned in rule 64 has been deposited been with the Official Receiver. ▪ No order may be made except a dismissal/adjournment if the applicant of winding up application, prior to the hearing, has not attended before the Registrar on the day appointed and satisfied the Registrar in the manner required by this rule (r 73(2) IRDCIRR) o Opposing WU application: Y may look to oppose the WU application at the hearing. ▪ Notice of intention: He must first serve on the applicant/solicitor notice of his intention to appear at the hearing (r 70(1) IDR(CIR)R). The notice shall (a) be signed by him or his solicitor, (b) state his address and (c) be served, or if sent by post shall be posted in such time as in the ordinary course of post to reach the address at least 3 clear working days before the day of the hearing (r 70(2) IDR(CIR)R). The notice must be in Form CIR-15 with the necessary variations (r 70(3) IDR(CIR)R). Non-compliance: A person who has failed to comply with this rule shall not, without permission of the court, be allowed to appear at the hearing (r 70(4) IDR(CIR)R). ▪ Affidavits: Affidavits in opposition to the WU application shall be filed and a copy thereof served on the applicant or his solicitor at least 5 days before the day appointed for the hearing (r 72(1) IDR(CIR(R). Affidavit in reply: Any affidavit in reply to an affidavit in opposition shall be filed within 3 days of date of service of the affidavit in opposition of the application, and a copy must be served on the party opposing the application (r 72(2) IDR(CIR)R). ▪ The debtor coy may also apply for an interlocutory injunction to restrain the presentation of the application if it believes it has some good grounds as to why the coy should not be WU. Winding-up order is made (dates back to the date of presentation of application or date where winding-up resolution is passed, whichever is earlier) o When winding up order is made, the applicant is to immediately inform the liquidator of the company of the making of the order in Form CIR-17 (s 76(1)(a) IRDCIRR) and advertise a notice of the making of the order in Form CIR-18 in the Gazette and in an English Local daily newspaper (s 76(1)(b) IRDCIRR). 5 o The winding up order is to be served personally or by prepaid letter on the company’s secretary (s 76(2) IRDCIRR). Dividend declared and paid Dissolution REQUIREMENTS FOR COMPULSORY WINDING UP TO BE ORDERED (1) Locus standi WHO CAN MAKE AN APPLICATION? to make an Under s 124(1) IRDA, a company, whether or not it is being wound up voluntarily, may be wound up under application for the an order of the Court on the application of one or more of the following: company to be (a) the company; (b) any director of the company; wound up (s (c) any creditor, including a contingent or prospective creditor of the company; 124(1) IRDA) (d) a contributory, any person who is the personal representative of a deceased contributory, or the Official Assignee of the estate of a bankrupt contributory [shareholders per s4(1) CA]; (e) the liquidator of the company; (h) the judicial manager appointed under this Act Meaning of “creditor” A “creditor” under s 124(1) IRDA includes both a prospective as well as a contingent creditor (Re People’s Parkway Development). Prospective creditor: A “prospective creditor” is one in respect of a debt which will certainly become due in the future, either on some date which has already been determined, or determinable by reference to future events (Stonegate Securities v Gregory). Contingent creditor: A “contingent creditor” is one in respect of a debt which will materialise out of an existing legal obligation on an event which may or may not occur (Stonegate Securities v Gregory). E.g. liability of a surety, liability of an insurer, or defendant in a negligence claim. (Applicant must establish self as actual creditor then can, if not application can be disputed on grounds of debt being disputed on substantial grounds): Until the applicant is established to be an actual creditor of the company, he will not have locus standi to make a winding-up application (BNP Paribas). Thus, if the debt is disputed on substantial grounds, the court will not allow its winding-up jurisdiction to be used as a means to pressure the company into submission. The company should either: (a) Resist the winding up application after it is filed on the ground that the debt is disputed; or (b) Apply for an interlocutory injunction to restrain the filing of a winding-up application on the ground that the debt is disputed and that any winding-up application filed would be an abuse of process. The company cannot merely assert that the debt is disputed – it must raise triable issues in order to obtain a stay of the winding-up proceedings (Mohd Zain bn Abudllah, Pacific Recreations). A dispute on quantum only, and not on the existence of the debt does not constitute a debt disputed on substantial grounds (Re Tweeds Garages Ltd). (2) Statutory WU if coy unable to pay debts grounds for winding Pursuant to s 125(1)(e) IRDA the court may order the winding up of a company if it is unable to pay its up debts [note: other grounds are in s 125(1) IRDA]. Under s 125(2) IRDA, a company shall be deemed to be (s 125(1) and (2) unable to pay its debts if: IRDA) (1) A creditor to whom the company is indebted in a sum exceeding $15,000 then due has served a statutory demand on the company, by leaving at the registered office of the company, a written demand by the creditor… requiring the company to pay the sum so due, and the company has for 3 weeks after the service of demand neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor (s 125(2)(a) IRDA); OR (2) an Enforcement Order or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part [i.e., unsatisfied enforcement order by debtor company] (s 125(2)(b) IRDA); OR (3) It is proved to the satisfaction of the court that the company is unable to pay its debts, taking into account the contingent and prospective liabilities of the company (s 125(2)(c) IRDA). COY DEEMED UNABLE TO PAY DEBTS IF (1) Failure to meet Statutory Demand – s 125(2)(a)** [Statutory presumption of insolvency] [MOST EFFECTIVE ROUTE] Evaluation: This is usually the most effective route - in practice, relying on the statutory presumption in s 125(2)(a) IRDA is the most effective route for creditors seeking to wind up a company. While the inability of the company to pay its debts may be proved by reference to the assets and liabilities of the company, in practice, it would often be far easier to rely on a presumption, since matters relating to the asset and liability position of the debtor are often matters primarily within the knowledge of the debtor. **However, a contingent or prospective creditor cannot rely on the statutory demand procedure set out in s 125(2)(a) IRDA as such debt must be liquidated (Ng Ah Kway) and presently due (Re Bryant Investment). Instead, a contingent or prospective creditor must rely on the Sun Electric cash flow test in order to wind up a company. 