Under existing law, civil liability for ‘insolvent trading’ only arises where there has been a criminal conviction. The devil will be in the detail on the suspension of wrongful trading to ensure that it is not abused. Such offences are assessed with the benefit of hindsight and it is therefore important for directors to take professional advice and ensure that their decision-making is carefully minuted. There is a concept of “wrongful trading” in Singapore and the operative provision is set out in Section 339(3) of the Companies Act (Chapter 50 of Singapore) (“Singapore Companies Act”). A wrongful trading application is made by the company’s liquidator/administrator. Other more minor technical amendments, and various changes to the regulation making powers given in the Act, were also made during the parliamentary process. With the overriding objective of helping companies which need to undergo a financial restructuring or rescue process to continue trading, the proposed measures will give those businesses extra time and space to weather the storm whilst ensuring that creditors get the best return possible in the circumstances. In Malaysia, the offence of wrongful trading is codified in s 539(3) of the Companies Act 2016 (CA). It is also worth noting that the reintroduced suspension of wrongful trading is not retrospective and therefore directors could be responsible for any worsening of financial condition between the end of the first suspension on 30 September and the 26 November when the second suspension started. Among its objectives, Singapore’s new Insolvency, Restructuring and Dissolution Act 2018 (IRDA) – which came into effect on 30 July 2020 ... fraudulent or wrongful trading and damages against delinquent company officers. The Bill replaces the existing insolvent trading regime with a new 'wrongful trading' provision in Sections 239. Further, the statutory minimum for the issuing of a statutory demand has been increased from AU$2,000 to AU$20,000 and the period for compliance with such a demand has been extended from twenty-one days to six months. In practice, therefore, civil liability for insolvent trading liability is seldom, if ever, pursued in Singapore. Wrongful trading Singapore has recently introduced a new “wrongful trading” provision under the Insolvency, Restructuring and Dissolution Act (“IRDA”) which has been passed by Parliament in 2018 (but has not yet to come into force as at the date of writing). The wrongful trading provisions now dispense with the requirement for criminal liability before civil liability can be found. If the company is in insolvent administration or insolvent liquidation, any such director will be guilty of wrongful trading … In Singapore, the position of the courts is similar to the position of the courts in England. The "wrongful trading" regime also abolishes the pre-requisite (present under the insolvent trading regime) of having to establish criminal liability first before … Consequently, the earlier insolvent trading provisions were seldom relied on to hold company officers accountable. Hong Kong and Singapore are trying to get in on the boom in blank check company listings, while safeguarding investors from what some say is a bubble about to burst. Under that framework, an officer of the company would only be personally liable to pay the whole or part of the debt incurred by the company, if there was a criminal conviction under the Companies Act. The Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”) consolidates Singapore’s personal and corporate insolvency, restructuring and dissolution laws into one omnibus legislation. a judicial manager appointed under Part 7 of the IRDA; Such a person may also be guilty of a criminal offence and shall be liable on conviction to a fine not exceeding S$10,000 or to imprisonment for a term not exceeding 3 years, or both. Businesses have been disrupted, cash flows have been interrupted and economies have been thrown into a huge negative shock. 2001, s.558G); South Africa (Companies Act 1984, s.424); Singapore (Companies Act 1990, s.339). Liquidators in a recent case failed to establish company's directors should pay over £2m as liability for wrongful trading. Insolvency Law Reform in Australia and Singapore: Directors' Liability for Insolvent Trading and Wrongful Trading Notably, apart from the scheme of arrangement process, Hong Kong lacks any formal corporate rescue procedure such as can be found in some other common law jurisdictions. UK Head Office More clarity on the new law is expected in the coming days. Under the new section 239, a company will “trade wrongfully” if it incurs debt or liabilities, when insolvent (or becomes insolvent as a result of incurring such debt or liability), without reasonable … The authors analyse the law in these two countries because they are important Asia-Pacific trading partners and their laws were originally largely the same – Singapore’s law on insolvent trading reflected the law in Australia from the 1960s. 