The Effect of Partial Payments in Insolvency Scenarios

woman looking at bill payments

The Monetary Threshold For Bankruptcy or Winding-Up Applications

Under the Insolvency Restructuring and Dissolution Act 2018 (IRDA), an individual or a company may face a bankruptcy or winding-up application respectively if a debt (or debts) is not paid to a creditor (or creditors). A creditor or, jointly with other creditors, may apply to the court for that individual to be adjudged a bankrupt or for the winding-up of the company if certain conditions have been satisfied (collectively referred to as the “Insolvency Application”).

In this article, we consider only one of the more common grounds for the Insolvency Application, which is that the debtor has been unable to pay its debts to the creditor. Other conditions with respect to the creditor and debtor are not considered here.

The common monetary threshold for both bankruptcy and winding-up applications is that the debt must be no less than $15,000 before a statutory demand could be issued by the creditor. In both instances (whether of an individual debtor or a corporate debtor), a presumption that the debtor is unable to pay its debts arises if a statutory demand is served on the debtor, and the debtor does not pay the debt within 3 weeks from the service of the statutory demand. If after the lapse of 3 weeks, the debtor has not paid the debt, the creditor may make an Insolvency Application provided the IRDA provisions are satisfied.

When Will the Court Take Jurisdiction to Make an Order? 

Can a debtor make partial payments to reduce the debt to under $15,000 to stave off the Insolvency Application? The answer seems to be that it depends on when the partial payments are made.

In HSBC Bank (Singapore) Ltd v Shi YuZhi [2017], the court had determined in relation to the Bankruptcy Act (which is the predecessor of the IRDA), that the relevant time at which the court would consider whether the $15,000 threshold is satisfied is at the time the Insolvency Application is made.

Hence, the view is that if the partial payment is made before the Insolvency Application is served, so that the debt is under $15,000 at that time, the court would not have jurisdiction to make the order of bankruptcy. This conclusion has also been reached in the context of winding-up applications in Sun Electric Power Limited v RCMA Asia Pte Ltd (formerly known as Tong Teik Pte Ltd) [2021], although this decision by the court related to the section 254 Companies Act (which has since been exported to the IRDA). It does not appear that the same conclusion would be differed from in the context of the current IRDA which now applies to winding up applications.

Will the Court Make the Order If the Partial Payment is Made After the Insolvency Application has been Served on the Debtor?

In the context of winding up applications, the court in the Sun Electric case left that it is still an open question as to whether the court will make the order if partial payments are made after the winding-up application is served. The same legal considerations would arguably apply to a bankruptcy application.

Nevertheless, the view may be taken that if a court maintains jurisdiction, that it has power to make the order, when the partial payment is made after the Insolvency Application has been served, then the court still has to exercise its discretion as to whether to make the order. In such circumstances, it is submitted that when the debt is reduced substantially below the $15,000 threshold, the court may not make the order.

Given the foregoing, there is a “safe harbour” during the three-week period after the statutory demand has been served on a debtor by a creditor. To stave off further legal proceedings, a debtor would be well-advised to make partial payment(s) to reduce the debt to below $15,000 within that three-week period, or no later than before the Insolvency Application has been served on the debtor.

Advocate and Solicitor

September 2022

© Glen Koh 2022

Notice: Nothing in this note shall be construed as legal advice.