Case Update: Living the Link Pte Ltd v Tan Lay Tin Tina [2016] SGHC 67 – SGHC clarifies law on undue preference, running account principle, and partial reversal of undue preference transactions

Significance: Singapore High Court, in determining a case of undue preference and breach of fiduciary duties by a former director of a company, considered the application of the running account principle defence. The principle is that a transaction, which on its face is an undue preference, can be upheld on the basis that it was made under a mutually beneficial running account. The Court held that the fact that an impugned payment was made pursuant to a running account is by itself insufficient to negate an intention to prefer – it must have been made with the intention of obtaining new value to keep the business going. The running account principle, so understood, is not strictly an independent defence, but goes to proving that the insolvent company was acting solely by reference to proper commercial considerations in making the payment and was not influenced at all by a desire to prefer the creditor: [55].

The Court also considered that the court’s broad discretion under s 99(2) of the Bankruptcy Act allows it, in an appropriate case, to order a partial reversal of transactions found to be undue preferences if justice so requires. Such an order may be justified, for example, in clear cases where the parties’ claims are uncontroversial, or where there is an agreement between the preferred creditor and the liquidators as to the amount which ought to be set aside for the claims of the other unsecured parties: [76].

The Court also followed the English Court of Appeal’s decision in Liquidator of West Mercia Safetywear Ltd v Dodd and another (1988) BCC 30 (“West Mercia”) in holding a director personally liable for procuring an undue preference on the basis of breach of fiduciary duties.

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