It has been said that the current regional economic crisis is unparalleled. Even profitable businesses have been known to fail, as lenders and major creditors tighten credit lines.

I'd like to share with you here some procedures in which you can employ to protect your business from creditors' actions and minimise losses. Conversely, these procedures may also be employed by you, as a creditor, to recover your debts.

Insolvent and Fraudulent Trading

Before I dwell into the informal and formal recovery procedures, I'd like to alert readers to an important trend: an increasing number of creditors are using insolvent and/or fraudulent trading as reason(s) to back their claims so as to enhance their recovery. These are contained in Sections 339(3) and 340 of the Companies Act Cap 50 ("the Act").

Under these sections, a director (or officer) of a limited company may be held personally responsible without any limitation of liability for payment of the whole or part of a debt contracted if at that time, he did not expect to be able to pay the debt (ie insolvent trading). The officer may also be guilty of an offence and subject to a fine and imprisonment. The penalty will be heavier if the business was carried out with an intention to defraud creditors.

Directors and officers should therefore be mindful of the provision in the Act mentioned here, and seek advice when necessary.

Informal Procedures

The consultants may help resolve the company's problems by:

•	Conducting a diagnostic review to ascertain the causes of the financial crisis

•	Suggesting solutions to overcome the crisis

•	Discussing with suppliers/lenders to hold hands and/or restructure the liabilities

•	Sourcing for injection of funds

•	Applying for a government grant under the Local Enterprise Technical Assistance Scheme (LETAS) if the work-out qualifies for it, so as to reduce the cost of the exercise.

The consultants' scope of the work varies and in some instances, major creditors (normally the lenders) of the company may insist that the consultants be a joint signatory for the company's bank accounts to help control its financial affairs.

The advantage of appointing special accountants/work-out consultants as compared to other appointment eg. Judicial managers is that no formal public notice is needed. The goodwill of the company is therefore affected less adversely.

Formal Procedures

Scheme of Arrangement
A company proposing a scheme is usually facing cash flow difficulties. The approval of the scheme provides confidence to potential investors and facilitates an injection of funds.

Section 210 of the Act provides that a company or any of its creditors or members may apply for a Court order to convene a meeting of creditors or members where a compromise or arrangement is proposed. If a majority representing three-fourths in value of those present and voting at the meeting, either in person or by proxy, agrees to the compromise or arrangement, the scheme, once sanctioned by the Court, will be binding on all creditors and members.

The main drawback of this procedure is the lack of automatic protection against creditors' actions. However, if the company could show that the scheme is proposed in the interest of its creditors and the company, the Court may be inclined to grant approval for it to convene the meeting(s) for the creditors/members to consider the scheme. An order of stay of proceedings (ie. no further legal actions unless allowed by the Court) is normally granted to facilitate the meetings.

The costs for proposing and administering the scheme are generally lower than judicial management. However, as a company usually continues operations while a scheme is being proposed, the directors and officers of the company are advised to trade carefully to avoid running into the risk of insolvent trading should the scheme fails.

Judicial Management
A company under pressure from creditors may petition for a judicial management order to protect itself from creditors' actions.

The laws relating to judicial management were introduced after the 1985 recession. It is now better known and more widely adopted. A company or its directors (pursuant to a resolution of its members or the board of directors) or a creditor may apply for it. When presenting the petition, the company is advised to put forth a plan, not necessarily in detail, in its applicaion to enhance the chances of securing the order. The Court may grant the order if:

i.

the survival of the company as a going-concern in whole or in-part

ii.

approval under Section 210 of the Act

iii.

there is a more advantageous realisation of the company's assets than would be effected on a winding up.

It is relevant to note that even if the business is not viable, a company or its creditor(s) may still petition for a judicial management order if it is likely to achieve the objective set out in (iii) above.

The judicial management order, however, may not be available to a company if the whole (or substantially the whole) of its assets is secured by a floating charge unless the debenture holder, who has the veto power given under the Act, agrees to the application.

There will be an immediate and automatic moratorium once the petition is presented in Court where:

Where necessary, the Court may on the application of the petitioner, appoint an interim judicial manager pending the judicial management order.

Once the judicial management order is given, the judicial manager shall forward a proposal within 60 days for consideration by the creditors. The judicial management order shall remain in force for 180 days to facilitate implementation. These periods may be extended by the Court.

The judicial manager will apply for the discharge of the order once the proposal is fully implemented.

Provisional liquidation / Liquidation
When the business of the company is no longer viable, it may be advisable to place the company under liquidation so that the company's affairs may be wound up in an orderly manner.

A company may be wound up by way of:

•	Members' Voluntary Winding Up for a solvent company

•	Creditors' Voluntary Winding Up for an insolvent company

•	Court order for either a solvent or insolvent company

At times, a company may be placed under provisional liquidation for various reasons eg. to avoid a scramble for assets by creditors. In this instance, a more expeditious approach than applying to Court would be for the company's directors to make a statutory declaration pursuant to Section 291 of the Act and to appoint a provisional liquidator. Any attachment, distress or execution put in force after the appointment of the provisional liquidator shall be void and no action or proceeding shall be proceeded with or commenced against the company unless approved by the Court.

A company may resolve by special resolution to place itself under liquidation by a Court order on the grounds of insolvency.

Alternatively, it may proceed with a creditors' voluntary winding up pursuant to Section 296 of the Act. Creditors are to meet on the same day after the extraordinary general meeting (to pass the special resolution for winding up) or the following day where they may nominate a person to be the liquidator. Where none is nominated, the person nominated by the shareholders shall be the liquidator.

It should be noted that creditors at the meeting have no right to object to the voluntary winding up. However, where a petition has already been filed in Court to wind up the company on the grounds of insolvency, the company shall not pass a resolution to wind up voluntarily.

Receivership
When a company defaults in its payment to its debentureholder, a receiver (and manager) may be appointed by the lender to recover the loan. In this instance, the company should give full assistance and co-operation to the receiver as such efforts will enhance the realisation and minimise the losses suffered by the company and its guarantors.

A receiver (and manager) may also be appointed by the Court:

•	To acts as a caretaker when the assets of the company are in jeopardy

•	To enforce a judgement debt or a security

There may be situations where the receivers and managers are prepared to continue to operate/trade after their appointment and to hive down the company's business with a view to dispose of the business as a going concern. It may then present an opportunity for the owner or investor to revive the business.

Conclusion

The chart below sums up how the various procedures highlighted here can help a company that is facing difficulties to turnaround and/or minimise losses.

Lastly, readers should note that the laws relating to insolvency are complex and cannot be covered sufficiently in-depth in this article, which aims to give an overview of the avenues available. Professional advice should be sought from an insolvency practitioner or a lawyer if assistance is required.

Year published : 1998