In this article, we address some questions you may have if you are a creditor of a Singapore company that has entered or is entering into liquidation or winding up due to insolvency or otherwise.
Q1. The company has entered liquidation, what now?
You can expect to receive a Notice from the liquidator to file your Proof of Debt (the “Notice”) (Rule 91 of the Companies (Winding Up) Rules (the “CWU Rules”)) if you were mentioned as a creditor in the Statement of Affairs submitted by the directors of the company. If you did not receive a Notice, you should contact the liquidator.
You will have 14 days from the date of the Notice to file your Proof of Debt. You should use Form 77 when filing your Proof of Debt. Form 77 can be downloaded from this weblink: https://io.mlaw.gov.sg/corporate-insolvency/forms/.
Q2: The company has been wound up and the liquidator has called for a Proof of Debt. Can I set-off the debt the company owes me against the debt I owe the company? Can I prove only the outstanding amount?
Section 327(2) of the Companies Act (“CA”) read with section 88(1) of the Bankruptcy Act (“BA”) provides for mandatory insolvency set-off regarding mutual dealings between a creditor and the company prior to the company being wound up. Only the balance after set-off may be provable.
Q3: I missed the deadline to file my Proof of Debt. What now?
Unfortunately, the failure to file your Proof of Debt within the stipulated time frame will disentitle you from receiving any dividends distributed prior to the filing of your Proof of Debt. However, this does not mean that your claim against the company disappears. You should nevertheless still proceed with filing your Proof of Debt with the liquidator as soon as possible. If the company has remaining undistributed assets, you may still prove your debt and receive subsequent distribution of dividends.
Q4: What happens after I have submitted my Proof of Debt?
The liquidator must, within 14 days from the latest date for lodging proofs mentioned in the Notice, inform you in writing whether the liquidator admits or rejects your Proof of Debt wholly or in part, or whether further evidence is required in support of your Proof of Debt (Rule 98 of the CWU Rules).
Q5: My Proof of Debt was rejected by the liquidator. What can I do?
You may apply to court to appeal against the liquidator’s rejection of your Proof of Debt. Any appeal against a liquidator’s rejection of Proof of Debt must be made within 21 days from the date of receiving the liquidator’s notice of rejection (Rule 93 of the CWU Rules). You must serve notice of intention to appeal on the liquidator within the 21 days.
The liquidator must, within 3 days from the date of receiving notice of your intention to appeal against his rejection of your Proof of Debt, file the Proof of Debt in question with the Registrar with a memorandum of his disallowance of the proof (Rule 97 of the CWU Rules).
The Court may then reverse or vary the liquidator’s decision in relation to your Proof of Debt (Rule 93 of the CWU Rules).
Q6: My appeal against the liquidator’s rejection of my Proof of Debt was unsuccessful. What now?
Unfortunately, there is no further right of appeal. The liquidator will exclude your rejected proof from participation in the distribution of dividend.
Q7: My Proof of Debt has been accepted. Does that mean I can get my dividends immediately?
Unfortunately, having your Proof of Debt accepted by the liquidator does not mean that you can get paid dividends immediately.
Ranking of debts and claims
- The first group of people to be repaid are secured creditors of the company whose debts are secured by fixed charges (e.g. mortgagees). This group will be repaid from the sale proceeds of the charged assets.
- S 328(1) of the CA and s 203 of the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”) provides a list of statutorily preferred creditors that are to be repaid in the following order of priority:List of statutory preferential debts
- Costs and expenses of the winding up including the remuneration of the liquidator;
- Wages or salary including allowance or reimbursement (capped at a stipulated amount or an amount that is equivalent to 5 months’ salary, whichever is lesser);
- Retrenchment benefits or ex gratia payments under employment contracts (capped at a stipulated amount or an amount that is equivalent to 5 months’ salary, whichever is lesser);
- All amounts due in respect of work injury compensation under the Work Injury Compensation Act (Cap. 354);
- Contributions payable by the company as employer (i.e. employer’s CPF contribution) during the 12 months next before, on or after the commencement of the winding up by the company;
- Remuneration for vacation leave accrued in respect of any period before, on or after the commencement of winding up; and
- Government taxes and GST.
- Assuming that there are sufficient remaining funds to pay categories 2(a), (b), (c), (e) and (f) in the list of statutory preferential creditors, the next group of people to be repaid are those whose debts are secured by floating charges.
- The next group to be repaid are creditors with unsecured debts.
- Finally, after all the creditors have been paid, the liquidator then divides the remaining assets amongst the company’s shareholders (also known as contributories) in accordance with the constitution of the company. The company’s Constitution or Memorandum and Articles of Association should state the rights of preference shareholders to have priority in the return of capital (s 75(1) of the CA). Thereafter, the company’s remaining shareholders are then paid in proportion to their respective interest in the company’s share capital.
Every creditor in each category must be paid in full before any money is paid to the subsequent category of creditors. If there are insufficient assets to pay any class of preferred debts, the debts within the class abate in equal proportions. Thereafter, the debts attributable to subsequent classes and other unsecured creditors will not be paid.
To learn more about the priority/ranking of debts in insolvency, refer to this post by Ronald JJ Wong.
Q8: I have a charge over some of the company’s assets. So, even if the company goes into liquidation, my assets in the company are protected by my charge, right?
