Undue Preference: The New Test - International Law Office

International Law Office

Insolvency & Restructuring - Singapore

Undue Preference: The New Test

May 26 2000

Bankruptcy Act 1995
Case Law

Bankruptcy Act 1995

The enactment of Section 99 of the Bankruptcy Act (Cap 20) in 1995 introduced a significant change to Singapore's insolvency law, bringing it in line with UK law. Section 99 (read with Section 329 of the Companies Act) allows for the voiding of certain transactions entered into by a company before liquidation, if the transactions constitute an unfair preference given to some creditors over other creditors. A company is treated as having given an unfair preference to a creditor if (i) it does anything which has the effect of putting that creditor in a position which, in the event of the company's liquidation, will be better than the position the creditor would have been in if that thing had not been done, and (ii) it was influenced by a desire to produce the above effect (ie, the improvement of a creditor's position).

The old law on unfair preferences required a 'dominant intention to prefer' a creditor on the part of the company. The court then had to look at all the circumstances of the case to see if an intention to improve the position of a creditor in the event of the company's liquidation could be objectively inferred. In addition, this intention to improve a creditor's position must have 'tipped the scales' in the company's decision to enter into the relevant transaction. In this way, the test for unfair preferences was objective.

Under Section 99, a dominant intention to prefer is no longer required. Rather, the section seeks to void transactions that were entered into by a company influenced by a desire to improve a creditor's position in the event of its own liquidation. The High Court has adopted the English approach set out in Re MC Bacon Ltd [1990] BCLC 324, in the recent case of Re Libra Industries Pte Ltd [2000] 1 SLR 84.

Case Law

Justice Millet in Re MC Bacon focused on the new language used, and noted that words such as 'dominant' and 'intention' under the old law have been replaced with 'influence' and 'desire'. He held that, in view of the new language used, the test for unfair preference is now necessarily a subjective one.

A company must positively wish to improve the position of a creditor in the event of its own liquidation and it is sufficient if such a desire is only one of the factors that operated in the minds of those who made the decision on behalf of the company.

In Re MC Bacon, the liquidators of an insolvent company sought to set aside a debenture granted to a bank, with whom it had an overdraft, four months before liquidation. Upon examination of all the circumstances of the case, Millet was satisfied that the directors of the insolvent company had decided to grant the debenture in order to avoid the calling in of the overdraft by the bank, and thereby continue trading. It was obvious from the evidence that the bank's support was necessary for the company's survival. Hence, Millet held that, on the facts, there was no desire on the part of the company to improve the position of the bank and the debenture was not void as an unfair preference.

In Re Libra Industries, the liquidators of an insolvent company sought to recover sums paid, over a period of a year and a half before the company's winding up, to the company's majority shareholder. It was alleged that no supporting invoices were made for these payments which amounted to more than S$900,000. The relationship between the company in liquidation and its majority shareholder gave rise to a rebuttable presumption under Section 99(5) that the payments were influenced by a desire to improve the shareholder's position in the event of the company's winding up.

In interpreting Section 99, Justice Kan Ting Chiu followed Millet's analysis and decision in Re MC Bacon. Based on the explanation given by the other shareholder of the company who confirmed the practice of the company in making payments to its majority shareholder without reference to specific invoices, and the fact that the majority shareholder was not paid in full to the exclusion of the other creditors, Kan Ting Chiu held that the presumption of desire was rebutted and the payments not void.


For further information on this topic contact Manoj Sandrasegara at Drew & Napier by telephone (+65 531 4156) or by fax (+65 532 7149) or by e-mail (manoj.sandra@drewnapier.com). The Drew & Napier web site can be accessed at www.drewnapier.com.
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