Vulnerable transactions under Singapore law

The rules governing corporate and personal insolvency in Singapore are set out in the Insolvency, Restructuring and Dissolution Act 2018 (IRDA), which includes mechanisms to reverse transactions that unfairly deplete a company's assets prior to insolvency, thereby protecting creditors' interests by allowing the value of the company’s assets to be maximised for distribution to its creditors on insolvency.

The following article summarises the circumstances in which these vulnerable transactions can be unwound for corporate entities subject to Singapore’s insolvency laws.

Transactions at Undervalue (Section 224, IRDA)

A company enters into a transaction with a person at an undervalue if:

• the company makes a gift to that person or otherwise enters into a transaction with that person on terms whereby the company receives no consideration; or
• the company enters into a transaction with someone for consideration the value of which, in money or an asset of a certain worth, is significantly less than the value of the consideration provided by the company.

In a situation where a company is in judicial management or is being wound up and has, within three years from the commencement of judicial management or winding up, entered into a transaction with any person at an undervalue, the judicial manager or liquidator may apply to the Singapore court for an order to restore the position to where it would have been had the company not entered into that transaction.

A transaction will not be set aside if the court is satisfied that the relevant transaction was entered into in good faith and for the purpose of carrying on its business and if, at the time the transaction was entered into, there were reasonable grounds for believing that the transaction would benefit the company. Transactions entered into on an arm's length basis and at prevailing market rates are unlikely to constitute transactions at an undervalue.

Unfair preferences (Section 225, IRDA)

A company gives an unfair preference to a person if:

• that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or other liabilities; and
• the company does anything or allows anything to be done, which has the effect of putting that person into a position that, in the event of the company’s winding up, will be better than the position the person would have been in if this thing had not been done.

If a company is in judicial management or is being wound up, and the company has, within one year from the commencement of judicial management or winding up (extended to two years where the person is connected to the company), given an unfair preference to any person, the judicial manager or liquidator may apply to a Singapore court for an order to restore the position to what it would have been had the company not given that preference.

The court will not make an order under section 225 unless the company, which gave the preference, was influenced in deciding to give the unfair preference by a desire to put the relevant person in an advantageous position (i.e. vis-à-vis the company’s other creditors) in the event of the company’s winding up.

Extortionate credit transactions (Section 228, IRDA)

Regarding the risk accepted by the person providing the credit, a transaction is presumed to be an extortionate transaction if:

• the terms of it are such as to require grossly exorbitant payments to be made for the provision of the credit; or
• it is harsh and unconscionable or substantially unfair.

Where a company is in judicial management or is being wound up and has received credit which is deemed to have been pursuant to an extortionate credit transaction, the judicial manager or liquidator of the company may apply to the Singapore court for an order with respect to the transaction if the transaction is extortionate and was entered into within three years before the commencement of the judicial management or winding up.

An order by the court may, among other things, sets aside the whole or any part of any obligation created by the transaction, varies the terms of the transaction or requires any person who was party to the transaction to pay to the company or to the liquidator any sums paid to that person by the company in connection with the transaction.

Avoidance of certain floating charges (Section 229, IRDA)

A floating charge on a company’s property created within one year of the commencement of judicial management or winding up (extended to two years where the person is connected to the company and where the company at the time of creation of the charge was unable to pay its debts, or became unable to pay its debts as a result of the transaction pursuant to which the charge was created) is invalid except to the extent of the aggregate of the following:

• the value of so much of the consideration for the creation of the charge in money paid or goods or services supplied to the company at the same time at or after the creation of the charge;
• the value of so much of that consideration that consists of the discharge or reduction at the same time as, or after, the creation of the charge of any debt of the company; and
• the amount of such interest (if any) as is payable on the amount falling within the two paragraphs above pursuant to any agreement under which the money was paid, the goods or services were supplied or the debt was discharged or reduced.

Power to disclaim onerous property (Section 230, IRDA)

Where any part of the property of a company consists of (among other things) onerous property such as unprofitable contracts, the judicial manager or liquidator of the company may, by giving notice in accordance with Section 230, disclaim the property. Such a disclaimer will determine (i.e. end) the rights, interests and liabilities of the company in or for the property disclaimed but does not (except as necessary for the purpose of releasing the company from any liability) affect the rights or liabilities of any other person.

Conclusion

Singapore law provides robust mechanisms to protect creditors by reversing vulnerable transactions that occur before insolvency.  These provisions, supported by decisions of the Singapore courts, ensure that transactions detrimental to creditors can be effectively challenged and set aside, and provide creditors with confidence that their interests are protected in the judicial management or insolvency of a company.

For more information on vulnerable transactions under Singaporean law, contact your CMS client partner or these CMS experts.