6 (a) Form of statutory demand: A petitioning creditor who seeks to rely on s 125(2)(a) must comply with the conditions therein. Under s 125(2)(a) IRDA, a company is deemed insolvent if: (1) the company is indebted in a sum exceeding $15,000 then due; (2) the creditor served a statutory demand on the company at its registered office; and (3) the company has for 3 weeks thereafter neglected to pay the sum or “to secure or compound for it to the reasonable satisfaction of the creditor” [statutory alternatives]. N.B. “Compounding a Debt” within s125(2)(a) IRDA refers to the making of an agreement between the debtor and creditor, whereby an alternative obligation is incurred in lieu or in satisfaction of the debt. However, not all agreements to accept an alternative payment arrangement constitute the compounding of a debt. In order for a debt to be compounded, the original obligation must have been discharged. Essentially, the new arrangement must override the original arrangement, such that the creditor is no longer able to enforce the original obligation. If the new arrangement contemplates that the original debt is still valid and enforceable and an action can continue to be brought upon it, then the debt has not been compounded. (Bombay Talkies (S) Pte Ltd v UOB Limited SGCA 66) (b) EFFECT OF PROCEDURAL IRREGULARITY or DEFICIENCIES IN STATUTORY DEMAND o Defect, irregularity or deficiency of Notice or Time) X: As per s 264(1) IRDA, procedural irregularities of notice or time [s 264(1)(b) IRDA] shall not necessarily invalidate proceedings under Parts 4 to 11 of the IRDA (in), unless the Court is of the opinion that it causes SUBSTANTIAL INJUSTICE that cannot be remedied by any order of court (s 264(2) IRDA) o The overall effect of non-complianceX is not that a statutory demand would automatically be set aside; the court has the discretion to scrutinize the statutory demand and make appropriate orders to ensure that substantial justice is done as between the parties: Lalwani Ashok Bherumal. o Stating incorrect sum X: Although a bankruptcy case, an inaccuracy of the sum stated to be owed in the statutory demand was not held to cause a substantial injustice to the debtor that could not be remedied (Lalwani Ashok Bherumal) o Failure to state statutory alternatives X/✓?: A statutory demand which merely states that a failure to pay the debt due within 3 weeks from the date of service, would allow the creditor to apply for winding up, without stating that the company has the option of securing or compounding the debt to the reasonable satisfaction of the creditor, may be (dicta) regarded as invalid (BNP Paribas v Jurong Shipyard). o Failure to state consequences of failure to comply X: Although there was no express or implied requirement in s 125(2)(a) that the statutory demand must contain a warning of the consequences of a failure to comply, it was both desirable and prudent to do so given that the court had the discretion whether or not to make an order for winding up (dicta in Re Dayang Construction). o Defective service of the statutory demand✓: The statutory demand must be served at the company’s registered office. The company’s latest address can be obtained by conducting a company profile search on ACRA’s database. Pac-Asian Services: Statutory demand was not served at the company’s registered office. It was held that the petitioning creditor could not rely on s 125(2)(a) IRDA because the service of the statutory demand was defective. (c) Challenging the Statutory Demand Court’s powers on hearing WU Application: Per s128(1) IRDA, on hearing a WU application the court may dismiss or adjourn the hearing conditionally or unconditionally or make any interim or other order that the Court thinks fit (i.e., including making an injunction against the applicant from filing a WU application for a disputed debt). DISPUTED DEBTS (C SHOULDN’T EVEN HAVE SERVED IT BC CANNOT) What is a ‘disputed debt’? Standard is that of triable issues of fact: (Mohd Zain bin Abdullah) [similar to resisting a summary judgment] Judgement pending appeal is NOT a dispute; debtor should apply for stay of enforcement pending appeal instead: Bank Utama (M) Bhd A creditor cannot serve a statutory demand for a disputed debt. If the alleged debt is disputed on substantial grounds, the court will not allow its winding-up jurisdiction to be used as a means to pressure the company into submission (BNP Paribas). As such, the company should either: (1) Resist the winding up application after it is filed on the ground that the debt is disputed; or (2) Apply for an injunction to restrain the filing of a winding-up application on the ground that the debt is disputed and that any winding-up application filed would be an abuse of process (Stonegate Securities Ltd). HOWEVER, Company must raise triable issues The company cannot merely assert that the debt is disputed – it must raise triable issues in order to obtain a stay of the winding-up proceedings (Mohd Zain bn Abudllah, Pacific Recreations). UNDISPUTED DEBT: If there is a “distinct possibility” that the company has a bona fide cross-claim against the creditor which may exceed the undisputed debt. In such cases, the court must give the company an opportunity to prove its claim rather than to allow a winding-up application to be filed (Metalform Asia). As such, the company should apply for an injunction to restrain the filing of a winding-up application until it is able to litigate its cross-claim against the creditor. (d) What Coy can do after being served SD for undisputed debts 7 Securing or compounding the debt to reasonable satisfaction of creditor within 21 days: Even if the debt is undisputed, the company may still stave off the winding-up application with offers to secure or compound the entire debt to the satisfaction of the creditor (BNP Paribas v Jurong Shipyard). From a practical perspective, this is an attractive option for the company as the filing of a winding-up application and the advertisement of the same is bound to cause commercial chaos for the company. However, if the company is unable to secure the entire debt, and it is unable to pay the sum required, the statutory presumption will apply and the company will be deemed unable to pay its debts. Partial repayment within the prescribed 3 weeks to reduce debt below 15k threshold: the CA in Sun Electric expressed its view in obiter that a company which makes partial payment of the debt demanded in a statutory demand within the prescribed three-week period such that the remaining amount payable falls under $10,000 [note now is 15k threshold] should not be deemed to be unable to pay its debts pursuant to [s125(2)(a) IRDA] (which is in pari materia with s 254(2)(a) CA which the CA considered) (2) Enforcement Order or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part – s 125(2)(b) IRDA [rarely used] Evaluation: In practice, there have been very few cases where a winding-up application is made on this ground. First, unless the debt is disputed, there is no need for a creditor to incur further cost and time to convert the contractual debt into a judgment debt. Second, even where the debt has been converted, it is unnecessary for the creditor to take the further step of levying enforcement and to make the winding-up application, as he can already rely on the judgment debt to serve a statutory demand under s 1252)(a) IRDA or prove that the “general” corporate insolvency test in s 125(2)(c) IRDA is satisfied. (3) Proved to the satisfaction of the court that the company is UNABLE TO PAY ITS DEBTS, taking into account the contingent and prospective liabilities of the company – s 125(2)(c) IRDA**** Under s 125(2)(c) IRDA, a company