SEARCHHome > Laws of Singapore > Commercial Laws > Singapore Company Law CHAPTER 16SINGAPORE COMPANY LAW Section 1Introduction Section 2Incorporation and its Consequences Section 3Corporate Governance Section 4Enforcement of Corporate Rights Section 5Shareholder Remedies Section 6Shares Section 7Debentures and Charges Section 8Companies in Distress Section 9Winding up SECTION 1 INTRODUCTION 16.1.1 InSingapore,companiesareprincipallygovernedbytheCompaniesAct(Cap50,1994RevEd)(hereinafterthe Act). It shouldbe notedthoughthat specifictypesof companiesmay, inaddition totheCompaniesAct,beregulatedbyotherstatutes.Forexample,insurancecompaniesandbanksarealsoregulatedbytheInsuranceAct(Cap142,1994RevEd)andtheBankingAct(Cap20,1994RevEd)respectively.Limitedliabilitypartnerships,whichdespitetheirnamearecompanies,aregovernedbytheLimited LiabilityPartnership Act(Act5of 2005).Certainprovisionsin otherstatutessuchas theSecuritiesand Futures Act (Cap 289, 1994 Rev Ed) are also relevant to companies. 16.1.2 It should also be noted that the statutory provisions governing companies are supplemented bythe common law. Return to the topSECTION 2 INCORPORATION AND ITS CONSEQUENCES Obligation to I ncorporate 16.2.1Undersection 17(3)ofthe Act,a businessorganizationthat hasmorethan 20members must beincorporatedasa company.However,thisrequirementdoes notapplytoapartnershipofpersonscarryingonaprofessionthatisformedinpursuanceofsomeotherwrittenlawinSingapore(section17(3)oftheA ) Th b fh l lf i h db h L lP f i A (C 161 1994Singapore Company Law Chinese Bahasa Indonesi anAct).ThusmembersofthelegalprofessionwhoaregovernedbytheLegalProfessionAct(Cap161,1994Rev Ed) may establish partnerships of more than 20 partners. Registration of a Company 16.2.2As ageneral rule, any person may, upon lodgment ofthe requisite documents andpayment of theprescribedfee,registeracompanyinSingapore.Themandatorydocumentstobelodgedundersection19(1)oftheActarethememorandumandarticlesofassociation.Thememorandumandarticlesofassociationaretheconstitutionaldocumentsofthecompany.Undersection22(1)oftheAct,thememorandumofassociationmustprescribethenameofthecompany,theamountofitssharecapital(ifany)andwhethertheliabilityofthemembersofthecompanyislimitedorunlimited.Thearticlesofassociation arethe regulationsof the companyand containprovisions relating to how thecompany isto begoverned. Where the memorandum and the articles are in conflict, the former will prevail. 16.2.3Oncethememorandumofthecompanyisregistered,theRegistrarwillissueanoticeofincorporationstating thatthecompany is,fromthedate specifiedin the notice,incorporatedand thetypeofcompanyitis,i.e.whetheritisalimited orunlimitedcompanyandwhereapplicablethatitisaprivatecompany see section 19(4) of the Act. Effects of I ncorporation 16.2.4 Section19(5) of the Act sets out the general effect of incorporationwhich is that the company isa body corporate with all such powers as flow from suchan entity. The company may sue and be sued in itsownname,ithasperpetualsuccessioninthatitcansurviveindefinitelyuntilitiswoundup,itmayholdland, and the liability of its members is limited in the event the company is wound up. 16.2.5Caseshaveestablishedthatasabodycorporateacompanyhas adistinctpersonalitythatisrecognizedbylaw.Inotherwords,acompanyhasanexistenceandidentityseparatefromthatofitsmembers see Salomon v ASalomon & Co Ltd[1897] AC 22;Lee v Lees AirFarming Ltd [1961] AC12. Themostimportantconsequenceofthis isthatthedebts andobligationsincurredby thecompanyareits ownanditsmembersdonotsharethecompanysliabilities.Creditorsofthecompanymayonlylooktothecompanyfor paymentofdebts owedtothem bythecompany. Ifthecompany isinsolvent and cannotpayitsdebts,thecreditorswillhavetobearthelosshoweversolventthecompanysindividualmembers maybe. All that themembers of a company are obliged todo is to contribute the amountthat remains unpaid ontheshares thatthe membershave subscribed. This obligationis owedto thecompany, notthe creditorsofthecompany.Assuch,if theshares wereissuedonafullypaidbasis,or havealreadybeenfullypaid,themembershave no furtherliabilitytothecompany.Thus,whenspeakingoflimitedliabilityitisimportanttonotethatwhatismeantisnotthatthecompanysliabilityislimitedbutthatthemembersliabilitytocontribute to the company is limited to the share capital for which the members have agreed to subscribe. Lifting the Veil of I ncorporation 16.2.6Whileanincorporatedcompanyhasapersonalityseparatefromthatofitsmembers,therearecircumstanceswhenthecourtswillignoresuchseparatepersonalityandtreatthecompanyanditsmembers (orofficers) asone for limited purposes. Thus, forexample, there may be circumstanceswhen thecourts will hold the members of a company liable for debts incurred by the company. When the courts do so,itissaidthattheveilofincorporationisliftedorpierced.Generally,thecasesofveilliftingfallintotwocategories: by statute and at common law. Statutory Exceptions to the Separate Personality Doctrine 16.2.7ItisopentoParliamenttolimittheeffectsofincorporationbyasuitablywordedstatutoryprovision.One ofthemoreimportant statutorylimitationson theseparatepersonalitydoctrine arisesundersections339(3)and340(2)ofthe Act.Thecombinedeffectofthoseprovisionsisthat,wheredebtsarecontractedwithoutanyreasonableorprobableexpectationthatthecompanywouldbeabletopaythedebts, anyofficer ofthe company whowas aparty to thecontracting ofsuch debts isguilty ofan offenceandmay, afterconviction, bemade personallyliableby thecourt for the payment ofthe wholeor any partof such debts. 16.2.8Another importantexception is found insection 340(1) of theAct. Where it appearsin the courseofthewindingupofacompanythatanybusinessofthecompanyhasbeencarriedonwithintenttodefraudcreditorsof thecompanyorcreditorsofany otherpersonorforanyfraudulent purpose,thecourtmaydeclarethatanypersonwhowasknowinglyapartytothecarryingonofthebusinessinsuchamannershallbepersonallyliableforalloranyofthedebtsorliabilitiesofthecompanyasthecourt maydirectdirect. 