These bad times have seen a lot of companies fall into the quagmire of
bankruptcy and liquidation. The winding up of a company affects not only its
shareholders and employees, but also its creditors. With little or no money in
the company's coffers, how then do its creditors protect their interests? May
they lay claim to the company's assets?
Along with the rise and ebb of the economy, one sees companies mushrooming and floundering. These days, it is more common to see companies nearing the end of their life expectancies. Of course, there are many reasons why companies are wound up, the most usual of which is the company's inability to pay its debts. Petitions are presented to the court to wind up companies, sometimes because the company cannot honour payment of debts barely exceeding $10,000. So, what happened to the company's assets? And its funds? Where did these go? Can the company get these assets and funds back? These are but some of the legitimate concerns of its creditors when a company crumbles under the weight of its debts.
Companies Act (1994 Ed) (Cap 50)
The Companies Act (Cap 50) ('CA') provides for the recovery of assets which
have been dissipated by a company both before and after the commencement of its
winding up.
Dispositions of a company's assets made before and after the commencement of its winding up are governed by ss 329(1) and 259 of the CA respectively.
Section 329(1)
... any transfer, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company which, had it been made or done by or against an individual, would in his bankruptcy be void or voidable under [s] 98, 99 or 103 of the Bankruptcy Act 1995 [Cap 20] (read with [ss] 100, 101 and 102 thereof) shall in the event of the company being wound up be void or voidable in like manner.Section 259
Any disposition of the property of the company, including things in action, and any transfer of shares or alteration in the status of the members of the company made after the commencement of the winding up by the court shall unless the court otherwise orders be void.
Sections 98 and 99 of the Bankruptcy Act (1995 Ed) (Cap 20) ('BA') deal with transactions at an undervalue and unfair preferences respectively. Section 103 deals with extortionate credit transactions. Due to constraint of space, only transactions entered into at an undervalue and unfair preferences by a company will be discussed.
Section 98 of the BA - Transactions at an Undervalue
When a company has entered into a transaction at an undervalue at the
relevant time, its appointed liquidator or the official receiver may apply to
the court for an order under s 329(1) of the CA read with s 98(1) of the BA. The
court 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. For
instance, the court may order that any property transferred as part of the
transaction or the proceeds of sale of such property be vested in the official
receiver or the appointed liquidators. The other party to the transaction may
also be ordered to repay all benefits received by him from the company as a
consequence of the transaction.
Transactions which fall within the purview of s 98(3) of the BA are at an undervalue. These include a gift made by the company or a transaction entered into by the company upon terms which provide for the company to receive no consideration, or a consideration which is significantly less than the value of the consideration given to the other party. However, two further prerequisites must exist before an application can be made:
To alleviate the burden of proof on the part of the applicant, the company's insolvency is presumed where the transaction is with its associate. As for whether a person is an 'associate' of the company, this is determined by s 101 of the BA with the necessary modifications in the context of companies. For instance, a company's associates include its directors, officers and subsidiaries.
There is scant local case authority on s 329(1) of the CA. The only two reported cases are decisions of the High Court in Buildspeed Construction Pte Ltd (in liquidation) v Theme Corp Pte Ltd & Anor [2000] 4 SLR 776 and Re Libra Industries Pte Ltd (in compulsory liquidation) [2000] 1 SLR 84.
In Buildspeed's case, the company was the main contractor employed by the second defendant for the construction, completion and maintenance of a certain development at the contract price of about $104m. In February 1998, the company had carried out certified works valued at $70.3m. On 18 March 1998, the company executed a novation agreement by which the first defendant undertook to perform the building contract with the second defendant in lieu of the company. Provisional liquidators of the company were appointed on 29 April 1998 and the company ceased to carry on business on 5 May 1998. On 29 May 1998, the company was wound up voluntarily by its creditors. The appointed liquidators applied, amongst other matters, for a declaration that the transaction contained in the novation agreement was at an undervalue.
The learned judge found that the company was wound up voluntarily sometime between 29 April and 29 May 1998. The novation agreement was, therefore, entered into within the requisite five-year period. According to the management accounts, at the time of the transaction, the company's current liabilities exceeded its current assets by more than $12m. The company also had a negative working capital of about $4m and no further capital was brought in. The learned judge found, accordingly, that the company was unable to pay its debts as they fell due as at 18 March 1998.
Having been satisfied that the two prerequisites for an application under s 329 of the CA existed, the learned judge proceeded to examine whether the transaction was entered into by the company at an undervalue. Based on the evidence provided, the learned judge found that the value of the consideration for the transaction contained in the novation agreement entered into by the company was significantly less than the value of the consideration provided by the company and the shortfall was between $2.3m and $2.9m. Accordingly, the novation agreement was declared, by the learned judge, to be a transaction at an undervalue and directions were given for an account to be rendered.
As the other case of Libra Industries concerns transactions entered into at an undervalue and unfair preferences by a company, it will be discussed in the later part of this article.