will be deemed unable to pay its debts if it is proved to the court’s satisfaction that it is unable to pay its debts, taking into consideration its contingent and prospective liabilities. **The cash flow test is the sole applicable test under s125(2)(c) IRDA The cash flow test assesses whether the company’s current assets exceed its current liabilities such that it can meet all debts as and when they fall due. “Current assets” and “current liabilities” refer to assets which will be realisable and debts which will fall due within a 12-month timeframe, as this is the standard accounting definition for those terms (Sun Electric). The balance sheet test, which compares the company’s total assets with its liabilities has no direct correlation with whether a company “is unable to pay its debts”.. Parliament could not have intended the balance sheet test as the test for s125(2)(c) IRDA as it is not a good indicator of the company’s present ability to pay its debts (Sun Electric at ). The CA further set out a non-exhaustive list of factors which should be considered under the cash flow test. These include (Sun Electric): 1. The quantum of all debts which were due or would be due in the reasonably near future [prospective/contingent debts] 2. Whether payment was being demanded or was likely to be demanded for those debts 3. Whether the company had failed to pay any of its debts, the quantum of such debt and for how long the company had failed to pay it 4. The length of time which had passed since the commencement of the winding up proceedings 5. The value of the company’s current assets and assets which would be realisable in the reasonably near future 6. The state of the company’s business, in order to determine its expected net cash flow from the business by deducting from projected future sales the cash expenses which would be necessary to generate those sales [expected net revenue] 7. Any other income or payment which the company might receive in the reasonably near future 8. Arrangements between the company and prospective lenders, such as its bankers and shareholders, in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a time later than the debts [whether can borrow $] Applying the cash flow test and considering the evidence, the appellant in Sun Electric was insolvent, and hence WU application should be granted (3) Court’s Once it is established that the company is unable to pay its debts pursuant to one of the grounds stated in s 125(2) IRDA, the creditor is prima facie entitled to a winding-up order (Metalform Asia). Exercise of Discretion* (s 128 HOWEVER, the court retains a discretion not to wind-up the company under s 128 IRDA. IRDA) o (Chan Sek Keong CJ made clear in (“BNP Paribas”) at , the “use of the word ‘may’ instead of ‘shall’ [in s 128 IRDA] indicates a discretionary power in the court to order a winding up”.) 8 Factors taken into consideration: o (a) Wishes of creditors: Under s 201(1) IRDA, the court may have regard to the wishes of the creditors in considering whether to allow a winding-up application. Regard must be given as to the value of each creditor’s debt (s 201(2) IRDA). ▪ Majority/minority: Although the fact that the majority creditors oppose the making of a winding-up application is a significant factor (Raiffeisen Zentralbank), the court will be vigilant to ensure that the rights of minority creditors are not ignored (Korea Asset Management). Raiffeisen Zentralbank: As RZ Bank was an unsecured creditor of only 1% of the company’s total debt, and faced almost no prospect of recovering its debt, the court did not accord great weight to its views. ▪ Secured creditors: Less weight should be given to the views of secured creditors because they are entitled to proceed against their security (Raiffeisen Zentralbank). o (b) Wishes of contributories [Shareholders, s4(1) CA]: Under s 201(1) IRDA, the court may have regard to the wishes of the contributories in considering whether to allow a winding-up application. Regard must be given to the number of votes conferred on each contributory (s 201(3) IRDA) o (c) Impact on related companies/entire business group (Public interest): Where the company is a member of a group enterprise, the filing of a winding-up petition could immediately trigger a series of cross-defaults under financial arrangements entered into by that company or other companies within the group. This might put the entire business group at risk of being pushed into a state of insolvency by the mere presentation of a winding-up application (BNP Paribas). o (d) Other economic and social issues (Public interest): In ascertaining whether a winding-up application should be allowed, the court must have regard not only to the interests of the creditors, but also the interests of the public at large (BNP Paribas). For instance, the court must take into consideration other economic and social interests which may be affected, such as those of the company’s employees, the non-petitioning creditors, as well as the company’s suppliers, customers and shareholders (BNP Paribas). N.B. the public interest considerations in BNP Paribas would weigh heavily where the company concerned is a viable one (BNP Paribas at ) D. Winding up method #2: Voluntary Winding up HOW TO WU: Pursuant to s 160(1)(b) IRDA, a company can be wound up voluntarily if the company resolves to do so by special resolution (75% members votes for it). o Effect of Voluntary Winding Up: ▪ The company, must starting on the commencement of winding up (this is at the time of the passing of special resolution – s 126(1)(a) IRDA), cease to carry on its business, except in so far as in it is in the opinion of the liquidator required for the beneficial winding up of the company (s 162(1) IRDA). ▪ Any transfer of shares, not being a transfer made to or with the sanction of the liquidator, and any alteration in the status of the members made after the commencement of the winding up, are void. (s 162(3) IRDA). o Powers of liquidator appointed via voluntary winding up: ▪ Liquidator has, with the approval of [special resolution of the company (member’s voluntary)], [approval of court or the committee of inspection (creditor’s voluntary)], exercise any powers given by section 144(1)(b), (c), (d), (e), (f) and (g). (s 177(1)(a) IRDA) ▪ Exercise any other power given to the liquidator in a winding up by the court (s 177(1)(b) IRDA). S 61 IRDA “creditors’ voluntary winding up” means a winding up under Division 3 of Part 8, other than a members’ voluntary winding up;” 9 “members’ voluntary winding up” means a winding up under Division 3 of Part 8, for which a declaration has been made and lodged under section 163;” N.B. members voluntary = solvent liquidation and creditors voluntary = insolvent liquidation (a) Process for MEMBERS’ Voluntary Winding Up (SOLVENT LIQUIDATION**). STEP 0: Pre-step for members’ voluntary winding up: Before the date of which ‘the notice of the meeting for the purposes of the resolution are proposed to be sent out’, the directors (if more than 2, the majority of the directors) must make a Declaration (of Solvency) to the effect that: (s 163(1) IRDA) (a) they have made an inquiry into the affairs of the company; and (b) the directors have formed the opinion that the company will be able to pay its debts in full within a period not exceeding 12 months after the