Case: Sun Electric Power Pte Ltd v RCMA Asia Pte Ltd [2021] SGCA 60 – cash flow test for insolvency; directors liability for costs

Sun Electric Power Pte Ltd v RCMA Asia Pte Ltd (formerly known as Tong Teik Pte Ltd) [2021] SGCA 60

Supreme Court Case Summary | Judgment


A. Directors’ conduct of appeal against company winding up

A company may appeal against a winding up order. Its directors may control the conduct of the appeal. However, the directors and/or shareholders may not use the company’s funds to pursue an unmeritorious appeal when these funds should be reserved for payment to the creditors. 2 general rules:

(1) directors and/or shareholders controlling the conduct of the appeal should pay costs incurred by the company in prosecuting the appeal out of their own pockets instead of using company funds. If the appeal succeeds, the directors and/or shareholders can reclaim from the company the funds that they had expended from their own pockets in prosecuting the appeal.

(2) the directors and/or shareholders controlling the conduct of the appeal should be personally responsible for the payment of any party and party costs awarded in favour of the respondent if the appeal fails.

B. Cash Flow Test for Insolvency

Previously, courts have applied both the cash flow test and the balance sheet test to assess if a company is insolvent.

The Court of Appeal held that the cash flow test is the only test under s 254(2)(c) of the Companies Act (now s 125(2)(c) of the Insolvency Restructuring and Dissolution Act) to determine whether a company is unable to pay its debts: at [65].

It assesses whether the company’s current assets exceed its current liabilities such that it is able to meet all debts as and when they fall due.

“Current assets” and “current liabilities” refer to assets which will be realisable and debts which will fall due within a 12-month timeframe.

The court also set out a non-exhaustive list of factors which should be considered under the cash flow test: at [69]:

a. the quantum of all debts which are due or will be due in the reasonably near future;

b. whether payment is being demanded or is likely to be demanded for those debts;

c. whether the company has failed to pay any of its debts, the quantum of such debt, and for how long the company has failed to pay it;

d. the length of time which has passed since the commencement of the winding up proceedings;

e. the value of the company’s current assets and assets which will be realisable in the reasonably near future;

f. the state of the company’s business, in order to determine its expected net cash flow from the business by deducting from projected future sales the cash expenses which would be necessary to generate those sales;

g. any other income or payment which the company may receive in the reasonably near future; and

h. arrangements between the company and prospective lenders, such as its bankers and shareholders, in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a time later than the debts.

C. Partial Payment of Statutory Demand Debt

Also, a company which makes partial payment of the debt demanded in a statutory demand within the prescribed 3-week period such that the remaining amount payable falls below $10,000 (the threshold amount for presumption of inability to pay) should not be deemed to be unable to pay its debts pursuant to s 254(2)(a) of the Companies Act.

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