Insolvency Law

AuthorKelvin POON LLB (Hons) (National University of Singapore); Advocate and Solicitor (Singapore); Partner, Rajah & Tann Singapore LLP. SIM Kwan Kiat LLB (Hons) (National University of Singapore), LLM (NYU); Advocate and Solicitor (Singapore); Attorney and Counsellor-at-law (New York State); Partner, Rajah & Tann Singapore LLP. Wilson ZHU LLB (Hons) (National University of Singapore); Advocate and Solicitor (Singapore); Partner, Rajah & Tann Singapore LLP.
Publication year2021
Citation(2021) 22 SAL Ann Rev 508
Date01 December 2021
I. Introduction1

18.1 Cases of note in 2021 include the Court of Appeal's decision on the test for insolvency2 and on the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law for Cross-border Insolvency3 (“Model Law”). The Singapore courts continue to shape the contours of the debt restructuring tools under Singapore law,4 considered the ambit of the estate costs rule,5 and had the opportunity to address the much-debated interplay between insolvency law and maritime law.6

II. Winding up of companies
A. Test of insolvency and statutory demand

18.2 The Court of Appeal in Sun Electric Power Pte Ltd v RCMA Asia Pte Ltd7 (“Sun Electric”) provided guidance on three important points in insolvency law. The first issue was whether the directors of a debtor company who are controlling the conduct of an appeal against a winding-up order should be personally liable for the costs of the appeal. The second issue was on the test for insolvency, and the third issue related to partial payments in response to a statutory demand.

18.3 It is open to a company to appeal a winding-up order whether or not it is subject to a stay, and the Court of Appeal held that the directors retain the power to control the appeal. That is well established. For instance, the English High Court remarked in Closegate Hotel Development v McClean8 that there was:9

… long-standing authority to the effect that even after the appointment of a provisional liquidators [sic], the board of directors of a company retains a residuary power to instruct lawyers to challenge the appointment of the provisional liquidator, to oppose the petition and, if a winding up order is made, to appeal against the making of that order.

18.4 The Court of Appeal held that the directors or shareholders controlling the appeal should be personally responsible for the costs of appealing the winding-up order, including any party-to-party costs in favour of a successful respondent. The directors should not use the company's funds, which would be under the liquidator's control, for such costs. That is correct as a matter of principle. If the winding-up order is stayed, the directors may use the company's funds for such costs but must be prepared to pay it back to the company if the appeal fails.10 If the appeal succeeds, the directors may seek reimbursement from the company.

18.5 This is the first reported decision by the Court of Appeal setting out clear rules on the cost consequences for directors who wish to appeal a winding-up order against the company. A successful respondent's efforts in enforcing a cost order against a wound-up company are usually futile, and security for costs does not adequately address the costs incurred in the appeal. The rules set by the Court of Appeal represent a fair allocation

of risks amongst the debtor company facing a winding-up order, the applicant for the order, and the directors of the company who control the appeal.

18.6 The next point dealt with was the test of insolvency. The respondent in Sun Electric argued that the company should be wound up under s 254(2)(c) of the Companies Act.11 Section 254(1)(e) states that a company may be wound up if a company is unable to pay its debts. Section 254(2) then states how a company may be deemed to be unable to pay its debts. Each of ss 254(2)(a) and 254(2)(b) relies on a deeming event — failure to satisfy a statutory demand (s 254(2)(a)) and execution on a judgment being returned unsatisfied (s 254(2)(b)), which gives rise to a presumption of insolvency.

18.7 Section 254(2)(c) states that company shall be deemed unable to pay its debts “if it is proved to the satisfaction of the Court that the company is unable to pay its debts, and in determining whether a company is unable to pay its debts the Court must take into account the contingent debts and liabilities of the company”. In other words, to rely on s 254(2)(c), the applicant needs to prove the debtor's inability to pay its debts.

18.8 In insolvency parlance, the cash flow and the balance sheet tests are commonly referred to as the tests of insolvency. Put simply, the cash flow test looks at whether the debtor is able to pay its debts when due, and the balance sheet test is a comparison of the debtor's assets and liabilities. The Court of Appeal held that, for purposes of s 254(2)(c), the cash flow test should be the “sole and determinative test”.12 The Court of Appeal's judgment is important in a number of aspects.

