robsonlee fraud or wrongful trading cases

1. WRONGFUL TRADING UNDER SECTION 239 OF THE IRDA

2. Definition of Wrongful Trading Section 239(12) of the IRDA states that a company trades wrongfully if: (a) The company, when insolvent, incurs debts or other liabilities without reasonable prospect of meeting them in full; or (b) The company incurs debts or other liabilities (i)  That it has no reasonable prospects of meeting in full; and (ii) That result in the company becoming insolvent. The term “liability” is defined broadly under Section 2 of the IRDA. It means a liability to pay money or money’s worth, regardless whether such liability is present of future, certain or contingent or of an amount that is fixed or liquidated or that is capable of being ascertained by fixed rules or as a matter of opinion. This includes liability arising from

3. (a) Under any written law; (b) Under any contract, tort or bailment; (c) As a result of a breach of trust by the person liable; or (d) Out of an obligation to make restitution. Orders that the Court may make Under Section 239(1) of the IRDA, if it is discovered that in the course of judicial management or winding up that the company has traded wrongfully, the Court may declare any party to be personally responsible for all or any of the debts or liabilities incurred by the company. This is subject to the following: (a) The party knows that the company was trading wrongfully; or (b) The party, as an officer of the company, ought to have known that the company was trading wrongfully.

4. Additionally, pursuant to Section 239(3), the court may make the following additional directions: Make provision for making the liability of any person a charge – (i)  On any debt/obligation due from the company to the person liable; or (ii) On any charge or any interest on any assets of the company held by or vested in either (a) the person liable; (b) any corporation/other person on behalf of the person liable; or (c) any person claiming as assignee from or through the person liable or any corporation or other person acting on behalf of the person liable. (b) Make such further order as is necessary for the purpose of enforcing any charge imposed under Section 239(3); and (c) Provide that sums recovered under Section 239 of the IRDA to be paid to such persons/classes of persons.

5. Such declarations/directions may be made pursuant to the following party’s application:[1] (a) The judicial manager; (b) The liquidator; (c) The Official Receiver; and (d) Any creditor/contributory of company, with the leave of either the judicial manager/liquidator or the court. Defence Section 239(2) of the IRDA provides a defence to Section 239(1) where: (a) The person acted honestly; and (b) Having regard to all circumstances of the case, the person ought fairly to be relieved from the personal liability. 

6. Criminal liability In addition to the declaration made under Section 239(1), where a company has traded wrongfully, every person who was a party to the wrongful trading and who either (a) knew that the company was trading wrongfully; or (b) as an officer of the company, ought, in all circumstances, to have known that the company was trading wrongfully, will be guilty of an offence.[2] The punishment would be a fine of not more than $10,000 or imprisonment for a term not more than 3 years or both.[3] Origins of Wrongful Trading under Section 239 of the IRDA The introduction of the new wrongful trading provision under Section 239 of the IRDA was made following the Report of the Insolvency Law Review Committee 2013 (the “Committee”). This provision was introduced to replace the old insolvent trading regime in Section 339(3) read with Section 340(2) of the Companies Act, as reproduced below:

7. Section 339(3): If, in the course of the winding up of a company or in any proceedings against a company, it appears that an officer of the company who was knowingly a party to the contracting of a debt had, at the time the debt was contracted, no reasonable or probable ground of expectation, after taking into consideration the other liabilities, if any, of the company at the time of the company being able to pay the debt, the officer shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $2,000 or to imprisonment for a term not exceeding 3 months. Section 340(2): Where a person has been convicted of an offence under section 339(3) in relation to the contracting of such a debt as is referred to in that subsection, the Court, on the application of the liquidator or any creditor or contributory of the company, may, if it thinks proper to do so, declare that the person shall be personally responsible without any limitation of liability for the payment of the whole or any part of that debt.

8. As reported in the Second Reading Speech by Senior Minister of State for Law, Mr Edwin Tong, on the Insolvency, Restructuring and Dissolution Bill, the old regime was unsatisfactory as criminal liability must first be found as a prerequisite before civil liability can be imposed against the officer of the company. This old regime has also not been used in any reported cases in Singapore.[4] The current wrongful trading provision in the IRDA was loosely adapted from the Cork Committee’s report published in 1982. The Committee highlights that the wrongful trading provision strikes that best balance between promoting responsible entrepreneurship and preventing abuse of the corporate form by those who manage the companies.[5] Case Law As noted above, there are no reported decisions on wrongful trading in Singapore before the enactment of the IRDA. There are also no reported decisions on wrongful trading in Singapore after the IRDA came into force.

