Validation of Payments Made by Companies Being Wound Up

You have finally received payment from a company registered in Singapore that owed you money. You didn’t know this but before paying you, the company had already gone bust, with a liquidator being appointed to oversee its winding up.

Now, the liquidator is pursuing you for having received payment from the company after it commenced winding up, and wants the money back.

What are your rights, as an unsecured creditor, in such a case?

General Rule: Payments Made by Companies After the Commencement of Winding up Are Void

Section 259 of the Companies Act states:

“Any disposition of 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.”

In other words, once a company starts to wind up, transactions undertaken by that company are generally void unless approved by the court. The liquidator will then be able to “claw back” the assets paid out under such transactions.

This is because insolvent companies are essentially operating on creditors’ monies, with transactions undertaken at the risk of creditors not being able to recover what is owed to them.

The date of the commencement of winding up depends on how the company was wound up:

• Compulsory winding up: the date of application for winding up;
• Members’ voluntary winding up: the date of the passing of the members’ special resolution for winding up; or
• Creditors’ voluntary winding up: the date of the passing of the creditors’ special resolution for winding up.

Can a Transaction Made Following Winding up Be Nevertheless Found Valid?

In certain situations, the court will sanction transactions made by companies which have commenced winding up proceedings. This is in recognition of the fact that a company, even if imminently or in fact insolvent, may need to make payments necessary to maintain essential functions. This could be due to various reasons, including the company making legitimate efforts to stay afloat.

The Singapore High Court has held, in Centaurea International v Citus Trading, that a transaction made by a company which has commenced winding up proceedings is likely to be validated when there are:

“special circumstances making such a course desirable in the interest of unsecured creditors as a body”.

Special circumstances will exist where the transaction is likely to benefit the company in question and the general body of unsecured creditors.

Whether the transaction is likely to provide such benefit should be determined at the time that it was made, rather than with the benefit of hindsight. The purpose of the transaction is also an important consideration.

In addition, whether the payments were made in good faith in the ordinary course of business to the creditor, without the creditor knowing about the winding up proceedings, is merely one factor – but a strong one – in favour of the court validating the transaction.

In Centaurea International v Citus Trading, a company, Centaurea International (“Centaurea”), obtained bunkers on credit terms from oil traders and sold them at marked-up prices to vessels. After exceeding its credit limit of US$1.2m to the creditor in question, namely Citus Trading (“Citus”), Centaurea paid US$1.5m to Citus to settle outstanding invoices. However before these payments were made, another creditor had already commenced winding up proceedings against Centaurea.

The court held that the payment of US$1.5m to Citus was not void despite being made after Centaurea had commenced winding up. This payment had the effect of refreshing Centaurea’s credit limits, thereby allowing it to continue business operations. The payment had therefore been likely to be for the benefit of Centaurea and its general body of creditors.

What If a Company That I Know Is Being Wound up Approaches Me for Business?

The court has warned in Centaurea International v Citus Trading that a creditor who enters into a transaction with a company, despite knowing that it has commenced winding up proceedings, and without first obtaining a validating order, “obviously takes the risk of the court subsequently refusing to make the order”.

Creditors are therefore advised to consider the risks involved when deciding whether to enter into transactions with companies which they know have commenced winding up proceedings.

What If the Transaction Is Invalidated?

If the transaction is held to be void by the court, the liquidator can claw back the payment made. In such a case, the unsecured creditor must then proceed with his claim against the insolvent entity by filing a proof of debt.

For legal advice on having to return payments made to you by a company after it has commenced winding up, please consult our experienced corporate lawyers.