I believe that as multinational corporations now seek to make repayments of interest and/or principal falling due in respect of bonds or other financial instruments, it is apposite to summarise the principles relating to transactions entered into by a company (pre-insolvency) which may be subject to challenge by a liquidator / judicial manager where the company in question subsequently goes into insolvency.

Under Singapore law, where financially-beleaguered companies make repayments to certain categories of creditors, they should bear in mind that these payments may be challenged (and potentially set aside) if the companies later go into a formal insolvency process.

These are critical concerns a financially-distressed company should take into consideration in making repayment of loans, interest and/or principal to certain creditors or classes of creditors, when other unsecured debts remain unpaid (although it may be subsequently be justified on the basis that the preferential payment was in the company’s best interests for various reasons).

In such a situation, antecedent transactions (i.e. transactions entered into prior to liquidation) will be subject to scrutiny by the liquidator or insolvency administrator.

In Singapore, where a transaction is set aside as an undue preference (either as a unfair preferential payment and/or a transaction at an undervalue, discuss in further detail below), both the directors who procured the making of the payment / transaction and the creditors who received the payment would likely be jointly and severally liable to repay the amount so received (or the difference between the transaction value and the actual market value at the material time) back to the company in liquidation: see Re Living the Link [2016] 3 SLR 0621 – a case which I penned a commentary on in Directors Duties – When Red Is The New Black” accessible here.

There are exceptions to these rules and fixed look-back periods, but largely these are considerations that insolvent companies (or companies on the verge of insolvency) should bear in mind when making selective payments to creditors.

The Legal Principles Applicable to Undue Preferences

At the outset, certain transactions entered into by a company before the commencement of a winding up (i.e. the date a winding up application is filed against a company / the date a resolution is passed to wind up the Company) may be challenged by a liquidator if the company is subsequently wound up (whether by the Court of by the creditors voluntarily). One such method of challenge is by setting aside the transaction in question as an “undue preference” pursuant to Section 329 of Singapore’s Companies Act (the “Act“).

Section 329 of the Act incorporates principles of bankruptcy law into the company law framework, in particular the concepts of setting aside antecedent transactions entered into by a bankrupt on the basis that those transactions constitute:-

  • unfair preferences;
  • transactions at an undervalue; and/or
  • extortionate credit transactions.

Consequently, the Section 329 “undue preference” provision is an umbrella provision incorporating all three of the concepts set out above. If a transaction falls within any of the categories set out above, it is liable to challenge if and when the company which entered into the transaction goes into insolvent liquidation.

Unfair Preferences

Insofar as unfair preferences are concerned, three elements must be satisfied a transaction may be set aside on this basis:-

  • First, the company must have given a preference. This occurs when the company does anything or suffers anything to be done which puts a creditor or a surety or guarantor for any of the company’s debts or liabilities into a position which, in the event of the company’s insolvent liquidation, will be better than the position the creditor would have been in if that thing had not been done. In short, a preference, as the name suggests, is something that puts a creditor ahead of other creditors similarly situated in the debtor’s insolvent liquidation. It does not affect the net asset position of the company, unlike an undervalue transaction, for to the extent that the creditor is paid the company’s liability to the creditor is correspondingly reduced.
  • Second, the company was influenced in deciding to give the preference by a subjective desire to produce in relation to that creditor the preferential effect.
  • Third, the preference was given within the relevant time (i.e. 6 months where the parties are not related, or 2 years where they are not).

It is usually the second ground, i.e. (2) above that is the hardest – evidentially – to establish. If a company grants security interests to a creditor because it is sufficiently pressurised to do so, the likelihood of a Court subsequently holding the granting of the interest in question as an unfair preference is minimized.

A key case in point which illustrates this principle is DBS Bank Ltd v Tam Chee Chong [2011] 4 SLR 948 where the Court of Appeal held that a charge over certain shares granted by Jurong Hi-Tech Industries Pte Ltd (“JHTI”) to DBS (to secure borrowings extended in the past) constituted an unfair preference which was set aside on application by the judicial manager of JHTI.

Critical to the Court’s findings was that JHTI had given the charge in question to DBS because DBS had been supportive of JHTI, that JHTI’s other creditors had exerted equal (if not more) pressure on JHTI to pay its debts but only DBS was given the charge and DBS provided no proper commercial consideration for the charge in that:-

  • JHTI was not placed in a position where DBS would call a default unless JHTI granted the Charge;
  • No new facilities were granted or disbursed by DBS as a result of the grant of the Charge; and
  • DBS had not granted any extension of time for repayment of the facilities made available by it to JHTI in granting the Charge

One main reason for the Court’s decision in this case was the credibility of the parties’ respective witnesses upon cross-examination. DBS’ representative gave inconsistent and incoherent reasons why the charge was granted whereas JHTI’s representative (whose evidence was ultimately preferred) stated that the charge was given because of the good relationship between DBS and JHTI.