9. Hence, the following sections will analyse case laws from other common law jurisdictions such as the United Kingdom and Australia English Cases • By way of context, wrongful trading encapsulated under Section 214 of United Kingdom’s Insolvency Act (the “UK Insolvency Act”) is reproduced as follows: • Subject to subsection (3) below, if in the course of the winding up of a company it appears that subsection (2) of this section applies in relation to a person who is or has been a director of the company, the court, on the application of the liquidator, may declare that that person is to be liable to make such contribution (if any) to the company’s assets as the court thinks proper. • This subsection applies in relation to a person if –

10. (a) The company has gone into insolvent liquidation, (b) At some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and (c) That part was a director of the company at that time; • The court shall not make a declaration under this section with respect to any person if it is satisfied that after the condition specified in subsection (2)(b) was first satisfied in relation to him that person took every step with a view to minimising the potential loss to the company’s creditors as (on the assumption that he had knowledge of the matter mentioned in subsection (2)(b)) he ought to have taken.

11. For the purposes of subsections (2) and (3), the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both— (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has. • The reference in subsection (4) to the functions carried out in relation to a company by a director of the company includes any functions which he does not carry out but which have been entrusted to him. • For the purposes of this section a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.

12. (6A) For the purposes of this section a company enters insolvent administration if it enters administration at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the administration. • In this section “director” includes a shadow director. • From the statutory provision, it can be seen that wrongful trading under the UK Insolvency Act differs from wrongful trading under the IRDA. Nevertheless, the English cases may offer some guidance as to how wrongful trading may or may not be made out. • In the case of Re Ralls Builders Ltd (in liquidation); Grant and another v Ralls[6], the liquidators brought wrongful trading proceedings against the directors under Section 215 of the UK Insolvency Act for a contribution to company’s assets. The liquidators alleged that the directors knew or ought to have known by 31 July 2010 or 31 August 2010 that there was no reasonable prospect that the company would avoid going into insolvent liquidation.

13. The court found that the directors were in a position whereby they knew or ought to have to known by 31 August 2010 that there was no reasonable prospect that the company would avoid insolvent liquidation. This was because at the end of August 2010, a potential investor that the directors had been speaking with to obtain investment made little to progress. The potential investor had also repeatedly failed to produce the moneys that he indicated would be available in August. In deciding whether to hold the directors personally liable to contribute to the company’s assets, the court considered whether the directors had taken every step with a view to minimising the loss to creditors. The continued trading of the company had facilitated the repayment of certain existing creditors while leaving new creditors unpaid. Thus, a declaration was not made to hold the directors personally liable to contribute. It should also be noted that the continued operations of the company in this case had produced a modest improvement in the net deficiency of the company.

14. In Re Continental Assurance Co of London plc[7], Continent was an insurance company that went into liquidation in March 1992 as a result of an unexpected surge in insurance claims. The liquidators brought a claim under Section 214 of the UK Insolvency Act against the former managing director and several of the company’s former non-executives. The liquidators allege that the company should have ceased trading in mid-1991 when losses were first reported. The court found that the directors were not liable as the company was still technically solvent in July 1991. Nevertheless, the court held that the same conclusion would have been reached if the company had been factually insolvent in July 1991. This was because the directors had acted reasonably based on the information available to them at the material time. When losses were first reported, the directors had instructed the auditors to conduct a detailed analysis on the company’s financial position. Moreover, at every board meeting during the crisis period, assurances were sought from the finance director and the auditors that the company was still solvent.

15. When further losses were thereafter reported, the directors concluded in December 1991 that the company had become insolvent, gave instructions that it should cease operations and sought advice from insolvency practitioners. In BTI 2014 LLC v Sequana SA and others[8], the court also noted that wrongful trading provides a powerful incentive for directors to take early action if their company is financial distressed, and not throw the burden of the company’s financial position and continued trading on to creditors. In this sense, wrongful trading operates like a sword of Damocles over the directors’ heads when the company is financially distressed. As noted by the court, the trigger point in which directors bear a duty to not engage in wrongful trading commences when there is either: (a) an insolvency that the directors know or ought to have known is around the corner; (b) the probability that the company is entering into liquidation.

