Insolvency: Claw-Back of Assets From Unfair Preference and Undervalued Transactions

Last updated on September 4, 2020

One of the most common reasons a company is wound up is because it is unable to pay its debts and it would not be commercially viable to carry on the business. In this scenario, liquidators will be appointed to distribute the company’s remaining assets to its creditors. Most of the time, the company’s remaining assets are insufficient and the liquidator may want to increase them. One way to do so is to claw back assets that have been previously transferred in transactions:

  • Where unfair or undue preference was given; or
  • At an undervalue.

This article will explain what constitutes unfair preference and undervalue transactions.

1. Clawing Back Assets From Unfair Preference Transactions

To make out a case for unfair preference, the liquidator must show 4 elements.

  1. The preferred party (the beneficiary of the transaction) is a creditor or guarantor for any of the company’s debts or liabilities;
  2. The company was insolvent (or became insolvent as a consequence of the transaction) at the time of giving the preference;
  3. The company does anything which puts the preferred party in a better position than the preferred party would have been had the transaction not be entered in the event of the company’s liquidation; and
  4. The company was influenced in deciding to enter the transaction by a desire to prefer the preferred party.

The first element is made out fairly easily. Such a relationship may be established by contracts.

The second element may be satisfied by applying either the cash flow or balance sheet test. The cash flow test involves showing that the company was unable to pay its debts as they fall due. However, the High Court noted in Tong Tien See Construction Pte Ltd v Tong Tien See that a temporal lack of liquidity does not equate to insolvency. The balance sheet test involves looking at whether the net value of assets is less than the net liabilities (including contingent and prospective liabilities).

The third element is self-explanatory. As long as the preferred party received more of the company’s assets than he would have received had the assets been distributed by the liquidator, he has been put in a better position.

The fourth element may be difficult to prove but the Insolvency, Restructuring and Dissolution Act 2018 has provided a statutory presumption of a desire to prefer. As long as the preferred party is an associate of the company, the company is presumed to have been influenced by a desire to prefer. The definition of associates of the insolvent company is wide. They include employees, directors, officers and another company which is under the control of the insolvent company by shareholding with at least one third voting powers in a general meeting.

If the preferred party is not an associate, the Court of Appeal in DBS v Tam Chee Chong has provided some guidelines. The Court emphasised that one must look at the subjective desire of the insolvent company to prefer at the point of payment. It is sufficient that the desire to prefer is one of the factors influencing the decision of the insolvent company to enter the transaction. In other words, the desire to prefer need not be a dominant intention. This desire to prefer may be negated by overwhelming but proper commercial pressure. The genuineness of commercial pressure depends on the facts of each case.

Last, the relevant time period during which assets may be clawed back is two years from the date of the winding up application for associates and 6 months for unrelated parties.

2. Clawing Back Assets From Undervalue Transactions

To determine if a transaction is at an undervalue (within the meaning of the Insolvency, Restructuring and Dissolution Act 2018), the liquidator must show 2 elements.

  • Any one of the following 2 situations:
    1. The company makes a gift to the recipient; or
    2. The company enters into a transaction where the value of consideration received is significantly less than the value of the consideration provided; and
  • The company was or became insolvent as a result of that transaction.

The first element is fairly easy to make out. It may be evidenced by contracts. In the second situation, one simply needs to look at the market value of the consideration received and the value of what was actually received.

The second element may be difficult to prove but the Insolvency, Restructuring and Dissolution Act 2018 has provided a statutory presumption of insolvency. As long as the transaction is with an associate, the transaction is presumed to be at an undervalue. The definition of “associates” is the same as that for unfair preference. The Court of Appeal in Show Theatres Pte Ltd (in liquidation) v Shaw Theatres Pte Ltd rejected numerous creative attempts to narrowly construe the meaning of “associates”. The Court held that if two companies had a common director, they are associates.

Last, the relevant time period during which assets may be clawed back is 5 years from the date of the winding up application regardless of whether the undervalue transaction was with an associate or not.

There might be certain transactions which is both at an undervalue and where unfair preference was given. In this scenario, the relevant time period during which assets may be clawed back is 5 years from the date of the winding up application regardless of whether the undervalue transaction was with an associate or not.

If you need assistance with winding up your company, please feel free to engage our services, offered at competitive rates.

