Singapore – Liquidation Under The Insolvency, Restructuring And Dissolution Act.

On 30 July 2020, the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) came into operation. The IRDA is an omnibus legislation housing all of Singapore’s insolvency and restructuring laws in one single piece of legislation.
 

The general framework of the IRDA has been discussed in the first article in our series of articles covering the various aspects of IRDA and can be found here.
 

In this article, which is the fourth article in our series, we will look at the liquidation provisions contained in the IRDA, including an overview of liquidation and its features, amendments to the liquidation regime that were implemented in 2017 and relevant modifications made to the regime in the IRDA.
 

Introduction
 

Prior to the IRDA, the procedures for liquidation were set out in Part X of the Companies Act (Cap. 50) and various subsidiary legislations such as the Companies (Winding Up) Rules. In 2017, the Companies Act was amended, with minor amendments made to the liquidation regime. The existing statutory regime for Winding Up, as tweaked in 2017, was largely transplanted into the IRDA, with further enhancements made to improve its efficiency.
 

What is Liquidation?
 

Liquidation, or winding up, is a formal process where an independent officer of the court (the liquidator) is appointed to take over the affairs of a company, realise the company’s assets, and distribute the assets to the company’s creditors and contributories, upon completion of which, the company’s existence is terminated.
 

Solvent companies can also voluntarily apply to be wound up through a “members’ voluntary liquidation”. To qualify, the directors must file a statutory declaration stating that the company is able to pay its debts in full within 12 months after the commencement of the liquidation.
 

Insolvent companies can be wound up voluntarily, through a “creditors’ voluntary liquidation” or involuntarily, by an Order of Court through a “compulsory liquidation”.
 

A creditors’ voluntary liquidation is usually initiated by the company’s directors, in circumstances where they believe that the company cannot continue business because of its liabilities. The directors will have to file a declaration to that effect with the Official Receiver, whereupon a provisional liquidator is usually appointed to manage the company’s affairs, and a creditors’ meeting is convened within 1 month of the declaration.
 

A compulsory liquidation is initiated by an application to Court, which can be made by (a) the company itself, (b) a creditor of the company, (c) a member of the company or (d) a judicial manager or provisional liquidator for the company to be wound up, based on any of the grounds stated in Section 254 of the Companies Act (now Section 125 of the IRDA).
 

Set out below are the grounds which can be relied upon to obtain a Court order for winding up proceedings:
 

• The company is unable to pay its debts[1];

• The company has ceased business activities;

• The company’s management is in a deadlock;

• The company’s directors have not acted in the interests of the members as a whole (usually sought in a minority oppression case brought by a member of the company under section 216 of the Companies Act); and

• The company has breached statutory provisions and/or committed offences committed
   

In practice, the most commonly relied on ground for a court-ordered winding up is that of the company not being able to pay its debts. A company is deemed to be unable to pay its debts if:[2]
 

1. It fails to satisfy a statutory demand for a sum of S$15,000[3] or more –  most applicants will rely on this ground as there is a statutory a presumption of a company’s inability to pay its debt if the company cannot satisfy the statutory demand within the stipulated time;

2. It fails to satisfy a judgment or Order of Court; 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.
    

When is a company insolvent?
 

The ground mentioned at (c) above is a “catch-all” ground which serves to allow the Court to order that an insolvent company be wound up. When then is a company considered to be unable to pay its debt and hence insolvent? There are generally two accepted tests of insolvency.
 

The first is the “cash-flow” test which is a test of whether a company is able to pay its debts as they fall due. Essentially, the Court will look at the company’s total debts and total assets to determine if the company had the ability to pay the debts at the time they each fell due. The Court would also have regard to the company’s business and any prospective funding which the company could obtain.[4]
 

The second is the “balance-sheet” test. Here, the Court will examine the company’s net assets and net liabilities (including its contingent and prospective liabilities). A company is balance sheet insolvent so long as its net assets are less than its net liabilities.

A company would therefore be insolvent if either the “cash-flow” test or the “balance-sheet” test was satisfied.
 

2017 Amendments to the Companies Act
 

The Companies (Amendment) Act 2017 (the “2017 Amendments”) was focused on revamping the Schemes of Arrangement regime and the Judicial Management regime then in existence. The amendments to the liquidation regime were relatively minor in comparison. However, there were nevertheless the following significant amendments.
 