16. Australian Cases In Australia, the relevant wrongful trading provision under Section 588G of the Australian Corporations Act 2001 (the “Australian CA”) is reproduced as follows: • This section applies if: (a) a person is a director of a company at the time when the company incurs a debt; (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be. • By failing to prevent the company from incurring a debt, the person contravenes this section if: (a) The person is aware at that time that there are such grounds for so suspecting; or

17. (b) A reasonable person in a like position in a company in the company’s circumstances would be so aware. • A person commits an offence if: • (a)  a company incurs a debt at a particular time; • (aa) at that time, a person is a director of the company; • (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; • (c) the person suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt or other debts (as in paragraph (1)(b)); and • (d) the person’s failure to prevent the company incurring the debt was dishonest. From the statutory provision, it can be seen that wrongful trading under the Australian CA differs from wrongful trading under the IRDA. Nevertheless, the Australian cases may offer some guidance as to how wrongful trading may or may not be made out.

18. In Fryer v Powell[9], the liquidators of a company in liquidation sued the directors for the recovery of a sum of money equivalent to the debts incurred at the time when the company was insolvent or when grounds existed for a reasonable suspicion that it was insolvent. On the facts, the company was hopelessly insolvent by mid-1992 and that its situation did not ever recover in a significant degree. The directors had realised that they were incurring debts which they were not in a position to pay and this situation persisted over a long period of time. There was also no realistic possibility of securing adequate funding from elsewhere to enable it to meet its debts. Thus, the directors had contravened Section 588G of the Australian CA. It should be noted that the term “debt” was defined as a debt incurred when, by its conduct or operations, a company has necessarily subjected itself to an unavoidable obligation to pay a sum of money at a future time. Such obligation may be present and absolute, or contingent.

19. In Smith v Boné, in the matter of ACN 002 864 002 Pty Ltd (in liq)[10], MrBoné, was the sole director of the company, Petrolink. When Petrolink went into liquidation, the liquidator brought an action under Section 588G of the Australian CA against MrBoné in respect of debts incurred while the company was insolvent. The issue before the court was whether there were reasonable grounds for suspecting that the company was insolvent in circumstances where there were payment arrangements with the Australian Tax Office in respect of tax debts. The court held that the payment arrangements did not cause the tax debt to cease to be due and payable. Hence, MrBoné was liable under Section 588 of the Australian CA. This case thus highlights that repayment agreements entered into with creditors are not sufficient to shield directors from liability under wrongful trading.

20. In the case of Treloar Constructions Pty Ltd v McMillan[11], Treloar Constructions Pty Ltd (“Treloar”) entered into a contract with McMillan Prestige Pty Ltd of which McMillan was a director. Treloar issued 11 invoices that were unpaid. Receivers were thus appointed to McMillan Prestige Pty Ltd and it was wound up. Treloar brought proceedings against McMillan to recover the unpaid invoices and for allowing the invoice debts to be incurred when the company was trading while insolvent. The Court of Appeal granted judgment in favour of Treloar. In so doing, the court noted that access to short term or “on-demand” funding was not supportive of a finding that a company was solvent.  FRAUDULENT TRADING UNDER SECTION 238 OF THE IRDA Under Section 238(1) of the IRDA, if in the course of judicial management or winding up, it appears that the business of company has been carried on with the intent to defraud creditors of the company or of any other person or for any fraudulent purpose,

21. the court may declare that any person who was knowingly a party to the carrying on of the business in that manner is personally responsible for all or any debts or other liabilities of the company. Fraudulent trading attracts a criminal liability of a fine not exceeding $15,000 or an imprisonment term not exceeding 7 years, or both. As noted by the High Court in Marina Towage Pte Ltd v Chin Kwek Chong and another[12], unlike wrongful trading, a finding that a company incurred a debt or other liability without reasonable prospects of meeting it in full is not a necessary or sufficient condition for establishing fraudulent trading.[13] Nevertheless, such a finding may constitute circumstantial evidence for the court to draw an inference of an intent to defraud.[14] It bears noting that there are no material changes in substance from the predecessor of Section 238(1) of the IRDA – the repealed Section 340 of the Companies Act.