The lesson to be learned is that an operating company on the verge of insolvency (or already insolvent) should not make unilateral repayment to particular creditors out of favour or for any other reason other than having no other alternative but to do so, e.g. fear of legal proceedings being commenced. Even then, the transaction may still be liable to be set aside if it is shown that there was a desire to improve that particular creditor’s position.

Transactions at an Undervalue

Alternatively, the granting of security may also arguably be set aside by a Court as a transaction at an undervalue. Traditionally, the granting of security interests in property could only be set aside as an unfair preference (this is the position taken in the English High Court decision of Re MC Bacon Ltd [1990] BCC 78), but the English Court of Appeal has subsequently held (in Hill v Spread Trustee Co Ltd and another [2007] WLR 2404) that the granting of a security interest may also constitute a transaction at an undervalue.

In Singapore, the position is yet to be definitively settled. That said, in a recent unreported Singapore High Court decision (Encus International Pte Ltd (In Compulsory Liquidation) v Tenacious Investment Pte Ltd and Ors [2016] SGHC 50 (“Encus”)), Prakash J (as her Honour then was) mentioned in obita that she preferred the position taken in Hill v Spread Trustee, i.e. that the granting of a charge can constitute a transaction at an undervalue.

If the granting of a charge is ultimately held to constitute a “transaction” (in the context of transactions at an undervalue), the security interests granted by an insolvent (or potentially insolvent) company may potentially be set aside on this ground if it can be shown that:-

  • the security interests granted constituted a gift;
  • the company did not receive consideration in exchange for the granting of the security; or
  • the company received significantly less consideration in money or money’s worth than what the third party received in consideration for the security interests in question. In short, the transaction must be a commercially unbalanced one.

It is worth noting that the “look back” period, i.e. the period in which transactions may be challenged as transactions at an undervalue, is 2 years prior to the date the winding up is deemed to commence, which is the date on which the winding up application is made – notthe date the winding up order is made.

Where the party with whom the transaction was made is a related party, this extends to 5 years. This is in contradistinction to the look-back period for unfair preferences, which is only 6 months or 2 years (in the latter case where the party to whom the preference was given was a related party).

If the a company wishes to defend its position on this front, it will have to show that the any additional security interests that were granted by the company to the third party was granted in good faith for valuable consideration for the company’s benefit (e.g. to allow the company to continue business).

These are the elements needed to establish the statutory defence under Regulation 6 of the Companies (Application of Bankruptcy Act Provisions) Regulations (Cap. 50).

Extortionate Credit Transactions

There is little local academic authority regarding transactions which are set aside on this basis. Ultimately though, a liquidator may challenge a transaction as being an extortionate credit transaction if it was entered into within 3 years before the commencement of an insolvent winding.

A transaction is extortionate if, having regard to the risk accepted by the person providing the credit, it requires grossly exorbitant payments to be made (whether unconditionally or in certain contingencies) in respect of the provision of the creditor, or it otherwise grossly contravenes ordinary principles of fair dealing.

The Company’s Best Interests

In the usual circumstance, directors owe fiduciary duties to act inter alia in the company’s best interests. This generally means – amongst other things – compliance with laws, running the company’s business for profit and ensuring that the company complies with all regulatory requirements.

However, where a company is insolvent (or on the verge of insolvency), the director’s duty to act in the company’s best interests translates to acting in the best interests of the unsecured creditors as a whole. This means that no creditor or particular class of creditors should be preferred to the detriment of the collective.

Disregarding the creditors’ collective best interests in an insolvent scenario therefore leads to potential allegations of breaches of fiduciary duty, for which directors and fiduciaries would be held personally liable if the allegations are proved.


If you – in your capacity as a director or senior management of the company –  that the company is insolvent (or on the verge of insolvency), payments to creditors should be carefully considered before being made.

Whilst certain payments are likely to be appropriate or in fact necessary and unavoidable (e.g. payment of utilities, or such other fundamental liabilities as to keep the business going), selective payments to particular creditors exposes the company, director(s) and receiving creditor to subsequent court action by a liquidator if the company goes into insolvent liquidation.

It would therefore be prudent to seek professional legal advice as to what transactions or payments are acceptable, and which are not.

3 August 2017

*The contents of this article represent the views of the author alone from a Singapore law perspective and are subject to copyright protection under the laws of the Republic of Singapore (as may from time to time be amended). No part of this article may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed and/or broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of the author.

Please note that whilst the information in this article is correct to the best of the author’s knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for and/or in respect of any particular course of action as such information may not suit your specific business, operational and/or commercial requirements. You are therefore urged to seek legal advice for your specific situation. All the author’s rights are expressly reserved and nothing herein shall be construed as a waiver thereof.