16.2.9 Athirdimportantexceptionariseswheredividendsarepaideventhoughtherearenoavailableprofitsout ofwhich topay suchdividends seesection 403(2)(b)ofthe Act.Since dividendsmay only bepaidwherethere areprofitssoasnottounduly prejudicecreditorsofthecompany,a directorormanagerofacompany whowilfully paysor permitsthepayment of adividendinthe absenceofprofitswill beliabletothecreditorsofthecompanyfortheamountofthedebtsduetothemtotheextentbywhichthedividends exceed the available profits. Common Law Exceptions to the Separate Personality Doctrine 16.2.10Personsincorporatecompaniesforvariousreasonsbut,undoubtedly,oneofthereasonsistoinsulatethemselves frompersonal liabilityshould thebusiness fail. Accordingly,the merefact thatmembersorofficersofacompanyutilizethecorporatevehicletoshieldthemselvesfrompersonalliabilityisno-reason to disregardthe companys separate personality seeAdams v Cape Industries plc [1990]1 Ch 433.However, the positionis different where themembers or officers ofa company abuse thecorporate form forimproper means. 16.2.11Thus,ifanindividualalreadyhasexistinglegalobligations,butattemptstousethecorporatevehicle toevade such obligations,the courts willignore the companys separate personality. Forexample, ithasbeenheldthata personwhohasagreedtosellahousecannotavoidhiscontractualobligationsbytransferringthehousetoacompany.Bothheandthecompanywereorderedtospecificallyperformthecontract eventhoughthecompanywasnotapartytothecontractseeJonesvLipman[1962]1WLR832. 16.2.12 Similarly,ifacompany isusedto perpetratea fraudulentact, thecourtswill treatthecompanyandthosebehinditasoneandthesame.Thus,ifacompanyhasbeenincorporatedtodefraudinnocentinvestors,thecourtmayholdthepromoterof thecompanyliableeventhoughthepromoterandcompanyare separate persons see Re Darby [1911] 1 KB 95. Return to the topSECTION 3 CORPORATE GOVERNANCE Separation of Ownership and Management 16.3.1 Section157Aofthe Actstatesthat thebusinessofthecompanyshallbe managedbyorunderthedirectionofthedirectors.The directorsmayexerciseallthepowersofacompanyexceptanypowerthatthe Actorthememorandumandarticlesofthecompanyrequirethecompanytoexercise ingeneralmeeting.Thisreflectsoneofthefeaturesofcompanylaw,namely,thatitcanfacilitateaseparationofownershipandmanagement.Themembersorshareholderswhoownthe companyneednotnecessarily beinvolvedinitsmanagementasdirectors. Whileinsomecompanies,particularlysmallones,the membersofthecompanymayalsobeinvolvedinitsmanagement-eitherasdirectorsorinsomeotherexecutivecapacity-inmanyothercompanies,themembersarenotinvolvedinmanagement.Instead,suchcompaniesaremanagedbyboardsofdirectorsinwhichmanyofthedirectorsarenotmembersofthecompany. Even when the directors are members ofthe company, their shareholdings in the company may berelativelysmall.Itshouldalsobenotedthat,insuchcompanies,eventhismanagementbytheboard mayoften be notionalasthemajorityofthemembersoftheboardmaynotbefull-timedirectorsbutarenon-executive directors. In suchcompanies, the day-to-day management of the company willbe in the hands oftheseniorexecutiveofficersof thecompany,someofwhommaybeboardmembers. Theroleofboardsinsuch companies is then to exercise a general oversight but not to be involved in executive matters. Statutory Duties 16.3.2Undercommonlaw,directorsareregardedasfiduciariesandthereforeowefiduciarydutiestotheircompanies.Atthesametime,theActalsoprescribescertaindutiesondirectorswhichmirrortheirgeneral dutiesunder the common law.One important provision issection 157(1) of theAct which prescribesthata directorshallat alltimesact honestlyandusereasonable diligenceinthe discharge ofthe dutiesofhis office.Section 157(2)of theAct goes onto statethat anofficer or agentof acompany shallnot makeimproperuse ofany informationacquired by virtueofhis positionasanofficeroragent ofthecompanytogain,directlyorindirectly,anadvantageforhimselforforanyotherperson,or tocausedetrimenttothecompany. 16.3.3 Section 157 of theAct does not purport to bean exhaustive statement ofthe law relatingto thedutiesthatdirectorsowetotheircompanies.Inthisregard,section157(4)providesthatthesection isinadditiontoandnotinderogation,ofanyotherruleoflawrelatingtothedutyorliabilityofdirectorsorofficersofacompany.Theeffectofsection157isto renderthosedutiesmandatorywhilethedutiesatcommonlawarecapable ofexclusionbyagreementbetweenthecompanyand itsdirectors,assumingthatthecompanyhasmadesuchadecisionindependentlyoftheinteresteddirectors.Undersection157(3)oftheAct, abreachof sections157(1) and157(2)renders theofficeror agentliable tothecompany foranyprofit made oranydamage sufferedbythe companyas aresultof thebreach.At thesametime, abreachofthesesectionsisanoffence,andtheofficeroragentshallbeliableuponconvictiontoafinenotexceeding $5,000 or to imprisonment for a term not exceeding one year. Duty at Common Law to Act in the Best I nterests of the Company 16.3.4In theexerciseoftheirduties,directorsmustactbonafideinwhat theyconsiderisinthebestinterests of the company. When the acts of directorsare challenged, the courts do not substitute their ownjudgmentforthatofthedirectorsseeECRCLandPteLtdvWing OnHoChristopher[2004]1SLR105;VitaHealthLaboratoriesPteLtdvPangSengMeng[2004]4SLR162.Allthatthecourtsareconcernedaboutiswhetherthedirectorshaveactedhonestlyinwhatthey(andnotthecourts)consideredtobeinthe companys best interests.Of course, if thedecision isone that no reasonableboard wouldhave arrivedat, this casts serious doubt on the bona fides of the directors. 16.3.5 It shouldbenotedthoughthat,whilethedirectorsoverridingdutyistothecompany,section159 of the Act provides that in exercising their powers, directors are entitled to have regard to the interestsofthecompanysemployeesgenerally,aswellastheinterestsofitsmembers.Thatdirectorsmayhaveregard tothe interestsof itsmembers isalso the positionat commonlaw sincethe memberscollectively doinasensecomprisethecompanynotwithstandingthecompanysseparatepersonalityseePetersAmericanDelicacyCoLtdvHeath(1939)61CLR457; GreenhalghvArderneCinemasLtd[1951]Ch286.Theentitlementtohaveregardtotheinterestsofemployeesisalsoa sensibleonesinceadvancingtheinterests of employees will often be in the best interests of the company. 