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.
- What is a Nominee Director & How to Appoint One in Singapore (With FAQs)
- Independent Directors: Who are They and What is Their Role?
- Board of Advisors: Who Are They and What Is Their Role?
- Appointing Company Directors in Singapore: Eligibility, Process etc.
- Managing Director vs CEO in Singapore: Roles and Obligations
- Guide to Directors' Remuneration in Singapore
- Directors' Duties in Singapore
- Shadow Directors: Who are They and What Duties Do They Owe to the Company?
- How to Remove a Director from a Company in Singapore
- Removal and Resignation of Company Auditor in Singapore
- Appointing a Company Secretary: Roles and Responsibilities
- Appointing an Authorised Representative for Foreign Companies in Singapore
- Process Agents in Singapore
- Share Buybacks in Singapore: Procedure, Cost and More
- How to Split Shares (or Stocks) in a Singapore Company
- 2 Ways to Remove a Singapore Company Shareholder ASAP
- What are Treasury Shares? Guide for Singapore Companies
- Guide to Paid-Up Capital in Singapore (Is $1 Enough?)
- Preparing a Register of Shareholders for a Singapore Company
- How to Issue Shares in a Singapore Private Company
- Guide to Transferring Shares in a Singapore Private Company
- Your Guide to Share Certificates in Singapore: Usage and How to Prepare
- Shareholder Rights in Singapore Private Companies
- Shareholder Roles and Obligations in Singapore Companies
- Dividend Payments Guide for Singapore Business Owners
- Share Transmission: What Happens If a Shareholder Dies in Singapore?
- How to Reduce the Share Capital of Your Singapore Company
- Buy-Sell Agreements: How to Write & Fund Them in Singapore
- Oppression of Minority Shareholders
- Is Your Business Collaboration Competition Law-Compliant?
- Explained: Registered Filing Agent for Singapore Businesses
- Transfer Pricing Obligations of Singapore Companies
- Adhering to Trading Sanctions and Restrictions in Singapore
- Cyber Hygiene Compliance Guide for Singapore Companies
- Corporate Social Responsibility For Businesses in Singapore
- Essential Regulatory Compliance Guide for Singapore Companies
- Dormant Companies and Their Filing Obligations in Singapore
- Anti-Money Laundering Regulations and Your Business: What You Need to Know
- Price-Fixing, Bid-Rigging and Other Anti-Competitive Practices to Avoid
- Legally Conducting Lucky Draws for Singapore Businesses
- Restaurant Inspection and Food Safety Rules in Singapore
- Does Your Company Need a Legal Team (In-House Counsel)?
- Acqui-Hiring of Singapore Companies: How Does It Work?
- How to Change the Name of Your Singapore Company
- Can Directors be Liable for Company Debts in Singapore?
- Company Loans to Directors/Shareholders in Singapore
- 3 Types of Insurance Every Singapore Business Needs
- Creating and Registering Charges in Singapore: Guide for Companies
- Guide to Effective Business Continuity Planning in Singapore
- Business Asset Sale & Disposal in Singapore: How Do They Work?
- Business Partnership Disputes in Singapore: How to Resolve
- How to Commence a Derivative Action on Behalf of a Company in Singapore
- Business Will: How to Pass on Your Business to Your Successors in Singapore
- Record-Keeping Requirements for Singapore Companies
- Company Constitutions in Singapore and How to Draft One
- Company Memorandum and Articles of Association
- Company Resolutions: What are They?
- Board Resolutions in Singapore
- Minutes of Company Meeting in Singapore: How to Record
- How to Set Up a Register of Controllers
- How to Set Up a Register of Nominee Directors
- Guide to Filing Financial Statements for Singapore Business Owners
- Filing Annual Returns For Your Business
- Carbon Tax in Singapore: What is the Rate and Who Must Pay?
- Laws and Penalties for GST Evasion in Singapore
- 6 Common Taxes in Singapore For Individuals & Businesses
- Singapore Corporate Tax: How to Pay, Tax Rate, Exemptions
- Start-Up Tax Exemption Guide for New Singapore Companies
- GST Registration: Requirements and Procedure in Singapore
- What is Withholding Tax and When to Pay It in Singapore
- Singapore Influencers: Here's How to Calculate Your Income Tax
- Tax Investigation of Tax-Evading Business Owners in Singapore
- Small Business Accounting Services in Singapore
- Company Audits in Singapore: Requirements and Exemptions
- Suspect a PDPA Data Breach? Here's What to Do Next
- Must You Notify PDPC About a Data Breach in Your Business?
- Data Room: Should Your Singapore Company Set Up One?
- Victim of a Data Breach? Here’s What You Can Do
- Summary: Your Organisation's 10 Main PDPA Obligations
- Essential PDPA Compliance Guide for Singapore Businesses
- PDPA Consent Requirements: How Can Your Business Comply?
- Is It Legal for Businesses to Ask for Your NRIC in Singapore?
- Here's a 7-Step Plan for Companies to Prevent Unauthorised Disclosure When Processing and Sending Personal Data
- Cloud Storage of Personal Data: Your Business’ Data Protection Obligations
- GDPR Compliance in Singapore: Is it Required and How to Comply
- Appointing a Data Protection Officer For Your Business: All You Need to Know
- How Can Companies Dispose of Documents Containing Personal Data?
- Check the Do-Not-Call Registry Before Marketing to Singapore Phone Numbers
- How to Legally Install CCTVs for Home/Business Use in Singapore
- Is Web Scraping or Crawling Legal in Singapore?
- Legal Options If Employees Breach Confidentiality in Singapore
- Social Media Marketing: Legal Guide for Singapore Businesses
- Your Guide to E-commerce Website Terms of Service in Singapore
- Dealing with Defamation of Your Business: Can You Sue?
- Sending Email Newsletters That Comply With Singapore Law
- A legal guide to drafting a social media policy for your company
- Your Guide to a Media Release Form in Singapore
- Your Guide to an Influencer Marketing Agreement in Singapore
- Outdoor Advertising: How to Legally Display Public Ads in Singapore
- A Guide to Digital Bank Regulation in Singapore
- Applying for a Major Payment Institution Licence in Singapore
- Applying to the MAS FinTech Regulatory Sandbox
- Payment Services Act Licensing Guide for Fintech Businesses
- How to Get a Payment Service Provider Licence in Singapore
- Financial Adviser's Licence Guide for Singapore Businesses
- Capital Markets (CMS) Licence Requirements in Singapore
- How to Offer E-Wallet Services in Singapore: Licensing Guide
- Digital Payment Token Services Licence Guide in Singapore
- How to Legally Offer Crypto Services in Singapore
- How to Restore a Struck-Off Company in Singapore
- Claw-Back of Assets From Unfair Preference and Undervalued Transactions
- Should You Save or Close Your Zombie Company in Singapore?
- Voluntary Suspension of Business in Singapore: How to Handle
- Winding Up a Singapore Company: Grounds and Procedure
- Closing Your Singapore Business: What You Need to Settle
- Striking Off a Company
- Restoring a Company That was Struck Off Without You Knowing
- Dissolution of partnerships in Singapore
- What Should a Creditor Do When a Company Becomes Insolvent?
- How to File a Proof of Debt Against a Company in Liquidation
- Validation of Payments Made by Companies Being Wound Up