commencement of the winding up. o This declaration will have no effect unless: (s 163(3) IRDA) ▪ (a) The opinion was formed at a meeting of directors; ▪ (b) made within 5 weeks immediately before the passing of the special resolution for voluntary winding up; ▪ (c) Lodged with the Registrar of Companies before the date on which ‘the notice of the meeting for the purposes of the resolution are proposed to be sent out’. o This declaration must attach a Statement of Affairs in Form VWU-9 showing – to the latest practicable date before the making of the application: (a) assets of the company & total amount expected to be realised from those assets; (b) the liabilities of the company; and (c) the estimated expenses of the winding up (s 163(2) IRDA) Making a declaration without reasonable ground for having the opinion is a criminal offence (s 163(4) IRDA) If company is wound up pursuant to the Declaration of Solvency, and its debts are not paid with the period stated in the declaration, lack of reasonable ground is presumed (s 163(5) IRDA). STEP 1: (A) Obtain special resolution: The company obtains a special resolution to wind up the company voluntarily (i.e. >75% of the member’s present voted in favour of winding up the company voluntarily) (s 160(1)(b) IRDA). [Note this is when winding up generally commences – s 161(6)(b) IRDA]. (B) Lodge notice & advertise: Within 7 days after the passing of the resolution, lodge a copy of the resolution within the Registrar of Companies (s 160(2)(a) IRDA); within 10 days after the passing of the resolution, give notice of the resolution in the Gazette and at least one English local daily newspaper (s160(2)(b) IRDA). ▪ Failure to do so is an offence (s 160(3) IRDA). STEP 2: Appoint Liquidator: The company must appoint one or more liquidators for the purposes of winding up affairs in a general meeting (s 164(1) IRDA). Upon the liquidator’s appointment, all powers of the directors shall cease except with the consent & approval of the liquidator (s 164(2) IRDA). (b) Process for CREDITORS’ Voluntary Winding Up (INSOLVENT LIQUIDATION**). Members Voluntary WU (“MVWU”) can be 🡺 Creditors Voluntary WU (“CVWU”)***** IF the Liquidator(s) in a Members Voluntary Winding UP is/are of the opinion that the company will not be able to pay or provide for the payment of its debts in full within the period stated in the declaration made under s 163(1) [i.e., the Declaration of Solvency and 12 months], the liquidator must immediately summon a meeting of the creditors and lay before the meeting a statement of the assets and liabilities of the company (s 165(1) IRDA). This meeting must be summoned within 30 days after the liquidator had formed that opinion (s 165(2)(a) IRDA). Notice of this meeting must be sent to creditors not less than 7 days before the meeting (s 165(2)(b) IRDA), advertised in the Gazette and one English local daily newspaper (s 165(2)(c) IRDA), and during the period before the day on which the creditors’ meeting is to be held, furnish the creditors free of charge with such information concerning the affairs of the company as the creditors may reasonably require (s 165(2)(d) IRDA). o At the meeting, the creditors may appoint some other person to be the liquidator instead of the liquidator appointed by the coy (s 165(5) IRDA). o Regardless whether the creditors appoint some other liquidator, or not the WU shall thereafter proceed as a CVWU (s 165(6) IRDA r/w 165(8) IRDA). A Declaration of Insolvency is thereafter made (s161(1) IRDA); see below STAGE 0: Pre-Step for Creditor’s Winding Up – appoint provisional liquidator. Must appoint provisional liquidator when directors think company is going insolvent S161(1) IRDA: Where directors have lodged a statutory declaration with the Official Receiver (Form found in First Schedule to Oaths and Declarations Act) and a declaration lodged with Registrar of Companies (Form VWU-1) to the effect that (Declaration of Insolvency): S161(1)(a) IRDA the company cannot by reason of its liabilities continue its business; and S161(1)(b) IRDA the meeting of the company and of its creditors have been summoned for a date within 30 days after the date of the declaration, 10 ▪ the directors must immediately appoint a licensed insolvency practitioner to be the provisional liquidator (s 161(1) IRDA). ▪ The declaration in Form VWU-1 must also (a) identify the company; and (b) provide the names and identification numbers of the directors making the declaration. o Power & Appointment period: The provisional liquidator can exercise all functions & powers of a liquidator in a creditors’ winding up (s 161(2) IRDA), and his appointment continues for 30 days from the date of appointment, or for such further period as the Official Receiver may allow (s 161(3) IRDA). o Advertisement of Notice of appointment of Provisional Liquidator: Notice of appointment of a provisional liquidator must be lodged with the Official Receiver together with the original statutory declaration. It must also be advertised in the Gazette and at least one English local daily newspaper, within 14 days after the appointment. o Date of commencement of winding up: Date of commencement of winding up is the date of appointment of the provisional liquidator if this was before the resolution for voluntary winding up (s 161(6)(a) IRDA). STAGE 1: (A) Obtain special resolution: The company obtains a special resolution to wind up the company voluntarily (i.e. >75% of the member’s present voted in favour of winding up the company voluntarily) (s 160(1)(b) IRDA). [Note this is when winding up generally commences – s 161(6)(b) IRDA]. (B) Lodge notice & advertise: Within 7 days after the passing of the resolution, lodge a copy of the resolution within the Registrar of Companies (s 160(2)(a) IRDA); within 10 days after the passing of the resolution, give notice of the resolution in the Gazette and at least one English local daily newspaper (s160(2)(b) IRDA). ▪ Failure to do so is an offence (s 160(3) IRDA). STAGE 2A: Convene creditor’s meeting: The company will then convene a creditor’s meeting – on the day, or the day next following the day on which the company’s meeting for the special resolution – to consider its proposal for a voluntary winding up of the company (s 166(1) IRDA). o Notice of creditor’s meeting: Notice of the meeting to creditors must be sent at least 10 days before the date of the creditor’s meeting (s 166(2)(a) IRDA). Within this notice, a statement showing the names of all creditors and the amount of their claims must be attached (s 166(2)(b) IRDA). o Advertise the notice of creditor’s meeting: Notice of the meeting of the creditors to be advertised at least 7 days before the date of the meeting in the Gazette and at least one English local daily newspaper (s 166(3) IRDA). o Directors of Company must provide full statement of company’s affairs, and at least one must show at the Creditors Meeting: ▪ A full statement of the company’s affairs showing in respect of assets the method and manner in which the valuation of the assets was arrived at, together with a list of the creditors and the estimated amount of their claims to be laid before the meeting of the creditors (s 166(4)(a) IRDA); ▪ Appoint one of their own to attend the meeting (s 166(4)(b) IRDA). This director and his secretary must disclose at the creditor’s meeting the company’s