On 15 June 2020, the Monetary Authority of Singapore (MAS)' poll of 23 economists and analysts indicates that Singapore’s economy will likely shrink by 11.8% in Q2 2020 on a year-on-year basis. Overall, GDP is estimated to contract 5.8% in 2020. COVID-19 and trade tensions have upended the economy and put many corporations in survival mode. 3,800 companies closed down in April 2020 alone, a sign of the severe strain on the Singapore economy wrought by the virus. Hard times however, do not mean directors should easily disregard their duties and legal obligations to the company as a whole. More so than any other time, with the looming spectre of insolvency, directors have to remain alert about compliance & governance. Pressure to please shareholders during this difficult time, such as by declaring dividends, to the detriment of other corporate stakeholders and creditors could also put directors in hot water. COVID-19 or not, there is no wiggle room to sidestep directors’ duties.
Directors have the duty to act honestly, avoid conflicts of interest and act in the best interests of the company. During financially difficult times where a company is insolvent, near insolvent or in a perilous financial position, directors bear the burden of crucial obligations to protect the interest of creditors.
a. Interests of creditors
When companies are insolvent on a cash-flow or balance sheet basis, the law implies that the directors have knowledge that the company is facing insolvency. In this situation, directors must consider the interest of creditors when making decisions for the company. This entails directors making decisions to not dissipate or exploit company assets to the prejudice of creditors’ interests. Generally, directors who act with good faith on reasonable commercial grounds to preserve or rehabilitate the company will not have breached this duty.
b. Insolvent and fraudulent trading
Under the Singapore Companies Act, directors must not permit the company to trade if there is no reasonable or probable ground of expectation of the company being able to pay its trade debts.
Furthermore, directors should not allow the business of the company to be carried on with the intent to defraud creditors or for any fraudulent purpose.
Both scenarios above may lead to directors facing criminal charges. Directors may also be made personally liable for the debts of the company.
Thankfully, the COVID-19 (Temporary Measures) Act 2020 has provided companies with some breathing space by not rendering directors liable for insolvent trading if debts are incurred in the ordinary course of business for the prescribed period of six months from 20 April 2020 to October 2020. Nonetheless, directors must continue to be prudent and it may useful to document (via minuted board discussions or resolutions) the commercial purpose for entering into commercial transactions or contracting any debt during this period.
c. Unfair preferences and undervalued transactions
Directors must be careful not to show preference in paying off any creditor over another and must not complete transactions whereby the company receives significantly less in value than what it provides. Directors must take special care in assessing the risks involved in transactions which might otherwise have been permitted under ordinary circumstances.
In light of the COVID-19 situation, companies may have had difficulty in holding Annual General Meetings (AGM) and filing Annual Returns (AR). However, directors must still ensure that the company fulfils both statutory obligations.
As of 7 April 2020, the Accounting and Corporate Regulatory Authority (ACRA) grants a 60-day extension of time to all listed and non-listed companies to perform the AGM and file the AR. This special extension will be applied to all AGMs and ARs due to be held during this period until 31 July 2020. Companies that had previously been granted an extension of time to hold their AGMs within this period will also be given a further 60 days of extension from the last date of the previous extension. The AR filing due dates for the period of 1 May 2020 to 31 August 2020 for all listed and non-listed companies will also be extended for 60 days. Such companies do not need to apply for the extension of time with ACRA as the extension is automatically applied.
A solvent company is one that can pay its debts in full, within a period not exceeding 12 months. If the company is unable to pay its debts, it is deemed insolvent. Under the Companies Act, a company is deemed unable to pay its debts if:
a. Winding up a solvent company
In the event that a company is solvent, a members’ voluntary winding up may be commenced. This involves the directors of a company first filing a Declaration of Solvency with an attached statement of affairs followed by passing of a special resolution for winding up the company. Next, a liquidator must be appointed to see through the process of winding up the company and distributing its assets. This is one way in which a solvent but under performing company can be closed down to free and return its capital to shareholders for use in other more productive endeavours.
b. Winding up an insolvent company
If directors are unable to come up with a Declaration of Solvency, and a financial analysis deems that a company is insolvent, the insolvent company can be wound up in two ways:
i. Creditors’ voluntary winding up
This process entails an application to wind up the company by appointing a provisional liquidator and holding a creditors’ meeting to seek agreement from creditors on the winding up.
ii. Winding up by order of court
There are certain grounds upon which a company can be wound up compulsorily. A company’s inability to pay its debts is a common ground for presenting an originating summons for compulsory winding up.
The following parties can file a summons to wind up a company compulsorily:
In light of the above, and with a view towards assisting directors with weathering the COVID-19 storm, we suggest all directors refresh themselves of the prevalent directors’ duties and those owed especially to creditors. We also provide the following practical tips:
This article is produced by our Singapore office, Bird & Bird ATMD LLP, and does not constitute legal advice. It is intended to provide general information only. Please note that the information in this article is accurate as at 6 July 2020. We will continue to monitor the situation and provide updates on any changes as soon as these are communicated to us. Please contact our lawyers if you have any specific queries.