Generally, credit has been used from the beginning of civilization and predates the use of money. Many historians further argue that money was probably introduced because of the necessity to accurately measure and pay debts.
In practice, credit in business demonstrates a company’s ability to sell a promise to repay debt at specified points in time in the future so that they can make purchases in the present.
So, whenever a company gets credit, it typically enters into some form of contractual arrangement, verbal or written. However, all credit transactions typically involve the risk that the debtor company may fail to fulfill its financial repayment obligations.
In such instances, the debtor will be declared to be in default. Unfortunately, when companies are persistently unable to pay their debts, the inevitable outcome is the phenomenon of liquidation!
Throughout this article, we shall comprehensively dissect company liquidation in Singapore and its most basic underworkings.
What is company liquidation?
In the traditional sense, liquidation is a process that entails the realisation (an executed sale to obtain money) of a company’s assets via private treaty or public auction in order to pay off its debts.
Generally speaking, liquidation mainly occurs when a company is insolvent. This means that it cannot pay its obligations when they are due.
As such, its assets are voluntarily or involuntarily sold to pay creditors and shareholders, based on the priority of their claims and their interest in the company.
When company liquidation is initiated in Singapore, the company trading stops, and other possible liabilities, like employment or renting a property, are also halted.
However, there are some exceptions where continued trading is necessary, in the best interest of all creditors.
It’s worth noting that liquidation differs from bankruptcy. In occurrences of bankruptcy, a company can continue operations with some protection from creditors.
This is primarily because bankrupt companies tend to typically be bound-in-cash and just face trouble making payments in full or on time. At the same time, this same case scenario doesn’t apply to companies in liquidation.
Why do companies liquidate?
Companies in Singapore can liquidate their assets for a variety of reason, namely:
- Cessation of business activities
- Management deadlock and shareholders disputes (Section 216 of the Companies Act (Cap 50)
- For corporate or financial restructuring purposes
- To minimize tax liabilities or maximize tax advantages for the company
- In case of a breach of statutory provisions and/or offenses committed.
- Loss making businesses
- Inability to repay its debts as they fall due .
What is the role of a liquidator?
In essence, a liquidator administers and wind-downs the company’s affairs during the liquidation process. This means that they handle all the selling of the company assets, then disperse the proceeds to creditors and claimants in their order of priority or preference.
That being said, ‘priority’ is usually determined by statute and regulation, depending on the class the stakeholder fits into. For example, employees usually have a high priority over unsecured creditors, while unsecured creditors have a higher priority over shareholders.
However, notwithstanding, remuneration and expenses of the liquidator are typically paid first.
Furthermore, liquidators also investigate the company’s past transactions to ascertain if any of the company’s assets were transferred, sold, or charged non-commercially.
For instance, if one creditor was unfavorably paid over another, or one person was paid in preference to another, or if money was suspiciously paid to a director or a relative of the director.
As such, the liquidator maintains the power to challenge such transactions or can make an application to the Court to void such transactions. Consequently, clawing back such assets or seeking monetary restitution for the loss.
Liquidation process for companies in Singapore
Voluntary Winding Up
- For solvent company
A Singapore company will usually choose to be voluntarily wound up by its members if its directors believe that the business will be able to pay its debts within one year of commencing the wind-up process. The directors must file a declaration of solvency.
In such instances, the company will proceed to appoint a liquidator (or provisional liquidator) to file the relevant notifications required under the Companies Act and wind up its affairs.
Creditors Voluntary Winding Up
- For insolvent company
The other side of the voluntary winding-up process company can involve creditors. A Singapore company can opt for a creditors’ voluntary winding up if its directors believe that the business cannot, because of its liabilities, continue business operations.
If a member’s resolution is passed in favour of the winding up, the company will appoint a liquidator, subject to any preference the creditors may have as to the choice of liquidator.
The directors must file a declaration with the Official Receiver stating that the business cannot, because of its liabilities, continue business operations and they will hold creditors’ meeting within 1 month of the declaration.
Compulsory Winding Up
- For insolvent company
On the other hand, a company may be wound up under an Order of the Court based on any of the grounds stated in Section 125 of the Insolvency, Restructuring and Dissolution Act 2018.That being said, The two common grounds are : inability to pay its debts, and if the Court deems it just and equitable.
In practice, a Singapore company is deemed unable to pay its debts if:
- A creditor with a claim against the company for more than S$15,000 has served a statutory demand demanding payment, and the company cannot satisfy the statutory demand within three weeks.
- the court judgment enforced by a creditor against the company remains unsatisfied, to some extent or in its entirety.
- It is proven to the Court’s satisfaction that the company is unable to fulfill its debt obligations.
There are two accepted tests to determine if a company is insolvent.
- Cash flow test – i.e. whether a company is able to pay its debts as they fall due, taking in consideration the company’s business and any prospective funding which the company could obtain
- Balance sheet test – i.e. whether a company’s liabilities exceed its assets (including its contingent and prospective liabilities)
Apart from the company itself, directors, creditors, liquidator, judicial manager or the Minister may submit a winding up application to the Court.
Do employees get paid when a company goes into liquidation?
During the liquidation process, money recovered will be paid in the following order:
- Secured creditors
- Cost and expenses incurred by the Official Receiver in winding up the company
- Liquidator’s remuneration
- Applicant’s costs for applying for the winding up order
- Employees’ wages and salaries, including reimbursements and allowances under the employment contract (capped at five months’ salary or S$13,000, whichever is lesser)
- Ex gratia payment or retrenchment benefits due to employees (capped at five months’ salary or S$13,000, whichever is lesser)
- Work injury compensation amount that is due to the employees
- Central Provident Fund (CPF) contributions of the employees (up to 12 months’ contributions for every employee)
- Remuneration to employees in respect of a vacation leave that is unconsumed (capped at five months’ salary or S$13,000, whichever is lesser)
- Total assessed taxes (including GST)
- Creditors with floating charge over assets
- Unsecured creditors
- Members of the company
Ultimately, the litmus test for a company in liquidation in Singapore is its persistent inability to pay its debts. As has been noted, Singapore businesses mainly liquidate due to bankruptcy, restructuring, or investors wanting to leave the company.
As shown above, the liquidation process entails winding up the affairs of the company with the help of a liquidator, with an end goal to dissolve the company. We also saw that liquidators have multiple stakeholders to account to, all with different self-interests. However, their primary responsibility is to serve the company’s creditors.
On the positive side, the Singapore business regulatory framework gives entrepreneurs multiple options for flexibly closing down businesses, dependent on their level of indebtedness, tax status, and the state of their assets.