affairs and the circumstances leading up to the proposed winding up. (s 166(5) IRDA). STAGE 2B: At the creditor’s meeting: o The creditors at the meeting may (if they think fit) appoint a committee of inspection [consisting of of up to 5 representatives from Creditors and up to 5 representatives from Company] of not more than 5 persons (s 169(1) IRDA); ▪ If such a committee is appointed, the company may, either at the meeting at which the resolution for voluntary winding up is passed or at any time subsequently in general meeting, appoint such number of persons but not more than 5 as it thinks fit to act as members of the committee (s 169(1) IRDA). o The company shall, and the creditors may, appoint a liquidator for the purpose of winding up the affairs and distributing the assets of the company ▪ If company’s and creditor’s choice differ, the creditors’ choice prevails (s 167(1) IRDA). STAGE 3: On the appointment of the liquidator, the voluntary winding up shall commence (s 161(6)(a) IRDA). o All powers of directors shall cease, except so far as the committee of inspection or (if there is no such committee) the creditors approve the continuance thereof (s 167(4) IRDA). o The company shall cease to carry on its business, except so far as is in the opinion of the liquidator required for the beneficial winding up thereof (s 162(1) IRDA). (c) Transitioning from CVWU into Court Order WU** [rationale being that Court supervision is desirable, where private liquidator is not acting independently. N.B. liquidator is an officer of the Court who owes fiduciary duties to the coy and its creditors] it is possible to transition from Creditors’ Voluntary WU into Court Ordered winding up. Cornerstone Inquiry is whether proceedings will be in the interest of creditors at large (Korea Asset Management, leave granted to apply for compulsory winding up instead of voluntary winding up because court-appointed liquidator would serve the interest of creditors better) Korea Asset Management Corp v Daewoo Singapore Pte Ltd (in liquidation) 1 SLR(R) 671 On the facts of the case, there were serious questions regarding the independence of the liquidators, and the majority creditor had voiced grave concerns regarding the state of the company and called for an inquiry into the reasons for the company’s failure - all to no avail. Key factors for this type of application include: o Timing of the claim (the later, the worse the prospects) o “Matrix factors” - fairness and “commercial morality” ▪ Views of majority creditors ▪ Whether an independent inquiry is needed 11 o Whether court supervision is needed (especially if an investigation into the company’s affairs is desired). E. Effect of winding-up APPLICATION being filed* Commencement date of Compulsory Winding Up WU*** For compulsory winding up, it will be deemed to commence from the time of the making of the application for winding up (s 126(2), IRDA) [generally this] However, if there is an earlier resolution to wind up voluntarily, winding up commences from time of passing of that Start here most resolution (s 126(1), IRDA) [i.e., voluntary -> compulsory] important to identify relevant date of Voluntary Winding Up commencement of WU Where provisional liquidator appointed (i.e. for creditor’s voluntary winding up) winding up commences from the time the “declaration of insolvency” under s 161(1) was lodged with the Registrar (s 161(6)(a), IRDA) For all other cases (i.e. member’s voluntary winding up), winding up commences at the time of the passing of the winding up resolution (s 161(6)(b), IRDA) Company or any ***this application may be made at any time after the presentation of a winding up application and before a Creditor(s) can APPLY winding up order has been made. for interim moratorium After a winding-up application has been filed, the company or any creditor or contributory may apply to to stay/restrain stay or restrain further proceedings against the company (s 129 IRDA). proceedings against The court may then stay or restrain further proceedings on such terms as it thinks fit (s 129 IRDA). company. For Voluntary winding up only: NOT AUTOMATIC o No application required: No action or proceeding can be commenced/proceeded against the company after MORATORIUM FOR WU the commencement of the winding up (s 170(2) IRDA). The ‘commencement’ is deemed to be at the time of c.f. JM passing of the special resolution (s 126(1) IRDA). Any enforcement order Uncompleted enforcement post commencement obtained/ uncompleted Creditors cannot take the benefit of enforcement proceedings against the company which are uncompleted as at after the the time when the winding up has commenced (s 206(1) IRDA). Since a winding-up is deemed to commence from commencement of the the time of the making of the application for the winding up/ filing of declaration of insolvency (see above to winding up shall be choose), which in this case is [date], and the enforcement or attachment was completed on [date], _______ will/will void. not be entitled to retain the benefit of the enforcement or attachment against the liquidator, unless the court orders otherwise [i.e., exceptions apply, see below] #enforcement for WU Post-commencement enforcement Rationale: to preserve o If enforcement started after winding up has commenced– void also unless the court orders otherwise [i.e., assets of coy for the exceptions apply, see below] (s 130(2) IRDA) general creditors For Voluntary winding up only: As per s 170(1) IRDA – Any attachment, sequestration, distress or enforcement put in force against the estate or effects of the company after the commencement of a creditors’ voluntary winding up is, unless the Court otherwise orders, void. The ‘commencement’ is deemed to be at the time of passing of the special resolution (s 126(1) IRDA). Rationale: The rationale behind this provision is that s the company’s pool of assets/funds is limited, it ought not to be diminished due to costs incurred as a result of actions against the company. All claims should generally be adequately dealt with in the cheap summary procedure of proving a debt in the winding up, rather than by dissipating the assets in a multiplicity of suits (Laser Research). Examples: o Garnishee Orders: Garnishee order obtained against bank for money in Company’s account; letter requesting payment sent to the bank on 18 February; bank paid money on 25 February, but winding up proceedings against the Company were commenced on 24 February. Held: Liquidator entitled to recover money which had been paid to creditor (Re Tiong Polestar Engineering) o Writ of Seizure & Sale: If a creditor seizes a company’s goods pursuant to a writ of seizure and sale but does not sell them before the company is commences liquidation, it will not be able to retain the proceeds of the seized goods (Re Tiong Polestar Engineering) Exception – secured creditors: The Court is more willing to allow secured creditors to proceed with enforcing their security, as their security is regarded as standing apart from the pool of assets available for distribution amongst unsecured creditors. However, such security had to be created prior to the winding up of the judgment debtor (SCK Serijadi v Artison Interior Pte Ltd) Who is a secured creditor?: At the time of winding up proceedings, a secured creditor has already accrued an entitlement to have the company’s