28-3, December 2019; Insolvency law reform in Australia and Singapore: Directors' liability for insolvent trading and wrongful trading Disclaimer: This update is provided to you for general information and should not be relied upon as legal advice. Further, during a three month transition period, creditors are prohibited from commencing insolvency proceedings against businesses. Zhao’s wrongful trading and the alleged Guangxin Agreement 13 In 2011, it was discovered that Zhao had traded wrongfully in breach of the agreed Trading Limit, resulting in massive losses to Vermont. In ensuring accountability for … As mentioned above, the IRDA expressly includes a statutory defence to civil personal liability – the Court may relieve the responsible person from personal liability if the person acted honestly and having regard to all the circumstances, that person ought fairly to be relieved from personal liability. ... We have previously discussed that the IRDA introduced a new concept of “wrongful trading” under Section 239 of the IRDA, which replaces the old concept of “insolvent trading” under section 339(3) of the Companies Act. A holding or parent company can be classed as a shadow director in certain circumstances; so can private equity houses and banks. Any attempt to do so would have been Poh claimed that he and Koh were not given much information on the internal investigations on Zhao pertaining to that matter.8 The wording of the insurance policies should therefore be scrutinised to assess whether wrongful trading claims would also fall within the exclusions. West Midlands, Wrongful Trading Singapore has recently introduced a new “wrongful trading” provision under the Insolvency, Restructuring and Dissolution Act (“I RDA ”) which has been passed by Parliament in 2018 (but has not yet to come into force as at the date of writing). Under existing law, civil liability for ‘insolvent trading’ only arises where there has been a criminal conviction. What’s more, even if there had been, the court would not have been prepared to make an award on the evidence presented to it. It is interesting that the IRDA provides a statutory defence only to civil personal liability, and not to criminal liability. Although rare, individuals may be subject to criminal and civil penalties and disqualification orders if they engage in fraudulent trading. Safeguards on Litigation and Availability of Third-party Funding. Singapore: Wrongful Trading Under The Insolvency, Restructuring and Dissolution Act 2018. Under the new section 239, a company will “trade wrongfully” if it incurs debt or liabilities, when insolvent (or becomes insolvent as a result of incurring such debt or liability), without reasonable … The key point is that shadow directors can be liable for wrongful trading and be ordered to contribute to the assets of an insolvent company. Singapore’s existing fraudulent and insolvent trading provisions were substantially reformed and a new liability for wrongful trading was introduced in 2018 by the IRDA as part of a package of reforms to strengthen Singapore’s status as an international hub for debt restructuring. Singapore: Wrongful Trading Under The Insolvency, Restructuring and Dissolution Act 2018. However, this approach to wrongful trading was not actually adopted in the United Kingdom and therefore this reflects a novel and untested approach to the concept of wrongful trading. The IRDA introduces the concept of wrongful trading, which provides that a company trades wrongfully if: a. the company, when insolvent, incurs debts or liabilities without reasonable prospect of meeting them in full; or In order to provide relief to businesses that are unable to meet their debts due to the impact of COVID-19, the Australian Federal Government has passed temporary amendments to its insolvency and corporation legislation through the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) that received Royal Assent on 24 March 2020. However, the IRDA appears to be silent on any defences for imposing criminal liability for the offence of wrongful trading. The IRDA introduces the concept of wrongful trading, which provides that a company trades wrongfully if: a. the company, when insolvent, incurs debts or liabilities without reasonable prospect of meeting them in full; or. New wrongful trading provision. The legislation provides that the obligation to file for insolvency as well as the payment prohibitions will be suspended until 30 September 2020, unless the insolvency is not due to the effects of the COVID-19 pandemic or there is no prospect of eliminating a payment default that has occurred. Given the financial stresses that many businesses will currently feel, now is an important time to pay attention to obligations not to trade if a company is insolvent (Singapore) and avoid any situation that could be seen to qualify as fraudulent trading (Hong Kong). Directors and others dealing with distressed Singapore corporates will need to pay close attention to this