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.
- Annual General Meetings (AGMs) in Singapore: What are They?
- Anti-Money Laundering Regulations and Your Business: What You Need to Know
- Price-Fixing, Bid-Rigging and Other Anti-Competitive Practices to Avoid
- The Business Owner’s Guide to Dividend Payments in Singapore
- Company Audits in Singapore: Requirements and Exemptions
- How to Transfer Shares in a Singapore Private Company: The Essential Guide
- How to Hold an Extraordinary General Meeting (EGM) in Singapore
- How to Issue Shares in a Singapore Private Company
- How to Reduce the Share Capital of Your Singapore Company
- How Businesses Can Legally Conduct Lucky Draws in Singapore
- Dormant Companies and Their Filing Obligations in Singapore
- How to Hold a Board Meeting in Singapore
- Essential Regulatory Compliance Guide for Singapore Companies
- Finding a Suitable Corporate Secretarial Firm in Singapore
- Oppression of Minority Shareholders
- Process Agents in Singapore
- Company Constitution in Singapore: What It is and How to Draft One
- How to Set Up a Register of Controllers
- How to Set Up a Register of Nominee Directors
- Memorandum of Understanding (MOU): Does Your Business Need One?
- Minutes of Company Meeting in Singapore: How to Record
- Guide to Filing Financial Statements for Singapore Business Owners
- Company Resolutions: What are They?
- Board Resolutions in Singapore
- Company Memorandum and Articles of Association
- Filing Annual Returns For Your Business
- Shadow Directors: Who are They and What Duties Do They Owe to the Company?
- Director's Remuneration: When Can Company Directors be Remunerated For Their Services?
- How to Remove a Director from a Company in Singapore
- Appointing Company Directors in Singapore: Eligibility, Process etc.
- Company Loans to Directors/Shareholders (& Vice Versa) in Singapore
- Share Transmission: What Happens If a Shareholder Dies in Singapore?
- Business Will: How to Pass on Your Business to Your Successors in Singapore
- Shareholder Rights in Singapore Private Companies
- Removal and Resignation of Company Auditor in Singapore
- What Responsibilities Do Company Shareholders Have in Singapore?
- Creating and Registering Charges in Singapore: Guide for Companies
- How to Commence a Derivative Action on Behalf of a Company in Singapore
- Appointing a Company Secretary: Roles and Responsibilities
- Directors' Duties in Singapore
- Essential PDPA Compliance Guide for Singapore Businesses
- Cloud Storage of Personal Data: Your Business’ Data Protection Obligations
- How Can Companies Dispose of Documents Containing Personal Data?
- Here's a 7-Step Plan for Companies to Prevent Unauthorised Disclosure When Processing and Sending Personal Data
- Appointing a Data Protection Officer For Your Business: All You Need to Know
- Summary: Your Organisation's 9 Main Obligations under the Personal Data Protection Act
- Check the Do-Not-Call Registry Before Marketing to Singapore Phone Numbers
- GDPR Compliance in Singapore: Is it Required and How to Comply
- Is It Legal for Businesses to Ask for Your NRIC in Singapore?
- PDPA Consent Requirements: How Can Your Business Comply?
- Legal Options If Employees Breach Confidentiality in Singapore
- Insolvency: Claw-back of Assets from Unfair Preference and Undervalue Transactions
- Striking Off a Company
- What Should a Creditor Do When a Company Becomes Insolvent?
- Dissolution of partnerships in Singapore
- Validation of Payments Made by Companies Being Wound Up
- Can a Company that Struck Itself Off the Register Later Apply to Restore Itself?
- Are You Closing Your Singapore Business? Have You Settled All of the Following?
- How to File a Proof of Debt against a Company in Liquidation
- Winding Up a Company