Winding up of foreign companies
 

The 2017 Amendments opened the door for foreign companies to undergo winding up proceedings in Singapore so long as they had a "substantial connection" with Singapore. A foreign company would be deemed to have a "substantial connection" with Singapore if (a) it had assets located in Singapore; (b) it had substantial business in Singapore; (c) Singapore law had been used as the governing law for its business transactions; (d) the foreign company had submitted to the jurisdiction of the Singapore courts for the resolution of disputes relating to its business transactions; and/or (e) Singapore was the company’s centre of main interests.
 

Retention of documents
 

The 2017 Amendments also saw the following changes made to the liquidation regime to bring certain compliance requirements in line with the Financial Action Task Force standards:[5]
 

• Extending the period of time for retention of winding up records from 2 years to 5 years; and

• Leaving only the Court with the power to direct the destruction of winding up records before the end of the minimum 5 years retention period. Prior to the 2017 Amendments, members in a voluntary winding up and creditors could make such similar directions.
   

Winding up under the IRDA
 

With the commencement of the IRDA, the sections in the Companies Act dealing with liquidation were repealed and largely re-enacted in Part 8 of the IRDA. The IRDA saw the implementation of some significant enhancements to the liquidation regime, which we discuss below.
 

1. Increase of debt threshold
    

Prior to the enactment of the IRDA, the statutory presumption of inability to pay debts was triggered once it was shown that a company could not pay a statutory demand in the sum of S$10,000 or more. This statutory threshold has now been raised to S$15,000[6], which brings it in line with the statutory threshold for presumption of inability to pay debts under the personal bankruptcy regime. The increase takes into account inflation over the years since the limit of S$10,000 was put in place almost 20 years ago.
 

Interested parties should note that with the enactment of the COVID-19 (Temporary Measures) Act 2020, the statutory threshold for insolvency in the IRDA has been temporarily increased to $100,000. Individuals and businesses also have up to 6 months (instead of 21 days) to respond to demands from creditors before a presumption of insolvency will arise. This temporary relief accorded to debtors is expected to last until 19 October 2020.
 

2. Early dissolution of companies
    

Often times, companies undergoing winding up proceedings no longer have sufficient assets to fund the liquidation process and the Official Receiver is usually appointed to administer the liquidation process. This proved to be problematic as the Official Receiver did not have the power to cause such companies to be quickly dissolved. Instead, the Official Receiver had to spend much time and public resources in continuing to administer the liquidation of these hopelessly insolvent companies as they could not be struck off the Register of Companies if the affairs and assets of these companies have not been fully administered (which was due to a lack of assets to fund the continued administration).
 

To address this problem, Sections 209 to 211 of the IRDA were enacted. These sections provide for the Official Receiver (or liquidator on approval of the Official Receiver) to trigger an early dissolution of a company which does not have sufficient assets to fund the administration of the liquidation if there is reasonable cause to believe that:[7]
 

1. the realisable assets of the company are insufficient to cover the expenses of the winding up; and

2. the affairs of the company do not otherwise require further investigation.
    

To safeguard the interests of creditors, the early dissolution procedure can only proceed after creditors have been given a 30 day notice period.[8] The creditors may then object and take steps to stop the early dissolution if they object to the early dissolution.[9]The new early dissolution procedure will no doubt provide for significant savings in the time and costs needed to liquidate hopelessly insolvent companies.
 

3. Official Receiver default liquidator only in limited circumstances
    

Prior to the enactment of the IRDA, the Official Receiver was the default liquidator in winding up proceedings, unless a private liquidator was appointed.[10] As the Official Receiver is a public office and has limited resources, the Insolvency Law Review Committee was of the view that this default position should be tweaked to reduce wastage of public resources. Aside from introducing the early dissolution procedure, under the IRDA the Official Receiver will no longer be the default liquidator. Instead, the Official Receiver can only be nominated to be appointed as liquidator if the applicant has taken reasonable steps to appoint a private liquidator but has failed to obtain consent from a private liquidator to be appointed and the Official Receiver consents to being nominated.[11] This amendment is targeted at ensuring that public resources are not spent on the liquidation of companies which have sufficient assets to fund the administration of the liquidation.
 