22. The relevant test to determine the intent to defraud is whether the debtor obtains credit with the intention that the creditor will never be paid or obtains credit to the prejudice of the creditor in a manner which the debtor knows is generally regarded as dishonest.[15] To this end, it is necessary to demonstrate that the creditor was deceived or mislead and that the debtor intended to gain an advantage.[16] GENERAL FIDUCIARY DUTIES OWED BY DIRECTORS WHEN A COMPANY IS NEAR INSOLVENCY When a company is insolvent or near insolvent, directors bear a fiduciary duty to take into account the interests of the company’s creditors when making decisions for the company. This fiduciary duty requires directors to ensure that the company’s assets are not dissipated or exploited for their own benefit to the prejudice of creditors’ interests.[17]

23. In Prima Bulkship Pte Ltd and another v Lim Say Wan[18], two special purpose vehicles (“SPVs”) were incorporated for the specific purpose of purchasing two vessels. The SPVs bought an action against the directors of the SPVs (“Defendant Directors”) for entering into memorandum of agreements (“MOAs”) to purchase the vessels when the SPVs were insolvent or of doubtful solvency. While the SPVs were of doubtful solvency, that in and of itself does not mean that the directors have breached their fiduciary duties. The surrounding circumstances had to be considered. Accordingly, the key issue is whether the Defendant Directors had breached their duty by permitting the SPVs to enter into the MOAs given the surrounding circumstances. The court noted that the fiduciary duty did not require the Defendant Directors to prevent the SPVs from entering into a bona fide transaction that they believed would benefit the company. Such believe should be based on reasonable commercial grounds.

24. To find otherwise would effectively impose personal liability on directors under the guise of breach of director’s duties for trading in an insolvent situation, when such liability is only for wrongful and/or fraudulent trading under Sections 339(3) and 340 of the Companies Act. In analysing the surrounding circumstances, the court found that there was a reasonable expectation that the purchasers and/or the shareholders of the SPVs would eventually obtain the finances when performance was due. By the time the Defendant Directors were appointed, the parties were on the cusp of entering into the MOAs. It would thus be unreasonable to find that the Defendant Directors had a duty to ensure that funds for the purchase be put in place before the MOAs were executed. Accordingly, the Court concluded that the Defendant Directors had not breached their duty. In the case of Dynasty Line Ltd v Sukamto Sia[19], Dynasty Line Limited (“Dynasty”) was a personal investment vehicle of an individual, Sia. Sia was the director and sole shareholder of Dynasty.

25. There was also another director, Lee. Dynasty completed seven sale and purchase agreements for the acquisition of approximately 29.5 million shares (“Shares”) in China Development Corporation (“CDC”). Approximately 28% of the purchase price was paid and the Shares was the only asset of Dynasty. Subsequently, the Shares were pledged by Dynasty to various financial institutions (“Security Transactions”) for loans granted to Sia and his associates (“Borrowers”). The Borrowers defaulted and the pledged Shares were sold off by the financial institutions as a consequence. Subsequently, Dynasty was wound up and liquidators commenced proceedings against Sia and Lee for breach of their fiduciary duties. The court held that at the time the Security Transactions were entered into, there were ample grounds for the directors of Dynasty to have concerns that Dynasty would be approaching or be in a position of insolvency if it went ahead with those transactions.  Dynasty was liable for the unpaid shares and did not have any other assets.

26. Hence, the pledging of the Shares greatly compromised Dynasty’s ability to pay the purchase price for the Shares and this imperilled its solvency.  The court found that Sia should have known that by pledging the Shares, he had prejudiced Dynasty’s ability to repay the liabilities that it owed to its creditors. Therefore, Sia breached his duty by wholly disregarding the interests of Dynasty’s creditors. Lee, on the other hand, was an experienced businessman and had been involved in the management of publicly listed companies for a number of years. He had to have been aware of the nature of one of the pledges as he had signed the relevant documents. Accordingly, he had breached his fiduciary duties in relation to that particular pledge.

27. [1] Section 239(5) of the IRDA. [2] Section 239(6) of the IRDA. [3] Section 239(6) of the IRDA. [4] Second Reading Speech by Senior Minister of State for Law, Mr Edwin Tong, on the Insolvency, Restructuring and Dissolution Bill, < https://www.mlaw.gov.sg/news/parliamentary-speeches/second-reading-speech-sms-edwin-tong-insolvency-omnibus-bill> at paragraph 30. [5] Report of the Insolvency Law Review Committee 2013, <https://app.mlaw.gov.sg/files/news/announcements/2013/10/ReportoftheInsolvencyLawReviewCommittee.pdf> at paragraph 21. [6] [2016] EWHC 243. [7] [2007] 2 BCLC 287. [8] [2022] UKSC 25.

28. [9] [2001] SASC 59; (2001) 159 FLR 433. [10] [2015] FCA 319. [11][2017] NSWCA 72. [12] [2021] SGHC 81. [13]Id, at [100]. [14]Ibid. [15]Id, at [96]. [16]Id, at [97]. [17]Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd [2010] 4 SLR 1089. [18] [2016] SGHC 283. [19] [2014] 3 SLR 277.