You would have to consider the type of charge you have.
If your debt is secured by a fixed charge, you would be repaid first from the sale proceeds of the charged assets. If, however, the proceeds from the sale of the security is insufficient to fully satisfy the debt the company owes to you, you would have to file a claim for the remaining outstanding debt as an unsecured creditor. Your claim would then be ranked with the rest of the unsecured creditors.
Registrable charge that has not been registered
If you are holding on to a registrable charge, i.e. a floating charge or a charge on book debt, but failed to register your charge and the company undergoes winding up, your charge will be void against the liquidator. The practical effect of this is that it would be as if there was no charge at all over the property that was subject to the registrable charge, i.e. the company’s property that was subject to the registrable charge will be made available to the company’s general body of creditors.
Non-registration of a charge does not invalidate the debt; the company still owes you an obligation to repay. However, your debt would be ranked in the same category as unsecured creditors in the ranking of debts and claims (see our answer to Question 7 above for the order of priority in the ranking of debts and claims).
Thus, if you are holding on to a registrable charge, it would be prudent to ensure that the charge has been duly registered. If you/the company have omitted to register your charge within the 30 days’ timeframe after the creation of the charge (s 131 of the CA), you should act fast and apply to Court to have the charge registered in order to protect your status as a secured creditor (s 137 of the CA).
Q9: I am a preference shareholder in the company. Should the company be liquidated, what steps can I take to ensure that I am paid dividends in priority to the other ordinary shareholders?
You should review the company’s constitution to ensure that it provides for the rights of preference shareholders to rank ahead of ordinary shareholders in the return of capital (s 75(1) of the CA). If the company’s constitution is silent on the ranking of shareholders, then you will not have priority in respect of the return of the company’s capital. Instead, you will be treated as an “ordinary shareholder” and will be paid in proportion to your interest in the company’s share capital.
If you are a preference shareholder, it would be useful to go through the company’s Constitution to ensure that it provides for the rights of preference shareholders to recover their capital ahead of ordinary shareholders.
Q10: What if I have unpaid goods or property in the company’s possession or custody?
It depends on whether there’s a valid retention of title clause.
A retention of title clause (also known as a Romalpa clause) in a contract means that ownership in property remains with the supplier until full payment for the goods has been received.
There are variations of such clauses for different scenarios: retention of title subject to all monies due from the company, proceeds of sale being paid to the supplier of the goods, use of raw materials in manufacturing process or mixing / comingling with other goods.
If the clause is valid, the goods in which ownership has remained with the supplier would not be treated as part of the company’s assets available for distribution to creditors or contributories.
It is also possible, depending on the specific terms of the clause in the contract, that the wound up company holds proceeds of sale of the goods subject to the retention of title clause for the seller or supplier of the goods and the supplier may be able to claim for the purchase price not as an unsecured creditor. This would depend on whether the situation falls within s 49 of the Sale of Goods Act.
You should notify the liquidator of such a clause as soon as possible.
Q11: What if I have money or property entrusted to the company that was not meant to be paid to the company?
The facts of the case may give rise to the creation of a trust over the money or property which means that it will be treated as separate from the assets of the company available for distribution to creditors and contributories.
Possible scenarios of such trust arising include money mistakenly paid to the company before or after it has been wound up, money lent to the company for a specific purpose which failed (Quistclose trust), property held by the company as legal owner under an express trust for a beneficial owner.
Q12: What if I received property or repayment of money from the company when it was insolvent?
Money or property received from a company that is or was insolvent may be clawed back by the liquidator.
S 98 to 103 of the BA may apply if there is any unfair preference or transaction made at an undervalue.
Undervalue transactions are transactions where the company received no value for it or where the value received was much less than it should be. Transactions caught under the provision must have occurred within five years before the winding up application was presented and the company must have been wound up at the time of the transaction or was wound up as a result of the transaction.
Unfair preferences are transactions where a creditor gets special preference such that it is in a better position than it would have been if the company was liquidated. Transactions caught are those which took place within two years before the presentation of the winding up application if the recipient of the preference is an associate, and within six months in all other cases. This applies to floating charges as well subject to certain requirements.
Q13: What if it turned out that the company was already insolvent when it purchased my goods or services?
If the company’s business was carried on before the winding up with the intent of defrauding creditors or for any fraudulent purpose, the person, e.g. director, responsible for or who was party to such activities may be personally liable for the debts or liabilities of the company (s 340 of the CA). There are also criminal consequences. This is known as fraudulent trading.
Whether the purchase of goods or services despite the company being unable to pay amounts to fraud depends on the specific facts. There must be dishonesty involved.
The new s 239 of the Insolvency, Restructuring and Dissolution Act 2018 provides for wrongful trading. Wrongful trading is when an insolvent company incurs debts or other liabilities without reasonable prospect of meeting them in full, or the company incurs debts or other liabilities that it has no reasonable prospect of meeting in full; and that result in the company becoming insolvent. Any person who knew the company was trading wrongfully or as an officer ought to have known that it was trading wrongfully may be held personally liable for the company’s debt or liabilities.
Do note that the COVID-19 (Temporary Measures) Act 2020 may apply to temporarily change the legal position in respect of some of the matters set out above.
Information as at 16 July 2020.