Appointment and Removal of Company Officers and Other Key Personnel
  1. Appointing Company Directors in Singapore: Eligibility, Process etc.
  2. Managing Director vs CEO in Singapore: Roles and Obligations
  3. Guide to Directors' Remuneration in Singapore
  4. Directors' Duties in Singapore
  5. Shadow Directors: Who are They and What Duties Do They Owe to the Company?
  6. How to Remove a Director from a Company in Singapore
  7. Removal and Resignation of Company Auditor in Singapore
  8. Appointing a Company Secretary: Roles and Responsibilities
  9. Appointing an Authorised Representative for Foreign Companies in Singapore
  10. Process Agents in Singapore
Holding Meetings
  1. What are Annual General Meetings (AGMs) in Singapore?
  2. How to Hold Extraordinary General Meetings (EGMs) in Singapore
  3. How to Hold a Board Meeting in Singapore
Shareholder Matters
  1. 2 Ways to Remove a Singapore Company Shareholder ASAP
  2. Guide to Paid-Up Capital in Singapore (Is $1 Enough?)
  3. Preparing a Register of Shareholders for a Singapore Company
  4. How to Issue Shares in a Singapore Private Company
  5. Guide to Transferring Shares in a Singapore Private Company
  6. Your Guide to Share Certificates in Singapore: Usage and How to Prepare
  7. Shareholder Rights in Singapore Private Companies
  8. Shareholder Roles and Obligations in Singapore Companies
  9. Dividend Payments Guide for Singapore Business Owners
  10. Share Transmission: What Happens If a Shareholder Dies in Singapore?
  11. How to Reduce the Share Capital of Your Singapore Company
  12. Buy-Sell Agreements: How to Write & Fund Them in Singapore
  13. Oppression of Minority Shareholders
Compliance
  1. Essential Regulatory Compliance Guide for Singapore Companies
  2. Dormant Companies and Their Filing Obligations in Singapore
  3. Anti-Money Laundering Regulations and Your Business: What You Need to Know
  4. Price-Fixing, Bid-Rigging and Other Anti-Competitive Practices to Avoid
  5. Legally Conducting Lucky Draws for Singapore Businesses
  6. Restaurant Inspection and Food Safety Rules in Singapore
Company Management
  1. Does Your Company Need a Legal Team (In-House Counsel)?
  2. How to Change the Name of Your Singapore Company
  3. Can Directors be Liable for Company Debts in Singapore?
  4. Company Loans to Directors/Shareholders in Singapore
  5. 3 Types of Insurance Every Singapore Business Needs
  6. Creating and Registering Charges in Singapore: Guide for Companies
  7. Guide to Effective Business Continuity Planning in Singapore
  8. Business Asset Sale & Disposal in Singapore: How Do They Work?
  9. Business Partnership Disputes in Singapore: How to Resolve
  10. How to Commence a Derivative Action on Behalf of a Company in Singapore
  11. Business Will: How to Pass on Your Business to Your Successors in Singapore
Company Documents
  1. Record-Keeping Requirements for Singapore Companies
  2. Company Constitutions in Singapore and How to Draft One
  3. Company Memorandum and Articles of Association
  4. Company Resolutions: What are They?
  5. Board Resolutions in Singapore
  6. Minutes of Company Meeting in Singapore: How to Record
  7. How to Set Up a Register of Controllers
  8. How to Set Up a Register of Nominee Directors
  9. Guide to Filing Financial Statements for Singapore Business Owners
  10. Filing Annual Returns For Your Business
Tax, Accounting and Audit Matters
  1. Singapore Corporate Tax: How to Pay, Tax Rate, Exemptions
  2. Start-Up Tax Exemption Guide for New Singapore Companies
  3. GST Registration: Requirements and Procedure in Singapore
  4. What is Withholding Tax and When to Pay It in Singapore
  5. Singapore Influencers: Here's How to Calculate Your Income Tax
  6. Tax Investigation of Tax-Evading Business Owners in Singapore
  7. Small Business Accounting Services in Singapore
  8. Company Audits in Singapore: Requirements and Exemptions
Data Protection
  1. Suspect a PDPA Data Breach? Here's What to Do Next
  2. Must You Notify PDPC About a Data Breach in Your Business?
  3. Summary: Your Organisation's 10 Main PDPA Obligations
  4. Essential PDPA Compliance Guide for Singapore Businesses
  5. PDPA Consent Requirements: How Can Your Business Comply?
  6. Is It Legal for Businesses to Ask for Your NRIC in Singapore?
  7. Here's a 7-Step Plan for Companies to Prevent Unauthorised Disclosure When Processing and Sending Personal Data
  8. Cloud Storage of Personal Data: Your Business’ Data Protection Obligations
  9. Drafting a Comprehensive Privacy Policy For Your Singapore Website
  10. GDPR Compliance in Singapore: Is it Required and How to Comply
  11. Appointing a Data Protection Officer For Your Business: All You Need to Know
  12. How Can Companies Dispose of Documents Containing Personal Data?
  13. Check the Do-Not-Call Registry Before Marketing to Singapore Phone Numbers
  14. How to Legally Install CCTVs for Home/Business Use in Singapore
  15. Is Web Scraping or Crawling Legal in Singapore?
  16. Legal Options If Employees Breach Confidentiality in Singapore
Marketing
  1. Dealing with Defamation of Your Business: Can You Sue?
  2. Sending Email Newsletters That Comply With Singapore Law
  3. A legal guide to drafting a social media policy for your company
  4. Your Guide to a Media Release Form in Singapore
  5. Your Guide to an Influencer Marketing Agreement in Singapore
  6. Outdoor Advertising: How to Legally Display Public Ads in Singapore
Franchising
  1. Starting a Franchise in Singapore: What Franchisors Should Look Out For
  2. Running a Franchise in Singapore: What To Look Out for as a Franchisee
Debt Restructuring
  1. What is Judicial Management and How It Works in Singapore
  2. Schemes of Arrangement: How They Work and How to Apply
  3. Informal Debt Restructuring and Workout in Singapore
Ending a Business
  1. Voluntary Suspension of Business in Singapore: How to Handle
  2. Winding Up a Singapore Company: Grounds and Procedure
  3. Closing Your Singapore Business: What You Need to Settle
  4. Striking Off a Company
  5. Can a Company that Struck Itself Off the Register Later Apply to Restore Itself?
  6. Dissolution of partnerships in Singapore
  7. What Should a Creditor Do When a Company Becomes Insolvent?
  8. How to File a Proof of Debt Against a Company in Liquidation
  9. Insolvency: Claw-Back of Assets From Unfair Preference and Undervalued Transactions
  10. Validation of Payments Made by Companies Being Wound Up