new wrongful trading provision. Singapore Law and Wrongful Calls on On-Demand Bank Guarantees. The upshot of this is that it may be easier to impose civil liability on those who are party to wrongful trading. payment and time obligations) where required; reviewing cost-cutting measures such as planning labour stand downs or reductions; monitor the outbreak as well as evolving economic circumstances and government assistance being put in place (if any) and how this impacts on the business and/or its assets / liabilities; engage the necessary advisory (e.g. On 1 April 2020, the Singapore government announced its plan to introduce the COVID-19 (Temporary Measures) Bill in Parliament in the next week to offer temporary relief to businesses and individuals who are unable to fulfil their contractual obligations because of COVID-19. Singapore There is a concept of “wrongful trading” in Singapore and the operative provision is set out in Section 339 (3) of the Companies Act (Chapter 50 of Singapore) (“Singapore Companies Act”). Although it seems like such a procedure is yet again at the forefront of LegCo’s mind, it will be several months until such legislation provides the much needed respite from the distress that many businesses are experiencing right now. Wrongful trading under the Insolvency, Restructuring and Dissolution Act 2018 Corporate Insolvency, Restructuring, and Recovery in the COVID-19 world – Part 1 How to use the COVID-19 (Temporary Measures) Act to protect you and your business from an economic downturn Given that many otherwise healthy companies are facing financial difficulties at this point in time and the temporary relief measures under the COVID-19 (Temporary Measures) Bill that will be introduced shortly, it is possible that there may be a further delay in the commencement of the IRDA because the new wrongful trading provisions would make it easier for directors and other stakeholders to incur liability. However, the Financial Services and the Treasury Bureau has indicated that the draft bill that will be put to LegCo in the autumn will include a corporate rescue procedure, including a six month moratorium from hostile acts by creditors. Woodhouse Farm, Reform of the prohibition against insolvent trading was a focus of Australia's insolvency law reforms in 2017, which led to the introduction of a safe harbour for directors from liability. Is taking wrongful trading positions Is acting as the agent or partner of the person(s) who controls the company Under those circumstances, a court may decide to treat the company and one or more of its associated individuals (shareholders, directors, officers or employees) as one and the same and to hold them personally liable. The company can do so by reviewing their current contracts and possibly attempting to renegotiate key contracts (e.g. Now, a party may be found personally liable for all of a company’s debts if they knew the company was trading wrongfully or, as an officer of the company, should have known it was doing so. However, for companies genuinely struggling as a result of the effects of COVID-19 this will provide directors with some valuable reassurance. Directors and officers should also ensure that they receive regular financial reports on the company so that they are apprised of its financial position and cash flow. Under section 239 (1) of the IRDA: (iii) Wrongful trading – Section 339(3) of the Act (iv) Fraudulent trading – Section 340 of the Act (v) Wrongful dividends – Section 403(2)(b) Reverse Corporate Veil Piercing. Wrongful trading provision: previously, civil liability for ‘insolvent trading ’ only arose where an individual had been successfully criminally convicted. United Kingdom. There is a concept of “wrongful trading” in Singapore and the operative provision is set out in Section 339(3) of the Companies Act (Chapter 50 of Singapore) (“Singapore Companies Act”). Wrongful trading is the main deterrent for directors against continuing to trade where there is no reasonable prospect of avoiding liability and this measure is designed to help directors of companies which are viable but for the effect of coronavirus navigate through the continuing significant economic uncertainty. Wrongful trading provision: previously, civil liability for ‘insolvent trading’ only arose where an individual had been successfully criminally convicted. History of Singapore’s insolvency regime. You can contact the taskforce at here. These measures may be extended by the government until no later than 31 March 2021. The Piggery, The current regime is limited by the requirement for criminal liability to be found as a prerequisite before an application can be made to … Under existing Singapore legislation, civil liability for insolvent trading only arises where there has been a criminal conviction. Calls on On-Demand Bank Guarantees can be restrained, either on the account of “ fraud” or “unconscionability“, which are treated as two distinct and independent grounds of restraint. Although