The liquidation process is often a long and complicated affair. Liquidators are tasked with the challenging job of realising a company’s assets and distributing them among creditors in accordance with the regulations. In many cases, legal proceedings are necessary against wrongdoers who have caused losses to the insolvent company or have improperly disposed of the insolvent company’s assets before liquidation. Liquidators require funding to pursue such claims. However, with the insolvent company’s lack of assets and funds, the liquidator may have no choice but to forego the claims that the company may have against such wrongdoers.

Under s 204(3) of the Insolvency Restructuring and Dissolution Act 2018 (“IRDA“), creditors who are prepared to assume risks by giving an indemnity to the liquidator for costs or providing funding for litigation to recover assets, can apply for a court order for assets recovered to be distributed to them in priority to other creditors. Song Jianbo v Sunmax Global Capital Fund 1 Pte Ltd (in compulsory liquidation) [2022] SGHC 312 (“Song Jianbo”) is the first reported case concerning the applicability of s 204(3) of the IRDA.

Brief facts

Mr Song Jianbo (“Mr Song“) was a creditor of Sunmax Global Capital Fund 1 Pte Ltd (in compulsory liquidation) (the “Company“). As the Company did not have sufficient assets to fund investigative or recovery efforts, the liquidator sought funding from creditors of the Company.

Mr Song offered funding for the investigation and recovery, along with an indemnity for the liquidator’s costs and expenses. The liquidator and Mr Song subsequently entered into a Creditor’s Funding Agreement (the “Agreement”), which provided for the funding, indemnification of the liquidator’s costs and expenses, and specific safeguards requested by the liquidator. The Agreement stipulated that the liquidator distributes to Mr Song, from assets or expenses recovered from the litigation, up to the entirety of the debt the liquidator certifies as owing by the Company to Mr Song. Further, Mr Song was to rank for such distribution in priority to all other unsecured creditors of the Company. Mr Song thereafter made an application under s 204(3) IRDA to be granted priority on the same terms (the “Application”).

The High Court granted the Application and ordered that Mr Song be repaid all of the debt in priority to other creditors, including preferred creditors under s 203(1) IRDA.

Position before the IRDA

Before the introduction of s 204(3) IRDA, the provision relied on to grant an advantage in distribution was s 328(10) Companies Act 1967 (the “Companies Act”). In Re Vanguard Energy Pte Ltd [2015] SGHC 156, the High Court held that under s 328(10) of the Companies Act, it could not make an order giving a more advantageous distribution to creditors until the assets and/or the expenses had been recovered. Therefore, creditors had to first fund the liquidators and then apply to Court for a more advantageous distribution. S 328(10) of the Companies Act has been adopted in s 204(1) IRDA.

Under s 328(10) CA, funding creditors had no guarantees that the risk they undertake will result in an advantage over other creditors in repayment. There was always the possibility that the funding creditor could end up with nothing in return for the provision of funding if litigation is not successful. However, even if the litigation was successful, there was also a risk the Court may not grant the funding creditor priority in distribution of assets under s 328(10) CA. If priority in distribution was not granted, the funding creditor may not be repaid from the recovered assets.

Without guarantee of a more beneficial distribution, there was lesser incentive for creditors to offer funding and the usefulness of s 328(10) CA was diminished. In the absence of compensation for the risk undertaken by creditors, it would have been difficult for liquidators to convince creditors to provide funding.

Factors considered

The general non-exhaustive list of factors considered in the grant of a prospective order under s 204(3) of the IRDA are:

1. the complexity and necessity of the proceedings in respect of which the funding or indemnity is given;
2. the extent of the funding or indemnity to be provided, and the level of risk to be undertaken and the costs to be borne by the funding creditor;
3. the failure of other creditors to provide funding or indemnity and whether the other creditors were given the opportunity to do so;
4. the emergence of other creditors between the making of the order and the date of a distribution under the order to the funding creditor;
5. the public interest in encouraging creditors to provide funding or indemnity to enable assets to be recovered; and
6. the presence or absence of any objections from the other creditors, the Liquidator, or the Official Assignee.

Mr Song had offered the funding and indemnity at the beginning of the Company’s winding up process and the Court recognised that Mr Song was taking a high risk. Mr Song risked not getting a return for his provision of funding because not much was known about the eventual success of the liquidator’s investigative and recovery efforts.

The Court recognised that there was a public interest in encouraging creditors to provide funding or indemnity to enable assets to be recovered. The pursuit of claims is beneficial to creditors and shareholders as it enhances the assets available for distribution. Additionally, proceedings by liquidators recover property from wrongdoers and go towards discouraging misconduct in relation to companies. Allegations of misfeasance by the former director of the Company in Song Jianbo were seen by the Court as a “matter of public importance that the Liquidator needed to investigate”.

Commentary

Song Jianbo helpfully elucidates the factors in the Court’s consideration when making an order under s 204(3) IRDA to grant a priority over other creditors. In that regard, potential funders may face a challenge in persuading the Court that there is a necessity to grant the priority since there is usually limited evidence on the risk and no benefit of hindsight at the early stages of litigation. Additionally, payment in priority to the funding creditor may potentially prejudice non-funding unsecured creditors — a problem that will require the consideration of relevant safeguards.

It is hoped that future cases and developments will refine the balancing act in Singapore between the protection of creditors and the upcoming shift towards a rehabilitation-friendly insolvency regime.

For more information on this matter, please feel free to contact  Mr Andrew Ang, Ms Divya Durai or Mr Chong Wei Jie.