16.3.6Therearealsocircumstanceswheredirectorsmusthaveregardtotheinterestsofcreditors.Generallyspeaking,creditorshavenointerestinthecompanysassets.Acreditorwhowishestoenforcethedebtowingtohimfromthecompanymustbringaclaimagainstthecompany.In theabsenceofaninterestin thecompanys assets,the directorsof a company donot haveto takethe interestsof creditorsinto account whenmaking corporate decisions. However,when a company isunable to pay itsdebts, and istherebyeffectivelyinsolvent,theinterestsofitscreditorsmustbetakenintoaccount.Thisisbecausecreditors of an insolvent companyare entitled to appoint a liquidator to get in theassets of the company towhichthecreditorshaveapriorclaimbeforethemembersofthecompany.Accordingly,insuchcircumstances, directorsmust ensure thatthe affairs ofthe company areproperly administered andthat itspropertyisnotdissipatedorexploitedtotheprejudiceofthecreditorsseeWinkworthvEdwardBaronDevelopment Co Ltd [1987] 1 All ER 114. Duty at Common Law to Avoid Conflicts of I nterest 16.3.7Asafiduciary,adutyofloyaltyisimposedonadirectorvis--visthecompany.Asaresult,adirectoris obligednottoplacehimself inapositionwherehisdutytothecompanymayconflictwithhisowninterestsseeChewKongHuatvRicwil(Singapore)PteLtd[2000]1SLR385;Kumagai-ZeneconConstructionPteLtdvLowHuaKin[2000]2SLR501.Oneparticularapplicationofthisdutyisthatadirector isnot permitted, withoutthe fully informedconsent ofthe company, tomake a profitin connectionwiththedirectorsposition. Thus,ifthedirector comes acrossabusinessopportunitywhiledischarginghisroleasadirector,hecannotpersonallytakeadvantageofsuchanopportunityunlessthecompanyhas,withfullknowledgeofthefacts,permittedhimtodoso.Thispermissionmaybe givenbytherestoftheboard(assumingtheotherboardmembersgivingapprovaldonotstandtobenefitpersonally)orbythemembers in general meeting. Duty at Common Law to Act for Proper Purposes 16.3.8 Themanagementofacompanyisgenerallyvestedintheboardofdirectorsandtheboardwilloftenhaveothermorespecificpowerssuchasthepowertoissuesharesundersection161oftheAct,providedthatthedirectorshave obtainedaspecificorgeneralmandatetodoso.Suchpowersmustbeexercisedfor properpurposes. Evenif directorshave actedin good faith inwhat theybelieve isin thebestinterestsofthecompany,theymayhaveexercisedcertainpowersin animpropermanner.Forexample,ithasbeenheldthat,wherethe powertoissueshares wasusedtofacilitate atakeover bidforacompany,that wasnot aproper exercise ofsuch apower even thoughthe directorsfelt that theywere acting in thecompanys best interests see Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. Effect of Breach of Fiduciary Duties 16.3.9Ifa directorplaceshisowninterestsabovethoseofthecompany,thedirector willbeliableforany losscaused tothe company. Ifthe directorhas profitedfrom his positionwithout theinformed consentofthecompany, thedirectormayhavetoaccount for theprofitstothecompany. Where thedirectorhascontractedwiththecompany,e.g.thedirectorhassoldanassettothecompany,thecompanymaybeabletoavoidthe contractifthecontractwiththecompanywasenteredintoinbreachofthedirectorsfiduciaryobligationstothecompany.Whereathirdpartyhasenteredintoacontractwiththecompanyknowingthatthedirectorsofthecompanyhaveacted improperly,thecompanymayalsobe able toavoidthe contract vis--vis the third party. Return to the topSECTION 4 ENFORCEMENT OF CORPORATE RIGHTS The Proper Plaintiff Rule 16.4.1 Asacompanyhasapersonalityseparatefromthatofitsmembers,amemberofthecompanycannot sue to enforce rights that belong to the company. This is known as the proper plaintiff rule, namely,that thecompany is the properplaintiff inrespect ofany rightsthat ithas see Fossv Harbottle(1843) 2Hare 461; Ng HengLiat vKiyue Co Ltd[2003] 4SLR 218.Where acompany hasrights tobe enforced,or isbeing sued,the usual bodythat is empoweredto decidewhether the companyshould either bringan actionor defend the claim is the board of directors in whom the power of management is usually vested. Derivative Actions 16.4.2Notwithstanding the proper plaintiff rule, there may be occasions wherea member of the companyis entitledto bring anaction on behalf of the company. Wherea member does this,the action isreferred toasaderivativeactionastherightisderivedfromthecompany.Thememberisnotsuingtoenforceanyrightsthatbelongtohimpersonally.Insuchactions,thecompanyisincludedasanominaldefendantsothat any decision of the court will bind the company as well. 16.4.3Amembermaybringaderivativeactioninrespectofawrongdonetothecompanywherethewrongdoeris theperson whohas controlofthecompanyand isinaposition,orhas usedsuchcontrol,topreventaproperactionfrombeingbroughtagainsthim.Thewrongdonemayhavearisenbecausetheperson incontrol of the company has appropriatedthe companys assetsfor himself, orit may consistof anabuseofthepowersvestedinthewrongdoers, e.g.wherethemajorityshareholdersattempttousetheirvotingpowerinanillegitimatemanner. Insuchasituation,thewrongdoerswouldusetheircontrolofthecompanytopreventaclaimfrombeingbroughtagainstthemselves.Accordingly,amemberwillbeallowedtoinstitute aderivativeaction againstthewrongdoers ifthemember isbringingthe claimbonafide forthebenefitofthecompanyincircumstanceswherethereis nootherremedyavailable.Iftheactionisbeingbrought for anulterior motive or in badfaith, the court is entitledto take that into account in determining ifit is in the best interests of the company that the action should proceed. Statutory Derivative Action 16.4.4In additionto thecommonlaw derivativeaction discussedabove, sections216A and216B oftheActmake provisionfora statutoryderivativeaction. Thisaction ispotentiallyavailable toanymember ofacompany,the Ministerof Finance(in certain cases),orany otherperson whointhe discretionof thecourtis aproper personto makean applicationunder the section.Such personsare potentialcomplainants undersections 216A and 216B. 16.4.5 Section 216A(2)of theAct provides thata complainantmay applyto the courtfor leaveto bringanactioninthenameandonbehalfofthe companyorinterveneinanactiontowhichthecompanyisaparty forthepurposeofprosecuting,defendingordiscontinuingtheactiononbehalfofthecompany.Thecourtwillonlygrantleaveifthecourt issatisfiedundersection216A(3)oftheActthatthecomplainanthas given14 daysnotice to thedirectors of thecompany ofthe complainants intentionto applyfor leave;thecomplainantisactingingoodfaith;anditappearstobeprimafacieintheinterestsof thecompanythattheactionbebrought,prosecuted,defendedordiscontinued.Oneadvantageofthestatutoryderivativeaction isthatif thecourt authorizesthebringing oftheaction, it can orderthecompany topayreasonablelegalfeesanddisbursementsincurredbythecomplainantinconnectionwiththeaction. Underthe common law derivative action, the risk of legal costs falls on the person bringing the action. 