it is rarely invoked, in this time of a COVID-19 global recession … When a company is insolvent, any payment or any transaction that it makes may incur civil and criminal liabilities for its directors. Accordingly, directors need to pay extra attention to their obligations not to trade by continuing to incur debts through the course of their daily business, while the company is insolvent. This is especially tricky in such stressful times where directors are anxious about their businesses and pressured to make quick decisions. The Bankruptcy Act and the relevant provisions in the Companies Act have since been repealed with the IRDA coming into force on 30 July 2020. In situations where the company is insolvent or is approaching insolvency, those involved in the company’s affairs (and not merely directors and officers of the company) should therefore be cautious about incurring debts and liabilities to ensure that they do not fall foul of the wrongful trading provisions. Be it enacted by the President with the advice and consent of the Parliament of Singapore, as follows: PART 1. To sustain the application, the director must have had, at some point before the winding up or administration of the company, knowledge that there was no reasonable prospect that the company could avoid going into insolvent liquidation or administration. On 1 October 2018, Singapore's parliament passed Insolvency, Restructuring and Dissolution Act 2018 (" New Insolvency Act "), and the act is expected to come into force soon. Wrongful trading must be established on a criminal standard of proof. This represents a departure from the earlier insolvent trading framework prior to the IRDA. It remains to be seen how the Courts will interpret and apply the defence of honesty, given that the party to the wrongful trading must have known or ought to have known of the wrongful trading in order for there to be personal liability. Prior to this, the provisions pertaining to personal insolvency were contained in the Bankruptcy Act, while provisions related to corporate insolvency were contained in the Companies Act. The government previously consulted on proposed changes to the UK’s insolvency framework and is now looking to introduce reforms including: In addition to this, the UK government has announced a temporary suspension of the wrongful trading regime, with retrospective effect from 1 March 2020, to remove the threat of personal liability for directors. The key distinction between this provision and wrongful trading under s.214 is dishonesty: for fraudulent trading, it is not enough to show that the directors continued to run up debts when they knew the company was insolvent and that this was prejudicial to creditors; dishonesty must be proven. This article highlights recent examples of how the court has considered these duties in the context of applications by liquidators or administrators of insolvent companies where allegations against directors of misfeasance (under section 212 of the Insolvency Act 1986) and wrongful trading (sections 214/246ZB of the Insolvency Act 1986) have been made. Debts can be incurred whether through the making of orders for supplies or the signing of agreements to leases spaces when the company has insufficient funds to fulfil such payments. It may be sufficient to establish that the director contracted the debts in a reckless or unreasonable manner without having to establish fraud or dishonesty. Home Books and Journals; International Insolvency Review; Nbr. b. the company incurs debts or liabilities that it has no reasonable prospect of meeting in full and that result in the company becoming insolvent. Companies in financial difficulties are, however, exposed to a variety of formal procedures including the appointment of a receiver, voluntary liquidation, and compulsory liquidation. New wrongful trading provision We have previously discussed that the IRDA introduced a new concept of “wrongful trading” under Section 239 of the IRDA, which replaces the old concept of “insolvent trading” under section 339 (3) of the Companies Act. WRONGFUL TRADING SECTION 214 AND 246ZB INSOLVENCY ACT 1986: The claim: wrongful trading occurs where a company has gone into insolvent liquidation or administration, and at some time before the company's liquidation or administration, the directors knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation or administration; and The IRDA was passed in Parliament on 1 October 2018 but is currently not in force. The IRDA includes a statutory defence for personal liability. Toggle navigation. A financially distressed company (or if the company is being wound up, the liquidator or provisional liquidator) may also restructure its debts through the scheme of arrangement process. The strict regime in Australia acts as an incentive to companies to only trade whilst solvent. We invite you to follow and join our online community via the below social media platforms. 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