What is Corporate Insolvency and how does it affect you?

Reading Time: 3 minutes

Corporate Insolvency: What it is and Options

Having garnered attention given the recent liquidation application of Singapore listed company Swiber Holdings, the term “corporate insolvency” is a term that most have heard before but know little about or what it means for the people associated with it.

Corporate insolvency is a state where a particular company is deemed insolvent if it is unable to pay its debts. There are a few ways to proceed in a situation where a company is insolvent. The most well-known one is that of liquidation or winding up, where a company’s assets are seized and sold to pay debts and the company ceases to exist.

Other ways that the company can pursue in a situation of corporate insolvency include judicial management and a scheme of arrangement. For judicial management, an application is made to the court to appoint a judicial manager to supervise the company. This manager can either help the company to recover and eventually repay all their debts or simply assist the company in better repaying their debts. As for scheme of arrangement, a plan to defer and restructure payments will be prepared and put forward for approval by creditors.

 

How it affects you

 

1. Employees are typically terminated with immediate effect

Corporate insolvency affects a large range of people. The first group to suffer the brunt of corporate insolvency would be employees. In the case of a winding up, all employees are typically terminated with immediate effect. However, there is an exception where if a business voluntarily wounds up and decides to continue operating for slightly longer, employees may only be terminated after that short period. In the cases of judicial management and schemes of arrangement, the employees will still be employed until the company is eventually wound up in a worst-case scenario. It is possible that they may not be terminated if the company manages to recover and avoid liquidation.

Importantly, employees’ wages are given priority in a winding up situation (s328 of the Companies Act). This means that any assets of the company being liquidated will be given to the employees first. This priority applies over all trade creditors, whether secured or unsecured. The point of this is that employees did not choose to bear the risks that the company assumed and their financial hardship should be reduced as far as possible.

 

2. Directors will have additional duties imposed on them during insolvency

As for directors, additional duties will apply to them when the company becomes insolvent. The director will have to ensure that the company does not take on any new debts it cannot repay (“wrongful trading” under s 339(3) of the Companies Act) or unfairly prefer some debts over other debts (“unfair preference” under s329 of the Companies Act). Upon application for liquidation or judicial management, the powers of directors also cease and are handed over to the liquidator or judicial manager. The directors will however retain their powers to manage the business if it is a scheme of arrangement.

Notably, the directors may also be exposed to liability for breaches of directors’ duties in the course of their work with the company before liquidation. These breaches are set out in sections 336, 340 and 341 of the Companies Act. They include false or fraudulent representations being made or conflicts of interest committed before liquidation.

 

3. Secured creditors will have priority over unsecured creditors

As for creditors, a distinction is made between unsecured and secured creditors in terms of recovery of assets. Secured creditors are those who have a form of security for their debt, for instance, a floating charge over certain assets of the company while unsecured ones do not. Secured creditors will have priority over unsecured ones but they may not necessarily recover all of their debts either. Creditors are paid on a paripassu basis, which means that they are paid out of the company’s assets equally. If any of these creditors have lawsuits pending against the company, these actions cannot continue.

 

4. Shareholders can only get paid after the creditors are paid in full

Finally, with regards to shareholders, they receive any monies remaining after all debts, expenses and costs have been paid off. In most cases, there is no money left for shareholders and they are unable to recoup their investment.

 

Steps to take moving forward

It is important to note that the above consequences of corporate insolvency apply to all companies, whether they are startups, small/medium enterprises or large companies. Going forward, companies can try to improve corporate governance. Employees should also try to keep themselves relevant by attending courses at the Workforce Development Agency for instance, so as to make any potential transition in the event of corporate insolvency less painful.

---

This article is written by Alex Liam.

This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.

---