16.4.6 Section 216B(1) states that an application under section 216A shallnot be stayed or dismissed byreason only that it is shown that an alleged breach of a right or duty owed to the company has been or maybe approvedby the membersof the companyHowever, evidenceof approval bythe members maybe takeninto account by the court in making an order under section 216A.Return to the topSECTION 5 SHAREHOLDER REMEDIES The Oppression Remedy 16.5.1Inadditiontotheabilitytobringacommonlaworstatutoryderivativeactiontoprotectthelegitimateinterests of the company,there aretwootherimportant remediesopentoshareholders whofeelthattheirinterestsarebeingprejudiced.Thefirstarisesundersection216oftheAct.Section216(1)providesthatanymemberorholderofadebentureofthecompany,ortheMinisterofFinanceincertaincases, may apply to thecourt for an order that the affairs of the companyare being conducted in a manneroppressivetooneormoreofthemembersorholdersofdebentures,orindisregardoftheirinterestsasmembers, shareholders orholders of debentures of the company.A similar application may be madeif an actofthecompanyhasbeendoneoristhreatenedwhichunfairlydiscriminatesagainstorisotherwiseprejudicialto oneor moreof themembers orholdersof debentures.Section 216is commonlyreferred toasthe oppression remedy. 16.5.2 Wheresuch anapplication ismade, andthe courtafter hearingthe evidenceis satisfied that thecomplaint is a validone, the court may, with aview to bringing an end orremedying the matters complainedof, make suchorder asit thinksfit.Such ordersmay includedirectingor prohibitingany actor cancelingorvaryinganytransactionorresolution;regulatingtheconductoftheaffairsofthecompanyinfuture;authorizingcivilproceedingstobebroughtinthenameofthecompany;providingforthepurchaseoftheshares and debenturesof the company by other members or holders of debentures or thecompany itself; oreven winding up the company. 16.5.3Section216oftheActis intendedtoproviderelieftomembersorholdersofdebentureswherethoseincontrol ofthecompanyexhibitconductthat isequivalenttoabuseorwrongdoing. Thecourtsarenotconcernedwhetheracompanyiswellmanaged.Businessdecisionsarefortheboardtomakeandthecourtswill notgenerallysecondguessbusinessdecisions.Norarethecourts concernedthatamemberorsomemembersarefrequentlyoutvoted.Itispart andparcelofcorporateadministrationthatdecisionsaretaken bythe majority.What the courtsare concerned withis whetherthe affairs ofthe companyare beingrun bythose in control insuch a waythat there is avisible departure fromthe standards of fairdealing anda violation of the conditions of fair play which a shareholder is entitled to expect see Re Kong Thai Sawmill(Miri)SdnBhd[1978]2MLJ227.Thismay arisewherekeyshareholdersareexcludedfrommanagement;whereshareholdersaredeprivedofinformationaboutthecompany;wherethedominantmembersareclearly preferringtheir own interests; andwhere the patriarch ofa family company behaves in an autocraticmanner, just to give some common examples. Winding Up on the J ust and Equitable Ground 16.5.4Undersection254(1)(i)oftheAct,thecourtmaywindupacompanywhereitisjustandequitabletodoso.Thisisanimportantremedyforshareholdersasitprovidesameansfordisgruntledshareholders to use the winding up process to disengage from a company. 16.5.5Thejustandequitablegroundforwindinguphasbeenusedinanumberofdifferentcircumstances.Forexample,wherethemainobjectofthecompanycannotbeachievedorhasbeendeparted from,aggrieved membersof thecompany may petition for thecompany tobe woundup. Similarly,a company may be wound up if it engages in actsthat are entirely outside of what can fairly be regarded ashavingbeenwithinthegeneralcontemplationandunderstandingofthememberswhentheybecamemembersofthecompany.Anothersituationwhere thejustandequitablegroundhasbeenusediswherethecompanysbusinesshasbeencarriedoninafraudulentmanner.Inaddition, wherethecompanyisaquasi-partnership,inthattheway thebusinessisrunresembles howapartnership ismanageddespitetheuseofthecorporateform,andfurther,trustandconfidenceamongthemembershasbeenirretrievablydamaged,thecourtmayorderthewindingupofthecompanysince the memberscannolongerworkwithone another. Return to the topSECTION 6 SHARES 16.6.1Ashareistheinterestofashareholder inthecompanymeasuredbyasumofmoney,forthepurposeof liabilityin thefirstplace, andof interestinthe second,but alsoconsistingof aseries ofmutualcovenants entered intoby all the shareholders betweenthemselves in accordance with section39(1) of theAct see Borlands Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279. 16.6.2Asmentionedearlier,theliabilityof amember/shareholderistocontributetothecompany onlythatamountunpaidonthesharestakenupbythemember/shareholder.Thisiswhatismeantbylimitedliability.Ashareholderisentitledtoparticipateinthelifeofthecompanyonthetermssetoutinthecompanysconstitutionaldocuments,namely,thememorandumandarticlesofassociation,andtotheextent allowed by the Act.The exact rights of the shareholder will depend onthe terms of the memorandumandarticles.Generally,allshareholderswillbeentitledtoapro-ratashareofanydividendsthataredeclared and paid. Where a companyis wound up,again all shareholdersare generally entitled toa pro-ratashareofanyassetsremainingafterthecreditorsofacompanyhavebeenpaid.Shareholdersarealsoentitled to appoint and remove the directors of the company. 16.6.3Generallyspeaking,therearetwobroadclassesofsharesordinarysharesandpreferenceshares. Preferenceshares, as the namesuggests, are shares thatconfer some preference onthe holders ofthoseshares.That preferencemaybeintheformof dividends orreturnofcapital. For example,thetermsofapreferentialsharemayprovidethattheholdersofthosesharesareentitledtoaparticularrateofdividend before any dividends may be paid to holders of ordinary shares. Maintenance of Capital 16.6.4 A company under Singapore law is requiredto maintain its capital in the sense that it cannot, as ageneralrule,return capitaltoitsmembers. Thisgeneralruleis intendedtoprotectcreditors. Creditors ofacompany are said to givecredit to the companyon the faiththat the capital ofthe company willbe appliedonlyfor thepurposes ofthe businessand therefore have aright to insist thatsuch capitalbe keptand notreturned to the shareholders see Re Exchange Banking Co (1882) 21 Ch D 519. 