charged/secured property made available due to the company’s default in repayment etc. (SCK Serijadi v Artison Interior Pte Ltd) Note: A judgement creditor is to be treated as an unsecured creditor (SCK Serijadi v Artison Interior Pte Ltd) HOWEVER (not entitled to interest of debt if secured creditor does not realise security within 12 months after commencement of insolvent WU): In the insolvent winding up of a company, no secured creditor is entitled to any interest in respect of the secured creditor’s debt after the commencement of the winding up, if the secured creditor does not realise the secured creditor’s security within 12 months after the commencement of the winding up or such further period as the liquidator may determine. (s 223(1) IRDA) 12 No DISPOSAL OF A disposition of the company’s property made after the commencement of winding up is void unless the court PROPERTY OR SHARES validates it (s 130(1) IRDA). The winding-up is generally deemed to commence from the date of the winding-up in company unless court application (s 126(2) IRDA; refer to above to ascertain date of commencement). gives approval AFTER commencement of WU ▪ Rationale: to prevent a shareholder from evading liability as a contributory, by transferring shares to some impecunious person after the commencement of winding up (Kong Swee Eng) Change in ownership of property ▪ Time period: any time after commencement of the winding up #disposition for WU ▪ “Disposition”: “Disposition” connotes a change in beneficial ownership of an asset by transfer or other type of dealing (QCD v Wah Nam Plastic Industry). o Transactions caught by s 130(1) IRDA include: ▪ Transfers by a company of its assets, whether by gift, sale, or exchange ▪ Grant of a mortgage, charge, or lease by a company over its assets ▪ Grant of an equitable interest by the company in its assets, by declaration of trust or otherwise ▪ Payments made with the company’s money. o Person with vested beneficial interest obtains property: 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 (QCD (M) Sdn Bhd v Wah Nam Plastic Industry) o Only applies to company, not creditors: Only applies to property held beneficially by the company, it does not impugn the realisation of security interest held by a creditor over the company’s property (QCD). F. Effect of winding-up ORDER being made (COMPULSORY WU) Directors to bear costs to appeal against winding up order** N.B. When Advising Debtor Company in pursuing CA Appeal (Sun Electric): (1) If a Debtor company intends to appeal against a WU Order, Directors have locus standi to pursue appeal against WU Order. (2) Directors and/or shareholders who are controlling the conduct of the appeal should expect to pay any costs incurred by the company in pursuing the appeal out of their own pockets and not the assets/funds of the company (3) Directors and/or shareholders controlling the appeal should also expect to be personally responsible for the payment of Cost Orders which may be ordered in favour of the Respondent if the appeal fails, of course if appeal succeeds directors may seek to be reimbursed by the company. Business of company According to s 144(1)(a) IRDA, the liquidator may only “carry on the business of the company so far as is necessary shall cease unless for the beneficial winding up thereof” with the authority of either the court or the committee of inspection. there is court o EXCEPTION (NO NEED PERMISSION FOR FIRST 4 WEEKS AFTER WUO): Such authority shall not be necessary for the liquidator to so carry on the business during the 4 weeks immediately after the date of the approval. winding up order (s 144(1)(a) IRDA) [Directors lose power, handling of co. goes over to liquidator(s)] Automatic When a winding-up order has been made or a provisional liquidator has been appointed, no action or proceeding moratorium comes shall be proceeded with or commenced against the company except with the leave of Court and in accordance with into force. such terms as the Court imposes (s 133(1) IRDA). [NOTE THIS IS WHEN Rationale: The purpose of the moratorium is to prevent the liquidators from being distracted and the assets of the ORDER IS MADE, c.f. company in liquidation being expended to respond to unnecessary actions (Jumabhoy Rafiq). when WU application commences, need to Principles applicable in court granting leave to commence or continue proceedings: apply] o ✓ Leave may be granted if: ▪ Benefit cannot be obtained through conventional WU procedure: The claim cannot be adequately dealt with in the winding up (through filing of proof of debt), or the remedy the applicant seeks cannot be given to him in winding up (Korea Asset Management). ▪ Applicant is enforcing in rem rights: The applicant is merely attempting to claim property which prima facie belongs to the applicant from the company. This is recognition by the law that the rights of a secured creditor should not be fettered as a matter of course by the initiation of insolvency proceedings (Korea Asset Management). o X Leave unlikely to be granted if: ▪ Application is made late when liquidator already completed a lot of work: The court is less likely to lift the moratorium if the application is made late in the day when the liquidator has already completed a substantial amount of his work, or when a creditor has acquiesced in the liquidator’s discharge of his duties for a substantial period (Korea Asset Management). ▪ Company’s resources were threadbare and considerable costs would be incurred if leave were granted (Korea Asset Management). ▪ Obtain benefit already available through conventional WU procedure: If the party applying for leave is seeking to avail itself of a benefit which would already be available to it through the conventional winding up procedure, i.e. filing of proof of debts (Korea Asset Management). ▪ Futile claim: If the proceedings for which leave was obtained will immediately prove to be futile (Korea Asset Management). 13 ▪ Prejudicing the rights of other legitimate creditors [unsecured creditor as applicant]: If the claim (for which leave was obtained), if successful, would cause the claims of other legitimate creditors to be prejudiced in a manner that could be viewed as negating the statutory scheme of pari passu treatment for all unsecured creditors (Korea Asset Management). Commencement date of Compulsory Winding Up WU*** For compulsory winding up, it will be deemed to commence from the time of the making of the application for winding up (s 126(2), IRDA) [generally this] However, if there is an earlier resolution to wind up voluntarily, winding up commences from time of passing of that identify relevant date of resolution (s 126(1), IRDA) [i.e., voluntary -> compulsory] commencement of WU Voluntary Winding Up Where provisional liquidator appointed (i.e. for creditor’s voluntary winding up) winding up commences from the time the “declaration of insolvency” under s 161(1) was lodged with the Registrar (s 161(6)(a), IRDA) For all other cases (i.e. member’s voluntary winding up), winding up commences at the time of the passing of the winding up resolution (s 161(6)(b), IRDA) Certain transactions will Once the winding-up order is made, the liquidator will have powers to avoid certain antecedent transactions which be subject to undermine the principle of pari passu distribution and/or the anti-deprivation rule. clawbacks. [N.B. these operate (1) Unfair preferences (s 225 IRDA) retrospectively before [where an unsecured creditor is preferred/placed in more favourable position, 1/2 years clawback] WU application] ▪ An unfair preference given to any person by the company at the relevant time, before the date of the List: making of the winding up application, may be avoided upon application to Court (s 225(1) IRDA). The 1.Undue/unfair Court, upon application, may make such order as it thinks fit for restoring the position to what it would have preferences been if the company had not entered into that unfair preference. (s 225(2) IRDA). 