4. Third Party Funding
    

As has been provided for in the Judicial Management regime, the IRDA also similarly enacted Sections 144(1)(g) and 177(1)(a), which give the liquidator the express statutory power to assign the proceeds of an actions relating to avoidance of undervalue and unfair preference transactions, extortionate credit transactions, wrongful/fraudulent trading and assessment of damages against delinquent officers. [12]
 

We have discussed the impact of this express statutory right in our previous article on Judical Management, which can be found here. 
 

5. Director can now apply for winding up
    

Previously, Section 253(1) of the Companies Act set out the list of persons who could apply to the Court for a winding up order to be made but such persons did not include a director of the company. This posed some real difficulties for companies where the shareholders and other directors were no longer interested in the affairs of the company, leaving the locally resident director potentially liable for statutory offences, including potentially insolvent trading.
 

To address this problem, Section 253(1) of the Companies Act was re-enacted as Section 124(1) of the IRDA, which has expanded on Section 253(1) of the Companies Act to expressly provide that a director of the company can apply to Court for a winding up order, if he can establish a prima facie case for winding up to the satisfaction of the Court, and the Court grants that person leave to bring the winding up application.[13]
 

6. Validity of floating charges
    

Under Section 330 of the Companies Act, a floating charge which was created on a company’s property within 6 months of the commencement of the company’s winding up would generally be considered invalid. Now, under Section 229 of the IRDA, the 6 month period has been extended and a floating charge will generally be invalid if:
 

1. Such a floating charge was created in favour of a person who is connected with the company, within the period of 2 years ending on the commencement winding up, as the case may be;

2. Such a floating charge was created in favour of any other person, within the period of 1 year ending on the commencement of the winding up; or

3. Such a floating charge was created within the period starting on the commencement of the judicial management of the company and ending on the date the company enters judicial management.
    

This newly enacted Section 229 of the IRDA will create some concern for parties who usually obtain floating charges as a form of security. More care will need to be taken in examining a company’s financial health if one is considering taking a floating charge as a form of security.
 

7. New wrongful trading provision
    

We have previously discussed that the IRDA introduced a new concept of “wrongful trading” under Section 239 of the IRDA, which replaces the old concept of “insolvent trading” under section 339(3) of the Companies Act.  In summary, a company “trades wrongfully" if it incurs debts or other liabilities, when insolvent (or becomes insolvent as a result of incurring such debts or other liabilities), without reasonable prospect of meeting them in full.[14] Section 239 of the IRDA also abolished the pre-requisite of having to establish criminal liability first before the director could be made personally liable for the debt. Further details on the new wrongful trading provision can be found here [15]. 
 

8. Court expressly empowered to terminate winding up
    

Previously, pursuant to Section 279 of the Companies Act, the Court had the power to stay winding up proceedings after the winding up order had been made. In this regard, the Court could stay the winding altogether (effectively terminating the winding up) or for a limited period of time. However, the Court did not have the power to “unwind” a winding up order and the company would not be able to get out of the liquidation and resume business as usual even if in the course of administering the liquidation, it was found that there was a potential for the company to continue as a going concern.

This problem has been addressed in Section 186 of the IRDA, which is the re-enacted version of Section 279 of the Companies Act, but includes an express provision for the Court to terminate the winding up on a fixed date. This means that the company will not have to undergo liquidation but is “revived” and can carry on conducting business if it is later discovered that there is potential for the company to continue as a going concern. This amendment no doubt strengthens Singapore’s corporate rehabilitation framework by providing for an avenue out of liquidation for potentially viable companies which had slipped into a short state of insolvency.
 

Conclusion
 

The present liquidation regime in the IRDA contains several interesting new features. Once the temporary relief accorded by the COVID-19 (Temporary Measures) Act 2020 ends on 19 October 2020 (unless extended), it will be interesting to see how the law develops. In particular, it will be interesting to see how case law develops with regard to how a director can establish a prima facie case for winding up to the satisfaction of the Court under Section 124(1) of the IRDA and how often the Court will employ its right to terminate a winding up.
 

If you are interested in finding out more about the IRDA, you are most welcome to approach us.
 

 

For further information, please contact:

 

Prakash Pillai, Partner, Clyde & Co

prakash.pillai@clydeco.com