First Singapore case considering a director’s right to apply for leave to wind up a company

As the director had shown that the company was unable to meet its liabilities as they fell due, and as he had also shown that a shareholders’ resolution for winding up could not be passed due to a lack of quorum, the Court held that he had satisfied the requirements for leave to be granted. 

Key takeaways

• The Insolvency, Restructuring and Dissolution Act 2018 introduced a right for a director of a company to apply to court for leave to wind up the company. 
• This case discusses the considerations the court will weigh in deciding whether to grant leave, and makes it clear that the court will not grant leave unless it is satisfied that the application is being made for a legitimate reason and not for an improper purpose. 
• Where directors are of the view that it will be in the interests of the company that it should be wound up, as a matter of best practice, they should as a first step seek to obtain a shareholders’ resolution for winding up. In the event that they have to bring an application to court to seek leave to wind up the company, this will be one factor (albeit not the only one) that will be taken into consideration by the court in deciding whether to grant the application. 

Director brings an application to wind up the company 

Adip Mittal v Offshore Holding Company Pte Ltd [2022] SGHC 239 (27 September 2022) involved an application to wind up Offshore Holding Company Pte Ltd (Offshore). Offshore is a Singapore incorporated company with two shareholders: Mercator Limited, which is a publicly listed company in India, and Mercator International Pte Ltd. Both shareholders are under liquidation. 

Offshore has two directors. Both agreed that Offshore is insolvent and should be wound up. However, attempts to pass a shareholders’ resolution for the winding up of Offshore were not successful as one of the shareholders, Mercator Limited, did not respond to notices of the meeting. Accordingly, with no quorum, a shareholders’ meeting could not be held. 

Accordingly, one of the directors, Adip Mittal (Applicant) brought the application to wind up Offshore under section 124(1)(b) of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) under which any director of a company may apply to court to have the company wound up. Section 124(2) provides that the winding up application may only be made if: 

• The director establishes to the satisfaction of the court a prima facie case for winding up; and 
• The court grants the director permission to bring the winding up application.  

Requirements for granting leave to a director to apply to wind up a company 

The Court reviewed the history of section 124(1)(b), and noted that the director’s right to bring an application had been added to prevent a perceived lacuna in the law, but that the legislature had also wanted to prevent abuse of the right by a director. The Court therefore held that the grant of permission to bring the application required that two limbs be satisfied: 

• There has to be a prima facie case for winding up. This means that the director has to adduce evidence on affidavit which, on its own and without rebuttal, would be sufficient to prove a case for winding up. Such evidence must satisfy one of the grounds for winding up under section 125(1) of the IRDA (e.g, that the company is unable to pay its debts). 
• The Court is satisfied that, among other considerations, the winding up application is being made for a legitimate reason and not for an improper purpose. Other considerations would include the following: 
  • The circumstances in which the application for permission is brought. For instance, if the director cannot bring about the winding up of the company in another way, then the director would well be justified to apply for permission to commence a winding up application. This will also go towards showing that the director’s application for permission is not for an improper purpose.
  • The presence of any collateral purpose for bringing the winding up application. 
  • The presence of any allegation of wrongdoing to the company which a director in his or her capacity would be well-placed to raise with the liquidator for further investigation.
  • The consequences of winding up if an order were eventually made.
  • The existence of a genuine dispute between the parties as to the grounds for winding up.
  • The general policy that an insolvent company should be promptly wound up as a matter of public interest.

The Applicant satisfied both requirements

The Court held that both limbs were satisfied in this case and granted the application: 

• As regards the first limb, the evidence adduced showed clearly that Offshore was hopelessly insolvent: its current liabilities greatly exceeded its current assets over a 12-month time frame and it would not be able to meet its debts as and when they fell due. Accordingly, the Applicant had shown that Offshore was insolvent and hence satisfied one of the grounds under which a company may be wound up. 
• As for the second limb, the Applicant had shown that the directors had tried to get the shareholders to pass a special resolution to wind up Offshore but one of the shareholders, Mercator Limited, had been completely unresponsive to notices and communications from the directors. Mercator Limited had not even responded to the court application for permission to wind up Offshore. Accordingly, it was clear to the Court that the application had been brought for a legitimate purpose: the inability to hold a shareholders’ meeting. Nor was there any evidence that there might be an ulterior motive behind the application. 

Comment

The difficulty facing directors when a company is near insolvency or is insolvent is that they need to also consider the interests of the company’s creditors when determining the interests of the company, and may be held liable for breaching their duties if they do not do this. So, where they are of the view that it would be in the interests of the company to be wound up but are unable to convene the necessary shareholders’ meeting to do so, they would be put in a very difficult position. This decision is to be welcomed as an appropriate means of balancing the needs of the various stakeholders involved to ensure that the directors’ power to apply for the winding up of a company is not abused. Directors facing a similar situation should, as an initial step, take all necessary and reasonable steps to get shareholders to pass the necessary resolution as this will be one factor that will be taken in consideration by the court in deciding whether to grant the application.