16.6.5Thisisnottosaythatmembersofacompanycannotobtainanyreturnontheirinvestment.Indeed,if acompany makesprofitsin aparticular year,the companymaypay dividendsto itsshareholdersoutoftheprofitsmade.Therulesrelatingtocapitalmaintenance alsodonotmeanthatmembersofthecompanymust continueto contributeto thecompany whentrading losseshave occurred thereby depletingthecompanyscapital.Amembers liabilitytothe companyislimitedonlytotheamounthehasagreedtocontributetothecompanywhenthesharesareissuedtohim.Therulesrelatingtocapitalmaintenancesimplymeanthat,absentprofits,acompanymustnottakeanystepsthatineffectreturncapitaltoitsshareholders. 16.6.6 Arising from this general principle, the following 5 propositions may be made: (i) acompany maynot purchase itsown shares orthose ofits parent company seesection 76(1)(b) of the Act;(ii) acompany may not lend money on thesecurity of itsown shares orthose of itsparent company- see section 76(1)(c) of the Act;(iii) acompany cannotgive financial assistanceto athird partyto purchasethe companysshares orthose of its parent company see section 76(1)(a) of the Act;(iv) a company cannot pay dividends except out of available profits;(v)acompanycannotreduceitscapitalorotherwisereturnassetstoitsmembers,excepttotheextent the Act permits this. 16.6.7One ofthe exceptions now permittedby the Act isthat a company may,in certain circumstancespurchaseitsownshares.Suchpurchasesmustbeapprovedbythecompanyingeneralmeeting.Undersection 76B(1) of the Act, the articles ofthe company must expressly allow such share buy-backs. Paymentfor such purchases must be made out of the companys distributable profits see section 76F(1) of the Act.Thispreservesthepositionofcreditorssincesuchprofitscouldinanyeventhavebeen distributedintheformofdividendstoshareholders.Inaddition,directorsandmanagersofacompanyshouldnotauthorizeanybuy-backsiftheyknowthatthecompanyisinsolvent orwillbeinsolventasaresultofsuchabuy-back see section 76F(3) of the Act. Reduction of Capital 16.6.8Notwithstandingthecapitalmaintenancerules,theActpermitsareductionofcapitalincertain 16.6.8Notwithstandingthecapitalmaintenancerules,theActpermitsareductionofcapitalincertaincircumstances. The most important provision is section 73(1) of the Act, whichstates that a company may,ifsoauthorizedbyitsarticlesbyspecialresolution,reduceitssharecapitalinanywayand,inparticular,without limiting the generality of the foregoing, may do all or any of the following: (i)extinguish or reduce the liability on any of its shares in respect of share capital not paid up;(ii) cancel any paid-up capital which is lost or unrepresented by available assets;(iii) pay off any paid-up share capital which is in excess of the needs of the company. 16.6.9 Any reduction must be approvedby the court and, in certain circumstances, creditors are entitledto object to the reduction see sections 73(1) (4) of the Act. Return to the topSECTION 7 DEBENTURES AND CHARGES 16.7.1 Acompanywillfrequentlyhaveto borrowmoneyforitsbusinessoperations. Oftenwhenitdoesso,adocumentknownasadebenture willbecreated. Simplyput,adebentureisa documentthat eithercreates a debt or acknowledges it see Levy v Abercorris Slate and Slab Co (1887) 37 Ch D 260. 16.7.2Whenacompanyborrows money,itwill oftengivesecuritytoitscreditorfortheloan.Whereadebtorgives securitytoacreditor, thecreditorobtains aproprietaryinterest inthepropertyof thedebtoroverwhichsecurity hasbeengranted.Thisproprietaryinterest inthoseassetsallowsthe creditortohavepriority tothoseassetsaheadof ordinarycreditorsofthedebtorshould thedebtornotbeable topay itsdebts. One commonform of security that companies provide toits creditors is a chargeover its assets. Thedebenturethatcreates oracknowledgesthedebtwill frequently alsocontainthetermsof thechargethatis created. 16.7.3 A chargeis a non-possessory form ofsecurity, i.e.the validityand efficacy ofthe securityis notdependentonthesecuredcreditorhavingpossessionofthesecuritygiven.Forexample,acompanythatneeds to use the machinery in its factory can still grant security by way of a charge over such machinery tothe bankthat hasprovided the financingto purchasethe machinery. The bank neednot takepossession ofthe machinery forthe charge to be effective. Beingnon-possessory in nature, the charge canalso be takenover intangible assets such as shares and book debts. 16.7.4 A chargearises where, ina transactionfor value, thecompany and itscreditor showan intentionthat property,existing orfuture, willbe madeavailable assecurity forthe paymentof adebt, and that thecreditorshallhaveapresentrighttohavesuchpropertymadeavailableassecurityeventhoughthepresentlegalrightcanonly be enforcedatafuturetime,andthoughthecreditorobtainsnolegalrightofpropertybutonlyarightatsomefuturetimetohavethesecuritymadeavailabletothecreditorseeNational Provincial and Union Bank of England v Charnley [1924] 1 KB 431 at pp 449-450. Fixed and Floating Charges 16.7.5 Company charges may be fixed orfloating. A fixed charge is one thatattaches to specified assetsthat are presently owned bythe chargor or that may be acquired in the future,e.g. a company may grant afixed charge over allthe machinery presently in its factory and anymachinery subsequently acquired for thefactory.Asthefixedchargeimmediatelyattachestothespecifiedassets,eitheratthecreationofthecharge orupon lateracquisition, thecompany cannotdispose of thecharged assetsto athird party.If thecompanydoes so,this isabreachofthetermsof thechargeandthethird partywill notobtaingoodtitleto theassets, unless thethird party hasprovided value for the purchase and didnot know ofthe existenceof the fixed charge. 16.7.6Afloatingchargeontheotherhandisasecurityinterestthatdoesnot,atitsinception,specificallyattachtoany assetsofthechargorcompany.Thechargeissaidtofloatovertheassetsinquestionuntilsomeactoccurswhichcausesthechargetoattachtotheassets.Fromthattime,thechargeeffectivelybecomes afixedcharge.Theactswhich causethe floatingchargetocrystallize,i.e.toattachtotheassets,maybecontractuallyprovidedforinthedebenture.Thus,thepartiesmayprovidethatin certain circumstancesthefloating chargewillautomatically crystallizewithouttheparties havingtodoanythingelse,orthatincertaincircumstancesthechargeemaygivenoticeofcrystallizationtothecompany thereby causingthe charge to crystallize. Floatingcharges may also crystallize inother ways, e.g.if the company goes into liquidation or if it ceases to be a going concern. 