2.Transactions at an o Liquidator can apply to the court to set aside undervalue 3.Extortionate credit STAGE 1: Within Clawback Period? transactions ▪ As a preliminary requirement, the transaction must have occurred within the relevant time period: 4.Floating charge for o Persons connected with the company: within the period starting 2 years before the date of the WU application past value and ending on the date of the commencement of the WU, for unfair preference given to persons “connected with 5.Unregistered floating the company” AND is not a transaction given at an undervalue. (s 226(1)(b) IRDA) 🡪 SEE BELOW FOR charge DEFINITION OF “CONNECTED WITH THE COY” 6.Disclaimer of onerous o All other persons: within the period starting 1 year before the commencement of the WU and ending on the date property of the commencement of the WU application (s 226(1)(c) IRDA). 14 Meaning of “connected” (s 217(2)(b) IRDA): person is a director, an associate of a director, or an associate of the company Meaning of “associate” of an individual [Directors’ associates] (s 217(3)-(7) IRDA): o “associate” of individual if the person is the individual’s spouse, relative of individual or spouse, or spouse of said relative (s 217(4) IRDA); partner in a partnership or spouse/relative of partner (s 217(5) IRDA); employer or employee (s 217(6) IRDA); trustee (s 217(7) IRDA) ▪ “Relative” includes brother, sister, uncle, aunt, nephew, niece, lineal ancestor/descendant, half-blood relations, adopted or stepchildren, illegitimate children (s 217(11) IRDA) ▪ “Spouse” includes former or reputed spouse (s 217(12) IRDA) Meaning of “associate” of a corporation [Company’s associates] (s 217(8)-(10)) o “Corporation” = any body corporate, incorporated in SG or elsewhere (s 217(15) IRDA) o Corporation is “associate” of another corporation if: same person controls both, both controlled by people who are associates of each other, same group or their associates control both (s 217(8) IRDA) ▪ “Control” = directors of corporation or corporation’s parent are accustomed to act in accordance with person/persons’ directions or instructions, person/persons controls voting power (s 217(14) IRDA) ” If 2 companies have common director or directors, they are treated as being connected with each other (Show Theatres v Shaw Theatres) o Corporation is “associate” of person if: person has control of the corporation, or person + associates together have control (s 217(9) IRDA) [e.g., shareholders/directors] o Person is “associate” of corporation if: person’s associates are employed by corporation (s 217(10) IRDA) ▪ Directors or officers of corporation are treated as employed (s 217(13) IRDA) STAGE 2: s225 IRDA Requirements ▪ Additionally, there are four requirements which must be satisfied in order for a transaction to be set aside on the ground of unfair preference (s 225(3) IRDA): (1) Preferred party is a creditor or a surety or guarantor for any of the insolvent party’s debts or liabilities; (s 225(3)(a) IRDA): AND (2) The company was unable to pay its debts at the time within the meaning of s 125(2) IRDA; or becomes unable to pay its debts within the meaning of s 125(2) in consequence of the unfair preference (s 226(2) IRDA). ▪ Presumption of THIS PART: Where a transaction is entered into at an undervalue by a company with a person who is connected with the company (otherwise than by reason only of being the company’s employee), the requirements under subsection (2) are presumed to be satisfied unless the contrary is shown. (s 226(3) IRDA) (3) (COY put creditor in better position than they would’ve been in event of WU) The insolvent party does anything or suffers anything to be done which has the effect of putting that person 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 (s 225(3)(b) IRDA); AND (4) Insolvent party was influenced in deciding to enter into the transaction by a desire to produce the effect mentioned in (s 225(3)(b) IRDA above ^) in relation to that person (s 225(4) IRDA) ▪ Presumption of THIS PART: A company which has given an unfair preference to a person who, at the time the unfair preference was given, was connected with the company (otherwise than by reason only of being the company’s employee) is presumed, unless the contrary is shown, to have been influenced in deciding to give the unfair preference by such a desire as is mentioned in subsection (4). (s 225(5) IRDA). The burden of proof then shifts to the insolvent party to rebut the presumption. 15 “Otherwise than by reason only of being the company’s employee” (for establishing presumptions above) i.e., in order to show connection between company and person receiving unfair preference, it is not sufficient that a person is only an employee of the company. To be regarded as a connected person, the requirements in s217(2)(b) must be met [due to separate entity] usually employment contract between person and coy. But if directly employed by the individual, the employee will amount to a connected person (s 217(6) IRDA) STAGE 3: Test for a desire to prefer (s225(4) IRDA): The liquidator bears the burden of proving that the company’s decision was subjectively influenced by a desire to prefer the creditor (DBS v Tam Chee Cheong). Desire to prefer need not be sole factor: In this regard, it is sufficient that the desire to prefer is merely one of the factors which influenced the decision to enter into the transactions; it need not be the sole or decisive factor (DBS v Tam Chee Cheong). No need to show knowledge of insolvency: In order to prove a desire to favour a particular creditor, it is not necessary to prove that the directors of the company knew of believed that the company was insolvent at the relevant time (Rabobank). Desire to prefer must exist at time preference was given: In general, the desire to prefer must exist at the time when the creditor received the preference, and not when it was promised the preference (Rabobank). Standard of proof (BoP): Df has to satisfy the court on a balance of probabilities that the company had acted solely with reference to proper commercial considerations in effecting the transactions (Living the Link v Tan Lay Tin Tina) Genuine Commercial considerations NOT desire to prefer: A transaction which is actuated by a genuine belief in the existence of a proper commercial consideration will not constitute a voidable preference (DBS v Tam Chee Cheong). ✓ For example, a company may not fall foul of the undue preference provisions if it is simply acting in response to overwhelming commercial business pressure exerted by a particular creditor (Rabobank). X The mere existence of a commercial reason for making a transaction, without more, does not explain how the transaction was