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High Court suggests that it should lean in favour of not granting approval for the transfer of shares where the shares are of an insolvent company

Under the Insolvency, Restructuring and Dissolution Act 2018, a transfer of shares in a company made after the commencement of winding up of that company by the Court is void unless otherwise ordered by the Court. While this section may be a potential risk where security over shares is taken, prior cases have held that approval for the transfer should be granted where shares are fully paid up. However, the latest High Court decision casts a shadow on this. This note considers the case. 

In Ong Boon Chuan v Tong Guan Food Products Pte Ltd (in compulsory liquidation) & Anor [2022] SGHC 181 (29 July 2022), the Singapore High Court considered whether to grant approval for the transfer of shares in a company that was being wound up. In deciding whether to do so, it suggested that the Court should “lean in favour of preserving the status quo” and not granting an order to approve the transfer.

Applicant sought to seize and sell respondent’s shares in company under liquidation

As noted, the case involved an application made under section 130 of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA). This provision avoids dispositions of property made after the commencement of winding up, including any transfer of shares in the company being wound up. Section 130(1) states:

Any disposition of the property of the company, including things in action, and any transfer of shares or alteration in the status of the members of the company, made after the commencement of the winding up by the Court is, unless the Court otherwise orders, void.

In this case, the shares to be transferred were shares in the company, Tong Guan Food Products Pte Ltd. The shareholders of the company were the Applicant, the Respondent and one other person.

The Respondent had alleged minority oppression against him by the Applicant and the shareholder and commenced court proceedings for the alleged oppression. He failed in his claim and the court ordered him to pay the Applicant’s legal costs incurred in fighting the minority oppression proceedings. When the Respondent failed to make payment as ordered, the Applicant sought to enforce this debt by applying to court to seize and sell the Respondent’s shares in the company.

As the company had been put into winding up, the Applicant therefore also had to seek court approval for the seizure and sale of the shares under section 130 of the IRDA.

Court should lean in favour of not granting approval for transfer

The Court approved the application for the transfer. However, in doing so, the Court intimated a more restrictive approach to the grant of approval than has previously been the case.

The Court noted that the Singapore Court of Appeal in Seah Teong Kang & Anor v Seah Yong Chwan (2015) had held that the purpose of section 130 of the IRDA was to ensure that there is no evasion of liability by contributories. Evasion might arise where shares are not fully paid up. In such an instance, a liquidator will call on the member to pay up the rest of the uncalled capital as his contribution to the company’s capital. The member may then seek to evade his responsibility to contribute to the winding up by transferring his shares to an impecunious person. However, where shares are fully paid up, members are generally not liable to contribute any further to the company’s capital. Accordingly, the Court of Appeal stated that where there was no risk of evasion, which would generally be the case if the shares are fully paid up, the transfer should be allowed. 

The High Court in this case, however, doubted whether the purpose underlying section 130 should continue to be seen as ensuring no evasion of liability. This was because these days shares are mostly fully paid upon issuance and hence members rarely have to contribute to the company upon a winding up. Accordingly, if this was the purpose of the section, it was effectively moribund.

Instead, the Court took the view that the more appropriate rationale for section 130 was the maintenance of the status quo of a company’s position pending resolution of the winding-up petition. One benefit of this was that it would reduce the burden on the liquidator in taking stock of the affairs of the company and allows examination of these dispositions to ensure that there is no undue prejudice in the winding-up of the company, particularly to its creditors.

As a corollary to that, the Court opined that as a rule of thumb, given the language of section 130 renders dispositions void unless the court orders, the court should lean in favour of not granting the application under section 130 in order to maintain the status quo, unless an applicant can demonstrate reasons for the court to exercise its discretion otherwise.

In exercising its discretion, the Court said that it would take into account factors that are related to the disposition of property in the context of winding up of the company. It did not, however, state what these factors were as this case did not engage any such factors.

The Respondent in this case had essentially sought to relitigate his allegations of minority oppression and corporate misfeasance which the Court held were irrelevant considerations under section 130; the section was not directed at relations between shareholders. Other reasons relied upon by the Respondent (abuse of process, collusion with the liquidator) were dismissed by the Court as having no basis in fact.

The Court therefore granted the application and allowed the transfer of shares pursuant to the Writ of Seizure and Sale.

Court’s comments bear close watch in the future

The comments of the Court may be of concern to lenders taking security over shares. Prior Singapore cases have established that approval for the transfer would not generally be an issue where the shares are fully paid up.

However, the Court’s comments in this case cast a bit of shadow on this by suggesting that the court should lean in favour of not granting the application to transfer. If followed in subsequent cases, a lender with security over shares of a company that is insolvent may find the transfer barred. It is too early to tell whether these comments will be followed in subsequent cases, but the development is one that bears watching closely.