16 7 7Theadvantageoffloatingchargesisthat theycanbetakenoverassetswhich asaclass are16.7.7Theadvantageoffloatingchargesisthat theycanbetakenoverassetswhich,asaclass,areconstantlychanging. Forexample, wherethe assetsof acompany largelycomprise perishablegoods orrawmaterials,itisimpracticaltoobtainafixedchargebecausethegoodshavetobesoldwithinarelativelyshortperiod orareintended to beused inthemanufacturingprocess. Ifafixed chargeoversuch assetsiscreated,it will be extremelyinconvenient forthecompany to haveto obtainthepermissionof thechargeeeachtimethecompanywishestosellitsgoodsorconsumeitsrawmaterials.Afloatingchargewillenablethechargorcompanytosell orotherwiseusesuchassets,anditisonly whenthechargecrystallizesthatthepower to dealwiththeassets comestoanend. Ontheotherhand, whentheassetsare notintendedto be dealt with inthe ordinary course ofbusiness, such asin the case ofmachinery or aparent companysshares in its subsidiary, a fixed charge would be more appropriate. Registration of Charges 16.7.8Undersection131oftheAct, certainchargescreatedby companieshavetoberegisteredwiththepublicauthorityresponsibleforcorporations.Failuretodosowillrenderthechargevoidagainsttheliquidator or other secured creditors of thecompany. As a chargee willoften wish to enforcea charge whenthe companyis insolvent,this providesan incentiveto chargeesto ensure that anycharge createdin theirfavouris registeredwithin the30day periodafterthe creationof thechargeas requiredby section131(1)oftheAct.Whereacharge hasnotbeenregisteredwithinthe30dayperiod,it maybepossibletoobtainanextensionoftimeundersection137oftheAct,e.g.iftheomissiontoregisterwasaccidentalordoesnot prejudice the position of creditors or members of the company. 16.7.9Undersection131(3)(g) oftheAct, allfloating chargesmustbe registered.Asfor fixedcharges,only those that fall within those charges described in section 131(3) of the Act require registration. Return to the topSECTION 8 COMPANIES IN DISTRESS Schemes of Arrangement 16.8.1Theremaybeoccasionswhereitisdesirabletorearrangetherights ofcreditorsandmembers,particularlywhere the companyis inafinancially perilousposition. Onsuchoccasions, itmaybe difficulttoobtaintheunanimous consentofallcreditorsand members. Insuchcircumstances,section210 oftheActprovidesforschemesofarrangementtobebindingonallcreditorsandmembersofacompanywheretherequisite majority isobtained, subject to confirmation bythe court. Schemes of arrangementare most oftenused where it is desirable to compromise creditors claims against an insolvent company. 16.8.2For a scheme ofarrangement to take effect, it willbe necessary first of all tomake an applicationtocourtundersection210(1)oftheActforan ordersummoningoneor moremeetingsof the creditorsormembersofthecompany.Ifthecourtismindedtomakesuchanorder, aproposalmustthenbetabledbeforetherelevantmeetingsandapprovedbytherequisitemajorityofthecreditorsormembers.Undersection 210(3) ofthe Act, the requiredmajority is three-fourths invalue of the creditoror members presentandvotingatthemeeting.Toallowmembersandcreditorsto exercisetheirvotes inaninformedmanner,section211(1)oftheActstatesthateverynoticesummoningthemeetingmustcontainastatementexplainingtheeffectof the compromiseorarrangementand,inparticular,statinganymaterial interestsofthedirectorsandtheeffectthereonofthecompromiseorarrangementin sofarasitisdifferentfromtheeffect onthe likeinterests ofother persons.If thisis not done and thecreditors and members donot havesufficientinformationonwhichtomakeaninformeddecision,thecourtmaylaterdeclinetoapprovetheschemeeventhoughitmayhavebeenapprovedbytherequisitemajorityseeReDorman,Long&Co[1934] Ch 635; Wah Yuen Engineering Pte Ltd v Singapore Cables Manufacturers Pte Ltd [2003] 3 SLR 629. 16.8.3Aftertherequisite majorityhasbeenobtained,theschemewillonlybebindingonthecompanyandits membersandcreditors ifthecourt approvesitsee section210(3)of theAct. Such approval maybe subject to such alterations or conditions as the courtthinks just and equitable see section 210(4). TheroleofthecourtistoensurethattheprocedurerequiredundertheActhas beencompliedwithandthatthe scheme is fair and reasonable see Re Dorman, Long & Co [1934] Ch 635. J udicial Management 16.8.4 Whereacompanyisinfinancial difficultybutthereisareasonable prospectofrehabilitatingthecompanyorofpreservingall orpartofthebusinessasagoingconcern, or thatotherwise the interestsofcreditorswould bebetter servedthanby resortingtoa windingup, thecompanyor itscreditors mayapplytocourtforanorderthatthecompanybeplacedunderthejudicialmanagementofapersonknownasajudicial manager see section 227A of the Act. 16.8.5Uponsuchanapplicationbythecompany,itsdirectorsorcreditors,section227B(1)oftheActprovidesthat thecourt maymake ajudicialmanagementorder ifthecourt issatisfiedthatthe companyisorwillbe unabletopayits debts.Additionally,thecourt mustbesatisfiedthat theorderifmade would belikely to achieve one or more of the following purposes, namely: (i)the survival of the company, or the whole or part of its undertaking as a going concern; (ii)theapproval undersection 210 ofthe Act ofa compromise or arrangement betweenthe companyand any such persons as are mentioned in that section;(iii)the more advantageous realization of the companys assets than would occur in a winding up. 16.8.6Thecourtmustbevigilanttoensurethatthejudicialmanagementprocedureisnotdirectlyorindirectly used by the directorsand shareholders ofthe company to thedetriment of creditors.The motivesoftheapplicationshouldthereforebeclearlyhonourable.Thecourtmustalsoshowgreatheedtothewishesandviewsof creditorssincetheassetsof an insolventcompanyineffectbelongto creditorsseeRe GenesisTechnologies International PteLtd [1994] 3SLR 390 atp 392.The court isobliged todismiss anapplicationforajudicialmanagementorder,however,ifthemakingofsuchanorderisopposedbyadebenture holder of debentures secured by a floating charge see sections 227B(4) and (5). 