not influenced by a desire to prefer (Progen Engineering). X The mere fact that a transaction was carried out during the company’s solvency did not mean that the continuance of such a transaction during the company’s insolvency was not influenced by a desire to prefer (Progen Engineering). X If multiple creditors exert significant pressure on the debtor, but the debtor chooses to favour one creditor to the exclusion of the others, this would be an indication of a desire to prefer that particular creditor (Tam Chee Cheong). ▪ In Tam Chee Cheong, the debtor repaid its DBS loans even though DBS had merely pressed for payment without taking any formal legal proceedings. Other creditors had exerted greater pressure through the issue of formal letters of demand. EXCEPTION: Defence for 3P: o ✓ Bona Fide Purchaser for Value w/o Notice: An order under s 225(2) IRDA shall not prejudice any interest in property which was acquired from the preferred creditor in good faith and for value w/o notice (s 227(3)(a) IRDA). Any interest deriving from such an interest is also protected. o ✓ 3P who isn’t a party to the transaction and was not a creditor at material time: An order under s 225(2), IRDA shall not require a 3P, who was not a party to the transaction and who received a benefit from the transaction or UP in good faith and for value, to pay a sum to the liquidator, except where the payment is to be in respect of an UP given to that person at a time when he was a creditor of the coy (s 227(3)(b), IRDA). (2) Transaction at an undervalue (s 224 IRDA) [that co had transacted with another party/ no consideration or too low a price, 3 years clawback] ▪ A transaction with a person which was made before the date of the making of the winding up application may be set aside upon application to Court on the basis that it is a transaction at an undervalue (s 224(1) IRDA). Court, upon application, may make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction. (s 224(2) IRDA). ▪ A company enters into a transaction with a person at an undervalue if — (Element 1: Within 3 years before commencement) The transaction was entered into within 3 years before the commencement of the WU and ending on the date of the commencement of the WU (s 226(1)(a) IRDA) THIS IS THE CLAWBACK PERIOD (Element 2: It is a transaction) And The transaction is a “transaction”. ▪ No requirement of mutuality: A “transaction” includes unilateral act of payment and a gift (Mercator v Noordstar). ▪ Intention to make payment required: For the transaction to fall within the ambit, it must be one which the insolvent company intended to make. A mistaken payment to an unintended recipient would not fall within the ambit (Velstra v Dexia). (Element 3: Where Gift or Where coy received inadequate consideration) And either one of the following requirements is satisfied: 16 ▪ (a) The company made a gift to that person or received no consideration for the transaction (s 224(3)(a) IRDA); OR ▪ (b) [inadequate consideration] The company entered 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 the individual (s 224(3)(b) IRDA). Point at time at which value of consideration is to be assessed: The value of the consideration must be assessed in light of the prevailing circumstances at the time of the transaction, and should not take into account subsequent events to determine the value of the transaction unless there was, at the time of the transaction, a real likelihood of events occurring which may have had an effect on the value of the consideration (Buildspeed Construction). ✓ Substantial Discount when buying something in bulk not considered undervalue (Parakou). X Granting of security without fresh consideration: The giving of security without fresh consideration may amount to an undervalue transaction (obiter in Encus Intl at ). (Element 4: Coy was @ the time unable to pay debts/becomes unable bc of transaction) And the company was unable to pay its debts at the time within the meaning of s 125(2) IRDA; or becomes unable to pay its debts within the meaning of section 125(2) in consequence of the transaction or preference (s 226(2) IRDA). ▪ Presumption of THIS PART when connected person: Where a transaction is entered into at an undervalue by a company with a person who is connected with the company (otherwise than by reason only of being the company’s employee i.e., being employee not enough to satisfy), the requirements under subsection (2) are presumed to be satisfied unless the contrary is shown. (s 226(3) IRDA) “Otherwise than by reason only of being the company’s employee” (for establishing presumptions above) i.e., in order to show connection between company and person receiving unfair preference, it is not sufficient that a person is only an employee of the company. To be regarded as a connected person, the requirements in s217(2)(b) must be met [due to separate entity] usually employment contract between person and coy. But if directly employed by the individual, the employee will amount to a connected person (s 217(6) IRDA) Meaning of “connected” (s 217(2)(b) IRDA): person is a director, an associate of a director, or an associate of the company Meaning of “associate” of an individual [Directors’ associates] (s 217(3)-(7) IRDA): o “associate” of individual if the person is the individual’s spouse, relative of individual or spouse, or spouse of said relative (s 217(4) IRDA); partner in a partnership or spouse/relative of partner (s 217(5) IRDA); employer or employee (s 217(6) IRDA); trustee (s 217(7) IRDA) ▪ “Relative” includes brother, sister, uncle, aunt, nephew, niece, lineal ancestor/descendant, half-blood relations, adopted or stepchildren, illegitimate children (s 217(11) IRDA) ▪ “Spouse” includes former or reputed spouse (s 217(12) IRDA) Meaning of “associate” of a corporation [Company’s associates] (s 217(8)-(10)) o “Corporation” = any body corporate, incorporated in SG or elsewhere (s 217(15) IRDA) o Corporation is “associate” of another corporation if: same person controls both, both controlled by people who are associates of each other, same group or their associates control both (s 217(8) IRDA) ▪ “Control” = directors of corporation or corporation’s parent are accustomed to act in accordance with person/persons’ directions or instructions, person/persons controls voting power (s 217(14) IRDA) ” If 2 companies have common director or directors, they are treated as being connected with each other (Show Theatres v Shaw Theatres) o Corporation is “associate” of person if: person has control of the corporation, or person + associates together have control (s 217(9) IRDA) [e.g., shareholders/directors] o Person is “associate” of corporation if: person’s associates are employed by corporation (s 217(10) IRDA) ▪ Directors or officers of corporation are treated as employed (s 217(13) IRDA) ▪ EXCEPTION: (Defense to Transactions at Undervalue): Under s 224(4) IRDA, the court will not set aside a transaction at an undervalue if it can prove to the satisfaction of the court that: (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. (3) Floating charges granted prior to commencement of WU (s 229 IRDA) 17 [where a creditor already lent money to debtor coy, and in return of no fresh loan/ consideration the debtor coy is giving a floating charge for the previous/ existing loan, 1/2 years clawback] ▪ Floating ch