Section 99 of the BA - Unfair Preferences
The official receiver or the appointed liquidators of a company which has been
wound up may apply to the court for an order under s 329 of the CA, read
together
with s 99 of the BA, if the company has at the relevant time given an
unfair preference to any person. The court may make 'such order as it thinks fit
for restoring the position to what it would have been' if the company had not
given that unfair preference. For instance, the court may order any property
transferred in connection with the giving of the preference or the proceeds of
sale of such property be vested in the official receiver or the appointed
liquidators of the company. The court may also order the party receiving the
preference to repay all benefits received by him from the company.
A company is said to give an unfair preference to a person if:
The fact that the company does anything or suffers anything to be done in pursuance of an order of court does not, without more, prevent it from constituting the giving of an unfair preference. However, the court must be satisfied that the company was influenced by a desire to produce the effect of putting the recipient of the preference in a better position than he would otherwise have been in the event of the company's liquidation, and that the company was insolvent at the time it gave the preference or became insolvent as a result. The company's desire to prefer is presumed where the unfair preference is given to its associate, but there is no presumption of insolvency unless the unfair preference given also amounts to a transaction at an undervalue.
Even if the company had given an unfair preference, the preference will not be impugned unless it was given within specific periods preceding the earlier of the dates on which the petition to wind up the company was presented or the resolution to wind up the company voluntarily was passed:
In the case of Libra Industries, the company was wound up by the court on 28 February 1997 upon the presentation of a winding-up petition on 23 January 1997. At all material times, Libra Equipment Holdings Pte Ltd ('LEHPL') held a majority of the company's shares and both companies had common directorship.
The company occupied part of the premises at No 37 Gul Drive, which it leased from LEHPL since January 1994. In June 1995, LEHPL purchased the adjoining premises at No 35 Gul Drive and decided to sell No 37 Gul Drive. However, completion of the sale was delayed until October 1996. In the meantime, in August 1996, the company retrospectively executed two lease agreements with LEHPL dated 1 August 1995 and 1 January 1996 in respect of both premises. From August 1995 to October 1996, the company paid rent in excess of $1m to LEHPL for both premises. The appointed liquidators applied to the court, amongst other matters, for a declaration that: (a) the lease agreements constituted transactions at an undervalue or were unfair preferences; and (b) for the return of the rent paid to LEHPL.
Between July and October 1996, the company sold fixed assets with a net asset value of about $530,000 to LEHPL and another company for a price of about $800,000. The proceeds of sale were simultaneously repaid by the company to LEHPL to the extent of about $500,000 as rent for premises at Nos 35 and 37 Gul Drive. In effect, the company received the sum of $300,000 for the sale of its assets. The liquidators, therefore, applied for a declaration that the sale of fixed assets constituted a transaction at an undervalue.
The liquidators also applied for a declaration that the company's unsubstantiated payments of about $941,000 to LEHPL between March 1995 and September 1996 constituted unfair preference to LEHPL and for a return of the funds.
The learned judge hearing the application dealt jointly with the sale of the fixed assets and execution of the lease agreements by the company as the issues were intertwined. The evidence showed that the leases were entered into in August 1996 when the company was already facing severe financial difficulties. The fact that the leases were retrospectively executed and overlapped over a period of 14 months did not make commercial sense, but strengthened the inference that the company intended to return to LEHPL the proceeds of sale of its assets. Of the rent payments made during that period, a total sum of $490,810 received by the company for the assets sold to LEHPL were immediately paid back to LEHPL as rent. The learned judge held that s 99(5) of the BA applied so that a rebuttable presumption of preference to its associate was raised. On the evidence, LEHPL was unable to rebut the presumption.
Accordingly, the learned judge held that one set of rent paid for the overlapping period, that is 14 months' rent amounting to $462,000, was at an undervalue. The rent payments were also voidable for being unfair preference to the extent of $490,810. LEHPL was, therefore, ordered to repay the sum of $490,810 to the company.
As for the unaccounted payments made by the company to LEHPL, the learned judge found that the relationship between the company and LEHPL gave rise to the rebuttable presumption of preference under s 99(5) of the BA. However, LEHPL had adduced sufficient evidence to rebut the presumption and the learned judge held that the payments made by the company to LEHPL were, therefore, not preferential.
Conclusion
Due to the dearth of local case authority on this issue, it is unclear how the
principles of the BA should be applied in connection with s 329 of the CA and
what modifications are necessary. However, the learned judge in Buildstreet's
case did opine that the purpose of s 329 of the CA was 'to provide for
uniformity in the treatment of transactions which were impugned whether the
insolvent person be a natural person or a company'. If the transaction had been
entered into by an individual, and in his bankruptcy such transaction would be
void or voidable under ss 98, 99 or 103 of the BA, then it shall, in the event
of a company being wound up, be void or voidable in like manner.
Felicia Chua
Baker & McKenzie.Wong & Leow