16.8.7Ifthecourtmakesanorderforjudicial management,thebusinessandpropertyofthecompanywillbemanagedbyajudicialmanagerseesection227B(2).Astheroleofthejudicialmanageristorehabilitatethecompanyortopreservepartorallofitsbusinessasagoingconcern, section227G(1)ofthe Actprovides that, on themaking of a judicialmanagement order, thejudicial manager shall takeinto hiscustody or controlall the property to which the companyis or appears to be entitled. Section 227G(2) goeson to state that, duringthe period forwhich the orderis in force,all the powersand duties ofthe directorsshall be exercisedand performed by the judicial managerand not by the directors. Thejudicial manager maydoall suchthings asarenecessary forthe managementofthe affairsof thecompanyand shalldo allsuchthings as the court may sanction see section 227G(3) of the Act. 16.8.8 Thebenefitofjudicialmanagement isthatitallowsacompanythatisnothopelesslyinsolventsome breathingspace toreorganize its affairs.If thiscan bedone successfully, thiswill benefit all creditorsandmembersof thecompany.The alternative maybeaforcedand prematureliquidation thatis notintheinterestsofmostcreditorsandmembers.Accordingly,whenajudicialmanagementorderismade,section227D(1)providesthatanyreceivershallvacate officeandanypetitionforthewindingupofthecompanyshallbedismissed.Section227D(4)goesontostatethatnootherproceedingsandnoexecutionorotherlegalprocessshallbecommencedagainstthecompanyoritsproperty,exceptwiththeconsentofthejudicialmanager orwithleaveofthecourt. Similarly,nosteps shallbetakentoenforcesecurityoverthecompanyspropertyortorepossessanygoodsexceptwiththeconsentofthejudicialmanagerorwithleave of the court. 16.8.9 Undersection227B(8) oftheAct,ajudicial managementorderwillbedischarged after180daysunless extended bythe court. The judicial managementorder may also be dischargedunder section 227N(4)oftheActifthecreditorsdeclinetoapprovethejudicialmanagersproposals;ifunder section227Q(1)oftheActitappearsontheapplicationofthejudicialmanagerthatthepurposesspecifiedinthejudicialmanagementordercannot beachieved;orifundersection 227R oftheActthejudicial managerhas actedor will act in a manner that would be unfairly prejudicial to the interests of creditors of the company. 16.8.10 Just as the judicial manageris appointed by an orderof court, so too the judicialmanager may atanytimeberemovedfromofficebythe court,andmayalsowith theleaveofthecourtresignbygivingnotice of resignation to the court see section 227J(1) of the Act. Return to the topSECTION 9 WINDING UP 16.9.1 Despite the bestof efforts,an insolventcompany maynot beable toovercome itsdifficulties. Insuchcircumstances,thecompanymaybedissolvedtoenableitsassetstobeliquidatedsothatitscreditorsmayberepaidpart ofwhatisowingtothem.Thisprocessbywhichacompanyisdissolvedisknownas windingup or liquidation. Ahealthycompany mayalso bewound up ifits membersno longerwishthebusiness tocontinue.When acompanyis woundup,itsassets ortheproceeds theretowillbe usedtopay off creditors after which the balance, if any, is distributed pro rata amongst shareholders. V l tWi diUVoluntary Winding Up 16.9.2There are twoforms of liquidation, namely voluntarywinding up and compulsory windingup by thecourt. Avoluntary windingup usuallyoccurs wherethe company resolvesto doso bya special resolution seesection290(1)(b)oftheAct.Inavoluntarywindingup,thedirectorsofthecompanymaymakeastatement pursuant to section 293(1) of the Act that the directors of the company are of the view that thecompanywillbeabletopayitsdebtsinfullwithinaperiodnotexceeding12monthsafterthecommencementofthewindingup.Ifthedirectorsdoso,thewindingupwillproceedasamembersvoluntarywindingup.Insuchcircumstances,theshareholderswillappointtheliquidatorseesection294(1)oftheAct.Ifthedirectorsdonot makesuchastatement,itwillbeacreditorsvoluntarywindingup,inwhichcasethedirectorsmustcallameetingofcreditorsinordertoappointtheliquidatorsee ReSin Teck Hong Oil Mills Ltd [1950] MLJ 232. 16.9.3Amembersvoluntarywindingupmaybeconvertedintoacreditorsvoluntarywindingupiftheliquidator appointedby themembers formsthe opinion thatthe companywill not beable topay itsdebts infull within theperiod stated in the declaration madeunder section 293(1) of the Act.The liquidator will thenhaveto summonameeting ofcreditorsand laybeforethema statementofthe assetsandliabilities ofthecompanyseesection295(1)oftheAct.Thecreditors maythen,pursuanttosection295(2)oftheAct,appoint some other person to be the liquidator for the purpose of the winding up of the company. Winding Up by the Court 16.9.4A companymay also be compulsorilywound up byan orderof court.Under section253(1) oftheAct, a petition to the court to wind up the company may be presented by (i)the company itself;(ii)a creditor;(iii)a contributory,thepersonalrepresentative ofadeceased contributoryor the Official Assigneeofthe estate of a bankrupt contributory;(iv)the liquidator of the company;(v) a judicial manager;(vi)various Ministers on specified grounds. 16.9.5 When such a petition is presented,the court pursuant to section 254(1) of theAct may order thewinding up of the company in certain circumstances, the more important of which are the following: (i)the company has by special resolution resolved that it be wound up by the court;(ii)thecompanydoesnotcommencebusinesswithinayearfromitsincorporationorsuspends itsbusiness for a whole year;(iii) the company is unable to pay its debts;(iv) thedirectorshaveactedintheaffairsofthecompanyin theirowninterestsratherthanintheinterests of the members as a whole;(v) the court is of opinion that it is just and equitable that the company be wound up;(vi) the company hascarried on multi-level marketing or pyramid selling incontravention of any writtenlaw that prohibits such activities;(vii)thecompanyisbeingusedforanunlawfulpurposeorforpurposesprejudicialtopublicpeace,welfare or good order in Singapore or against national security or interest. 