18.9 First, it ruled that the earlier oft-cited judgment in Re Great Eastern Hotel (Pte) Ltd13 that either the cash flow test or the balance sheet test was applicable under s 254(2)(c) was incorrect.14 Second, the Court of Appeal clarified the content of the cash flow test: It is not simply an assessment of the debtor's ability to pay its debts immediately when due. Instead:15

… the cash flow test assesses whether the company's current assets exceed its current liabilities such that it is able to meet all debts as and when they fall due. We agree … that ‘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. [emphasis added].

The Court of Appeal then set out a list of non-exhaustive factors in applying the cash flow test:16

(a) the quantum of all debts which are due or will be due in the reasonably near future;

(b) whether payment is being demanded or is likely to be demanded for those debts;

(c) whether the company has failed to pay any of its debts, the quantum of such debt, and for how long the company has failed to pay it;

(d) the length of time which has passed since the commencement of the winding up proceedings;

(e) the value of the company's current assets and assets which will be realisable in the reasonably near future;

(f) 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;

(g) any other income or payment which the company may receive in the reasonably near future; and

(h) 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.

The cash flow test, as set out by the Court of Appeal, is not a simple assessment of whether the debtor is able to pay its debts when due. It would be necessary to go beyond the fact of whether the company has failed to pay its debts in the face of a demand. The inquiry extends to factors including the realisable value of the debtor's assets, the state of its business and intercompany arrangements. It can be expected that it will be a fairly involved factual inquiry, and it may not be easy to determine the matter summarily when the factors are heavily disputed. As such, it seems likely that applicants for a winding-up order will seek to rely on a statutory demand or an unsatisfied execution to raise the presumption of insolvency.

18.10 That segues to the point on partial payments in response to a statutory demand. Section 254(2)(a) of the Companies Act states that “where a creditor has served on the company a statutory demand for a debt exceeding $10,000, the company will be deemed as unable to pay its debts if it neglects to: (a) pay the sum; (b) secure the sum; or (c) compound the sum, within the period of three weeks from the service of the demand” [emphasis in original; other emphasis omitted].17 On the facts, a day after the three-week period, the appellant paid part of the debt such that the outstanding sum fell below $10,000. This raised the question whether a company which pays the statutory demand in part such that the remaining sum falls below the stated limit can be considered to have “neglected to pay the sum”. The court considered two situations: first, where the partial payment was made within the prescribed period; and second, where the partial payment was only made after that period. The Court of Appeal decided that a company which made partial payment to reduce the sum owed to below $10,000 within the three-week period should not be deemed unable to pay its debt under s 254(2)(a). The court, however, reserved its decision on the scenario where the debtor did so after the expiry of such period.

B. Statutory demands based on adjudication determinations

18.11 In Diamond Glass Enterprise Pte Ltd v Zhong Kai Construction Co Pte Ltd,18 Diamond Glass Enterprise Pte Ltd (“DG”), a subcontractor of Zhong Kai Construction Co Pte Ltd (“ZK”), obtained an adjudication determination (“AD”) against ZK under the Building and Construction Industry Security of Payment Act19 (“SOPA”) and entered judgment against ZK based on the AD. DG then served a statutory demand based on the adjudicated amount and, when ZK failed to meet the statutory demand, commenced a winding-up application against ZK.

18.12 ZK did not commence proceedings to invalidate the AD. Instead, ZK filed an application for the dismissal of the winding-up application or, alternatively, a stay or adjournment on the basis that it had crossclaims against DG arising out of two suits which it had initiated against DG, claiming liquidated damages and costs to complete the contract with DG. At first instance, ZK succeeded in its application for a stay of the winding-up application pending the disposal of the two suits and DG appealed. DG's appeal was dismissed by the Court of Appeal though the High Court's order was varied in part.

18.13 The Court of Appeal recognised that, under s 21(1) of the SOPA, adjudication determinations are temporarily final until resolved by the court or arbitral tribunal finally determining all the disputes between...

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