Wk 10 Winding up Part 2 SMU Corporate Law Class Slides under Prof Wan Wai Yee

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Winding up (Part 2)Corporate Law

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Wan Wai YeeAssociate Professor

Commencement of winding up

Voluntary winding up• Winding up is deemed to commence:

– upon appointment of provisional liquidator before the resolution for voluntary winding up was passed, on the

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date of the directors’ declaration of the company’s inability to carry on its business by reason of its liabilities (s 291(6)(a)) or

– When the resolution for voluntary winding up is passed, even if the company is subsequently wound up by the court

Commencement of winding up

Effects of Petition (winding up by the court)

If a winding up order is made, the winding up is deemed to have commenced at the time that the petition is presented: see s 255(2)

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petition is presented: see s 255(2)

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Winding up

Effect of winding upWhile liquidation does not destroy the company’s legal

personality, the commencement of winding up affects a company’s transactions: see s 259, 260, 261 262 292 and 294

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261, 262, 292 and 294

Winding up

Voluntary winding up• Business of the company ceases from the commencement

of the winding up, except required for winding up (as determined by liquidator) (s 292(1))

Winding up by the court

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Winding up by the court• Liquidator may carry on company’s business so far as is

necessary for the beneficial winding up for a period of up to four weeks after the making of the winding up order: S 272(1)(a)

• Thereafter, liquidator needs to obtain authority of the court or committee of inspection to continue with the business of the company

Winding up

Directors’ powers• Voluntary winding up - Once liquidator is

appointed, powers of directors cease except allowed by the liquidator or by the members (or th itt f i ti th dit i

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the committee of inspection or the creditors, in the case of creditors’ voluntary winding up) with the consent of the liquidator: s 294(2)

• Winding up by the court – no express provisions but case law provides that powers of the directors cease when the court orders the winding up of the company

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Winding up (court)

Avoidance of disposition of property (CWU)

See s 259 (disposition of property, including choses in action, transfers of shares or alteration in status of the members) madeafter commencement of winding up by the Court is void unlessth t d th i

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the court orders otherwise

Implications – cannot contract out of s 259

Winding up (court)

Avoidance of certain attachments (CWU)

S 260 (attachment, execution after commencement of winding up) is void

F dit ’ l t i di 299 ( tt h t

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For creditors’ voluntary winding up, see s 299 (attachment, execution after commencement of creditors’ winding up is void

Winding up (court)

Stay of actions (CWU)

S 262(3) – upon making of winding up or appointment of provisional liquidator, stay of actions unless with leave of court

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Winding up

Avoidance of transfer of shares (applies to both voluntary and court ordered winding up)

See s 259 (court ordered winding up) – unless the court otherwise orders

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See 292 (voluntary winding up) - unless with the liquidator’s sanction

Pre-liquidation transactions

Undervalue

S 329 of CA r/w s 98 BA

where an individual is adjudged bankruptand he has at the relevant time entered into a transaction with any person at an

company being wound up

s 100 BA

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undervalue, the Official Assignee may apply to the court for an order to restorethe position to what it would have been if that individual had not entered into that transaction...

s 98(3) BA~ gift or transaction for which no consideration is given~ transaction for which consideration is inadequate

s 102 BA – types of orders which court may make


Transaction that is an undervalue is vulnerable. Transaction is at an undervalue where: (s 98)

• Company makes a gift to counterparty or otherwise enters into transaction with that counterparty on terms that provide for it to receive no consideration

• Company enters into transaction with that counterparty for consideration

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p y p ythe value of which is significantly less than value of the consideration by the company

• (s 100) Transaction occurs within five years ending with the day of the presentation of the petition or commencement of winding up and company was insolvent or becomes insolvent as a consequence of transaction

• Presumption of insolvency if transaction is at an undervalue between company and associate: s 100 BA r/w Companies (Application of Bankruptcy Provisions) Reg, unless otherwise shown

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• Note: reg 6 provides a defence: no order is made if the court is satisfied that:– Company which entered into transaction did so in good

faith for the purpose of carrying on its business; and

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– At the time it did so there were reasonable grounds for believing that the transaction would benefit the company


where an individual is adjudged bankrupt and he has, at the relevant time given an unfair preference to any person, the Official

company being wound up

s 100 BA

S 329 CA r/w s 99 BA

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Assignee may apply to court for an order to restore the position to what it would have been if that individual had not given that unfair preference s 102 BA

s 99(3) + (4)

Unfair preference

Pre-liquidation transaction

Unfair preference“beneficiary” of the preference is a creditor of the companyth d thi hi h t th

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the company does something which puts the “beneficiary” in a better position in the event of the company’s winding upthe company was influenced by the desire to benefit the “beneficiary”

such ‘desire’ is presumed where the creditor is an ‘associate’ of the company, s 99(5) BA

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Pre-liquidation transaction

• Examples of unfair preferences:– Payment of debt of unsecured creditor when insolvency

is imminent [prefer this creditor to other creditors who have not been paid]P t f t h d f h d l [ t l dl d i

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– Payment of rent ahead of schedule [put landlord in a better position]

Unfair preference

• Desire to prefer creditor may be inferred even for non-related parties

• See DBS Bank Ltd v Tam Chee Chong and another (judicial managers of Jurong Hi-Tech (j g gIndustries Pte Ltd (under judicial management)) [2011] SGCA 47

• Rabobank International, Singapore Branch v Jurong Technologies Industrial Corp Ltd (under judicial management) [2011] SGCA 48

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Associates

• ss 101(6) + (9) BA

Co B

Board of co B is accustomed to acting in accordance with Co A’s directions

Who are associates?