16.9.6 Of theabove circumstances,by far theground mostrelied uponis that thecompany isunable topayitsdebts.Section254(2)(a)oftheActprovidesthatacompanyshallbedeemedunabletopayitsdebtsifacreditorhasservedonthecompanyastatutorydemandforasumexceedingS$10,000andthecompanyhas,for3weeksthereafter,neglectedtopaythesumortosecureorcompoundittothereasonablesatisfactionofthecreditor.Acompanyshallalsobepresumedunabletopayitsdebtsifexecutionorotherprocessissuedonajudgmentororderofanycourtinfavourofacreditorofthecompanyisreturnedunsatisfiedinwholeorinpartseesection254(2)(b)oftheAct.Itisalsoopentocreditorsofacompanytosubstantivelyprove tothesatisfactionof the courtthatthecompanyisunabletopayitsdebtsand,insuchcases,thecourtcantakeintoaccountthecontingentandprospectiveliabilities of the company see section 254(2)(c) of the Act. Effect of Commencement of Winding Up 16.9.7Whenwindingupcommences,thecompanymovesintoadifferentphase,onethatisnotconcernedwiththebusiness asagoingconcernbutwith thewindingdownoftheenterprise. Atthesametime,theinterestsofcreditorsbecomemoreimportantascreditorshavepriorityovermemberstotheresidualassetsofthecompany.Assuch,anumberofconsequencesarise,someofwhichwillberesidualassetsofthecompany.Assuch,anumberofconsequencesarise,someofwhichwillbesummarizedhere.First, though,itis necessarytodeterminewhenwindingupcommencesasmanyoftheconsequencesbegin fromthe dateofthe commencementof windingup. Inthecase ofa voluntarywindingup,the windingupis generallydeemed tohavecommenced atthetime of the passingofthe resolutionforvoluntary winding up. However,where a provisional liquidator has been appointedbefore any such resolutionwaspassed,avoluntarywindingupcommencesatthetime whenthedirectorsofthecompanyfiledthedeclarationunder section291(1) ofthe Actof thecompanys inabilityto continueits businessby reasonofits liabilities see section 291(6) of the Act. 16.9.8Undersection255(1)oftheAct,wherearesolutionforvoluntarywindinguphasbeenpassed,butthecompanyissubsequentlywoundupbythecourt,thewindingupisstillregardedashavingcommencedfromthetimeofthepassingoftheresolution.Section255(2)oftheActprovidesthatinallother cases where the companyis wound up by the court, the winding up isdeemed to have commenced atthe time of the presentation of the petition for the winding up. 16.9.9 Inavoluntarywindingup(whethermembersor creditors),section292(1)oftheAct providesthatthecompanyshall,from the commencementofthewinding upcease tocarryonitsbusiness,exceptso far as in the opinion of the liquidator isrequired for the beneficial winding up thereof. Where the companyiswoundupbythecourt, theliquidatormayunder section272(1)oftheActcarry onthebusinessofthecompanyfor4weeksafterthedateofthewindinguporder.Thereafter,theliquidatormustobtaintheconsentof thecourt orthecommittee ofinspectionto continuewith thebusinessof thecompany. Ontheappointmentofaliquidatorinavoluntarywindingup,thepowersofthedirectorsgenerallyceaseseesections 294(2) and 297(4) of the Act. This is also the case with a winding up by the court. 16.9.10Pursuant to section259 ofthe Act, anydisposition ofthe property ofthe company,any transferofshares oralterationinthe statusofmembers made after thecommencement ofwindingupby thecourtshallbevoidunlessthecourtotherwiseorders.Thereis noequivalentprovision inthecaseofavoluntarywindingup.Wherejudgmentcreditorshavenotcompletedexecutionagainstthecompanybeforethecommencementofwindingup(whetherthewindingupisbythecourtor voluntary),theymaynot retainthe benefitof their execution as against theliquidator see section 334(1)of the Act.This is becausein aliquidationtheassetsofthecompanyshouldbedistributed proratatoall creditorsofthecompanyinthefirstinstance.Similarly,afterthecommencementofwindingupbythecourtoracreditorsvoluntarywindingup,any attachment,sequestration, distressorexecutionputinforceshallbevoidsee sections260 and 299(1) of the Act. 16.9.11Inthecaseof windingupby thecourt,atanytimeafterthepresentationofthepetitionandbeforea windingup orderhasbeenmade,thecompany orany creditororcontributorymayapplytothecourt to stayanyproceedingspending againstthecompany seesection258 oftheAct. When awindingup orderhas beenmade, no actionmay be startedagainst thecompany or proceededwith except with theleave ofthecourtseesection262(3)oftheAct.Similarly,in the caseofvoluntarywindingup,section299(2)oftheActstatesthat,afterthecommencementofwindingup, noactionshallbecommencedorproceeded with against the company except by leave of the court. Recovery of Companys Property 16.9.12In awinding up, oneof theprincipal rolesof theliquidator is toget inthe companysproperty sothatit canbe realizedand theproceeds distributedto creditorswith anybalance goingto themembers. Inmostcases,thisisastraightforwardprocess.However,theremay be circumstanceswherethecompanyspropertyhasbeenimproperlytransferredtothirdpartiesandtheliquidatormustattemptto recoversuchproperty. Two common instances involve undue preferences and transactions at an undervalue. 16.9.13Section329oftheActprohibitsunduepreferencesandtransactionsatanundervaluebyreference to variousprovisions in the Bankruptcy Act(Cap. 20, 2000 Rev Ed). Generallyspeaking, a transferofproperty amountsto anundue preferenceunder section99(3) ofthe BankruptcyAct ifit wasmade toacreditor of the company andputs the creditor in a better position than he wouldotherwise have been in thewindingupofthecompany.Inaddition,thecompanymusthavebeeninfluenced, indecidingtogivethepreference, bya desireto producethe effectof placingthat personin sucha betterposition see section99(4)oftheBankruptcyActandthetransfertookplaceattherelevanttime.Thismeansthatthetransactionmusthavetakenplacewithintwoyearsofthepresentationofthepetitionorthecommencementofwindingupwhere thepersonsaidto havebeenpreferredis anassociate(e.g.apersonincontrolofa companyisanassociateofthecompany) andinothercaseswithinsix monthsofthesamedate see section100 of theBankruptcy Act. Where theliquidator has establishedthat anact constitutesanunduepreference,thecourtmay avoidthetransaction andallowtheliquidatortorecoverthepropertytransferred. 16.9.14 Atransactionenteredintobyacompanywithathirdpartyatanundervaluemayalsobesetaside by the court. Such a transaction arises where: (i) thecompany makesagift tothat personor otherwise enters into a transactionwith thatpersonon terms that provide for the company to receive no consideration; or(ii) thecompany entersinto atransaction withthat personfor aconsideration thevalue ofwhich, inmoneyormoneysworth,issignificantlylessthanthevalue,inmoneyormoneysworth,oftheconsideration provided by the company. 16.9.15Furthermore,thetransactionmusthaveoccurredwithinfiveyearsendingthedayofthepresentationofthepetitionorthecommencementofwindingupseesection100(1)oftheBankruptcyAct.Inaddition,itmustalsobeshownthat,atthetimethetransactiontookplace,thecompanywasinsolventor becameinsolventas aconsequence ofthetransaction seesection 100(2)of theBankruptcyAct.Return to the top Updated as at 30 April 2009By: Tan Cheng HanProfessorFaculty of Law, National University of Singapore

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