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

Significance:

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.

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Case: Offence of Raising Funds Without Prospectus and Small Offer Exemption

Singapore Law; Legal; Lawyer

Significance: In Public Prosecutor v Tay Chee Ming [2020] SGMC 1, the court found a company director and shareholder, Tay, guilty of an offence under section 240 of the Securities and Futures Act (Cap. 289) (SFA) for raising funds from the public in Singapore through offers of convertible loan agreements (CLA) with investors by his company. Tay was sentenced to imprisonment for 15 months. Tay raised about S$8 million in total.

This appears to be the first court decision on the offence and a discussion on the small offer exemption under section 272A(1) of the SFA, which is one of the safe harbour exemptions from prospectus requirements for businesses to raise funds. The private placement exemption in section 272B of the SFA was not raised by the accused and so was not considered.

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Film Financing 2: Understand the Different Types of Business Structures

Registering a suitable business entity structure is important for film financing because the structure affects the options in terms of what you can offer to investors.

In theory, there are many options for a business structure: sole proprietorship, general partnership, limited partnership, limited liability partnership (LLP), private limited company.

I’ll just cut straight to the point. If you want to have more options in terms of offering equity / shares to investors, then opt for a private limited company.

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Case Update: Pathfinder Strategic Credit LP and another v Empire Capital Resources Pte Ltd [2019] SGCA 29 – Necessary Disclosure for Leave for Creditors’ Meeting for Scheme of Arrangement

Singapore Law; Legal; Lawyer

Significance: Singapore Court of Appeal sets out principles on reasonably necessary disclosure required for court to grant leave for calling a creditors’ meeting to consider a proposed scheme of arrangement. Court holds that applicant did not provide necessary financial disclosure required and refused to grant leave.

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Article: Measure of Loss for Breach of Warranty in Sale of Shares

Singapore Law; Legal; Lawyer

If A buys shares from B, and B made certain warranties to A about the company which turned out to be false, A can sue B for breach of warranty. Separately, if B had made misrepresentations to A to induce A to purchase the shares, A can sue B for misrepresentation in addition to breach of contract.

This may occur for example where it was falsely warranted that the company’s profits were higher than they in fact were, or that certain machinery or property of the company was in good working condition and free of defects.

How is the loss measured in such a scenario?

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Shareholders Agreement Drafting Questionnaire

Singapore Law; Legal; Lawyer

What is a Shareholders Agreement?

A shareholders agreement is a legal document setting out the rights and obligations of the shareholders in a company. Shareholders agreements are often used in private companies or joint ventures. Unlike the company constitution, the shareholder agreement is not mandatory under the Companies Act. The Companies Act is the main governing legislation for companies incorporated in Singapore. If there is no shareholders agreement, the relationships of shareholders as between themselves and with the company are governed by the constitution or articles of association of the company.

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