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Co A(in liquidation)

Co C

As directions

Co A excises control over 1/3 or more of the voting power in Co C

associates of Co A

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Associates

associate (as defined under s 101BA)

+

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associate =+

director/shadow director

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associates of director/ shadow director

includes his spouse, former spouse, relative etc

s 101(7)

Associates

Reg 5 of Companies (Application of Bankruptcy Act Provisions) Regulations

associate

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Co B

control


Co B

control control

associate

Reg 5(a) Reg 5(b)

Co B is an ‘associate’ of Co A

Associates

Show Theatres v Shaw Theatres

Director

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Company A(in liquidation)

Company B

Company B and Company A are connected persons

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‘relevant time’‘relevant time’s 100 BA + s 329(2) CA

undervalue transaction (s 98BA) -5 years prior to commencement of WU

undue preference (s 99BA) -2 years if given to associate6 th i ll th

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6 months in all other cases

commencementof winding up

relevant time

s 100(2) BA – [co] must have been either insolvent or became so as a result of transaction during relevant times 100(3) BA – [co] presumed to be insolvent if it entered into a transaction at undervalue with its associate


Disclaim onerous property

S 332 – liquidator may disclaim property consisting of:

• Estate or interest in land which is burdened with onerous covenants

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covenants• Shares in corporations• Unprofitable contracts• Property that is unsaleable or not readily salable by reason of its

binding the possessor thereof to the performance of any onerous act, or to the payment of any sum of money

Need leave of court

Invalidation of Floating Charge,Invalidation of Floating Charge,s 330 CAs 330 CA

commencement of winding upfloating charge

created invalid

6 months

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created invalid

exception:if company solvent immediately after creation of charge; orin respect of any cash paid to the company at or after the creation of charge

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where the company now in liquidation bought or sold property from or to a director for cash considerationwithin 2 years before commencement of

Contracts with Directors, Contracts with Directors, s 331 CAs 331 CA

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winding up

the company may recover the amount by which the property was overvalued or undervalued

“cash consideration” – any consideration other than issue of shares – s 331(4)

Actions against culpable persons

• Wrongful Trading – s 339(3) CA– contracting debt at time when there is no reasonable

ground to expect that company can repay– criminal liability + personal liability for defaulting officer,

s 340(2)

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s 340(2)

• Fraudulent Trading – s 340 CA– carry on with intention to defraud creditors, person

knowingly a party to the fraud personally liable for company debts

– criminal offence, s 340(5)– Creditor or contributory of the company can initiate

action against a director for fraudulent trading


• Misfeasance claims against directors, s 341 CA– breach of fiduciary duty, etc.

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• Order of disqualification as a director, s 149 CA– where company has gone into insolvent liquidation – person was director at the time of, or within – 3-year period before, liquidation– conduct makes him/her unfit to be a director– initiated by Minister or Official Receiver

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• Common law?– Has been raised in Singapore HC decisions that

interests of creditors should be dominant in an insolvent company

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Proof of debts

Section 327• Upon commencement of winding up, liquidator calls on

creditors to lodge proof of debt• All claims against the company, present or future, certain

or contingent, ascertained or sounding only in damages are admissible in proof

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are admissible in proof. • Rules on proof of debts are those apply in bankruptcy for

insolvent company. • NB: secured creditor does not need to file proof of debt –

can go ahead and realise security; if security realised is insufficient, he can prove for the balance as unsecured creditor

• We would not go into details on what debts are provable in this course.

Proof of debts

• A note:– Set-off is available under s 88 r/w s 327(2). Set-off is

an extremely complex topic. We would not cover the availability of set-off in this course.

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Distribution

Priorities• Distribution of assets is in accordance with a set scheme

of priorities. The secured creditors get paid first. After that, the preferential creditors are paid in accordance with s 328. If there is anything left, the unsecured creditors will then

t id

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get paid.• If surplus of assets remains after payment of creditors, the

members’ capital is returned to them. Any surplus after the return of capital is divided pro rata among members. Note some preference shares carry a right to priority in return of capital but do not participate in surplus assets.

• Any unclaimed assets are paid over the Official Receiver and eventually become part of the consolidated fund: s 322.

Distribution

• Note:– Secured creditor always get paid first– But note that floating charge holder may have priority

postponed to preferential creditors

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– Application of set-off. We are not covering set off in detail but set-off is extremely useful for a creditor who has a debt owed by him to the company; where there are mutual debts and liabilities, only balance is provable under s 88 BA

Priorities

Pari passu rule

Fundamental principle of insolvency law (under common law) that a contract cannot provide that a debtor’s assets be distributed other than in accordance with the insolvency laws.

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It follows that:• Unfair preferences are prohibited• Contract cannot provide for increased security to be granted

upon the insolvency of the debtor• Guides the exercise of judicial discretion in various instances e.g.

validation of dispositions of company’s property etc.

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Dissolution

Dissolution without liquidation:

• Through amalgamation

• Striking defunct companies off the register (s 344)

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Voluntary winding up: (s 308)

• Once the affairs of the company are fully wound up, liquidator makes up account showing how the winding up was conducted and how the property was disposed of. Final meeting is held for the purpose of laying the account before it. Within 7 days of final meeting, the liquidator lodges prescribed return with Registrar and Official Receiver. 3 months after the lodging of the return, the company will be dissolved unless the court orders otherwise

Dissolution

Court ordered winding up• Company will be dissolved from the date of order

of dissolution: s 276(1)

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Questions?

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Documents

Wk 10 Winding up Part 2 SMU Corporate Law Class Slides under Prof Wan Wai Yee